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MORGAN STANLEY
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
SEMI-ANNUAL REPORT
JUNE 30, 1998
[LOGO]
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
President's Letter.......................... 1
Performance Summary......................... 2
Managers' Reports and Statements of Net
Assets by Portfolio:
Global and International Equity Portfolios:
Active International Allocation (formerly
Active Country Allocation)............... 4
Asian Equity.............................. 16
Asian Real Estate......................... 21
Emerging Markets.......................... 26
European Equity .......................... 37
European Real Estate...................... 43
Global Equity ............................ 48
International Equity ..................... 54
International Magnum ..................... 59
International Small Cap................... 66
Japanese Equity........................... 71
Latin American............................ 75
U.S. Equity Portfolios:
Aggressive Equity......................... 79
Emerging Growth........................... 85
Equity Growth............................. 89
Small Cap Value Equity.................... 95
Technology................................ 100
U.S. Equity Plus.......................... 104
U.S. Real Estate.......................... 110
Value Equity.............................. 114
Balanced Portfolio.......................... 118
Fixed Income Portfolios:
Emerging Markets Debt..................... 123
Fixed Income.............................. 128
Global Fixed Income....................... 132
High Yield................................ 136
Municipal Bond............................ 142
Money Market Portfolios:
Money Market.............................. 146
Municipal Money Market.................... 150
Statements of Operations.................... 158
Statements of Changes in Net Assets......... 162
Statement of Cash Flows..................... 176
Financial Highlights ....................... 177
Notes to Financial Statements............... 204
Officers and Directors ..................... 213
</TABLE>
This report is authorized for distribution only when preceded or accompanied by
prospectuses of the Morgan Stanley Institutional Fund, Inc. Prospectuses
describe in detail each of the Portfolio's investment policies to the
prospective investor. Please read the prospectuses carefully before you invest
or send money.
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
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PRESIDENT'S LETTER
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FELLOW SHAREHOLDERS:
We are pleased to provide the Fund's semi-annual report for the six months
ended June 30, 1998. Our Fund currently offers 26 portfolios providing investors
with a full array of global and domestic equity and fixed income products
covering core strategies as well as more specialized portfolios. Together, the
Fund's portfolios allow investors to meet specific investment needs or to
allocate assets among different portfolios to implement an overall investment
strategy.
In this report you will find commentary, performance statistics and other
useful information for each of the Fund's portfolios. Additionally, we have
provided a performance summary for all portfolios on pages 2 and 3 of this
report.
The first half of 1998 witnessed a period of mixed performance in the
aftermath of the Asian currency crisis which shook global capital markets in the
fourth quarter of 1997. U.S. bonds briefly rallied as Asian markets continued to
fall in January, as these assets are considered a safe haven in times of global
market uncertainty. However, as Asian equity markets stabilized and began to
rise, U.S. bond yields edged back up to the levels at which they started the
year. In equity markets, investors quickly shrugged off the bad news in Asia
amidst news of better than expected earnings growth and low inflation in the
U.S. and Europe. In Europe, investors chose to focus on the positive impact
European Monetary Union (EMU) was expected to have on Europe. The majority of
European markets set record highs in the first quarter. The S&P 500 Index rose
14.0% in the first three months of 1998. Japan experienced a volatile first
quarter, producing a strong return in January, only to lose much of the gains in
March, and end the quarter slightly positive. The MSCI EAFE Index returned 14.7%
during the first quarter, outpacing U.S. equity markets.
After a strong first quarter, market gains were more moderate in the second
quarter. Most of the weakness and uncertainty stemmed from Asia as the currency
crisis countries experienced another leg down of economic contraction. Japan's
economic troubles intensified, and the yen began to depreciate rapidly,
threatening a broader round of competitive devaluations. The volatility in
foreign markets was again positive for U.S. bonds, as another flight to quality
ensued. U.S. equity markets experienced up and down months in the second
quarter, as news from Asia turned for the worse, and uncertainty mounted
regarding the prospects for future growth and the direction of U.S. interest
rates. The S&P 500 Index gained 3.3% in the second quarter. International equity
markets fared worse than the U.S., as the MSCI EAFE Index rose only 1.1% for the
quarter. Most of the weakness in international equities stemmed from Japan and
Asia ex-Japan, which fell 4.5% and 22.6%, respectively, during the quarter.
European equities, the largest component of the MSCI EAFE Index, continued to
outperform, returning 5.1% in the second quarter.
At this writing, global equity markets have continued to weaken as the
tug-of-war between U.S./European growth and Asian recession continues. Despite
the favorable liquidity environment, we expect growth to slow in the U.S. and
Europe, leading to accelerating earnings disappointments in the coming months.
In volatile and uncertain markets, our managers will continue to stress the
importance of closely adhering to investment strategies and styles in order to
deliver superior long-term performance to our shareholders.
The Fund has changed the name of the Active Country Allocation Portfolio to
the Active International Allocation Portfolio in order to better reflect its
investment objective. Managed by Ann Thivierge and Barton Biggs, the Portfolio
invests in international equity markets, with emphasis placed on country versus
individual stock selection. The Portfolio's A Shares returned 18.77% for the six
months ended June 30, compared to 15.93% for its benchmark, the MSCI EAFE Index.
Finally, the Small Cap Value Equity Portfolio and Balanced Portfolio were
successfully merged into similar portfolios of the MAS Funds in July. Former
shareholders of these Portfolios received shares in the respective MAS Funds
portfolios as part of the merger. MAS Funds is managed by Miller Anderson &
Sherrerd LLP, an affiliate of Morgan Stanley Asset Management Inc., the adviser
to the Fund.
We hope you find the enclosed report informative. As always, we very much
appreciate your support of the Fund.
Sincerely,
[SIGNATURE]
Michael F. Klein
PRESIDENT
August, 1998
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1
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
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PERFORMANCE SUMMARY (UNAUDITED)
JUNE 30, 1998
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<TABLE>
<CAPTION>
NET ASSETS NET ASSET VALUE
INCEPTION DATES (000) PER SHARE SIX MONTH TOTAL RETURN
------------------ ------------------- ---------------- ----------------------------------
COMPARABLE
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B INDICES
-------- -------- ---------- ------- ------- ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GLOBAL AND INTERNATIONAL EQUITY
PORTFOLIOS:
Active International
Allocation 1/17/92 1/02/96 $ 256,665 $ 526 $12.34 $12.44 18.77 % 18.70 % 15.93%(1)
Asian Equity 7/01/91 1/02/96 58,326 1,278 7.13 7.12 - 24.39 - 24.26 - 26.85(2)
Asian Real Estate 10/01/97 10/01/97 3,024 263 5.63 5.66 - 29.09 - 29.51 - 26.96(20)
Emerging Markets 9/25/92 1/02/96 1,331,023 11,661 11.10 11.10 - 14.42 - 14.48 - 15.84(3)
European Equity 4/02/93 1/02/96 325,340 9,481 22.35 22.30 24.44 24.30 26.49(4)
European Real Estate 10/01/97 10/01/97 47,684 3,631 11.01 11.00 15.65 15.55 10.23(21)
Global Equity 7/15/92 1/02/96 196,145 10,628 21.12 21.00 14.04 13.76 16.64(5)
International Equity 8/04/89 1/02/96 3,432,750 9,452 20.28 20.23 18.18 18.10 15.93(1)
International Magnum 3/15/96 3/15/96 208,780 34,143 12.83 12.79 18.03 17.99 15.93(1)
International Small Cap 12/15/92 -- 322,557 -- 18.38 -- 17.75 -- 13.77(22)
Japanese Equity 4/25/94 1/02/96 63,378 1,586 6.18 6.14 4.92 4.60 - 2.61(6)
Latin American 1/18/95 1/02/96 53,518 7,387 9.24 9.14 - 15.31 - 15.37 - 19.88(7)
U.S. EQUITY PORTFOLIOS:
Aggressive Equity 3/08/95 1/02/96 223,039 23,033 17.87 17.80 13.25 13.23 17.71(9)
Emerging Growth 11/01/89 1/02/96 70,339 1,428 9.21 9.09 19.30 19.14 20.66(8)
Equity Growth 4/02/91 1/02/96 786,976 61,476 19.58 19.53 15.65 15.49 17.71(9)
Small Cap Value Equity 12/17/92 1/02/96 42,472 7,156 12.22 12.17 8.72 8.56 5.66(10)
Technology 9/16/96 9/16/96 31,585 1,272 14.23 14.20 21.31 21.16 17.71(9)
U.S. Equity Plus 7/31/97 7/31/97 31,504 1,138 11.84 11.83 14.84 14.74 17.71(9)
U.S. Real Estate 2/24/95 1/02/96 329,871 18,776 14.49 14.43 - 5.23 - 5.43 - 5.03(11)
Value Equity 1/31/90 1/02/96 96,806 2,457 15.03 14.99 10.78 10.68 17.71(9)
BALANCED PORTFOLIO 2/20/90 1/02/96 4,957 239 8.02 7.99 7.08 6.90 10.55(12)
FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 2/01/94 1/02/96 189,461 4,158 5.55 5.55 - 3.81 - 3.81 - 1.08(13)
Fixed Income 5/15/91 1/02/96 205,720 4,198 11.05 11.06 3.91 3.84 3.93(14)
Global Fixed Income 5/01/91 1/02/96 65,441 330 11.40 11.38 3.43 3.39 3.27(15)
High Yield 9/28/92 1/02/96 177,113 10,539 11.67 11.64 4.09 3.91 4.31(16)
Municipal Bond 1/18/95 1/02/96 45,686 -- 10.54 -- 2.17 -- 2.32(17)
MONEY MARKET PORTFOLIOS:
Money Market 11/15/88 -- 1,630,416 -- 1.00 -- 2.59 -- --
Municipal Money Market 2/10/89 -- 984,426 -- 1.00 -- 1.51 -- --
</TABLE>
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<TABLE>
<CAPTION>
YIELD INFORMATION AS OF JUNE 30, 1998
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30 DAY
CURRENT YIELD++ 7 DAY 7 DAY 30 DAY 30 DAY
----------------- CURRENT EFFECTIVE CURRENT COMPARABLE
CLASS A CLASS B YIELD+ YIELD+ YIELD++ YIELD
------- ------- -------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED INCOME PORTFOLIOS: MONEY MARKET PORTFOLIOS:
Emerging Markets Debt 15.87% 15.59% Money Market 5.14% 5.28% 5.16% 5.13%(18)
Fixed Income 5.81 5.66 Municipal Money Market 3.17 3.22 3.16 3.13(19)
Global Fixed Income 4.42 4.27
High Yield 9.06 8.79
Municipal Bond 4.20 --
</TABLE>
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+The 7 day current yield and 7 day effective yield assume an annualization of
the current yield at June 30, 1998 with all dividends reinvested. As with all
money market portfolios, yields fluctuate as market conditions change and the
7 day yields are not necessarily indicative of future performance.
++The current 30 day yield reflects the net investment income generated by the
Portfolio over a specified 30 day period expressed as an annual percentage.
Expenses accrued for the 30 day period include any fees charged to all
shareholders. Yields will fluctuate as market conditions change and are not
necessarily indicative of future performance.
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2
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<TABLE>
<CAPTION>
FIVE-YEAR AVERAGE ANNUAL AVERAGE ANNUAL TOTAL
ONE YEAR TOTAL RETURN TOTAL RETURN RETURN SINCE INCEPTION
- ----------------------------------- -------------------------- ----------------------------------------------------------
COMPARABLE COMPARABLE COMPARABLE COMPARABLE
CLASS A CLASS B INDICES CLASS A INDICES CLASS A INDICES--CLASS A CLASS B INDICES--CLASS B
- --------- --------- ------------- ------------ ------------ ----------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
13.61% 13.44% 6.10%(1) 12.15% 10.03%(1) 10.91% 9.81%(1) 14.60% 9.39%(1)
- 61.78 - 61.81 - 60.20(2) - 9.29 - 9.17(2) - 0.21 - 0.91(2) - 30.64 - 28.45(2)
- 43.22* - 43.40* - 51.73*(20) -- -- -- -- -- --
- 32.66 - 32.83 - 38.58(3) 2.83 0.38(3) 6.31 3.25(3) - 2.57 - 9.80(3)
27.73 27.46 37.06(4) 22.11 22.97(4) 22.28 22.00(4) 25.66 28.95(4)
10.19* 10.05* 10.26*(21) -- -- -- -- -- --
20.82 20.37 17.03(5) 21.62 15.64(5) 20.86 15.42(5) 24.09 18.47(5)
16.48 16.21 6.10(1) 19.40 10.03(1) 13.59 5.36(1) 20.46 9.39(1)
8.41 8.16 6.10(1) -- -- 14.42 10.42(1) 14.12 10.42(1)
8.28 -- - 16.76(22) 10.54 - 1.05(22) 14.96 4.06(22) -- --
- 22.80 - 23.19 - 31.84(6) -- -- - 2.76 - 9.96(6) - 2.89 - 16.76(6)
- 16.95 - 17.47 - 24.92(7) -- -- 15.13 5.00(7) 23.49 9.59(7)
32.71 32.34 30.17(9) -- -- 39.36 32.06(9) 34.73 29.79(9)
31.87 31.61 31.39(8) 15.24 21.90(8) 13.45 17.89(8) 13.50 26.31(8)
33.53 33.22 30.17(9) 26.12 23.08(9) 20.04 19.13(9) 31.16 29.79(9)
27.96 27.58 18.10(10) 18.91 17.30(10) 18.45 17.57(10) 26.95 19.52(10)
30.66 30.43 30.17(9) -- -- 38.25 35.07(9) 37.95 35.07(9)
19.36* 19.25* 20.58*(9) -- -- -- -- -- --
8.50 8.20 8.05(11) -- -- 23.79 18.74(11) 22.63 19.08(11)
26.11 25.91 30.17(9) 19.51 23.08(9) 15.35 19.00(9) 23.39 29.79(9)
16.28 16.07 17.36(12) 11.94 14.14(12) 11.46 13.01(12) 13.73 17.51(12)
- 2.95 - 3.06 1.39(13) -- -- 15.47 11.35(13) 23.32 18.91(13)
10.37 10.20 10.54(14) 6.96 6.88(14) 8.49 8.49(14) 7.09 6.91(14)
6.12 5.91 5.87(15) 5.96 6.63(15) 7.40 8.41(15) 4.32 3.64(15)
12.15 11.81 10.98(16) 12.00 10.43(16) 13.02 11.33(16) 13.54 11.76(16)
6.99 -- 7.34(17) -- -- 6.34 7.63(17) -- --
-- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
</TABLE>
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*Cumulative (unannualized) total return since inception of the Portfolio.
<TABLE>
<C> <S> <C> <C>
INDICES:
(1) MSCI EAFE (Europe, Australasia, and Far East) (12) Indata Balanced-Median
(2) MSCI All-Country Far East Free ex-Japan (13) J.P. Morgan Emerging Markets Bond Plus
(3) IFC Global Total Return Composite (14) Lehman Aggregate Bond
(4) MSCI Europe (15) J.P. Morgan Traded Global Bond
(5) MSCI World (16) CS First Boston High Yield
(6) MSCI Japan (17) Lehman 7-Year Municipal Bond
(7) MSCI Emerging Markets Global Latin America (18) IBC Money Fund Comparable Yield
(8) NASDAQ Composite (19) IBC Municipal Money Fund Comparable Yield
(9) S&P 500 (20) GPR Life Far East Asia Real Estate T.R.
(10) Russell 2500 (21) GPR Life European Real Estate T.R.
(11) NAREIT Equity (22) MSCI EAFE Small Cap
</TABLE>
Past performance should not be construed as a guarantee 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.
Investments in the Money Market and Municipal Money Market Portfolios are
neither insured nor guaranteed by the U.S. Government. There is no assurance
that the Money Market and Municipal Money Market Portfolios will be able to
maintain a stable net asset value of $1.00 per share. Please read the
Portfolios' prospectuses carefully before you invest or send money.
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3
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
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OVERVIEW
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ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 0.7%
Austria 0.4%
Belgium 0.1%
Denmark 0.1%
France 6.7%
Germany 9.1%
Italy 6.4%
Japan 10.1%
Netherlands 6.6%
Norway 0.2%
Portugal 1.3%
Spain 3.8%
Sweden 3.3%
Switzerland 7.3%
United Kingdom 13.3%
Other 30.6%
</TABLE>
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE
AVERAGE ANNUAL
ANNUAL SINCE
YTD ONE YEAR FIVE YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A......... 18.77% 13.61% 12.15% 10.91%
PORTFOLIO -- CLASS B......... 18.70 13.44 N/A 14.60
INDEX -- CLASS A............. 15.93 6.10 10.03 9.81
INDEX -- CLASS B............. 15.93 6.10 N/A 9.39
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (includes dividends net of withholding
taxes).
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
EAFE INDEX AND 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 Active International Allocation Portfolio (formerly the Active Country
Allocation Portfolio) invests in international equity markets, with emphasis
placed upon countries, rather that stock selection. This approach reflects our
belief that a diversified selection of securities representing exposure to
countries that we find attractive may provide an effective way to maximize the
return potential and minimize the risk associated with global investing.
For the six months ended June 30, 1998, the Portfolio had a total return of
18.77% for the Class A shares and 18.70% for the Class B shares compared to
15.93% for the Morgan Stanley Capital International (MSCI) EAFE Index (the
"Index"). For the one year ended June 30, 1998, the Portfolio had a total return
of 13.61% for the Class A shares and 13.44% for the Class B shares compared to
6.10% for the Index. For the five-year period ended June 30, 1998, the average
annual total return for Class A was 12.15%, compared to 10.03% for the Index.
From inception on January 17, 1992 to June 30, 1998, the average annual total
return for Class A was 10.91% compared to 9.81% for the Index. From inception on
January 2, 1996 to June 30, 1998, the average annual total return for Class B
was 14.60% compared to 9.39% for the Index.
For the second quarter ended June 30, 1998, the Portfolio had a total return of
2.66% for the Class A shares and 2.64% for the Class B shares compared to 1.06%
for the Index.
Second quarter 1998 performance returns for the regional indices are laid out
below.
<TABLE>
<CAPTION>
MSCI INDICES 2Q 98 YTD
--------- ---------
<S> <C> <C>
Europe 4.0% 25.1%
Japan - 5.9 - 4.0
Pacific Ex-Japan - 17.4 - 11.7
Emerging Markets - 23.7 - 18.2
USA - 0.9 12.9
</TABLE>
The Index rose strongly in the first half of 1998, although the second quarter
returns were less robust than those of the start of the year. Since the start of
the year, stock markets in Europe produced strong gains, but Japan and the rest
of Asia fell further. We made several allocation adjustments in countries,
sectors, and currencies during the period, gradually increasing our cash as
further evidence of the depth
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Active International Allocation Portfolio
4
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
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OVERVIEW
- --------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
of the economic problems in Japan, Asia, and other emerging markets such as
Russia and South Africa developed.
We remain overweight European equities, particularly the so-called "Euro-bubble"
countries. We still believe that the European bourses are the best place to be
in an equity world that is generally both frothy and expensive.
After the glorious surge of the first three months of the year, the second
quarter was either the pause that refreshes, a period of consolidation as the
technicians would say, or a broad top formation. Frankly, we aren't quite sure
which, but if actions speak louder than words, our cash position is definitely
on the high side.
We have benefited from our long held strategy of being overweight Europe and
underweight Japan, the yen, and the rest of Asia. Within Europe, our heavy
allocations to Italy and Spain which served us so well in the first quarter were
less fruitful, as the bourses of Germany and France, where we were modestly
overweight, assumed leadership.
At this point, we are not inclined to alter our fundamental positions. There is
a lot of turbulence and random noise, but the underlying environment is that the
U.S. economy and dollar are strong, Europe is recovering, and Asia is sick.
Stock markets are discounting mechanisms so we must be alert that change at the
margin is not occurring.
With this in mind, we visited Asia in April and spent three days in Japan. We
met with investors, businessmen, the Bank of Japan, the Ministry of Finance, and
a senior leader of the LDP. We found good manners and some charm but nothing to
cheer us. Has there been positive change at the margin in Japan? Maybe a little,
but the problems are so dire and confidence so low, that dramatic solutions
which alter sentiment are needed. Instead, the government tries to fool the
markets with talk and half-way measures. The bridge bank proposal is a step in
the right direction, but details are lacking and it will take years to play out;
it is not a market-clearing solution. The politicians' vacillation on tax cuts
is pathetic, and the markets are tiring of it.
We still believe Japan's equity market is expensive, its economy a disaster, and
its political institutions remain in full denial of the seriousness of the
predicament that the country is in. We are actually more bearish on the yen than
the stock market, and our approximately 40% of the index weight in Japan is 90%
hedged back to the dollar.
The rest of Asia is not in a recession but a depression. Visits to Hong Kong and
China confirmed this, as did the New York visit with the Finance Minister of
Malaysia. We eliminated our position in Hong Kong which turned out to be
felicitous. The problems of Asia have been dissected ad nauseum, but in summary
we believe it is too soon to make a serious investment commitment.
Europe still looks like the place to be because of its economic cycle and
because of European Monetary Union (EMU) and its accompanying euphoria. Recent
visits to both Spain and Italy confirmed our conviction that these two markets
are the essence of the so-called "Euro-bubble" concept.
There is still a lot of skepticism about EMU, and some very smart people believe
that it won't work in the long run.
We say baloney! It will work and the surprise may be how successful it is. The
Euro-bubble markets should be the prime beneficiaries. The real politik of
Euroland requires that the new European Central Bank must converge interest
rates at a low enough level to sustain growth in the slower-growing core
countries where unemployment is still very high, even if this means that the
faster growing fringe economies overheat. The elite that has stage-managed EMU
so adroitly simply cannot take the chance that the French and German economies
falter in the first year of EMU.
We are continuing to put a lot of effort into sector research. We maintain our
emphasis on financial stocks across Europe. In Italy we heard repeatedly how the
banks and insurance companies are benefiting from low interest rates strong fund
flows. We added a tilt into European oil stocks during the second quarter which
we have profitably unwound, and we are currently buying a broad cross section of
European real estate securities.
Commercial property prices across Europe are still very depressed, but we
believe the cycle is about to turn, as do local experts and our sources in
Morgan Stanley's real estate group. Already rents are beginning to firm, and
many of the stocks are selling well below both net asset values and replacement
costs of the underlying assets.
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Active International Allocation Portfolio
5
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
In conclusion, we are carefully watching markets and economic events. The risk
is that Asia undermines the Western economies, and indeed there are a few early
signs that both the U.S. and Europe are slowing. If so, earnings will be
disappointing but interest rates will fall again. Will equity markets go down
under such circumstances? In our opinion, it depends on how severe the earnings
shortfall is. We do believe that international portfolios should outperform U.S.
equities in this environment.
Ann D. Thivierge
PORTFOLIO MANAGER
Barton M. Biggs
PORTFOLIO MANAGER
July 1998
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Active International Allocation Portfolio
6
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS (68.7%)
AUSTRALIA (0.6%)
8,200 Amcor Ltd......................................... $ 36
3,964 Australian Gas Light Co., Ltd..................... 25
11,200 Australian National Industries Ltd................ 6
15,420 Boral Ltd......................................... 29
2,800 Brambles Industries Ltd........................... 55
23,683 Broken Hill Proprietary Co., Ltd.................. 200
(a)6,197 Burns, Philip & Co., Ltd.......................... --
9,914 Coca Cola Amatil Ltd.............................. 66
13,750 Coles Myer Ltd.................................... 54
11,783 Crown Ltd......................................... 4
14,000 CSR Ltd........................................... 40
23,700 Fosters Brewing Group Ltd......................... 56
12,257 Gio Australia Holdings Ltd........................ 31
15,648 Goodman Fielder Ltd............................... 23
3,600 ICI Australia Ltd................................. 21
3,100 Leighton Holdings Ltd............................. 11
3,118 Lend Lease Corp., Ltd............................. 63
18,132 MIM Holdings Ltd.................................. 9
15,273 National Australia Bank Ltd....................... 202
(a)3,237 Newcrest Mining Ltd............................... 4
22,764 News Corp., Ltd................................... 186
20,207 Normandy Mining Ltd............................... 17
8,628 North Ltd......................................... 18
11,300 Pacific Dunlop Ltd................................ 18
11,500 Pioneer International Ltd......................... 28
2,402 Renison Goldfields Consolidated Ltd............... 2
4,100 Rio Tinto Ltd..................................... 49
7,625 Santos Ltd........................................ 24
2,600 Smith (Howard) Ltd................................ 15
1,545 Sons of Gwalia Ltd................................ 4
8,024 Southcorp Holdings Ltd............................ 23
4,100 TABCORP Holdings Ltd.............................. 21
47,200 Telstra Corp., Ltd. (Installment Receipts -- Final
Installment: AUD 1.35/share due 11/17/98)....... 121
(a)532 Westfield Trust................................... 1
21,500 Westpac Banking Corp.............................. 131
12,484 WMC Ltd........................................... 38
----------
1,631
----------
AUSTRIA (0.3%)
400 Austrian Airlines/Oesterreiche Luftverkehrs AG.... 13
100 Austrian Mikro Systeme Int'l AG................... 7
2,600 Bank Austria AG................................... 212
200 Bau Holding AG.................................... 11
200 Beteiligungs AG................................... 12
400 Boehler-Uddeholm AG............................... 26
100 BWT AG............................................ 21
200 EA-Generali AG.................................... 59
800 Flughafen Wein AG................................. 38
(a)100 Lenzing AG........................................ 8
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
400 Mayr-Melnhof Karton AG............................ $ 26
1,000 Oest Elektrizatswirts AG, Class A................. 120
800 OMV AG............................................ 107
500 Radex-Heraklith Industriebet AG................... 24
300 Steyr-Daimler-Puch AG............................. 8
400 VA Technologie AG................................. 50
300 Wienerberger Baustoffindustrie AG................. 73
----------
815
----------
BELGIUM (0.1%)
2,000 KBC Bancassurance Holding N.V..................... 179
----------
DENMARK (0.1%)
800 BG Bank A/S....................................... 50
1,400 Den Danske Bank................................... 168
200 Jyske Bank A/S (Registered)....................... 24
1,400 Unidanmark A/S, Class A........................... 126
----------
368
----------
FRANCE (6.7%)
1,735 Accor............................................. 486
3,782 Alcatel Alsthom................................... 770
6,969 Axa............................................... 784
6,072 Banque Nationale de Paris......................... 496
565 Bouygues.......................................... 103
884 Canal Plus........................................ 165
2,379 Cap Gemini Sogeti................................. 374
962 Carrefour......................................... 609
2,257 Casino Guichard-Perrachon......................... 180
2,117 Cie de Saint Gobain............................... 392
3,326 Cie Generale des Eaux............................. 710
3,453 Cie Generale des Establissements Michelin, Class
B............................................... 199
295 Credit Commercial de France....................... 25
150 Dexia France...................................... 20
6,762 Elf Aquitaine..................................... 950
793 Eridania Beghin-Say............................... 175
188 Essilor International............................. 80
19,433 France Telecom.................................... 1,340
1,781 Groupe Danone..................................... 491
2,193 Havas............................................. 186
475 Imetal............................................ 65
460 Klepierre......................................... 89
(a)2,263 Lafarge........................................... 234
120 Lafarge (New)..................................... 12
3,128 Lagardere S.C.A................................... 130
2,710 L'air Liquide..................................... 448
680 Legrand........................................... 180
1,658 L'OREAL........................................... 922
2,061 LVMH Moet Hennessy Louis Vuitton.................. 412
3,108 Lyonnaise des Eaux................................ 511
4,270 Paribas........................................... 457
278 Pathe............................................. 55
1,788 Pernod Ricard..................................... 124
593 Pinault-Printemps - Re doute...................... 496
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active International Allocation Portfolio
7
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FRANCE (CONT.)
<TABLE>
<C> <S> <C>
484 Promodes.......................................... $ 268
1,177 PSA Peugeot Citroen............................... 253
8,920 Rhone-Poulenc, Class A............................ 503
163 Sagem............................................. 127
2,852 Sanofi............................................ 335
3,522 Schneider......................................... 281
688 Silic............................................. 125
2,561 Simco (RFD)....................................... 210
1,582 Societe BIC....................................... 113
131 Societe Eurafrance................................ 82
2,852 Societe Generale, Class A......................... 593
236 Sodexho Alliance.................................. 45
2,170 Sophia............................................ 100
3,042 Thomson CSF....................................... 116
6,018 Total, Class B.................................... 782
1,492 Unibail........................................... 193
5,780 Usinor Sacilor.................................... 89
2,159 Valeo............................................. 221
----------
17,106
----------
GERMANY (8.7%)
1,383 Adidas AG......................................... 239
(a)983 AGIV AG........................................... 27
6,583 Allianz AG........................................ 2,172
(a)175 Allianz AG (New).................................. 57
1,833 AMB AG............................................ 214
800 Bankgesellschaft Berlin AG........................ 17
16,900 BASF AG........................................... 801
20,650 Bayer AG.......................................... 1,066
7,633 Bayerische Hypotheken Bank AG..................... 484
8,283 Bayerische Vereinsbank AG......................... 705
300 BHF-Bank AG....................................... 11
3,267 Bilfinger & Berger Bau AG......................... 111
267 Brau Und Brunnen AG............................... 35
1,267 CKAG AG........................................... 157
1,500 Commerzbank AG.................................... 57
2,317 Continential AG................................... 72
18,200 Daimler-Benz AG................................... 1,786
2,767 Degussa AG........................................ 171
18,700 Deutsche Bank AG.................................. 1,585
67,289 Deutsche Telekom AG............................... 1,817
14,617 Dresdner Bank AG.................................. 789
2,767 FAG Kugelfischer Georg Schaefer AG................ 41
1,535 Heidelberger Zement AG............................ 146
2,983 Hochtief AG....................................... 143
300 IKB Deutsche Industriebank AG..................... 6
283 Karstadt AG....................................... 137
1,483 Kloeckner-Humboldt-Deutz AG....................... 17
283 Linde AG.......................................... 199
10,283 Lufthansa AG...................................... 258
433 MAN AG............................................ 169
10,500 Mannesmann AG..................................... 1,066
5,367 Merck KGaA........................................ 240
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
6,493 Metro AG.......................................... $ 394
2,357 Muechener Rueck AG (Registered)................... 1,170
550 Preussag AG....................................... 196
14,773 RWE AG............................................ 877
1,867 SAP AG............................................ 1,134
2,317 Schering AG....................................... 273
15,733 Siemens AG........................................ 958
100 STRABAG AG........................................ 9
1,050 Thyssen AG........................................ 266
14,800 VEBA AG........................................... 1,009
623 Viag AG........................................... 422
913 Volkswagen AG..................................... 878
----------
22,381
----------
HONG KONG (0.0%)
9 Bank of East Asia Ltd............................. --
800 Cathay Pacific Airways Ltd........................ 1
100 Hang Lung Development Co.......................... --
700 Hong Kong & China Gas Co., Ltd.................... 1
200 Hong Kong & Shanghai Hotel Ltd.................... --
600 Hopewell Holdings Ltd............................. --
600 Hutchison Whampoa Ltd............................. 3
100 Johnson Electric Holdings Ltd..................... --
800 New World Development Co., Ltd.................... 2
900 Regal Hotel International......................... --
600 Shangri-La Asia Ltd............................... --
5,750 Sino Land Co...................................... 2
800 South China Morning Post Holdings Ltd............. --
1,171 Sun Hung Kai Properties Ltd....................... 5
300 Swire Pacific Ltd., Class A....................... 1
500 Television Broadcasts Ltd......................... 1
700 Varitronix International Ltd...................... 2
----------
18
----------
ITALY (6.3%)
48,372 Assicurazioni Generali S.p.A...................... 1,574
86,700 Banca Commerciale Italiana........................ 519
30,000 Banca Di Roma..................................... 62
4,000 Banca Intesa S.p.A (RNC).......................... 12
100,300 Banco Ambrosiano Veneto S.p.A..................... 561
20,000 Banco di Napoli (RNC)............................. 26
11,000 Banco Popolare di Milano.......................... 88
(a)98,440 Benetton Group S.p.A.............................. 204
8,500 Cartiere Burgo.................................... 68
(a)133,900 Ciga S.p.A........................................ 156
146,000 Credito Italiano S.p.A............................ 765
36,000 Edison S.p.A...................................... 289
387,000 ENI S.p.A......................................... 2,537
7,300 Falck Acciaierie & Ferriere Lombarde.............. 47
175,950 Fiat S.p.A........................................ 770
38,980 Fiat S.p.A. Di Risp (NCS)......................... 97
33,000 Immobiliaria Metanopoli S.p.A..................... 36
16,500 Impregilo S.p.A................................... 15
52,500 Istituto Bancario San Paolo....................... 758
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active International Allocation Portfolio
8
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
ITALY (CONT.)
<TABLE>
<C> <S> <C>
30,950 Istituto Mobiliare Italiano S.p.A................. $ 488
290,500 Istituto Nazionale delle Assicurazioni............ 826
12,350 Italcementi S.p.A................................. 111
8,800 Italcementi S.p.A. (RNC).......................... 39
35,800 Italgas........................................... 146
12,400 La Rinascente S.p.A............................... 124
26,400 Magneti Marelli S.p.A............................. 58
63,000 Mediaset S.p.A.................................... 402
34,800 Mediobanca S.p.A.................................. 442
155,574 Montedison S.p.A.................................. 193
51,900 Montedison S.p.A. Di Risp (NCS)................... 40
(a)129,680 Olivetti S.p.A.................................... 193
71,920 Parmalat Finanziaria S.p.A........................ 147
88,000 Pirelli S.p.A..................................... 275
16,260 R.A.S. S.p.A...................................... 212
4,705 R.A.S. S.p.A (RNC)................................ 42
7,400 SAI............................................... 95
16,500 Sirti S.p.A....................................... 90
38,000 Snia BPD S.p.A.................................... 47
174,444 Telecom Italia S.p.A.............................. 1,285
39,534 Telecom Italia S.p.A. Di Risp (NCS)............... 191
311,400 Telecom Italia Mobile S.p.A....................... 1,905
67,500 Telecom Italia Mobile S.p.A. (RNC)................ 228
----------
16,163
----------
JAPAN (10.1%)
110 Advantest Corp.................................... 6
25,400 Ajinomoto Co., Inc................................ 223
(a)26,600 Aoki Corp......................................... 13
900 Asahi Bank Ltd.................................... 4
16,000 Asahi Breweries Ltd............................... 202
53,000 Asahi Chemical Industry Co., Ltd.................. 191
48,800 Asahi Glass Co., Ltd.............................. 264
81,000 Bank of Tokyo-Mitsubushi Ltd...................... 858
800 Bank of Yokohama Ltd.............................. 2
16,000 Bridgestone Corp.................................. 379
22,600 Canon, Inc........................................ 514
12,800 Casio Computer Co., Ltd........................... 119
400 Chiba Bank Ltd.................................... 1
17,600 Chugai Pharmaceuticals Co., Ltd................... 115
21,600 Dai Nippon Printing Co., Ltd...................... 345
18,600 Daiei, Inc........................................ 44
17,600 Daikin Industries Ltd............................. 114
18,600 Daiwa House Industry Co., Ltd..................... 164
20,600 Denso Corp........................................ 342
100 East Japan Railway Co............................. 470
12,800 Ebara Corp........................................ 114
7,200 Fanuc Ltd......................................... 249
11,000 Fuji Photo Film Ltd............................... 383
40,200 Fujitsu Ltd....................................... 424
12,800 Furukawa Electric Co., Ltd........................ 43
21,000 Hankyu Corp....................................... 86
(a)16,000 Hazama Corp....................................... 9
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
87,000 Hitachi Ltd....................................... $ 568
21,000 Honda Motor Co., Ltd.............................. 748
11,000 Ito-Yokado Co., Ltd............................... 518
(a)55,000 Japan Airlines Co., Ltd........................... 153
40,000 Japan Energy Corp................................. 42
600 Joyo Bank Ltd..................................... 2
10,800 Jusco Co., Ltd.................................... 198
33,400 Kajima Corp....................................... 92
22,700 Kansai Electric Power Co., Inc.................... 395
21,000 Kao Corp.......................................... 324
26,400 Kawasaki Steel Corp............................... 48
36,200 Kinki Nippon Railway Co., Ltd..................... 170
34,400 Kirin Brewery Co., Ltd............................ 325
31,400 Komatsu Ltd....................................... 153
46,000 Kubota Corp....................................... 106
(a)53,400 Kumagai Gumi Co., Ltd............................. 39
5,000 Kyocera Corp...................................... 245
15,600 Kyowa Hakko Kogyo Co., Ltd........................ 62
41,000 Long-Term Credit Bank of Japan Ltd................ 24
46,000 Marubeni Corp..................................... 92
4,800 Marui Co., Ltd.................................... 72
46,000 Matsushita Electric Industrial Co., Ltd........... 740
53,000 Mitsubishi Chemical Corp.......................... 96
46,000 Mitsubishi Corp................................... 285
60,800 Mitsubishi Electric Corp.......................... 140
94,000 Mitsubishi Heavy Industries Ltd................... 355
31,400 Mitsubishi Materials Corp......................... 64
25,000 Mitsubishi Trust & Banking Corp................... 213
45,800 Mitsui & Co., Ltd................................. 248
(a)33,400 Mitsui Engineering & Shipbuilding Co., Ltd........ 25
400 Mitsui Fudosan Co., Ltd........................... 3
200 Mitsui Trust & Banking Co., Ltd................... 1
15,800 Mitsukoshi Ltd.................................... 45
12,800 Mycal Corp........................................ 81
31,400 NEC Corp.......................................... 293
18,600 NGK Insulators Ltd................................ 162
13,800 Nippon Express Co., Ltd........................... 74
15,600 Nippon Fire & Marine Insurance Co., Ltd........... 64
15,800 Nippon Light Metal Co., Ltd....................... 18
15,600 Nippon Meat Packers, Inc.......................... 191
49,800 Nippon Oil Co., Ltd............................... 161
190,000 Nippon Steel Corp................................. 334
256 Nippon Telegraph & Telephone Corp................. 2,124
46,000 Nippon Yusen Kabushiki Kaisha..................... 156
58,600 Nissan Motor Co., Ltd............................. 185
98,800 NKK Corp.......................................... 95
20,600 Odakyu Electric Railway Corp...................... 63
34,400 Oji Paper Co., Ltd. (New)......................... 150
71,600 Osaka Gas Co., Ltd................................ 184
15,600 Penta-Ocean Construction Co., Ltd................. 36
5,000 Pioneer Electronic Corp........................... 96
1,000 Rohm Co., Ltd..................................... 103
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active International Allocation Portfolio
9
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
60,000 Sakura Bank Ltd................................... $ 156
13,800 Sankyo Co., Ltd................................... 315
56,000 Sanwa Bank Ltd.................................... 501
46,000 Sanyo Electric Co., Ltd........................... 139
4,800 Secom Co., Ltd.................................... 277
3,400 Sega Enterprises Ltd.............................. 59
18,600 Sekisui House Co., Ltd............................ 144
31,200 Sharp Corp........................................ 253
5,800 Shimano, Inc...................................... 147
25,600 Shimizu Corp...................................... 74
9,000 Shin-Etsu Chemical Co., Ltd....................... 156
9,000 Shiseido Co., Ltd................................. 102
600 Shizuoka Bank Ltd................................. 6
31,400 Showa Denko....................................... 32
8,100 Sony Corp......................................... 698
60,600 Sumitomo Chemical Co., Ltd........................ 187
33,400 Sumitomo Corp..................................... 161
21,400 Sumitomo Electric Industries...................... 217
12,800 Sumitomo Forestry Co., Ltd........................ 72
15,800 Sumitomo Metal Mining Co.......................... 64
61,800 Sumitomo Metal Industries......................... 99
15,600 Sumitomo Osaka Cement Co., Ltd.................... 20
34,400 Taisei Corp., Ltd................................. 74
10,800 Taisho Pharmaceutical Co., Ltd.................... 202
21,000 Taiyo Yuden Co., Ltd.............................. 224
21,600 Takeda Chemical Industries........................ 575
34,400 Teijin Ltd........................................ 104
21,400 Tobu Railway Co., Ltd............................. 57
11,900 Tohoku Electric Power Co., Inc.................... 176
800 Tokai Bank Ltd.................................... 4
53,000 Tokio Marine & Fire Insurance Co., Ltd............ 545
28,300 Tokyo Electric Power Co........................... 555
3,000 Tokyo Electron Ltd................................ 92
70,600 Tokyo Gas Co...................................... 157
25,400 Tokyu Corp........................................ 77
22,600 Toppan Printing Co., Ltd.......................... 242
53,100 Toray Industries, Inc............................. 276
19,600 Toto Ltd.......................................... 119
34,400 Toyoba Co......................................... 45
66,000 Toyota Motor Corp................................. 1,709
31,400 Ube Industries Ltd................................ 41
600 Yamaichi Securities Co., Ltd...................... --
16,000 Yokogawa Electric Corp............................ 85
----------
26,077
----------
NETHERLANDS (6.6%)
61,638 ABN Amro Holding N.V.............................. 1,443
3,150 Akzo Nobel N.V.................................... 701
23,600 Elsevier N.V...................................... 356
3,508 Getronics N.V..................................... 182
13,438 Heineken NV....................................... 528
41,813 ING Groep N.V..................................... 2,739
3,070 KLM Royal Dutch Airlines N.V...................... 125
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
20,633 Koninklijke Ahold N.V............................. $ 663
4,300 Koninklijke KNP BT N.V............................ 111
19,325 Koninklijke PTT Nederland N.V..................... 744
950 Nedlloyd Groep N.V................................ 19
3,304 Oce N.V........................................... 141
14,000 Philips Electronics N.V........................... 1,177
7,840 Rodamco N.V....................................... 215
85,400 Royal Dutch Petroleum Co.......................... 4,738
1,868 Stork N.V......................................... 60
(a)19,325 TNT Post Group N.V................................ 494
13,500 UNI-INVEST N.V.................................... 196
25,500 Unilever N.V...................................... 2,024
2,785 Wolters Kluwer N.V................................ 382
----------
17,038
----------
NORWAY (0.2%)
(a)50,200 Choice Hotels Scandinavia ASA..................... 151
25,000 Christiania Bank Og Kreditkasse................... 105
29,100 Den Norske Bank ASA............................... 153
28,180 Linstow ASA....................................... 202
(a)33 NCL Holdings ASA.................................. --
----------
611
----------
PORTUGAL (1.3%)
15,776 Banco Commercial Portugues (Registered)........... 448
9,360 Banco Espirito Santo Comercial de Lisboa
(Registered).................................... 281
5,500 Banco Totta & Acores, Class B (Registered)........ 167
6,900 BPI-SGPS.......................................... 223
1,200 Cia de Seguros Tranquilidade (Registered)......... 32
6,100 Cimpor SGPS....................................... 214
300 Cin-Corparacao Industial do Norte................. 22
1,200 Corticeira Amorim................................. 23
25,600 EDP-Electricidade de Portugal..................... 595
500 Engil-SGPS........................................ 6
700 INAPA-Investimentos Participacoes e Gestao........ 9
5,950 Jeronimo Martins SGPS............................. 286
13,500 Portugal Telecom (Registered)..................... 716
6,400 Portucel Industrial-Empresa....................... 51
(a)900 Sociedade de Construcoes Soares da Costa.......... 7
1,195 Somague-Sociedade Gestora de Participacoes........ 11
3,000 Sonae Investmentos................................ 164
1,300 UNICER-Uniao Cervejeira........................... 29
----------
3,284
----------
SINGAPORE (0.0%)
32,000 Asia Food & Properties Ltd........................ 4
800 Fraser & Neave Ltd................................ 2
(a)5,000 Inchcape Marketing Services Ltd................... 1
750 Keppel Corp., Ltd................................. 1
560 Oversea-Chinese Banking Corp. (Foreign)........... 2
200 Robinson & Co., Ltd............................... 1
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active International Allocation Portfolio
10
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SINGAPORE (CONT.)
<TABLE>
<C> <S> <C>
600 Shangri-La Hotel Ltd.............................. $ 1
1,020 Singapore Press Holdings Ltd...................... 7
----------
19
----------
SPAIN (3.8%)
635 Acerinox.......................................... 85
(a)1,807 Aguas de Barcelona................................ 101
22,000 Argentaria........................................ 494
10,192 Autopistas Concesionaria Espanola................. 158
(a)1,850 Azucarera Ebro Agricolas.......................... 55
29,800 Banco Bilbao Vizcaya (Registered)................. 1,529
16,300 Banco Central Hispano Americano................... 512
(a)2,800 Banco Espanol de Credito.......................... 34
600 Banco Popular Espanol............................. 51
42,000 Banco Santander................................... 1,075
200 Bankinter......................................... 13
600 Corporacion Financiera Alba....................... 66
2,390 Corporacion Mapfre................................ 84
2,400 Dragados y Construccion........................... 77
650 ENCE.............................................. 11
40,700 Endesa............................................ 890
(a)6,700 Ercros............................................ 8
2,400 Fomento Construction y Cantractas................. 124
6,100 Gas Natural SDG................................... 441
35,300 Iberdrola......................................... 573
2,594 Metrovacesa....................................... 76
11,500 Repsol............................................ 634
6,000 Tabacalera........................................ 123
(a)3,372 Telefonica........................................ 156
37,100 Telefonica........................................ 1,715
12,200 Union Electrica Fenosa............................ 157
2,450 Uralita........................................... 35
6,932 Vallehermoso...................................... 255
550 Viscofan Envolturas Celulosicas................... 26
3,523 Zardoya Otis...................................... 105
----------
9,663
----------
SWEDEN (3.3%)
23,300 ABB AB, Class A................................... 330
9,500 ABB AB, Class B................................... 132
5,700 AGA AB, Class A................................... 89
(a)13,900 Asticus AB........................................ 153
46,233 Astra AB, Class A................................. 945
10,800 Astra AB, Class B................................. 215
4,550 Atlas Copco AB, Class A........................... 124
2,400 Atlas Copco AB, Class B........................... 65
5,700 Castellum AB...................................... 67
22,800 Diligentia AB..................................... 197
11,700 Electrolux AB, Class B............................ 201
65,800 Ericsson LM, Class B.............................. 1,922
1,950 Fastighets AB Tornet.............................. 31
14,600 ForeningsSparbanken AB............................ 439
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
7,200 Hennes & Mauritz AB, Class B...................... $ 459
(a)720 Mandamus AB....................................... 5
(a)3,900 Netcom Systems AB, Class B........................ 149
14,500 Nordbanken Holding AB............................. 106
400 OM Gruppen AB..................................... 8
6,100 Piren AB.......................................... 48
3,200 S.K.F. AB, Class B................................ 58
6,700 Sandvik AB, Class A............................... 185
2,800 Sandvik AB, Class B............................... 77
2,535 Securitas AB, Class B............................. 124
22,800 Skandia Forsakrings AB............................ 326
25,500 Skandinaviska Enskilda Banken, Class A............ 436
500 Skanska AB, Class B............................... 22
11,250 STORA, Class A.................................... 177
7,600 Svenska Cellulosa AB, Class B..................... 197
9,300 Svenska Handelsbanken, Class A.................... 431
200 Svenska Handelsbanken, Class B.................... 9
3,900 Svenskt Stal AB (SSAB), Series A.................. 60
4,900 Trelleborg AB, Class B............................ 64
1,200 Volvo AB, Class A................................. 35
14,150 Volvo AB, Class B................................. 421
2,700 WM-Data AB, Class B............................... 94
----------
8,401
----------
SWITZERLAND (7.3%)
335 ABB AG............................................ 495
635 Adecco............................................ 287
195 Alusuisse-Lonza Holdings Ltd. (Registered)........ 248
40 Banca del Gottardo................................ 29
20 Banque Cantonale Vaudoise (Bearer)................ 8
9,300 CS Holding AG (Registered)........................ 2,071
240 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 306
952 Homestake Mining Co............................... 10
1,340 Nestle (Registered)............................... 2,870
2,185 Novartis AG (Registered).......................... 3,639
55 Roche Holding AG (Bearer)......................... 816
239 Roche Holding AG (Registered)..................... 2,349
600 SAirGroup (Registered)............................ 198
60 SGS Surveillance.................................. 102
180 SMH AG (Bearer)................................... 139
140 Sulzer AG (Registered)............................ 111
2,918 Swiss Bank Corp. (Registered)..................... 1,086
495 Swiss Reinsurance (Registered).................... 1,253
3,500 Union Bank of Switzerland (Bearer)................ 1,302
830 Union Bank of Switzerland (Registered)............ 299
225 Valora Holding AG................................. 59
20 Vontobel Holding AG (Bearer)...................... 29
1,620 Zurich Versicherungs-Gesellschaft (Registered).... 1,035
----------
18,741
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active International Allocation Portfolio
11
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
THAILAND (0.0%)
(a)8,000 CMIC Finance & Securities PCL (Foreign)........... $ --
(a)18,600 General Finance & Securities PCL (Foreign)........ --
10,657 Land & House Co., Ltd. (Foreign).................. 3
(a,d)34,700 Siam City Bank PCL (Foreign)...................... --
(a)14,600 TPI Polene PCL (Foreign).......................... 1
----------
4
----------
UNITED KINGDOM (13.3%)
28,300 Abbey National plc................................ 503
18,300 Allied Irish Banks plc............................ 265
18,300 Arjo Wiggins Appleton plc......................... 61
13,000 Associated British Foods plc...................... 123
1,800 Bank of Scotland.................................. 20
36,317 Barclays plc...................................... 1,048
71,435 B.A.T. Industries plc............................. 716
20,467 Bass plc.......................................... 384
93,241 BG plc............................................ 540
18,254 BICC plc.......................................... 39
33,910 Blue Circle Industries plc........................ 192
16,670 BOC Group plc..................................... 227
25,700 Boots Co. plc..................................... 426
18,300 BPB Industries plc................................ 111
52,300 British Aerospace plc............................. 401
28,525 British Airways plc............................... 309
24,650 British Land Co. plc.............................. 253
136,532 British Petroleum Co. plc......................... 1,993
41,700 British Sky Broadcasting plc...................... 300
52,200 British Steel plc................................. 115
142,500 British Telecommunications plc.................... 1,761
84,748 BTR plc........................................... 241
7,826 Burmah Castrol plc................................ 140
54,672 Cable & Wireless plc.............................. 665
28,680 Cadbury Schweppes plc............................. 444
29,750 Capital Shopping Centers plc...................... 200
20,840 Caradon plc....................................... 64
(a)84,200 Centrica plc...................................... 142
14,396 CGU plc........................................... 269
23,543 Coats Viyella plc................................. 29
13,100 Courtaulds plc.................................... 97
2,616 De La Rue Co. plc................................. 13
80,181 Diageo plc........................................ 951
(a)11,912 Diageo plc, Class B............................... 99
80 Elementis plc..................................... --
13,189 EMI Group plc..................................... 115
1 Energy Group plc.................................. --
62,600 General Electric plc.............................. 540
31,230 GKN plc........................................... 398
77,100 Glaxo Wellcome plc................................ 2,316
18,272 Granada Group plc................................. 336
63,600 Grantchester Holdings plc......................... 182
28,100 Great Universal Stores plc........................ 371
19,870 Guardian Royal Exchange plc....................... 116
15,640 Hanson plc........................................ 95
44,988 HSBC Holdings plc................................. 1,091
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
13,800 HSBC Holdings plc (75p)........................... $ 351
20,900 Imperial Chemical Industries plc.................. 336
13,900 Kingfisher plc.................................... 224
31,641 Ladbroke Group plc................................ 174
37,500 Land Securities plc............................... 580
20,900 Lasmo plc......................................... 84
25,100 Legal & General Group plc......................... 268
138,600 Lloyds TSB Group plc.............................. 1,941
(a)5,224 Lonrho Africa plc................................. 6
5,224 Lonrho plc........................................ 25
77,300 Marks and Spencer plc............................. 704
15,700 MEPC plc.......................................... 138
30,900 National Power plc................................ 291
2,600 National Westminster Bank plc..................... 47
17,071 Peninsular & Oriental Steam Navigation Co......... 246
39,120 Pilkington plc.................................... 72
44,762 Prudential Corp. plc.............................. 590
10,300 Railtrack Group plc............................... 253
24,163 Rank Group plc.................................... 133
29,000 Reed International plc............................ 262
42,533 Reuters Group plc................................. 487
15,700 Rexam plc......................................... 68
31,348 Rio Tinto plc..................................... 353
7,800 RMC Group plc..................................... 135
34,528 Royal & Sun Alliance Insurance Group plc.......... 357
14,470 Royal Bank of Scotland Group plc.................. 251
21,127 Safeway plc....................................... 138
37,523 Sainsbury (J) plc................................. 335
7,800 Schroders plc..................................... 201
26,130 Scottish Power plc................................ 229
46,900 Sears plc......................................... 41
15,646 Sedgwick Group plc................................ 34
13,100 Slough Estates plc................................ 75
130,396 Smithkline Beecham plc............................ 1,593
12,538 Southern Electric plc............................. 113
1,600 Standard Chartered plc............................ 18
36,507 Tarmac plc........................................ 65
18,300 Tate & Lyle plc................................... 145
20,916 Taylor Woodrow plc................................ 70
44,620 Tesco plc......................................... 436
13,552 Thames Water plc.................................. 247
5,928 Thorn plc......................................... 24
13,017 TI Group plc...................................... 99
76,000 Unilever plc...................................... 810
14,586 United Utilities plc.............................. 212
71,056 Vodafone Group plc................................ 902
(a)157,400 Wates City Of London Properties plc............... 258
22,600 Zeneca Group plc.................................. 971
----------
34,093
----------
TOTAL COMMON STOCKS (Cost $146,674)............................. 176,592
----------
PREFERRED STOCKS (0.7%)
AUSTRALIA (0.1%)
16,741 News Corp., Ltd................................... 119
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active International Allocation Portfolio
12
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
AUSTRIA (0.1%)
500 Bank Austria AG................................... $ 41
664 Bank Austria AG (New)............................. 54
100 Bau Holding AG.................................... 5
----------
100
----------
GERMANY (0.4%)
1,317 SAP AG............................................ 896
283 Volkswagen AG..................................... 193
----------
1,089
----------
ITALY (0.1%)
59,900 Fiat S.p.A........................................ 149
----------
PORTUGAL (0.0%)
960 Jeronimo Martins SGPS............................. 6
----------
TOTAL PREFERRED STOCKS (Cost $726).............................. 1,463
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ------------
RIGHTS (0.0%)
GERMANY (0.0%)
(a,d)18,200 Daimler-Benz AG................................... 20
(a)6,493 Metro AG.......................................... --
----------
20
----------
PORTUGAL (0.0%)
(a)7,800 Banco Espirito Santo Comercial de Lisboa
(Registered).................................... 6
----------
SWITZERLAND (0.0%)
(a)635 Adecco............................................ --
----------
TOTAL RIGHTS (Cost $0).......................................... 26
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ------------
WARRANTS (0.0%)
FRANCE (0.0%)
(a)4,333 Cie Generale des Eaux, expiring 5/02/01........... 9
----------
HONG KONG (0.0%)
(a)7,850 Hong Kong & China Gas Co., Ltd., expiring
9/30/99......................................... 1
(a)4,300 Hysan Development Co., Ltd., expiring 4/30/99..... --
----------
1
----------
ITALY (0.0%)
(a)1,400 La Rinascente S.p.A., CW99, (RNC), expiring
12/31/99........................................ 1
(a)2,450 La Rinascente S.p.A., CW99, expiring 12/31/99..... 5
(a)5,300 Mediobanca S.p.A, expiring 12/31/00............... 25
----------
31
----------
SINGAPORE (0.0%)
(a)2,400 Asia Food & Properties Ltd., expiring 7/12/02..... --
(a)11,750 Straits Steamship, expiring 12/20/00.............. 1
----------
1
----------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
THAILAND (0.0%)
(a)6,349 National Finance & Securities PCL, expiring
11/15/99........................................ $ --
----------
TOTAL WARRANTS (Cost $0)........................................ 42
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- ------------
UNITS (0.0%)
AUSTRALIA (0.0%)
16,129 General Property Trust............................ 26
16,454 Westfield Trust................................... 32
----------
TOTAL UNITS (Cost $62).......................................... 58
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ------------
CONVERTIBLE DEBENTURES (0.0%)
FRANCE (0.0%)
FRF 60 Sanofi, 4.00%, 1/01/00............................ 81
18 Simco, 3.25%, 1/01/06............................. 18
----------
TOTAL CONVERTIBLE DEBENTURES (Cost $52)......................... 99
----------
FIXED INCOME SECURITIES (0.0%)
FRANCE (0.0%)
62 Casino Guichard-Perrachon, Series XW, 4.50%,
7/12/01......................................... 49
----------
ITALY (0.0%)
ITL 11,200 Mediobanca S.p.A., Series XW, 4.50%, 1/01/00...... 6
----------
TOTAL FIXED INCOME SECURITIES (Cost $33)........................ 55
----------
TOTAL FOREIGN SECURITIES (69.4%) (Cost $147,547)................ 178,335
----------
</TABLE>
<TABLE>
<C> <S> <C>
SHORT-TERM INVESTMENT (29.2%)
REPURCHASE AGREEMENT (29.2%)
$ 75,227 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $75,238,
collateralized by U.S. Treasury Bonds, 7.25%,
due 8/15/04, valued at $76,872 (Cost $75,227)... 75,227
----------
FOREIGN CURRENCY (0.2%)
AUD 30 Australian Dollar................................. 18
ATS 134 Austrian Schilling................................ 11
BEF 167 Belgian Franc..................................... 4
FRF 863 French Franc...................................... 143
HKD 115 Hong Kong Dollar.................................. 15
JPY 16,514 Japanese Yen...................................... 119
MYR 9 Malaysian Ringgit................................. 2
NLG 54 Netherlands Guilder............................... 27
NOK 92 Norwegian Krone................................... 12
SGD 1 Singapore Dollar.................................. 1
KRW 21,851 South Korean Won.................................. 16
ESP 102 Spanish Peseta.................................... 1
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active International Allocation Portfolio
13
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
FOREIGN CURRENCY (CONT.)
SEK 1,451 Swedish Krona..................................... $ 182
CHF 20 Swiss Franc....................................... 13
----------
TOTAL FOREIGN CURRENCY (Cost $576).............................. 564
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.8%) (Cost $223,350)..................... 254,126
----------
OTHER ASSETS (11.4%)
Cash............................................ $ 49
Securities at Value, Held as Collateral for
Securities Lending............................ 24,641
Margin Deposit on Futures Contracts............. 3,054
Dividends Receivable............................ 667
Receivable for Portfolio Shares Sold............ 484
Receivable for Daily Variation on Futures
Contracts..................................... 266
Foreign Withholding Tax Reclaim Receivable...... 121
Interest Receivable............................. 12
Other........................................... 12 29,306
----------
LIABILITIES ( - 10.2%)
Collateral on Securities Loaned................. (24,641)
Payable for Investments Purchased............... (921)
Net Unrealized Loss on Foreign Currency Exchange
Contracts..................................... (204)
Investment Advisory Fees Payable................ (203)
Custodian Fees Payable.......................... (158)
Administrative Fees Payable..................... (34)
Directors' Fees & Expenses Payable.............. (11)
Other Liabilities............................... (69) (26,241)
---------- ----------
NET ASSETS (100%)............................................. $ 257,191
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 218,938
Undistributed Net Investment Income........................... 2,736
Accumulated Net Realized Gain................................. 4,326
Unrealized Appreciation on Investments, Foreign Currency
Translations and Futures Contracts.......................... 31,191
----------
NET ASSETS.................................................... $ 257,191
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $256,665
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 20,801,243 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $12.34
----------
----------
CLASS B:
- --------------------------------------------------------------
NET ASSETS.................................................... $526
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 42,270 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $12.44
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
IN NET
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- --------------- --------- ----------- ---------------- --------- ------------
U.S.$ 186 $ 186 7/01/98 SEK 1,483 $ 186 $ --
U.S.$ 41 41 7/01/98 NLG 83 41 --
U.S.$ 55 55 7/01/98 ITL 97,079 55 --
U.S.$ 9 9 7/01/98 GBP 5 9 --
BEF 167 4 7/02/98 U.S.$ 4 4 --
MYR 10 2 7/02/98 U.S.$ 2 2 --
NOK 92 12 7/02/98 U.S.$ 12 12 --
U.S.$ 33 33 7/02/98 GBP 20 33 --
U.S.$ 66 66 7/03/98 ITL 118,062 66 --
U.S.$ 47 47 7/03/98 GBP 28 47 --
U.S.$ 39 39 7/06/98 GBP 24 39 --
SGD 1,921 1,136 7/07/98 U.S.$ 1,090 1,090 (46)
U.S.$ 307 307 7/07/98 SGD 549 325 18
U.S.$ 792 792 7/07/98 SGD 1,371 811 19
DEM 419 232 7/09/98 U.S.$ 229 229 (3)
U.S.$ 4,685 4,685 7/09/98 DEM 8,238 4,570 (115)
ITL 4,990,149 2,809 7/15/98 U.S.$ 2,774 2,774 (35)
U.S.$ 4,601 4,601 7/15/98 ESP 699,200 4,562 (39)
U.S.$ 6,082 6,082 7/15/98 ITL 10,765,659 6,060 (22)
U.S.$ 11,007 11,007 7/29/98 GBP 6,603 11,009 2
U.S.$ 228 228 7/31/98 FRF 1,379 227 (1)
MYR 2,810 666 8/04/98 U.S.$ 623 623 (43)
U.S.$ 682 682 8/04/98 MYR 2,810 666 (16)
U.S.$ 707 707 8/07/98 AUD 1,110 689 (18)
HKD 17,588 2,261 8/12/98 U.S.$ 2,264 2,264 3
U.S.$ 2,261 2,261 8/12/98 HKD 17,588 2,261 --
DEM 1,715 954 8/14/98 U.S.$ 954 954 --
DEM 2,052 1,141 8/14/98 U.S.$ 1,166 1,166 25
U.S.$ 9,058 9,058 8/17/98 GBP 5,582 9,297 239
U.S.$ 2,388 2,388 8/19/98 JPY 313,635 2,279 (109)
JPY 260,179 1,893 8/26/98 U.S.$ 1,947 1,947 54
SEK 5,212 655 9/04/98 U.S.$ 658 658 3
U.S.$ 669 669 9/04/98 SEK 5,212 655 (14)
JPY 209,830 1,530 9/10/98 U.S.$ 1,535 1,535 5
JPY 520,238 3,793 9/10/98 U.S.$ 3,808 3,808 15
FRF 3,355 557 9/16/98 U.S.$ 569 569 12
U.S.$ 6,963 6,963 9/16/98 FRF 41,897 6,960 (3)
DEM 8,853 4,932 9/18/98 U.S.$ 4,948 4,948 16
JPY 819,253 5,983 9/21/98 U.S.$ 6,018 6,018 35
JPY 152,032 1,111 9/28/98 U.S.$ 1,079 1,079 (32)
JPY 704,785 5,153 9/28/98 U.S.$ 5,140 5,140 (13)
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active International Allocation Portfolio
14
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IN NET
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- --------------- --------- ----------- ---------------- --------- ------------
DEM 8,848 $ 4,934 10/02/98 U.S.$ 4,948 $ 4,948 $ 14
DEM 8,800 4,910 10/16/98 U.S.$ 4,948 4,948 38
JPY 682,721 5,007 10/19/98 U.S.$ 4,814 4,814 (193)
--------- --------- -----
$ 100,581 $ 100,377 $ (204)
---------
--------- --------- -----
--------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- see note A-1 to financial
statements.
DEM -- German Mark
GBP -- British Pound
ITL -- Italian Lira
NCS -- Non-Convertible Shares
PCL -- Public Company Limited
RFD -- Ranked for Dividend
RNC -- Non-Convertible Savings Shares
- --------------------------------------------------------------------
FUTURES CONTRACTS:
At June 30, 1998 the following futures contracts were open:
<TABLE>
<CAPTION>
NET
UNREALIZED
NUMBER AGGREGATE APPRECIATION
OF FACE VALUE EXPIRATION (DEPRECIATION)
CONTRACTS (000) DATE (000)
<S> <C> <C> <C> <C>
- -
---------- ------------- ----------- ---------------
PURCHASES:
IBEX Plus Index 68 ESP 4,312 July-98 $ 175
Aust All Ord. 17 AUD 1,144 Sept-98 27
CAC 40 Index 95 FRF 80,627 Sept-98 348
DAX Index 8 DEM 4,700 Sept-98 130
FT-SE 100 Index 203 GBP 11,959 Sept-98 (97)
Milan MIB30 Index 16 ITL 5,442,400 Sept-98 70
TOPIX Index 1 JPY 12,445 Sept-98 3
-----
$656
-----
-----
</TABLE>
- ------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 16,177 6.3%
Consumer Goods......................... 36,433 14.2
Energy................................. 20,254 7.9
Finance................................ 42,058 16.4
Gold Mines............................. 34,268 13.3
Materials.............................. 7,264 2.8
Multi-Industry......................... 2,840 1.1
Services............................... 19,041 7.4
--------- ---
$ 178,335 69.4%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active International Allocation Portfolio
15
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Hong Kong 31.7%
India 9.6%
Indonesia 2.0%
Korea 5.4%
Malaysia 9.0%
Pakistan 1.5%
Philippines 3.9%
Singapore 8.0%
Taiwan 18.8%
Thailand 3.2%
Other 6.9%
</TABLE>
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) ALL-COUNTRY FAR
EAST FREE EX-JAPAN INDEX(1)
- ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------------
AVERAGE
AVERAGE ANNUAL
ANNUAL SINCE
YTD ONE YEAR FIVE YEARS INCEPTION
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A.... - 24.39% - 61.78% - 9.29% - 0.21%
PORTFOLIO -- CLASS B.... - 24.26 - 61.81 N/A - 30.64
INDEX -- CLASS A........ - 26.85 - 60.20 - 9.17 - 0.91
INDEX -- CLASS B........ - 26.85 - 60.20 N/A - 28.45
</TABLE>
1. The MSCI All-Country Far East Free ex-Japan Index is an unmanaged index of
common stocks and includes Indonesia, Hong Kong, Malaysia, the Philippines,
Korea, Singapore, Taiwan and Thailand (includes dividends).
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
ALL-COUNTRY FAR EAST FREE EX-JAPAN INDEX AND 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 investment objective of the Asian Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities which are
traded on recognized exchanges of Hong Kong, Singapore, Malaysia, Thailand,
Indonesia and the Philippines. The Portfolio may also invest in equity
securities traded on markets in Taiwan, South Korea, India, Pakistan, Sri Lanka
and other Asian developing markets which are open for foreign investment. The
Portfolio does not intend to invest in securities which are principally traded
in Japan or in companies organized under the laws of Japan.
For the six months ended June 30, 1998, the Portfolio had a total return of
- 24.39% for the Class A shares and - 24.26% for the Class B shares compared
to a total return of - 26.85% for the Morgan Stanley Capital International
(MSCI) All-Country Far East Free ex-Japan Index (the "Index.") For the one year
ended June 30, 1998 the Portfolio had a total return of - 61.78% for the Class
A shares and - 61.81% for the Class B shares compared to - 60.20% for the
Index. For the five-year period ended June 30, 1998 the average annual total
return for Class A was - 9.29% compared to - 9.17% for the Index. From
inception on July 1, 1991 to June 30, 1998 the average annual total return of
Class A was - 0.21% compared to - 0.91% for the Index. From inception on
January 2, 1996 to June 30, 1998 the average annual total return of Class B was
- 30.64% compared to - 28.45% for the Index.
The performance of the Portfolio's holdings in Hong Kong contributed much of the
outperformance. The continued slide in the yen forced additional pressure on the
Hong Kong/U.S. dollar peg throughout the second quarter, pressure which directly
translated into higher interest rates in Hong Kong. The Hong Kong stock market
is dominated by interest rate sensitive issues such as property and banking
shares, which led the decline of the overall market. The Portfolio has avoided
such stocks since the start of the year, concentrating its attention on
companies with low financial gearing and stable cash flows. Key Portfolio
holdings such as China Light and Power (CLP Holdings), Hong Kong
Telecommunications and Hong Kong and China Gas all held up in the weak market.
The one significant banking share the Portfolio does hold, HSBC, derives an
increasing amount of its revenue stream from outside Hong Kong and as such has
earnings insulated from Hong Kong's economy.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
16
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
Security selection in Malaysia also made a significant impact on the Portfolio's
outperformance. The Portfolio was concentrated in consumer oriented stocks such
as Rothman's and Nestle, which have dominant market share and the ability to
pass along price increases directly to the consumer. The markets decline was led
by companies with highly leveraged balance sheets and uncertain cash flows, as
well as the banks which had made the loans to those same companies. The
Portfolio avoided companies with either of those criteria in the first half of
1998.
Security selection in the Philippines made the largest negative contribution to
the Portfolio's performance. This was largely due to the steep decline in the
Portfolio's large holding in Music Semicon, a designer of content addressable
memory chips for computer networks. Delays in its next generation of products
forced the stock down, as did the indefinite postponement of its NASDAQ listing.
The +9.8% rally in the Asian markets in the first quarter of 1998 proved
short-lived as the Index fell - 33.02% in the second quarter of 1998. This
sharp decline has led to a deterioration in the year-to-date performance to
- 26.85%, and marks the lowest level the Index has reached since early 1991.
Individual country performance proved to be similarly negative, as eight of the
nine component countries of the Index posted losses. The best performing markets
were Korea, which managed a 5.6% return year-to-date, and the Philippines with a
- 4.1% fall in that same period. The most severe declines were registered in
Indonesia, China and Singapore, which fell - 57.9%, - 35.3% and - 33.8%,
respectively.
The inability of the Japanese government to address the looming disaster in its
financial sector and the corresponding depreciation of the yen against the U.S.
dollar weighed heavily on the Asian markets in the second quarter. Aside from
the obvious impact of decreased competitiveness on international markets against
Japanese goods for Asian exports, the depreciation combined with the timid
Japanese consumer have sharply curtailed Japanese imports of Asian goods.
Furthermore, the Japanese banks which had built up enormous exposure to Asian
corporate debt over the last decade have begun calling in their loans at a rapid
level, further contributing to the liquidity crunch haunting the region.
On a country-by-country basis there are a number of situations which are
worthwhile examining in closer detail. Although we retain the view that the
Chinese government will not devalue the yuan (and consequently the Hong Kong
dollar) in the short term, there are increasing pressures building up in China
which will escalate the costs this decision makes on the Chinese economy. The
competitiveness of Chinese exports has been seriously undermined by the regional
currency depreciations, with forthcoming consequences for both the level of
exports and the profitability of the export sector. Equally, if not more
important, imports in China have gained significant ground at the expense of
domestic companies. This slowdown comes at a time when the Chinese leadership
desperately needs growth throughout the economy to soak up redundant employees
from the restructuring of the State Owned Enterprises. Furthermore, inward
Foreign Direct Investment is also likely to decline sharply as flows from Hong
Kong and Japan evaporate. The impact of a yuan devaluation in the near term
would be negative for Asia, most likely resulting in the Hong Kong/U.S. dollar
peg breaking and a further round of devaluation throughout the region.
A slowing Chinese economy is just one factor that is likely to force a further
deterioration of the Hong Kong economy. Reported gross domestic product growth
in the first quarter of 1998 was - 2%, and with further negative growth
probable in the second quarter of 1998, Hong Kong could be entering into a full
blown recession. Unemployment jumped to 3.5%, very high by Hong Kong standards,
and the overnight rate hit 10% by mid-June, showing further doubt in the Hong
Kong dollar/U.S. dollar currency peg. The destruction of wealth in property and
equities, as well as the steep decline in tourism, have forced retail sales down
over 10% in the first quarter of 1998. This deflation, combined with high
interest rates, is a lethal mixture for the property sector, which has fallen
40% already, yet still remains ridiculously expensive by world standards. The
impact on the economy will continue to be severe.
Accurate forecasts of Indonesia's growth have become even more difficult since
the departure of long term leader Suharto. His appointee, Vice President B.J.
Habibie, originally seen as merely a caretaker, continues to solidify his power
with the ruling Golkar party in Jakarta. Although the riots and demonstrations
which forced Suharto from power
- --------------------------------------------------------------------------------
Asian Equity Portfolio
17
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
have subsided, distrust of the government remains simmering just below the
surface. Equally serious, the depreciation of the rupiah, combined with a
drought brought on by El Nino, indicate that simply feeding the 200 million
people of this country could prove to be difficult. The situation is exacerbated
by the flight of many of the ethnic Chinese who dominated the Indonesian economy
but were targeted for racial attacks during the riots earlier this year. Without
their capital and commercial expertise, distribution of even simple products
will remain extremely difficult in the rural areas. Inflation is also becoming a
serious problem, to add to the country's ills. Despite extremely cheap
valuations, almost ridiculous in U.S. dollar terms, the macroeconomic and
political risks in Indonesia remain immense.
Korea on the other hand has taken the lead in confronting its problems and
trying to work through its version of the Asian financial crisis. Its Financial
Supervisory Commission, composed of a mixture of leaders from the public and
private sector, has set an aggressive timetable for dealing with financial
sector reform and corporate restructuring. Furthermore, the Korea Asset
Management Corporation (KMAC) is in the final stages of formation, a government
owned entity which will be charged with acquiring the bad debt from the banking
sector in exchange for bonds drawn on the KAMC. The government has also built up
over U.S. $40 billion in foreign reserves, while the Korean current account
surplus has reached U.S. $23 billion. Though immense problems remain in the
economy, the first steps have been taken to address them.
In order for there to be a true end to this financial crisis the countries of
the region must address directly the failures in their own economies. Although
the problems in Japan have proved to be the most recent catalyst, it is
important to note that the situation in Asia, and the seeds of its eventual
recovery are based within the countries themselves. The International Monetary
Fund has instituted an initial cleansing of the banking systems in the countries
under its care, but a great deal of work domestically needs to be accomplished.
The capability and desire of banks to make loans on an economic basis, and the
regulatory framework for such an environment have to occur fundamentally at the
local level. A plan has to be made and followed about how each individual
country can address the upwards of 20% non-performing loans in their system. On
the non-financial side, manufacturing over-capacity must be shuttered and demand
stimulated at the domestic level for products. And finally, corporations must be
restructured to place a greater emphasis on shareholder's return for the region
to attract the capital and expertise essential to the rebuilding process.
Timothy D. Jensen
PORTFOLIO MANAGER
Ashutosh Sinha
PORTFOLIO MANAGER
Vinod Sethi
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Asian Equity Portfolio
18
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (93.1%)
HONG KONG (31.7%)
830,500 CLP Holdings Ltd.................................. $ 3,784
136,600 HSBC Holdings plc................................. 3,341
2,276,600 Hong Kong & China Gas Co., Ltd.................... 2,586
628,000 Hong Kong Electric Holdings Ltd................... 1,945
1,652,100 Hong Kong Telecommunications Ltd.................. 3,102
438,000 Hutchison Whampoa Ltd............................. 2,312
748,000 Li & Fung Ltd..................................... 1,207
220,000 Television Broadcasts Ltd......................... 582
----------
18,859
----------
INDIA (9.6%)
90,000 Ashok Leyland Ltd................................. 91
147,500 Bharat Heavy Electricals Ltd...................... 856
50 Castrol (India) Ltd............................... 1
31,000 Container Corp. of India Ltd...................... 334
32,250 Hero Honda Motors Ltd............................. 666
24,500 Housing Development Finance Corp., Ltd............ 1,729
62,500 Nestle India Ltd.................................. 543
5,800 Reckitt & Coleman of India Ltd.................... 39
158,050 State Bank of India............................... 788
17,000 T.V.S. Suzuki Ltd................................. 179
129,980 Tata Engineering & Locomotive Co., Ltd............ 510
----------
5,736
----------
INDONESIA (2.0%)
215,000 Astra International, Inc.......................... 15
64,500 Bat Indonesia..................................... 114
401,000 Gudang Garam...................................... 237
1,212,000 Indofood Sukses Makmur (Foreign).................. 119
3,711,000 Mayora Indah...................................... 151
272,400 Unilever Indonesia................................ 517
----------
1,153
----------
KOREA (5.4%)
10,200 Hankuk Glass Industry Co., Ltd.................... 111
(a)19,760 Nong Shim Co., Ltd................................ 855
(d)14,390 Pohang Iron & Steel Co., Ltd...................... 472
4,760 S1 Corp........................................... 482
(d)298 SK Telecom Co., Ltd............................... 135
37,366 Samsung Electronics Co............................ 1,157
8 Samsung Electronics Co. GDR....................... --
----------
3,212
----------
MALAYSIA (9.0%)
250,000 Amway (Malaysia) Holdings Bhd..................... 410
237,000 Carlsberg Brewery Malaysia Bhd.................... 720
141,000 Esso Malaysia Bhd................................. 118
669,000 Guinness Anchor Bhd............................... 709
346,000 Hap Seng Consolidated Bhd......................... 183
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
264,000 Nestle (Malaysia) Bhd............................. $ 1,196
769,000 R.J. Reynolds Bhd................................. 1,065
122,000 Rothmans of Pall Mall (Malaysia) Bhd.............. 845
87,000 Shell Refining Co. (Malaysia) Bhd................. 124
----------
5,370
----------
PAKISTAN (1.5%)
43,300 Lever Brothers Pakistan Ltd....................... 816
33,400 Shell Pakistan Ltd................................ 107
----------
923
----------
PHILIPPINES (3.9%)
299,300 La Tondena Distillers, Inc........................ 151
(a)3,089,700 Music Corp........................................ 274
8,850 Philippine Long Distance Telephone Co............. 202
637,000 San Miguel Corp., Class B......................... 840
5,462,000 SM Prime Holdings, Inc............................ 864
----------
2,331
----------
SINGAPORE (8.0%)
(a)75,000 Creative Technology Ltd........................... 928
829,000 Natsteel Electronics Ltd.......................... 1,389
279,000 Singapore Technologies Engineering Ltd............ 196
(a)598,000 Singapore Telecommunications Ltd.................. 849
192,200 United Overseas Bank Ltd. (Foreign)............... 597
414,000 Venture Manufacturing (Singapore) Ltd............. 784
----------
4,743
----------
TAIWAN (18.8%)
(a)329,750 Asustek Computer, Inc............................. 2,697
(a)140,000 China Development Corp............................ 324
(a)624,116 Compal Electronics, Inc........................... 1,680
(a)77,560 Compeq Manufacturing Co., Ltd..................... 413
(a)518,000 Delpha Construction Co., Ltd...................... 678
1,452,477 Far East Textile Ltd.............................. 1,124
(a)321,800 Hon Hai Precision Industry........................ 1,630
(a)218,060 Kuoyang Construction.............................. 343
(a)945,688 Siliconware Precision Industries Co............... 1,373
(a)453,850 Taiwan Semiconductor Manufacturing Co............. 938
----------
11,200
----------
THAILAND (3.2%)
110,800 BEC World PCL (Foreign)........................... 423
79,500 Delta Electronics (Thailand) PCL (Foreign)........ 452
664,200 Eastern Water Resources Development & Management
PCL (Foreign)................................... 913
39,500 Grammy Entertainment PCL (Foreign)................ 92
(a)20,000 GSS Array Technology PCL (Foreign)................ 47
----------
1,927
----------
TOTAL COMMON STOCKS (Cost $71,116)............................... 55,454
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
19
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
SHORT TERM INVESTMENT (0.5%)
REPURCHASE AGREEMENT (0.5%)
$ 315 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $315,
collateralized by U.S. Treasury Bonds, 11.25%,
due 2/15/15, valued at $329 (Cost $315)......... $ 315
----------
FOREIGN CURRENCY (2.7%)
HKD 992 Hong Kong Dollar.................................. 128
INR 10,743 Indian Rupee...................................... 253
MYR 360 Malaysian Ringgit................................. 87
PKR 366 Pakistan Rupee.................................... 8
PHP 616 Philippines Peso.................................. 15
SGD 14 Singapore Dollar.................................. 8
KRW 53,687 South Korean Won.................................. 39
TWD 36,715 Taiwan Dollar..................................... 1,069
THB 123 Thai Baht......................................... 3
----------
TOTAL FOREIGN CURRENCY (Cost $1,616)............................. 1,610
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (96.3%) (Cost $73,047)......................... 57,379
----------
OTHER ASSETS (20.5%)
Cash............................................... $ 2
Securities at Value, Held as Collateral for
Securities Lending............................... 9,331
Receivable for Portfolio Shares Sold............... 2,376
Dividends Receivable............................... 236
Receivable for Investments Sold.................... 217
Other.............................................. 61 12,223
----------
LIABILITIES ( - 16.8%)
Collateral on Securities Loaned.................... (9,331)
Payable for Investments Purchased.................. (237)
Custodian Fees Payable............................. (196)
Investment Advisory Fees Payable................... (105)
Payable for Portfolio Shares Redeemed.............. (41)
Directors' Fees & Expenses Payable................. (20)
Deferred Foreign Taxes Payable..................... (14)
Administrative Fees Payable........................ (11)
Distribution Fee Payable........................... (1)
Other Liabilities.................................. (42) (9,998)
---------- ----------
NET ASSETS (100%)................................................ $ 59,604
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................. $ 173,427
Undistributed Net Investment Income.............................. 2,955
Accumulated Net Realized Loss.................................... (101,080)
Unrealized Depreciation on Investments and Foreign Currency
Translations (Net of accrual for foreign taxes of $14 on
unrealized appreciation on investments)........................ (15,698)
----------
NET ASSETS....................................................... $ 59,604
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -----------------------------------------------------------------
NET ASSETS....................................................... $58,326
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 8,175,619 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $7.13
----------
----------
CLASS B:
- -----------------------------------------------------------------
NET ASSETS....................................................... $1,278
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 179,418 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $7.12
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see note A-1 to financial statements.
GDR -- Global Depositary Receipt
PCL -- Public Company Limited
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------ ------ ----------- ------------ ------ ------------
U.S.$ 106 $ 106 7/01/98 SGD 180 $ 106 $ --
U.S.$ 22 22 7/02/98 PHP 929 22 --
------ ------ -----
$ 128 $ 128 $ --
------
------ ------ -----
------ -----
</TABLE>
- ------------------------------------------------------------
SUMMARY OF COMMON STOCKS BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -----------------------------------------------------------------
Capital Equipment...................... $ 16,131 27.1%
Consumer Goods......................... 12,103 20.4
Diversified Operations................. 3,533 5.9
Energy................................. 8,422 14.1
Finance................................ 8,665 14.5
Materials.............................. 1,054 1.8
Services............................... 5,546 9.3
-------- ---
$ 55,454 93.1%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
20
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 12.8%
Hong Kong 36.1%
Japan 15.1%
Philippines 3.0%
Singapore 18.5%
Taiwan 3.9%
Other 10.6%
</TABLE>
PERFORMANCE COMPARED TO THE GPR LIFE
FAR EAST ASIA REAL ESTATE T.R. INDEX(1)
- -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------
YTD SINCE INCEPTION
---------- ---------------
<S> <C> <C>
PORTFOLIO -- CLASS A(3).......... - 29.09% - 43.22%
PORTFOLIO -- CLASS B(3).......... - 29.51 - 43.40
INDEX............................ - 26.96 - 51.73
</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.
- ------------------------------------------------------------
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.
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 six months ended June 30, 1998, the Portfolio had a total return of
- 29.09% for Class A shares and - 29.51% for Class B shares compared to
- 26.96% 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 June
30, 1998, the Portfolio had a total return of - 43.22% for Class A shares and
- 43.40% for Class B shares compared to - 51.73% for the Index.
The Portfolio's underperformance reflects the relative strength of Japan where
our portfolio was significantly underweight, and the weak showing of Singapore
where we maintain an overweight position.
MACRO-ECONOMIC BACKDROP
The key driving force behind the Asian markets during this past quarter was
Japan. Through its large share of trade and direct investment in Asia, Japan's
economic troubles have further complicated the recovery process in the Asian
countries, where currency values have plummeted. With one-third of the world's
total savings at its disposal, Japan has the economic wherewithal to stabilize
Asia. However, principally as a result of its weak political structure, Japan
has not been able to quickly address its own domestic economic problems.
Consequently, Japan has turned itself from being an integral part of the
solution to the Asian crisis to being a major part of the Asian problem because
of the size of its economy. The weakness in both the Japanese economy and its
currency also pose significant threats to the broader, inter-linked global
economy and financial system.
The adverse impact of the regional financial crisis has started to feed through
to the real economy throughout Asia since early this year. The extent and speed
of the reversal in growth was in many cases worse than expected as many
countries slid into the negative growth territory as early as the first quarter,
including Hong Kong and Malaysia. Japan also posted a negative growth rate
although it has its own set of problems. In North Asia, the sharp depreciation
of the Japanese yen has heightened concerns about a
- --------------------------------------------------------------------------------
Asian Real Estate Portfolio
21
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO (CONT.)
possible devaluation of the Chinese currency, the yuan, which in turn puts
intense pressure on the Hong Kong dollar peg. In Indonesia, the economic fallout
and social unrest brought President Suharto's 32 year rule to an end. Even
Taiwan, Australia and New Zealand have not been spared and have begun to
experience a deceleration in growth on the back of falling exports. There is
evidence that the sharp reversal in growth has led many countries in the region
to shift their policy objective from "stability" bias to "growth" bias through
fiscal stimuli.
As a major supplier of credit, the withdrawal of Japanese credit lines from the
region has resulted in rising interest rates and worsened the credit crunch.
Deteriorating asset quality at home and abroad is forcing Japanese banks to call
back loans even in fundamentally sound countries and from high quality
customers. Hong Kong appeared to be one of the worst hit by the withdrawal as
Japanese credit as a percentage of total outstanding loans in Hong Kong fell
from 15% at December 1997 to the current 10%. In addition, speculative pressure
on the Hong Kong dollar peg has also driven up interest rates. Blue-chip
property developers in Hong Kong were reported to be paying around 200 basis
points over LIBOR for funding compared with only 50 basis points last year.
REAL ESTATE MARKETS
Economic difficulties, rising unemployment, corporate restructuring and reduced
service sector activity have resulted in declining demand for real estate across
Asia, particularly in the office and residential sectors. In some cases, the
crisis has turned what was previously a supply and demand equilibrium into a
cyclical bear market as potential demand is held back. Rents have accordingly
adjusted downward, particularly in Hong Kong where the rate of change has been
very rapid. Capital values, on the other hand, have fallen even faster not just
because of lower actual and expected rental levels, but also because of higher
nominal and real interest rates arising from the economic fallout. Prime office
rents in Hong Kong have fallen to Hong Kong $38 per square foot (U.S. $5 psf)
from the recent peak of about Hong Kong $77 psf (U. S. $10 psf). In Singapore,
prime office rents are down about 20% to S$8 psf (U.S. $4.80 psf) from the peak
in 1996. After a brief period of recovery, office rents in Tokyo have begun to
experience renewed lethargy reflecting weak economic conditions. Mass
residential prices in Hong Kong have fallen by more than 40% from the peak,
while those in Singapore have declined by 30%, in local currency terms, from the
high in 1996.
While major structural problems still exist in some countries where vacancy
rates are high (north of 25% in some cases) and rising, the rapid asset price
and factor cost adjustments are likely to trigger a demand response in markets
where the economic fallout is less severe and the banking system and real estate
markets are structurally sound. We expect demand to return to more normal levels
in these markets after some degree of economic stability is achieved.
In response to the sharp decline in economic growth and residential property
prices, the Hong Kong government announced in late June a Hong Kong $32 billion
stimulus package to soften the impact of the economic crunch. Among the most
important measures are the immediate suspension of land sales until March 1999
and the doubling of government funds to Hong Kong $7.2 billion (U.S. $930
million) to help an additional 6,000 first-time home buyers.
China is now probably the only country in Asia where housing demand is rising
strongly with ample liquidity available for home financing. China's new Premier,
Zhu Rongji, announced in April that China would scrap its current welfare
housing system from July 1 this year in favor of a new home ownership scheme
designed to help boost domestic demand. As part of this reform package, fiscal
subsidies will be made to individual home purchasers while mortgage loans will
be made accessible. The People's Bank of China, the country's central bank, has
revised regulations to allow mortgage lending by all commercial banks. The
central bank has also allocated yuan 100 billion (U.S. $12 billion) for mortgage
loans in 1998 alone, a 10-fold increase from last year.
Despite the economic fallout, property prices in crisis countries such as
Thailand have not reached clearing levels. The bid-ask spreads are still wide as
owners continue to be unrealistic in their expectations and the legal framework
remains inefficient in handling foreclosures.
REAL ESTATE SECURITIES
The escalation of the crisis during the last quarter has sparked off another
round of sell-off in Asian equities and property shares. In Hong Kong and
Singapore where the banking sector is not crippled, default risks are low and
management quality high, real estate
- --------------------------------------------------------------------------------
Asian Real Estate Portfolio
22
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO (CONT.)
shares have fallen 60-80% in value from their highs in the space of a year. A
good number of well managed companies are now trading below their appraised net
asset values based on the most conservative assumptions. In the near term,
however, currency and interest rate volatilities are likely to hold back
performance of these shares. We expect potentially significant absolute
performance of these shares once currencies stabilize and interest rates are
allowed to fall in response to renewed capital inflows.
Despite the promising fundamentals, the Chinese residential property shares have
performed badly recently in tandem with the poor market sentiment toward Hong
Kong and China. Their shares are generally cheap relative to their underlying
property assets and the companies are operating in a favorable industry
environment. Although they have yet to build a track record, a few of these
companies have demonstrated, through their ability to access cheap land and the
quality of their products, their potential to become future industry leaders.
We continue to anticipate a prolonged period of economic hardship in emerging
markets such as Indonesia and Thailand. They still face major structural
problems and the quality of company management and disclosure standards are
generally poor.
Kiat Seng Seah
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Asian Real Estate Portfolio
23
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS (89.4%)
AUSTRALIA (12.8%)
60,000 BT Office Trust.................................. $ 54
46,000 Capital Property Trust........................... 60
50,000 Centro Properties Group.......................... 80
60,000 IPOH Ltd......................................... 69
71,000 Mirvac Property Trust............................ 66
48,000 Westfield Trust.................................. 92
--------
421
--------
HONG KONG (36.1%)
38,000 Cheung Kong Holdings Ltd......................... 187
380,000 China Overseas Land & Investment................. 49
287,000 China Resources Beijing Land..................... 93
317,000 HKR International Ltd............................ 112
44,000 Henderson Land Development Co., Ltd.............. 145
(a)522,000 Hopson Development Holdings Ltd.................. 114
261,000 Lai Sun Development Co., Ltd..................... 33
77,000 New World Development Co., Ltd................... 149
57,000 Sun Hung Kai Properties Ltd...................... 242
727,000 Winsan (China) Investment Group Co., Ltd......... 60
--------
1,184
--------
JAPAN (15.1%)
13,000 Daibiru Corp..................................... 84
21,000 Mitsubishi Estate Co., Ltd....................... 185
17,000 Mitsui Fudosan Co., Ltd.......................... 134
21,000 Sumitomo Realty & Development Co., Ltd........... 93
--------
496
--------
PHILIPPINES (3.0%)
200,400 Ayala Land, Inc.................................. 58
(a)1,000,000 Filinvest Land, Inc.............................. 42
--------
100
--------
SINGAPORE (18.5%)
60,000 City Developments Ltd............................ 168
68,000 DBS Land Ltd..................................... 56
48,000 Keppel Land Ltd.................................. 44
87,000 Marco Polo Developments Ltd...................... 65
40,000 Singapore Land Ltd............................... 84
448,000 Wing Tai Holdings Ltd............................ 191
--------
608
--------
TAIWAN (3.9%)
(a)97,500 Delpha Construction Co., Ltd..................... 128
--------
TOTAL COMMON STOCKS (Cost $3,699)................................. 2,937
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
FOREIGN CURRENCY (8.1%)
AUD 38 Australian Dollar................................ $ 24
HKD 111 Hong Kong Dollar................................. 14
JPY 6,952 Japanese Yen..................................... 50
SGD 286 Singapore Dollar................................. 169
TWD 300 Taiwan Dollar.................................... 9
--------
TOTAL FOREIGN CURRENCY (Cost $263)................................ 266
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (97.5%) (Cost $3,962)................... 3,203
------
OTHER ASSETS (5.9%)
Cash............................................... $ 62
Net Unrealized Gain on Foreign Currency Exchange
Contracts........................................ 49
Due from Adviser................................... 23
Receivable for Closed Foreign Currency Exchange
Contracts........................................ 20
Receivable for Investments Sold.................... 14
Dividends Receivable............................... 7
Foreign Withholding Tax Reclaim Receivable......... 1
Other.............................................. 21 197
-----
LIABILITIES ( - 3.4%)
Payable for Investments Purchased.................. (70)
Custodian Fees Payable............................. (20)
Administrative Fees Payable........................ (1)
Directors' Fees & Expenses Payable................. (1)
Other Liabilities.................................. (21) (113)
----- ------
NET ASSETS (100%)......................................... $3,287
------
------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................................ $6,115
Undistributed Net Investment Income............................ 53
Accumulated Net Realized Loss.................................. (2,192)
Unrealized Depreciation on Investments and Foreign Currency
Translations................................................. (689)
------
NET ASSETS..................................................... $3,287
------
------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $3,024
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 537,086 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $5.63
------
------
CLASS B:
- --------------------------------------------------------------
NET ASSETS.................................................... $263
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 46,450 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $5.66
----
----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Real Estate Portfolio
24
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ----------- ------- ----------- ------------ ------- ------------
JPY 6,643 $ 48 7/01/98 U.S.$ 47 $ 47 $ (1)
SGD 197 117 7/01/98 U.S.$ 115 115 (2)
HKD 397 51 7/02/98 U.S.$ 51 51 --
JPY 26,040 188 7/02/98 U.S.$ 200 200 12
JPY 65,085 469 7/02/98 U.S.$ 500 500 31
U.S.$ 186 186 7/02/98 JPY 26,040 188 2
U.S.$ 474 474 7/02/98 JPY 65,085 469 (5)
U.S.$ 51 51 7/02/98 HKD 397 51 --
AUD 532 330 7/08/98 U.S.$ 340 340 10
U.S.$ 340 340 7/08/98 AUD 520 322 (18)
HKD 5,768 744 7/09/98 U.S.$ 720 720 (24)
U.S.$ 720 720 7/09/98 HKD 5,798 748 28
TWD 3,535 103 9/18/98 U.S.$ 100 100 (3)
SGD 1,593 934 11/09/98 U.S.$ 1,000 1,000 66
U.S.$ 948 948 11/09/98 SGD 1,593 934 (14)
JPY 13,406 99 11/30/98 U.S.$ 100 100 1
SGD 885 518 12/15/98 U.S.$ 500 500 (18)
JPY 42,750 316 12/17/98 U.S.$ 300 300 (16)
------- ------- ---
$ 6,636 $ 6,685 $ 49
-------
------- ------- ---
------- ---
</TABLE>
- ------------------------------------------------------------
SUMMARY OF COMMON STOCKS BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
SECTOR DIVERSIFICATION (000) NET ASSETS
<S> <C> <C>
- --------------------------------------------------------------
Apartment.............................. $ 213 6.5%
Diversified............................ 2,019 61.4
Land................................... 88 2.7
Office and Industrial.................. 445 13.6
Shopping Center........................ 172 5.2
------- ---
$ 2,937 89.4%
------- ---
------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Real Estate Portfolio
25
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 4.5%
Brazil 17.0%
Chile 0.7%
China 0.7%
Egypt 1.8%
Greece 2.0%
Hong Kong 1.5%
Hungary 2.9%
India 7.9%
Indonesia 0.9%
Israel 4.3%
Korea 4.2%
Malaysia 2.5%
Mexico 9.7%
Pakistan 2.0%
Philippines 1.8%
Poland 2.7%
Russia 7.3%
South Africa 7.3%
Taiwan 5.4%
Thailand 1.7%
Turkey 6.3%
Venezuela 0.1%
Zimbabwe 0.6%
Other 4.2%
</TABLE>
PERFORMANCE COMPARED TO THE IFC GLOBAL
TOTAL RETURN COMPOSITE INDEX(1)
- -------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------------
AVERAGE
AVERAGE ANNUAL
ANNUAL SINCE
YTD ONE YEAR FIVE YEARS INCEPTION
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A.... - 14.42% - 32.66% 2.83% 6.31%
PORTFOLIO -- CLASS B.... - 14.48 - 32.83 N/A - 2.57
INDEX -- CLASS A........ - 15.84 - 38.58 0.38 3.25
INDEX -- CLASS B........ - 15.84 - 38.58 N/A - 9.80
</TABLE>
1. The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (includes dividends).
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS
COUNTRY OR REGIONAL INDICES, 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 investment objective of the Emerging Markets Portfolio is to provide
long-term capital appreciation by investing in equity securities of emerging
country issuers.
For the six months ended June 30, 1998, the Portfolio had a total return of
- 14.42% for the Class A shares and - 14.48% for the Class B shares compared
to a total return of - 15.84% for the IFC Global Total Return Composite Index
(the "Index"). For the one year ended June 30, 1998, the Portfolio had a total
return of - 32.66% for the Class A shares and - 32.83% for the Class B shares,
compared to - 38.58% for the Index. For the five-year period ended June 30,
1998, the average annual total return of Class A was 2.83% compared to 0.38% for
the Index. From inception on September 25, 1992 to June 30, 1998, the average
annual total return for Class A was 6.31% compared to 3.25% for the Index. From
inception on January 2, 1996 to June 30, 1998, the average annual total return
of Class B was - 2.57% compared to - 9.80% for the Index.
The spectacular bust in Asia and the bear market in emerging countries have
heightened the importance of resolving the issues plaguing these markets. In our
view, investors are passing judgment that capitalism without democracy is
fundamentally flawed, and they are demanding politically open systems which
encourage the free flow of information of all kinds. This free flow of
information is ultimately the best natural "regulator" in the world. A free
press, full and frequent disclosure by corporations, government agencies and, in
particular, the banking system is vital for vibrant and effective economic
functioning.
It is our opinion that one of the most critical factors in the modernizing
equation for poor countries, particularly democracies, is the specter of mass
unemployment. Economic liberalization dramatically increases efficiency and is
fundamentally deflationary in its early stages. Japan, Asia and Russia are in
the throes of an inevitable adjustment, and Latin America, particularly Mexico,
is in the early stages of recovering from one. In truly impoverished countries,
unemployment is more than a statistic and a political inconvenience. Social
safety nets are crucial in countries with high illiteracy and low or no labor
mobility. Mass privatizations are critical, not only in increasing efficiency
and accountability in large parts of the economy, but also as an important
source of funding for social security and unemployment benefits.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
26
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
At the microeconomic level, a focus on shareholder values needs to replace the
idea of old style "Asian Values", i.e., corporations must be run in the interest
of the owners, and not directed by overweening politicians, ministries or run in
the "national interest." In today's world of low and declining tariffs, intense
global competition and readily available information, corporate survival will
increasingly depend on producing goods and services of better quality at lower
prices. The corporate largesse engendered by the corrupt nexus between politics
and big business must end. Increasingly, the ability to extract earnings from
assets that exceed their cost of capital will be key. Developing countries will
have to focus on nurturing and producing a professional cadre of businessmen who
can steer family-begun and run empires in a more competitive global landscape.
Education at the management and employee level will be critical, otherwise
technologically driven productivity jumps, primarily in the West, will erode one
of the important competitive edges of the Emerging Markets -- cheap and
plentiful labor.
To summarize, we believe there are several important lessons to be learned from
the Asian currency crisis:
- - Consistency in fiscal, monetary and currency policy is crucial. Inconsistency
is brutally punished.
- - Banking systems are the heart of an economy and must be carefully and
rigorously supervised.
- - Bankruptcy laws are crucial cleansing solvents, and must be clearly stated and
enforced.
- - Return on equity must exceed the cost of equity. Prices of both must be clear;
shareholder and property rights must be respected in the capital markets and
in the board room.
- - Deregulating capital markets without deregulating domestic industry is a
disastrous combination.
During the second quarter, a second round of Asian contagion spread throughout
the emerging markets largely due to Japan's equity and currency malaise. For the
second quarter ended June 30, 1998 the Portfolio had a total return of -20.88%
for the Class A shares and -20.88% for the Class B shares compared to -21.59%
for the Index. The Portfolio's edge over the Index was largely driven by strong
stock selection, particularly in Russia, Brazil, India, and Taiwan. Our
underweight position in Malaysia was the single most important contributor to
outperformance on a country basis as the market fell 46.1% during the second
quarter. Also favorable was our overweight exposure to Poland and Turkey which
returned - 2.7% and +9.5%, respectively. The most notable negative was our
underweight position in Greece which was up 17.8% over the second quarter.
The recent turmoil in the emerging markets has led to steep declines in all the
Latin markets. The Latin region fell 20.0% during the second quarter led by
Venezuela ( - 40.2%), Brazil ( - 22.0%), and Chile ( - 21.7%). Peru was the best
performing Latin market, falling 4.7%. Declining commodity prices (particularly
oil and copper) and political noise given upcoming presidential elections
(Brazil and Venezuela) have negatively affected these markets.
During the second quarter, we increased our Argentine exposure by approximately
2%, to a market weight position. This increase was driven by signs of economic
strength and the government's commitment to reform. We trimmed 2% from our
Brazilian holdings, bringing us to a market-neutral position. While Brazil
offers attractive value and growth opportunities on a stock level, it suffers
from deteriorating macro variables, such as a widening fiscal deficit and a
vulnerable currency. In Argentina and Brazil, we are focusing on the telecom
sector given its strong operating earnings growth and privatization potential.
While remaining underweight, we increased (+1%) our Mexican exposure during the
month of April. Our underweight position is driven by a deterioration in the
macro environment (i.e., worsening trade account and expectations for higher
inflation and interest rates). We are focusing on the consumer-related
industries, such as beverages and retailers, given the continued strength of the
Mexican consumer.
The Asian markets plunged 33.2% during the second quarter, driven by declines in
Thailand ( - 52.6%), Indonesia ( - 52.5%), and Malaysia ( - 46.1%). The best
performing Asian market was Taiwan, which fell 23.1%. Asia's abysmal returns
were a result of renewed fears that Asia's currency markets would devalue again
based on currency instability in Japan and Russia. Also disconcerting for the
markets has been news of mounting bad bank loans, and rising interest rates,
inflation and unemployment within South East Asia. The most notable political
event took place in Indonesia, where President Suharto resigned on May 21st
after leading the country for 32 years. Vice President Habibie replaced him (to
the
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
27
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
dismay of many student protesters) and has pledged new general elections next
year. We expect that Habibie will be in office on a transitional basis.
The equity markets of the Indian sub-continent plummeted, with India and
Pakistan falling 20.8% and 52.3%, respectively for the second quarter. Both
markets toppled in the aftermath of nuclear tests, sparking renewed tension in
the region and economic sanctions from the U.S. and Japan. We had been focusing
on these markets as they offer good value and growth potential. Nevertheless,
with the announcement of a disappointing Indian budget on June 1st, we have
begun to trim our overweight position there.
Europe, Middle East and Africa posted disparate returns. The laggards included
Russia ( - 53.1%) and South Africa ( - 26.6%). Turkey and Israel were the star
performers of this region, returning +9.5% and +5.8%, respectively. Russia's
equity market was decimated this past quarter given political changes, pressure
on the currency, and oil price declines. At the end of March, President Yeltsin
dismantled his cabinet in a successful effort to get rid of then Prime Minister
Chernomyrdin. Yeltsin assembled his new team headed by Prime Minister Kiriyenko,
who had previously been the Fuel and Energy Minister. In the short-term,
sentiment deteriorated as fears over currency instability forced the central
bank to hike interest rates by more than 100%. On a positive note, expectations
of an IMF package for the ailing economy have been realized and should be
supportive of the market and currency going forward.
South African equity and currency markets faced an arduous June, as returns
spiraled downward throughout the month. The equity market fell 23.3% in June,
including a 15.7% decline in the currency versus the dollar. A weak supply of
foreign currency reserves left the government unable to ward off increasing
pressure on the currency, as speculators sensed vulnerability. A lack of
consistency in implementing monetary policy led to a loss of confidence in the
central bank. The central bank continued to tinker with overnight repurchase
rates throughout the month, only to induce more pessimism over the short-term
future of the South African market. Ongoing structural problems in wages, which
remain high in real terms, weaker dollar commodity prices and low economic
growth conspired to create an overvalued rand vis-a-vis Asian currencies,
further eroding the competitiveness of South African companies.
Over the course of the second quarter, we entered the Greek market by +2% given
our expectation for improving macroeconomic numbers as Greece prepares to join
the European Union. We moved to an overweight stance on Hungary as a result of
improving economic growth and declining inflation. Though still overweight, we
trimmed 2% from our exposure to Russia as interest rates rose to astronomical
levels. Lastly, while maintaining our underweight position, we added 3% to South
Africa where we are focusing on the corporate restructuring story.
MARKET OUTLOOK
With most Asian markets down 75%-90% and others halved, we believe we are
somewhere close to an important economic and market trough. The speed and size
of the recovery in these countries will be a function of recognizing and
resolving the issues discussed in our general overview. In Asia, we are in the
midst of a Japan-yen driven panic that has led to a second round of volatility
in Asia. Nonetheless, the early indications are that Korea and Thailand in
particular are starting to transform. Both these countries have new political
leadership which should pave a clearer path to readjustment. With the market
down 95% and Suharto ousted, it is easy, though glib, to say that the worst is
over in Indonesia. The repair work to construct both a free market economy and a
functioning democracy is going to be long and painful. The ability of Russia and
China to adapt to economic recessions and the intense pressure to devalue are
important factors that have yet to play out.
The markets are in an unforgiving mood, having driven China/Hong Kong down 50%
and Russia down 70%. There may be worse economic, and perhaps political news
ahead, particularly if the Japanese mandarins don't take their heads out of the
sand. However, we believe that the death knell to socialism's last and true
champions has been struck and the evidence indicates that Darwinian adaptation
is underway. Stock buybacks in Japan, chaebol asset sales in Korea, bankruptcy
law formulation in Thailand and the passage of social security reform in Brazil
are perhaps the first drops of rain after the long drought.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
28
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
Asset valuations are near bargain levels. Investor sentiment is the most
depressed that we have ever seen, and we are seeing the early signs of
restructuring across several markets. Yen stability and some decisive action by
Japan to end its crisis of confidence will most likely be the catalyst that
arrests the current free fall in sentiment and prices. We are aligning our
Portfolio more towards countries and companies that are demonstrating
hard-headed adaptability to the new environment we envisage.
Madhav Dhar
PORTFOLIO MANAGER
Robert L. Meyer
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
29
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
COMMON STOCKS (92.9%)
ARGENTINA (4.5%)
(a)6 Acindar, Class B................................. $ --
113,980 Nortel ADR....................................... 2,835
649,201 Telecom Argentina ADR............................ 19,354
985,258 Telefonica Argentina ADR......................... 31,959
226,535 YPF ADR.......................................... 6,810
-----------
60,958
-----------
BRAZIL (16.9%)
1,004,948,653 Banco Bradesco (Preferred)....................... 8,429
(a,d)295,998,880 Banco Nacional (Preferred)....................... 13
18,416,030 Brahma (Preferred)............................... 11,465
187,666 Brahma ADR (Preferred)........................... 2,346
567,030,179 CEMIG (Preferred)................................ 17,650
165,913 CEMIG ADR (Preferred)............................ 5,136
(e)103,241 CEMIG ADR (Preferred)............................ 3,271
(d)12,714,900 Coteminas........................................ 3,463
(e)98,865 Coteminas ADR.................................... 1,348
40,575,768 CRT, Class A (Preferred)......................... 44,240
119,441 CVRD, Class A (Preferred)........................ 2,375
185,219 CVRD ADR (Preferred)............................. 3,916
(a)2,019,600 EBE (Preferred).................................. 31
(a)2,019,600 EMAE (Preferred)................................. 2
2,019,600 EPTE (Preferred)................................. 7
2,019,600 Eletropaulo Metropolitana (Preferred)............ 150
11,559,000 Encorpar (Preferred)............................. 29
1,277,207 Light............................................ 392
1,188,000 Lightpar......................................... --
(a,d)119,019,000 Lojas Arapua (Preferred)......................... 75
(a,e)120,830 Lojas Arapua GDR (Preferred)..................... 65
52,673,000 Lojas Renner (Preferred)......................... 1,549
39,236,000 Pao de Acucar (Preferred)........................ 882
128,154 Pao de Acucar ADR................................ 2,900
40,540,333 Petrobras (Preferred)............................ 7,536
(e)59,795 Petrobras ADR (Preferred)........................ 1,115
51,302,000 Telebras......................................... 4,081
179,340,000 Telebras (Preferred)............................. 19,507
591,783 Telebras ADR (Preferred)......................... 64,615
(a)17,996,000 Telerj Celular, Class B (Preferred).............. 1,058
1 Telesp........................................... --
478,299 Telesp (Preferred)............................... 112
(a)84,685,299 Telesp Celular, Class B (Preferred).............. 7,029
402,565 Unibanco ADR (Preferred)......................... 11,876
-----------
226,663
-----------
CHILE (0.7%)
147,900 CCU ADR.......................................... 3,124
110,760 Endesa ADR....................................... 1,578
164,545 Enersis ADR...................................... 4,021
67,786 Santa Isabel ADR................................. 746
-----------
9,469
-----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
CHINA (0.7%)
(a)231,575 Huaneng Power International, Inc. ADR............ $ 3,112
2,029,000 Qingling Motors Co., Class H..................... 563
(a)357,650 Yanzhou Coal Mining Co., Ltd. ADR................ 3,487
20,095,000 Zhenhai Refining & Chemical Co., Ltd., Class H... 2,594
-----------
9,756
-----------
EGYPT (1.8%)
66,200 Al-Ahram Beverages Co. GDR....................... 2,082
54 Ameriyah Cement Co............................... 1
241,592 Commercial International Bank.................... 2,663
54,437 Commercial International Bank GDR (Registered)... 591
166,555 Eastern Tobacco.................................. 2,987
18,200 Egypt Gas Co..................................... 1,744
98,700 Egyptian Finance & Industrial (New).............. 2,112
78,000 Helwan Cement.................................... 1,178
50,603 Industrial & Engineering......................... 823
80,460 Madinet Nasr Housing & Development............... 3,851
20,885 North Cairo Flour Mills Co....................... 353
2,500 Paints & Chemical Industry....................... 72
331,200 Paints & Chemical Industry GDR................... 2,931
125,765 Tourah Portland Cement........................... 2,166
-----------
23,554
-----------
GREECE (2.0%)
(a)282,850 Hellenic Petroleum............................... 2,313
(a)699,819 Hellenic Telecommunication Organization.......... 17,960
23,040 National Bank of Greece.......................... 2,956
73,620 STET Hellas Telecommunications ADR............... 3,055
-----------
26,284
-----------
HONG KONG (1.5%)
1,701,000 CLP Holdings Ltd................................. 7,750
1,228,000 China Resources Enterprise Ltd................... 1,268
6,092,000 Ng Fung Hong Ltd................................. 4,207
321,000 Shanghai Industrial Holdings Ltd................. 756
4,136,000 South China Morning Post Holdings Ltd............ 1,988
654,000 Sun Hung Kai Properties Ltd...................... 2,777
8,647,000 Zhejiang Expressway Co., Ltd., Class H........... 1,451
-----------
20,197
-----------
HUNGARY (2.9%)
(a)58,185 Gedeon Richter Rt................................ 4,683
28,300 Gedeon Richter Rt. GDR (Registered).............. 2,321
617,380 Matav Rt......................................... 3,585
126,830 Matav Rt. ADR.................................... 3,734
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
30
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
HUNGARY (CONT.)
<TABLE>
<C> <S> <C>
775,714 MOL Magyar Olaj-es Gazipari Rt. GDR
(Registered)................................... $ 20,906
(a)86,300 OTP Bank Rt...................................... 4,242
-----------
39,471
-----------
INDIA (7.8%)
6,575 Apollo Tyres Ltd................................. 14
592 Associated Cement Cos., Ltd...................... 17
358,400 Bajaj Auto Ltd................................... 4,835
3,991,800 Bharat Heavy Electricals Ltd..................... 23,155
(a)128,000 Bharat Petroleum Corp., Ltd...................... 1,059
31 Ceat Ltd......................................... --
(d)1,215,900 Container Corp. of India Ltd..................... 13,105
156,550 Cummins India.................................... 1,302
(a)255,240 Esab India Ltd................................... 460
1,900 Federal Bank Ltd................................. 3
527,313 Hero Honda Motors Ltd............................ 10,888
166,000 Hindustan Petroleum Corp., Ltd................... 1,529
200,000 Hoechst Marion Roussel Ltd....................... 1,868
131,186 Housing Development Finance Corp., Ltd........... 9,260
(a,g)133,194 India Magnum Fund Ltd., (The) Class A............ 4,262
300 Indian Petrochemicals Corp., Ltd................. --
100 Indo Rama Synthetics Ltd......................... --
600 Industrial Credit & Investment Corp. of India
Ltd............................................ --
201,200 Infosys Technology Ltd........................... 10,548
150 ITC Bhadrachalam Paperboards Ltd................. --
372,162 ITC Ltd.......................................... 5,723
35,000 ITC Ltd. GDR..................................... 614
(a)52,862 JK Synthetics Ltd................................ 2
175,950 Larsen & Toubro Ltd.............................. 952
40,000 Larsen & Toubro Ltd. GDR......................... 374
(a,g)42,697,100 Morgan Stanley Growth Fund....................... 6,042
131,581 MRF Ltd., Class B................................ 5,992
154,400 Shanti Gears Ltd................................. 255
180,750 Shriram Honda Power Equipment, Class B........... 597
(d)45,000 Sri Venkatesa Mills Ltd.......................... 49
272,300 State Bank of India.............................. 1,357
3,114 Sudarshan Chemical Industries Ltd................ 3
988 Tata Engineering & Locomotive Co., Ltd........... 4
2,100 Wartsila Diesel Ltd.............................. 8
-----------
104,277
-----------
INDONESIA (0.9%)
4,055,341 Gudang Garam..................................... 2,392
(a)68,600 Gulf Indonesia Resources Ltd..................... 789
16,715,855 Indah Kiat Pulp & Paper Corp. (Foreign).......... 3,202
982,500 Semen Gresik..................................... 560
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
12,946,800 Telekomunikasi Indonesia......................... $ 3,665
292,995 Telekomunikasi Indonesia ADR..................... 1,703
-----------
12,311
-----------
ISRAEL (4.3%)
(a)2,208,000 Bank Hapoalim Ltd. (Registered).................. 6,679
(a)216,300 Dor Energy 1988 Ltd.............................. 1,557
525,000 First International Bank of Israel, Class 1...... 820
768,048 First International Bank of Israel, Class 5...... 6,007
180,543 Koor Industries Ltd.............................. 20,861
(a)155,301 Orbotech Ltd..................................... 5,649
4,184,850 Supersol Ltd..................................... 13,788
122,100 Supersol Ltd. ADR................................ 2,015
-----------
57,376
-----------
KOREA (4.2%)
191,000 Hankuk Glass Industry Co., Ltd................... 2,087
(d)650,093 Pohang Iron & Steel Co., Ltd..................... 21,311
42,060 S1 Corp.......................................... 4,258
784,903 Samsung Electronics Co........................... 24,296
(a)18,478 Samsung Electronics Co. GDR...................... 258
1,380 Samsung Fire & Marine Insurance Co............... 230
(d)8,044 SK Telecom Co., Ltd.............................. 3,636
-----------
56,076
-----------
MALAYSIA (2.5%)
202,000 Carlsberg Brewery Malaysia Bhd................... 613
2,355,200 Genting Bhd...................................... 4,256
1,922,000 Golden Hope Plantations Bhd...................... 1,760
1,204,000 Kuala Lumpur Kepong Bhd.......................... 1,944
(a)1,352,000 Magnum Corp. Bhd................................. 502
1,413,600 Malayan Banking Bhd.............................. 1,424
1,413,600 Malayan Banking Bhd, Class A..................... 1,424
491,000 Malaysian International Shipping Corp. Bhd
(Foreign)...................................... 715
385,000 Nestle (Malaysia) Bhd............................ 1,744
1,502,000 Petronas Gas Bhd................................. 2,787
492,000 R.J. Reynolds Bhd................................ 682
498,000 Rothmans of Pall Mall (Malaysia) Bhd............. 3,450
1,825,000 Technology Resources Industries Bhd.............. 1,253
3,974,000 Telekom Malaysia Bhd............................. 6,703
3,451,000 Tenaga Nasional Bhd.............................. 4,158
-----------
33,415
-----------
MEXICO (7.4%)
(a)2,326,269 Banacci, Class B................................. 4,528
(a)966,103 Banacci, Class L................................. 1,558
1,248,325 Bancomer, Class B................................ 465
(a,e)154,080 Bancomer, Class B ADR............................ 1,137
1,592,495 Cemex CPO........................................ 5,969
994,727 Cemex CPO ADR.................................... 7,465
60,580 Cemex, Class B................................... 267
219,218 Cemex, Class B ADR............................... 1,932
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
31
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
MEXICO (CONT.)
<TABLE>
<C> <S> <C>
(a)32,768 Femsa ADR........................................ $ 1,032
2,963,284 Kimberly-Clark, Class A.......................... 10,465
(a)518,854 Televisa CPO ADR................................. 19,522
897,335 Telmex, Class L ADR.............................. 43,128
189,267 TV Azteca ADR.................................... 2,046
-----------
99,514
-----------
MOROCCO (0.0%)
5,924 SNI Maroc, Series 'V' (Bearer)................... 568
-----------
PAKISTAN (2.0%)
31 Crescent Textile Mills Ltd....................... --
(a)3,162 D.G. Khan Cement Ltd............................. --
6,361,100 Fauji Fertilizer Co., Ltd........................ 6,864
3,212,900 Hub Power Co..................................... 882
1,252,665 Pakistan State Oil Co., Ltd...................... 1,983
38,350 Pakistan Telecommunications Corp. GDS............ 1,323
40,292,700 Pakistan Telecommunications Corp., Class A....... 14,158
(a)5,627,702 Sui Northern Gas................................. 1,062
-----------
26,272
-----------
PERU (0.0%)
49 Cementos Lima.................................... --
-----------
PHILIPPINES (1.8%)
16,091,400 Ayala Corp....................................... 4,148
344,704 Ayala Land, Inc., Class B........................ 99
1,636,890 Manila Electric Co., Class B..................... 4,318
346,170 Philippine Long Distance Telephone Co............ 7,886
26,100 Philippine Long Distance Telephone Co. ADR....... 591
3,176,360 San Miguel Corp., Class B........................ 4,189
18,875,000 SM Prime Holdings, Inc........................... 2,987
-----------
24,218
-----------
POLAND (2.7%)
(a)198,868 Agros Holding, Class C........................... 2,909
81,937 Bank Handlowy W Warszawie........................ 1,563
42,170 Bank Slaski...................................... 2,830
2,543,300 BIG Bank Gdanski................................. 3,392
194,000 BIG Bank Gdanski GDR............................. 3,773
107,400 BRE Bank......................................... 2,911
(a)127,360 Debica........................................... 2,557
(a,d)33,400 Eastbridge N.V................................... 2,245
(a)971,512 Elektrim......................................... 11,841
(a)68,040 Exbud GDR........................................ 820
(a)483,800 Polifarb Cieszyn-Wroclaw......................... 1,249
-----------
36,090
-----------
RUSSIA (6.9%)
(d)592,359 Alliance Cellulose Ltd........................... 2,358
43,000 AO Tatneft ADR................................... 333
(a)600,000 Global Tele-Systems Group, Inc. (Registered)..... 29,250
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
(a)214,733 Lukoil Holding................................... $ 1,836
43,330 Lukoil Holding ADR............................... 1,439
11,024,330 Mosenergo ADR.................................... 551
(a,d)37,259,635 Mustcom.......................................... 12,843
(e)124,600 Pliva d.d. GDR................................... 2,025
(a,d)317,851 Russian Telecom Development Corp................. 1,510
(a,d)990 Storyfirst Communications, Inc., Class C......... 1,416
(a,d)2,640 Storyfirst Communications, Inc., Class D......... 3,775
(a,d)3,250 Storyfirst Communications, Inc., Class E......... 4,648
(a,d)1,331 Storyfirst Communications, Inc., Class F......... 3,807
267,280 Surgutneftgaz ADR................................ 1,069
(a,d)21,882,643 Svyaz Finance.................................... 17,506
113,790 Tatneft ADR...................................... 882
11,857,500 Unified Energy Systems (2nd Issue)............... 1,533
(a)133,635 Vimpel-Communications ADR........................ 5,980
-----------
92,761
-----------
SOUTH AFRICA (7.2%)
709,930 Amalgamated Banks of South Africa................ 4,438
373,898 Barlow Rand Ltd.................................. 1,974
482,857 Bidvest Group Ltd................................ 3,691
22,120 Coronation Holdings Ltd.......................... 344
90,900 Coronation Holdings Ltd. (New)................... 1,367
1,142,650 Ellerine Holdings Ltd............................ 6,274
615,100 Forbes Group Ltd................................. 1,221
1,966,409 Illovo Sugar Ltd................................. 2,458
532,865 Liberty Life Association of Africa Ltd........... 10,407
938,175 Malbak Ltd....................................... 634
4,884,660 NBS Boland Group Ltd............................. 6,354
(a)7,748,300 New Africa Investments Ltd., Class N............. 8,312
2,118,130 Orion Selections Holdings Ltd.................... 3,578
1,527,210 Orion Selections Ltd............................. 1,896
890,500 Persetel Holdings Ltd............................ 7,973
520,100 Primedia Ltd., Class N........................... 3,418
3,268,425 Protea Furnishers Ltd............................ 2,319
798,730 Rembrandt Group Ltd.............................. 4,993
1,732,030 Sasol Ltd........................................ 10,051
355,150 South African Breweries Ltd...................... 7,320
2,572,874 The Education Investment Corp., Ltd.............. 4,673
3,956,900 Woolworths Holdings Ltd.......................... 2,941
-----------
96,636
-----------
TAIWAN (5.4%)
(a)1,329,500 Asustek Computer, Inc............................ 10,873
(a)5,589,000 Chinatrust Commercial Bank....................... 5,514
(a)3,886,062 Compal Electronics, Inc.......................... 10,461
13,786,054 Far East Textile Ltd............................. 10,672
(a)1,995,000 Hon Hai Precision Industry....................... 10,103
(a)2,002,500 Kuoyang Construction............................. 3,147
1,523,000 President Chain Store Corp....................... 4,853
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
32
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
TAIWAN (CONT.)
<TABLE>
<C> <S> <C>
(a)7,143,072 Siliconware Precision Industries Co.............. $ 10,374
(a)3,524,000 Taiwan Semiconductor Manufacturing Co............ 7,282
-----------
73,279
-----------
THAILAND (1.7%)
943,950 Advanced Info Service PCL (Foreign).............. 4,026
305,500 BEC World PCL (Foreign).......................... 1,166
4,742,800 Bangkok Bank PCL (Foreign)....................... 5,844
619,350 Delta Electronics (Thailand) PCL (Foreign)....... 3,522
224,000 Lanna Lignite PCL (Foreign)...................... 154
(a,d)994,300 National Petrochemical PCL (Foreign)............. 277
(a)709,600 PTT Exploration & Production PCL (Foreign)....... 5,381
521,900 Shinawatra Computer Co. PCL (Foreign)............ 1,905
(a)34,400 Siam Cement PCL (Foreign)........................ 24
(a)268,100 Thai Engine Manufacturing PCL (Foreign).......... 102
985,900 United Communication Industry PCL (Foreign)...... 467
-----------
22,868
-----------
TURKEY (6.2%)
(e)159,280 Akbank T.A.S..................................... 1,028
32,801,600 Akbank T.A.S..................................... 1,059
96,202,500 Arcelik.......................................... 4,516
49,231,100 Ege Biracilik.................................... 5,823
21,320,000 Erciyas Biracilik................................ 3,242
(a)76,997,000 Eregli Demir Celik............................... 11,999
1,791,000 Migros (Registered).............................. 1,749
11,666,000 Petrol Ofisi A.S................................. 2,979
26,693,000 Turk Sise ve Cam Fabrikalari A.S................. 195
84,697,500 Turkiye Is Bankasi, Class C...................... 3,419
(a)70,055,000 Vestel Elektronik Sanayi Ve Ticaret A.S.......... 9,339
1,488,903,221 Yapi Ve Kredi Bankasi A.S........................ 38,019
-----------
83,367
-----------
VENEZUELA (0.1%)
2,164,326 Electricidad de Caracas.......................... 977
-----------
ZIMBABWE (0.6%)
6,665,249 Delta Corp., Ltd................................. 4,367
290,800 Meikles Africa Ltd............................... 371
1,682,700 Meikles Africa Ltd. ADR.......................... 2,061
(e)9,900,000 Trans Zambesi Industries Ltd..................... 1,237
3,800,000 Trans Zambesi Industries Ltd. (Registered)....... 475
-----------
8,511
-----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
OTHER (0.2%)
(g)245,645 Morgan Stanley Africa Investment Fund, Inc....... $ 2,917
-----------
TOTAL COMMON STOCKS (Cost $1,486,352)................................ 1,247,785
-----------
PREFERRED STOCKS (0.0%)
COLOMBIA (0.0%)
(d)103,207 Bancolombia...................................... 192
-----------
RUSSIA (0.0%)
(a)85,000 Norilsk Nickel................................... 187
-----------
TOTAL PREFERRED STOCKS (Cost $973)................................... 379
-----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------------
RIGHTS (0.2%)
BRAZIL (0.1%)
(a)1,061,295 CRT.............................................. --
(a)1,111,637 CRT (RFD)........................................ 1,212
(a)22,479 TELESP (Preferred)............................... --
-----------
1,212
-----------
POLAND (0.0%)
(a)107,400 BRE Bank......................................... 31
-----------
TURKEY (0.1%)
(a)20,501,000 Akbank T.A.S..................................... 527
(a)26,693,000 Turk Sise ve Cam Fabrikalari A.S................. 882
-----------
1,409
-----------
TOTAL RIGHTS (Cost $1,436)........................................... 2,652
-----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------------
WARRANTS (0.0%)
THAILAND (0.0%)
(a)1,020,633 Siam Commercial Bank PCL, (Foreign) (Cost $0).... --
-----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- ----------------
UNITS (2.7%)
MEXICO (2.3%)
971,329 Femsa............................................ 30,251
-----------
RUSSIA (0.4%)
(a,d)1,637 Storyfirst Communications, Inc., First Section,
Tranche I, 25.00%, 7/30/98..................... 2,341
(a,d)96 Storyfirst Communications, Inc., Second Section,
Tranche I, 25.00%, 7/30/98..................... 137
(a,d)421 Storyfirst Communications, Inc., Tranche II,
26.00%, 7/30/98................................ 602
(a,d)562 Storyfirst Communications, Inc., Tranche IV,
28.00%, 7/30/98................................ 804
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
33
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
UNITS (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
RUSSIA (CONT.)
<TABLE>
<C> <S> <C>
(a,d)654 Storyfirst Communications, Inc., Tranche V,
29.00%, 7/30/98................................ $ 936
(a,d)550 Storyfirst Communications, Inc., Tranche VI,
30.00%, 7/30/98................................ 787
-----------
5,607
-----------
TOTAL UNITS (Cost $26,997)........................................... 35,858
-----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------------
CONVERTIBLE DEBENTURES (0.1%)
INDIA (0.0%)
INR 336 DCM Shriram Industries Ltd.,
7.50%, 2/21/02................................. 176
-----------
SOUTH AFRICA (0.1%)
ZAR (a)111 Sasol Ltd., 8.50%, 12/29/49...................... 621
-----------
TOTAL CONVERTIBLE DEBENTURES (Cost $1,863)........................... 797
-----------
NON-CONVERTIBLE DEBENTURES (0.1%)
INDIA (0.1%)
INR 341 DCM Shriram Industries Ltd., (Floating Rate),
9.90%, 2/21/02................................. 225
700 Saurashtra Cement & Chemicals Ltd., 18.00%,
11/27/98....................................... 1,399
-----------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $2,864)....................... 1,624
-----------
TOTAL FOREIGN SECURITIES (96.0%)
(Cost $1,520,485).................................................. 1,289,095
-----------
SHORT-TERM INVESTMENT (4.3%)
REPURCHASE AGREEMENT (4.3%)
$ 57,760 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $57,769,
collateralized by U.S. Treasury Notes, 5.75%,
due 11/15/00, valued at $58,952 (Cost
$57,760)....................................... 57,760
-----------
FOREIGN CURRENCY (1.2%)
ARP 4 Argentine Peso................................... 4
BRL 2,170 Brazilian Real................................... 1,876
CAD 1 Canadian Dollar.................................. 1
COP 5,164 Colombian Peso................................... 4
EGP 886 Egyptian Pound................................... 260
HKD 1,502 Hong Kong Dollar................................. 194
HUF 3,871 Hungarian Forint................................. 18
INR 51,781 Indian Rupee..................................... 1,221
IDR 2,262,058 Indonesian Rupiah................................ 153
MYR 5,977 Malaysian Ringgit................................ 1,440
MXP 1,746 Mexican Peso..................................... 194
MAD 3,348 Morrocan Dhiram.................................. 343
</TABLE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
PKR 77,904 Pakistan Rupee................................... $ 1,690
PHP 849 Philippines Peso................................. 20
PLN 5,079 Poland Zloty..................................... 1,457
ZAR 26,490 South African Rand............................... 4,475
KRW 99,885 South Korean Won................................. 73
LKR 2 Sri Lankan Rupee................................. --
TWD 108,149 Taiwan Dollar.................................... 3,147
TRL 2,154,225 Turkish Lira..................................... 8
VEB 21,859 Venezuelan Bolivar............................... 40
-----------
TOTAL FOREIGN CURRENCY (Cost $16,847)................................ 16,618
-----------
TOTAL INVESTMENTS (101.5%) (Cost $1,595,092)......................... 1,363,473
-----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.6%)
Net Unrealized Gain on Foreign Currency Exchange
Contracts............................................. $ 6,647
Receivable for Investments Sold......................... 6,255
Dividends Receivable.................................... 3,894
Interest Receivable..................................... 2,974
Receivable for Portfolio Shares Sold.................... 463
Foreign Withholding Tax Reclaim Receivable.............. 363
Other................................................... 111 20,707
----------
LIABILITIES ( - 3.1%)
Bank Overdraft Payable.................................. (12,360)
Payable for Investments Purchased....................... (10,224)
Net Unrealized Loss on Swap Agreements.................. (6,244)
Investment Advisory Fees Payable........................ (5,123)
Payable for Portfolio Shares Redeemed................... (3,959)
Custodian Fees Payable.................................. (1,823)
Payable for Foreign Taxes............................... (926)
Administrative Fees Payable............................. (177)
Directors' Fees & Expenses Payable...................... (92)
Sub-Administrative Fees Payable......................... (27)
Distribution Fee Payable................................ (7)
Other Liabilities....................................... (534) (41,496)
---------- ----------
NET ASSETS (100%)..................................................... $1,342,684
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital....................................................... $1,767,647
Undistributed Net Investment Income................................... 5,658
Accumulated Net Realized Loss......................................... (198,560)
Unrealized Depreciation on Investments, Foreign Currency translations
and Swaps (Net of accrual for foreign taxes of $489 on unrealized
appreciation on investments)........................................ (232,061)
----------
NET ASSETS............................................................ $1,342,684
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
34
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ----------------------------------------------------------------------
NET ASSETS............................................................ $1,331,023
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 119,901,591 outstanding $0.001 par value shares
(authorized 500,000,000 shares)..................................... $11.10
----------
----------
CLASS B:
- ----------------------------------------------------------------------
NET ASSETS............................................................ $11,661
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,050,697 outstanding $0.001 par value shares
(authorized 500,000,000 shares)..................................... $11.10
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- --------------- -------- ----------- -------------- --------- -----------
KRW 59,183 $ 43 7/01/98 U.S.$ 43 $ 43 $ --
U.S.$ 1,792 1,792 7/01/98 BRL 2,072 1,792 --
U.S.$ 101 101 7/01/98 IDR 1,487,725 101 --
U.S.$ 103 103 7/02/98 IDR 1,517,723 103 --
U.S.$ 374 374 7/02/98 MYR 1,544 372 (2)
MYR 81,808 19,328 8/11/98 U.S.$ 21,737 21,737 2,409
ZAR 30,186 4,928 9/18/98 U.S.$ 5,439 5,439 511
ZAR 77,385 12,632 9/18/98 U.S.$ 13,947 13,947 1,315
ZAR 16,442 2,614 12/23/98 U.S.$ 2,813 2,813 199
ZAR 66,349 10,543 12/24/98 U.S.$ 11,252 11,252 709
ZAR 82,238 13,142 12/28/98 U.S.$ 14,065 14,065 923
KRW 4,363,485 3,154 12/29/98 U.S.$ 2,866 2,866 (288)
ZAR 10,283 1,642 12/31/98 U.S.$ 1,688 1,688 46
KRW 11,140,983 8,051 1/04/99 U.S.$ 7,218 7,218 (833)
ZAR 99,189 15,219 6/21/99 U.S.$ 16,879 16,879 1,660
U.S.$ 563 563 6/21/99 ZAR 3,660 561 (2)
-------- --------- -----------
$ 94,229 $ 100,876 $ 6,647
--------
-------- --------- -----------
--------- -----------
</TABLE>
- ------------------------------------------------------------
SWAP AGREEMENTS:
The Portfolio had the following Total Return Swap Agreements open at June 30,
1998:
<TABLE>
<CAPTION>
NET
NOTIONAL UNREALIZED
AMOUNT (DEPRECIATION)
(000) DESCRIPTION (000)
<C> <S> <C>
- ----------- ------------------------------------------------- ---------------
$ (d)7,400 Agreement with Goldman Sachs International
terminating November 3, 1998 to pay 12 month
USD-LIBOR minus 4.00% and to receive the SET
Index converted into USD at the mid-market rate
on October 30, 1998 $ (3,095)
(d)3,000 Agreement with Goldman Sachs International
terminating November 5, 1998 to pay 12 month
USD-LIBOR minus 4.50% and to receive the SET
Index converted into USD at the mid-market rate
on November 3, 1998 (1,260)
(d)2,000 Agreement with Goldman Sachs International
terminating November 9, 1998 to pay 12 month
USD-LIBOR minus 3.50% and to receive the SET
Index converted into USD at the mid-market rate
on November 5, 1998. (963)
(d)1,191 Agreement with Goldman Sachs International
terminating March 5, 1999 to make quarterly
payments equal to the 3 month USD-LIBOR plus
1.75% and to receive quarterly payments equal
to the SET Index converted into USD at the
mid-market rate. (173)
(d)2,713 Agreement with Goldman Sachs International
terminating March 6, 1999 to make quarterly
payments equal to the 3 month USD-LIBOR plus
2.00% and to receive quarterly payments equal
to the SET Index converted into USD at the
mid-market rate. (414)
(d)1,299 Agreement with Goldman Sachs International
terminating March 9, 1999 to make quarterly
payments equal to the 3 month USD-LIBOR plus
1.75% and to receive quarterly payments equal
to the SET Index converted into USD at the
mid-market rate. (179)
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
35
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
NOTIONAL UNREALIZED
AMOUNT (DEPRECIATION)
(000) DESCRIPTION (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
$ (d)2,363 Agreement with Goldman Sachs International
terminating March 12, 1999 to make quarterly
payments equal to the 3 month USD-LIBOR plus
2.00% and to receive quarterly payments equal
to the SET Index converted into USD at the
mid-market rate. $ (160)
-------
$ (6,244)
-------
-------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Securities (totaling $97,836 or 7.3% of net assets at June 30, 1998)
were valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security - certain conditions for public sale may exist.
(g) -- The fund is advised by an affiliate.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
PCL -- Public Company Limited
RFD -- Ranked for Dividend
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate. The rates shown are those in effect on June
30, 1998.
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------
Capital Equipment...................... $ 107,609 8.0%
Consumer Products...................... 198,570 14.8
Energy................................. 128,159 9.5
Finance................................ 187,110 13.9
Materials.............................. 103,010 7.7
Multi-Industry......................... 50,733 3.8
Services............................... 513,904 38.3
----------- ---
$ 1,289,095 96.0%
----------- ---
----------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
36
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Austria 0.9%
Belgium 1.0%
Denmark 1.9%
Finland 6.7%
France 12.0%
Germany 16.0%
Italy 5.6%
Netherlands 7.5%
Norway 1.4%
Spain 4.2%
Sweden 8.0%
Switzerland 9.9%
United Kingdom 23.3%
Other 1.6%
</TABLE>
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX(1)
- ---------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEAR INCEPTION
------ ------ ------- ---------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A.......... 24.44% 27.73% 22.11% 22.28%
PORTFOLIO -- CLASS B.......... 24.30 27.46 N/A 25.66
INDEX -- CLASS A.............. 26.49 37.06 22.97 22.00
INDEX -- CLASS B.............. 26.49 37.06 N/A 28.95
</TABLE>
1. The MSCI Europe Index is an unmanaged market value weighted index of common
stocks listed on the stock exchanges of countries in Europe (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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE MEASURED BY THE MSCI
EUROPE INDEX AND 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 investment objective of the European Equity Portfolio is to seek long-term
capital growth through investment in equity securities of European issuers.
Equity securities for this purpose include stocks and stock equivalents such as
securities convertible into common and preferred stocks and securities having
equity characteristics, such as rights and warrants to purchase common stock.
The approach taken in selecting investments for the Portfolio is oriented to
individual stock selection and is value driven. The initial step in identifying
attractive undervalued securities is the screening of European databases. Stocks
are screened for undervaluation on two primary criteria, cash flow and book
value, and three secondary criteria, earnings, sales and yield. Once stocks have
been selected from this screening process, they are put through detailed
fundamental analysis. Important areas covered during this in-depth study include
the companies' balance sheets and cash flow, franchise, products, management and
the strategic value of the assets.
For the six months ended June 30, 1998, the Portfolio had a total return of
24.44% for the Class A shares and 24.30% for the Class B shares compared to a
total return of 26.49% for the Morgan Stanley Capital International (MSCI)
Europe Index (the "Index"). For the one year ended June 30, 1998, the Portfolio
had a total return of 27.73% for the Class A shares and 27.46% for the Class B
shares compared to 37.06% for the Index. For the five-year period ended June 30,
1998, the average annual total return of Class A was 22.11% compared to 22.97%
for the Index. From inception on April 2, 1993 to June 30, 1998, the average
annual total return of Class A was 22.28% compared to 22.00% for the Index. From
inception on January 2, 1996 to June 30, 1998, the average annual total return
of Class B was 25.66% compared to 28.95% for the Index.
For the second quarter the Portfolio return was 5.13%, in line with the Index,
in U.S. dollars, as performance was impacted by a very weak June, where the
continuing positive of the U.K. underweight and Continental European overweight
was negatively impacted by stock selection in Germany, Switzerland and the U.K..
This was due to specific stocks in Germany (Holzmann and Veba), as well as
Schindler in Switzerland. The overall theme in the U.K. was continued weakness
of capital goods stocks on the back of renewed sterling strength and concerns
about the direction of the domestic economy.
- --------------------------------------------------------------------------------
European Equity Portfolio
37
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
The Portfolio continues its underweight in the U.K., but with the increasing
emergence of value in that market it is likely that this underweight will be
gradually reduced in the months ahead. The main overweights continue to be
Finland and Sweden, where we continue to find high quality well managed
companies generating very high returns on capital. The Portfolio maintains near
market weightings in the other major European markets, due to the increasingly
stretched valuations there.
While increasing economic growth in the European core is of benefit to
domestically oriented stocks, we are increasingly cautious about the prospects
for the world economy given the recession in Asia and Japan and overcapacities
emerging in that region. We are therefore wary of investing in basic industries
or in capital goods companies, and view a weaker dollar as a potential risk to
European earnings as well. We would argue that in a number of cases Continental
European stock prices do not adequately take these risks into account. While we
find little remaining value in the Spanish and Italian markets, given recent
performance, we nevertheless maintain our positions on the basis of expectations
regarding European convergence and the largely domestic nature of the listed
stocks in these countries.
Additions to the portfolio in the first six months of the year included:
RHONE POULENC, a French integrated chemicals company which is committed to
transforming itself into a life science company, with some specialty chemicals.
We are confident it will succeed in this aim. Rhone Poulenc is cheap on the
basis of earnings before income tax, depreciation and amortization.
BANCO BILBAO VIZCAYA (BBV) is one of the largest banking groups in Spain
together with Banco Santander and Argentaria, and the second largest market cap
in the Spanish Stock Exchange. BBV has 56% of its assets in Spain and 23% in
America (mainly Latin America, where it is growing through affiliates).
Traditionally dedicated to Retail Banking (which still accounts for 63% of
Operating Income), the firm is diversifying to Middle and Wholesale Banking,
Private Banking, and Capital Markets. BBV's 1998-2000 strategic plan ("Programa
Two*1000") is geared toward further growth, greater communication, and increased
profitability (more pressure on margins).
AUTOLIV (Sweden) produces vehicle occupant safety devices, primarily airbags and
seatbelts. These products typically have no aftermarket, thus volumes depend on
penetration of vehicles and vehicle production, while prices are dependent on
OEM contracts. Seatbelts, Autoliv's original business, is fairly mature. Prices
of front airbags are falling as this has become a mass market product. Future
growth is expected from new products such as side impact airbags, in addition to
other crash products including the next generation of "smart" airbags.
AEGIS (U.K.) is the holding company for Carat, the largest independent media
planning and buying agency in Europe, with a roster of multinational clients
including Volkswagen, Philips, American Express, Walt Disney, and Coca-Cola. As
media audiences fragment and new media proliferate, Carat is expanding the range
of services it offers to help clients target and reach consumers efficiently.
The company is also expanding from a small base in the U.S. and Asia to serve
the multinational clients whose loyalty it enjoys in Europe. Even while growing,
Aegis is able to convert 100% or more of its operating profit into operating
cash flow by virtue of the float provided by customers, who pay their bills
before the company pays the media.
BG (U.K.) comprises the gas pipeline business Transco, gas exploration and
production, and some international downstream assets. Transco is the monopoly
gas pipeline and storage system in the U.K., formerly owned by British Gas. BG
was savagely derated by the market following adverse regulatory actions and poor
allocation of capital across the Group by the previous management. BG has come
through the regulatory review, and new management appear to have normalized the
relationship with the regulator. Free cash flows should improve in the E&P
operations following re-allocation of capital and an improving production
profile.
CAPITAL RADIO (U.K.) is one of the largest and most successful commercial radio
groups in the U.K. with shareholdings in a number of other radio broadcasting
companies. More recently, a restaurant group and a record label have been added
to its fold.
DIAGEO (U.K.) is one of the world's largest diversified consumer goods
companies, formed in 1997 with the merger of Grand Metropolitan and Guinness.
Diageo's core business is drinks, and it is the world's largest spirits player.
Guinness Brewing is a growing
- --------------------------------------------------------------------------------
European Equity Portfolio
38
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
international specialty beer company. Diageo's principal food interests comprise
Burger King, Pillsbury, Green Giant, and Haagen-Dazs. Diageo generates
substantial free cash flows, which should be sensibly used by a management team
committed to shareholder value.
LONRHO (U.K.) was for many years a highly diversified conglomerate with
interests including mining, whisky, and motor dealing. Following the departure
of its founder Tiny Rowland and subsequent management changes, Lonrho is
becoming a focused mining Group with principal interests in platinum, coal
(Duiker), and gold (Ashanti). Its last major non-core business, Princess Hotels,
is scheduled to be sold, and Lonrho Africa is to be demerged. The restructuring
has been complicated and at times acrimonious, which has significantly damaged
sentiment towards the stock. The remaining Group is relatively easy to
understand and value and trades at a significant discount to the sum of its
parts and its peer group.
The merger of Bayerische Vereinsbank and Bayerische Hypobank creates the
second-largest bank in Germany and the largest mortgage provider in Europe. The
new entity, BHV, has possibly the most focused and appealing strategy of any
major European bank at present. The new message is groundbreaking for German
banking: a bank focused regionally and on retail banking; a bank committed to
capital efficiency and the need to boost internal capital generation, and a bank
clear about exploiting alternative distribution channels to its advantage.
SVEDALA INDUSTRIES (Sweden) is a global industrial group with business
activities in over 40 countries and more than 200 service units in all parts of
the world. It is the world's leading supplier of complete equipment and systems
for contracting and construction operations and mineral-processing applications.
The company is also the market leader in processing, crushing, grinding, process
equipment, bulk materials handling, and compaction.
RICHEMONT is the Swiss holding company for Rothmans International, the
fourth-largest international tobacco group, and Vendome Luxury Group, whose
brands include Cartier, Alfred Dunhill, and Montblanc. On the negative side, the
Rupert family owns just 10% of the equity but controls 50% of the voting stock
in Richemont. On the positive side, the Ruperts have a good track record of
creating and nurturing cash-generative consumer franchises.
Stock sales during the early part of the year included:
USINOR (France) -- bearish on world steel price prospects.
AMER-YHTYMAE (Finland) reached target price.
DEUTSCHE LUFTHANSA (Germany) reached target price.
KLM ROYAL DUTCH (Netherlands) reached target price.
KONINKLIJKE VAN OMMEREN (Netherlands) reached target price.
FORENINGSSPARBANKEN (Sweden) exceeded share price target.
NOVARTIS (Switzerland) reached target price.
SULZER (Switzerland) reached target price.
ASSOCIATED BRITISH FOODS (U.K.) sterling strength on sugar business.
AGGREKO (U.K.) is a spin-off from Christian Salvesen.
BAT INDUSTRIES (U.K.) sold on strength.
BOOKER (U.K.) -- bearish on prospects for U.K. cash & carry.
CHRISTIAN SALVESEN (U.K.) -- bearish on prospects for the company.
JOHN MOWLEM (U.K.) reached target price.
KWIK SAVE (U.K.) sold on strength.
RACAL ELECTRONICS (U.K.) sold on strength.
Robert Sargent
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
European Equity Portfolio
39
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS (96.4%)
AUSTRIA (0.9%)
47,990 Boehler-Uddeholm AG.............................. $ 3,171
---------
BELGIUM (1.0%)
55 G.I.B. Group VVPR................................ 3
59,000 G.I.B. Holdings Ltd.............................. 3,329
---------
3,332
---------
DENMARK (1.9%)
50,100 BG Bank A/S...................................... 3,106
34,500 Unidanmark A/S, Class A.......................... 3,103
---------
6,209
---------
FINLAND (6.7%)
53,200 Huhtamaki Oyj, Series 1.......................... 3,047
16,445 Kone Oyj, Class B................................ 2,310
487,000 Merita Ltd., Class A............................. 3,216
123,350 Metra Oyj, Class B............................... 4,050
60,300 Partek Oyj Abp................................... 1,045
284,500 Rautaruukki Oyj.................................. 2,179
22,100 Sampo Insurance Co. plc, Class A................. 1,047
145,400 The Rauma Group.................................. 2,984
146,850 Valmet Oyj....................................... 2,534
---------
22,412
---------
FRANCE (12.0%)
8,000 Alcatel Alsthom.................................. 1,628
24,900 Cie de Saint Gobain.............................. 4,616
28,450 Cie Generale des Establissements Michelin, Class
B.............................................. 1,642
37,100 Elf Aquitaine.................................... 5,215
38,200 France Telecom................................... 2,634
17,700 Groupe Danone.................................... 4,879
35,111 Lafarge.......................................... 3,629
65,700 Legris Industries................................ 3,075
47,000 Rhone-Poulenc.................................... 2,650
17,400 Scor............................................. 1,103
(a)35,000 SGS-Thompson Microelectronics N.V................ 2,480
36,900 Total, Class B................................... 4,795
11,980 Union des Assurances Federales................... 1,888
---------
40,234
---------
GERMANY (14.0%)
109,800 BASF AG.......................................... 5,205
76,200 Bayer AG......................................... 3,934
26,800 Bayerische Vereinsbank AG........................ 2,281
10,320 Buderus AG....................................... 5,150
92,800 Gerresheimer Glas AG............................. 1,394
49,720 Metro AG......................................... 3,019
(a)13,890 Philipp Holzmann AG.............................. 3,327
23,900 Plettac AG....................................... 3,340
8,205 Suedzucker AG.................................... 4,991
61,100 VEBA AG.......................................... 4,167
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
6,350 Viag AG.......................................... $ 4,295
5,693 Volkswagen AG.................................... 5,477
---------
46,580
---------
ITALY (5.6%)
1,041,880 Magneti Marelli S.p.A............................ 2,287
273,700 Marzotto (Gaetano) & Figli S.p.A................. 4,174
590,500 Mediaset S.p.A................................... 3,770
935,600 Sogefi S.p.A..................................... 3,133
318,300 Telecom Italia S.p.A............................. 2,344
652,255 Telecom Italia S.p.A. Di Risp (NCS).............. 3,159
---------
18,867
---------
NETHERLANDS (7.5%)
121,900 ABN Amro Holding N.V............................. 2,854
22,400 Akzo Nobel N.V................................... 4,982
103,570 Hollandsche Beton Groep N.V...................... 2,159
95,536 ING Groep N.V.................................... 6,258
35,000 Koninklijke Bijenkorf Beheer N.V................. 2,453
130,000 Koninklijke KNP BT N.V........................... 3,357
34,200 Philips Electronics N.V.......................... 2,876
---------
24,939
---------
NORWAY (1.4%)
221,800 Saga Petroleum A/S, Class B...................... 3,139
57,650 Sparebanken...................................... 1,655
---------
4,794
---------
SPAIN (4.2%)
88,300 Banco Bilbao Vizcaya (Registered)................ 4,532
3,027 Bodegas y Bebidas................................ 138
223,500 Iberdrola........................................ 3,629
53,845 Telefonica....................................... 2,489
241,000 Uralita.......................................... 3,434
---------
14,222
---------
SWEDEN (8.0%)
109,700 Autoliv, Inc..................................... 3,507
80,400 BT Industries AB................................. 1,623
130,400 Esselte AB, Class B.............................. 3,024
6,850 Fastighets AB Balder............................. 68
2,770 Mandamus AB...................................... 17
720,900 Nordbanken Holding AB............................ 5,287
67,500 Pharmacia & Upjohn, Inc.......................... 3,106
148,000 PLM AB........................................... 2,338
10,745 S.K.F. AB, Class B............................... 195
59,200 Spectra-Physics AB, Class A...................... 946
142,300 Svedala Intrustri AB............................. 3,300
68,500 Svenska Handelsbanken, Class A................... 3,177
---------
26,588
---------
SWITZERLAND (9.9%)
125 Ascom Holdings AG (Bearer)....................... 231
1,910 Bobst AG (Bearer)................................ 3,516
1,825 Cie Financiere Richemont AG, Class A............. 2,390
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
40
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
6,500 Forbo Holding AG (Registered).................... $ 3,311
4,460 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 5,679
3,600 Nestle (Registered).............................. 7,710
600 Schindler Holding AG (Participating
Certificates).................................. 914
1,520 Schindler Holding AG (Registered)................ 2,357
3,920 SIG-Schweizerische Industrie-Gesellschaft Holding
AG (Registered)................................ 3,194
13,900 Valora Holding AG................................ 3,668
---------
32,970
---------
UNITED KINGDOM (23.3%)
1,221,600 Aegis Group plc.................................. 1,979
201,498 Bank of Ireland.................................. 4,122
294,410 Bank of Scotland................................. 3,299
631,500 BG plc........................................... 3,654
308,000 British Telecommunications plc................... 3,806
506,700 BTR plc.......................................... 1,439
360,100 Bunzl plc........................................ 1,690
183,000 Burmah Castrol plc............................... 3,270
133,900 Capital Radio plc................................ 1,589
104,150 CGU plc.......................................... 1,945
424,000 Charter plc...................................... 4,429
318,983 Diageo plc....................................... 3,782
403,600 Glynwed International plc........................ 1,661
239,500 Great Universal Stores plc....................... 3,160
537,100 Imperial Tobacco Group plc....................... 3,965
233,575 Lonrho Africa plc................................ 281
233,575 Lonrho plc....................................... 1,096
972,800 Medeva plc....................................... 2,762
93,600 Peninsular & Oriental Steam Navigation Co........ 1,349
335,500 Premier Farnell plc.............................. 1,703
5,106,286 Premier Oil plc.................................. 3,603
241,932 Reckitt & Colman plc............................. 4,622
53,600 RMC Group plc.................................... 930
391,573 Royal & Sun Alliance Insurance Group plc......... 4,051
1,093,800 Scapa Group plc.................................. 3,471
384,800 SIG plc.......................................... 1,446
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
175,568 Tate & Lyle plc.................................. $ 1,393
124,200 Unilever plc..................................... 1,323
186,200 Westminster Health Care Holdings plc............. 989
798,400 WPP Group plc.................................... 5,237
---------
78,046
---------
TOTAL COMMON STOCKS (Cost $249,645).............................. 322,364
---------
PREFERRED STOCKS (2.0%)
GERMANY (2.0%)
7,200 Dyckerhoff AG.................................... 2,866
31,900 Hornbach Holding AG.............................. 2,927
1,520 Volkswagen AG.................................... 1,037
---------
TOTAL PREFERRED STOCKS (Cost $4,310)............................. 6,830
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ------------
RIGHTS (0.0%)
GERMANY (0.0%)
(a)49,720 Metro AG (Cost $0)............................... 2
---------
TOTAL FOREIGN SECURITIES (98.4%) (Cost $253,955)................. 329,196
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ------------
SHORT TERM INVESTMENT (1.5%)
REPURCHASE AGREEMENT (1.5%)
$ 4,985 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $4,986,
collateralized by U.S. Treasury Bonds, 11.25%,
due 2/15/15, valued at $5,097
(Cost $4,985).................................. 4,985
---------
FOREIGN CURRENCY (0.2%)
BEF 2,008 Belgian Franc.................................... 54
GBP 8 British Pound.................................... 13
FIM 2,563 Finnish Markka................................... 468
FRF 393 French Franc..................................... 65
DEM 220 German Mark...................................... 122
ITL 84 Italian Lira..................................... --
CHF 140 Swiss Franc...................................... 92
---------
TOTAL FOREIGN CURRENCY (Cost $817)............................... 814
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
41
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- ----------------------------------------------------------------------------
<C> <S> <C>
TOTAL INVESTMENTS (100.1%) (Cost $259,757)........................ $334,995
--------
OTHER ASSETS (1.0%)
Receivable for Investments Sold..................... $ 1,822
Dividends Receivable................................ 879
Receivable for Portfolio Shares Sold................ 601
Foreign Withholding Tax Reclaim Receivable.......... 337
Interest Receivable................................. 2
Net Unrealized Gain on Foreign Currency Exchange
Contracts......................................... 1
Other............................................... 1 3,643
----------
LIABILITIES ( - 1.1%)
Payable for Investments Purchased................... (1,785)
Payable for Portfolio Shares Redeemed............... (1,265)
Investment Advisory Fees Payable.................... (594)
Custodian Fees Payable.............................. (77)
Administrative Fees Payable......................... (42)
Directors' Fees & Expenses Payable.................. (12)
Distribution Fee Payable............................ (5)
Other Liabilities................................... (37) (3,817)
---------- --------
NET ASSETS (100%)................................................. $334,821
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................................... $229,343
Undistributed Net Investment Income............................... 3,715
Accumulated Net Realized Gain..................................... 26,532
Unrealized Appreciation on Investments and Foreign Currency
Translations.................................................... 75,231
--------
NET ASSETS........................................................ $334,821
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ------------------------------------------------------------------
NET ASSETS........................................................ $325,340
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 14,554,222 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $22.35
--------
--------
CLASS B:
- ------------------------------------------------------------------
NET ASSETS........................................................ $9,481
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 425,198 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $22.30
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ---------- ------- ----------- ------------ ------- ------------
U.S.$ 64 $ 64 7/01/98 DEM 115 $ 64 $ --
U.S.$ 385 385 7/01/98 FIM 2,115 386 1
ESP 1,020 7 7/02/98 U.S.$ 7 7 --
U.S.$ 143 143 7/02/98 GBP 86 143 --
------- ------- ------
$ 599 $ 600 $ 1
------- ------- ------
------- ------- ------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ESP -- Spanish Peseta
NCS -- Non-Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 70,125 20.9%
Consumer Goods......................... 57,138 17.1
Multi-Industry......................... 21,449 6.4
Energy................................. 17,317 5.2
Finance................................ 48,478 14.5
Materials.............................. 63,981 19.1
Military............................... 930 0.3
Services............................... 49,778 14.9
--------- ---
$ 329,196 98.4%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
42
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Belgium 0.6%
Denmark 2.9%
Finland 3.2%
France 16.6%
Italy 1.7%
Netherlands 6.7%
Norway 6.9%
Spain 3.2%
Sweden 14.4%
Turkey 3.6%
United Kingdom 33.8%
United States 1.5%
Other 4.9%
</TABLE>
PERFORMANCE COMPARED TO THE GPR LIFE
EUROPEAN REAL ESTATE T.R. INDEX(1)
- -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------
YTD SINCE INCEPTION
---------- -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A(3)............ 15.65% 10.19%
PORTFOLIO -- CLASS B(3)............ 15.55 10.05
INDEX.............................. 10.23 10.26
</TABLE>
1. The GPR Life European Real Estate T.R. Index is an European 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.
- ------------------------------------------------------------
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 investment objective of the European Real Estate Portfolio is to provide
current income and long-tern capital appreciation by investing primarily in
equity securities of companies in the European real estate industry.
For the six months ended June 30, 1998, the Portfolio had a total return of
15.65% for the Class A shares and 15.55% for the Class B shares compared to
10.23% for the GPR Life European Real Estate T.R. Index (the "Index"). For the
period from October 1, 1997 (commencement of operations) through June 30, 1998,
the Portfolio had a total return of 10.19% for Class A shares and 10.05% for
Class B shares compared to 10.26% for the Index.
During the first half of 1998, the once dominant U.K. stepped aside to the less
developed real estate markets of the European continent. The result was the
worst 6-month return in the U.K. since 1995, while only four continental
markets, Austria, Sweden, Norway and the Netherlands, underperformed the
European Index. Going forward, we believe the United Kingdom is approaching the
peak, France is establishing a rebound, Scandinavia is emerging as a strong
property region and Southern Europe is benefiting from a unified Europe.
The first half underperformance in the U.K. was caused by a meltdown in the
second quarter. For the first time since 1995, the U.K. property market posted a
negative return for the quarter, falling by 9.5% in U.S. dollar terms. The
decline was caused, we believe, by an overreaction by investors to an expected
slow down in capital value growth. The effects were magnified when Land
Securities and British Land reported slightly below consensus results. Although
we believe the growth rate in the U.K. market has peaked, we feel the recent
price depreciation is overplayed. The pace of growth in the U.K. markets should
slow, but it should not reverse itself in the near future. In response, we have
increased our exposure to the hardest hit U.K. majors, in particular Land
Securities and British Land. However, we are not changing our underweight
country stance. The majors exposure results from a reshuffling from some of our
smaller market cap investments.
The slowdown in the U.K. is countered by an acceleration of activity in France.
The French real estate securities market produced an 11.9% return for the second
quarter, and a 31.7% first half number in U.S. dollar terms. This appreciation
is a combination
- --------------------------------------------------------------------------------
European Real Estate Portfolio
43
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO (CONT.)
of continued foreign investor interest in the Paris region and increasing
domestic M&A activity. Foreign investment includes the acquisition of the UIS
and UIC assets from GAN, the French insurance company, by American investors,
General Electric and Goldman Sachs. At the same time, the French public
companies are absorbing smaller public players. GFC is merging with Paris
apartment rival UIF, Societe Fonciere Lyonnaise is acquiring Exor's property
portfolio, and Unibail is conducting a stock swap for the shares of Frankoparis.
These transactions are serving to solidify valuations at previously estimated
levels. We expect to see further consolidation throughout the coming months, and
continue to overweight the country, focusing on the office and commercial
sectors.
Sweden is a country of have's and have-nots. The country's overall first-half
performance of 0.1% under performed Europe by 10.2%, in U.S. dollar terms. But
these numbers include a range of companies contributing between - 35.0% and
28.0%, emphasizing the importance of stock picking. The deviation in performance
is largely due to the existence of three separate property sub-markets. Unlike
most European countries which focus on the property market of the capital city,
Swedish portfolios are divided between Stockholm, Malmo and Gothenburg.
Stockholm, the largest market, has seen the strongest run, especially in prime
properties. Malmo, the second largest, has disappointed investors looking for
strong rental growth in anticipation of the bridge-link with Denmark. And
Gothenburg, the third market, is beginning to recover with stabilizing
occupancies and a hint of rental growth. Our overweight position thus focuses on
the Gothenburg market and secondary locations in Stockholm which have lagged the
recovery of the prime properties.
The Danish, and Finnish real estate markets each outperformed during the half,
while Norway underperformed by 8.9% in U.S. dollar terms. Denmark posted an
impressive 28.9% return, and the Finnish IPO Sponda returned 10.0% (Finland is
not in the Index), each in U.S. dollar terms. The Danish performance was
primarily attributable to the strong growth of EjendomsSelskabet Norden. The
office and residential company's aggressive acquisition and redevelopment
strategy is capitalizing on the growth in Copenhagen. Furthermore, the upcoming
bridge-link with the city of Malmo, Sweden should ensure further economic
expansion. In Finland, the market was triggered by the initial public offering
of Sponda, an office and retail play in Helsinki. We believe Sponda is merely
the beginning of Finnish entry into the public arena. Meanwhile, foreign
investors are showing unwarranted concern over the oil-based economy of Norway.
These concerns have driven already discounted real estate valuations lower,
increasing the attractiveness of the market. We remain strongly overweight
Denmark and Norway, and anxiously await further activity in Finland.
The Netherlands economy continues to thrive, pulling the property market along
with it, albeit at a slower rate than the rest of Europe. The Dutch property
stocks underperformed the European Index by 8.0% this half, posting a 2.2% total
return in U.S. dollars. Once again this appreciation was a result of the
domestic players, as opposed to the larger international portfolio holders. In
particular, the retail market led the pack with an adjusted year-over-year climb
in retail sales of 5.0% in April and May. However, even though we believe the
market should continue along at this pace, we are underweight the country in
belief of better opportunities in markets either to the North or South.
The Belgian market was the most active initial offering market during the half.
While the Index posted a 19.5% gain, the true activity was in the newer names.
Over the past three months alone, Retail Estates, Kinepolis Group and Cibix
conducted initial public offerings, and the Dutch company Wereldhave and
Sweden's Diligentia (Asticus) each spun-off their Belgian portfolios to the
public market. Furthermore, we expect additional listings in the near future as
more real estate investors are recognizing the benefits of Belgium's tax
efficient SICAFI structure. We are currently overweight Belgium through our
Asticus position.
Spain began 1998 on a strong note, but has since cooled. The property market
returned 38.7% for the half, after a strong 34.6% rise in the first quarter, in
U.S. dollar terms. This first half performance is a direct result of the
upcoming convergence of interest rates with the inauguration of the Euro. As
Spanish interest rates have fallen in line with those in France and Germany,
real estate capital values have soared. While we believe the bulk of the
one-time rate convergence appreciation is accounted for in current pricing, we
remain overweight the country in anticipation of further economic expansion
resulting from the Euro.
- --------------------------------------------------------------------------------
European Real Estate Portfolio
44
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO (CONT.)
The Italian growth story is similar to Spain. The first quarter offered a 74.0%
return, followed by a correction in the second quarter of - 20.4%, finishing
the half up 35.7%. The sharp rise in each country is in anticipation of the
European Monetary Union (EMU) and the currently ongoing interest rate
convergence. The primary difference between the two markets is the opportunity
for investment. Italy is confined to a few small companies with limited free
floats. However, we remain overweight the Italian market. We believe the direct
property fundamentals are sufficient to accept the lower liquidity, and a fall
IPO should increase overall awareness for the market.
The real estate markets in Germany, Switzerland and Austria remain in the trough
of the real estate cycle. Each of these markets is dominated by an inefficient
open-end fund structure, which unjustifiably decreases yields through required
investment guidelines. Until this structure changes, we cannot foresee the
markets offering sufficient value to attract our attention. A recent German IPO
suggests the tide may be turning; however, the lack of company disclosure
suggests the market still has a ways to go.
Jan Willem de Geus
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
European Real Estate Portfolio
45
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
COMMON STOCKS (95.1%)
BELGIUM (0.6%)
(a)9,700 Retail Estates................................... $ 307
--------
DENMARK (2.9%)
26,300 EjendomsSelskabet Norden A/S..................... 1,509
--------
FINLAND (3.2%)
(a)232,900 Sponda Oyj....................................... 1,635
--------
FRANCE (16.6%)
7,877 Klepierre........................................ 1,530
4,239 Locindus......................................... 613
8,000 Silic............................................ 1,455
(a)6,800 Societe Fonciere Lyonnaise....................... 1,074
13,467 Sophia........................................... 622
8,622 Unibail.......................................... 1,115
17,457 Union Immobiliere de France SA................... 1,377
19,824 Union Pour le Financement d'Immeubles de
Societes....................................... 734
--------
8,520
--------
ITALY (1.7%)
812,000 Immobiliaria Metanopoli S.p.A.................... 898
--------
NETHERLANDS (6.7%)
78,300 Rodamco N.V...................................... 2,149
88,839 UNI-INVEST N.V................................... 1,289
--------
3,438
--------
NORWAY (6.9%)
193,100 Avantor ASA...................................... 1,461
(a)186,900 Choice Hotels Scandinavia ASA.................... 561
(a)209,081 Linstow ASA...................................... 1,500
--------
3,522
--------
SPAIN (3.2%)
44,000 Vallehermoso..................................... 1,618
--------
SWEDEN (14.4%)
(a)16,700 Asticus AB....................................... 184
137,000 Castellum AB..................................... 1,614
166,900 Diligentia AB.................................... 1,443
85,300 Fastighets AB Tornet............................. 1,369
200,950 Piren AB......................................... 1,587
752,500 Platzer Bygg AB, Class B......................... 1,198
--------
7,395
--------
TURKEY (3.6%)
(a)137,280,000 Yapi Kredi Koray Gayrimen Kul, Class B........... 1,830
--------
UNITED KINGDOM (33.8%)
256,300 British Land Co. plc............................. 2,634
694,000 Buford Holdings plc.............................. 1,205
(a)1,155,000 Dunloe House plc................................. 484
414,900 Freeport Leisure plc............................. 2,446
600,100 Grantchester Holdings plc........................ 1,714
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
342,100 Great Portland Estates plc....................... $ 1,411
164,900 Jarvis Hotels plc................................ 473
140,200 Land Securities plc.............................. 2,169
226,100 MEPC plc......................................... 1,990
582,400 Town Centre Securities plc....................... 914
(a)1,165,200 Wates City of London Properties plc.............. 1,907
--------
17,347
--------
UNITED STATES (1.5%)
(a)105,000 Omega Worldwide, Inc............................. 794
--------
TOTAL COMMON STOCKS (Cost $48,528).................................. 48,813
--------
TOTAL FOREIGN & U.S. SECURITIES (95.1%) (Cost $48,528).............. 48,813
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
SHORT-TERM INVESTMENTS (7.7%)
REPURCHASE AGREEMENT (7.7%)
$ 3,939 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $3,940,
collateralized by U.S. Treasury Bonds, 8.875%
due 2/15/19, valued at $4,034
(Cost $3,939).................................. 3,939
--------
FOREIGN CURRENCY (1.2%)
DKK 157 Danish Krone..................................... 23
FRF 3,602 French Franc..................................... 595
ESP 908 Spanish Peseta................................... 6
--------
TOTAL FOREIGN CURRENCY (Cost $624).................................. 624
--------
TOTAL INVESTMENTS (104.0%) (Cost $53,091)........................... 53,376
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (2.2%)
Receivable for Investments Sold..................... $ 781
Dividends Receivable................................ 166
Receivable for Portfolio Shares Sold................ 160
Foreign Withholding Tax Reclaim Receivable.......... 14
Interest Receivable................................. 1
Other............................................... 21 1,143
----------
LIABILITIES ( - 6.2%)
Payable for Investments Purchased................... (1,852)
Bank Overdraft Payable.............................. (1,208)
Payable for Portfolio Shares Redeemed............... (44)
Investment Advisory Fees Payable.................... (39)
Custodian Fees Payable.............................. (22)
Administrative Fees Payable......................... (6)
Distribution Fee Payable............................ (2)
Directors' Fees & Expenses Payable.................. (1)
Other Liabilities................................... (30) (3,204)
---------- --------
NET ASSETS (100%)................................................. $ 51,315
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Real Estate Portfolio
46
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- ----------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................................... $ 49,984
Undistributed Net Investment Income............................... 400
Accumulated Net Realized Gain..................................... 642
Unrealized Appreciation on Investments and Foreign Currency
Translations.................................................... 289
--------
NET ASSETS........................................................ $ 51,315
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ------------------------------------------------------------------
NET ASSETS........................................................ $47,684
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 4,332,233 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $11.01
--------
--------
CLASS B:
- ------------------------------------------------------------------
NET ASSETS........................................................ $3,631
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 330,074 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $11.00
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
- ------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------
Apartment.............................. $ 13,359 26.0%
Diversified............................ 18,182 35.4
Land................................... 3,678 7.2
Lodging/Leisure........................ 1,034 2.0
Office & Industrial.................... 1,830 3.6
Shopping Centers....................... 10,730 20.9
-------- ---
$ 48,813 95.1%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Real Estate Portfolio
47
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 0.9%
Belgium 1.2%
Canada 1.7%
Finland 1.2%
France 6.4%
Germany 7.8%
Hong Kong 0.4%
Ireland 2.4%
Italy 2.3%
Japan 8.2%
Netherlands 5.9%
Portugal 0.2%
Spain 2.2%
Sweden 1.9%
Switzerland 7.4%
United Kingdom 11.6%
United States 38.3%
</TABLE>
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------------
AVERAGE
AVERAGE ANNUAL
ANNUAL SINCE
YTD ONE YEAR FIVE YEARS INCEPTION
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A.... 14.04% 20.82% 21.62% 20.86%
PORTFOLIO -- CLASS B.... 13.76 20.37 N/A 24.09
INDEX -- CLASS A........ 16.64 17.03 15.64 15.42
INDEX -- CLASS B........ 16.64 17.03 N/A 18.47
</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 (includes
dividends).
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.
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 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
emerging markets.
For the six months ended June 30, 1998, the Portfolio had a total return of
14.04% for the Class A shares and 13.76% for the Class B shares compared to a
total return of 16.64% for the Morgan Stanley Capital International (MSCI) World
Index (the "Index"). For the one year ended June 30, 1998, the Portfolio had a
total return for the Class A shares of 20.82% and 20.37% for the Class B shares
compared to 17.03% for the Index. For the five-year period ended June 30, 1998,
the Portfolio had a total return of 21.62% for the Class A shares compared to
15.64% for the Index. From inception on July 15, 1992 to June 30, 1998, the
average annual total return of Class A was 20.86% compared to 15.42% for the
Index. From inception on January 2, 1996 to June 30, 1998, the average annual
total return of Class B was 24.09% compared to 18.47% for the Index.
The approach in selecting investments for the Portfolio is oriented to
individual stock selection and is value driven. The initial step in identifying
attractive undervalued securities is the screening of global databases. Stocks
are screened for undervaluation on two primary criteria, cash flow and book
value, and three secondary criteria, earnings, sales and yield. Stocks selected
from this screening process are put through detailed fundamental analysis.
Important areas covered during this in-depth study include the companies'
balance sheet and cash flow, franchise, products, management and the strategic
value of the businesses assets.
The Portfolio's underperformance in 1998 was almost entirely due to weak
relative performance from U.S. stock selection, particularly in the second
quarter. It is also clearly reflective of the fact that the U.S. market is being
driven to record levels by macro-cap names such as General Electric and
Coca-Cola respectively trading at 35 times and 53 times trailing earnings. As
value investors, we are loath to pay such premiums in what seems to be an
expensive flight to (apparent) quality.
Several of our U.S. stocks were hurt, however, by specific events that we
believe caused them to be oversold. Borg Warner (BWA), for example, the auto
components manufacturer, fell 24 percent during the
- --------------------------------------------------------------------------------
Global Equity Portfolio
48
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
second quarter because of Asian fears (20 percent of sales) and production
delays within Ford, which produces 20 percent of BWA's sales. The oil stocks
Noble Drilling and Ocean Energy continue to be affected by weakness in the price
of oil. Philip Morris, one of our largest holdings, fell 4% amid continuing
litigation worries. We expect, however, some shareholder-friendly measures to be
announced by the company during the second half of the year. Stock selection in
Italy was also a negative contributor during the past six months, as Telecom
Italia fell 20 percent in the second quarter. On a positive note, stock
selection in Switzerland, the Netherlands and Ireland was particularly strong
and our underweight positions in Japan and Southeast Asia continued to benefit
the Portfolio.
Given a remarkably strong first half of the year in Europe, robust returns in
the United States, and sustained weakness throughout Asia, it is somewhat
difficult to predict the second half of 1998. The U.S. market's current
fascination with Internet stocks seems unhealthily optimistic while,
importantly, earnings expectations for the balance of the year remain overly
optimistic. Continental Europe provides the only environment where both
corporate profits are accelerating and interest rates are likely to remain low.
While Asia's travails are slowing the pace of recovery we do not expect even the
capital goods dependent economy of Germany to stagnate. Stock markets have not,
however, been slow to discount this environment and multiples are high, although
European markets generally remain more attractive than the United States on
price-to-book value and price-to-cash flow multiples. The extent of earnings
disappointment from Asia will be the key driver of the second half, although
companies in both Europe and the United States typically generate less than 10
percent of their sales there. Money flows, merger and acquisition activity, and
interest rates should remain supportive in the near term.
We decreased our U.S. weighting during the period as some of our U.S. stocks
have reached their fair-value targets and we strive to add more defensive names.
We would expect to continue our underweighting in the United States, with
selected overweights in Europe. Despite regular visits from our analysts--and
absent fundamental reform--we struggle to find catalysts that will unlock what
increasingly appears to be relative value in Japan, and the risk in Southeast
Asia continues to outweigh the potential return.
Additions to the Portfolio in the past six months included:
AMERICAN STORES operates the second largest food-store chain and one of the
largest drugstore chains in the U.S. The company is currently tackling its
enormous transition from a decentralized holding company into an integrated
operating company. Over time, the benefits of this re-engineering program will
outweigh the implementation costs and the company should also benefit from a
stabilization of their capital expenditures which has grown over the last few
years.
CHASE MANHATTAN provides domestic and international financial services, and has
virtually completed rationalizing two of the largest mergers in U.S. banking
history. It is the leading player in the corporate loan syndication business and
has weakened recently due to concerns over its emerging markets exposure. Chase
should be able to grow earnings at a double-digit rate, and use excess cash to
buy back 3 to 4 percent of the stock.
TUPPERWARE CORP manufactures and markets a broad line of consumer and personal
care products, with its core product line being food storage containers. The
company also has a line of children's educational toys, serving products and
gifts, and its products are sold in more than 100 countries as well as the U.S..
The stock is cheap on a cash-flow basis for a high return on capital business.
UNICOM (Commonwealth Edison) (USA) supplies electricity to 70% of northern
Illinois. Its assets are split 70% generation and 30% T&D (transmission and
distribution). The company is the largest nuclear operator in the United States
and provides energy marketing and district cooling services in twelve states.
The strengths of the company include: a new regulatory environment (Dec. 1997)
that protects it from competition until 2006 at the earliest; highly regarded
new management; and improving nuclear operating rates. The stock is cheap
relative to book value and earnings.
AEGIS (U.K.) is the holding company for Carat, the largest independent media
planning and buying agency in Europe, with a roster of multinational clients
including Volkswagen, Philips, American Express, Walt Disney, and Coca-Cola. As
media audiences fragment and new media proliferate, Carat is expanding the range
of services it offers to help clients target and reach consumers efficiently.
The company is also
- --------------------------------------------------------------------------------
Global Equity Portfolio
49
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
expanding from a small base in the U.S. and Asia to serve the multinational
clients whose loyalty it enjoys in Europe. Even while growing, Aegis is able to
convert 100% or more of its operating profit into operating cash flow by virtue
of the float provided by customers, who pay their bills before the company pays
the media.
BTR (U.K.) is a diversified engineering group currently restructuring to
concentrate on core businesses of automotive components, power drives, control
systems and specialist engineering. These remaining businesses are more cash
generative, and have higher growth and higher returns on investment than the
businesses scheduled for disposal. Principal threats to the investment thesis
are likely disposal proceeds, an operating environment which has already
generated multiple profit warnings, market concerns on management credibility
and the threat of margin erosion. These concerns are valid, but look well
discounted in the current share price. A satisfactory resolution of these issues
and prudent use of disposal proceeds should lead to a re-rating of the stock.
WOLSELEY (U.K.) is one of the world's largest distributors of building products,
with principal operations in the USA, U.K. and Continental Europe. Principal
businesses are the distribution of plumbing prerequisites and heating-related
supplies through Ferguson Enterprises in the U.S. and the Plumb Centre in the
U.K. The market appears to have over-reacted to a profits warning from
Wolseley's U.S. operations, where increased information technology spend has
raised fears of past under-investment. Allayment of these concerns combined with
good growth potential around the world should lead to a re-rating of the stock.
GROUPE DANONE is France's largest brewer of beer as well as the world number two
in mineral water and number one in European dairy products. Though the company
has problems in their biscuits and pasta businesses, management is committed to
turning these around. Danone has a low level of maintenance capital expenditure
and generates strong free cash flow.
RICHEMONT is the Swiss holding company for Rothmans International, the
fourth-largest international tobacco group, and Vendome Luxury Group, whose
brands include Cartier, Alfred Dunhill, and Montblanc. On the negative side, the
Rupert family owns just 10% of the equity but controls 50% of the voting stock
in Richemont. On the positive side, the Ruperts have a good track record of
creating and nurturing cash-generative consumer franchises.
VALMET (Finland) is the world's leading paper machine manufacturer with a strong
global position. In recent years it has expanded from its strong European base
and is now well established in both North America and the fast growing markets
in Asia. In recent years the group has reduced its cyclicality by increasing the
use of subcontractors and expanding the service and maintenance business. Valmet
has a strong financial position and is cheap on earnings and cashflow.
Stock sales during the first half of the year included:
COLES MYER (Australia) reached fair value.
IRISH LIFE (Ireland) reached target price.
SULZER (Switzerland) reached fair value.
BASS (U.K.) reached target price.
JOHN MOWLEM (U.K.) reached target price.
RACAL ELECTRONICS (U.K.) sold on strength.
TATE AND LYLE (U.K.) better value elsewhere.
UNILEVER (U.K.) reached target price.
ASCENT ENTERTAINMENT (USA) spin off from Comsat.
AT&T (USA) reached fair value.
BROWNING-FERRIS (USA) low conviction on investment thesis going forward.
LUKENS STEEL (USA) takeover.
PENNZOIL (USA) sold in wake of management actions following failed takeover
attempt.
Frances Campion
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Global Equity Portfolio
50
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (98.8%)
AUSTRALIA (0.9%)
443,600 CSR Ltd........................................... $ 1,282
186,800 Telstra Corp., Ltd. (Installment Receipts - Final
Installment: AUD 1.35/share due 11/17/98)....... 479
----------
1,761
----------
BELGIUM (1.2%)
22,700 Delhaize-Le Lion.................................. 1,586
16,300 G.I.B. Holdings Ltd............................... 920
----------
2,506
----------
CANADA (1.7%)
33,550 Potash Corp. of Saskatchewan, Inc................. 2,526
(a)16,400 Renaissance Energy Ltd............................ 246
32,120 TELUS Corp........................................ 831
----------
3,603
----------
FINLAND (1.2%)
38,000 Pohjola Insurance Co., Class B.................... 1,892
33,050 Valmet Oyj........................................ 570
----------
2,462
----------
FRANCE (6.4%)
2,010 Bongrain.......................................... 1,009
25,266 Elf Aquitaine..................................... 3,552
8,200 France Telecom.................................... 565
14,900 Groupe Danone..................................... 4,107
21,000 Rhone-Poulenc, Class A............................ 1,184
(a)13,800 SGS-Thompson Microelectronics N.V................. 978
30,600 Scor.............................................. 1,940
----------
13,335
----------
GERMANY (6.6%)
76,600 BASF AG........................................... 3,631
40,620 Bayer AG.......................................... 2,097
3,470 Karstadt AG....................................... 1,678
63,500 VEBA AG........................................... 4,331
800 Viag AG........................................... 541
1,307 Volkswagen AG..................................... 1,257
----------
13,535
----------
HONG KONG (0.4%)
(a)287,000 Hysan Development Co., Ltd........................ 237
318,481 Jardine Strategic Holdings, Inc................... 605
----------
842
----------
IRELAND (2.4%)
719,478 Anglo Irish Bank Corp. plc........................ 1,934
69,200 Clondalkin Group plc.............................. 580
342,981 Green Property plc................................ 2,395
----------
4,909
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
ITALY (2.3%)
164,800 Mediaset S.p.A.................................... $ 1,052
781,813 Telecom Italia S.p.A. Di Risp (NCS)............... 3,786
----------
4,838
----------
JAPAN (8.2%)
95,000 Fuji Photo Film Ltd............................... 3,310
109,000 Fujisawa Pharmaceutical Co., Ltd.................. 1,021
139,000 Hitachi Ltd....................................... 907
141 Japan Tobacco, Inc................................ 955
185,000 Kao Corp.......................................... 2,856
91,000 Matsushita Electric Industrial Co., Ltd........... 1,464
140,000 Nichido Fire & Marine Insurance Co., Ltd.......... 732
218 Nippon Telegraph & Telephone Corp................. 1,809
13,000 Sony Corp......................................... 1,121
86,000 Sumitomo Marine & Fire Insurance Co., Ltd......... 481
37,000 Sumitomo Rubber Industries........................ 200
22,000 TDK Corp.......................................... 1,627
37,000 Toyo Seikan Kaisha Ltd............................ 454
----------
16,937
----------
NETHERLANDS (5.9%)
119,912 ABN Amro Holding N.V.............................. 2,807
(a)26,900 Benckiser N.V., Class B........................... 1,655
18,880 Hollandsche Beton Groep N.V....................... 394
81,422 ING Groep N.V..................................... 5,334
22,700 Philips Electronics N.V........................... 1,909
----------
12,099
----------
PORTUGAL (0.2%)
13,450 Cimpor SGPS....................................... 473
----------
SPAIN (2.2%)
137,800 Iberdrola......................................... 2,238
47,800 Telefonica........................................ 2,210
----------
4,448
----------
SWEDEN (1.9%)
404,200 Nordbanken Holding AB............................. 2,964
71,500 Skandia Forsakrings AB............................ 1,022
----------
3,986
----------
SWITZERLAND (7.4%)
760 ABB AG (Bearer)................................... 1,123
800 Ascom Holdings AG (Bearer)........................ 1,478
370 Bobst AG (Bearer)................................. 681
2,280 Cie Financiere Richemont AG, Class A.............. 2,986
2,500 Forbo Holding AG (Registered)..................... 1,273
1,855 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 2,362
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
51
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
1,840 Nestle (Registered)............................... $ 3,941
1,750 SIG-Schweizerische Industrie-Gesellschaft Holding
AG (Registered)................................. 1,426
----------
15,270
----------
UNITED KINGDOM (11.6%)
543,400 Aegis Group plc................................... 880
228,888 Aggreko plc....................................... 761
80,530 Bank of Ireland................................... 1,647
464,762 BTR plc........................................... 1,319
83,300 Burmah Castrol plc................................ 1,488
228,888 Christian Salvesen plc............................ 443
37,850 Danka Business Systems plc ADR.................... 447
269,000 English China Clays plc........................... 921
222,300 Imperial Tobacco Group plc........................ 1,641
241,400 Matthews (Bernard) plc............................ 472
94,600 Peninsular & Oriental Steam Navigation Co......... 1,363
(a,d)653,333 Pentos plc........................................ --
118,100 Premier Farnell plc............................... 600
226,391 Reckitt & Colman plc.............................. 4,325
257,700 Royal & Sun Alliance Insurance Group plc.......... 2,666
81,453 Southern Electric plc............................. 737
169,100 Wolseley plc...................................... 994
509,100 WPP Group plc..................................... 3,339
----------
24,043
----------
UNITED STATES (38.3%)
29,600 Albertson's, Inc.................................. 1,534
30,150 Aluminum Company of America....................... 1,988
178,100 American Stores Co................................ 4,308
(a)26,300 Beazer Homes USA, Inc............................. 682
(a)47,400 BJ's Wholesale Club, Inc.......................... 1,926
19,200 Boise Cascade Corp................................ 629
50,600 Borg-Warner Automotive, Inc....................... 2,432
(a)139,300 Cadiz Land Co., Inc............................... 1,611
(a)22,000 Cadiz Land Co., Inc. (Restricted Shares).......... 254
39,400 Chase Manhattan Corp.............................. 2,975
118,100 COMSAT Corp....................................... 3,344
(a)185,150 Data General Corp................................. 2,766
(a)109,000 Egghead, Inc...................................... 920
116,400 Enhance Financial Services Group, Inc............. 3,929
56,400 Finova Group, Inc................................. 3,194
(a)138,900 GenRad, Inc....................................... 2,743
50,700 General Signal Corp............................... 1,825
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
21,300 Georgia-Pacific Corp.............................. $ 1,255
13,800 Georgia Pacific Corp. (Timber Group).............. 318
41,400 Goodrich (BF) Co.................................. 2,054
143,100 Houghton Mifflin Co............................... 4,543
23,350 IBP, Inc.......................................... 423
(a)83,000 InteliData Technologies Corp...................... 80
45,600 MBIA, Inc......................................... 3,414
19,400 Mellon Bank Corp.................................. 1,351
(a)66,662 NCR Corp.......................................... 2,167
(a)67,410 Noble Drilling Corp............................... 1,622
(a)68,415 Ocean Energy, Inc................................. 1,338
120,100 Penncorp Financial Group, Inc..................... 2,462
101,900 Pharmacia & Upjohn, Inc........................... 4,700
163,500 Philip Morris Cos., Inc........................... 6,438
31,000 Tecumseh Products Co., Class A.................... 1,637
45,900 Tenneco, Inc...................................... 1,747
38,100 Terra Nova (Bermuda) Holdings
Ltd., Class A................................... 1,195
(a)16,800 Toys "R" Us, Inc.................................. 396
98,200 Tupperware Corp................................... 2,762
67,700 UST Corp.......................................... 1,794
14,800 United Dominion Industries Ltd.................... 494
(a)135,400 WorldCorp, Inc.................................... 42
----------
79,292
----------
TOTAL COMMON STOCKS (Cost $172,066)........................... 204,339
----------
PREFERRED STOCK (1.2%)
GERMANY (1.2%)
3,620 Volkswagen AG (Cost $1,009)....................... 2,469
----------
TOTAL FOREIGN & U.S. SECURITIES (100.0%)
(Cost $173,075)............................................. 206,808
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<C> <S> <C>
- ----------
FOREIGN CURRENCY (0.2%)
BEF 1,235 Belgian Franc..................................... 33
GBP 33 British Pound..................................... 56
FRF 469 French Franc...................................... 78
DEM 46 German Mark....................................... 26
ITL 150,253 Italian Lira...................................... 85
JPY 16,835 Japanese Yen...................................... 121
NLG 11 Netherlands Guilder............................... 5
NZD 43 New Zealand Dollar................................ 22
ESP 513 Spanish Peseta.................................... 3
CHF 40 Swiss Franc....................................... 26
----------
TOTAL FOREIGN CURRENCY (Cost $454)............................ 455
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
52
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.2%) (Cost $173,529).......................... $207,263
--------
OTHER ASSETS (0.5%)
Cash.................................................. $ 92
Dividends Receivable.................................. 487
Receivable for Portfolio Shares Sold.................. 302
Foreign Withholding Tax Reclaim Receivable............ 118
Receivable for Investments Sold....................... 27
Other................................................. 3 1,029
----------
LIABILITIES ( - 0.7%)
Payable for Investments Purchased..................... (913)
Investment Advisory Fees Payable...................... (355)
Net Unrealized Loss on Foreign Currency Exchange
Contracts........................................... (74)
Payable for Portfolio Shares Redeemed................. (67)
Custodian Fees Payable................................ (31)
Administrative Fees Payable........................... (25)
Directors' Fees & Expenses Payable.................... (6)
Distribution Fee Payable.............................. (6)
Other Liabilities..................................... (42) (1,519)
---------- --------
NET ASSETS (100%)................................................... $206,773
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital......................................... $164,709
Undistributed Net Investment Income..................... 1,372
Accumulated Net Realized Gain........................... 7,039
Unrealized Appreciation on Investments and Foreign
Currency Translations................................. 33,653
--------
NET ASSETS.............................................. $206,773
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ------------------------------------------------------------------
NET ASSETS........................................................ $196,145
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,289,046 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $21.12
--------
--------
CLASS B:
- ------------------------------------------------------------------
NET ASSETS........................................................ $10,628
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 506,050 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $21.00
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------ ------- ----------- ------------ -------- -------------
GBP 3,450 $ 5,706 12/16/98 U.S.$ 5,632 $ 5,632 $ (74)
------- -------- ---
------- -------- ---
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see note A-1 to financial statements.
ADR -- American Depositary Receipt
AUD -- Australian Dollar
NCS -- Non Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
SECTOR DIVERSIFICATION (000) NET ASSETS
<S> <C> <C>
- -------------------------------------------------------------------
Advertising Service.................... $ 840 0.4%
Capital Equipment...................... 46,552 22.5
Consumer Goods......................... 2,469 1.2
Consumer Products -- Miscellaneous..... 36,599 17.7
Diversified Operations................. 8,088 3.9
Energy................................. 11,704 5.7
Finance................................ 45,634 22.1
Gold Mines............................. 1,865 0.9
Materials.............................. 16,253 7.8
Technology............................. 447 0.2
Services............................... 36,357 17.6
--------- -----
$ 206,808 100.0%
--------- -----
--------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
53
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 2.0%
Belgium 0.4%
Canada 3.1%
Denmark 1.2%
Finland 0.6%
France 11.7%
Germany 8.1%
Hong Kong 2.0%
Italy 3.2%
Japan 14.9%
Netherlands 6.1%
New Zealand 0.5%
Portugal 0.4%
Singapore 0.2%
Spain 1.9%
Sweden 3.7%
Switzerland 6.6%
United Kingdom 25.7%
Other 7.7%
</TABLE>
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ONE ANNUAL FIVE ANNUAL SINCE
YTD YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A......... 18.18% 16.48% 19.40% 13.59%
PORTFOLIO -- CLASS B......... 18.10 16.21 N/A 20.46
INDEX -- CLASS A............. 15.93 6.10 10.03 5.36
INDEX -- CLASS B............. 15.93 6.10 N/A 9.39
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (includes dividends net of withholding
taxes).
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
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.
The investment objective of the International Equity Portfolio is long-term
capital appreciation through investment primarily in equity securities of
non-U.S. issuers. Equity securities for this purpose include common stocks and
equivalents, such as securities convertible into common stocks, and securities
having common stock characteristics, such as rights and warrants to purchase
common stocks.
For the six months ended June 30, 1998, the Portfolio had a total return of
18.18% for the Class A shares and 18.10% for the Class B shares compared to
15.93% for the Morgan Stanley Capital International (MSCI) EAFE Index (the
"Index"). For the one year ended June 30, 1998, the Portfolio had a total return
of 16.48% for Class A shares and 16.21% for Class B shares compared to 6.10% for
the Index. For the five-year period ended June 30, 1998, the average annual
total return of Class A shares was 19.40% compared to 10.03% for the Index. From
inception on August 4, 1989 to June 30, 1998, the average annual total return of
Class A shares was 13.59% compared to 5.36% for the Index. From inception on
January 2, 1996 to June 30, 1998, the average annual total return of Class B
shares was 20.46% compared to 9.39% for the Index.
While the U.K. market sells at a discount to the rest of Europe, it probably
deserves to given higher core inflation and the advanced stage of the domestic
profits cycle. The substantial U.K. weighting in the portfolio is driven not so
much by absolute or even relative value but rather by the cash generative nature
of the business franchises available in this market relative to those in other
major. We believe that as the year progresses deflationary pressures in
tradeable goods will intensify and profit disappointments in this area will
become more widespread. This makes us overtly cautious on markets such as
Germany whose economy and stock market are characterized by capital intensive
manufacturing and banking sectors with large exposures to late cycle Asian
lending. Our overweight position in France is due to the higher franchise
content in its corporate sector.
As for Japan, our quarterly visits to cheap, low quality companies again turned
up no new investment ideas as corporate management in industries such as
chemicals and electric utilities showed themselves to be interested in
restructuring only to the minimum extent required to ensure operating survival.
In the case of banks we do believe something substantive is
- --------------------------------------------------------------------------------
International Equity Portfolio
54
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
being done to improve their feeble return on equity but the extent of their bad
loan problems is sufficiently opaque for the risk reward ratio to be
unfathomable. The recent announcement of a government managed bridge bank is
tantamount to a warning that more weak Japanese banks are going to be allowed to
fail. With 100% downside one therefore has to have a high level of certainty as
to which ones will survive. Japanese disclosure does not allow for this type of
certainty.
As for South East Asia suffice to say that what we termed an Armageddon scenario
at the end of last year has come to pass and therefore our worst case asset
price calculations have, if anything, proved not pessimistic enough. A recent
visit to the region left us with the view that 1999 will be the year when the
corporate sector encounters its worst liquidity problems and no property stocks
should be added until that time. We reversed our initial foray into the
Singapore banking sector as the bank in question effected a rights issue on
unsatisfactory terms for less than clear reasons. However, we do believe this
sector has the best risk reward ratio for getting exposure to an eventual
recovery in the region, other than the media sector where liquidity is a
problem.
It is asking a lot to expect the current indifference of U.S. investors to a
rapidly deteriorating profits outlook to continue, and it would be foolhardy to
expect extended markets elsewhere to hold up in the face of a meaningful
correction on Wall Street. Meanwhile, even if the LDP does win a sufficient
majority in the imminent Japanese elections to push through a genuinely
simulative package, the news flow from Japan will continue to be negative in the
short term and therefore the potential for another run on the yen will remain.
We therefore see a difficult outlook for equities over the balance of the year
and are particularly mindful of avoiding companies likely to suffer a
compression of profits if global economic growth slows. The capital goods sector
appear particularly vulnerable in this respect. As for new investment ideas,
Europe is fully priced, value in the U.K. is too vulnerable to a deteriorating
macro environment, and cheap Japanese stocks deserve their low ratings due to
poor management. This augurs for a relatively stable portfolio structure though
we will sell stocks such as Unilever when they more than discount the most
optimistic earnings scenario.
Dominic Caldecott
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
International Equity Portfolio
55
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
COMMON STOCKS (90.4%)
AUSTRALIA (2.0%)
1,540,750 Brambles Industries Ltd.......................... $ 30,272
1,250,600 CSR Ltd.......................................... 3,613
15,143,200 Fosters Brewing Group Ltd........................ 35,677
-----------
69,562
-----------
BELGIUM (0.4%)
238,050 G.I.B. Holdings Ltd.............................. 13,431
-----------
CANADA (3.1%)
374,480 Potash Corp. of Saskatchewan, Inc................ 28,196
(a)1,949,100 Renaissance Energy Ltd........................... 29,206
1,899,350 TELUS Corp....................................... 49,112
-----------
106,514
-----------
DENMARK (1.2%)
142,300 Den Danske Bank.................................. 17,086
264,108 Unidanmark A/S, Class A (Registered)............. 23,755
-----------
40,841
-----------
FINLAND (0.6%)
342,400 Huhtamaki Oyj, Series 1.......................... 19,610
168,467 Merita Ltd., Class A............................. 1,112
-----------
20,722
-----------
FRANCE (11.7%)
266,700 Alcatel Alsthom.................................. 54,288
12,760 Bongrain......................................... 6,406
219,182 Cie de Saint Gobain.............................. 40,629
410,200 Elf Aquitaine.................................... 57,655
791,600 France Telecom................................... 54,584
264,400 Groupe Danone.................................... 72,882
405,800 Rhone-Poulenc, Class A........................... 22,882
352,656 Schneider........................................ 28,113
279,250 Scor............................................. 17,709
249,500 Total, Class B................................... 32,428
946,398 Usinor Sacilor................................... 14,617
-----------
402,193
-----------
GERMANY (6.2%)
1,058,300 BASF AG.......................................... 50,172
709,700 Bayer AG......................................... 36,636
22,200 Hoechst AG....................................... 1,109
36,950 Karstadt AG...................................... 17,866
614,503 RWE AG........................................... 36,458
21,040 Varta AG......................................... 4,060
356,100 VEBA AG.......................................... 24,286
65,610 Viag AG.......................................... 44,383
-----------
214,970
-----------
HONG KONG (2.0%)
12,495,155 Hong Kong Land Holdings Ltd...................... 15,619
5,034,000 Hysan Development Co., Ltd....................... 4,158
15,741,837 Jardine Strategic Holdings, Inc.................. 29,909
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
3,561,600 Swire Pacific Ltd., Class A...................... $ 13,446
6,842,500 Swire Pacific Ltd., Class B...................... 4,107
-----------
67,239
-----------
ITALY (3.2%)
5,842,300 Mediaset S.p.A................................... 37,302
15,021,987 Telecom Italia S.p.A. (RNC)...................... 72,749
-----------
110,051
-----------
JAPAN (14.9%)
2,768,000 Aisin Seiki Co., Ltd............................. 25,539
679,600 Aoyama Trading Co., Ltd.......................... 16,767
595,000 Canon, Inc....................................... 13,521
9,480 Central Japan Railway Co......................... 35,083
342,000 Chudenko Corp.................................... 7,142
1,604,000 Daibiru Corp..................................... 10,345
2,257,000 Daicel Chemical Industries Ltd................... 4,787
1,116,000 Eisai Co., Ltd................................... 15,216
2,144,000 Fuji Photo Film Ltd.............................. 74,704
766,000 Fujisawa Pharmaceutical Co., Ltd................. 7,173
1,478,000 Hitachi Ltd...................................... 9,649
4,539 Japan Tobacco, Inc............................... 30,747
3,144,000 Kao Corp......................................... 48,537
1,429,000 Matsushita Electric Industrial Co., Ltd.......... 22,988
889,000 NEC Corp......................................... 8,292
3,547,000 Nichido Fire & Marine Insurance Co., Ltd......... 18,551
3,698 Nippon Telegraph & Telephone Corp................ 30,679
729,000 Ono Pharmaceutical Co., Ltd...................... 17,460
191,000 Ryosan Co........................................ 3,128
2,560,000 Shionogi & Co., Ltd.............................. 14,774
163,400 Sony Corp........................................ 14,086
4,132,000 Sumitomo Marine & Fire Insurance Co., Ltd........ 23,131
493,000 Sumitomo Rubber Industries....................... 2,660
215,900 Takefuji Corp.................................... 9,968
2,223,000 Toyo Seikan Kaisha Ltd........................... 27,262
1,068,000 Yamanouchi Pharmaceutical Co..................... 22,266
-----------
514,455
-----------
NETHERLANDS (6.1%)
225,900 ABN Amro Holding N.V............................. 5,288
239,200 Akzo Nobel N.V................................... 53,197
826,060 Hollandsche Beton Groep N.V...................... 17,226
813,939 ING Groep N.V.................................... 53,321
265,200 Koninklijke Bijenkorf Beheer N.V................. 18,586
628,440 Koninklijke KNP BT N.V........................... 16,226
561,000 Philips Electronics N.V.......................... 47,180
-----------
211,024
-----------
NEW ZEALAND (0.5%)
2,232,479 Fisher & Paykel Industries Ltd................... 5,683
5,134,100 Lion Nathan Ltd.................................. 11,417
(a)392,500 Smith City Group Ltd............................. --
-----------
17,100
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
56
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
PORTUGAL (0.4%)
346,950 Cimpor SGPS...................................... $ 12,195
-----------
SINGAPORE (0.2%)
945,100 Singapore Press Holdings Ltd. (Foreign).......... 6,321
-----------
SPAIN (1.9%)
2,770,000 Iberdrola........................................ 44,977
463,481 Telefonica....................................... 21,429
-----------
66,406
-----------
SWEDEN (3.7%)
995,400 ForeningsSparbanken AB........................... 29,948
(a)49,445 Mandamus AB...................................... 310
3,189,300 Nordbanken Holding AB............................ 23,389
749,000 Pharmacia & Upjohn, Inc. ADR..................... 34,459
63,000 S.K.F. AB, Class B............................... 1,145
464,700 Skandia Forsakrings AB........................... 6,641
1,182,900 Svenska Cellulosa AB, Class B.................... 30,622
-----------
126,514
-----------
SWITZERLAND (6.6%)
16,475 ABB AG........................................... 24,348
24,810 Cie Financiere Richemont AG, Class A............. 32,492
22,540 Forbo Holding AG (Registered).................... 11,480
20,531 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 26,143
46,775 Nestle (Registered).............................. 100,173
11,524 Schindler Holding AG (Participating
Certificates).................................. 17,563
37,835 Union Bank of Switzerland (Bearer)............... 14,079
-----------
226,278
-----------
UNITED KINGDOM (25.7%)
6,217,500 Aggreko plc...................................... 20,663
561,300 Associated British Foods plc..................... 5,301
3,056,139 B.A.T. Industries plc............................ 30,623
3,201,635 BG plc........................................... 18,526
202,000 Billiton plc..................................... 410
(a)15,250,000 BTR plc.......................................... 43,295
2,670,667 Bank of Scotland................................. 29,927
2,718,700 British Telecommunications plc................... 33,598
6,685,500 Bunzl plc........................................ 31,373
2,436,450 Burmah Castrol plc............................... 43,537
6,217,500 Christian Salvesen plc........................... 12,045
2,164,600 Commercial Union plc............................. 40,415
1,240,900 Danka Business Systems plc....................... 3,937
2,800,800 Diageo plc....................................... 33,209
3,566,128 English China Clays plc.......................... 12,209
2,846,900 Great Universal Stores plc....................... 37,559
2,496,100 Imperial Tobacco Group plc....................... 18,425
5,082,251 John Mowlem & Co. plc............................ 12,307
(a)2,497,750 Lonrho Africa plc................................ 3,003
2,443,650 Lonrho plc....................................... 11,467
2,023,068 National Westminster Bank plc.................... 36,184
2,088,820 Peninsular & Oriental Steam Navigation Co........ 30,104
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
2,778,400 Premier Farnell plc.............................. $ 14,105
3,433,500 Racal Electronic plc............................. 19,439
4,146,202 Reckitt & Colman plc............................. 79,213
1,978,300 RMC Group plc.................................... 34,326
2,506,168 Rolls-Royce plc.................................. 10,359
3,184,000 Royal & Sun Alliance Insurance Group plc......... 32,941
966,617 Somerfield plc................................... 6,183
1,718,650 Southern Electric plc............................ 15,556
2,012,502 Tate & Lyle plc.................................. 15,973
3,158,700 Unilever plc..................................... 33,655
4,609,500 Wolseley plc..................................... 27,097
13,501,900 WPP Group plc.................................... 88,558
-----------
885,522
-----------
TOTAL COMMON STOCKS (Cost $2,350,228)............................... 3,111,338
-----------
PREFERRED STOCK (1.9%)
GERMANY (1.9%)
94,950 Volkswagen AG (Cost $19,272)..................... 64,758
-----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------
WARRANTS (0.0%)
HONG KONG (0.0%)
(a)503,400 Hysan Development Co., Ltd., expiring 4/30/99
(Cost $0)...................................... 4
-----------
TOTAL FOREIGN SECURITIES (92.3%) (Cost $2,369,500).................. 3,176,100
-----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
SHORT-TERM INVESTMENT (2.3%)
REPURCHASE AGREEMENT (2.3%)
$ 79,317 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $79,329
collateralized by U.S. Treasury Notes, 7.00%
due 7/15/06, valued at $81,033 (Cost
$79,317)....................................... 79,317
-----------
FOREIGN CURRENCY (6.1%)
AUD 1 Australian Dollar................................ --
BEF 13,596 Belgian Franc.................................... 365
GBP 168 British Pound.................................... 280
FRF 35,199 French Franc..................................... 5,820
DEM 296,013 German Mark...................................... 164,133
ITL 2,822,033 Italian Lira..................................... 1,588
JPY 3,902,071 Japanese Yen..................................... 28,150
NLG 22,547 Netherlands Guilder.............................. 11,088
NZD 335 New Zealand Dollar............................... 174
ESP 85 Spanish Peseta................................... 1
SEK 7 Swedish Krona.................................... 1
-----------
TOTAL FOREIGN CURRENCY (Cost $213,832).............................. 211,600
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
57
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.7%) (Cost $2,662,649)......................... $3,467,017
----------
OTHER ASSETS (10.0%)
Securities at Value, Held as Collateral for Securities
Lending.............................................. $ 259,824
Receivable for Investments Sold........................ 69,635
Dividends Receivable................................... 7,803
Receivable for Portfolio Shares Sold................... 3,396
Foreign Withholding Tax Reclaim Receivable............. 2,387
Interest Receivable.................................... 28
Other.................................................. 70 343,143
----------
LIABILITIES ( - 10.7%)
Collateral on Securities Loaned........................ (259,824)
Payable for Portfolio Shares Redeemed.................. (80,484)
Payable for Investments Purchased...................... (17,483)
Investment Advisory Fees Payable....................... (7,019)
Net Unrealized Loss on Foreign Currency Exchange
Contracts............................................ (740)
Bank Overdraft Payable................................. (709)
Custodian Fees Payable................................. (543)
Payable for Closed Foreign Currency Exchange
Contracts............................................ (514)
Administrative Fees Payable............................ (441)
Directors' Fees & Expenses Payable..................... (149)
Distribution Fee Payable............................... (5)
Other Liabilities...................................... (47) (367,958)
---------- ----------
NET ASSETS (100%).................................................... $3,442,202
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital...................................................... $2,392,551
Undistributed Net Investment Income.................................. 27,963
Accumulated Net Realized Gain........................................ 218,428
Unrealized Appreciation on Investments and Foreign Currency
Translations....................................................... 803,260
----------
NET ASSETS........................................................... $3,442,202
----------
----------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
CLASS A:
- -----------------------------------------------------------------------
<S> <C>
NET ASSETS............................................................. $3,432,750
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 169,283,685 outstanding $0.001 par value shares
(authorized 500,000,000 shares)...................................... $20.28
----------
----------
CLASS B:
- -----------------------------------------------------------------------
NET ASSETS............................................................. $9,452
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 467,298 outstanding $0.001 par value shares (authorized
500,000,000 shares).................................................. $20.23
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ----------- --------- ----------- ------------ --------- ------------
BEF 9,377 $ 252 7/01/98 DEM 455 $ 252 $ --
DEM 21,331 11,827 7/01/98 CHF 17,954 11,845 18
DEM 5,999 3,326 7/01/98 GBP 1,193 3,329 3
NLG 9,306 4,577 7/01/98 DEM 8,256 4,578 1
U.S.$ 233 233 7/01/98 SGD 399 236 3
GBP 17,500 142,538 11/09/98 U.S.$141,773 141,773 (765)
--------- --------- ------
$ 162,753 $ 162,013 $ (740)
---------
--------- --------- ------
--------- ------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
CHF -- Swiss Franc
RNC -- Non-Convertible Savings Shares
SGD -- Singapore Dollar
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------------
Capital Equipment...................... $ 676,258 19.6%
Consumer Goods......................... 1,033,133 30.0
Energy................................. 342,295 10.0
Finance................................ 420,271 12.2
Multi-Industry......................... 205,209 6.0
Services............................... 498,934 14.5
----------- ---
$ 3,176,100 92.3%
----------- ---
----------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
58
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 1.5%
Austria 0.5%
Belgium 0.7%
Denmark 1.3%
Finland 5.2%
France 9.8%
Germany 11.1%
Hong Kong 0.8%
Italy 4.1%
Japan 13.8%
Malaysia 0.1%
Netherlands 5.0%
New Zealand 0.1%
Norway 1.0%
Singapore 0.2%
Spain 3.5%
Sweden 6.0%
Switzerland 7.2%
United Kingdom 17.7%
Other 10.4%
</TABLE>
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 18.03% 8.41% 14.42%
PORTFOLIO -- CLASS B.... 17.99 8.16 14.12
INDEX................... 15.93 6.10 10.42
</TABLE>
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (includes dividends net of withholding
taxes).
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.
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. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.
The International Magnum Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers in accordance with
the EAFE country weightings determined by the Adviser. The EAFE countries in
which the Portfolio will invest are those comprising the Morgan Stanley Capital
International (MSCI) EAFE Index, which includes Australia, Japan, New Zealand,
most nations located in Western Europe, and certain developed countries in Asia.
For the six months ended June 30, 1998, the Portfolio had a total return of
18.03% for the Class A shares and 17.99% for the Class B shares compared to
15.93% for the Morgan Stanley Capital International (MSCI) EAFE Index (the
"Index"). For the one year ended June 30, 1998, the Portfolio had a total return
of 8.41% for Class A shares and 8.16% for Class B shares compared to 6.10% for
the Index. From inception on March 15, 1996 to June 30, 1998, the average annual
total return of Class A shares was 14.42% and 14.12% for Class B shares compared
to 10.42% for the Index.
After an extraordinary start in the first quarter, international equity markets
slowed somewhat in the second quarter. The tone for the second quarter was set
by European markets, which had set records in the first quarter, but were less
impressive in the second. The drag on performance came from the far east where
Asia ex-Japan suffered through another round of the "Asian flu" and Japan
experienced its own bout of currency weakness. In the midst of this turmoil the
Portfolio was able to produce a positive return of 3.30% return for the Class A
shares.
Following a dramatic rise in the first quarter, the European markets eased but
nonetheless posted healthy gains, rising by 5.1% in U.S. dollar terms for the
three months ended June 30, 1998. Year-to-date, the European markets have
climbed an impressive 26.5% in U.S. dollar terms. The European markets continue
to benefit from the stability of their markets and their favorable economic
prospects. Optimism about European Monetary Union (EMU) is also helping as EMU
took another step closer to reality with the finalization in May of the 11
initial EMU participants.
The European markets were led by strong performances for the quarter and
year-to-date in Germany (+16.7% and +36.5%, respectively), Finland (+23.5% and
+65.6%, respectively) and Belgium
- --------------------------------------------------------------------------------
International Magnum Portfolio
59
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
(+21.6% and +43.3%, respectively). Germany has been helped by EMU euphoria and
improving economic fundamentals including lower unemployment rates and benign
inflation, while the gains in Finland largely reflect the strong performance of
Nokia (+125%), which comprises over half the index. Belgium thrived on the
strength of the banking sector, as consolidation in European financial services
has boosted the sector throughout the continent. Portugal and Italy, two of the
markets that were the strongest during the first quarter, succumbed to profit
taking during the second quarter, both falling over 2%. The United Kingdom is
one of the weakest markets year-to-date, falling 2.0% for the quarter and rising
only 15.7% year-to-date, with much of the rise attributable to the strength of
the pound. Tight monetary policy has threatened to drive the U.K. into a
recession, while the strength of the currency has hurt exporters.
Investors in Japanese equities endured another difficult quarter in the second
quarter of 1998 as the MSCI Japan Index posted a - 4.5% return in U.S. dollar
terms for the quarter (bringing the year-to-date U.S. dollar return to - 2.6%).
Market participants' disappointment at the lack of leadership on the part of
Japanese policy-makers prompted the selling of both the Japanese equity market
and the currency. For most of this decade the Japanese economy has been hampered
by the dual burdens of billions of dollars of bad bank loans and the lack of a
coherent and stimulative fiscal policy. An RTC-like institution to fix the
banking sector and permanent tax cuts could help solve these problem and get the
Japanese economy moving in the right direction again. Thus, the ruling party's
confounding unwillingness to confront the nation's problems in a meaningful way
led to a loss of confidence on the part of investors which resulted in a run on
the yen during the quarter that saw the Japanese currency depreciate by over 13%
versus the U.S. dollar. During that same period the Nikkei 225 Index of Japanese
stocks fell 11%. In mid-June, during the most panic-filled moments of the
selloff in Japan, the U.S. Fed intervened in the currency markets along with the
Bank of Japan to support the yen. This show of solidarity gave yen-selling
speculators pause and the markets stabilized, though the quarter ended without a
clearly defined policy response from the Japanese, so there is still cause for
concern in the second half of the year.
The markets of Asia-ex Japan were off 22.6% for the quarter which leaves them
down 17.4% year-to-date in U.S. dollar terms. Clearly, the price gains
experienced during first quarter have evaporated and a cure for the Asian
contagion has not yet been found. The main culprit this time in what amounts to
the second major downturn in Asian markets in a year was Japan. Fears that a
free-fall in the Japanese currency would lead to another round of currency
devaluations throughout the region frightened investors. First came the
recognition that no policy change would be implemented in the near term to
improve Japan's stalled economy. This led to a rapid sell-off in the yen which
in turn led investors to fear an imminent devaluation in the Chinese yuan and
perhaps then the Hong Kong dollar as well. Such a series of events would leave
the other countries in the region in as poor a competitive position as they were
before the first round of devaluations last summer.
The dramatic fall-off in economic activity throughout Asia has been another
factor which has contributed to poor equity returns in the region. As predicted,
growth has fallen off substantially in the aftermath of last year's currency
devaluations: Singapore, where the market fell 35.2% in the second quarter of
1998, has experienced a credit contraction for the first time in a decade (bank
loan growth - 3%) and the government is calling for only a 0.5% growth in gross
domestic product (down from a prediction of approximately - 5% at the beginning
of the year); in Hong Kong (down 26.9% in the second quarter of 1998)
authorities have gone to the unprecedented measure of postponing the real estate
auctions which give the government most of its revenues to support real estate
prices but real estate prices are still down by half from their highs. The story
is the same throughout Asia; until the engine of growth, Japan, revives, the
region is not likely to experience significant economic expansion.
Our regional allocation has us underweight Asia and Japan. This helped
performance over the second quarter, while being roughly neutral versus Europe
also helped performance, though a heavier commitment to Europe would have helped
more. Sector selection was negative, particularly in Europe as we were
underweight the bank and insurance sectors which were among the stronger
performers. Style hurt performance badly as growth stocks outperformed our
Portfolio's value stocks by a rather wide margin, particularly in Europe.
Currency
- --------------------------------------------------------------------------------
International Magnum Portfolio
60
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
hedging, where we hedged exposure to the yen and the deutschemark which both
depreciated during the quarter, added to performance.
During the second quarter we continued to increase our exposure to Europe based
on the belief that fears of an Asian induced slowdown there were overdone and
that European Monetary Union would enhance growth prospects for the region. We
moved from slightly underweight to a neutral position such that European
holdings now make up 73% of the Portfolio versus 74% for the Index. In Japan we
remain underweight with a 14% position versus 21% for the Index. In Asia, we
have an underweight position as well with a 3% holding versus 5% for the Index.
This
allocation leaves us with a 10% unallocated cash position which we believe is
appropriate given current market volatility.
Going forward, Europe still appears to offer the most attractive investment
potential and we anticipate going overweight there. We will maintain our
underweight positions in Japan and Asia pending the implementation of the proper
government policies necessary to bolster regional economic growth.
Francine J. Bovich
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
International Magnum Portfolio
61
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (87.3%)
AUSTRALIA (1.5%)
83,200 Australia & New Zealand Banking Group Ltd........ $ 575
18,750 Brambles Industries Ltd.......................... 367
57,600 Commonwealth Bank of Australia................... 673
16,780 Lend Lease Corp., Ltd............................ 340
27,030 National Australia Bank Ltd...................... 357
84,400 News Corp., Ltd.................................. 690
41,700 Seven Network Ltd................................ 126
227,200 Telstra Corp., Ltd. (Installment Receipts-Final
Installment: AUD 1.35/share due 11/17/98)...... 583
---------
3,711
---------
AUSTRIA (0.5%)
19,000 Boehler-Uddeholm AG.............................. 1,256
---------
BELGIUM (0.7%)
31,225 G.I.B. Group..................................... 1,762
---------
DENMARK (1.3%)
24,000 BG Bank A/S...................................... 1,488
18,200 Unidanmark A/S, Class A (Registered)............. 1,637
---------
3,125
---------
FINLAND (5.2%)
21,500 Huhtamaki Oyj, Series 1.......................... 1,231
12,355 Kone Oyj, Class B................................ 1,735
194,300 Merita Ltd., Class A............................. 1,283
72,050 Metra Oyj, Class B............................... 2,366
39,100 Partek Oyj Abp................................... 678
173,500 Rautaruukki Oyj.................................. 1,329
20,450 Sampo Insurance Co., plc, Class A................ 970
77,000 The Rauma Group.................................. 1,580
86,775 Valmet Oyj....................................... 1,497
---------
12,669
---------
FRANCE (9.8%)
4,500 Alcatel Alsthom.................................. 916
1,360 Bongrain......................................... 683
15,521 Cie de Saint Gobain.............................. 2,877
15,180 Cie Generale des Establissements Michelin, Class
B.............................................. 876
20,900 Elf Aquitaine.................................... 2,938
20,500 France Telecom................................... 1,414
9,830 Groupe Danone.................................... 2,710
18,800 Lafarge.......................................... 1,943
37,700 Legris Industries................................ 1,764
21,100 Rhone-Poulenc, Class A........................... 1,190
9,300 Scor............................................. 590
(a)21,700 SGS-Thompson Microelectronics N.V................ 1,538
22,000 Total, Class B................................... 2,859
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
6,390 Union des Assurances Federales................... $ 1,006
33,900 Usinor Sacilor................................... 523
---------
23,827
---------
GERMANY (8.8%)
63,100 BASF AG.......................................... 2,991
34,850 Bayer AG......................................... 1,799
12,800 Bayerische Vereinsbank AG........................ 1,089
4,983 Buderus AG....................................... 2,487
60,200 Gerresheimer Glas AG............................. 905
17,920 Metro AG......................................... 1,088
(a)7,430 Philipp Holzmann AG.............................. 1,780
12,590 Plettac AG....................................... 1,759
29,000 VEBA AG.......................................... 1,978
3,440 Viag AG.......................................... 2,327
3,338 Volkswagen AG.................................... 3,211
---------
21,414
---------
HONG KONG (0.8%)
60,500 CLP Holdings Ltd................................. 276
274,300 Hong Kong & China Gas Co., Ltd................... 312
113,500 Hong Kong Electric Holdings Ltd.................. 352
133,200 Hong Kong Telecommunications Ltd................. 250
11,300 HSBC Holdings plc................................ 276
48,000 Hutchison Whampoa Ltd............................ 253
115,000 Li & Fung Ltd.................................... 186
3,000 Ng Fung Hong Ltd................................. 2
47,000 Television Broadcasts Ltd........................ 124
---------
2,031
---------
ITALY (4.1%)
558,020 Magneti Marelli S.p.A............................ 1,225
98,100 Marzotto (Gaetano) & Figli S.p.A................. 1,496
276,000 Mediaset S.p.A................................... 1,762
457,600 Sogefi S.p.A..................................... 1,532
806,211 Telecom Italia S.p.A. Di Risp (NCS).............. 3,905
---------
9,920
---------
JAPAN (13.8%)
106,000 Amada Co., Ltd................................... 516
10,000 Autobacs Seven Co., Ltd.......................... 286
42,000 Canon, Inc....................................... 954
65,000 Casio Computer Co., Ltd.......................... 604
47,000 Dai Nippon Printing Co., Ltd..................... 751
187,000 Daicel Chemical Industries Ltd................... 397
106,000 Daifuku Co., Ltd................................. 395
85,000 Daikin Industries Ltd............................ 548
10,000 FamilyMart Co., Ltd.............................. 381
36,000 Fuji Machine Manufacturing Co.................... 956
27,000 Fuji Photo Film Ltd.............................. 941
59,000 Fujitec Co., Ltd................................. 358
93,000 Fujitsu Ltd...................................... 980
153,000 Furukawa Electric Co............................. 515
33,000 Hitachi Credit Corp.............................. 556
133,000 Hitachi Ltd...................................... 868
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
62
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
60,000 Inabata & Co..................................... $ 185
105,000 Kaneka Corp...................................... 553
36,000 Kurita Water Industries Ltd...................... 426
13,300 Kyocera Corp..................................... 651
59,000 Kyudenko Co., Ltd................................ 386
35,000 Lintec Corp...................................... 306
62,000 Matsushita Electric Industrial Co., Ltd.......... 997
212,000 Mitsubishi Chemical Corp......................... 384
57,000 Mitsubishi Estate Co., Ltd....................... 502
196,000 Mitsubishi Heavy Industries Ltd.................. 741
54,000 Mitsumi Electric Co., Ltd........................ 954
19,000 Murata Manufacturing Co., Ltd.................... 617
111,000 NEC Corp......................................... 1,035
47,000 Nifco, Inc....................................... 373
12,000 Nintendo Co., Ltd................................ 1,112
29,000 Nippon Pillar Packing............................ 109
117 Nippon Telegraph & Telephone Corp................ 971
202,000 Nissan Motor Co., Ltd............................ 637
45,000 Nissha Printing Co., Ltd......................... 276
23,000 Ono Pharmaceutical Co., Ltd...................... 551
90,000 Ricoh Co., Ltd................................... 949
31,000 Rinnai Corp...................................... 470
18,000 Sangetsu Co., Ltd................................ 232
45,000 Sankyo Co., Ltd.................................. 1,026
74,000 Sanwa Shutter Corp............................... 326
65,000 Sekisui Chemical Co., Ltd........................ 333
43,000 Sekisui House Co., Ltd........................... 333
14,000 Shimamura Co., Ltd............................... 379
90,000 Shin-Etsu Polymer Co., Ltd....................... 364
15,700 Sony Corp........................................ 1,353
31,000 Sumitomo Marine & Fire Insurance Co., Ltd........ 174
52,000 Suzuki Motor Co., Ltd............................ 473
12,000 TDK Corp......................................... 887
25,000 Tokyo Electron Ltd............................... 766
269,000 Toshiba Corp..................................... 1,100
33,000 Toyota Motor Corp................................ 855
138,000 Tsubakimoto Chain Co............................. 463
41,000 Yamaha Corp...................................... 399
42,000 Yamanouchi Pharmaceutical Co., Ltd............... 875
---------
33,529
---------
MALAYSIA (0.1%)
12,000 Carlsberg Brewery Malaysia Bhd................... 36
58,000 Guinness Anchor Bhd.............................. 61
17,000 Nestle (Malaysia) Bhd............................ 77
16,000 Rothmans of Pall Mall (Malaysia) Bhd............. 112
---------
286
---------
NETHERLANDS (5.0%)
60,600 ABN Amro Holding N.V............................. 1,419
11,000 Akzo Nobel N.V................................... 2,446
30,000 Hollandsche Beton Groep N.V...................... 626
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
52,105 ING Groep N.V.................................... $ 3,413
12,000 Koninklijke Bijenkorf Beheer N.V................. 841
73,600 Koninklijke KNP BT N.V........................... 1,900
19,200 Philips Electronics N.V.......................... 1,615
---------
12,260
---------
NEW ZEALAND (0.1%)
(a)127,000 AMP NZ Office Trust.............................. 59
7,280 Fletcher Challenge Forests....................... 4
10,000 Telecom Corp. of New Zealand Ltd. (Installment
Receipts-Final Installment: NZD 4.15/Share due
3/31/99)....................................... 21
20,000 Telecom Corp. of New Zealand Ltd................. 83
---------
167
---------
NORWAY (1.0%)
111,600 Saga Petroleum ASA, Class B...................... 1,580
30,650 Sparebanken...................................... 879
---------
2,459
---------
SINGAPORE (0.2%)
(a)10,100 Creative Technology Ltd.......................... 123
103,000 Natsteel Electronics Ltd......................... 172
16,000 United Overseas Bank Ltd. (Foreign).............. 50
53,000 Venture Manufacturing Ltd........................ 100
---------
445
---------
SPAIN (3.5%)
53,600 Banco Bilbao Vizcaya (Registered)................ 2,751
147,700 Iberdrola........................................ 2,398
(a)29,881 Telefonica....................................... 1,382
136,000 Uralita.......................................... 1,937
---------
8,468
---------
SWEDEN (6.0%)
59,500 Autoliv, Inc..................................... 1,902
44,700 BT Industries AB................................. 902
76,500 Esselte AB, Class B.............................. 1,774
422,000 Nordbanken Holding AB............................ 3,095
35,600 Pharmacia & Upjohn, Inc. ADR..................... 1,638
72,800 PLM AB........................................... 1,150
5,900 S.K.F. AB, Class B............................... 107
44,000 Spectra-Physics AB, Class A...................... 704
62,400 Svedala Indrustri AB............................. 1,446
39,700 Svenska Handelsbanken, Class A................... 1,842
---------
14,560
---------
SWITZERLAND (7.2%)
65 Ascom Holdings AG (Bearer)....................... 120
890 Bobst AG (Bearer)................................ 1,638
763 Cie Financiere Richemont AG, Class A............. 999
4,270 Forbo Holding AG (Registered).................... 2,175
2,300 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 2,929
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
63
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
2,160 Nestle (Registered).............................. $ 4,626
150 Schindler Holding AG (Participating
Certificates).................................. 229
895 Schindler Holding AG (Registered)................ 1,388
1,800 SIG-Schweizensche Industrie-Gesellschaft Holding
AG (Registered)................................ 1,467
6,900 Valora Holding AG (Registered)................... 1,820
---------
17,391
---------
UNITED KINGDOM (17.7%)
650,400 Aegis Group plc.................................. 1,054
2,227 B.A.T. Industries plc............................ 22
343,617 BG plc........................................... 1,988
272,143 BTR plc.......................................... 772
111,112 Bank of Ireland.................................. 2,273
129,683 Bank of Scotland................................. 1,453
172,700 British Telecommunications plc................... 2,134
184,900 Bunzl plc........................................ 868
141,200 Burmah Castrol plc............................... 2,523
65,900 Capital Radio plc................................ 782
217,000 Charter plc...................................... 2,267
61,325 Commercial Union plc............................. 1,145
5,500 Danka Business Systems plc....................... 17
148,436 Diageo plc....................................... 1,760
180,500 Glynwed International plc........................ 743
130,500 Great Universal Stores plc....................... 1,722
44,900 Halma plc........................................ 92
291,000 Imperial Tobacco Group plc....................... 2,148
275,761 John Mowlem & Co. plc............................ 668
(a)128,100 Lonrho Africa plc................................ 154
128,100 Lonrho plc....................................... 601
564,400 Medeva plc....................................... 1,602
52,400 Peninsular & Oriental Steam Navigation Co........ 755
176,000 Premier Farnell plc.............................. 894
2,522,700 Premier Oil plc.................................. 1,780
153,496 Reckitt & Colman plc............................. 2,933
29,800 RMC Group plc.................................... 517
178,789 Royal & Sun Alliance Insurance Group plc......... 1,850
576,200 Scapa Group plc.................................. 1,828
220,700 SIG plc.......................................... 829
79,500 Tate & Lyle plc.................................. 631
69,200 Unilever plc..................................... 737
89,000 Westminster Health Care Holdings plc............. 473
446,400 WPP Group plc.................................... 2,928
---------
42,943
---------
TOTAL COMMON STOCKS (Cost $184,345)............................... 212,223
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
PREFERRED STOCKS (2.3%)
GERMANY (2.3%)
4,550 Dyckerhoff AG.................................... $ 1,811
16,000 Hornbach Holding AG.............................. 1,468
3,600 Suedzucker AG.................................... 2,190
---------
TOTAL PREFERRED STOCKS (Cost $4,215).............................. 5,469
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -------------
RIGHTS (0.0%)
GERMANY (0.0%)
(a)17,920 Metro AG (Cost $0)............................... 1
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------------
CORPORATE BOND (0.0%)
NEW ZEALAND (0.0%)
NZD 127 AMP NZ Office Trust, 7.50%, 6/30/03 (Cost $75)... 57
---------
TOTAL FOREIGN SECURITIES (89.6%) (Cost $188,635)................... 217,750
---------
SHORT-TERM INVESTMENT (9.5%)
REPURCHASE AGREEMENT (9.5%)
$ 22,973 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $22,976,
collateralized by U.S. Treasury Notes, 5.625%
due 2/15/06, valued at $23,494 (Cost
$22,973)....................................... 22,973
---------
FOREIGN CURRENCY (0.7%)
BEF 1,203 Belgian Franc.................................... 32
GBP 365 British Pound.................................... 609
FIM 1,132 Finnish Markka................................... 206
FRF 1,422 French Franc..................................... 235
DEM 65 German Mark...................................... 36
HKD 1,747 Hong Kong Dollar................................. 225
ITL 148,197 Italian Lira..................................... 83
JPY 22,427 Japanese Yen..................................... 162
MYR 17 Malaysian Ringgit................................ 4
NLG 18 Netherlands Guilder.............................. 9
NZD 7 New Zealand Dollar............................... 4
SGD 1 Singapore Dollar................................. 1
ESP 166 Spanish Peseta................................... 1
CHF 123 Swiss Franc...................................... 81
---------
TOTAL FOREIGN CURRENCY (Cost $1,682)............................... 1,688
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
64
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%) (Cost $213,290).......................... $242,411
--------
OTHER ASSETS (9.4%)
Cash................................................. $ 1
Securities at Value, Held as Collateral for
Securities Lending................................. 19,892
Receivable for Investments Sold...................... 1,309
Net Unrealized Gain on Foreign Currency Exchange
Contracts.......................................... 580
Dividends Receivable................................. 575
Receivable for Portfolio Shares Sold................. 284
Foreign Withholding Tax Reclaim Receivable........... 151
Interest Receivable.................................. 3
Other................................................ 1 22,796
----------
LIABILITIES ( - 9.2%)
Collateral on Securities Loaned...................... (19,892)
Payable for Investments Purchased.................... (1,639)
Investment Advisory Fees Payable..................... (408)
Payable for Portfolio Shares Redeemed................ (165)
Custodian Fees Payable............................... (79)
Administrative Fees Payable.......................... (29)
Distribution Fee Payable............................. (19)
Directors' Fees & Expenses Payable................... (7)
Other Liabilities.................................... (46) (22,284)
---------- --------
NET ASSETS (100%).................................................. $242,923
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $205,956
Undistributed Net Investment Income................................ 2,360
Accumulated Net Realized Gain...................................... 4,912
Unrealized Appreciation on Investments and Foreign Currency
Translations..................................................... 29,695
--------
NET ASSETS......................................................... $242,923
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -------------------------------------------------------------------
NET ASSETS......................................................... $208,780
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 16,270,744 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $12.83
--------
--------
CLASS B:
- -------------------------------------------------------------------
NET ASSETS......................................................... $34,143
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,669,496 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $12.79
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- -------------- -------- ----------- ------------ -------- -----------
U.S.$ 164 $ 164 7/01/98 DEM 297 $ 164 $ --
U.S.$ 97 97 7/01/98 FIM 531 97 --
BEF 1,203 32 7/02/98 U.S.$ 32 32 --
CHF 84 55 7/02/98 U.S.$ 55 55 --
HKD 1,629 210 7/02/98 U.S.$ 210 210 --
ITL 148,141 83 7/02/98 U.S.$ 83 83 --
U.S.$ 29 29 7/02/98 MYR 121 29 --
SGD 1,209 715 7/07/98 U.S.$ 685 685 (30)
U.S.$ 709 709 7/07/98 SGD 1,209 715 6
DEM 3,655 2,028 7/10/98 U.S.$ 2,010 2,010 (18)
JPY 500,640 3,621 7/16/98 U.S.$ 3,909 3,909 288
U.S.$ 3,640 3,640 7/16/98 JPY 500,640 3,620 (20)
CHF 2,502 1,654 7/21/98 U.S.$ 1,689 1,689 35
JPY 746,604 5,410 7/29/98 U.S.$ 5,810 5,810 400
U.S.$ 5,439 5,439 7/29/98 JPY 746,604 5,410 (29)
DEM 3,655 2,032 8/14/98 U.S.$ 2,072 2,072 40
JPY 519,375 3,775 8/19/98 U.S.$ 3,929 3,929 154
U.S.$ 381 381 8/19/98 JPY 52,123 379 (2)
JPY 675,640 4,926 9/10/98 U.S.$ 4,946 4,946 20
DEM 869 484 9/14/98 U.S.$ 482 482 (2)
JPY 797,057 5,827 9/28/98 U.S.$ 5,852 5,852 25
JPY 1,076,029 7,900 10/26/98 U.S.$ 7,613 7,613 (287)
-------- -------- -----
$ 49,211 $ 49,791 $ 580
--------
-------- -------- -----
-------- -----
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
AUD -- Australian Dollar
NCS -- Non-Convertible Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -------------------------------------------------------------------
Capital Equipment...................... $ 43,098 17.7%
Consumer Goods......................... 47,600 19.6
Electrical & Electronics............... 20,467 8.4
Energy................................. 17,216 7.1
Finance................................ 26,762 11.0
Materials.............................. 28,115 11.6
Multi-Industry......................... 14,605 6.0
Services............................... 19,887 8.2
--------- ---
$ 217,750 89.6%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
65
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 5.8%
Denmark 1.2%
Finland 6.7%
France 6.2%
Germany 9.2%
Hong Kong 1.9%
Ireland 4.3%
Italy 1.5%
Japan 12.7%
Netherlands 8.7%
New Zealand 0.8%
Norway 1.9%
Singapore 0.8%
Spain 1.8%
Sweden 2.4%
Switzerland 7.8%
United Kingdom 19.6%
Other 6.7%
</TABLE>
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE SMALL CAP INDEX(1)
- -----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEARS INCEPTION
---------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
PORTFOLIO.... 17.75% 8.28% 10.54% 14.96%
INDEX........ 13.77 - 16.76 - 1.05 4.06
</TABLE>
1. The MSCI EAFE Small Cap Index is an arithmetic, unmanaged, market
value-weighted average of the performance of over 900 securities of companies
listed on the stock exchange of countries in Europe, Australasia and the Far
East with a fixed market capitalization cut off of U.S. $200-$800 million
(this index is a price only index and does not include dividends).
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
EAFE SMALL CAP INDEX AND 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 International Small Cap Portfolio seeks long-term capital appreciation by
investing primarily in the equity securities of non-U.S. issuers. The Portfolio
applies a disciplined bottom-up value approach to identify and invest in small
capitalization companies which are both attractive businesses and available at
cheap prices. A market capitalization cut-off of U.S. $1 billion is used as our
definition of "small."
For the six months ended June 30, 1998, the Portfolio had a total return of
17.75% compared to a total return of 13.77% for the Morgan Stanley Capital
International (MSCI) EAFE Small Cap Index (the "Index"). For the one year ended
June 30, 1998, the Portfolio had a total return of 8.28% compared to -16.76% for
the Index. For the five-year period ended June 30, 1998, the average annual
total return for the Portfolio was 10.54% compared to -1.05% for the Index. From
inception on December 15, 1992 through June 30, 1998, the average annual total
return of the Portfolio was 14.96% compared to 4.06% for the Index.
Outperformance for the first six months of 1998 reflected a combination of
generally strong stock selection and the twin benefits of being underweight in
the weak South East Asian markets and overweight in Europe. Stock selection was
notably strong in the U.K., the Netherlands, Hong Kong and Sweden. Negative
factors for performance were the strong new year bounce in Japanese small caps
where the Portfolio is underweight, the Portfolio's overweighting of the weak
Australian small cap market and poor relative stock selection in Finland and
Australia. The Australian dollar hedge, however, contributed positively.
Turnover for the first six months was 16% with no change in the overall
geographic mix and little anticipated in the quarter ahead. The Portfolio's
positions in Country Road in Australia, Sediver in France, Bluebird Toys in the
U.K. and Marieberg in Sweden were all sold following successful bids. Ricardo,
in the U.K., was also sold recently having reached fair value following a
substantial re-rating. A number of new positions were established, some of the
more recent being:
STAR CITY CASINO is the only licensed casino operator in Sydney. Its share price
has fallen over 60% due to concerns over the impact of the Asian crisis on
gaming revenues. This has been more than discounted in the current share price
and ignores both a
- --------------------------------------------------------------------------------
International Small Cap Portfolio
66
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
successful cost cutting program and more focused marketing initiative. The
shares offer an effective dividend yield of over 12%.
AIFUL is the fourth largest consumer loan company in Japan with a 9.7% market
share. Demand for consumer loans is growing due to changing demographics while
the consumer loan companies are set to gain more market share from the banks.
Loan growth will also be driven by the extension of Aiful's branch network
combined with the introduction of Home Equity and Shoko loans. The shares are
trading on a March 1999 price-earnings of 10.3 times which represents a
substantial discount to its peer group and is not reflective of Aiful's earnings
outlook.
HALDEX is the world leader in automatic brake adjusters used in trucks and valve
spring wire for car engines. The recent acquisition of Midland-Grau in the
United States will transform the company from a specialized part manufacturer
into a brake system supplier. Bought on 8.0 times cash flow, current valuations
do not reflect the substantial benefits from the U.S. acquisition or the
potential of a recently launched new four wheel drive system.
AEGIS is a U.K. listed company active in media planning and buying, the most
cash-generative and fastest growing part of the advertising industry. The shares
were purchased on 22 times earnings which is an average price for an
exceptionally attractive company.
Despite the significant decline in the Asian markets, the full global impact of
the region's crisis is still underestimated in some quarters. Brokers' forecasts
for corporate profitability, on the whole, remain too high. Credit is extremely
tight, unemployment is rising and the property and banking sectors face enormous
problems. Recent visits to a number of Hong Kong banks, however, suggest that,
at least publicly, management are not prepared to admit the scale of their
potential difficulties. As the more financially sound companies find alternative
means of trade finance, Asian exports are likely to grow to the detriment of
western competitors while imports will continue to contract with a similarly
negative impact on Europe, Australasia and the U.S. Corporate capital
expenditure plans are likely to be reigned in hurting the capital goods sector.
With hindsight top slicing profits on a number of the Portfolio's capital goods
stocks in the first quarter was too early but we remain very wary of the
Portfolio's exposure to the sector. We believe there is some small cap value to
be found in South East Asia although we will continue to tread cautiously.
Huge structural problems remain in Japan and we remain unconvinced by the level
of political will to tackle the level of restructuring (read job losses)
necessary. The recent poor election results of the LDP suggest the Japanese
public are equally unconvinced but entrenched factions in the LDP don't bode
well for a more radical successor to Prime Minister Hashimoto. It is
questionable whether dangled carrots of possible tax cuts, if implemented, will
have the desired impact when the Japanese worker is rightly deeply concerned
over his job and pension security. Moreover, with the budget deficit in excess
of 6% of gross domestic product, the government can ill afford such measures.
Small cap valuations are attractive but overcapacity and misuse of capital mean
Japan remains a corporate minefield.
Attractive valuations are still available in small cap Europe, in marked
contrast to the large cap sector. In the U.K. the strength of Sterling risks
pushing the manufacturing sector into recession but quality business franchises
and value-enhancing management are available outside this sector at some
compelling valuations. On the Continent, the European recovery continues to feed
through to corporate profitability although Asia will take the edge off this. A
growing equity culture both in terms of corporate financing and ownership is
leading to a surge in new issues, a number of which have given the Portfolio
access to very attractive cash flow businesses which have historically seen no
reason to list. This is a very positive trend for small caps long term.
While we remained concerned over large cap equity valuations, small caps
continue to sell at an attractive, unjustified discount. Corporate activity
continues to benefit the Portfolio and, with no shortage of cash rich balance
sheets and highly rated paper available, we see no reason why this should not
continue.
Margaret Naylor
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
International Small Cap Portfolio
67
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------------
COMMON STOCKS (89.2%)
AUSTRALIA (5.8%)
329,795 Ausdoc Group Ltd................................. $ 573
623,503 Auspine Ltd...................................... 872
1,748,543 Australian Hospital Care Ltd..................... 1,268
(a)1,057,866 Bains Harding Ltd................................ 138
361,560 BRL Hardy Ltd.................................... 1,166
1,840,431 Eltin Ltd........................................ 1,495
(a)7,333,100 E.R.G. Ltd....................................... 4,046
1,041,000 Morgan & Banks Ltd............................... 2,149
7,490,464 Parbury Ltd...................................... 1,486
537,000 Ramsay Health Care Ltd........................... 633
1,290,614 Skilled Engineering Ltd.......................... 1,048
(a)1,990,900 Solution 6 Holdings Ltd.......................... 1,233
(a)4,288,300 Star City Holdings Ltd........................... 2,499
---------
18,606
---------
DENMARK (1.2%)
72,400 Sydbank A/S...................................... 4,036
---------
FINLAND (6.7%)
77,600 KCI Konecranes International..................... 3,935
45,775 Kone Oyj, Class B................................ 6,429
318,300 Metsa Tissue Oyj................................. 3,443
198,300 Rautaruukki Oyj.................................. 1,519
221,400 Tamro Oyj........................................ 1,434
231,040 The Rauma Group.................................. 4,741
---------
21,501
---------
FRANCE (6.2%)
18,060 Algeco........................................... 1,792
12,048 Chargeurs........................................ 995
29,649 Dauphin O.T.A.................................... 2,991
75,523 De Dietrich et Compagnie......................... 4,983
54,203 Europeene d'Extincteurs.......................... 4,383
102,500 Legris Industries................................ 4,797
---------
19,941
---------
GERMANY (5.1%)
75,850 Gerresheimer Glas AG............................. 1,140
(a)56,000 Kamps AG......................................... 1,661
(a)97,650 Marseille-Kliniken AG............................ 1,413
90,370 Moebel Walther AG................................ 4,259
(a)15,480 Philipp Holzmann AG.............................. 3,708
10,850 Plettac AG....................................... 1,516
7,626 Sinn AG.......................................... 1,395
(a)33,300 Winkler & Duennebier AG.......................... 1,478
---------
16,570
---------
HONG KONG (1.9%)
2,221,000 Li & Fung Ltd.................................... 3,583
7,882,000 Vitasoy International Holdings Ltd............... 2,594
---------
6,177
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------------
IRELAND (4.3%)
2,289,527 Anglo Irish Bank Corp. plc (British Pound
Shares)........................................ $ 6,154
150,430 Clondalkin Group plc............................. 1,260
931,914 Green Property plc............................... 6,506
---------
13,920
---------
ITALY (1.5%)
(a)407,300 Buffetti S.p.A................................... 1,622
459,000 Sogefi S.p.A..................................... 1,537
74,000 Unicem S.p.A. (RNC).............................. 321
19,000 Vincenzo Zucchi S.p.A............................ 198
207,050 Vincenzo Zucchi S.p.A. (NCS)..................... 1,025
---------
4,703
---------
JAPAN (12.7%)
260,800 Asatsu, Inc...................................... 5,315
64,400 Aiful Corp....................................... 3,145
231,000 Foster Electric Co., Ltd......................... 1,216
635,000 Hankyu Realty Co., Ltd........................... 2,799
227,000 Hanshin Department Store Ltd..................... 688
847,000 Japan Oil Transportation Co., Ltd................ 1,955
194,000 Kansei Corp...................................... 826
299,000 Kirin Beverage Corp.............................. 5,619
104,700 Maezawa Kasei Industries......................... 1,405
95,000 Mirai Industry Co., Ltd.......................... 798
335,000 Nifco, Inc....................................... 2,658
676,000 Nissan Fire & Insurance Co....................... 2,326
106,000 Nissei Industries................................ 765
100,000 Rock Field Co., Ltd.............................. 1,414
111,000 Sotoh Co., Ltd................................... 760
612,100 Toc Co........................................... 5,250
239,000 Toyoda Gosei Co.................................. 698
424,000 Ushio, Inc....................................... 3,367
---------
41,004
---------
NETHERLANDS (8.7%)
74,600 Ahrend Groep N.V................................. 2,436
101,605 Apothekers Cooperatie OPG........................ 3,423
29,813 Atag Holding N.V................................. 1,934
(a)110,100 Benckiser N.V., Class B.......................... 6,774
105,700 GTI Holding N.V.................................. 3,795
25,000 Internatio-Muller N.V............................ 837
208,200 Hollandsche Beton Groep N.V...................... 4,342
85,200 Nutreco Holding N.V.............................. 2,983
22,322 Samas Groep N.V.................................. 1,570
---------
28,094
---------
NEW ZEALAND (0.8%)
876,736 Fisher & Paykel Industries Ltd................... 2,232
347,500 Fletcher Challenge Building...................... 433
---------
2,665
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
68
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<C> <S> <C>
NORWAY (1.9%)
73,850 Adelsten ASA, Class B............................ $ 665
151,450 Kverneland ASA................................... 3,952
(a,d)228,020 Oceanor.......................................... --
55,638 Sparebanken...................................... 1,597
---------
6,214
---------
SINGAPORE (0.8%)
1,352,000 GP Batteries International Ltd................... 2,465
---------
SPAIN (1.8%)
48,368 Bodegas y Bebidas................................ 2,208
80,678 Miquel y Costas & Miquel......................... 3,735
---------
5,943
---------
SWEDEN (2.4%)
8,900 BT Industries AB................................. 180
104,900 Haldex AB........................................ 1,894
140,150 Nobel Biocare AB................................. 2,091
95,950 Scandic Hotels AB................................ 3,488
---------
7,653
---------
SWITZERLAND (7.8%)
(a)410 Bachem Feinchemikalien AG, Class B
(Registered)................................... 495
1,739 Bobst AG (Bearer)................................ 3,201
2,734 Bucher Holdings AG (Bearer)...................... 3,590
11,112 Edipresse (Bearer)............................... 3,057
2,750 LEM Holdings AG.................................. 666
6,340 PubliGroupe...................................... 1,966
5,416 SIG-Schweizerische Industrie-Gesellschaft Holding
AG (Registered)................................ 4,413
17,334 Valora Holding AG................................ 4,575
5,235 Zehnder Holding AG, Class B...................... 3,107
---------
25,070
---------
UNITED KINGDOM (19.6%)
1,528,400 Aegis Group plc.................................. 2,476
744,800 Bluebird Toys plc................................ 1,424
282,170 Capital Radio plc................................ 3,349
380,800 Corporate Services Group plc..................... 1,520
582,040 Devro plc........................................ 4,879
(a,d)2,540,850 Donelon Tyson plc................................ --
2,159,498 GEI International plc............................ 3,715
1,982,300 Industrial Control Services Group plc (Sub
Notes)......................................... 1,390
574,089 International Business Communications (Holdings)
plc............................................ 4,765
1,263,965 John Mowlem & Co. plc............................ 3,061
(a,d)33,795,100 Kendell plc...................................... --
214,635 Le Riches Stores plc............................. 2,043
676,800 Litho Supplies plc............................... 2,232
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------------
115,835 Mallett plc...................................... $ 198
2,575,600 Matthews (Bernard) plc........................... 5,032
635,500 Oriflame International........................... 4,723
(a,d)2,659,393 Pentos plc....................................... --
501,600 Quadramatic plc.................................. 1,642
525,800 SGB Group plc.................................... 1,936
975,500 SIG plc.......................................... 3,665
414,100 Scholl plc....................................... 3,354
1,509,500 The 600 Group plc................................ 3,126
715,200 Time Products plc................................ 1,636
568,760 UniChem plc...................................... 4,963
249,600 Waterman Partnership Holdings plc................ 190
372,400 Westminster Health Care Holdings plc............. 1,978
---------
63,297
---------
TOTAL COMMON STOCKS (Cost $264,782).................................. 287,859
---------
PREFERRED STOCKS (4.1%)
GERMANY (4.1%)
8,155 Dyckerhoff AG.................................... 3,247
29,111 Hornbach Holding AG.............................. 2,671
7,862 STO AG-Vorzug.................................... 2,947
(a)10,965 Villeroy & Boch AG............................... 1,522
15,043 Wuerttembergische Metallwarenfabrik AG........... 2,711
---------
TOTAL PREFERRED STOCKS (Cost $12,015)................................ 13,098
---------
TOTAL FOREIGN SECURITIES (93.3%) (Cost $276,797)..................... 300,957
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------------
SHORT TERM INVESTMENT (9.8%)
REPURCHASE AGREEMENT (9.8%)
$ 31,758 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $31,763,
collateralized by U.S. Treasury Notes, 6.50%,
due 10/15/06, valued at $32,524 (Cost
$31,758)....................................... 31,758
---------
FOREIGN CURRENCY (0.5%)
AUD 43 Australian Dollar................................ 27
GBP 540 British Pound.................................... 902
FRF 174 French Franc..................................... 29
DEM 245 German Mark...................................... 136
ITL 4,610 Italian Lira..................................... 2
JPY 44,054 Japanese Yen..................................... 318
NLG 11 Netherlands Guilder.............................. 5
NZD 132 New Zealand Dollar............................... 68
ESP 13,667 Spanish Peseta................................... 89
CHF 80 Swiss Franc...................................... 53
---------
TOTAL FOREIGN CURRENCY (Cost $1,620)................................. 1,629
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
69
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ------------------------------------------------------------------------
TOTAL INVESTMENTS (103.6%) (Cost $310,175).................... $334,344
--------
OTHER ASSETS (0.8%)
Receivable for Portfolio Shares Sold............ $ 1,480
Dividends Receivable............................ 519
Foreign Withholding Tax Reclaim Receivable...... 251
Receivable for Investments Sold................. 107
Net Unrealized Gain on Foreign Currency Exchange
Contracts..................................... 45
Interest Receivable............................. 9
Other........................................... 21 2,432
----------
LIABILITIES ( - 4.4%)
Payable for Investments Purchased............... (13,408)
Investment Advisory Fees Payable................ (651)
Custodian Fees Payable.......................... (63)
Administrative Fees Payable..................... (40)
Directors' Fees & Expenses Payable.............. (15)
Payable for Portfolio Shares Redeemed........... (4)
Other Liabilities............................... (38) (14,219)
---------- --------
NET ASSETS (100%)............................................. $322,557
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $285,692
Undistributed Net Investment Income........................... 1,704
Accumulated Net Realized Gain................................. 11,001
Unrealized Appreciation on Investments and Foreign Currency
Translations................................................ 24,160
--------
NET ASSETS.................................................... $322,557
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 17,546,172 outstanding $0.001 par value Shares
(authorized 1,000,000,000 shares)........................... $18.38
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
UNREALIZED
CURRENCY IN EXCHANGE GAIN
TO DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ----------- -------- ----------- ------------ -------- ------
U.S.$ 60 $ 60 7/01/98 SEK 475 $ 60 $ --
U.S.$ 107 107 7/01/98 JPY 15,220 110 3
U.S.$ 158 158 7/01/98 NOK 1,211 158 --
U.S.$ 256 256 7/01/98 SGD 438 259 3
U.S.$ 310 310 7/01/98 SEK 2,463 309 (1)
U.S.$ 339 339 7/01/98 FRF 2,054 340 1
U.S.$ 419 419 7/01/98 FIM 2,301 420 1
U.S.$ 799 799 7/01/98 DEM 1,444 801 2
U.S.$ 1,296 1,296 7/01/98 NLG 2,642 1,299 3
U.S.$ 1,591 1,591 7/01/98 CHF 2,421 1,597 6
GBP 3,250 5,387 11/09/98 U.S.$ 5,414 5,414 27
-------- -------- ------
$ 10,722 $ 10,767 $ 45
--------
-------- -------- ------
-------- ------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- see note A-1 to financial
statements.
FIM -- Finnish Markka
NCS -- Non-Convertible Shares
NOK -- Norwegian Krone
RNC -- Non-Convertible Savings Shares
SEK -- Swedish Krona
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -------------------------------------------------------------------
Building Products...................... $ 433 0.1%
Capital Equipment...................... 82,307 25.5
Capital Goods Construction............. 5,908 1.8
Consumer Goods......................... 4,233 1.3
Consumer Products -- Miscellaneous..... 72,975 22.6
Diversified Operations................. 11,511 3.6
Finance................................ 31,813 9.9
Materials.............................. 29,840 9.2
Technology............................. 180 0.1
Services............................... 61,757 19.2
--------- ---
$ 300,957 93.3%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
70
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Appliances & Household Durables 7.2%
Automobiles 6.4%
Business & Public Services 3.8%
Chemicals 4.8%
Construction & Housing 2.5%
Data Processing & Reproduction 7.3%
Electrical & Electronics 14.9%
Electrical Components--Misc. 10.5%
Financial Services 2.0%
Health & Personal Care 6.5%
Industrial Components 1.5%
Insurance 0.7%
Machinery & Engineering 14.7%
Merchandising 1.1%
Metals--Non-Ferrous 1.1%
Miscellaneous Materials & Components 1.5%
Real Estate 1.9%
Recreation, Other Consumer Goods 1.4%
Telecommunications 2.6%
Textiles & Apparel 1.0%
Other 6.6%
</TABLE>
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) JAPAN INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ----------- ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A... 4.92% - 22.80% - 2.76%
PORTFOLIO -- CLASS B... 4.60 - 23.19 - 2.89
INDEX -- CLASS A....... - 2.61 - 31.84 - 9.96
INDEX -- CLASS B....... - 2.61 - 31.84 - 16.76
</TABLE>
1. The MSCI Japan Index is an unmanaged index of common stocks (includes
dividends).
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.
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. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.
The investment objective of the Japanese Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities of Japanese
issuers. Equity securities are defined as common and preferred stocks,
convertible securities and rights and warrants to purchase common stocks.
For the six months ended June 30, 1998, the Portfolio had a total return of
4.92% for the Class A shares and 4.60% for the Class B shares compared to
- 2.61% for the Morgan Stanley Capital International (MSCI) Japan Index (the
"Index"). For the one year ended June 30, 1998, the Portfolio had a total return
of - 22.80% for the Class A shares and - 23.19% for the Class B shares
compared to a total return of - 31.84% for the Index. From inception on April
25, 1994 to June 30, 1998, the average annual total return of Class A was
- 2.76% compared to - 9.96% for the Index. From inception on January 2, 1996
to June 30, 1998, the average annual total return of Class B was - 2.89%
compared to - 16.76% for the Index.
During the first half of 1998, economic conditions in Japan continued to
deteriorate and both sentiment and the markets reflected a "sell Japan" attitude
by investors.
In order to solve this weak economic condition, an economic package was
announced in April with a 16 trillion yen stimulus program which contained a 12
trillion yen "mamizu" or real new spending. However, this package primarily
involved public works programs similar to previous packages and observers were
disappointed with the lack of new measures to meaningfully contribute to long
term economic growth. At the same time, the sole currency intervention by the
Bank of Japan of more than $10 billion did not have an impact on the rapidly
weakening yen. Moreover, foreigners and the Japanese public became increasingly
frustrated that the Japanese Government did not announce proposals for permanent
tax cuts or specific measures to address the non-performing loan issues during
the London G7 Summit in May.
In fact, Japan's gross domestic product for fiscal year 1997 resulted in 0.7%
growth, the lowest in 23 years and all economic data and leading indicators
confirmed the economy was only going from bad to worse. In particular,
unemployment rose to 4.1%, the highest on record since 1953, the beginning of
this statistic. The Japanese banks' non performing loans remained broadly
debated without any clear solution plans. A metaphor for these compounding
problems was perhaps the massive selling of shares in Long Term Credit Bank
(LTCB), one of Japan's largest and
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
71
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO (CONT.)
most established banks. To many observers it meant the market itself requested
LTCB to retreat from the financial business. Eventually LTCB announced a merger
with Sumitomo Trust to stem a complete collapse in public confidence.
With these conditions mentioned above investors adopted a "sell Japan" attitude.
For example, the yen weakened to 146 against the U.S. dollar and foreign
investors in Japanese equities with currency losses became increasingly bearish.
Meanwhile, both domestic individual investors and institutions chose a flight to
quality into Japanese bonds and massive outflows to non-yen investments gained
momentum. As a result the 10-year Japanese Global Bond yielded a transistor
sized 1.1% and the equity market hovered near the lows set in 1992, 1995 and
early 1998.
However, during late June some constructive measures began to emerge because
fears of Japan's deflationary cycle spreading around the globe raised sharp
criticism from the U.S., Asia and Europe. China and the rest of Asia officially
complained of Japan's lack of action and President Clinton and Chinese officials
declared that the yuan will not be devalued in an attempt to regain some
confidence in the local markets. With this political agreement in June, the U.S.
and Japan made a coordinated currency intervention defending the rapidly
weakening yen. Authorities believed that this currency intervention would send a
strong message to the markets that Japan would take necessary action to renew
faith for the rapidly depreciating currency and ever stagnant economy. In a
largely public gesture, U.S. Treasury vice secretary Summers visited Japan in
order to strongly encourage Japan to resolve its financial problems. With the
Upper House Elections looming on July 12 the Japanese Government finally
proclaimed a new "Bridge Bank" for non-performing loans and hints of permanent
corporate and individual tax cuts were voiced by the leading political party
members. The result of these more favorable developments fueled some short
covering and the equity market rebounded sharply during the last several days in
June.
OUTLOOK
Importantly, while there are some encouraging signs of real change including the
recent resounding defeat of the LDP, we remain cautious on the actual process by
which these changes will be implemented. In our view the coordinated
intervention between the U.S. and Japan was more a symbol for a pact between
Japan and the U.S. that real measures to address Japan's ailing economy will
immediately occur. Unsurprisingly, shortly after the currency intervention
details of the "Total Plan," "Bridge Bank" and permanent tax cuts made daily
headlines in the media. In reality the tax cuts and additional public works
spending will mean a ballooning budget deficit and therefore will likely hit a
political wall. We are also unclear how the "Bridge Bank" will actually work and
whether such a program can be effectively managed at a time when Japan lacks
strong political leadership. It is also evident to us that Japan's traditional
political system will be tested in light of these government proclamations. In
particular, the public will increasingly demand a clear explanation of the
rising deficit spending to accommodate these initiatives at a time of economic
weakness and government revenue short-falls. The weakness of the yen should be
net positive for our core holdings in international blue chips but we have found
no evidence to date that the exporters have used this opportunity to grow their
exports for fear of renewed backlash from the U.S. and Europe. In other words,
the weak yen is not yet exploited by the most productive sectors of the Japanese
economy to spur gross domestic product growth.
Japan is in critical shape and public lack of satisfaction with the Government
is actively becoming voiced as evidenced by July 12 election results. We believe
authorities sense that unless meaningful and concrete steps are taken
immediately, Japan will fall further into an abyss. We are cautiously optimistic
that there are emerging signs of a spark at the end of a long dark tunnel. Our
Portfolio, however, will continue to overweight defensive globally competitive
blue chips with some earnings momentum and reasonable valuation. We believe it
is prudent to limit holdings in domestic economically sensitive sectors until a
meaningful and transparent process to invigorate the domestic economy becomes
clearer and better articulated.
John R. Alkire
PORTFOLIO MANAGER
Kunihiko Sugio
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
72
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (93.4%)
APPLIANCES & HOUSEHOLD DURABLES (7.2%)
109,000 Matsushita Electric Industrial Co., Ltd.......... $ 1,753
47,400 Rinnai Corp...................................... 718
26,000 Sony Corp........................................ 2,241
---------
4,712
---------
AUTOMOBILES (6.4%)
10,000 Autobacs Seven Co., Ltd.......................... 286
413,000 Nissan Motor Co., Ltd............................ 1,302
90,000 Suzuki Motor Co., Ltd............................ 818
67,000 Toyota Motor Corp................................ 1,735
---------
4,141
---------
BUSINESS & PUBLIC SERVICES (3.8%)
91,000 Dai Nippon Printing Co., Ltd..................... 1,454
58,000 Sangetsu Co., Ltd................................ 749
70,000 Shin-Etsu Polymer Co., Ltd....................... 283
---------
2,486
---------
CHEMICALS (4.8%)
361,000 Daicel Chemical Industries Ltd................... 766
194,000 Kaneka Corp...................................... 1,022
303,000 Mitsubishi Chemical Corp......................... 549
148,000 Sekisui Chemical Co., Ltd........................ 758
---------
3,095
---------
CONSTRUCTION & HOUSING (2.5%)
90,000 Sekisui House Co., Ltd........................... 698
274,000 Tsubakimoto Chain Co............................. 919
---------
1,617
---------
DATA PROCESSING & REPRODUCTION (7.3%)
74,000 Canon, Inc....................................... 1,682
285,000 Furukawa Electric Co., Ltd....................... 960
70,000 Nissha Printing Co., Ltd......................... 429
160,000 Ricoh Co., Ltd................................... 1,686
---------
4,757
---------
ELECTRICAL & ELECTRONICS (14.9%)
247,000 Hitachi Ltd...................................... 1,613
60,000 Kyudenko Co., Ltd................................ 393
115,000 Mitsumi Electric Co., Ltd........................ 2,033
205,000 NEC Corp......................................... 1,912
21,000 Nintendo Co., Ltd................................ 1,947
428,000 Toshiba Corp..................................... 1,751
---------
9,649
---------
ELECTRONIC COMPONENTS--MISC (10.5%)
130,000 Casio Computer Co., Ltd.......................... 1,209
27,000 Kyocera Corp..................................... 1,321
39,000 Murata Manufacturing Co., Ltd.................... 1,266
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
24,000 TDK Corp......................................... $ 1,775
40,000 Tokyo Electron Ltd............................... 1,226
---------
6,797
---------
FINANCIAL SERVICES (2.0%)
77,000 Hitachi Credit Corp.............................. 1,297
---------
HEALTH & PERSONAL CARE (6.5%)
35,000 Ono Pharmaceutical Co., Ltd...................... 838
81,000 Sankyo Co., Ltd.................................. 1,846
73,000 Yamanouchi Pharmaceutical Co., Ltd............... 1,522
---------
4,206
---------
INDUSTRIAL COMPONENTS (1.5%)
118,000 Fujitec Co., Ltd................................. 715
30,000 Nifco, Inc....................................... 238
---------
953
---------
INSURANCE (0.7%)
80,000 Sumitomo Marine & Fire
Insurance Co., Ltd............................. 448
---------
MACHINERY & ENGINEERING (14.7%)
178,000 Amada Co., Ltd................................... 867
174,000 Daifuku Co., Ltd................................. 649
148,000 Daikin Industries Ltd............................ 954
60,000 Fuji Machine Manufacturing Co., Ltd.............. 1,593
50,000 Fuji Photo Film Ltd.............................. 1,742
179,000 Fujitsu Ltd...................................... 1,885
73,000 Kurita Water Industries Ltd...................... 864
268,000 Mitsubishi Heavy Industries Ltd.................. 1,013
---------
9,567
---------
MERCHANDISING (1.1%)
19,000 FamilyMart Co., Ltd.............................. 724
---------
METALS-NON-FERROUS (1.1%)
160,000 Sanwa Shutter Corp............................... 704
---------
MISCELLANEOUS MATERIALS & COMPONENTS (1.5%)
59,000 Lintec Corp...................................... 515
125,000 Nippon Pillar Packing............................ 469
---------
984
---------
REAL ESTATE (1.9%)
142,000 Mitsubishi Estate Co., Ltd....................... 1,250
---------
RECREATION, OTHER CONSUMER GOODS (1.4%)
95,000 Yamaha Corp...................................... 925
---------
TELECOMMUNICATIONS (2.6%)
200 Nippon Telegraph & Telephone Corp................ 1,659
---------
TEXTILES & APPAREL (1.0%)
24,600 Shimamura Co., Ltd............................... 665
---------
TOTAL COMMON STOCKS (Cost $74,816)................................ 60,636
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
73
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$ 2,104 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $2,104
collateralized by U.S. Treasury Bonds, 6.625%,
due 2/15/27, valued at $2,158 (Cost $2,104).... $ 2,104
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (96.6%) (Cost $76,920)........................... 62,740
--------
OTHER ASSETS (4.7%)
Receivable for Portfolio Shares Sold................. $ 2,816
Interest Receivable.................................. 243
Dividends Receivable................................. 5
Other................................................ 3 3,067
----------
LIABILITIES ( - 1.3%)
Net Unrealized Loss on Foreign Currency Exchange
Contracts.......................................... (397)
Payable for Portfolio Shares Redeemed................ (204)
Investment Advisory Fees Payable..................... (112)
Bank Overdraft Payable............................... (59)
Custodian Fees Payable............................... (19)
Directors' Fees & Expenses Payable................... (11)
Administrative Fees Payable.......................... (9)
Distribution Fees Payable............................ (2)
Other Liabilities.................................... (30) (843)
---------- --------
NET ASSETS (100%).................................................. $ 64,964
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $111,391
Undistributed Net Investment Income................................ 2,159
Accumulated Net Realized Loss...................................... (34,008)
Unrealized Depreciation on Investments and Foreign Currency
Translations..................................................... (14,578)
--------
NET ASSETS......................................................... $ 64,964
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -------------------------------------------------------------------
NET ASSETS......................................................... $63,378
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 10,248,048 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $6.18
--------
--------
CLASS B:
- -------------------------------------------------------------------
NET ASSETS......................................................... $1,586
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 258,277 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $6.14
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- -------------- -------- ----------- ------------ -------- -----------
JPY 4,303,750 $ 31,397 9/14/98 U.S.$ 31,000 $ 31,000 $ (397)
--------
-------- -------- -----
-------- -----
</TABLE>
- ------------------------------------------------------------
JPY -- Japanese Yen
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
74
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 9.5%
Brazil 44.8%
Chile 6.9%
Colombia 0.7%
Mexico 33.3%
Other 4.8%
</TABLE>
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS
GLOBAL LATIN AMERICA INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ----------- ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... -15.31% -16.95% 15.13%
PORTFOLIO -- CLASS
B..................... -15.37 -17.47 23.49
INDEX -- CLASS A...... -19.88 -24.92 5.00
INDEX -- CLASS B...... -19.88 -24.92 9.59
</TABLE>
1. The MSCI Emerging Markets Global Latin America Index is a broad based market
cap weighted composite index covering at least 60% of markets in Argentina,
Brazil, Chile, Colombia, Peru, Mexico and Venezuela (includes dividends).
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.
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. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.
The investment objective of the Latin American Portfolio is long-term capital
appreciation through investment primarily in equity securities of Latin American
issuers. The Portfolio may also invest in debt securities issued or guaranteed
by a Latin American government or governmental entity.
For the six months ended June 30, 1998, the Portfolio had a total return of
- -15.31% for the Class A shares and -15.37% for the Class B shares compared to a
total return of -19.88% for the Morgan Stanley Capital International (MSCI)
Emerging Markets Global Latin America Index (the "Index"). For the one year
ended June 30, 1998, the Portfolio had a total return of -16.95% for the Class A
shares and -17.47% for the Class B shares compared to -24.92% for the Index.
From inception on January 18, 1995 to June 30, 1998, the average annual total
return of Class A was 15.13% compared to 5.00% for the Index. From inception on
January 2, 1996 to June 30, 1998, the average annual total return of Class B was
23.49% compared to 9.59% for the Index.
The recent turmoil in the emerging markets has led to steep declines in all
Latin markets. For the second quarter ended June 30, 1998, the Portfolio had a
total return of -18.38% for the Class A shares and -18.39% for the Class B
shares which compared favorably to the Index of -20.03% for the same period. The
largest contributors to the Fund's outperformance relative to the benchmark were
our underweight position in Venezuela (-40.2%) and strong stock selection,
specifically in Brazil and Argentina.
The Latin region fell 20.0% during the quarter driven by returns in Venezuela
(-40.2%), Brazil (-22.0%), and Chile (-21.7%). Peru was the best performing
Latin market, falling 4.7%. Rounding out the region, Argentina fell 17.6%,
Colombia declined 9.4%, and Mexico dropped 16.9%. Declining commodity prices
(particularly oil and copper) and political noise surrounding upcoming
presidential elections (Brazil and Venezuela) have negatively affected these
markets.
Weak fiscal fundamentals coupled with an increase in political uncertainty has
led to Brazil's continued descent. Particularly because this is an election
year, we lack confidence that the government will strengthen its fiscal
position. Political jitters were apparent in early June when President Cardoso's
opposition (left-wing party candidate Lula) began to
- --------------------------------------------------------------------------------
Latin American Portfolio
75
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO (CONT.)
gain popularity. President Cardoso's drop in the polls largely reflected social
malaise resulting from the mishandling of the drought and famine conditions in
the Northeast, fires in the Amazon forest, growing unemployment and unfortunate
statements regarding the working ethics of those who are eligible to retire.
During the second quarter, we trimmed our Brazilian holdings, bringing us to a
more modest overweight position (+5%). While Brazil offers attractive value and
growth opportunities on a stock level, we are cautious with respect to its
widening fiscal deficit and vulnerable currency. We continue to focus on the
telecom sector given its strong operating earnings growth and privatization
potential.
The Mexican equities market faltered due to declining oil prices and a reduction
in capital inflows. Over the past 12 months, the average oil export price for
Mexico has declined nearly 40%. While the oil shock has contributed to a wider
trade deficit, the shock has been particularly detrimental for fiscal
performance as oil represents 32% of Mexico's total revenues. Because of
attractive valuations introduced during the quarter in selected stocks, we
increased our exposure from a market-neutral posture to a modest overweight
position. In spite of the oil price squeeze, we expect gross domestic product
growth to remain healthy fueled by strong consumer demand. Thus, our focus is on
the consumer-related industries, such as beverages and retailers.
Argentina was dragged down in sympathy with the region and concern about a
widening trade deficit. We increased our Argentine exposure to a modest
underweight position. We are encouraged by Argentina's strong economic activity,
low inflation, increasing international reserves, and improving fiscal deficit.
In Argentina, we are focusing on the telecom companies which offer strong
operating earnings growth.
The Chilean market's decline was driven by high domestic interest rates,
commodity price deflation, and weak demand from Asia for copper, forestry
products, and fishmeal. Interest rates have been continually raised by the
central bank since the beginning of 1998 in an effort to defend the Chilean peso
and narrow the country's trade deficit. The high interest rates have hindered
stock market returns, as local investors prefer to tap the fixed-income market
and foreign investors remain sidelined awaiting signs of a rate cut.
In the other markets, while the Colombia stock market greeted President-elect
Pastrana's June 21 win with optimism, lending rates averaging 15%, the highest
levels in 13 years, dampened investor sentiment. In April, we exited both the
Peruvian and Venezuelan markets. In Peru, deteriorating external accounts and
slow growth have hindered the market. In Venezuela, higher interest rates, a
tense political environment, and overvalued currency concerns led to our
decision to eliminate our exposure to the market.
We are optimistic that capital flows will return to this region as Latin America
offers the best fundamentals of all the emerging markets. Latin America sells at
10 times 1999 estimated earnings on forecast U.S. dollar earnings per share
growth of 15%.
Robert L. Meyer
PORTFOLIO MANAGER
Andy B. Skov
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Latin American Portfolio
76
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
COMMON STOCKS (95.2%)
ARGENTINA (9.5%)
90,725 Telecom Argentina ADR............................ $ 2,705
76,469 Telefonica Argentina ADR......................... 2,480
19,990 YPF ADR.......................................... 601
---------
5,786
---------
BRAZIL (44.8%)
(a,d)11,847,000 Banco Nacional (Preferred)....................... 1
79,086,701 CEMIG (Preferred)................................ 2,462
(e)1,275 CEMIG ADR (Preferred)............................ 40
45,773 CEMIG ADR (Preferred)............................ 1,417
(a)1,721,628,000 CERJ............................................. 848
1,340,000 Cimento ITAU (Preferred)......................... 238
152,018,900 Copel, Class B ADR (Preferred)................... 1,420
1,863,830 Coteminas........................................ 508
(e)27,025 Coteminas ADR.................................... 368
6,710,485 CRT (Preferred).................................. 7,317
13,530 CVRD (Preferred)................................. 269
36,990 CVRD ADR (Preferred)............................. 782
(a)34,986 CVRD, Class B (Preferred)........................ --
2,588,000 Encorpar (Preferred)............................. 6
(a)32,801,000 Gerasul.......................................... 45
49,146,328 Gerdau (Preferred)............................... 680
5,000 Globex Utilidades (Preferred).................... 43
(a)458,900 Iven (Preferred)................................. 230
(a)10,009,300 Lojas Arapua (Preferred)......................... 6
(a,e)13,460 Lojas Arapua GDR................................. 7
(a)15,852,000 Lojas Renner (Preferred)......................... 466
(e)29,855 Petrobras ADR.................................... 557
2,540 Petrobras ADR (Preferred)........................ 47
(e)80,099 Rossi GDR........................................ 400
101,175 Rossi GDR (Reg S)................................ 506
9,608,400 Telebras (Preferred)............................. 1,045
48,399 Telebras ADR (Preferred)......................... 5,285
(a)10,670,000 Telerj Celular, Class B (Preferred).............. 635
(a)8,692,000 Telesp Celular, Class B (Preferred).............. 721
32,094 Unibanco ADR (Preferred)......................... 947
---------
27,296
---------
CHILE (6.9%)
3,840 Banco Edwards ADR................................ 54
7,375 Banco Santander ADR.............................. 95
7,080 Banco Santiago ADR............................... 119
26,765 CCU ADR.......................................... 565
50,352 Chilectra ADR.................................... 1,070
14,000 CTC ADR.......................................... 284
18,660 D&S ADR.......................................... 280
48,734 Endesa ADR....................................... 694
17,360 Enersis ADR...................................... 424
(a)7,700 Gener ADR........................................ 141
25,270 Quinenco ADR..................................... 227
22,703 Santa Isabel ADR................................. 250
---------
4,203
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
COLOMBIA (0.7%)
48,803 Bavaria.......................................... $ 285
89,155 Valores Bavaria.................................. 153
---------
438
---------
MEXICO (33.3%)
(a)382,039 Banacci, Class B................................. 744
(a)78,246 Banacci, Class L................................. 126
2,047,178 Bancomer, Class B................................ 763
(a)149,990 Bimbo, Class A................................... 297
66,920 Carso, Class A1.................................. 275
388,098 Cemex CPO........................................ 1,455
34,620 Cemex CPO ADR.................................... 260
87,950 Cemex, Class B................................... 388
59,169 Cemex, Class B ADR............................... 522
210,336 Cifra, Class C................................... 292
233,445 Cifra, Class V................................... 347
1,250 Cifra, Class V ADR............................... 19
(a)52,440 Femsa ADR........................................ 1,652
(a)93,008 Femsa O.......................................... 2,897
(a)40,730 Grupo Modelo, Class C............................ 342
419,141 Kimberly-Clark, Class A.......................... 1,480
336,090 Soriana, Class B................................. 964
(a)72,909 Televisa CPO ADR................................. 2,743
92,648 Telmex, Class L ADR.............................. 4,453
19,748 TV Azteca ADR.................................... 214
---------
20,233
---------
TOTAL COMMON STOCKS (Cost $67,333).................................... 57,956
---------
PREFERRED STOCK (0.0%)
COLOMBIA (0.0%)
263 Bancolombia (Cost $1)............................ --
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -----------------
RIGHTS (0.0%)
CHILE (0.0%)
(a,d)885 CTC.............................................. --
---------
MEXICO (0.0%)
(a)27 Cemex............................................ --
(a)31 Cemex CPO........................................ --
---------
TOTAL RIGHTS (Cost $0)................................................ --
---------
TOTAL FOREIGN SECURITIES (95.2%) (Cost $67,334)....................... 57,956
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------------
SHORT-TERM INVESTMENT (4.0%)
REPURCHASE AGREEMENT (4.0%)
$ 2,433 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $2,433
collateralized by U.S. Treasury Bonds, 11.25%,
due 2/15/15, valued at $2,491 (Cost $2,433).... 2,433
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Latin American Portfolio
77
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<C> <S> <C>
FOREIGN CURRENCY (1.1%)
ARP 291 Argentine Peso................................... $ 291
BRL 193 Brazilian Real................................... 167
COP 5,566 Colombian Peso................................... 4
MXP 1,879 Mexican Peso..................................... 209
PSS 5 Peruvian New Sol................................. 2
VEB 8,195 Venezuelan Bolivar............................... 15
--------
TOTAL FOREIGN CURRENCY (Cost $689).................................... 688
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.3%) (Cost $70,456)............................. 61,077
--------
OTHER ASSETS (0.7%)
Cash.................................................... $ 1
Receivable for Investments Sold......................... 244
Dividends Receivable.................................... 197
Receivable for Portfolio Shares Sold.................... 20 462
----------
LIABILITIES ( - 1.0%)
Payable for Portfolio Shares Redeemed................... (304)
Investment Advisory Fees Payable........................ (216)
Custodian Fees Payable.................................. (63)
Administrative Fees Payable............................. (8)
Distribution Fee Payable................................ (5)
Directors' Fees & Expenses Payable...................... (4)
Payable for Foreign Taxes Payable....................... (4)
Sub-Administrative Fees Payable......................... (4)
Other Liabilities....................................... (26) (634)
---------- --------
NET ASSETS (100%)..................................................... $ 60,905
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital...............................................
$ 71,848
Undistributed Net Investment Income...........................
654
Accumulated Net Realized Loss.................................
(2,213)
Unrealized Depreciation on Investments and Foreign Currency
Translations (Net of accrual for foreign tax of $4 on
unrealized appreciation on investments).....................
(9,384)
--------
NET ASSETS....................................................
$ 60,905
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $53,518
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 5,791,146 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $9.24
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS B:
- --------------------------------------------------------------
NET ASSETS.................................................... $7,387
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 807,829 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $9.14
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ---------- ------ ----------- ----------- ------ -----------
MXP 1,117 $ 124 7/01/98 U.S.$ 124 $ 124 $ --
------
------ ------ ---
------ ---
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value--see note A-1 to financial statements.
(e) -- 144A Security--certain conditions for public sale may exist.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------
Consumer Goods......................... $ 8,834 14.5%
Energy................................. 9,766 16.0
Finance................................ 3,755 6.2
Materials.............................. 4,593 7.6
Multi-Industry......................... 732 1.2
Services............................... 30,276 49.7
-------- ---
$ 57,956 95.2%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Latin American Portfolio
78
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Basic Materials 2.5%
Capital Goods 19.1%
Consumer Cyclicals 8.2%
Consumer Staples 15.2%
Financial 27.1%
Technology 6.1%
Transportation 18.6%
Other 3.2%
</TABLE>
PERFORMANCE COMPARED TO THE LIPPER CAPITAL
APPRECIATION INDEX AND THE S&P 500 INDEX(1)
- ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------
AVERAGE
ANNUAL SINCE
YTD ONE YEAR INCEPTION
---------- ------------ ------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A............... 13.25% 32.71% 39.36%
PORTFOLIO -- CLASS B............... 13.23 32.34 34.73
LIPPER CAP. APPRECIATION
INDEX -- CLASS A................. 14.69 24.90 23.33
S&P 500 INDEX -- CLASS A........... 17.71 30.17 32.06
LIPPER CAP. APPRECIATION
INDEX -- CLASS B................. 14.69 24.90 20.04
S&P 500 INDEX -- CLASS B........... 17.71 30.17 29.79
</TABLE>
1. The Lipper Capital Appreciation Index is a composite of mutual funds managed
for maximum capital gains. The S&P 500 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.
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 Aggressive Equity Portfolio seeks capital appreciation through a
concentrated, non-diversified portfolio of corporate equity and equity-linked
securities. Short sales and options can be used to enhance performance.
For the six months ended June 30, 1998, the Portfolio had a total return of
13.25% for the Class A shares and 13.23% for the Class B shares compared to a
total return of 14.69% for the Lipper Capital Appreciation Index and 17.71% for
the S&P 500 Index. For the one year ended June 30, 1998, the Portfolio had a
total return of 32.71% for the Class A shares and 32.34% for the Class B shares
compared to 24.90% for the Lipper Capital Appreciation Index and 30.17% for the
S&P 500 Index. From inception on March 8, 1995 through June 30, 1998, the
average annual total return of Class A was 39.36% compared to 23.33% for the
Lipper Capital Appreciation Index and 32.06% for the S&P 500 Index. From
inception on January 2, 1996 through June 30, 1998, the average annual total
return of Class B was 34.73% compared to 20.04% for the Lipper Capital
Appreciation Index and 29.79% for the S&P 500 Index.
The Portfolio tends to hold between 30 and 40 issues (we held 38 securities at
June 30) and we have the ability to invest up to 25% in a single security when
our conviction is very strong. At quarter end our largest position was
Continental Airlines, which represented 18.6% of the Portfolio's net assets, and
the ten largest holdings accounted for approximately 62% of the net assets.
After strong performance in the first quarter the Portfolio had a disappointing
second quarter. For the three months ended June 30, 1998 the Portfolio had a
total return of -4.18% for the Class A shares and -4.25% for the Class B shares
compared to 1.69% for the Lipper Capital Appreciation Index and 3.30% for the
S&P 500 Index. Among our best performing issues in the second quarter were Clear
Channel and General Motors (contributing approximately 1.3% and 1.1%, to total
return, respectively,) but these gains were not enough to offset the weakness we
experienced when Cendant, a top ten holding, fell precipitously on its mid-April
announcement of "accounting irregularities."
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
79
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONT.)
Our top ten holdings at June 30 were as follows:
<TABLE>
<CAPTION>
% OF
NET ASSETS
---------------
<S> <C>
Continental Airlines 19%
Clear Channel Communications 10
Loews Corp. 9
United Technologies 6
General Re Corp. 4
Citicorp 3
American Express 3
Litton Industries 3
Microsoft 3
Allstate 2
--
62%
--
--
</TABLE>
The 62% weighting in our top ten positions is much more concentrated than most
U.S. equity portfolios, but is fairly typical for this fund. Since inception in
March 1995, the top ten holdings have tended to account for between 50-75% of
net assets. Our belief is that heavy concentration may lead to greater than
average volatility but not necessarily greater than average risk. To us, risk is
synonymous with lack of knowledge, which our strategy of "seeking the
information edge" seeks to avoid. We may be wrong, as we were with Cendant this
quarter, but we cannot be faulted for not knowing our companies. Over the longer
term, we believe the ability to concentrate in issues where we have extremely
strong conviction should lead to strong performance. This has certainly been the
case since the inception of the Portfolio, which has outperformed the S&P 500
Index (as shown on the preceding page) at a time when the vast majority of U.S.
equity funds have underperformed. Looking forward, we see ample opportunities
for capital appreciation in individual stocks and we highlight a few of our
largest holdings below.
CONTINENTAL AIRLINES
Our biggest position, Continental Airlines, seems exciting for several reasons.
At $61, the stock trades at only ten times consensus earnings expectations for
1998. Such a low valuation in today's market (according to Factset consensus for
the S&P 500 price/ earnings ratio (price/earnings) is 25.9) implies that
investors are wary about the company's ability to grow off the 1998 base. Our
research indicates that growth should be strong. We believe that consensus
earnings per share (EPS) expectations of $5.75 for 1998 and $5.95 for 1999 are
too conservative. Continental should earn at least $6.20 and $7.00 in 1998 and
1999, respectively. Like other airlines, Continental has recently begun to
deploy free cash flow into share repurchases. This is very accretive to EPS and
should enhance value over time. In addition to using strong cash flow from
operations, we anticipate that the company will monetize its stake in Amadeus,
an international reservation system, over the next 6-12 months. This should
create cash proceeds of $300 million or more, in exchange for an asset with no
earnings. Management has committed publicly to using all of those proceeds for
share repurchase. At or near current prices, this would eliminate 6% of total
shares outstanding.
In essence, we think investors are overstating the risks for the airline
industry (higher oil prices, economic recession) and underappreciating the
positive structural changes that have and will continue to benefit airlines.
Pricing should remain strong and capacity growth is restrained. Code-share
alliances enhance growth prospects without use of capital, and costs, in
general, are coming down. One powerful example of the latter is travel agent
commissions, which have dropped and should drop further. Deleveraging has led to
lower sustainable interest costs. And upgrading fleets will reduce oil from 15%
to 10% of total costs over the next few years. Because its hubs (Houston,
Cleveland, Newark) are more underutilized than most, Continental has greater
capacity growth than most of the larger cap airlines -- 10% this year, 8-10%
next year and 5%+ in 2000. All things being equal, this should enhance
valuation. We believe a conservative 12-month price target would be $84, up 40%
and implying a price/earnings multiple of 12 times. But a 15 price/earnings and
therefore a $105 stock price cannot be ruled out.
CLEAR CHANNEL COMMUNICATIONS
Clear Channel Communications, has been a strong performer year to date and in
1997, and we continue to be excited about its prospects. Following the recent
acquisition by the company of More Group of the United Kingdom, Clear Channel
has become the largest "out of home" advertising media company in the world.
Extremely well managed, Clear Channel has been a leader in consolidating the
radio and TV station business in the United States, and more recently the
billboard industry. Radio and billboard share some very positive
characteristics: extremely low
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OVERVIEW
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AGGRESSIVE EQUITY PORTFOLIO (CONT.)
capital reinvestment, high profit margins, and the probability of secular growth
through market share gains against traditional television advertising.
Clear Channel was just starting to buy radio stations outside the United States
(New Zealand, Czech Republic, Mexico), but the More acquisition catapults the
company into the global arena. More is the world's largest player in outdoor
furniture advertising (ads on buses, city benches, telephone booths, etc.).
More's presence in overseas markets will allow Clear Channel to further
consolidate outdoor furniture, as well as accelerating its international growth
in billboards and radio. Consensus expectations for Clear Channel call for cash
EPS of $3.15 this year and $3.80 next year. We believe the numbers will be more
like $3.25 and $4.25, with dynamic growth projected off the 1999 base. At $110,
Clear Channel stock is not cheap, at 33.8 times projected 1998 cash earnings.
But growth is rapid and sustainable. We believe a reasonable one-year target
would be 30 times 1999 cash earnings, or $128.
LOEWS
We bought Loews aggressively in May and June, as the stock was quite weak but we
believed business fundamentals were intact. Loews, the Tisch family holding
company, is a very unusual stock. It is a holding company with a strong track
record of investments by management but investors are placing an incredibly low
valuation on the stock -- less than nine times projected 1998 operating profits
and less than one times projected year-end book value.
Why such a low valuation? We think there are three primary reasons. First, Loews
owns Lorillard, the cigarette manufacturer. Second, the company holds a large
and widely publicized S&P 500 put position. The total put investment may exceed
$1 billion. This investment was first made in the summer of 1997 and thus is
significantly unprofitable so far. Third, the company is, from time to time, an
aggressive buyer of its shares but for over a year it has not repurchased any
stock.
From where we stand today, however, we see a lot of reasons to be enthusiastic.
First, Loews is a book value growth machine. Managed by the Tisch family, which
controls about one-third of the company's 115 million shares, Loews is strictly
about maximizing shareholder value over time. For an investment holding company,
this will equate to maximizing book value over the long term. Over the past 12
years, Loews book value per share has compounded at a 15% annual rate. Its stock
price though, has grown at less than half that rate. Even assuming a slowdown to
10% annual growth, the book value will exceed $100 by the end of next year. In
addition, Loews stock should act as a hedge if the United States market finally
cracks. Admittedly, we do not expect Loews to be the best stock in the Portfolio
if the bull market continues unabated; Nor do we have a view that the market is
going down. But we would note that the Tischs have been very right before, and
sometimes early. For example, in the early 1990's, Loews put together the
largest offshore drilling company in the world by buying rigs at below scrap
value. Today, Loews owns 70 million shares of Diamond Offshore, valued at about
$40 per share, with a cost to Loews of well less than $1 per share. We think
Loews stock will go up with or without a market decline. But in the case of a
significant market decline, Loews stock would, in our view, be one of the very
best stocks on a relative basis.
Finally, Loews is compelling based on sum of the parts valuation, and share
repurchases will eventually return. The company owns large stakes in two
publicly traded stocks -- CNA Financial and Diamond Offshore. Taking into
account these positions plus conservative estimates of 100%-owned assets, Loews
stock is the cheapest it has been in years. CNA per Loews share is about $63,
while Diamond Offshore per Loews share equates to about $24. Net cash per share
is about $20, while the company's hotel business is conservatively valued at $8
per share or more. Hence, even valuing Lorillard at zero gets you to $115, 32%
above the current price. But if we put a six price/ earnings on Lorillard (a
discount to publicly traded cigarette stocks), the value would be about $21 per
Loews share. While management is obviously bearish and wants to conserve cash,
at some point we expect the company to repurchase its stock aggressively. This
would be very accretive to book value per share growth, EPS and net asset value
per share.
MICROSOFT
For the first time in years, a technology stock has made it into our top ten.
Typically, we shy away from large investments in technology because it is so
hard to stay ahead of the information curve. We have held Microsoft for some
time, but added to it in April and May on the sell-off related to the Department
of Justice suit. Our view was that the threat of government action was being
exaggerated by investors. While
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OVERVIEW
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AGGRESSIVE EQUITY PORTFOLIO (CONT.)
the stock has surged to new highs recently and it is not at all cheap
statistically, Microsoft offers a powerful combination of growth, extremely high
margins and low risk of competitive threats.
GENERAL REINSURANCE
We bought General Reinsurance aggressively in late June, following the
announcement that Berkshire Hathaway was acquiring the company in a 100% stock
deal. We have owned Berkshire Hathaway over the past several years but sold it
recently on price. It is a unique way to invest alongside the world's greatest
investor, but the stock, which has more than doubled over the past 12 months,
had become very expensive. The General Reinsurance acquisition, though, changes
the Berkshire story dramatically and makes it much more compelling. The
following factors lead us to this conclusion. By using Berkshire stock as
currency, Warren Buffett is, in effect, monetizing the phenomenal stock price
appreciation achieved in recent years (the stock is up five-fold over the past
five years). He is purchasing General Reinsurance at about 22 times earnings
using a currency valued at more than twice that. Hence, the transaction is very
accretive to EPS and book value per share. We also believe this acquisition will
change the way Berkshire is classified -- from holding company to financial
services giant. Following the deal, Berkshire will own 100% of Geico, General
Reinsurance and National Indemnity. Since buying the rest of Geico a few years
ago, Berkshire has used its tremendous capital base, reputation and ability not
to maximize reported profits to drive big market share gains in auto insurance.
We expect similar results in reinsurance. Besides being able to leverage its
strengths to help General Reinsurance grow, Buffett will now dramatically
increase his "float," or capital generated by insurance premiums, which he can
invest. We think there is a strong chance that Berkshire will be added to the
S&P 500 Index following the deal. General Reinsurance is in the index and
Berkshire's market capitalization after the deal will approximate $120 billion.
This will force institutional investors to consider owning the stock.
Our twelfth largest holding at quarter end was Cendant, a stock which has been
much in the news since the company's announcement in mid-April of "accounting
irregularities" in the company's CUC division. (Cendant resulted from the merger
of CUC and HFS last December.) The stock dropped precipitously (about 46%),
falling as low as $17. Although the final audit report is not yet available our
initial reaction was that the market overreacted by taking the stock down so far
so fast. (At prices in the teens the market had effectively wiped out most of
the value of the CUC business.) We believe the core franchise and membership
business models of the company remain intact but feel there is more uncertainty
now. We await the final audit report with about a 2% position in the stock,
having reduced our exposure substantially.
As we begin the second half of the year the Portfolio is very much a combination
of classic or familiar growth names such as Microsoft, less familiar or
traditional growth opportunities such as Continental Airlines and Loews, and
stocks which fall somewhere in between (Clear Channel is a clean, "classic"
growth story but not necessarily a familiar or household name yet). We build the
portfolio stock by stock and do not have a preconceived notion as to sector or
thematic weights in the Portfolio; these would tend to be residuals in our stock
selection process. That said, we have been getting many questions about our view
of Asia and the effect the turmoil there may have on United States companies, in
general, or the Portfolio, in particular. Our thesis is that, ultimately, the
weakness in Asia will prove to be more a positive than a negative for U.S.-based
global franchise companies, many of which we own. Examples in the Portfolio
currently include Citicorp/Travelers, United Technologies, Microsoft and even
Clear Channel. These companies have established a growing presence and/or brand
recognition in Asia and may well be in a position to garner more market share in
the wake of the local economic disarray in many of the Asian markets.
Kurt A. Feuerman
PORTFOLIO MANAGER
July 1998
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- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
COMMON STOCKS (96.8%)
BASIC MATERIALS (2.5%)
CHEMICALS (1.5%)
48,800 E.I. DuPont de Nemours & Co. .................... $ 3,642
---------
CHEMICALS (DIVERSIFIED) (1.0%)
43,300 Monsanto Co. .................................... 2,419
---------
TOTAL BASIC MATERIALS......................................... 6,061
---------
CAPITAL GOODS (19.1%)
AEROSPACE/DEFENSE (5.9%)
101,200 Cordant Technologies, Inc. ...................... 4,668
(a)80,700 Gulfstream Aerospace Corp. ...................... 3,753
58,100 Northrop Grumman Corp. .......................... 5,992
---------
14,413
---------
ELECTRICAL EQUIPMENT (0.0%)
(a)4,600 Celestica, Inc. ................................. 86
---------
MACHINERY (DIVERSIFIED) (1.9%)
96,600 Case Corp. ...................................... 4,661
---------
MANUFACTURING (DIVERSIFIED) (7.1%)
52,700 Tyco International Ltd. ......................... 3,320
153,300 United Technologies Corp. ....................... 14,180
---------
17,500
---------
OFFICE EQUIPMENT & SUPPLIES (4.2%)
(a)181,000 Knoll, Inc. ..................................... 5,339
40,800 Pitney Bowes, Inc. .............................. 1,964
30,600 Xerox Corp. ..................................... 3,110
---------
10,413
---------
TOTAL CAPITAL GOODS........................................... 47,073
---------
CONSUMER CYCLICALS (8.2%)
AUTOMOBILES (2.1%)
78,700 General Motors Corp. ............................ 5,258
---------
GAMING, LOTTERY & PARIMUTUEL COMPANIES (0.4%)
41,500 International Game Technology ................... 1,006
---------
LODGING HOTELS (0.6%)
54,700 Hilton Hotels Corp. ............................. 1,559
---------
PUBLISHING (NEWSPAPERS) (1.0%)
28,400 Pulitzer Publishing Co. ......................... 2,535
---------
RETAIL (SPECIALTY) (0.5%)
(a)37,400 Staples, Inc. ................................... 1,082
---------
SERVICES (COMMERCIAL & CONSUMER) (3.6%)
(a)285,461 Cendant Corp. ................................... 5,959
(a)626,100 Nielsen Media Research .......................... 2,896
---------
8,855
---------
TOTAL CONSUMER CYCLICALS...................................... 20,295
---------
CONSUMER STAPLES (15.2%)
BEVERAGES (NON-ALCOHOLIC) (1.5%)
91,100 Coca Cola Enterprises, Inc. ..................... 3,576
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
BROADCASTING (TV, RADIO, CABLE) (9.8%)
(a)221,400 Clear Channel Communications, Inc. .............. $ 24,160
---------
ENTERTAINMENT (1.4%)
(a)77,600 SFX Entertainment, Inc. ......................... 3,560
---------
FOODS (2.5%)
22,900 Quaker Oats Co. ................................. 1,258
23,900 Ralston-Ralston Purina Group .................... 2,792
20,200 Wrigley (William) Jr. Co. ....................... 1,980
---------
6,030
---------
TOTAL CONSUMER STAPLES........................................ 37,326
---------
FINANCIAL (27.1%)
BANKS (MAJOR REGIONAL) (0.8%)
5,200 Wells Fargo & Co. ............................... 1,919
---------
BANKS (MONEY CENTER) (5.4%)
34,700 BankAmerica Corp. ............................... 2,999
57,000 Citicorp ........................................ 8,507
14,500 Morgan (J.P.) & Co., Inc. ....................... 1,698
---------
13,204
---------
FINANCIAL (DIVERSIFIED) (3.4%)
72,900 American Express Co. ............................ 8,311
---------
INSURANCE (LIFE & HEALTH) (1.1%)
(a)50,400 Reinsurance Group of America, Inc. .............. 2,586
---------
INSURANCE (MULTI-LINE) (9.1%)
258,300 Loews Corp. ..................................... 22,504
---------
INSURANCE (PROPERTY-CASUALTY) (6.4%)
66,100 Allstate Corp. .................................. 6,052
38,000 General Re Corp. ................................ 9,633
---------
15,685
---------
INVESTMENT BANKING & BROKERAGE (0.9%)
24,300 Merrill Lynch & Co. ............................. 2,242
---------
TOTAL FINANCIAL............................................... 66,451
---------
TECHNOLOGY (6.1%)
COMPUTERS (SOFTWARE & SERVICES) (3.0%)
(a)68,900 Microsoft Corp. ................................. 7,467
---------
ELECTRONICS (DEFENSE) (3.1%)
(a)127,300 Litton Industries, Inc. ......................... 7,511
---------
TOTAL TECHNOLOGY.............................................. 14,978
---------
TRANSPORTATION (18.6%)
AIRLINES (18.6%)
(a)753,400 Continental Airlines, Inc., Class B ............. 45,863
---------
TOTAL COMMON STOCKS (Cost $230,921)........................... 238,047
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
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- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
SHORT TERM INVESTMENT (5.1%)
REPURCHASE AGREEMENT (5.1%)
$ 12,639 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $12,641,
collateralized by
U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $12,926 (Cost
$12,639)....................................... $ 12,639
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (101.9%) (Cost $243,560)....................... 250,686
--------
OTHER ASSETS (0.5%)
Receivable for Investments Sold.................... $ 1,175
Dividends Receivable............................... 105
Receivable for Portfolio Shares Sold............... 28
Interest Receivable................................ 2
Other.............................................. 1 1,311
----------
LIABILITIES ( - 2.4%)
Payable for Investments Purchased.................. (4,361)
Payable for Portfolio Shares Redeemed.............. (1,015)
Investment Advisory Fees Payable................... (468)
Administrative Fees Payable........................ (30)
Distribution Fee Payable........................... (14)
Custodian Fees Payable............................. (8)
Directors' Fees & Expenses Payable................. (7)
Bank Overdraft Payable............................. (2)
Other Liabilities.................................. (20) (5,925)
---------- --------
NET ASSETS (100%)................................................ $246,072
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................. $204,640
Undistributed Net Investment Income.............................. 143
Accumulated Net Realized Gain.................................... 34,163
Unrealized Appreciation on Investments........................... 7,126
--------
NET ASSETS....................................................... $246,072
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A
- -----------------------------------------------------------------
NET ASSETS....................................................... $223,039
NET ASSETS VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 12,478,457 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $17.87
--------
--------
CLASS B
- -----------------------------------------------------------------
NET ASSETS....................................................... $23,033
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,293,962 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $17.80
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Auto & Transportation 4.1%
Consumer Discretionary 29.4%
Consumer Staples 4.2%
Financial Services 24.0%
Health Care 1.5%
Materials & Processing 1.7%
Multi-Sector Companies 1.6%
Producer Durables 12.5%
Technology 12.0%
Utilities 8.0%
Other 1.0%
</TABLE>
PERFORMANCE COMPARED TO THE NASDAQ
COMPOSITE INDEX(1)
- -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A......... 19.30% 31.87% 15.24% 13.45%
PORTFOLIO -- CLASS B......... 19.14 31.61 N/A 13.50
INDEX -- CLASS A............. 20.66 31.39 21.90 17.89
INDEX -- CLASS B............. 20.66 31.39 N/A 26.31
</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.
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 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 gross revenues
ranging from $10 million to $750 million.
For the six months ended June 30, 1998, the Portfolio had a total return of
19.30% for the Class A shares and 19.14% for the Class B shares compared to a
total return of 20.66% for the NASDAQ Composite Index (the "Index"). For the one
year ended June 30, 1998, the Portfolio had a total return of 31.87% for the
Class A shares and 31.61% for the Class B shares, compared to 31.39% for the
Index. For the five-year period ended June 30, 1998, the average annual total
return of Class A was 15.24% compared to 21.90% for the Index. From inception on
November 1, 1989 through June 30, 1998, the average annual total return of Class
A was 13.45% compared to 17.89% for the Index. From inception on January 2, 1996
through June 30, 1998, the average annual total return of Class B was 13.50%
compared to 26.31% for the Index.
Over the first six months we have shifted the Portfolio's focus from healthcare
and technology towards consumer discretionary (especially publishing and
broadcasting), and financial services.
We also reduced the number of issues in the Portfolio to about 60 as of June 30,
1998. This has enabled us to take larger positions in our best ideas, while
remaining diversified through our "farm team," or names which represent less
than a 50 basis point position. We continue to feel that by taking larger
positions we are best able to leverage our research efforts.
Our largest position at quarter end was Knoll, which represented 6% of net
assets. Knoll designs, manufactures and develops office furniture products and
accessories, focusing on the middle to high end of the contract furniture
market. We continue to be excited about the company's revenue growth, as well as
significant de-leveraging which should help earnings per share grow at a faster
rate than sales.
We have a 5.3% of net assets position in Reinsurance Group of America, a company
which engages primarily in life reinsurance. (Reinsurance is an arrangement
under which an insurance company can cede part of its underwriting risk to a
reinsurer.) This service allows primary insurers to increase their
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OVERVIEW
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EMERGING GROWTH PORTFOLIO (CONT.)
volume of business and stabilize results. We have opportunistically traded into
the class "A" or non-voting shares, which trade at a significant discount to the
common, but continue to own the common shares due to liquidity issues.
We also see opportunity in two recent spin-offs, Nielson Media (4.3% of net
assets) and RH Donnelley (1.9% of net assets). Both are small cap companies
being spun off by large cap parents, which, coupled with sales by index funds,
has created a good deal of selling pressure on the stocks. This has caused these
stocks to trade at levels which we feel do not reflect their positive underlying
fundamentals.
Nielson Media is the leading source of television audience measurement services
in North America. It services the major networks as well as many cable stations.
RH Donnelley is the largest independent marketer of yellow pages in the United
States. The company sold over $1 billion of advertising in 1997 and is the
leader in all of its major markets. (Donnelley, which has been in operation
since 1886, is also a leading provider of pre-press publishing services for
yellow pages directory). Over the last three years the company has had
advertising renewal rates in excess of 90%.
At quarter end the Portfolio held 57 positions and 1.2% in cash. The top ten
holdings accounted for 41.2% of net assets.
Kurt A. Feuerman
PORTFOLIO MANAGER
Daniel R. Lascano
PORTFOLIO MANAGER
July 1998
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- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS (99.0%)
AUTO & TRANSPORTATION (4.1%)
AIR TRANSPORT (3.6%)
(a)19,200 America West Holdings Corp., Class B............. $ 548
(a)34,000 Continental Airlines, Inc., Class B ............. 2,070
--------
2,618
--------
AUTO TRUCKS & PARTS (0.5%)
(a)13,900 Keystone Automotive Industries, Inc. ............ 320
--------
TOTAL AUTO & TRANSPORTATION..................................... 2,938
--------
CONSUMER DISCRETIONARY (29.4%)
ADVERTISING AGENCIES (1.6%)
(a)41,400 ADVO, Inc. ...................................... 1,167
--------
ENTERTAINMENT (3.2%)
(a)44,900 Marquee Group, Inc. ............................. 267
(a)43,900 SFX Entertainment, Inc. ......................... 2,014
--------
2,281
--------
HOTEL/MOTEL (1.1%)
23,100 Four Seasons Hotels, Inc. ....................... 814
--------
HOUSEHOLD FURNISHINGS (1.4%)
(a)35,000 Furniture Brands International, Inc. ............ 982
--------
PUBLISHING: MISCELLANEOUS (1.9%)
443,600 R.H. Donnelley Corp. ............................ 1,359
--------
PUBLISHING: NEWSPAPERS (6.6%)
54,100 Harte-Hanks Communications, Inc. ................ 1,396
37,800 Pulitzer Publishing Co. ......................... 3,374
--------
4,770
--------
RADIO & TV BROADCASTERS (1.9%)
(a)8,000 Clear Channel Communications, Inc. .............. 873
(a)12,100 Metro Networks, Inc. ............................ 520
--------
1,393
--------
RESTAURANTS (3.2%)
(a)36,200 Brinker International, Inc. ..................... 697
(a)17,800 Dave & Busters, Inc. ............................ 443
(a)51,150 Sonic Corp. ..................................... 1,138
--------
2,278
--------
RETAIL (1.9%)
(a)26,300 Ames Department Stores, Inc. .................... 692
(a)10,950 Dollar Tree Stores, Inc. ........................ 443
(a)7,200 Guitar Center, Inc. ............................. 217
--------
1,352
--------
SERVICES: COMMERCIAL (6.0%)
(a)17,300 MPW Industrial Services Group, Inc. ............. 227
677,300 Nielsen Media Research .......................... 3,133
(a)48,300 Steven Myers & Associates, Inc. ................. 936
--------
4,296
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
WHOLESALERS (0.6%)
(a)27,900 Tristar Aerospace Co. ........................... $ 432
--------
TOTAL CONSUMER DISCRETIONARY.................................... 21,124
--------
CONSUMER STAPLES (4.2%)
FOODS (4.2%)
9,153 Tootsie Roll Industries, Inc. ................... 702
(a)66,700 U.S. Foodservice, Inc. .......................... 2,339
--------
TOTAL CONSUMER STAPLES.......................................... 3,041
--------
FINANCIAL SERVICES (24.0%)
DIVERSIFIED FINANCIAL SERVICES (1.3%)
25,101 Mutual Risk Management Ltd. ..................... 915
--------
FINANCIAL DATA PROCESSING SERVICES & SYSTEMS (1.0%)
(a)17,800 SunGard Data Systems, Inc. ...................... 683
--------
FINANCIAL MISCELLANEOUS (6.3%)
44,100 CMAC Investment Corp. ........................... 2,712
(a)169,400 Indigo Aviation AB ADR .......................... 1,842
--------
4,554
--------
INSURANCE: MULTI-LINE (5.2%)
(a)27,400 Reinsurance Group of America, Inc. .............. 1,620
(a)41,700 Reinsurance Group of America, Inc.
(Non-Voting)................................... 2,140
--------
3,760
--------
INSURANCE: PROPERTY & CASUALTY (5.3%)
16,800 Mercury General Corp. ........................... 1,083
48,100 Orion Capital Corp. ............................. 2,688
--------
3,771
--------
INVESTMENT MANAGEMENT COMPANIES (4.9%)
15,600 Conning Corp. ................................... 303
72,800 PIMCO Advisors Holdings L.P. .................... 2,484
31,500 Waddell & Reed Financial, Inc., Class A ......... 754
--------
3,541
--------
TOTAL FINANCIAL SERVICES........................................ 17,224
--------
HEALTH CARE (1.5%)
DRUGS & PHARMACEUTICALS (1.1%)
(a)21,600 Medicis Pharmaceutical, Class A ................. 783
--------
HEALTH CARE FACILITIES (0.4%)
(a)18,700 Paragon Health Network, Inc. .................... 302
--------
TOTAL HEALTH CARE............................................... 1,085
--------
MATERIALS & PROCESSING (1.7%)
BUILDING MATERIALS (1.1%)
16,600 Martin Marietta Materials, Inc. ................. 747
--------
BUILDING: CEMENT (0.6%)
6,500 Southdown, Inc. ................................. 464
--------
TOTAL MATERIALS & PROCESSING.................................... 1,211
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
87
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
OTHER (1.6%)
MULTI-SECTOR COMPANIES (1.6%)
(a)37,400 Primark Corp. ................................... $ 1,171
--------
PRODUCER DURABLES (12.5%)
AEROSPACE (3.8%)
50,200 Cordant Technologies, Inc. ...................... 2,315
(a)29,300 Howmet International, Inc. ...................... 440
--------
2,755
--------
OFFICE FURNITURE & BUSINESS EQUIPMENT (8.7%)
(a)147,900 Knoll, Inc. ..................................... 4,363
71,200 Steelcase, Inc. ................................. 1,851
--------
6,214
--------
TOTAL PRODUCER DURABLES......................................... 8,969
--------
TECHNOLOGY (12.0%)
COMMUNICATIONS TECHNOLOGY (2.8%)
(a)52,500 American Tower Corp., Class A ................... 1,309
(a)9,900 Tellabs, Inc. ................................... 708
--------
2,017
--------
COMPUTER SERVICES SOFTWARE & SYSTEMS (2.0%)
(a)10,800 Compuware Corp. ................................. 551
(a)17,500 Peoplesoft, Inc. ................................ 821
(a)1,518 Structural Dynamics Research Corp. .............. 35
--------
1,407
--------
COMPUTER TECHNOLOGY (2.7%)
(a)43,000 Ingram Micro, Inc., Class A ..................... 1,903
--------
ELECTRONICS (1.5%)
(a)24,800 Sanmina Corp. ................................... 1,071
--------
ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (3.0%)
24,000 Linear Technology Corp. ......................... 1,446
(a)20,800 Xilinx, Inc. .................................... 707
--------
2,153
--------
TOTAL TECHNOLOGY................................................ 8,551
--------
UTILITIES (8.0%)
UTILITIES: ELECTRICAL (1.7%)
35,000 Montana Power Co. ............................... 1,216
--------
UTILITIES: TELECOMMUNICATIONS (6.3%)
(a)62,100 Associated Group, Inc., Class B ................. 2,422
(a)24,800 Cellular Communications International, Inc. ..... 1,237
31,100 COMSAT Corp. .................................... 881
--------
4,540
--------
TOTAL UTILITIES................................................. 5,756
--------
TOTAL COMMON STOCKS (Cost $66,647)................................ 71,070
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (6.2%)
REPURCHASE AGREEMENT (6.2%)
$ 4,424 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $4,425,
collateralized by U.S. Treasury Bonds, 11.25%,
due 2/15/15, valued at $4,521 (Cost $4,424).... $ 4,424
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (105.2%) (Cost $71,071).......................... 75,494
--------
OTHER ASSETS (1.5%)
Cash................................................. $ 70
Receivable for Investments Sold...................... 889
Dividends Receivable................................. 65
Interest Receivable.................................. 1
Other................................................ 7 1,032
----------
LIABILITIES ( - 6.7%)
Payable for Investments Purchased.................... (4,535)
Investment Advisory Fees Payable..................... (161)
Payable for Portfolio Shares Redeemed................ (22)
Administrative Fees Payable.......................... (10)
Custodian Fees Payable............................... (7)
Directors' Fees & Expenses Payable................... (6)
Distribution Fee Payable............................. (1)
Other Liabilities.................................... (17) (4,759)
---------- --------
NET ASSETS (100%).................................................. $ 71,767
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $ 52,927
Undistributed Net Investment Income................................ 775
Accumulated Net Realized Gain...................................... 13,642
Unrealized Appreciation on Investments............................. 4,423
--------
NET ASSETS......................................................... $ 71,767
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -------------------------------------------------------------------
NET ASSETS......................................................... $70,339
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 7,635,173 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $9.21
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS B:
- -------------------------------------------------------------------
NET ASSETS......................................................... $1,428
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 157,125 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $9.09
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
88
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Basic Materials 2.0%
Capital Goods 18.1%
Communication Services 2.4%
Consumer Cyclicals 11.2%
Consumer Staples 15.1%
Energy 0.9%
Financial 26.1%
Health Care 1.9%
Technology 11.2%
Transportation 8.8%
Other 2.3%
</TABLE>
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
FIVE SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A......... 15.65% 33.53% 26.12% 20.04%
PORTFOLIO -- CLASS B......... 15.49 33.22 N/A 31.16
INDEX -- CLASS A............. 17.71 30.17 23.08 19.13
INDEX -- CLASS B............. 17.71 30.17 N/A 29.79
</TABLE>
1. The S&P 500 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.
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 Equity Growth Portfolio employs a growth-oriented investment strategy
seeking long-term capital appreciation. The Portfolio seeks to accomplish its
objective by investing primarily in equities of medium and large capitalization
companies exhibiting strong earnings growth.
For the six months ended June 30, 1998, the Portfolio had a total return of
15.65% for the Class A shares and 15.49% for the Class B shares compared to a
total return of 17.71% for the S&P 500 Index (the "Index"). For the one year
ended June 30, 1998, the Portfolio had a total return of 33.53% for Class A
shares and 33.22% for Class B shares compared to a total return of 30.17% for
the Index. For the five-year period ended June 30, 1998, the average annual
total return of Class A was 26.12% compared to 23.08% for the Index. From
inception on April 2, 1991 through June 30, 1998 the average annual total return
of Class A was 20.04% compared to 19.13% for the Index. From inception on
January 2, 1996 through June 30, 1998 the average annual total return of Class B
was 31.16% compared to 29.79% for the Index.
The Portfolio tends to hold between 75 and 100 issues (we held 81 securities at
June 30) and we have the ability to invest up to 10% in a single security when
our conviction is very strong. At quarter end our largest position was
Continental Airlines, which represented 8.8% of the Portfolio's net assets, and
the ten largest holdings accounted for 40% of the net assets.
After a strong first quarter, the portfolio had a disappointing second quarter.
For the three months ended June 30, 1998 the Portfolio had a total return of
- -0.96% for the Class A shares and -0.96% for the Class B shares compared to
3.30% for the S&P 500 Index and 2.85% for the Lipper Growth Index. While some of
our large positions performed very well in the second quarter (notably Clear
Channel and General Motors which added approximately 0.71% and 0.51% to total
return, respectively), these gains were not enough to offset the weakness we
experienced when Cendant, a top ten holding, fell precipitously on its mid-April
announcement of "accounting irregularities" in the company's CUC division.
Cendant resulted from the merger of CUC and HFS last December. The stock
plummeted about 46%, falling as low as $17.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
89
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
The audit report was released in July. We were surprised by the severity of the
market reaction since, in our judgement, the bad news was out. We believe the
core franchise and membership business models of the company remain intact. We
believe the recent announcement cleans the slate--the accounting issues have
been quantified and mangement is developing a plan to move forward. At this
writing, Cendant represents less than a 2% holding.
The Portfolio is very much a mix of what we call "classic" or familiar growth
issues such as Microsoft, less familiar or traditional growth stocks such as
Continental Airlines and Loews, and stocks which fall somewhere in between
(Clear Channel is a clean, "classic" growth story but not necessarily a familiar
or household name yet). Another important characteristic of our style is what we
call "opportunistic concentration" which refers to our ability, when we have
very high conviction in a stock, to take as much as a 10% weighting in the
issue. Our belief is that concentration may lead to greater than average
volatility but not necessarily greater than average risk. To us, risk is
synonymous with lack of knowledge, which our strategy of "seeking the
information edge" seeks to avoid. We may be wrong, as we were with Cendant this
quarter, but we cannot be faulted for not knowing our companies. Over the longer
term, we think the ability to concentrate in issues where we have extremely high
conviction should lead to strong performance. We believe this ability to
concentrate has been one of the primary contributors to our strong performance
over the past several years. We feel this is a good proxy for other growth
managers.
Although there is much discussion today about lofty valuation levels and the
risk that weakness in Asia poses for the U.S. equity market, as we look forward,
we see ample opportunities for capital appreciation in individual stocks. The
fact that we have no dearth of new, exciting growth ideas for the Portfolio is
the primary reason that we remain constructive on the prospects for the market,
in general. At June 30, one of our largest positions was Continental Airlines,
which seems exciting for several reasons. At $61, the stock trades at only ten
times consensus earnings expectations for 1998. Such a low valuation in today's
market implies that investors are wary about the company's ability to grow off
the 1998 base. We believe that consensus earnings per share expectations of
$5.75 for 1998 and $5.95 for 1999 are too conservative and believe Continental
can earn at least $6.20 and $7.00 in 1998 and 1999, respectively. Like other
airlines, Continental has recently begun to deploy free cash flow into share
repurchases. This is very accretive to EPS and should enhance value over time.
In addition to using strong cash flow from operations, we anticipate that the
company will monetize its stake in Amadeus, an international reservation system,
over the next 6-12 months. This should create cash proceeds of $300 million or
more, in exchange for an asset with no earnings. Management has committed
publicly to using all of those proceeds for share repurchase. At or near current
prices, this would eliminate 6% of total shares outstanding.
In essence, we think investors are overstating the risks for the airline
industry (higher oil prices, economic recession) and underappreciating the
positive structural changes that have and should continue to benefit airlines.
Pricing should remain strong and capacity growth is restrained. Code-share
alliances enhance growth prospects without use of capital, and costs, in
general, are coming down. Travel agent commissions have dropped and should drop
further, deleveraging has led to lower sustainable interest costs, and upgrading
fleets will reduce oil from 15% to 10% of total costs over the next few years.
Because its hubs (Houston, Cleveland, Newark) are more underutilized than most,
Continental has greater capacity growth than many of the larger cap airlines --
10% this year, 8-10% next year and 5%+ in 2000. All things being equal, this
should enhance valuation.
We also continue to like Clear Channel Communications, which has been a strong
performer year-to-date and in 1997. Following the company's recent acquisition
of More Group in the United Kingdom, Clear Channel has become the largest "out
of home" advertising media company in the world. Extremely well managed, Clear
Channel has been a leader in consolidating the radio and TV station business in
the United States, and, more recently, the billboard industry. Radio and
billboard share some very positive characteristics: extremely low capital
reinvestment, high profit margins, and the probability of secular growth through
market share gains against traditional television advertising. Clear Channel was
just starting to buy radio stations outside the United States (New Zealand,
Czech Republic, Mexico), but the More acquisition catapults the company into the
global arena. More is the world's largest player in outdoor
- --------------------------------------------------------------------------------
Equity Growth Portfolio
90
<PAGE>
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
furniture advertising (ads on buses, city benches, telephone booths, etc.).
More's presence in overseas markets will allow Clear Channel to consolidate
outdoor furniture advertising further, as well as accelerating its international
growth in billboards and radio. Consensus expectations for Clear Channel call
for cash earnings per share of $3.15 this year and $3.80 next year. We estimate
the numbers will be more like $3.25 and $4.25, with dynamic growth projected off
the 1999 base.
Loews is clearly one of our "less traditional" growth stock holdings. Although
the stock was weak in May and June we continue to believe business fundamentals
are intact. Loews, the Tisch family holding company, has a strong track record
of investments by management but investors are placing an incredibly low
valuation on the stock -- less than nine times projected 1998 operating profits
and less than one times projected year-end book value. We think there are three
primary reasons the stock commands such a low valuation. First, Loews owns
Lorillard, the cigarette manufacturer. Second, the company holds a large and
widely publicized S&P 500 put position. The total put investment may exceed $1
billion. This investment was first made in the summer of 1997 and thus is
significantly unprofitable so far. Third, the company is, from time to time, an
aggressive buyer of its shares but for over a year it has not repurchased any
stock. We see a lot of reasons to be enthusiastic, however. First, Loews is a
book value growth machine. Over the past 12 years, Loews book value per share
has compounded at a 15% annual rate. Its stock price though, has grown at less
than half that rate. Even assuming a slowdown to 10% annual growth, the book
value will exceed $100 by the end of next year. Loews is also compelling based
on sum of the parts valuation, and share repurchases will eventually return. The
company owns large stakes in two publicly traded stocks -- CNA Financial and
Diamond Offshore. Adding the value of these positions to conservative estimates
of the company's 100%-owned assets, Loews stock is the cheapest it has been in
years. CNA per Loews share is about $63, while the value of Diamond Offshore per
Loews share equates to about $24. Net cash per share is about $20, while the
company's hotel business is conservatively valued at $8 per share or more.
Hence, even valuing Lorillard at zero gets you to $115, 32% above the current
price. But if we put a six price/earnings on Lorillard (a discount to publicly
traded cigarette stocks), the value would be about $21 per Loews share. While
management is obviously bearish and wants to conserve cash, at some point we
expect the company to repurchase its stock aggressively. This would be very
accretive to book value per share growth, EPS and net asset value per share.
Finally, we view the stock as an excellent hedge should the U.S. market finally
crack. We believe, particularly in the case of a significant market decline,
that Loews would be one of the very best performing stocks on a relative basis.
The final stock we highlight is a true "classic" growth stock and one of the few
technology issues we own. Typically, we avoid large investments in technology
issues because it is so hard to stay ahead of the information curve. We have
made an exception with Microsoft. The stock sold off in April and May related to
the Department of Justice suit. Our view is that the threat of government action
was exaggerated by investors. While the stock has surged to new highs recently
and it is not at all cheap statistically, we believe Microsoft offers a powerful
combination of growth, extremely high margins and low risk of competitive
threats.
Kurt Feuerman
PORTFOLIO MANAGER
Margaret K. Johnson
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Equity Growth Portfolio
91
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (97.7%)
BASIC MATERIALS (2.0%)
CHEMICALS (1.1%)
125,700 E.I. DuPont de Nemours & Co. .................... $ 9,380
---------
CHEMICALS (DIVERSIFIED) (0.9%)
141,800 Monsanto Co...................................... 7,923
---------
TOTAL BASIC MATERIALS........................................... 17,303
---------
CAPITAL GOODS (18.1%)
AEROSPACE & DEFENSE (5.4%)
232,700 Cordant Technologies, Inc........................ 10,733
(a)336,700 Gulfstream Aerospace Corp........................ 15,657
184,800 Northrop Grumman Corp............................ 19,057
---------
45,447
---------
MACHINERY (DIVERSIFIED) (1.8%)
314,300 Case Corp........................................ 15,165
---------
MANUFACTURING (DIVERSIFIED) (7.2%)
102,800 Textron, Inc..................................... 7,369
162,200 Tyco International Ltd........................... 10,219
474,900 United Technologies Corp......................... 43,928
---------
61,516
---------
OFFICE EQUIPMENT & SUPPLIES (3.7%)
(a)430,500 Knoll, Inc....................................... 12,700
145,100 Pitney Bowes, Inc................................ 6,983
118,200 Xerox Corp....................................... 12,012
---------
31,695
---------
TOTAL CAPITAL GOODS............................................. 153,823
---------
COMMUNICATION SERVICES (2.4%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS) (0.5%)
(a)58,000 Associated Group, Inc., Class A.................. 2,378
(a)52,900 Associated Group, Inc., Class B.................. 2,103
---------
4,481
---------
TELECOMMUNICATIONS (LONG DISTANCE) (1.9%)
128,700 AT&T Corp........................................ 7,352
(a)176,100 WorldCom, Inc.................................... 8,530
---------
15,882
---------
TOTAL COMMUNICATION SERVICES.................................... 20,363
---------
CONSUMER CYCLICALS (11.2%)
AUTO PARTS & EQUIPMENT (0.5%)
116,600 ITT Industries, Inc.............................. 4,358
---------
AUTOMOBILES (2.4%)
304,200 General Motors Corp.............................. 20,324
---------
GAMING, LOTTERY & PARIMUTUEL COMPANIES (0.7%)
(a)55,300 Harrah's Entertainment, Inc...................... 1,286
183,000 International Game Technology.................... 4,437
---------
5,723
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
LODGING-HOTELS (0.6%)
190,100 Hilton Hotels Corp............................... $ 5,418
---------
PUBLISHING (0.9%)
(a)537,400 Primedia, Inc.................................... 7,288
---------
PUBLISHING (NEWSPAPERS) (1.5%)
57,000 Gannett Co., Inc................................. 4,051
95,600 Pulitzer Publishing Co........................... 8,532
---------
12,583
---------
RETAIL (BUILDING SUPPLIES) (1.4%)
139,850 Home Depot, Inc.................................. 11,617
---------
RETAIL (SPECIALTY) (0.4%)
(a)129,200 Staples, Inc..................................... 3,739
---------
SERVICES (ADVERTISING/MARKETING) (0.4%)
(a)120,400 Young & Rubicam, Inc............................. 3,853
---------
SERVICES (COMMERCIAL & CONSUMER) (2.4%)
(a)972,856 Cendant Corp..................................... 20,308
---------
TOTAL CONSUMER CYCLICALS........................................ 95,211
---------
CONSUMER STAPLES (15.1%)
BEVERAGES (NON-ALCOHOLIC) (2.5%)
94,100 Coca Cola Co..................................... 8,046
333,700 Coca Cola Enterprises, Inc....................... 13,097
---------
21,143
---------
BROADCASTING (TV, RADIO, CABLE) (5.9%)
(a)427,800 Clear Channel Communications, Inc................ 46,684
79,600 Comcast Corp., Class A........................... 3,164
---------
49,848
---------
ENTERTAINMENT (1.8%)
(a)194,300 SFX Entertainment, Inc........................... 8,914
76,900 Time Warner, Inc................................. 6,570
---------
15,484
---------
FOODS (2.1%)
78,100 Quaker Oats Co................................... 4,291
61,500 Ralston-Ralston Purina Group..................... 7,184
69,000 Wrigley (William) Jr. Co......................... 6,762
---------
18,237
---------
RESTAURANTS (0.8%)
(a)199,300 Brinker International, Inc....................... 3,837
87,600 Cracker Barrel Old Country Store, Inc............ 2,781
---------
6,618
---------
TOBACCO (2.0%)
433,600 Philip Morris Cos., Inc.......................... 17,073
---------
TOTAL CONSUMER STAPLES.......................................... 128,403
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
92
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
ENERGY (0.9%)
OIL & GAS (DRILLING) (0.9%)
111,200 Diamond Offshore Drilling, Inc................... $ 4,448
42,400 Schlumberger, Ltd................................ 2,896
---------
TOTAL ENERGY.................................................... 7,344
---------
FINANCIAL (26.1%)
BANKS (MAJOR REGIONAL) (0.8%)
17,333 Wells Fargo & Co................................. 6,396
---------
BANKS (MONEY CENTER) (4.2%)
113,700 BankAmerica Corp................................. 9,828
127,436 Chase Manhattan Corp............................. 9,621
70,100 Citicorp......................................... 10,463
48,700 Morgan (J.P.) & Co., Inc......................... 5,704
---------
35,616
---------
CONSUMER FINANCE (0.2%)
46,100 MBNA Corp........................................ 1,521
---------
FINANCIAL (DIVERSIFIED) (3.6%)
269,400 American Express Co.............................. 30,712
---------
INSURANCE (LIFE & HEALTH) (1.2%)
94,500 Provident Cos., Inc.............................. 3,260
(a)128,900 Reinsurance Group of America, Inc................ 6,614
---------
9,874
---------
INSURANCE (MULTI-LINE) (6.7%)
467,200 Loews Corp....................................... 40,705
92,700 Nationwide Financial Services, Inc., Class A..... 4,728
189,250 Travelers Group, Inc............................. 11,473
---------
56,906
---------
INSURANCE (PROPERTY-CASUALTY) (8.1%)
184,750 Ace Ltd.......................................... 7,205
165,800 Allstate Corp.................................... 15,181
(a)263 Berkshire Hathaway, Inc., Class A................ 20,593
79,000 CMAC Investment Corp............................. 4,859
41,000 General Re Corp.................................. 10,394
23,000 Progressive Corp................................. 3,243
192,252 St. Paul Cos., Inc............................... 8,087
---------
69,562
---------
INVESTMENT BANKING & BROKERAGE (1.0%)
90,400 Merrill Lynch & Co............................... 8,339
---------
SAVINGS & LOANS (0.3%)
64,550 Washington Mutual, Inc........................... 2,804
---------
TOTAL FINANCIAL................................................. 221,730
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
HEALTH CARE (1.9%)
HEALTH CARE (DRUGS-MAJOR PHARMS) (1.9%)
53,200 Eli Lilly & Co................................... $ 3,515
57,400 Merck & Co., Inc................................. 7,677
42,700 Pfizer, Inc...................................... 4,641
---------
TOTAL HEALTH CARE............................................... 15,833
---------
TECHNOLOGY (11.2%)
COMMUNICATION EQUIPMENT (1.1%)
(a)27,000 ADC Telecommunications, Inc...................... 986
(a)35,000 CIENA Corp....................................... 2,438
64,800 Motorola, Inc.................................... 3,406
(a)32,200 Tellabs, Inc..................................... 2,306
---------
9,136
---------
COMPUTERS (HARDWARE) (1.1%)
(a)58,200 Dell Computer Corp............................... 5,402
35,400 International Business Machines Corp............. 4,064
---------
9,466
---------
COMPUTERS (NETWORKING) (0.8%)
(a)77,050 Cisco Systems, Inc............................... 7,093
---------
COMPUTERS (SOFTWARE & SERVICES) (4.2%)
76,500 America Online, Inc.............................. 8,109
79,600 Computer Associates International, Inc........... 4,423
(a)209,500 Microsoft Corp................................... 22,704
(a)450 Oracle Corp...................................... 11
---------
35,247
---------
ELECTRONICS (COMPONENT DISTRIBUTORS) (0.7%)
(a)137,400 Ingram Micro, Inc., Class A...................... 6,080
---------
ELECTRONICS (DEFENSE) (2.1%)
(a)302,100 Litton Industries, Inc........................... 17,824
---------
ELECTRONICS (SEMICONDUCTORS) (1.2%)
75,800 Intel Corp....................................... 5,619
75,200 Linear Technology Corp........................... 4,536
---------
10,155
---------
TOTAL TECHNOLOGY................................................ 95,001
---------
TRANSPORTATION (8.8%)
AIRLINES (8.8%)
(a)1,219,700 Continental Airlines, Inc., Class B.............. 74,249
---------
TOTAL COMMON STOCKS (Cost $726,734)............................... 829,260
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
93
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
SHORT TERM INVESTMENT (6.2%)
REPURCHASE AGREEMENT (6.2%)
$ 52,290 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $52,298,
collateralized by U.S. Treasury Notes, 7.875%,
due 11/15/04, valued at $53,442 (Cost
$52,290)....................................... $ 52,290
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (103.9%) (Cost $779,024)......................... 881,550
--------
OTHER ASSETS (0.8%)
Receivable for Investments Sold...................... $ 5,821
Dividends Receivable................................. 698
Receivable for Portfolio Shares Sold................. 337
Interest Receivable.................................. 8
Other................................................ 6 6,870
----------
LIABILITIES ( - 4.7%)
Payable for Investments Purchased.................... (36,062)
Payable for Portfolio Shares Redeemed................ (1,909)
Investment Advisory Fees Payable..................... (1,182)
Bank Overdraft Payable............................... (576)
Administrative Fees Payable.......................... (98)
Distribution Fee Payable............................. (32)
Directors' Fees & Expenses Payable................... (24)
Custodian Fees Payable............................... (17)
Other Liabilities.................................... (68) (39,968)
---------- --------
NET ASSETS (100%).................................................. $848,452
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $657,636
Undistributed Net Investment Income................................ 1,005
Accumulated Net Realized Gain...................................... 87,285
Unrealized Appreciation on Investments............................. 102,526
--------
NET ASSETS......................................................... $848,452
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -------------------------------------------------------------------
NET ASSETS......................................................... $786,976
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 40,183,761 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $19.58
--------
--------
CLASS B:
- -------------------------------------------------------------------
NET ASSETS......................................................... $61,476
NET ASSET VALUE, OFFERING AND REDEMPTION
PICE PER SHARE
Applicable to 3,147,842 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $19.53
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
94
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Banking 11.2%
Building 4.9%
Capital Goods 1.0%
Chemicals 2.5%
Communications 5.0%
Computers 7.0%
Consumer--Durables 4.4%
Consumer--Retail 11.6%
Consumer--Service & Growth 1.9%
Consumer--Staples 8.9%
Electric 1.0%
Energy 2.3%
Entertainment 1.0%
Financial--Diversified 3.5%
Health Care 4.3%
Industrial 4.0%
Insurance 2.3%
Metals 0.8%
Paper & Packaging 0.7%
Restaurants 1.2%
Services 3.3%
Technology 2.7%
Transportation 5.5%
Utilities 4.6%
Other 4.4%
</TABLE>
PERFORMANCE COMPARED TO THE RUSSELL 2500 INDEX
AND S&P 500 INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
FIVE SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A......... 8.72% 27.96% 18.91% 18.45%
PORTFOLIO -- CLASS B......... 8.56 27.58 N/A 26.95
RUSSELL 2500 -- CLASS A...... 5.66 18.10 17.30 17.57
RUSSELL 2500 -- CLASS B...... 5.66 18.10 N/A 19.52
S&P 500 -- CLASS A........... 17.71 30.17 23.08 21.71
S&P 500 -- CLASS B........... 17.71 30.17 N/A 29.79
</TABLE>
1. The Russell 2500 Index and the S&P 500 Index are unmanaged indices of common
stock.
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.
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 Small Cap Value Equity Portfolio invests in equity securities of small to
medium-sized companies that our research indicates are undervalued relative to
the market in general at the time of purchase. The Portfolio's disciplined value
approach seeks to outperform the Russell 2500 Small Company Index in the longer
term. We believe our emphasis on high quality companies should help the
Portfolio perform particularly well in difficult markets.
The Small Cap Value Equity Portfolio selects companies that can be purchased at
bargain prices. Bargains mostly arise as a result of public overreactions to
temporary problems associated with an otherwise healthy company, or because a
company is neglected and currently out-of-the limelight of investors' interest.
Often, these companies operate as major players in very focused markets and are
not widely followed by the investment community.
The Portfolio invests in all economic sectors of the market, and our strategy of
maintaining a well-diversified portfolio is intended to produce consistent and
reliable results over time. Our investment approach combines quantitative and
fundamental research, and is based on the premise that the prices of stocks move
more frequently, and in greater magnitude, than do the fundamentals of the
underlying companies. This discrepancy creates an opportunity for disciplined,
value-oriented investors. Our value approach importantly includes quality and
growth standards which are carefully designed to help avoid "value-traps", where
cheap stocks sometimes remain cheap (or become cheaper) because the company is
run by bad managers or is mired in a hopelessly difficult business environment.
The end result should be a portfolio with below-market valuation and an overall
growth rate as similar as possible to the Russell 2500 benchmark.
For the six months ended June 30, 1998, the Portfolio had a total return of
8.72% for the Class A shares and 8.56% for the Class B shares compared to a
total return of 5.66% and 17.71% for the Russell 2500 Index and the S&P 500
Index, respectively. For the one year ended June 30, 1998, the Portfolio had a
total return of 27.96% for the Class A shares and 27.58% for the Class B shares
compared to a total return of 18.10% and 30.17% for the Russell 2500 Index and
the S&P 500 Index, respectively. For the five-year period ended June 30, 1998,
the average annual total return of Class A was 18.91% compared to 17.30% for the
Russell 2500 Index and 23.08% for
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
95
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
the S&P 500 Index. From inception on December 17, 1992 through June 30, 1998,
the average annual total return of Class A was 18.45% compared to 17.57% for the
Russell 2500 Index and 21.71% for the S&P 500 Index. From inception on January
2, 1996 through June 30, 1998, the average annual total return of Class B was
26.95% compared to 19.52% for the Russell 2500 Index and 29.79% for the S&P 500
Index.
Small and mid cap stocks trended down during the quarter reflecting fears of an
eventual Federal Reserve interest rate hike and continued earnings shortfalls
due to weakening demand from Asia. The prolonged slowdown in Asia likely limits
the Federal Reserve's flexibility to reign in the U.S. domestic growth caused by
lower interest rates. In short, the Federal Reserve's hands are tied until Asia
shows signs of recovery or Japan moves decisively to stimulate economic growth
and address the banking crisis. We are skeptical of a quick Asian recovery or
substantive Japanese economic reform. We have further reduced our exposure to
companies with Asian exposure and have maintained our overweighting in
domestically-focused financial, consumer and business service stocks.
Sector and stock selection added to the portfolio's performance for financial
services, basic resources, and food. Stock selection was poor in consumer
durables and retail. We remain underweighted in industries which lack pricing
flexibility: energy, basic resources and electric utilities. As value investors
we continue to search for companies with low valuations and better than average
growth prospects.
Individual stocks which added to performance included, Capital One Financial,
(up 58%), Providian Financial (37%), Mylan Labs (32%), Fresh Del Monte (23%) and
Trigon Healthcare (20%). Underperforming stocks included Respironics ( - 46%),
Essex International ( - 40%) and Ensco ( - 31%).
At a special meeting held on June 19, 1998, shareholders of the Small Cap Value
Equity Portfolio approved an agreement and plan of reorganization and
liquidation. This plan was effected on July 20, 1998 when all the assets and
liabilities of the Portfolio were transferred to the Mid Cap Portfolio of the
MAS Funds managed by Miller Anderson & Sherrerd, LLP, an affiliate of MSAM.
Shareholders received shares in the MAS Mid Cap Portfolio in exchange for their
shares in the Small Cap Value Equity Portfolio (please see the Notes to the
Financial Statements for further details).
Gary G. Schlarbaum
PORTFOLIO MANAGER
William Gerlach
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
96
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (95.5%)
BANKING (11.1%)
2,000 Affiliated Community Bancorp, Inc. ............... $ 73
4,200 Amsouth Bancorp................................... 165
5,500 City National Corp................................ 203
8,900 Colonial Bancgroup, Inc. ......................... 287
8,550 Comerica, Inc. ................................... 566
14,800 Community First Bankshares, Inc. ................. 388
5,500 Compass Bancshares, Inc. ......................... 248
3,900 Crestar Financial Corp............................ 213
12,400 Dime Bancorp, Inc. ............................... 371
(a)8,300 First Alliance Corp............................... 58
4,700 First Tennessee National Corp..................... 148
(a)2,800 Golden State Bancorp, Inc. ....................... 83
8,700 Mellon Bank Corp.................................. 606
5,400 Mercantile Bankshares Corp........................ 188
5,450 North Fork Bancorp., Inc. ........................ 133
8,800 Providian Financial Corp.......................... 691
13,300 Southtrust Corp................................... 579
19,140 Sovereign Bancorp, Inc. .......................... 313
(a)2,400 United Panam Financial Corp....................... 25
2,500 Wilmington Trust Corp............................. 152
----------
5,490
----------
BUILDING (4.9%)
3,450 Hughes Supply, Inc. .............................. 126
2,600 Lafarge Corp...................................... 102
14,500 Martin Marietta Materials, Inc. .................. 653
21,800 Southdown, Inc. .................................. 1,556
----------
2,437
----------
CAPITAL GOODS (1.0%)
(a)7,400 Analog Devices, Inc. ............................. 182
5,400 Case Corp......................................... 261
(a)2,700 Stoneridge, Inc. ................................. 49
----------
492
----------
CHEMICALS (2.5%)
18,900 Solutia, Inc. .................................... 542
(a)14,200 USA Waste Services, Inc. ......................... 701
----------
1,243
----------
COMMUNICATIONS (5.0%)
2,200 Century Telephone Enterprises, Inc. .............. 101
(a)13,200 General Instrument Corp........................... 359
(a)7,800 Journal Register Co............................... 131
(a)16,200 Nextel Communications, Inc., Class A.............. 403
(a)30,100 Valassis Communications, Inc. .................... 1,161
600 Washington Post Co., Class B...................... 345
----------
2,500
----------
COMPUTERS (7.0%)
(a)8,600 BMC Software, Inc. ............................... 447
(a)13,000 Cadence Design Systems, Inc. ..................... 406
(a)7,300 CompUSA, Inc. .................................... 132
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)7,000 Computer Horizons Corp............................ $ 259
(a)9,200 Electronic Arts, Inc. ............................ 497
(a)8,700 Fiserv, Inc. ..................................... 369
(a)3,900 HMT Technology Corp............................... 33
(a)43,400 Novell, Inc. ..................................... 553
(a)14,800 Sterling Software, Inc. .......................... 438
(a)6,800 Storage Technology Corp........................... 295
(a)2,100 Stratus Computer, Inc. ........................... 53
----------
3,482
----------
CONSUMER-DURABLES (4.4%)
12,300 Alpharma, Inc. ................................... 271
10,700 Arvin Industries, Inc. ........................... 389
(a)7,100 Blyth Industries, Inc. ........................... 236
(a)2,000 Dan River, Inc., Class A.......................... 34
(a)11,200 HEALTHSOUTH Corp.................................. 299
6,600 Mylan Laboratories, Inc. ......................... 198
(a)7,000 Quorum Health Group, Inc. ........................ 186
(a)23,326 Respironics, Inc. ................................ 363
(a)7,900 Sybron International Corp......................... 199
----------
2,175
----------
CONSUMER-RETAIL (11.6%)
(a)1,400 Barnes & Noble, Inc. ............................. 52
(a)9,600 Best Buy Co., Inc. ............................... 347
(a)16,200 BJ's Wholesale Club, Inc. ........................ 658
(a)5,100 Brylane, Inc. .................................... 235
(a)5,100 Budget Group, Inc., Class A....................... 163
(a)14,000 Consolidated Stores, Inc. ........................ 508
11,258 CVS Corp.......................................... 438
9,600 DIAL Corp......................................... 249
(a)8,800 Dress Barn, Inc. ................................. 219
15,700 Family Dollar Stores, Inc. ....................... 290
(a)5,600 Knoll, Inc. ...................................... 165
(a)22,600 Office Depot, Inc. ............................... 713
3,650 Pier 1 Imports, Inc. ............................. 87
21,400 Ross Stores, Inc. ................................ 920
17,400 TJX Cos., Inc. ................................... 420
(a)3,500 Viking Office Products, Inc. ..................... 110
(a)5,100 Zale Corp......................................... 162
----------
5,736
----------
CONSUMER-SERVICE & GROWTH (1.9%)
7,600 Danka Business Systems plc ADR.................... 90
3,200 Energy East Corp.................................. 133
(a)4,400 Horizon Offshore, Inc. ........................... 43
(a)22,380 Ocean Energy, Inc. ............................... 438
(a)10,500 R&B Falcon Corp................................... 238
----------
942
----------
CONSUMER-STAPLES (8.9%)
8,400 Allmerica Financial Corp.......................... 546
23,100 Crescent Real Estate Equities, Inc. .............. 777
4,900 Dean Foods Co..................................... 269
(a)26,200 Fresh Del Monte Produce, Inc. .................... 496
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
97
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
CONSUMER-STAPLES (CONT.)
<TABLE>
<C> <S> <C>
(a)3,600 Heller Financial, Inc. ........................... $ 108
9,200 Interstate Bakeries Corp.......................... 305
1,900 Investors Financial Services Corp................. 101
2,100 Lancaster Colony Corp............................. 79
(a)8,600 Promus Hotel Corp................................. 331
1,800 Raymond James Financial Corp...................... 54
12,300 Regions Financial Corp............................ 505
8,500 Reliastar Financial Corp.......................... 408
13,900 Richfood Holdings, Inc. .......................... 288
3,300 T. Rowe Price Associates, Inc. ................... 124
----------
4,391
----------
ELECTRIC (1.0%)
7,650 Black Hills Corp.................................. 176
(a)8,800 SCI Systems, Inc. ................................ 331
----------
507
----------
ENERGY (2.3%)
200 Arch Coal, Inc. .................................. 5
5,400 Columbia Energy Group............................. 300
7,500 ENSCO International, Inc. ........................ 130
7,600 New Century Energies, Inc. ....................... 345
2,400 Sun Co., Inc. .................................... 93
3,900 Tosco Corp........................................ 115
4,000 Valero Energy Corp................................ 133
----------
1,121
----------
ENTERTAINMENT (1.0%)
8,300 Media General, Inc., Class A...................... 409
2,700 Universal Corp.................................... 101
----------
510
----------
FINANCIAL-DIVERSIFIED (3.5%)
9,100 A.G. Edwards, Inc. ............................... 388
5,700 Bear Stearns Cos., Inc. .......................... 324
2,800 Capital One Financial Corp........................ 348
5,800 Legg Mason, Inc. ................................. 334
3,000 National Commerce Bancorp......................... 126
(a)10,200 Unicapital Corp................................... 195
(a)725 Wellsford Real Properties, Inc. .................. 10
----------
1,725
----------
HEALTH CARE (4.3%)
(a)13,600 Artesyn Technologies, Inc. ....................... 218
3,100 Bergen Brunswig Corp., Class A.................... 144
(a)5,100 Health Care & Retirement Corp..................... 201
(a)11,800 Lincare Holdings, Inc. ........................... 496
(a)8,100 PharMerica, Inc. ................................. 98
(a)10,100 Universal Health Services, Inc., Class B.......... 589
(a)5,400 Wellpoint Health Networks, Inc. .................. 400
----------
2,146
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
INDUSTRIAL (4.0%)
8,100 AGCO Corp......................................... $ 167
(a)2,100 CDI Corp.......................................... 56
(a)8,200 Lear Corp......................................... 421
600 Lone Star Industries, Inc. ....................... 46
(a)11,750 Networks Associates, Inc. ........................ 562
(a)6,400 Teradyne, Inc. ................................... 171
4,700 Trinity Industries, Inc. ......................... 195
(a)3,800 Triumph Group, Inc. .............................. 160
(a)11,100 Varco International, Inc. ........................ 220
----------
1,998
----------
INSURANCE (2.3%)
4,500 Ambac Financial Group, Inc. ...................... 263
3,300 Everest Reinsurance Holdings, Inc. ............... 127
7,000 Nationwide Financial Services, Inc., Class A...... 357
13,700 Old Republic International Corp................... 402
----------
1,149
----------
METALS (0.8%)
6,500 AK Steel Holding Corp............................. 116
5,300 Precision Castparts Corp.......................... 283
----------
399
----------
PAPER & PACKAGING (0.7%)
4,500 Bowater, Inc. .................................... 213
1,800 Central Newspapers, Inc., Class A................. 125
----------
338
----------
RESTAURANTS (1.2%)
(a)15,600 Brinker International, Inc. ...................... 300
10,400 Michael Foods, Inc. .............................. 306
----------
606
----------
SERVICES (3.3%)
(a)8,700 AccuStaff, Inc. .................................. 272
(a)26,500 Interim Services, Inc. ........................... 851
(a)26,100 Philip Service Corp............................... 108
10,000 Russ Berrie & Co., Inc. .......................... 250
6,200 Viad Corp......................................... 172
----------
1,653
----------
TECHNOLOGY (2.7%)
(a)7,900 Atmel Corp........................................ 108
(a)3,000 Cooper Cameron Corp............................... 153
5,700 Linear Technology Corp............................ 344
(a)14,400 Sybase, Inc. ..................................... 100
(a)4,100 Symantec Corp..................................... 107
3,300 Tektronix, Inc. .................................. 117
(a)7,400 Watson Pharmaceuticals, Inc. ..................... 345
(a)3,500 Ziff-Davis, Inc. ................................. 49
----------
1,323
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
98
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
TRANSPORTATION (5.5%)
(a)30,400 Acclaim Entertainment, Inc. ...................... $ 181
14,000 Air Express International Corp.................... 374
4,000 Airborne Freight Corp............................. 140
(a)12,300 Atlas Air, Inc. .................................. 416
2,100 Canadian National Railway Co...................... 112
11,500 CNF Transportation, Inc. ......................... 489
6,300 Dana Corp......................................... 337
4,900 Southwest Airlines Co............................. 145
6,800 Teekay Shipping Corp.............................. 170
(a)8,500 Tower Automotive, Inc. ........................... 364
----------
2,728
----------
UTILITIES (4.6%)
12,900 Allegheny Energy, Inc. ........................... 389
4,600 CMS Energy Corp................................... 202
10,300 Florida Progress Corp............................. 423
7,500 Illinova Corp..................................... 225
5,600 IPALCO Enterprises, Inc. ......................... 249
6,200 LG&E Energy Corp.................................. 168
8,600 Pinnacle West Capital Corp........................ 387
6,000 Texas Utilities Co................................ 250
----------
2,293
----------
TOTAL COMMON STOCKS (Cost $43,438)............................ 47,384
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.1%)
BANKING (0.1%)
(a)10,300 Golden State Bancorp, Inc. (Cost $54)............. 55
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (4.3%)
REPURCHASE AGREEMENT (4.3%)
$ 2,135 Chase Securities, Inc. 5.40%, dated 6/30/98, Due
7/01/98, to be repurchased at $2,135,
collateralized by U.S. Treasury Bonds, 11.25%,
due 2/15/15, valued at $2,187 (Cost $2,135)..... 2,135
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%) (Cost $45,627)................. $ 49,574
-----------
OTHER ASSETS (2.4%)
Cash....................................... $ 1
Receivable for Investments Sold............ 1,062
Dividends Receivable....................... 126
Other...................................... 2 1,191
----------
LIABILITIES ( - 2.3%)
Payable for Investments Purchased.......... (1,020)
Investment Advisory Fees Payable........... (81)
Administrative Fees Payable................ (6)
Custodian Fees Payable..................... (5)
Distribution Fee Payable................... (4)
Directors' Fees & Expenses Payable......... (3)
Other Liabilities.......................... (18) (1,137)
---------- -----------
NET ASSETS (100%)........................................ $ 49,628
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 40,213
Undistributed Net Investment Income........................... 18
Accumulated Net Realized Gain................................. 5,450
Unrealized Appreciation on Investments........................ 3,947
-----------
NET ASSETS.................................................... $ 49,628
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $42,472
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,476,940 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $12.22
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
CLASS B:
- --------------------------------------------------------------
NET ASSETS.................................................... $7,156
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 587,868 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $12.17
-----------
-----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
99
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Data Communications 25.1%
Data Storage & Processing 4.3%
Electronic Equipment 2.4%
Information Processing 1.0%
Internet Related 5.0%
Large Diversified Computer Mfg. 1.3%
Micro Computer Mfg. 4.6%
Office Automation 1.1%
Semiconductor Mfg. 19.8%
Software Products 21.6%
Test, Analysis &
Instrumentation Equipment 0.6%
Transaction Processing 1.2%
Other Technology 9.4%
Other 2.6%
</TABLE>
PERFORMANCE COMPARED TO THE S&P 500 INDEX AND THE LIPPER SCIENCE AND TECHNOLOGY
FUNDS INDEX(1)
- -----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A.... 21.31% 30.66% 38.25%
PORTFOLIO -- CLASS B.... 21.16 30.43 37.95
S&P 500 INDEX........... 17.71 30.17 35.07
LIPPER SCIENCE AND
TECHNOLOGY FUNDS
INDEX................... 17.46 18.72 20.34
</TABLE>
1. The S&P 500 Index is an unmanaged index of common stocks. The Lipper Science
and Technology Funds Index is a composite index of mututal funds that invest
at least 65% of their assets in science and technology 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.
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. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.
The investment objective of the Technology Portfolio is to achieve long-term
capital appreciation by investing primarily in equity securities of companies
expected to benefit from their involvement in technology and technology-related
industries. The focus of the Portfolio is to identify significant long-term
technology trends and to invest in those premier companies we believe are
positioned to materially gain from these trends. Stocks selected for the
Portfolio are also expected to meet comprehensive selection criteria. The
Portfolio may invest up to 35% of its total investments in securities of foreign
companies to participate sufficiently in the global technology market.
For the six months ended June 30, 1998, the Portfolio had a total return of
21.31% for the Class A shares and 21.16% for the Class B shares compared to
17.71% for the S&P 500 Index and 17.46% for the Lipper Science and Technology
Funds Index. For the one year ended June 30, 1998, the Portfolio had a total
return of 30.66% for the Class A shares and 30.43% for the Class B shares
compared to 30.17% for the S&P 500 Index and 18.72% for the Lipper Science and
Technology Funds Index. From inception on September 16, 1996 through June 30,
1998, the average annual total return of Class A was 38.25% and 37.95% for Class
B compared to 35.07% for the S&P 500 Index and 20.34% for the Lipper Science and
Technology Funds Index.
Overall, we were pleased with the Portfolio's performance for the second quarter
as it has performed well on an absolute and relative basis. The strong
performance for the second quarter was due to broadbased strength across both
our large and small capitalizations stocks, as well as most tech sub-sectors.
The software, Internet and data networking sectors and the larger capitalization
companies performed particularly well. The best performing stocks were Ciena,
America Online, Ascend Communications, and Cisco. The Portfolio was underweight
the semiconductor and semiconductor capital equipment sectors which did not
perform as well.
We look forward to the remainder of 1998. Despite concerns regarding the Asian
economic crisis and some high profile earnings disappointments, we believe
overall fundamentals for technology continue to be favorable. There are over
2,000 public technology companies and we strive to remain invested in the best
100. Our goal remains the same;
- --------------------------------------------------------------------------------
Technology Portfolio
100
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
identify the premier companies which present compelling investment opportunities
and avoid companies with deteriorating fundamentals.
Stephen C. Sexauer
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Technology Portfolio
101
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (97.4%)
TECHNOLOGY (97.4%)
DATA COMMUNICATIONS (25.1%)
(a)17,900 ADC Telecommunications, Inc. ..................... $ 654
(a)13,700 Advanced Fibre Communications, Inc. .............. 549
(a)1,900 AirTouch Communications, Inc. .................... 111
(a)13,100 Ascend Communications, Inc. ...................... 649
(a)7,000 Bay Networks, Inc. ............................... 226
(a)2,200 China Telecomm (Hong Kong) Ltd., ADR.............. 76
(a)16,600 CIENA Corp. ...................................... 1,156
(a)7,300 Cisco Systems, Inc. .............................. 672
(a)6,200 DSP Communications, Inc. ......................... 85
(a)9,700 Excell Switching Corp. ........................... 241
(a)5,000 Genesystems Telecommunications Labs, Inc. ........ 165
(a)3,900 JDS Fitel, Inc. .................................. 65
4,900 Lucent Technologies, Inc. ........................ 408
(a)2,000 Metromedia Fiber Network, Inc., Class A........... 93
(a)4,500 Micromuse, Inc. .................................. 184
(a)5,000 Newbridge Networks Corp. ......................... 120
(a)600 Nextel Communications, Inc., Class A.............. 15
(a)11,300 Powerwave Technologies, Inc. ..................... 189
(a)6,700 Proxim, Inc. ..................................... 111
(a)6,000 QUALCOMM, Inc. ................................... 337
4,000 RELTEC Corp. ..................................... 180
(a)10,600 RF Micro Devices, Inc. ........................... 115
4,500 Sprint Corp. ..................................... 317
(a)3,300 Tekelec, Inc. .................................... 148
(a)1,600 Teligent, Inc., Class A........................... 47
(a)8,100 3Com Corp. ....................................... 249
(a)6,200 TranSwitch Corp. ................................. 85
(a)2,500 Uniphase Corp. ................................... 157
(a)1,500 US LEC Corp., Class A ............................ 31
(a)4,900 WorldCom, Inc. ................................... 237
(a)19,100 Xylan Corp. ...................................... 569
----------
8,241
----------
DATA STORAGE & PROCESSING (4.3%)
(a)11,400 EMC Corp. ........................................ 511
(a)9,400 Quantum Corp. .................................... 195
(a)20,200 Seagate Technology, Inc. ......................... 481
(a)3,400 Storage Technology Corp. ......................... 148
(a)43,700 Syquest Technology, Inc. ......................... 64
----------
1,399
----------
ELECTRONIC EQUIPMENT (2.4%)
(a)5,600 Apex PC Solutions, Inc. .......................... 156
(a)1,400 Exodus Communications, Inc. ...................... 63
(a)3,800 International Network Services.................... 156
(a)6,700 Micrel, Inc. ..................................... 218
(a)6,500 Microchip Technology, Inc. ....................... 170
(a)500 Visual Networks, Inc. ............................ 18
----------
781
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
INFORMATION PROCESSING (1.0%)
(a)10,194 Cendant Corp. .................................... $ 213
(a)5,100 Electronics for Imaging, Inc. .................... 108
----------
321
----------
INTERNET RELATED (5.0%)
(a)1,000 Amazon.com, Inc. ................................. 100
11,200 America Online, Inc. ............................. 1,187
(a)10,000 E*TRADE Group, Inc. .............................. 229
(a)800 YAHOO!, Inc. ..................................... 126
----------
1,642
----------
LARGE DIVERSIFIED COMPUTER MFG (1.3%)
(a)14,600 Unisys Corp. ..................................... 413
----------
MICRO COMPUTER MFG (4.6%)
(a)7,500 Apple Computer, Inc. ............................. 215
(a)3,000 Dell Computer Corp. .............................. 278
(a)6,900 Gateway 2000, Inc. ............................... 349
(a)38,600 Micron Electronics, Inc. ......................... 466
(a)4,600 Sun Microsystems, Inc. ........................... 200
----------
1,508
----------
OFFICE AUTOMATION (1.1%)
9,200 Harris Corp. ..................................... 411
----------
SEMICONDUCTOR MFG (19.8%)
(a)23,800 Altera Corp. ..................................... 704
(a)9,500 Analog Devices, Inc. ............................. 233
(a)5,300 Applied Micro Circuits Corp. ..................... 137
(a)100 Broadcom Corp., Class A........................... 7
8,700 Dallas Semiconductor Corp. ....................... 270
7,400 Intel Corp. ...................................... 549
(a)5,800 Lattice Semiconductor Corp. ...................... 165
(a)5,950 Level One Communications, Inc. ................... 140
10,000 Linear Technology Corp. .......................... 603
(a)14,600 Maxim Integrated Products, Inc. .................. 463
(a)19,700 Mercury Computer Systems, Inc. ................... 286
(a)3,500 Micron Technology, Inc. .......................... 87
(a)2,900 MMC Networks, Inc. ............................... 92
5,000 Motorola, Inc. ................................... 263
(a)11,500 PMC-Sierra, Inc. ................................. 539
9,200 Texas Instruments, Inc. .......................... 536
(a)9,200 Veeco Instruments, Inc. .......................... 229
(a)13,200 Vitesse Semiconductor Corp. ...................... 408
(a)22,900 Xilinx, Inc. ..................................... 779
----------
6,490
----------
SOFTWARE PRODUCTS (21.6%)
4,200 Adobe Systems, Inc. .............................. 178
(a)2,200 At Home Corp., Series A........................... 104
(a)3,700 BEA Systems, Inc. ................................ 85
(a)3,900 Cadence Design Systems, Inc. ..................... 122
(a)7,300 Citrix Systems, Inc. ............................. 499
10,400 Computer Associates International, Inc. .......... 578
(a)15,900 Compuware Corp. .................................. 813
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
102
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
TECHNOLOGY (CONT.)
SOFTWARE PRODUCTS (CONT.)
<TABLE>
<C> <S> <C>
(a)700 ISS Group, Inc. .................................. $ 26
(a)8,600 J.D. Edwards & Co. ............................... 369
(a)9,400 Learning Company, Inc. ........................... 278
(a)2,000 Lycos, Inc. ...................................... 151
(a)5,200 Macromedia, Inc. ................................. 97
(a)7,100 Microsoft Corp. .................................. 769
(a)1,100 Microstrategy, Inc. .............................. 31
(a)10,600 Netscape Communications Corp. .................... 287
(a)6,450 Network Associates, Inc. ......................... 309
(a)15,500 Novell, Inc. ..................................... 198
(a)12,800 Peoplesoft, Inc. ................................. 602
(a)21,200 Platinum Technology, Inc. ........................ 606
(a)4,400 Progress Software Corp. .......................... 180
(a)15,800 Software AG Systems, Inc. ........................ 462
(a)5,000 Software Net Corp. ............................... 96
(a)7,000 Tecnomatix Technologies Ltd. ..................... 140
(a)6,100 Vantive Corp. .................................... 125
----------
7,105
----------
TEST, ANALYSIS & INSTRUMENTATION EQUIPMENT (0.6%)
(a)20,400 Barringer Technologies, Inc. ..................... 193
----------
TRANSACTION PROCESSING (1.2%)
2,200 Galileo International, Inc. ...................... 99
(a)7,900 SABRE Group Holdings, Inc. ....................... 300
----------
399
----------
OTHER (9.4%)
(a)2,300 BISYS Group, Inc. ................................ 94
(a)13,800 CGI Group, Inc. .................................. 294
(a)700 Clear Channel Communications, Inc. ............... 76
(a)2,700 Data Processing Resources Corp. .................. 84
(a)4,800 ECsoft Group plc ADR.............................. 155
(a)14,700 Ingram Micro, Inc., Class A....................... 650
(a)1,000 Intermedia Communications, Inc. .................. 42
(a)7,100 Medicis Pharmaceutical Corp., Class A............. 259
(a)1,200 Orbital Sciences Corp. ........................... 45
5,550 Paychex, Inc. .................................... 226
(a)3,700 Robert Half International, Inc. .................. 207
(a)8,100 Romac International, Inc. ........................ 246
(a)9,300 SunGard Data Systems, Inc. ....................... 357
(a)7,500 Whittman-Hart, Inc. .............................. 363
----------
3,098
----------
TOTAL TECHNOLOGY............................................ 32,001
----------
TOTAL COMMON STOCKS (Cost $28,109)............................ 32,001
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (1.2%)
REPURCHASE AGREEMENT (1.2%)
$ 387 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $387,
collateralized by U.S. Treasury Bonds, 11.25%,
due 2/15/15, valued at $403 (Cost $387)......... $ 387
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.6%) (Cost $28,496).................... 32,388
----------
OTHER ASSETS (4.2%)
Cash.......................................... $ 264
Receivable for Investments Sold............... 931
Receivable due from Broker.................... 181
Dividends Receivable.......................... 1
Other......................................... 3 1,380
----------
LIABILITIES ( - 2.8%)
Payable for Investments Purchased............. (802)
Investment Advisory Fees Payable.............. (19)
Custodian Fees Payable........................ (15)
Directors' Fees & Expenses Payable............ (5)
Administrative Fees Payable................... (4)
Distribution Fee Payable...................... (1)
Other Liabilities............................. (65) (911)
---------- ----------
NET ASSETS (100%)........................................... $ 32,857
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 29,659
Accumulated Net Investment Loss............................... (249)
Accumulated Net Realized Loss................................. (445)
Unrealized Appreciation on Investments........................ 3,892
----------
NET ASSETS.................................................... $ 32,857
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $31,585
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,219,247 outstanding $0.001 par value Shares
(authorized 500,000,000 shares)............................. $14.23
----------
----------
CLASS B:
- --------------------------------------------------------------
NET ASSETS.................................................... $1,272
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 89,552 outstanding $0.001 par value Shares
(authorized 500,000,000 shares)............................. $14.20
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
103
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Basic Materials 4.6%
Capital Goods 12.7%
Communication Services 5.4%
Consumer--Cyclicals 10.6%
Consumer--Staples 15.1%
Energy 3.8%
Financial 17.0%
Healthcare 10.0%
Technology 13.3%
Transportation 1.3%
Utilities 4.0%
Other 2.2%
</TABLE>
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------
YTD SINCE INCEPTION
---------- -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A(3)............ 14.84% 19.36%
PORTFOLIO -- CLASS B(3)............ 14.74 19.25
INDEX.............................. 17.71 20.58
</TABLE>
1. The S&P 500 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 commenced operations on July 31, 1997.
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 U.S. Equity Plus Portfolio seeks long-term capital appreciation by investing
primarily in equity securities of issuers in the S&P 500 Index. Equity
securities include common and preferred stocks, convertible securities, and
rights and warrants to purchase common stocks.
The Portfolio investment process utilizes systematic quantitative and
qualitative inputs. The quantitative inputs include several proprietary
valuation and momentum models, as well as a market conditions model. The
qualitative inputs include stock ratings from Morgan Stanley's Equity Research
analysts. These inputs are combined in a systematic way to produce an
attractiveness measure for every stock in the Portfolio investment universe. The
Portfolio is designed to have consistently higher returns than the S&P 500 with
a volatility of portfolio return that is approximately equal to that of the S&P
500. This is sought by using a multi-factor risk model for building the
Portfolio and by maintaining sector neutrality with respect to the S&P 500
Index. The active exposure to any single company is also kept to a modest level.
For the six months ended June 30, 1998, the Portfolio had a total return of
14.84% for the Class A shares and 14.74% for the Class B shares, compared to
17.71% for the S&P 500 Index (the "Index"). For the period from inception on
July 31, 1997 to June 30, 1998, the Portfolio had a total return of 19.36% for
Class A shares and 19.25% for Class B shares compared to 20.58% for the Index.
The Portfolio is sector neutral to the Index, so sector weights had no impact on
incremental performance. The performance of a sector in the Portfolio is
completely driven by stock selection (and relative weights) within the sector.
Based on stock selection, our best performing sectors were banking, financial
services, electric utilities and trucking and railroads. Our worst performing
sectors were consumer non-durables, capital goods, energy and technology.
Virtually all of the performance differential between the Portfolio and the
benchmark came from active stock selection. The five largest contributions to
our performance relative to the Index came from the following stocks: 1) Green
Tree Financial, a diversified financial service company, rocketed 64% on the
takeover announcement by Conseco in April. 2) McDonalds, the worldwide fast-food
system of restaurants, posted a healthy 45% gain as the company pre-announced
strong second quarter
- --------------------------------------------------------------------------------
U.S. Equity Plus Portfolio
104
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO (CONT.)
earnings and showcased plans to install a high-tech cooking system. 3) Chase
Manhattan, a diversified global financial service provider, had a great start in
1998 largely on the back of a stellar first quarter, returning almost 40% as
investors responded to a continuing flow of news on a favorable outlook for
earnings growth. 4) Likewise, Becton Dickinson, which manufactures and sells a
broad line of medical supplies, devices and diagnostics, posted an handsome 55%
return preserving a high level of investor confidence while mounting an
aggressive acquisition campaign and coping with severe foreign exchange
translation impacts. 5) Chrysler, a large U.S., mid-range automotive company,
returned 63% largely on an announced takeover by Daimler, a formidable high-end
German competitor.
On the other side, the five most negative contributions to our performance
relative to the Index came from the following stocks: 1) Philip Morris, a
diversified consumer packaged goods company, sagged 11% making a 52-week low
facing mounting lawsuits and increased federal regulations on tobacco products.
2) AT&T, which offers communication services and products, posted a 6% decline.
Despite better-than-expected second quarter earnings, investors expressed
disappointment in weak consumer long-distance and wireless services businesses
and the expected impact on earnings of the TCI purchase. 3) UST, which produces
and markets smokeless tobacco products, cigars and alcoholic beverages, sank 25%
as reports circulated that smokeless tobacco would be added to official
government lists of cancer-linked agents. 4) Case Corporation, which
manufactures and markets both farm and construction equipment, declined 20%. The
company pre-announced substantially weaker earnings due to worsening economic
conditions and falling orders in Eastern Europe. 5) Travelers, a diversified
financial service holding company, surged on the announcement to merge with
Citicorp. However, investors' euphoria was short-lived and Travelers returned
13% for the first half of 1998, lagging the market's pace by 4%.
A cheery American musical couple in the 1960's once sang, "And the beat goes
on..." In the first two quarters of 1998 the U.S. economy continued to cruise
along in a state which has become known as the "sweet spot" -- robust economic
growth, full employment, low inflation, low interest rates and high consumer
confidence. The ingredients, once again, proved to be terrific for large cap
stocks. In particular, large cap growth stocks were the shining stars, outpacing
their value counterparts by over 11% (as measured by Barra/S&P). As part of our
risk control design we choose not to chase some of the most aggressive growth
stocks characterized by extreme price momentum. Consequently, we miss out on
some of the high-flyers and we tend to lag the S&P modestly during this part of
the cycle. However, the lagging tends not to last for long. We generally bounce
back as the value/growth cycle continues. Looking forward, our view is that
economic growth should continue its long expansion, however, the lack of pricing
power that many firms are feeling will start to take its toll. While we are not
expecting serious problems, this may not be good news for U.S. stocks.
Narayan Ramachandran
PORTFOLIO MANAGER
Eugene Flood
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
U.S. Equity Plus Portfolio
105
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (97.8%)
BASIC MATERIALS (4.6%)
ALUMINUM (0.1%)
700 Aluminum Company of America....................... $ 46
----------
CHEMICALS (0.5%)
2,100 E.I. DuPont De Nemours & Co. ..................... 157
----------
CHEMICALS (DIVERSIFIED) (0.6%)
3,900 Goodrich (BF) Co. ................................ 193
----------
CHEMICALS (SPECIALTY) (0.6%)
800 Great Lakes Chemical Corp......................... 32
1,000 Hercules, Inc. ................................... 41
(a)7,400 W.R. Grace & Co. ................................. 126
----------
199
----------
GOLD & PRECIOUS METALS MINING (0.3%)
2,800 Barrick Gold Corp. ............................... 54
1,500 Newmont Mining Corp. ............................. 35
----------
89
----------
IRON & STEEL (2.1%)
600 Allegheny Teledyne, Inc. ......................... 14
(a)40,400 Armco, Inc. ...................................... 257
(a)17,700 Bethlehem Steel Corp. ............................ 220
6,000 USX -- U.S. Steel Group, Inc. .................... 198
----------
689
----------
METALS MINING (0.4%)
8,800 Freeport-McMoRan Copper & Gold, Inc., Class B..... 134
----------
TOTAL BASIC MATERIALS....................................... 1,507
----------
CAPITAL GOODS (12.7%)
AEROSPACE & DEFENSE (0.3%)
800 Lockheed Martin Corp. ............................ 85
300 Northrop Grumman Corp. ........................... 31
----------
116
----------
CONTAINERS (METAL & GLASS) (0.2%)
1,200 Crown Cork & Seal Co., Inc. ...................... 57
----------
ELECTRICAL EQUIPMENT (4.0%)
3,900 Emerson Electric Co. ............................. 235
9,000 General Electric Co. ............................. 819
700 Raychem Corp. .................................... 21
4,400 Thomas & Betts Corp. ............................. 217
----------
1,292
----------
ENGINEERING & CONSTRUCTION (1.3%)
3,800 Fluor Corp........................................ 194
6,400 McDermot International, Inc. ..................... 220
----------
414
----------
MACHINERY (DIVERSIFIED) (1.8%)
3,300 Case Corp. ....................................... 159
4,200 Caterpillar, Inc. ................................ 222
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
1,400 Cincinnati Milacron, Inc. ........................ $ 34
3,000 Deere & Co........................................ 159
----------
574
----------
MANUFACTURING (DIVERSIFIED) (2.8%)
3,300 Aeroquip-Vickers, Inc. ........................... 193
2,500 Allied Signal, Inc. .............................. 111
600 Minnesota Mining & Manufacturing Co. ............. 49
8,000 Tyco International Ltd. .......................... 504
600 United Technologies Corp. ........................ 55
----------
912
----------
OFFICE EQUIPMENT & SUPPLIES (0.9%)
3,000 Xerox Corp. ...................................... 305
----------
TRUCKS & PARTS (1.4%)
400 Cummins Engine Co., Inc. ......................... 21
(a)10,400 Navistar International Corp. ..................... 300
2,800 Paccar, Inc. ..................................... 146
----------
467
----------
TOTAL CAPITAL GOODS......................................... 4,137
----------
COMMUNICATION SERVICES (5.4%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS) (0.3%)
(a)1,800 AirTouch Communications, Inc. .................... 105
----------
TELECOMMUNICATIONS (LONG DISTANCE) (2.5%)
12,100 AT&T Corp. ....................................... 691
900 Sprint Corp. ..................................... 64
(a)1,100 WorldCom, Inc. ................................... 53
----------
808
----------
TELEPHONE (2.6%)
2,700 Ameritech Corp. .................................. 121
800 Bell Atlantic Corp. .............................. 37
2,600 Bellsouth Corp. .................................. 175
8,300 GTE Corp. ........................................ 462
800 SBC Communications, Inc. ......................... 32
700 U.S. WEST, Inc.................................... 33
----------
860
----------
TOTAL COMMUNICATION SERVICES................................ 1,773
----------
CONSUMER CYCLICALS (10.6%)
AUTO PARTS & EQUIPMENT (0.1%)
300 Goodyear Tire & Rubber Co. ....................... 20
500 TRW, Inc. ........................................ 27
----------
47
----------
AUTOMOBILES (1.9%)
3,400 Chrysler Corp. ................................... 192
5,400 Ford Motor Co. ................................... 318
1,600 General Motors Corp. ............................. 107
----------
617
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Equity Plus Portfolio
106
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
CONSUMER CYCLICALS (CONT.)
BUILDING MATERIALS (0.2%)
800 Armstrong World Industries, Inc. ................. $ 54
----------
FOOTWEAR (0.1%)
(a)1,200 Reebok International Ltd. ........................ 33
----------
HOMEBUILDING (0.7%)
100 Fleetwood Enterprises, Inc. ...................... 4
7,400 Pulte Corp. ...................................... 221
----------
225
----------
HOUSEHOLD FURNISHINGS & APPLIANCES (0.8%)
(a)5,100 Maytag Corp. ..................................... 252
----------
PUBLISHING (0.3%)
1,900 Dow Jones & Co., Inc. ............................ 106
----------
PUBLISHING (NEWSPAPERS) (1.6%)
4,100 Gannett Co., Inc. ................................ 291
1,700 Knight-Ridder, Inc. .............................. 94
1,600 New York Times Co., Class A....................... 127
----------
512
----------
RETAIL (BUILDING SUPPLIES) (1.2%)
3,800 Home Depot, Inc. ................................. 316
2,000 Lowe's Cos., Inc. ................................ 81
----------
397
----------
RETAIL (GENERAL MERCHANDISE) (2.8%)
(a)2,600 Costco Cos., Inc. ................................ 164
(a)800 Kmart Corp. ...................................... 15
3,100 Sears Roebuck & Co. .............................. 189
8,900 Wal-Mart Stores, Inc. ............................ 541
----------
909
----------
RETAIL (COMPUTERS & ELECTRONICS) (0.0%)
200 Circuit City Stores-Circuit City Group............ 9
----------
RETAIL (SPECIALTY) (0.5%)
1,800 Gap, Inc. ........................................ 111
700 Ikon Office Solutions, Inc. ...................... 10
1,000 TJX Cos., Inc. ................................... 24
----------
145
----------
RETAIL (SPECIALTY/APPAREL) (0.4%)
(a)7,500 Venator Group, Inc. .............................. 144
----------
TOTAL CONSUMER CYCLICALS.................................... 3,450
----------
CONSUMER STAPLES (15.1%)
BEVERAGES (NON-ALCOHOLIC) (2.8%)
8,500 Coca Cola Co. .................................... 727
4,400 PepsiCo, Inc. .................................... 181
----------
908
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
DISTRIBUTORS (FOOD & HEALTH) (0.7%)
1,300 Cardinal Health, Inc. ............................ $ 122
2,400 SUPERVALU, Inc. .................................. 107
----------
229
----------
ENTERTAINMENT (1.5%)
2,600 King World Productions, Inc. ..................... 66
1,300 The Walt Disney Co. .............................. 137
2,000 Time Warner, Inc. ................................ 171
(a)2,000 Viacom, Inc., Class B............................. 116
----------
490
----------
FOODS (1.9%)
2,900 Hershey Foods Corp. .............................. 200
2,500 Ralston -- Ralston Purina Group................... 292
1,000 Sara Lee Corp. ................................... 56
800 Unilever N.V. (NY Shares)......................... 63
----------
611
----------
HOUSEHOLD PRODUCTS (NON-DURABLES) (3.0%)
300 Colgate Palmolive Co. ............................ 26
700 Fort James Corp. ................................. 31
3,000 Kimberly-Clark Corp. ............................. 138
8,500 Procter & Gamble Co. ............................. 774
----------
969
----------
HOUSEWARES (0.0%)
400 Tupperware Corp. ................................. 11
----------
PERSONAL CARE (0.6%)
300 Avon Products, Inc. .............................. 23
3,300 Gillette Co. ..................................... 187
----------
210
----------
RESTAURANTS (1.8%)
3,500 Darden Restaurants, Inc. ......................... 56
7,800 McDonald's Corp. ................................. 538
----------
594
----------
SPECIALTY PRINTING (0.4%)
3,500 Deluxe Corp. ..................................... 126
----------
TOBACCO (2.4%)
14,700 Philip Morris Cos., Inc. ......................... 579
7,900 UST, Inc. ........................................ 213
----------
792
----------
TOTAL CONSUMER STAPLES...................................... 4,940
----------
ENERGY (3.8%)
OIL & GAS (DRILLING) (2.1%)
6,200 Dresser Industries, Inc. ......................... 273
1,400 Halliburton Co. .................................. 63
6,700 Helmerich & Payne, Inc. .......................... 149
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Equity Plus Portfolio
107
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
ENERGY (CONT.)
OIL & GAS (DRILLING) (CONT.)
<TABLE>
<C> <S> <C>
(a)5,900 Rowan Companies, Inc. ............................ $ 115
1,000 Schlumberger, Ltd. ............................... 68
----------
668
----------
OIL & GAS (EXPLORATION & DRILLING) (0.0%)
400 Apache Corp. ..................................... 12
----------
OIL & GAS (REFINING & MARKETING) (0.6%)
5,300 Sun Co., Inc. .................................... 206
----------
OIL (INTERNATIONAL INTEGRATED) (1.1%)
3,500 Chevron Corp. .................................... 290
700 Mobil Corp. ...................................... 54
200 Royal Dutch Petroleum Co. ........................ 11
----------
355
----------
TOTAL ENERGY................................................ 1,241
----------
FINANCIAL (17.0%)
BANKS (MAJOR REGIONAL) (1.5%)
1,200 Banc One Corp. ................................... 67
1,700 Bank of New York Co., Inc. ....................... 103
300 Fleet Financial Group, Inc. ...................... 25
400 Norwest Corp. .................................... 15
6,600 U.S. Bancorp...................................... 284
----------
494
----------
BANKS (MONEY CENTER) (6.4%)
3,100 BankAmerica Corp. ................................ 268
9,200 Chase Manhattan Corp. ............................ 694
900 Citicorp.......................................... 134
10,500 First Union Corp. ................................ 612
4,900 NationsBank Corp. ................................ 375
----------
2,083
----------
CONSUMER FINANCE (0.4%)
500 Associates First Capital Corp. ................... 39
500 Countrywide Credit Industries, Inc. .............. 25
800 Providian Financial Corp. ........................ 63
----------
127
----------
FINANCIAL (DIVERSIFIED) (2.1%)
300 American Express Co. ............................. 34
5,700 Federal Home Loan Mortgage Corp. ................. 268
3,700 Federal National Mortgage Assoc................... 225
2,600 SunAmerica, Inc. ................................. 150
----------
677
----------
INSURANCE (LIFE & HEALTH) (0.1%)
500 Torchmark Corp. .................................. 23
----------
INSURANCE (MULTI-LINE) (4.7%)
2,500 American International Group, Inc. ............... 365
3,200 CIGNA Corp. ...................................... 221
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
2,900 Hartford Financial Service Group, Inc. ........... $ 332
10,300 Travelers Group, Inc.............................. 624
----------
1,542
----------
INSURANCE (PROPERTY-CASUALTY) (1.5%)
5,400 Allstate Corp. ................................... 494
----------
INVESTMENT BANKING & BROKERAGE (0.3%)
1,300 Lehman Brothers Holdings, Inc. ................... 101
----------
TOTAL FINANCIAL............................................. 5,541
----------
HEALTH CARE (10.0%)
HEALTH CARE (DIVERSIFIED) (5.0%)
3,900 American Home Products Corp. ..................... 202
6,700 Bristol-Myers Squibb Co. ......................... 770
4,900 Johnson & Johnson................................. 362
4,300 Warner Lambert Co. ............................... 298
----------
1,632
----------
HEALTH CARE (DRUGS-MAJOR PHARMS) (3.8%)
5,400 Eli Lilly & Co. .................................. 357
900 Merck & Co., Inc. ................................ 120
6,900 Pfizer, Inc. ..................................... 750
----------
1,227
----------
HEALTH CARE (HOSPITAL MANAGEMENT) (0.0%)
500 Columbia/HCA Healthcare Corp. .................... 14
----------
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) (1.1%)
2,000 Becton Dickinson & Co. ........................... 155
(a)200 Boston Scientific Corp. .......................... 14
1,400 Guidant Corp. .................................... 100
1,200 Medtronic, Inc. .................................. 77
----------
346
----------
HEALTH CARE (SPECIALIZED SERVICES) (0.1%)
(a)900 Alza Corp., Class A............................... 39
----------
TOTAL HEALTH CARE........................................... 3,258
----------
TECHNOLOGY (13.3%)
COMMUNICATION EQUIPMENT (2.0%)
(a)1,800 Andrew Corp. ..................................... 33
6,800 Lucent Technologies, Inc. ........................ 566
600 Northern Telecom Ltd. ............................ 34
(a)300 Tellabs, Inc. .................................... 21
----------
654
----------
COMPUTERS (HARDWARE) (2.8%)
(a)1,000 Apple Computer, Inc. ............................. 29
2,000 Compaq Computer Corp. ............................ 57
(a)2,800 Dell Computer Corp. .............................. 260
(a)1,200 Gateway 2000, Inc. ............................... 61
2,600 Hewlett Packard Co. .............................. 155
2,400 International Business Machines Corp. ............ 275
(a)1,500 Sun Microsystems, Inc. ........................... 65
----------
902
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Equity Plus Portfolio
108
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY (CONT.)
COMPUTERS (NETWORKING) (0.6%)
(a)2,300 Cisco Systems, Inc. .............................. $ 212
----------
COMPUTERS (PERIPHERALS) (0.4%)
(a)3,000 EMC Corp. ........................................ 134
----------
COMPUTERS (SOFTWARE & SERVICES) (5.8%)
3,500 Computer Associates International, Inc. .......... 195
900 Computer Sciences Corp. .......................... 58
1,400 HBO & Co. ........................................ 49
(a)12,400 Microsoft Corp. .................................. 1,344
(a)9,700 Oracle Corp. ..................................... 238
----------
1,884
----------
ELECTRONICS (SEMICONDUCTORS) (1.6%)
6,900 Intel Corp. ...................................... 511
----------
SERVICES (COMPUTER SYSTEMS) (0.1%)
300 Shared Medical Systems Corp. ..................... 22
----------
TOTAL TECHNOLOGY............................................ 4,319
----------
TRANSPORTATION (1.3%)
AIRLINES (0.8%)
(a)1,600 AMR Corp. ........................................ 133
1,000 Delta Air Lines, Inc. ............................ 129
----------
262
----------
RAILROADS (0.5%)
1,800 Burlington Northern Santa Fe Corp. ............... 177
----------
TOTAL TRANSPORTATION........................................ 439
----------
UTILITIES (4.0%)
ELECTRIC COMPANIES (3.5%)
5,800 Cinergy Corp. .................................... 203
5,400 Dominion Resources, Inc. ......................... 220
4,600 Edison International.............................. 136
2,900 FPL Group, Inc. .................................. 183
300 Firstenergy Corp. ................................ 9
1,100 GPU, Inc. ........................................ 42
5,600 PECO Energy Co. .................................. 163
3,800 PP&L Resources, Inc. ............................. 86
2,500 Texas Utilities Co. .............................. 104
----------
1,146
----------
NATURAL GAS (0.5%)
1,400 Coastal Corp. .................................... 98
900 Columbia Energy Group............................. 50
200 NICOR, Inc. ...................................... 8
----------
156
----------
TOTAL UTILITIES............................................. 1,302
----------
TOTAL COMMON STOCKS (Cost $30,298)............................ 31,907
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT TERM INVESTMENT (1.2%)
REPURCHASE AGREEMENT (1.2%)
$ 399 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $399,
collateralized by U.S. Treasury Bonds, 8.875%,
due 2/15/19, valued at $409
(Cost $399)..................................... $ 399
----------
TOTAL INVESTMENTS (99.0%) (Cost $30,697)...................... 32,306
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.3%)
Cash................................................ $ 1
Receivable for Portfolio Shares Sold................ 403
Dividends Receivable................................ 38 442
----------
LIABILITIES ( - 0.3%)
Payable for Portfolio Shares Redeemed............... (31)
Investment Advisory Fees Payable.................... (28)
Custodian Fees Payable.............................. (4)
Administrative Fees Payable......................... (4)
Directors' Fees & Expenses Payable.................. (1)
Distribution Fee Payable............................ (1)
Other Liabilities................................... (37) (106)
---------- --------
NET ASSETS (100%)................................................. $ 32,642
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................................. $ 28,388
Undistributed Net Investment Income............................. 131
Accumulated Net Realized Gain................................... 2,514
Unrealized Appreciation on Investments.......................... 1,609
--------
NET ASSETS...................................................... $ 32,642
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ----------------------------------------------------------------
NET ASSETS...................................................... $31,504
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,659,806 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................... $11.84
--------
--------
CLASS B:
- ----------------------------------------------------------------
NET ASSETS...................................................... $1,138
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 96,193 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................... $11.83
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Equity Plus Portfolio
109
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Diversified 7.6%
Lodging/Resorts 8.2%
Office/Industrial 38.0%
Other Common Stock 0.9%
Residential 19.3%
Retail 17.4%
Self Storage 4.4%
Other 4.2%
</TABLE>
PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT
TRUSTS (NAREIT) EQUITY INDEX(1)
- ----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... - 5.23% 8.50% 23.79%
PORTFOLIO -- CLASS
B..................... - 5.43 8.20 22.63
INDEX -- CLASS A...... - 5.03 8.05 18.74
INDEX -- CLASS B...... - 5.03 8.05 19.08
</TABLE>
1. The NAREIT Equity Index is an unmanaged market weighted index of tax
qualified REITs listed on the New York Stock Exchange, American Stock
Exchange and the NASDAQ National Market System, including dividends.
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.
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 U.S. Real Estate Portfolio seeks to provide above average current income and
long-term capital appreciation by investing primarily in equity securities of
companies in the U.S. real estate industry, including real estate investment
trusts ("REITS").
For the six months ended June 30, 1998, the Portfolio had a total return of
- 5.23% for the Class A shares and - 5.43% for the Class B shares compared to
a total return of - 5.03% for the National Association of Real Estate
Investment Trusts (NAREIT) Equity Index (the "Index"). For the one year ended
June 30, 1998, the Portfolio had a total return of 8.50% for the Class A shares
and 8.20% for the Class B shares compared to 8.05% for the Index. From inception
on February 24, 1995 through June 30, 1998, the average annual total return of
the Class A shares was 23.79% compared to 18.74% for the Index. From inception
on January 2, 1996 through June 30, 1998, the average annual total return of the
Class B shares was 22.63% compared to 19.08% for the Index.
Following a difficult first quarter, the second quarter provided very little for
REIT investors to cheer about. The Index declined 4.59% for the quarter and is
now down 5.03% year-to-date. In the first quarter the key reason for the
difficulties in REIT prices appeared to be technical -- the continued strength
in the U.S. equity market led many non-dedicated real estate investors to move
funds to the broad market from the REIT sector. However, in the second quarter
the discussion with regard to the continuation of price weakness led to a
greater focus on real estate fundamentals going forward. As the U.S. real estate
cycle continues to age, the level of new construction has begun to raise
concerns among a spectrum of public and private real estate industry
participants. Markets are now being gauged for a view as to when supply will
surpass demand. Since the public market tends to look forward, we can expect
multiples to contract in anticipation of a deterioration in fundamentals.
After three years of strong performance, the sector is faced with competing
rallying cries of both REIT bulls and bears. One group of analysts finds value
in the sector by demonstrating the large disparity between the relative average
multiple of the S&P 500 versus REITs. These analysts also cite REITs for their
defensive characteristics and for providing portfolio diversification. The bears
point to the cyclical nature of the real estate asset class and argue that
multiples have begun to contract in anticipation of a slowdown in the rate of
return in U.S. commercial real estate
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
110
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
and an eventual downturn in capital values. Other favorite criticisms brought
forth by the bears include the notion that REITs' reliance on raising equity
capital to grow creates a supply-demand imbalance for REIT shares, thus keeping
a ceiling on share prices. This opinion reflects the idea that non-dedicated
investors will continue to avoid the sector; in addition, it is not clear how
much demand will be provided by value-oriented investors or those investors
searching for defensive vehicles.
As we have discussed, the multifamily and industrial markets have already
achieved equilibrium, with limited pockets of current supply problems. Despite a
rapidly accelerating pace of new office development, the potential for
widespread occupancy pressures from this sector does not appear on the horizon
until 1999 or 2000. New development is confined primarily to sunbelt suburban
locations and is only lightly scattered in a number of central business
districts. In the hotel sector, although recent concerns were focused on the
limited service segment of the market, the cautionary yellow flag is now being
waved for each of the categories. The reason that potential oversupply in the
hotel sector creates greater concern than other sectors is that the typical
lease in a hotel is for only one night and, as a result, economics can
deteriorate rapidly. In light of the strong economy, retail sales have been
buoyant resulting in strong results for retailers and greater demand to open new
stores. We expect new development to meet this demand.
It is not surprising that the equity offering calendar has become very light and
the few deals that were completed in the quarter were priced at far lower levels
than were desired by issuers. We expect that, given current valuations, a number
of the IPOs that have been filed will be postponed until the market can recover.
In addition, a number of companies that have made large acquisitions and had
expected to complete equity follow-on offerings need to study their alternatives
carefully. Clearly, if current pricing levels persist, the rapid pace of equity
securitization will slow as companies will be reluctant (or unable) to raise
equity capital to finance their growth. This should apply to both acquisitions
financed by cash as well as the trend of trading property for shares with
institutional investors and private companies. Finally, we expect that the
merger environment may heat-up as some companies are trading at or below
valuation levels that approximate their private real estate value.
The current market also may require a change of focus by the majority of the
REIT analyst community. The recent focus has been on setting targets for a
company's annual acquisitions pace and utilizing these targets to establish
estimates of funds from operations ("FFO") per share. Since this analysis is
highly dependent on projecting future equity issuance and the corresponding
price for that issuance, current FFO estimates have become suspect. Our style of
focusing on net asset value ("NAV") per share does not face this issue. However,
to the extent we have attributed some portion of the NAV to "development value"
we must analyze the feasibility of a REIT completing its identified projects. We
have spent considerable time discussing the attitude of management toward
enhancing shareholder value by focusing on internal growth, development and
redevelopment of assets as well as stock buybacks and the sale of non-strategic
assets.
The REIT market has come under pressure by selling from non-dedicated investors;
these investors were most heavily concentrated in the larger capitalization
companies, particularly those companies focusing in the office and hotel sectors
(which have been the two best performing sectors over the course of the last
three years). We have continued to shape the Portfolio with companies offering
attractive fundamental valuations relative to their underlying real estate
value. As a result, we have added a number of large cap companies that have
faced the greatest price compression. From a top-down perspective, we have
significantly added to the office sector as a result of price declines. We have
attempted to overweight the office sector previously due to favorable
fundamentals, but lofty prices caused us to temper that overweighting. These
high prices had been the result of external growth expectations, which are in
the process of being downgraded. Despite the price pressure in the hotel sector,
we have modestly decreased our exposure due to the concerns discussed above. In
order to pay for the addition to office, we have decreased our exposure to both
multifamily and healthcare. These two sectors have been modestly valued and have
not suffered the same declines in share price.
Russell C. Platt
PORTFOLIO MANAGER
Theodore R. Bigman
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
111
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
COMMON STOCKS (93.5%)
DIVERSIFIED (7.6%)
65,200 Capital Automotive REIT.......................... $ 925
388,200 Pacific Gulf Properties, Inc. REIT............... 8,395
239,200 Pennsylvania REIT................................ 5,307
67,100 Vornado Realty Trust REIT........................ 2,663
(a)654,898 Wellsford Real Properties, Inc................... 9,250
---------
26,540
---------
LODGING/RESORTS (8.2%)
(a)179,500 CapStar Hotel Co. ............................... 5,026
(a)300,100 Host Marriott Corp............................... 5,346
(a)108,700 John Q Hammons Hotels, Inc., Class A............. 768
327,537 Starwood Lodging Trust REIT...................... 15,824
(a)105,000 Station Casinos, Inc............................. 1,542
---------
28,506
---------
OFFICE/INDUSTRIAL (36.9%)
INDUSTRIAL (2.2%)
43,700 Meridian Industrial Trust, Inc. REIT............. 1,005
383,100 Prime Group Realty Trust REIT.................... 6,561
---------
7,566
---------
OFFICE/INDUSTRIAL MIXED (3.4%)
87,200 Bedford Property Investors, Inc. REIT............ 1,591
164,000 Reckson Associates Realty Corp. REIT............. 3,875
168,400 Spieker Properties, Inc. REIT.................... 6,526
---------
11,992
---------
OFFICE (31.3%)
677,600 Arden Realty, Inc. REIT.......................... 17,533
(a,d)335,100 Beacon Capital Partners, Inc..................... 6,702
578,454 Brandywine Realty Trust REIT..................... 12,943
866,200 Brookfield Properties Corp....................... 11,922
600,800 CarrAmerica Realty Corp. REIT.................... 17,048
13,200 Crescent Real Estate Equities, Inc............... 444
420,527 Equity Office Properties Trust REIT.............. 11,932
592,200 Great Lakes, Inc. REIT........................... 10,326
165,900 Kilroy Realty Corp. REIT......................... 4,147
154,500 Mack-Cali Realty Corp. REIT...................... 5,311
255,700 SL Green Realty Corp. REIT....................... 5,753
243,900 Trizec Hahn Corp................................. 5,229
---------
109,290
---------
TOTAL OFFICE/INDUSTRIAL.......................................... 128,848
---------
OTHER (0.4%)
580,384 Atlantic Gulf Communities Corp................... 1,197
(a)27,056 Reckson Services Industries, Inc................. 90
---------
1,287
---------
RESIDENTIAL (19.3%)
APARTMENTS (13.6%)
366,400 Avalon Bay Communities, Inc. REIT................ 13,923
102,800 Equity Residential Properties Trust REIT......... 4,877
383,200 Essex Property Trust, Inc. REIT.................. 11,879
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
188,800 Irvine Apartment Communities, Inc. REIT.......... $ 5,463
448,810 Security Capital Atlantic, Inc. REIT............. 10,014
34,200 Security Capital Pacific Trust REIT.............. 770
18,100 Smith (Charles E.) Residential Realty, Inc.
REIT........................................... 579
---------
47,505
---------
MANUFACTURED HOMES (5.7%)
580,952 Chateau Communities, Inc. REIT................... 16,702
32,800 Manufactured Home Communities, Inc. REIT......... 791
69,700 Sun Communities, Inc. REIT....................... 2,309
---------
19,802
---------
TOTAL RESIDENTIAL................................................ 67,307
---------
RETAIL (16.7%)
REGIONAL MALLS (7.0%)
173,500 CBL & Associates Properties, Inc. REIT........... 4,207
983,400 Taubman Centers, Inc. REIT....................... 14,013
191,300 Urban Shopping Centers, Inc. REIT................ 6,026
2,000 Westfield America, Inc. REIT..................... 37
---------
24,283
---------
STRIP CENTERS (9.7%)
765,100 Burnham Pacific Property Trust REIT.............. 10,855
585,400 Federal Realty Investment Trust REIT............. 14,086
211,900 Pan Pacific Retail Properties, Inc. REIT......... 4,106
2,200 Ramco-Gershenson Properties Trust REIT........... 42
196,600 Regency Realty Corp. REIT........................ 4,940
---------
34,029
---------
TOTAL RETAIL..................................................... 58,312
---------
SELF STORAGE (4.4%)
352,010 PS Business Parks, Inc. REIT..................... 8,272
106,100 Public Storage, Inc. REIT........................ 2,971
145,100 Shurgard Storage Centers, Inc., Series A REIT.... 4,027
---------
15,270
---------
TOTAL COMMON STOCKS (Cost $314,412)................................ 326,070
---------
PREFERRED STOCK (0.7%)
RETAIL (0.7%)
STRIP CENTERS (0.7%)
80,400 First Washington Realty Trust, Series A REIT
(Cost $2,251).................................. 2,329
---------
CONVERTIBLE PREFERRED STOCKS (0.4%)
OTHER (0.4%)
(a)107,021 Atlantic Gulf Communities Corp................... 749
(a)75,765 Altantic Gulf Communities Corp., Series B........ 530
---------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $1,828)................... 1,279
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
112
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
WARRANTS (0.4%)
OFFICE/INDUSTRIAL (0.3%)
INDUSTRIAL (0.3%)
(a)184,843 Meridian Industrial Trust, Inc. REIT, expiring
2/23/99........................................ $ 1,201
---------
OTHER (0.1%)
(a,d)112,509 Atlantic Gulf Communities Corp., Class A,
expiring 6/24/04............................... 56
(a,d)112,509 Atlantic Gulf Communities Corp., Class B,
expiring 6/24/04............................... 56
(a,d)112,509 Atlantic Gulf Communities Corp., Class C,
expiring 6/24/04............................... 56
---------
168
---------
TOTAL WARRANTS (Cost $300)......................................... 1,369
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------------
CORPORATE BOND (0.8%)
OFFICE/INDUSTRIAL (0.8%)
OFFICE (0.8%)
$ 2,934 Brookfield Properties Corp.
6.00%, 2/14/07 (Cost $2,274)................... 2,892
---------
SHORT-TERM INVESTMENT (1.9%)
REPURCHASE AGREEMENT (1.9%)
6,627 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $6,628,
collateralized by U.S. Treasury Bonds, 11.25%,
due 2/15/15, valued at $6,774 (Cost $6,627).... 6,627
---------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.7%) (Cost $327,692)......................... $ 340,566
----------
OTHER ASSETS (3.5%)
Cash................................................ $ 33
Receivable for Investments Sold..................... 9,013
Dividends Receivable................................ 2,887
Receivable for Portfolio Shares Sold................ 79
Interest Receivable................................. 57
Other............................................... 203 12,272
----------
LIABILITIES ( - 1.2%)
Payable for Investments Purchased................... (3,372)
Investment Advisory Fees Payable.................... (685)
Administrative Fees Payable......................... (42)
Custodian Fees Payable.............................. (15)
Directors' Fees & Expenses Payable.................. (12)
Distribution Fee Payable............................ (12)
Other Liabilities................................... (53) (4,191)
---------- ----------
NET ASSETS (100%)................................................. $ 348,647
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................................... $ 316,264
Undistributed Net Investment Income............................... 3,174
Accumulated Net Realized Gain..................................... 16,335
Unrealized Appreciation on Investments............................ 12,874
----------
NET ASSETS........................................................ $ 348,647
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ------------------------------------------------------------------
NET ASSETS........................................................ $ 329,871
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 22,765,858 outstanding $0.001 par value Shares
(authorized 500,000,000 shares)................................. $14.49
----------
----------
CLASS B:
- ------------------------------------------------------------------
NET ASSETS........................................................ $18,776
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,300,786 outstanding $0.001 par value Shares
(authorized 500,000,000 shares)................................. $14.43
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- see note A-1 to financial
statements.
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
113
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Basic Materials 4.0%
Capital Goods 17.8%
Communication Services 9.5%
Consumer Cyclicals 8.5%
Consumer Staples 2.1%
Energy 8.0%
Financial 27.8%
Health Care 1.0%
Technology 8.3%
Transportation 4.7%
Utilities 5.8%
Other 2.5%
</TABLE>
PERFORMANCE COMPARED TO THE S&P 500 INDEX AND THE
INDATA EQUITY-MEDIAN INDEX(1)
- -----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
FIVE SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A......... 10.78% 26.11% 19.51% 15.35%
PORTFOLIO -- CLASS B......... 10.68 25.91 N/A 23.39
S&P 500 INDEX -- CLASS A..... 17.71 30.17 23.08 19.00
S&P 500 INDEX -- CLASS B..... 17.71 30.17 N/A 29.79
INDATA EQUITY-MEDIAN INDEX --
CLASS A.................... 13.86 27.18 20.19 17.33
INDATA EQUITY-MEDIAN INDEX --
CLASS B.................... 13.86 27.18 N/A 26.07
</TABLE>
1. The S&P 500 and the Indata Equity-Median Index are unmanaged indicies of
common stocks. The Indata Equity-Median Index includes an average asset
allocation of 8.8% cash and 91.2% equity based on $517 billion in assets
among 1,141 portfolios for the period ended June 30, 1998.
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.
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.
Our value investment philosophy for the Value Equity Portfolio is based on the
premise that a diversified portfolio of undervalued securities should outperform
the market over the long-term, and would be expected to preserve principal in a
difficult market environment.
Key aspects of our philosophy are as follows:
Reversion to mean valuation levels (return to the long-term average) is the
most consistent and powerful force in investing.
We buy companies selling at less than our research measures to be their true
worth.
Our Portfolio is characterized by a distinctly below average
price-to-earnings ratio, price-to-book ratio, and a high dividend yield.
We limit our universe of investments to larger, liquid stocks. This is a
list similar to the S&P 500.
For the six months ended June 30, 1998, the Portfolio had a total return of
10.78% for the Class A shares and 10.68% for the Class B shares compared to a
total return of 17.71% for the S&P 500 Index and 13.86% for the Indata
Equity-Median Index. For the one year ended June 30, 1998, the Portfolio had a
total return of 26.11% for the Class A shares and 25.91% for the Class B shares
compared to a total return of 30.17% for the S&P 500 Index and 27.18% for the
Indata Equity-Median Index. For the five-year period ended June 30, 1998, the
average annual total return of Class A was 19.51% compared to 23.08% for the S&P
500 Index and 20.19% for the Indata Equity-Median Index. From inception on
January 31, 1990 through June 30, 1998, the average annual total return of Class
A was 15.35% compared to 19.00% for the S&P 500 Index and 17.33% for the Indata
Equity-Median Index. From inception on January 2, 1996 through June 30, 1998,
the average annual total return of Class B was 23.39% compared to 29.79% for the
S&P 500 Index and 26.07% for the Indata Equity-Median Index.
For the second quarter ended June 30, 1998, the Portfolio had a total return of
- 2.34% for the Class A shares and - 2.39% for the Class B shares compared to
3.30% for the S&P 500 Index and 1.44% for the Indata Equity-Median Index.
According to LIPPER MUTUAL FUNDS QUARTERLY, the average Equity-Income mutual
fund (value-style fund) had a return of - 1.0% in the quarter ended June 30,
1998, and 9.6% for the six months ended June 30, 1998.
- --------------------------------------------------------------------------------
Value Equity Portfolio
114
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO (CONT.)
The Portfolio holds undervalued companies with a wide valuation gap as compared
to the characteristics of the S&P 500:
<TABLE>
<CAPTION>
1998 CAP-WEIGHTED
<S> <C> <C>
PRICE-EARNINGS PRICE-TO-BOOK
------------- -------------
Portfolio.................. 14.9X 3.4X
S&P 500.................... 23.4X 5.9X
</TABLE>
Mega-cap stocks dominated performance in the first half of 1998 resulting in
extremely narrow performance within the S&P 500. The top four stocks in the
index contributed 20% of the performance of the index, and the top 100
contributed approximately 75%. This environment has made it very difficult for
active managers to outperform, as most manage equally-weighted portfolios and
are underweight the largest and most influential stocks. The S&P 500 Index, on
an equally-weighted basis, returned 11.6% for the six months ended June 30,
1998, compared to the market cap-weighted index return of 17.7%. The divergence
in performance is even more pronounced when comparing small and large cap
indexes. The larger cap Russell 1000 Index returned 16.2% while the smaller cap
Russell 2000 Index returned 4.9% for the six months ended June 30, 1998. Within
the large cap indexes, growth stocks dominated value.
Contributing to this flight to safety in the mega cap stocks are concerns over
Asia, the continued flow of negative news from that region and the uncertain
impact on corporate profits. Fears of recession, as the economy has slowed from
the first quarter, and deflation fears has led to underperformance of cyclical
stocks and commodity based stocks. Both U.S. investors and accelerating cash
flows from foreign investors have sought the safety and comfort of large,
liquid, well known names. We believe the odds of the continued dominance by the
mega-cap stocks are limited by valuation.
During the first half, the best performing sectors in the Portfolio, on an
absolute basis, were health care, up 28%, transportation, up 20%, and
technology, up 19%. Underperforming sectors included capital goods, down 22%,
and consumer non-durables and multi-industry, both down 11%. The best performing
stocks in the first half were Gulfstream Aerospace, up 59%, Phillips, up 42%,
Chase Manhattan, up 39%, and American General, up 33%. Stocks providing the
biggest disappointment included Case, down 20%, Philip Morris, down 11%, AT&T,
down 6%, and Ashland, down 3%.
The more significant changes we made to the Portfolio in the first half included
increasing our exposure in the aircraft sector which, when combined with the
specific stocks selected, contributed positively to performance. Gulfstream
Aerospace, a position re-established during the second quarter, was the top
performing stock of the Portfolio. We also added to United Technologies,
established a position in Cordant Technologies (formerly Thiokol) and swapped
the position in Lockheed Martin for a smaller one in Northrop Grumman.
In consumer non-durables, we sold the RJR Nabisco position in the mid thirties,
as the tobacco legislative outlook deteriorated in Congress. At the same time,
we slightly decreased the position in Philip Morris, a less contrarian tobacco
name which is financially stronger to weather the coming tobacco battles, and
added Loews Corp. In consumer durables, we sold the Borg Warner position as a
sales shortfall in Korea and Japan combined with lower than expected Ford orders
resulted in flat earnings versus expectations of up 10%. Case Corp. has became
one of our larger holdings due to its attractive valuation, 10% earnings per
share growth and recent stock buyback announcement. Although estimates have come
down slightly, business fundamentals are strong, they signed a very good long
term UAW labor contract, but have suffered delayed shipments to the Former
Soviet Union. We also recently added Navistar to the Portfolio.
Our work to decrease the contrarian bets did pay off as we eliminated Louisiana
Pacific, Ryder, Georgia Pacific, Phelps Dodge and Woolworth, at prices above
quarter end prices, on average. In each case the business fundamentals continue
to deteriorate. In the chemical sector, we established a new position in
Millennium Chemicals while reducing the position in DuPont. In the
transportation area, we sold American Airlines, while adding to Continental
Airlines. Traffic growth is above average, Continental hubs are underserved, and
management is buying back stock. We believe the proposed Continental/Northwest
alliance will yield significant long term benefits to both carriers.
Compared to the S&P 500 Index, we continue to overweight utilities and financial
services, where we recently added positions in industry leaders Citicorp and
Allstate. We continue to underweight technology and health care.
Stephen C. Sexauer
PORTFOLIO MANAGER
Philip W. Friedman
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Value Equity Portfolio
115
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------
COMMON STOCKS (97.5%)
BASIC MATERIALS (4.0%)
12,600 E.I. DuPont de Nemours & Co. ..................... $ 940
61,500 Millennium Chemicals, Inc. ....................... 2,083
23,100 Olin Corp. ....................................... 963
--------
3,986
--------
CAPITAL GOODS (17.8%)
81,500 Case Corp. ....................................... 3,932
58,700 Cordant Technologies, Inc. ....................... 2,708
(a)28,300 Gulfstream Aerospace Corp. ....................... 1,316
(a)44,300 Navistar International Corp. ..................... 1,279
20,900 Northrop Grumman Corp. ........................... 2,155
10,400 Philips Electronics N.V. (NY Shares).............. 884
45,300 Steelcase, Inc. .................................. 1,178
45,300 United Technologies Corp. ........................ 4,190
--------
17,642
--------
COMMUNICATION SERVICES (9.5%)
40,200 AT&T Corp. ....................................... 2,296
49,800 Bell Atlantic Corp. .............................. 2,272
33,000 Sprint Corp. ..................................... 2,327
53,900 U.S. WEST, Inc. .................................. 2,533
--------
9,428
--------
CONSUMER CYCLICALS (8.5%)
39,000 General Motors Corp. ............................. 2,606
21,900 J.C. Penney Co., Inc. ............................ 1,584
98,766 Meritor Automotive, Inc. ......................... 2,370
67,900 Ogden Corp. ...................................... 1,880
--------
8,440
--------
CONSUMER STAPLES (2.1%)
52,300 Philip Morris Cos., Inc. ......................... 2,059
--------
ENERGY (8.0%)
49,000 Ashland, Inc. .................................... 2,530
18,500 Atlantic Richfield Co............................. 1,445
17,400 Mobil Corp........................................ 1,333
77,100 USX-Marathon Group................................ 2,645
--------
7,953
--------
FINANCIAL (27.8%)
25,000 Allstate Corp..................................... 2,289
33,500 American General Corp............................. 2,385
19,130 Banc One Corp..................................... 1,068
25,800 BankAmerica Corp.................................. 2,231
32,800 BankBoston Corp................................... 1,825
20,100 Bankers Trust (New York) Corp..................... 2,333
32,200 Chase Manhattan Corp.............................. 2,431
13,200 Citicorp.......................................... 1,970
24,300 Fleet Financial Group, Inc........................ 2,029
34,800 Lincoln National Corp............................. 3,180
12,700 Loews Corp........................................ 1,106
14,700 Mellon Bank Corp.................................. 1,023
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------
31,800 PNC Bank Corp..................................... $ 1,711
47,500 St. Paul Cos., Inc................................ 1,998
--------
27,579
--------
HEALTH CARE (1.0%)
20,200 Bausch & Lomb, Inc. .............................. 1,013
--------
TECHNOLOGY (8.3%)
70,200 Harris Corp....................................... 3,137
(a)37,900 Litton Industries, Inc. .......................... 2,236
(a)16,100 Seagate Technology, Inc. ......................... 383
43,778 Texas Instruments, Inc. .......................... 2,553
--------
8,309
--------
TRANSPORTATION (4.7%)
(a)76,600 Continental Airlines, Inc., Class B............... 4,663
--------
UTILITIES (5.8%)
80,600 NIPSCO Industries, Inc. .......................... 2,257
43,100 Pinnacle West Capital Corp. ...................... 1,940
37,500 Texas Utilities Co. .............................. 1,561
--------
5,758
--------
TOTAL COMMON STOCKS (Cost $82,273)............................ 96,830
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT TERM INVESTMENT (0.8%)
REPURCHASE AGREEMENT (0.8%)
$ 736 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $736,
collateralized by U.S. Treasury Bonds, 11.25%,
due 2/15/15, valued at $756 (Cost $736)......... 736
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.3%) (Cost $83,009)........................... 97,566
--------
OTHER ASSETS (2.4%)
Receivable for Investments Sold......................... $ 2,243
Dividends Receivable.................................... 145
Receivable for Portfolio Shares Sold.................... 1
Other................................................... 14 2,403
-------
LIABILITIES ( - 0.7%)
Payable for Investments Purchased....................... (422)
Investment Advisory Fees Payable........................ (109)
Payable for Portfolio Shares Redeemed................... (32)
Administrative Fees Payable............................. (13)
Directors' Fees & Expenses Payable...................... (7)
Custodian Fees Payable.................................. (6)
Distribution Fee Payable................................ (2)
Other Liabilities....................................... (115) (706)
------- --------
NET ASSETS (100%).................................................. $99,263
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Value Equity Portfolio
116
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- ------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.............................................. $ 64,667
Undistributed Net Investment Income.......................... 342
Accumulated Net Realized Gain................................ 19,697
Unrealized Appreciation on Investments....................... 14,557
-----------
NET ASSETS................................................... $ 99,263
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -------------------------------------------------------------
NET ASSETS................................................... $96,806
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 6,442,774 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................ $15.03
-----------
-----------
CLASS B:
- -------------------------------------------------------------
NET ASSETS................................................... $2,457
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 163,938 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................ $14.99
-----------
-----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Value Equity Portfolio
117
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 6.9%
Banking 7.7%
Capital Goods 3.3%
Chemicals 0.6%
Communications 3.6%
Consumer--Durables 1.9%
Consumer--Retail 0.9%
Consumer--Service & Growth 0.9%
Consumer--Staples 1.0%
Energy 4.8%
Financial--Diversified 1.2%
Health Care 0.5%
Industrial 1.0%
Insurance 5.0%
Technology 3.4%
Transportation 3.1%
U.S. Treasury Notes 40.7%
Utilities 4.7%
Other 8.8%
</TABLE>
PERFORMANCE COMPARED TO INDATA
BALANCED-MEDIAN INDEX(1)
- -----------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
FIVE SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A......... 7.08% 16.28% 11.94% 11.46%
PORTFOLIO -- CLASS B......... 6.90 16.07 N/A 13.73
INDEX -- CLASS A............. 10.55 17.36 14.14 13.01
INDEX -- CLASS B............. 10.55 17.36 N/A 17.51
</TABLE>
1. The Indata Balanced-Median Index is an unmanaged index and includes an asset
allocation of 2.5% cash, 35.8% bonds and 61.7% equity based on $45.7 billion
in assets among 746 portfolios for the period ended June 30, 1998 (includes
dividends).
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.
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 Balanced Portfolio's value investment objective is to seek high total return
while preserving capital by investing in a combination of undervalued equity
securities and fixed income securities.
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%.
For the six months ended June 30, 1998, the Portfolio had a total return of
7.08% for the Class A shares and 6.90% for the Class B shares compared to a
total return of 10.55% for the Indata Balanced-Median Index (the "Index"). For
the one year ended June 30, 1998, the Portfolio had a total return of 16.28% for
the Class A shares and 16.07% for the Class B shares compared to a total return
of 17.36% for the Index. For the five-year period ended June 30, 1998, the
average annual total return of Class A was 11.94% compared to 14.14% for the
Index. From inception on February 20, 1990 through June 30, 1998, the average
annual total return of Class A was 11.46% compared to 13.01% for the Index. From
inception on January 2, 1996 through June 30, 1998, the average annual total
return of Class B was 13.73% compared to 17.51% for the Index.
For second quarter ended June 30, 1998, the Portfolio had a total return of
- -0.44% for the Class A shares and -0.55% for the Class B shares compared to
2.08% for the Index. According to LIPPER MUTUAL FUNDS QUARTERLY, the average
Balanced mutual fund returned 1.2% for the quarter ended June 30, 1998.
Our asset allocation, based on market value at June 30, 1998, is as follows:
<TABLE>
<S> <C>
Equities................................. 50.5%
Fixed Income............................. 40.7
Cash..................................... 8.8
---
100%
---
---
</TABLE>
EQUITIES
For the quarter ended June 30, 1998, the equity component of the Portfolio had a
gross return of - 2.3% and for the six months ended June 30, 1998
- --------------------------------------------------------------------------------
Balanced Portfolio
118
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
returned 10.9%. The S&P 500 Index returned 3.3% for the quarter ended June 30,
1998 and 17.7% for the six months ended June 30, 1998.
Mega-cap stocks dominated performance in the first half of 1998 resulting in
extremely narrow performance within the S&P 500. The top four stocks in that
index contributed 20% of the performance of the index, and the top 100
contributed approximately 75%. This environment has made it very difficult for
active managers to outperform, as most manage equally-weighted portfolios and
are underweight the largest and most influential stocks. The S&P 500 Index, on
an equally-weighted basis, returned 11.6% for the six months ended June 30,
1998, compared to the market cap-weighted index return of 17.7%. The divergence
in performance is even more pronounced when comparing small and large cap
indexes. The larger cap Russell 1000 Index returned 16.2% while the smaller cap
Russell 2000 Index returned 4.9% for the six months ended June 30, 1998. Within
the large cap indexes, growth stocks dominated value.
Contributing to this flight to safety in the mega cap stocks are concerns over
Asia, the continued flow of negative news from that region and the uncertain
impact on corporate profits. Fears of recession, as the economy has slowed from
the first quarter, and deflation fears has led to underperformance of cyclical
stocks and commodity based stocks. Both U.S. investors and accelerating cash
flows from foreign investors have sought the safety and comfort of large,
liquid, well known names. We believe the odds of the continued dominance by the
mega-cap stocks are limited by valuation.
The equity component of the 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.
<TABLE>
<CAPTION>
1998 CAP-WEIGHTED
PRICE-EARNINGS PRICE-TO-BOOK
------------- -------------
<S> <C> <C>
Portfolio -- equity
portion................... 14.9X 3.4X
S&P 500.................... 23.6X 5.9X
</TABLE>
During the first half, the best performing sectors in the equity portion of the
Portfolio, on an absolute basis, were health care, up 28%, transportation, up
20%, and technology, up 19%. Underperforming sectors included capital goods,
down 22%, and consumer non-durables and multi-industry, both down 11%. The best
performing stocks in the first half were Gulfstream Aerospace, up 59%, Phillips,
up 42%, Chase Manhattan, up 39%, and American General, up 33%. Stocks providing
the biggest disappointment included Case, down 20%, Philip Morris, down 11%,
AT&T, down 6%, and Ashland, down 3%.
The more significant changes we made to the equity component of the Portfolio in
the first half included increasing our exposure in the aircraft sector which,
when combined with the specific stocks selected, contributed positively to
performance. Gulfstream Aerospace, a position re-established during the second
quarter, was the top performing stock of the Portfolio. We also added to United
Technologies, established a position in Cordant Technologies (formerly Thiokol)
and swapped the position in Lockheed Martin for a smaller one in Northrop
Grumman.
In consumer non-durables, we sold the RJR Nabisco position in the mid-thirties,
as the tobacco legislative outlook deteriorated in Congress. At the same time,
we slightly decreased the position in Philip Morris, a less contrarian tobacco
name which is financially stronger to weather the coming tobacco battles, and
added Loews Corp. In consumer durables, we sold the Borg Warner position as a
sales shortfall in Korea and Japan, combined with lower than expected Ford
orders, resulted in flat earnings versus expectations of up 10%. Case Corp. has
became one of our larger holdings due to its attractive valuation, 10% earnings
per share growth and recent stock buyback announcement. Although estimates have
come down slightly, business fundamentals are strong, they signed a very good
long term UAW labor contract, but have suffered delayed shipments to the Former
Soviet Union. We also recently added Navistar to the Portfolio.
Our work to decrease the contrarian bets did pay off as we eliminated Louisiana
Pacific, Ryder, Georgia Pacific, Phelps Dodge and Woolworth, at prices above
quarter end prices, on average. In each case the business fundamentals continue
to deteriorate. In the chemical sector, we established a new position in
Millennium Chemicals while reducing the position in DuPont. In the
transportation area, we sold American Airlines, while adding to Continental
Airlines. Traffic growth is above average, Continental hubs are underserved, and
management is buying back stock. We believe the proposed Continental/Northwest
alliance will yield significant long term benefits to both carriers.
- --------------------------------------------------------------------------------
Balanced Portfolio
119
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
Compared to the S&P 500 Index, we continue to overweight utilities and financial
services, where we recently added positions in industry leaders Citicorp and
Allstate. We continue to 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 six months
ended June 30, 1998, the fixed income portion of the Portfolio had total return
of 3.4% compared to 3.5% for the Lehman Intermediate-Government/Corporate Index
(MSAM's fixed-income benchmark).
The fixed income component of the Portfolio began the year at a weighted average
maturity of 3.6 years and average duration of 3.2. During the first half of the
year, interest rates declined across all maturity spectrums, with the largest
reductions occurring in the ten-year and thirty-year bonds. At the end of the
first half of 1998, the fixed income component of the Portfolio had a weighted
average maturity of 3.1 years, and average duration of 2.9. With the uncertain
direction of the economy and inflation, and even possible deflationary
conditions from weakening Asian economies, expectations for interest rate cuts
seem to have outweighed any inflationary expectations caused by the continued
economic strength.
At a special meeting held on June 19, 1998, shareholders of the Balanced
Portfolio approved an agreement and plan of reorganization and liquidation. This
plan was effected on July 20, 1998 when all the assets and liabilities of the
Portfolio were transferred to the Balanced Portfolio of the MAS Funds managed by
Miller Anderson & Sherrerd, LLP, an affiliate of MSAM. Shareholders received
shares in the MAS Balanced Portfolio in exchange for their shares in the
Balanced Portfolio. (please see the Notes to the Financial Statements for
further details.)
Stephen C. Sexauer
PORTFOLIO MANAGER
Philip W. Friedman
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Balanced Portfolio
120
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (50.5%)
AEROSPACE (6.9%)
1,600 Cordant Technologies, Inc. ....................... $ 74
(a)700 Gulfstream Aerospace Corp. ....................... 33
(a)1,000 Litton Industries, Inc. .......................... 59
300 Loews Corp. ...................................... 26
600 Northrop Grumman Corp. ........................... 62
1,150 United Technologies Corp. ........................ 106
----------
360
----------
BANKING (7.7%)
550 Banc One Corp. ................................... 31
700 BankAmerica Corp. ................................ 61
900 BankBoston Corp. ................................. 50
550 Bankers Trust (New York) Corp. ................... 64
800 Chase Manhattan Corp. ............................ 60
700 Fleet Financial Group, Inc. ...................... 58
400 Mellon Bank Corp. ................................ 28
850 PNC Bank Corp. ................................... 46
----------
398
----------
CAPITAL GOODS (3.3%)
2,200 Case Corp. ....................................... 106
2,783 Meritor Automotive, Inc. ......................... 67
----------
173
----------
CHEMICALS (0.6%)
700 Olin Corp......................................... 29
----------
COMMUNICATIONS (3.6%)
1,100 AT&T Corp. ....................................... 63
850 Sprint Corp. ..................................... 60
1,400 U.S. WEST, Inc. .................................. 66
----------
189
----------
CONSUMER-DURABLES (1.9%)
1,050 General Motors Corp. ............................. 70
1,100 Steelcase, Inc. .................................. 29
----------
99
----------
CONSUMER-RETAIL (0.9%)
650 J.C. Penney Co., Inc. ............................ 47
----------
CONSUMER-SERVICE & GROWTH (0.9%)
1,600 Ogden Corp........................................ 44
----------
CONSUMER-STAPLES (1.0%)
1,325 Philip Morris Cos., Inc........................... 52
----------
ENERGY (4.8%)
1,400 Ashland, Inc...................................... 72
500 Atlantic Richfield Co. ........................... 39
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
400 E.I. DuPont de Nemours & Co. ..................... $ 30
500 Mobil Corp. ...................................... 38
2,000 USX-Marathon Group ............................... 69
----------
248
----------
FINANCIAL-DIVERSIFIED (1.2%)
400 Citicorp.......................................... 60
----------
HEALTH CARE (0.5%)
550 Bausch & Lomb, Inc. .............................. 27
----------
INDUSTRIAL (1.0%)
1,600 Millennium Chemicals, Inc. ....................... 54
----------
INSURANCE (5.0%)
700 Allstate Corp. ................................... 64
750 American General Corp. ........................... 53
950 Lincoln National Corp. ........................... 87
1,300 St. Paul Cos., Inc. .............................. 55
----------
259
----------
TECHNOLOGY (3.4%)
1,750 Harris Corp. ..................................... 78
300 Philips Electronics N.V. (NY Shares) ............. 25
(a)400 Seagate Technology, Inc. ......................... 10
1,100 Texas Instruments, Inc. .......................... 64
----------
177
----------
TRANSPORTATION (3.1%)
(a)2,100 Continental Airlines, Inc., Class B............... 128
(a)1,200 Navistar International Corp. ..................... 34
----------
162
----------
UTILITIES (4.7%)
1,300 Bell Atlantic Corp. .............................. 59
2,200 NIPSCO Industries, Inc. .......................... 62
1,500 Pinnacle West Capital Corp. ...................... 68
1,350 Texas Utilities Co. .............................. 56
----------
245
----------
TOTAL COMMON STOCKS (Cost $2,067)............................. 2,623
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
FIXED INCOME SECURITIES (40.7%)
U.S. TREASURY NOTES (40.7%)
$ 1,603 5.50%, 4/15/00.................................... 1,603
500 5.875%, 11/15/05.................................. 510
----------
TOTAL FIXED INCOME SECURITIES (Cost $2,067)................... 2,113
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Balanced Portfolio
121
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
SHORT TERM INVESTMENT (7.4%)
REPURCHASE AGREEMENT (7.4%)
$ 384 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $384,
collateralized by U.S. Treasury Bonds, 11.25%,
due 2/15/15, valued at $395 (Cost $384)......... $ 384
----------
TOTAL INVESTMENTS (98.6%) (Cost $4,518)....................... 5,120
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (2.0%)
Receivable for Investments Sold............... $ 65
Interest Receivable........................... 22
Due from Adviser.............................. 14
Dividends Receivable.......................... 4 105
----------
LIABILITIES ( - 0.6%)
Payable for Investments Purchased............. (9)
Custodian Fees Payable........................ (4)
Administrative Fees Payable................... (1)
Directors' Fees & Expenses Payable............ (1)
Other Liabilities............................. (14) (29)
---------- -----------
NET ASSETS (100%)........................................... $ 5,196
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
-------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 4,057
Undistributed Net Investment Income........................... 45
Accumulated Net Realized Gain................................. 492
Unrealized Appreciation on Investments........................ 602
----------
NET ASSETS.................................................... $ 5,196
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $4,957
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 618,128 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $8.02
----------
----------
CLASS B:
- --------------------------------------------------------------
NET ASSETS.................................................... $239
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 29,953 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $7.99
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Balanced Portfolio
122
<PAGE>
W[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 16.4%
Brazil 26.1%
Bulgaria 1.3%
Colombia 1.0%
Ecuador 0.9%
Indonesia 1.4%
Ivory Coast 0.3%
Jamaica 1.9%
Korea 4.1%
Mexico 19.6%
Peru 1.1%
Russia 29.6%
South Africa 0.7%
Thailand 1.7%
Turkey 5.4%
Venezuela 1.6%
Other -13.1%
</TABLE>
PERFORMANCE COMPARED TO THE J.P. MORGAN EMERGING
MARKETS BOND PLUS INDEX(1)
- ----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------ -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A... - 3.81% - 2.95% 15.47%
PORTFOLIO -- CLASS B... - 3.81 - 3.06 23.32
INDEX -- CLASS A - 1.08 1.39 11.35
INDEX -- CLASS B....... - 1.08 1.39 18.91
</TABLE>
1 The J.P. Morgan Emerging Markets Bond Plus Index is a total return index
tracking the traded U.S. dollar currency denominated instruments in the
emerging markets. The Index is composed of Brady Bonds, benchmark Eurobonds,
loans and Argentine domestic debt.
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.
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. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.
The investment objective of the Emerging Markets Debt Portfolio is high total
return through investment primarily in debt securities of government,
government-related and corporate issuers located in emerging countries.
For the six months ended June 30, 1998, the Portfolio had a total return of
- 3.81% for the Class A shares and - 3.81% for the Class B shares compared to
a total return of - 1.08% for the J.P. Morgan Emerging Markets Bond Plus Index
(the "Index"). For the one year ended June 30, 1998, the Portfolio had a total
return of - 2.95% for the Class A shares and - 3.06% for the Class B shares
compared to 1.39% for the Index. From inception on February 1, 1994 through June
30, 1998, the average annual total return of Class A was 15.47%, compared to
11.35% for the Index. From inception on January 2, 1996 through June 30, 1998,
the average annual total return of Class B was 23.32% compared to 18.91% for the
Index. As of June 30, 1998, the Portfolio had an SEC 30-day yield of 15.87% for
the Class A shares and 15.59% for the Class B shares.
Throughout the last two quarters the Asian region remained in the spotlight and
often dictated the tone of the market. In the first quarter emerging market debt
recovered a large portion of the losses realized in October of 1997, however the
market remained volatile during this period of spread compression, with general
market spreads oscillating within a 100 basis point range. In December a rally
spurred by Russia's improving external debt profile and Boris Yeltsin's
improving health was cut short by Asian currency volatility and the declining
economic condition of Korea and Indonesia. In January, a market sell-off caused
by Russian fiscal imbalances, historically low commodity prices and policy
inaction in Indonesia was reversed by the successful rescheduling of Korea's
short-term bank debt obligations. In February, dramatic swings in the current
account positions of Thailand and Korea combined with new evidence of Russia's
commitment to prudent fiscal policy helped bolster investor confidence, despite
continued uncertainty in Indonesia. Apparent economic and political
stabilization in the region buoyed investor sentiment, causing spreads to rally
to the mid 400's. When this period of calm proved to be temporary, spreads
widened out to above 600 basis points, as the "Asian Contagion" hit emerging
markets debt yet again.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
123
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
The second quarter started off uneventfully as financial markets globally
drifted sideways throughout the month of April. Relative stability in Asia and
Indonesia in particular allowed emerging market debt to rally despite political
uncertainty in Russia, Ecuador and Venezuela. This period of relative calm was
short lived as continued weakness in Asia and the forced resignation of former
President Suharto in Indonesia caused investors to reassess the risk premiums
required for all emerging market assets. Russia in particular came under
pressure. We decreased the Portfolio's exposure to Indonesia as the post-Suharto
political environment remained fragile with no "quick fix" in sight. Believing
that the market had overly penalized Russian debt, we shifted to an overweight
position in late May after Russian assets experienced a significant sell-off,
returning - 9.90% for the month.
The months of May and June saw the return of the kind of nervousness, investor
skepticism, and volatility in the emerging markets that we experienced during
the large sell off in 1994 and more recently in the Asian induced sell off
during the fourth quarter of 1997. The reasons for this round of volatility are
less obvious than past episodes, as there have not been the classic signs of a
decrease in global liquidity nor has this sell off been precipitated by
political/social instability in any major country. Interest rates continue to
stay low globally, there have not been large flows out of emerging market debt
mutual funds, global inflation remains quite well contained, and broadly
speaking, most emerging countries continue to pursue virtuous economic policies.
However, the ill health of the Japanese economy and of major Japanese banks has
caused investors to adjust risk premiums higher and has caused liquidity for
most emerging countries to evaporate. Investors fear that Japan's inability to
fix its economy will continue to weaken the yen and might eventually cause a
devaluation in China. This would increase the risk of another round of currency
devaluation in Asia and might further depress commodity prices, a large source
of earnings for many emerging countries. The good news is that markets have
considerably discounted such a negative scenario. While Asia continues to cast a
dark shadow over the emerging markets, any evidence of a turn around or
stabilization in Asia should allow prices on emerging market debt to recover
substantially.
In June, Russian debt underperformed the other emerging market bonds by a wide
margin again, with the Russian subcomponent of the Index returning - 13.85% for
the month. The dramatic sell off in Russian assets reflects investor's concerns
about short-term liquidity rather than longer term solvency issues. Russia
relies heavily on foreign debt and foreign investors in its local markets to
fund its budget deficit which has been aggravated this year by poor tax
collection resulting from low oil prices. As global liquidity has become scarce,
Russia has come under particular scrutiny as it relies on the markets for
constant funding. We believe that the new administration in Moscow has developed
a credible program and should survive its current predicament. The Russians are
working closely with the IMF and should come to terms, in the next two months,
for additional aid and an expanded program to bolster international reserves.
The current government is the most reform-minded since the collapse of communism
and it is in western government's interest to see them succeed. Russia's
deteriorating fiscal position is providing the impetus for the government to
conclude its negotiations with the IMF for additional aid. All of the Fund's
holdings in Russia are in U.S. dollar denominated securities and as such would
not be directly impacted by a devaluation of the rouble. We will continue to
overweight Mexico as we remain confident about the soundness of Mexico's
macroeconomics fundamentals. The Mexican economy is expected to register growth
of 5% this year and unlike 1995, growth is more balanced now as it is being
driven by both the export sector and the non-tradables sector. We continue to
underweight Venezuela due to the country's declining fiscal and political
condition.
Paul Ghaffari
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
124
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
DEBT INSTRUMENTS (106.0%)
ARGENTINA (16.4%)
CORPORATE (5.1%)
U.S.$ (e)1,900 Acindar Industria, (Floating Rate), 11.555%,
11/12/98........................................ $ 1,918
ARP (e)6,310 CIA International Telecommunications, 10.375%,
8/01/04......................................... 5,207
U.S.$ 391 Nortel Inversora, Series A, 6.00%, 3/31/07........ 352
(e)2,550 Supercanal Holdings, 11.50%, 5/15/05.............. 2,454
----------
9,931
----------
SOVEREIGN (11.3%)
(s)8,800 Republic of Argentina, Global Bond, Series BGL5,
11.375%, 1/30/17................................ 9,376
940 Republic of Argentina, Global Bond, 9.75%,
9/19/27......................................... 871
(s)13,110 Republic of Argentina, (Floating Rate), (Bearer),
6.625%, 3/31/05................................. 11,596
----------
21,843
----------
31,774
----------
BRAZIL (22.3%)
CORPORATE (1.1%)
(e)2,300 Globo Communicacoes e Participacoes, 10.625%,
12/05/08........................................ 2,049
----------
SOVEREIGN (21.2%)
(v)21,557 Federative Republic of Brazil, C Bond, (Floating
Rate), (Registered), PIK, 8.00%, 4/15/14........ 15,885
(s,v)16,684 Federative Republic of Brazil, Series EI-L,
(Floating Rate), 6.625%, 4/15/06................ 13,738
(s)12,800 Federative Republic of Brazil, Global Bond,
9.375%, 4/07/08................................. 11,507
----------
41,130
----------
43,179
----------
BULGARIA (1.3%)
SOVEREIGN (1.3%)
(n,v)400 Republic of Bulgaria Front Loaded Interest
Reduction Bond, Series A, 2.25%, 7/28/12........ 248
(v)3,300 Republic of Bulgaria Interest Arrears PDI Bond,
(Floating Rate), 6.563%, 7/28/11................ 2,365
----------
2,613
----------
COLOMBIA (1.0%)
SOVEREIGN (1.0%)
2,190 Republic of Colombia, Global Bond, 7.625%,
2/15/07......................................... 1,978
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
ECUADOR (0.9%)
CORPORATE (0.9%)
U.S.$ 1,500 Conecel, 14.00%, 5/01/02.......................... $ 1,500
100 Consorcio Ecuatorian Notes, 14.00%, 5/01/02....... 100
----------
1,600
----------
INDONESIA (1.4%)
CORPORATE (1.4%)
3,450 Tjiwi Kimia International Company Guaranteed
Notes, 13.25%, 8/01/01.......................... 2,664
----------
IVORY COAST (0.3%)
SOVEREIGN (0.3%)
FRF (v)12,725 Republic of Ivory Coast Front Loaded Interest
Reduction Bond, (Floating Rate), 2.00%,
3/29/18......................................... 634
----------
JAMAICA (1.9%)
CORPORATE (1.9%)
U.S.$ 4,000 Mechala Group, Jamaica, Series B, 12.75%,
12/30/99........................................ 3,680
----------
KOREA (4.1%)
SOVEREIGN (4.1%)
4,900 Export-Import Bank of Korea, 6.50%, 10/06/99...... 4,625
3,650 Korea Development Bank, Global Bond, 7.125%,
9/17/01......................................... 3,228
----------
7,853
----------
MEXICO (19.6%)
CORPORATE (3.3%)
4,500 Empresas ICA Sociedad Controladora, (Registered),
11.875%, 5/30/01................................ 4,793
(e)1,550 Innova S De R.L. Senior Notes, 12.875%, 4/01/07... 1,589
----------
6,382
----------
SOVEREIGN (16.3%)
(v)1,150 United Mexican States Discount Bond, Series A,
(Floating Rate), 6.594%, 12/31/19............... 1,034
(v)500 United Mexican States Discount Bond, Series B,
(Floating Rate), 6.477%, 12/31/19............... 450
(v)1,100 United Mexican States Discount Bond, Series D,
(Floating Rate), 6.602%, 12/31/19............... 989
(s)9,750 United Mexican States Global Bond, 9.875%,
1/15/07......................................... 10,147
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
125
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
MEXICO (CONT.)
SOVEREIGN (CONT.)
<TABLE>
<C> <S> <C>
U.S.$ 1,500 United Mexican States Global Bond, 11.375%,
9/15/16......................................... $ 1,673
15,250 United Mexican States Global Bond, 11.50%,
5/15/26......................................... 17,335
----------
31,628
----------
38,010
----------
PERU (1.1%)
SOVEREIGN (1.1%)
(e,n,v)2,348 Republic of Peru Front Loaded Interest Reduction
Bond, 3.25%, 3/07/17............................ 1,312
(n,v)1,350 Republic of Peru Front Loaded Interest Reduction
Bond, 3.25%, 3/07/17............................ 754
----------
2,066
----------
RUSSIA (29.6%)
CORPORATE (2.0%)
(e)1,000 UnExim International Finance BV, 9.875%,
8/01/00......................................... 761
4,150 UnExim International Finance BV, 9.875%,
8/01/00......................................... 3,159
----------
3,920
----------
SOVEREIGN (27.6%)
(v)30,490 Russian Principal Loans, (Floating Rate), 3.313%,
12/15/20........................................ 14,483
6,200 Ministry of Finance Russia Debentures, Series III
14.00%, 5/19/99................................. 5,247
1,950 Ministry of Finance Russia Debentures, Series IV
3.00%, 5/14/03.................................. 1,124
(e)23,060 Ministry of Finance Russia, 11.75%, 6/10/03....... 20,408
5,580 Ministry of Finance Russia, 10.00%, 6/26/07....... 4,220
(e)7,820 Ministry of Finance Russia, 12.75%, 6/24/28....... 6,989
5 Russian Interest Arrears Note, (Floating Rate),
6.625%, 12/15/15................................ 3
1,656 Russian Interest Arrears Note, Series 19YR,
(Floating Rate), 6.625%, 12/15/15............... 921
----------
53,395
----------
57,315
----------
SOUTH AFRICA (0.7%)
SOVEREIGN (0.7%)
ZAR 8,000 Nacional Financiera SNC, Euro, 17.00%, 2/26/99.... 1,324
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
THAILAND (1.7%)
SOVEREIGN (1.7%)
U.S.$ 3,300 Kingdom of Thailand, 8.70%, 8/01/99............... $ 3,310
----------
TURKEY (2.1%)
SOVEREIGN (2.1%)
1,600 Pera Financial Services Co., 9.375%, 10/15/02..... 1,428
(e)2,900 Pera Financial Services Co., 9.375%, 10/15/02..... 2,588
----------
4,016
----------
VENEZUELA (1.6%)
SOVEREIGN (1.6%)
(s,v)3,845 Republic of Venezuela Debt Conversion Bond, Series
DL, (Floating Rate), 6.625%,
12/18/07........................................ 3,148
----------
TOTAL DEBT INSTRUMENTS (Cost $222,258)............................... 205,164
----------
STRUCTURED INVESTMENTS (3.8%)
BRAZIL (3.8%)
SOVEREIGN (3.8%)
7,500 Salomon Brothers Federative Republic of Brazil
Credit Linked Enhanced Note, 9.00%, 1/05/99
(Cost $7,500)................................... 7,402
----------
NO. OF
RIGHTS
- -----------------
RIGHTS (0.0%)
MEXICO (0.0%)
(a)4,539 United Mexican States, Value Recovery Rights,
expiring 6/30/03 (Cost $0)...................... --
----------
NO. OF
WARRANTS
(000)
- -----------------
WARRANTS (0.0%)
NIGERIA (0.0%)
(a)1,250 Central Bank of Nigeria, expiring 11/15/20 (Cost
$0)............................................. --
----------
FACE
AMOUNT
(000)
- -----------------
SHORT-TERM INVESTMENTS (5.9%)
TURKEY (3.3%)
TREASURY BILLS (3.3%)
TRL 1,039,850,000 75.00%, 8/19/98................................... 3,553
861,050,000 28.30%, 9/02/98................................... 2,877
----------
6,430
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
126
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
UNITED STATES (2.6%)
REPURCHASE AGREEMENT (2.6%)
U.S.$ 5,054 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $5,055,
collateralized by U.S. Treasury Bonds, 6.625%,
due 2/15/27, valued at $5,175................... $ 5,054
----------
TOTAL SHORT-TERM INVESTMENTS (Cost $11,730).......................... 11,484
----------
FOREIGN CURRENCY (0.6%)
FRF 5,758 French Franc...................................... 952
DEM 247 German Mark....................................... 137
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL FOREIGN CURRENCY (Cost $1,081)................................... 1,089
--------
TOTAL INVESTMENTS (116.3%) (Cost $242,569)............................. 225,139
--------
OTHER ASSETS (10.9%)
Cash..................................................... $ 5,905
Receivable for Investments Sold.......................... 9,733
Interest Receivable...................................... 5,194
Net Unrealized Gain on Foreign Currency Exchange
Contracts.............................................. 215
Receivable for Portfolio Shares Sold..................... 23
Dividends Receivable..................................... 3
Other.................................................... 7 21,080
----------
LIABILITIES ( - 27.2%)
Payable for Reverse Repurchase Agreement................. (31,749)
Payable for Investments Purchased........................ (10,515)
Payable for Closed Reverse Repurchase Agreements......... (8,963)
Payable for Portfolio Shares Redeemed.................... (575)
Investment Advisory Fees Payable......................... (513)
Custodian Fees Payable................................... (115)
Administrative Fees Payable.............................. (27)
Payable for Foreign Taxes................................ (15)
Directors' Fees & Expenses Payable....................... (11)
Distribution Fee Payable................................. (3)
Other Liabilities........................................ (114) (52,600)
---------- --------
NET ASSETS (100%)...................................................... $193,619
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital........................................................ $213,809
Undistributed Net Investment Income.................................... 9,175
Accumulated Net Realized Loss.......................................... (12,094)
Unrealized Depreciation on Investments and Foreign Currency
Translations......................................................... (17,271)
--------
NET ASSETS............................................................. $193,619
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -----------------------------------------------------------------------
NET ASSETS............................................................. $189,461
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 34,120,797 outstanding $0.001 par value shares
(authorized 500,000,000 shares)...................................... $5.55
--------
--------
CLASS B:
- -----------------------------------------------------------------------
NET ASSETS............................................................. $4,158
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 749,092 outstanding $0.001 par value shares (authorized
500,000,000 shares).................................................. $5.55
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
NET
UNREALIZED
CURRENCY TO IN EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ---------- ------------- -------- --------
ZAR 8,226 $ 1,385 7/07/98 U.S.$ 1,600 $ 1,600 $ 215
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(e) -- 144A security -- certain conditions for public sale may exist.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1998. Maturity date disclosed is the
ultimate maturity.
(s) -- Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of June 30, 1998 -- see note A-4 to
financial statements.
(v) -- Security is a Brady Bond, created through the debt restructuring
exchange of commercial bank loans to foreign entities for new fixed
income obligations. These bonds may be collateralized and are actively
traded on the over-the-counter secondary market.
ARP -- Argentine Peso
PDI -- Past Due Interest
PIK -- Payment-In-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
TRL -- Turkish Lira
ZAR -- South African Rand
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate. The rates shown are those in effect at June
30, 1998.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
127
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Asset Backed Securities 10.0%
Corporate Bonds & Notes 30.5%
U.S. Government & Agency Obligations 51.0%
Other 8.5%
</TABLE>
PERFORMANCE COMPARED TO THE LEHMAN
AGGREGATE BOND INDEX(1)
- ----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A.......... 3.91% 10.37% 6.96% 8.49%
PORTFOLIO -- CLASS B.......... 3.84 10.20 N/A 7.09
INDEX -- CLASS A.............. 3.93 10.54 6.88 8.49
INDEX -- CLASS B.............. 3.93 10.54 N/A 6.91
</TABLE>
1. The Lehman Aggregate Bond Index is an unmanaged index comprised of the
Government/Corporate Index, the Mortgage-Backed Securities Index and the
Asset-Backed Securities Index.
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.
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 Fixed Income Portfolio invests primarily in a diversified portfolio of U.S.
Government securities, corporate bonds (including competitively priced
Eurodollar bonds), mortgage-backed securities and other fixed income securities.
Targeted rates of return for the Portfolio are based on current and projected
market and economic conditions and on a conservative investment management
approach.
For the six months ended June 30, 1998, the Portfolio had a total return of
3.91% for the Class A shares and 3.84% for the Class B shares compared to a
total return of 3.93% for the Lehman Aggregate Bond Index (the "Index"). For the
one year ended June 30, 1998, the Portfolio had a total return of 10.37% for the
Class A shares and 10.20% for the Class B shares compared to 10.54% for the
Index. For the five-year period ended June 30, 1998, the average annual total
return of Class A was 6.96% compared to 6.88% for the Index. From inception on
May 15, 1991 through June 30, 1998, the average annual total return of Class A
was 8.49% compared to 8.49% for the Index. From inception on January 2, 1996
through June 30, 1998, the average annual total return of Class B was 7.09%
compared to 6.91% for the Index. As of June 30, 1998, the Portfolio had an SEC
30-day yield of 5.81% for the Class A shares and 5.66% for the Class B shares.
The second quarter of 1998 brought with it a second round of Asian economic
turmoil. The lack of desire or willingness of Japan's leadership to address the
growing economic problems and the decline of the yen in the currency markets
exacerbated the Asian decline. Aftershocks have been felt throughout Asia and
had a peripheral effect on other markets and economies outside that region.
The impact of all of this on the U.S. economy has been somewhat mixed. While
domestic housing, consumption, and employment data during the second quarter
continued to suggest a very healthy economy, there is some evidence that the
export-related portions of the manufacturing sector have been unfavorably
impacted by both the dollar's recent strength and by Asia's economic weakness.
Against this backdrop, it came as no surprise that the Federal Open Market
Committee elected to leave monetary policy unchanged at its most recent meeting.
Although the Fed has maintained a publicly-stated bias in favor of a tighter
monetary policy, we believe the central bank is unlikely to raise rates unless
and until there is clearer evidence of growing inflationary pressures.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
128
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (CONT.)
While Asia's economic difficulties will remain a source of concern, our view is
that the region's key policy makers and the major industrialized countries
understand how to deal with this latest phase of the crisis. An example of this
is Japan's recent creation of a mechanism to help resolve some of its banking
problems. While this is just one piece of the puzzle, it is nevertheless an
important milestone along the road to eventual recovery for Asia's affected
economies.
We began the second quarter with neutral duration compared to our benchmark.
During the latter half of the first quarter, interest rate volatility had became
quite pronounced and we believed that until a more defined trend developed this
would be a prudent strategy. Around the middle of May, the bond markets began to
focus on the slowing effects of the Asian crisis and a more positive trend
developed. We began to extend the duration of the portfolio and finished the
quarter with a target of 0.4 to 0.5 year longer than the benchmark. Despite the
historically flat yield curve, we slightly overweighted the longer end of the
curve believing we could capitalize on very constructive technical circumstances
associated with the reduced issuance of long Treasury bonds.
Corporate bond yield spreads widened during the quarter, particularly Yankee
issues associated with Asia. Our exposure in this sector was very limited. Near
record levels of corporate issuance also put pressure on spreads. Our weighting
in corporate issues finished the quarter slightly greater than the benchmark. We
continue to believe that some of the better values are with the insurance and
bank names we have held for some time.
We anticipate maintaining a moderately bullish duration strategy over the near
term. With Gross Domestic Product expected to moderate over the next several
quarters and inflation to remain tame, the favorable interest rate trend should
continue. We expect to slightly increase our allocation to investment grade
corporate bonds. The recent underperformance of this sector is providing, in our
opinion, an attractive buying opportunity. Seasonally, we find that corporates
usually outperform Treasury's on a duration-adjusted basis during the third
quarter. Over the past 15 years, corporates have bested their Treasury
benchmarks nearly 70% of the time, with a perfect record over the past five
years. Attractive spreads within the mortgage market also leads us to desire a
slightly overweight position. Yield spreads are at or near the widest levels of
the year. We expect to concentrate on mortgage securities trading at moderate
discount prices.
Warren Ackerman, III
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Fixed Income Portfolio
129
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
FIXED INCOME SECURITIES (91.5%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (51.0%)
U.S. TREASURY BONDS (12.8%)
$ 5,000 6.25%, 8/15/23.................................... $ 26,766
----------
U.S. TREASURY NOTES (15.0%)
8,000 6.00%, 7/31/02.................................... 8,135
12,000 7.25%, 8/15/04.................................... 13,056
10,000 6.50%, 8/15/05.................................... 10,553
----------
31,744
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (0.0%)
8 13.00%, 9/01/10................................... 9
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (17.6%)
3,515 6.00%, 9/01/10.................................... 3,487
4,739 6.00%, 2/01/11.................................... 4,691
3,194 8.00%, 2/01/12.................................... 3,304
7,378 6.00%, 4/01/13.................................... 7,298
8,063 6.50%, 4/01/24.................................... 8,075
10,039 6.50%, 5/01/28.................................... 9,999
----------
36,854
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (5.6%)
6,363 7.50%, 8/15/26.................................... 6,541
5,117 7.00%, 2/15/28.................................... 5,198
----------
11,739
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS....................... 107,112
----------
CORPORATE BONDS AND NOTES (30.5%)
CONSUMER STAPLES (1.2%)
2,500 Philip Morris Cos., Inc., (Floating Rate), 6.15%,
3/15/00......................................... 2,500
----------
ELECTRICAL EQUIPMENT (1.0%)
2,000 Ford Motor Co., 6.625%, 2/15/28................... 2,002
----------
ELECTRONICS (2.5%)
3,000 Sony Corp., 6.125%, 3/04/03....................... 3,007
2,000 Telefonica de Argentina, (Yankee Bond), 11.875%,
11/01/04........................................ 2,150
----------
5,157
----------
FINANCE (22.2%)
(e)2,000 American General Institutional Capital, Series A,
7.57%, 12/01/45................................. 2,143
(e)2,000 BT Capital Trust, Series B1, 7.90%, 1/15/27....... 2,112
2,250 Cincinnati Financial Corp., 6.90%, 5/15/28........ 2,299
3,000 CNA Financial Corp., 6.50%, 4/15/05............... 3,010
2,000 Donaldson, Lufkin & Jenrette, Inc., 6.90%,
10/01/07........................................ 2,073
(e)2,000 First Chicago Corp., 7.75%, 12/01/26.............. 2,165
3,298 First Union-Lehman Brothers Commercial Mortgage,
Series 97-C2, Class A1, 6.60%, 3/18/04.......... 3,338
2,000 Ford Motor Credit Co., 6.125%, 4/28/03............ 2,000
2,500 General Motors Acceptance Corp., 7.375%,
6/22/00......................................... 2,565
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
$ (e)3,000 Goldman Sachs Group, 6.25%, 2/01/03............... $ 3,033
(e)1,750 Hutchison Whampoa Ltd., Class B, 7.45%, 8/01/17... 1,388
1,300 Lehman Brothers Holdings, Inc., 7.375%, 5/15/04... 1,369
4,089 Lehman Brothers Large Loan, Series 97-LLI A1,
6.79%, 10/15/34................................. 4,209
(e)3,000 Liberty Mutual Insurance Co., 8.20%, 5/04/07...... 3,384
(e)1,500 Lumbermens Mutual Casualty Co., Series A1, 9.15%,
7/01/26......................................... 1,807
3,000 Merrill Lynch & Co., 6.00%, 2/12/03............... 2,988
2,000 Salomon, Inc., 7.30%, 5/15/02..................... 2,072
1,500 Simon Debartolo Group, Series MTN, 7.125%,
9/20/07......................................... 1,543
(e)2,955 World Financial Credit, 6.91%, 9/01/13............ 3,065
----------
46,563
----------
HEALTH CARE SUPPLIES & SERVICES (0.8%)
1,500 Columbia/HCA Healthcare, Series MTN, 8.85%,
1/01/07......................................... 1,606
----------
INDUSTRIAL (2.1%)
2,500 Endesa-Chile, 7.75%, 7/15/08...................... 2,494
(e)2,000 Oil Enterprises Ltd., 6.239%, 6/30/08............. 2,000
----------
4,494
----------
RETAIL-GENERAL (0.7%)
1,500 Nordstrom, Inc., 6.95%, 3/15/28................... 1,531
----------
TOTAL CORPORATE BONDS AND NOTES.................................... 63,853
----------
ASSET BACKED SECURITIES (10.0%)
(e)3,000 Aesop Funding II LLC, Series 97-1, Class A1,
6.22%, 10/20/01................................. 3,022
733 Chase Commercial Mortgage Securities Corp., Series
97-2, Class A1, 6.45%, 12/19/04................. 746
4 Federal National Mortgage Association, REMIC,
Series 92-59, Class F, (Floating Rate), 6.09%,
8/25/06......................................... 4
5,000 Ford Credit Auto Owner Trust, Series 98-B, Class
A3, 5.85%, 10/15/01............................. 4,994
1,500 First Plus Home Loan Trust, Series 97-4, Class A4,
6.57%, 4/10/13.................................. 1,513
2,958 Merrill Lynch Mortgage Investors, Inc., Series
98-C2, Class A1, 6.22%, 2/15/30................. 2,973
2,832 Mid-State Trust, Series IV A, 8.33%, 4/01/30...... 3,104
1,389 Resolution Trust Corp., Series 91-M5, Class A,
9.00%, 3/25/17.................................. 1,417
(e)3,250 Team Fleet Financing Corp., Series 97-1A, 7.35%,
5/15/03......................................... 3,367
----------
TOTAL ASSET BACKED SECURITIES...................................... 21,140
----------
TOTAL FIXED INCOME SECURITIES (Cost $189,544)........................ 192,105
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
130
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
SHORT TERM INVESTMENT (11.1%)
REPURCHASE AGREEMENT (11.1%)
$ 23,341 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $23,345,
collateralized by U.S. Treasury Notes, 5.50%,
due 2/28/03, valued at $23,843 (Cost $23,341)... $ 23,341
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (102.6%) (Cost $212,885)............................. 215,446
--------
OTHER ASSETS (1.3%)
Interest Receivable...................................... $ 2,626
Receivable for Investments Sold.......................... 15
Receivable for Portfolio Shares Sold..................... 10
Other.................................................... 9 2,660
----------
LIABILITIES (-3.9%)
Payable for Investments Purchased........................ (5,011)
Payable for Portfolio Shares Redeemed.................... (2,993)
Investment Advisory Fees Payable......................... (112)
Administrative Fees Payable.............................. (29)
Custodian Fees Payable................................... (14)
Directors' Fees & Expenses Payable....................... (10)
Bank Overdraft Payable................................... (2)
Distribution Fee Payable................................. (2)
Other Liabilities........................................ (15) (8,188)
---------- --------
NET ASSETS (100%)...................................................... $209,918
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital...................................................... $ 206,294
Undistributed Net Investment Income.................................. 1,108
Accumulated Net Realized Loss........................................ (45)
Unrealized Appreciation on Investments............................... 2,561
----------
NET ASSETS........................................................... $ 209,918
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------------------------
NET ASSETS........................................................... $205,720
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 18,622,050 outstanding $0.001 Par value shares
(authorized 500,000,000 shares).................................... $11.05
----------
----------
CLASS B:
- ---------------------------------------------------------------------
NET ASSETS........................................................... $4,198
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 379,714 outstanding $0.001 Par value shares
(authorized 500,000,000 shares).................................... $11.06
----------
----------
</TABLE>
- ------------------------------------------------------------
(e) -- 144A Security -- certain conditions for public sale may exist.
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate. The rates shown are those in effect on June
30, 1998.
REMIC -- Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
131
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australian Dollar 6.7%
British Pound 7.9%
Canadian Dollar 4.1%
Danish Krone 4.9%
French Franc 4.4%
German Mark 18.5%
Italian Lira 6.8%
Japanese Yen 3.3%
Swedish Krona 6.8%
United States Dollar 31.1%
Other 5.5%
</TABLE>
PERFORMANCE COMPARED TO THE J.P. MORGAN TRADED
GLOBAL BOND INDEX(1)
- --------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A........... 3.43% 6.12% 5.96% 7.40%
PORTFOLIO -- CLASS B........... 3.39 5.91 N/A 4.32
INDEX -- CLASS A............... 3.27 5.87 6.63 8.41
INDEX -- CLASS B............... 3.27 5.87 N/A 3.64
</TABLE>
1. The J.P. Morgan Traded Global Bond Index is an unmanaged index of securities
and includes Australia, Belgium, Canada, Denmark, France, Germany, Italy,
Japan, The Netherlands, Spain, Sweden, the United Kingdom and the United
States.
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.
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. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.
The Global Fixed Income Portfolio aims to produce an attractive real rate of
return by investing in fixed income securities issued by U.S. and foreign issues
including governments, agencies, supranational entities, eurobonds and
corporations with varying maturities in various currencies.
For the six months ended June 30, 1998, the Portfolio had a total return of
3.43% for the Class A shares and 3.39% for the Class B shares compared to a
total return of 3.27% for the J.P. Morgan Traded Global Bond Index (the
"Index"). For the one year ended June 30, 1998, the Portfolio had a total return
of 6.12% for the Class A shares and 5.91% for the Class B shares compared to
5.87% for the Index. For the five-year period ended June 30, 1998, the average
annual total return of Class A was 5.96% compared to 6.63% for the Index. From
inception on May 1, 1991 through June 30, 1998, the average annual total return
of Class A was 7.40% compared to 8.41% for the Index. From inception on January
2, 1996 through June 30, 1998, the average annual total return of Class B was
4.32% compared to 3.64% for the Index. As of June 30, 1998, the Portfolio had an
SEC 30-day yield of 4.42% for the Class A shares and 4.27% for the Class B
shares.
The Asian economic crisis and the resultant weakness in world trade and
commodity prices continued to provide an attractive environment for global bonds
during the first half of 1998.
As secondary negative macroeconomic shocks have emerged within the Asian
countries, growth expectations for the region, and particularly Japan, have been
further marked down. While the impact to growth in the U.S. and western Europe
has been overshadowed by the strength of the domestic economies to-date,
expectations are for a broader downturn in the second half of the year. This
coupled with a general flight to quality from the emerging markets saw all
global fixed income markets produce solid local currency returns over the
period.
In the U.S., ten-year yields fell 30 basis points as treasuries gained on
dollar/yen strength, benign inflation data and the perception that any
tightening by the Federal Reserve was now on hold. The European markets produced
a better performance as the lower inflation outlook led to a further downgrading
of interest rate expectations and ten-year yields generally fell 42-62 basis
points. The continued move towards monetary union was also a dominant
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
132
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO (CONT.)
theme within Europe with the release of various European convergence reports
clearing the way for the start of monetary union with eleven qualifying
countries. However, as Italian, Spanish and Irish yields had already nearly
fully converged with those in Germany, the main beneficiary was Sweden, a
potential second stage member, where ten-year yields fell 100 basis points. The
U.K. market was one of the poorest performers, hurt by higher than expected
inflation data and a surprise quarter point rise in base rates in June. In
Japan, the further deterioration of the economy to close to depression-like
conditions and investor scepticism regarding the latest fiscal package continued
to support the bond market, and ten-year yields fell 18 basis points.
Global returns in U.S. dollars were reduced due to general dollar appreciation
over the period. While the U.S. currency was broadly stable against the European
currencies, it experienced sharp rises against the Japanese yen and the other
dollar bloc currencies. During the period, the dollar appreciated 6.3% versus
the yen and 5.0% versus the Australian dollar whose proximity to Asia appeared
to further it's correlation with the yen.
These developments resulted in a 3.27% return in dollar terms for the Index over
the six month period. Significant contributory factors to the outperformance of
the Portfolio were the underweight exposure to both Japanese interest rate risk
and the yen. The overweighting to Swedish bonds and for part of the period to
sterling also aided relative performance. Our cautious approach to duration
outside of Japan proved to be a negative factor.
Our strategy remained broadly unchanged throughout the first quarter. However,
we implemented a significant shift in exposure in June in response to our more
negative interpretation of the Asian crisis and our concern that investors may
start pricing in a higher risk premium for Japanese assets. We sold Japanese
bonds, extending our underweight position, and purchased both dollar bloc and
European bonds, taking our interest rate exposure in both regions to overweight
and our overall portfolio exposure to neutral. On the currency side, we
increased our underweighting to the Japanese yen in favor of the U.S. dollar
throughout the period. Following the Federal Reserve's intervention in the
currency markets to support yen/dollar, we also reduced our underweight yen
position.
We believe that Japan and the level of the Japanese yen are now key to any
recovery within the Asian economies. However, we remain unconvinced of the
Japanese government's commitment to providing any near term effective stimulus
to their economy. While talk of permanent tax cuts and a 'bridge bank' scheme
are positive, investors need clearer indications of policy implementation. It is
difficult to predict what will happen in Japan and Asia, but on balance, we feel
that the Asian crisis together with it's negative implications for global growth
has further to run. These fundamentals should continue to support global bonds
and also to sustain the ongoing flight to quality from the emerging markets. We
are therefore positive on global bond markets with the exception of Japan.
However, caution is also required, as U.S. bond yields are at their lowest level
since 1993 and Japanese and European yields are also at all-time lows. It is
therefore difficult to justify extending interest rate exposure unless we expect
economic conditions globally to worsen from the already negative scenario priced
into the markets. We are therefore positioned for neutral interest rate exposure
overall, expecting bonds to remain a potentially good performing asset class
over the remainder of the year.
J. David Germany
PORTFOLIO MANAGER
Michael B. Kushma
PORTFOLIO MANAGER
Paul F. O'Brien
PORTFOLIO MANAGER
Ram Willner
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
133
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
FIXED INCOME SECURITIES (94.5%)
AUSTRALIAN DOLLAR (6.7%)
GOVERNMENT BONDS (4.0%)
AUD 1,800 Government of Australia, Series 1101,
12.00%, 11/15/01............................... $ 1,345
1,200 Government of Australia, Series 206, 10.00%,
2/15/06........................................ 949
400 Government of Australia, Series 808, 8.75%,
8/15/08........................................ 308
--------
2,602
--------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS-GLOBAL (2.7%)
1,000 Federal National Mortgage Association - Global
6.375%, 8/15/07................................ 641
1,800 Federal National Mortgage Association - Global
6.50%, 7/10/02................................. 1,147
--------
1,788
--------
4,390
--------
BRITISH POUND (7.9%)
GOVERNMENT BONDS (7.9%)
GBP 200 United Kingdom Conversion Gilt 9.00%, 7/12/11.... 430
800 United Kingdom Treasury Gilt 8.50%, 12/07/05..... 1,526
1,650 United Kingdom Treasury Gilt 8.50%, 7/16/07...... 3,242
--------
5,198
--------
CANADIAN DOLLAR (4.1%)
GOVERNMENT BONDS (4.1%)
CAD 2,900 Government of Canada 8.75%, 12/01/05............. 2,376
350 Government of Canada 8.00%, 6/01/23.............. 317
--------
2,693
--------
DANISH KRONE (4.9%)
GOVERNMENT BONDS (4.9%)
DKK 4,200 Kingdom of Denmark 9.00%, 11/15/00............... 673
15,400 Kingdom of Denmark 8.00%, 5/15/03................ 2,563
--------
3,236
--------
FRENCH FRANC (4.4%)
GOVERNMENT BONDS (4.4%)
FRF 8,500 BTAN 5.50%, 10/12/01............................. 1,457
7,500 Government of France O.A.T. 7.25%, 4/25/06....... 1,444
--------
2,901
--------
GERMAN MARK (18.5%)
EUROBONDS (4.4%)
DEM 1,300 KFW International Finance, Inc. 7.50%, 1/24/00... 758
3,500 Landeskreditbank Baden-Wuerttemberg Financial
6.625%, 8/20/03................................ 2,111
--------
2,869
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
GOVERNMENT BONDS (14.1%)
DEM 1,000 Deutschland Republic, Series 97 6.00%, 1/04/07... $ 601
5,100 Deutschland Republic, Series 95 6.50%,
10/14/05....................................... 3,142
2,000 German Unity Bond 8.00%, 1/21/02................. 1,242
2,500 Government of Germany 6.25%, 1/04/24............. 1,562
4,300 Treuhandanstalt 7.50%, 9/09/04................... 2,753
--------
9,300
--------
12,169
--------
ITALIAN LIRA (6.8%)
GOVERNMENT BONDS (6.8%)
ITL 2,800,000 BTPS 10.00%, 8/01/03............................. 1,945
1,450,000 BTPS 9.50%, 1/01/05.............................. 1,023
2,100,000 BTPS 9.50%, 2/01/06.............................. 1,519
--------
4,487
--------
JAPANESE YEN (3.3%)
EUROBONDS (3.3%)
JPY 150,000 International Bank for Reconstruction &
Development 4.75%, 12/20/04.................... 1,314
100,000 Japan Development Bank 6.50%, 9/20/01............ 850
--------
2,164
--------
SWEDISH KRONA (6.8%)
GOVERNMENT BONDS (6.8%)
SEK 13,100 Swedish Government 13.00%, 6/15/01............... 2,026
18,100 Swedish Government 6.00%, 2/09/05................ 2,426
--------
4,452
--------
UNITED STATES DOLLAR (31.1%)
ASSET BACKED SECURITIES (5.0%)
U.S.$ 750 Asset Securitization Corp., CMO, Series 96-D3 A1
B 7.21%, 10/13/26.............................. 788
535 Asset Securitization Corp., CMO, Series 95-MD4 A1
7.10%, 8/13/29................................. 560
130 CISCE Series 97-1 Class A7 6.42%, 12/26/09....... 134
460 Delta Funding Home Equity Loan Trust, Series 97-1
7.21%, 4/25/29................................. 476
764 LB Commercial Conduit Mortgage Trust, (Floating
Rate), CMO 7.14%, 8/25/04...................... 788
516 Mid-State Trust, Series IV A 8.33%, 4/01/30...... 561
--------
3,307
--------
CORPORATE BONDS AND NOTES (4.0%)
(e)500 BankAmerica Institutional, Series B 7.70%,
12/31/26....................................... 531
(e)300 BT Institutional Capital Trust, Series A 8.09%,
12/01/26....................................... 324
(e)150 First Chicago Corp. 7.75%, 12/01/26.............. 163
385 Goldman Sachs Group 6.25%, 2/01/03............... 389
(e)300 Lumbermens Mutual Casualty Co., Series AI 9.15%,
7/01/26........................................ 360
(e)300 Metropolitan Life Insurance 7.45%, 11/01/23...... 301
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
134
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED STATES DOLLAR (CONT.)
CORPORATE BONDS AND NOTES (CONT.)
<TABLE>
<C> <S> <C>
U.S.$ (e)300 Nationwide Mutual Life Insurance 7.50%,
2/15/24........................................ $ 308
(e)300 Petroliam Nasional Bhd. 7.125%, 10/18/06......... 264
--------
2,640
--------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (22.1%)
U.S. TREASURY BONDS (8.2%)
1,600 8.125%, 8/15/19.................................. 2,065
3,100 6.25%, 8/15/23................................... 3,318
--------
5,383
--------
U.S. TREASURY NOTES (13.9%)
2,300 6.375%, 3/31/01.................................. 2,348
1,100 7.25%, 5/15/04................................... 1,194
2,000 7.50%, 2/15/05................................... 2,214
1,025 6.25%, 2/15/07................................... 1,074
2,300 3.625%, 1/15/08 (Inflation Indexed).............. 2,274
--------
9,104
--------
14,487
--------
20,434
--------
TOTAL FIXED INCOME SECURITIES (94.5%) (Cost $61,497)............... 62,124
--------
FOREIGN CURRENCY (1.3%)
DEM 1,555 German Mark...................................... 862
ITL 203 Italian Lira..................................... --
JPY 2,375 Japanese Yen..................................... 17
--------
TOTAL FOREIGN CURRENCY (Cost $885)................................. 879
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (95.8%) (Cost $62,382)........................... 63,003
--------
OTHER ASSETS (6.7%)
Receivable for Investments Sold...................... $ 2,726
Interest Receivable.................................. 1,465
Net Unrealized Gain on Foreign Currency Exchange
Contracts.......................................... 158
Foreign Withholding Tax Reclaim Receivable........... 45
Other................................................ 6 4,400
----------
LIABILITIES ( - 2.5%)
Bank Overdraft Payable............................... (1,535)
Investment Advisory Fees Payable..................... (23)
Custodian Fees Payable............................... (12)
Administrative Fees Payable.......................... (10)
Directors' Fees & Expenses Payable................... (7)
Other Liabilities.................................... (45) (1,632)
---------- --------
NET ASSETS (100%).................................................. $ 65,771
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $ 68,729
Undistributed Net Investment Income................................ 1,288
Accumulated Net Realized Loss...................................... (5,023)
Unrealized Appreciation on Investments and Foreign Currency
Translations..................................................... 777
--------
NET ASSETS......................................................... $ 65,771
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -------------------------------------------------------------------
NET ASSETS......................................................... $ 65,441
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 5,741,217 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................... $11.40
--------
--------
CLASS B:
- -------------------------------------------------------------------
NET ASSETS......................................................... $330
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 29,019 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................... $11.38
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 1998,
the Portfolio is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
NET
UNREALIZED
CURRENCY TO IN EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ---------- ------------- -------- --------
DEM 1,555 $ 862 7/01/98 U.S.$ 860 $ 860 $ (2)
JPY 15,462 112 7/01/98 U.S.$ 111 111 (1)
DEM 1,900 1,054 7/13/98 U.S.$ 1,071 1,071 17
DEM 1,200 666 7/13/98 U.S.$ 670 670 4
U.S.$ 668 668 7/13/98 DEM 1,200 666 (2)
SEK 14,850 1,863 7/14/98 U.S.$ 1,957 1,957 94
SEK 4,000 502 7/14/98 DEM 931 517 15
JPY 25,000 904 7/16/98 U.S.$ 918 918 14
U.S.$ 4,749 4,749 7/16/98 JPY 655,000 4,737 (12)
CAD 1,900 1,292 7/17/98 U.S.$ 1,294 1,294 2
U.S.$ 259 259 7/17/98 CAD 375 255 (4)
U.S.$ 420 420 7/17/98 CAD 615 418 (2)
AUD 5,850 3,628 7/21/98 U.S.$ 3,629 3,629 1
FRF 8,000 1,325 7/24/98 U.S.$ 1,359 1,359 34
-------- -------- --------
$ 18,304 $ 18,462 $ 158
--------
-------- -------- --------
-------- --------
</TABLE>
- ------------------------------------------------------------
(e) -- 144A Security -- certain conditions for public sale may exist.
CMO -- Collateralized Mortgage Obligation
Floating Rate Security -- The interest rate changes on these instruments are
based on changes in a designated base rate. The rates shown are those
in effect on June 30, 1998.
Inflation Index Security -- Security includes principal adjustment feature in
which par amount adjusts with the Consumer Price Index to insulate
bonds from the effects of inflation. The face amount shown is that in
effect on June 30, 1998.
- ------------------------------------------------------------
SUMMARY OF FIXED INCOME SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
SECTOR DIVERSIFICATION (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Finance................................ $ 10,980 16.7%
Foreign Government and Agency
Obligations.......................... 34,869 53.0
U.S. Government and Agency
Obligations.......................... 16,275 24.8
-------- ---
$ 62,124 94.5%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
135
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace & Defense 1.0%
Banking 0.6%
Broadcast--Radio & Television 10.2%
Building Materials and Components 2.9%
Chemicals 1.5%
Computers 1.1%
Consumer Staples 1.3%
Electronics 0.5%
Energy 3.6%
Entertainment 2.5%
Environmental Controls 0.9%
Financial Services 9.6%
Food 0.6%
Foreign Government Bonds 6.9%
Gaming & Lodging 2.3%
Health Care Supplies & Services 6.7%
Hospital Management 1.0%
Metals 1.6%
Multi-Industry 10.5%
Packaging & Container 0.7%
Paper 1.4%
Personal Care Products 0.8%
Real Estate 1.5%
Retail--General 1.0%
Technology 0.6%
Telecommunications 23.8%
Transportation 0.9%
Utilities 1.7%
Other 2.3%
</TABLE>
PERFORMANCE COMPARED TO THE CS FIRST BOSTON HIGH
YIELD INDEX(1)
- ----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------------------------
AVERAGE AVERAGE
ANNUAL FIVE ANNUAL SINCE
YTD ONE YEAR YEARS INCEPTION
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
PORTFOLIO -- CLASS A.......... 4.09% 12.15% 12.00% 13.02%
PORTFOLIO -- CLASS B.......... 3.91 11.81 N/A 13.54
INDEX -- CLASS A.............. 4.31 10.98 10.43 11.33
INDEX -- CLASS B.............. 4.31 10.98 N/A 11.76
</TABLE>
1. The CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.
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.
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 High Yield Portfolio seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a yield
above that generally available on debt securities in the four highest rating
categories.
For the six months ended June 30, 1998, the Portfolio had a total return of
4.09% for the Class A shares and 3.91% for the Class B shares compared to a
total return of 4.31% for the CS First Boston High Yield Index (the "Index").
For the one year ended June 30, 1998, the Portfolio had a total return of 12.15%
for the Class A shares and 11.81% for the Class B shares compared to 10.98% for
the Index. For the five-year period ended June 30, 1998, the average annual
total return of Class A was 12.00%, compared to 10.43% for the Index. From
inception on September 28, 1992 through June 30, 1998, the average annual total
return of Class A was 13.02% compared to 11.33% for the Index. From inception on
January 2, 1996 through June 30, 1998, the average annual total return of Class
B was 13.54%, compared to 11.76% for the Index. As of June 30, 1998, the
Portfolio had an SEC 30-day yield of 9.06% for the Class A shares and 8.79% for
the Class B shares.
U.S. high-yield bonds significantly underperformed high quality bonds in the
second quarter as interest rates fell. The high-yield market has been negatively
impacted by the renewed turmoil in Asia, the developing crisis in Russia and
concern that corporate profits in the U.S. may begin to face some pressure. Even
though the emerging markets represent a small portion of the high-yield index,
the weakness in these markets has caused spreads in the high-yield market to
widen in sympathy as investors are requiring a higher risk premium for lower
rated bonds. In addition, there continued to be a substantial supply of new
issues in the period, particularly in the communications sector, which the
market had difficulty absorbing.
For the second quarter ended June 30, 1998 the Portfolio had a total return for
the Class A shares of -0.14% and -0.20% for the Class B shares compared to 1.26%
for the Index. The underperformance in the second quarter was primarily due to
our emphasis on non-U.S. and emerging market issues relative to the benchmark
along with the overweighting in the communications sector.
While these positions caused underperformance in the second quarter, we continue
to be overweight in
- --------------------------------------------------------------------------------
High Yield Portfolio
136
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
communications and non-U.S. issues where we see significant relative value. We
added to communications holdings in the second quarter, where increased new
supply presented a number of attractive opportunities. These holdings are well
diversified by business strategies, including competitive local exchange
carriers, wireless, and long distance. New investments in the sector included
Level 3 Communications, a domestic long-haul fiber network provider, and Global
Crossings, which builds undersea fiber optic cable systems. Outside the U.S.,
holdings are focused on selected Asian corporates (with Korea being the largest
exposure) and Latin American bonds, especially corporate issues in Argentina,
Brazil and Mexico. While these non-U.S. markets have been weak, they currently
offer very high dollar denominated yields that we believe offer significant
value relative to what is available in other sectors.
Recent purchases in the healthcare and retail sectors as a result of bottom up
security selection have resulted in an overweighting in these sectors as well.
We purchased Tenet Healthcare, a stable, higher quality name and Oxford Health,
an HMO provider that we believe is successfully working through its recent
problems. Additions to the retail sector include Corporate Express, HMV Media
Group and Musicland. We continue to avoid U.S. cyclicals and are underweighted
in the media and entertainment, energy and metals sectors.
We have maintained an average credit quality higher than that of the Index, and
have balanced the opportunities in low-rated bonds with positions in higher
quality issues. Additionally, the interest rate sensitivity of the Portfolio is
similar to that of the benchmark. While the market environment has become more
challenging recently, we see excellent bottom-up investment opportunities in
securities with attractive yields relative to high quality bonds.
Robert Angevine
PORTFOLIO MANAGER
Thomas L. Bennett
PORTFOLIO MANAGER
Stephen F. Esser
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
High Yield Portfolio
137
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
CORPORATE BONDS AND NOTES (78.7%)
BROADCAST-RADIO & TELEVISION (10.2%)
$ 2,360 CSC Holdings, Inc., 9.875%, 5/15/06............... $ 2,593
2,200 CSC Holdings, Inc., 7.875%, 12/15/07.............. 2,316
(e)990 Lenfest Communications, Inc., 7.625%, 2/15/08..... 1,015
2,390 Lenfest Communications, Inc., 8.375%, 11/01/05.... 2,539
1,850 Paramount Communications, Inc., 8.25%, 8/01/22.... 1,956
475 Rogers Cablesystems Ltd., Series B, 10.00%,
3/15/05......................................... 528
200 Rogers Cablesystems of America, 10.125%,
9/01/12......................................... 218
2,850 Rogers Cantel, Inc., 8.30%, 10/01/07.............. 2,786
1,440 Rogers Communications, Inc., 9.125%, 1/15/06...... 1,460
3,720 TV Azteca, 10.50%, 2/15/07........................ 3,739
----------
19,150
----------
BUILDING MATERIALS & COMPONENTS (2.9%)
2,145 American Standard, Cos., Inc., 7.375%, 2/01/08.... 2,107
3,265 Outdoor Systems, Inc., 8.875%, 6/15/07............ 3,404
----------
5,511
----------
CHEMICALS (1.5%)
2,620 ISP Holdings, Inc., Series B, 9.00%, 10/15/03..... 2,731
----------
COMPUTERS (1.1%)
1,095 Advanced Micro Devices, Inc., 11.00%, 8/01/03..... 1,158
(e,n)1,400 WAM!NET, Inc., 0.00%, 3/01/05..................... 889
----------
2,047
----------
CONSUMER STAPLES (1.3%)
2,400 Kmart Corp., 8.80%, 7/01/10....................... 2,482
----------
ELECTRONICS (0.5%)
(e)1,060 Hyundai Semiconductor, 8.625%, 5/15/07............ 823
(e)200 Samsung Electronics Co., 7.45%, 10/01/02.......... 166
----------
989
----------
ENERGY (3.6%)
(e,n)1,300 Cia Energetica Sao Paulo, 9.125%, 6/26/07......... 1,176
(e)2,040 Chesapeake Energy, 9.625%, 5/01/05................ 2,050
400 Korea Electric Power, 7.75%, 4/01/13.............. 295
1,500 Quezon Power Ltd., 8.86%, 6/15/17................. 1,266
1,960 Snyder Oil Corp., 8.75%, 6/15/07.................. 1,980
----------
6,767
----------
ENVIRONMENTAL CONTROLS (0.9%)
(n)1,500 Norcal Waste Systems, Inc., Series B, 13.25%,
11/15/05........................................ 1,725
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FINANCIAL SERVICES (3.5%)
$ (e)1,300 Fuji JGB Investments LLC, 9.87%, 12/31/49......... $ 1,155
1,400 Indah Kiat Financial Mauritius, 10.00%, 7/01/07... 994
1,115 Navistar Financial Corp., 9.00%, 6/01/02.......... 1,167
(n)2,745 PTC International Finance BV, 0.00%, 7/01/07...... 1,887
1,435 Western Financial Bank, 8.875%, 8/01/07........... 1,345
----------
6,548
----------
FOOD (0.6%)
(e)1,065 Smithfield Foods, Inc., 7.625%, 2/15/08........... 1,062
----------
GAMING & LODGING (2.3%)
2,540 Grand Casinos, Inc., 10.125%, 12/01/03............ 2,743
496 Louisiana Casino Cruises, Inc., 11.50%,
12/01/98........................................ 498
890 Station Casinos, Inc., 10.125%, 3/15/06........... 992
----------
4,233
----------
HEALTH CARE SUPPLIES & SERVICES (6.7%)
(e)1,485 American Cellular Corp., 12.50%, 5/15/08.......... 1,491
975 Columbia/HCA Healthcare, 8.13%, 8/04/03........... 1,002
5,280 Columbia/HCA Healthcare, 6.91%, 6/15/05........... 5,102
(e)955 Oxford Health Plans, Inc., 11.00%, 5/15/05........ 979
1,930 Tenet Healthcare Corp., 8.625%, 1/15/07........... 1,990
(e)1,975 Tenet Healthcare Corp., 8.125%, 12/01/08.......... 1,987
----------
12,551
----------
HOSPITAL MANAGEMENT (1.0%)
(e)1,880 Fresenius Medical Capital Trust II, 7.875%,
2/01/08......................................... 1,833
----------
METALS (1.6%)
(e)1,050 Jet Equipment Trust, Series C-1, 11.79%,
6/15/13......................................... 1,430
(e)525 Jet Equipment Trust, Series 95-D, 11.44%,
11/01/14........................................ 710
(e)990 NSM Steel, Ltd.,12.25%, 2/01/08................... 871
----------
3,011
----------
MULTI-INDUSTRY (10.5%)
(e)1,035 American Commercial Lines LLC, 10.25%, 6/30/08.... 1,049
1,055 Asia Pulp & Paper Company, Ltd., 12.00%,
2/15/04......................................... 739
(e)1,340 Cex Holdings, Inc., 9.625%, 6/01/08............... 1,353
1,840 Comcast Cellular Corp., Series B, 9.50%,
5/01/07......................................... 1,918
594 Fleming Cos., Inc., 10.50%, 12/01/04.............. 616
(a)900 HYLSA S.A. de C.V., 9.25%, 9/15/07................ 848
1,150 Multicanal, 10.50%, 2/01/07....................... 1,150
2,855 Murrin Murrin Holdings, PTY, (Yankee Bond),
9.375%, 8/31/07................................. 2,816
1,895 Musicland Group, Inc., 9.875%, 3/15/08............ 1,886
1,215 Psinet, Inc., 10.00%, 2/15/05..................... 1,239
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
138
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
MULTI-INDUSTRY (CONT.)
<TABLE>
<C> <S> <C>
$ (e)1,600 RBS Participacoes, 11.00%, 4/01/07................ $ 1,448
(e)435 RG Receivables Ltd., 9.60%, 2/10/05............... 404
(e)1,965 Samsonite Corp., 10.75%, 6/15/08.................. 1,953
(e)2,400 Vencor, Inc., 9.875%, 5/01/05..................... 2,361
----------
19,780
----------
PACKAGING & CONTAINER (0.7%)
1,245 SD Warren Co., 12.00%, 12/15/04................... 1,379
----------
PAPER (1.4%)
(e)2,550 Norampac, Inc., 9.50%, 2/01/08.................... 2,595
----------
PERSONAL CARE PRODUCTS (0.8%)
1,500 Revlon Consumer Products, 8.125%, 2/01/06......... 1,498
----------
REAL ESTATE (1.5%)
1,200 CB Richard Ellis Services Group, Inc., 8.875%,
6/01/06......................................... 1,191
1,250 HMC Acquisition Properties, Series B, 9.00%,
12/15/07........................................ 1,378
285 Murrin Murrin Holdings, Senior Notes, 9.375%,
8/31/07......................................... 281
----------
2,850
----------
RETAIL-GENERAL (1.0%)
2,185 Southland Corp., 5.00%, 12/15/03.................. 1,898
----------
TECHNOLOGY (0.6%)
(e)1,465 AST Research, Inc., 7.45%, 10/01/02............... 1,207
----------
TELECOMMUNICATIONS (21.9%)
(e)1,845 AMSC Acquisition Co., 12.25%, 4/01/08............. 1,735
(e,n)1,550 Dolphin Telecom plc, 0.00%, 6/01/08............... 884
(e)650 Esprit Telecom Group plc, 11.50%, 12/15/07........ 676
1,050 Esprit Telecom Group plc, 10.875%, 6/15/08........ 1,053
(e)1,000 Flag Ltd., 8.25%, 1/30/08......................... 1,010
(a)600 Globalstar Capital Corp., 11.375%, 2/15/04........ 584
(e)1,200 Globo Communicacoes e Participacoes Ltd., 10.50%,
12/20/06........................................ 1,092
(n)3,590 Intermedia Communications, Inc.,
Series B, 0.00%, 7/15/07........................ 2,621
(e)1,790 IXC Communications, Inc., 9.00%, 4/15/08.......... 1,794
(a,e)605 Iridium LLC/Capital Corp., Series A, 13.00%,
7/15/05......................................... 647
(e)1,945 Level 3 Communications, Inc., 9.125%, 5/01/08..... 1,887
(e,n)2,995 NEXTLINK Communications, Inc., 0.00%, 4/15/08..... 1,834
(n)1,810 Nextel Communications, Inc., 0.00%, 8/15/04....... 1,756
(n)7,265 Nextel Communications, Inc., 0.00%, 9/15/07....... 4,868
(e,n)950 Nextel Communications, Inc., 0.00%, 2/15/08....... 601
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
$(a,n)2,275 Occidente y Caribe Cellular, 0.00%, 3/15/04....... $ 1,979
(e)1,290 Onepoint Communications Corp., 14.50%, 6/01/08.... 1,213
2,685 Philippine Long Distance Telephone, Global Bond,
9.25%, 6/30/06.................................. 2,651
(e)1,430 Primus Telecommunications Group, Inc., 9.875%,
5/15/08......................................... 1,401
555 Qwest Communications International, Inc., Series
B, 10.875%, 4/01/07............................. 640
(e,n)1,085 Qwest Communications International, Inc., 0.00%,
2/01/08......................................... 781
(n)1,700 RCN Corp., 0.00%, 10/15/07........................ 1,097
(n)2,460 RCN Corp., 0.00%, 2/15/08......................... 1,494
(e,n)3,750 Rhythms Netconnections, 0.00%, 5/15/08............ 1,819
56 RSL Communications plc, 12.25%, 11/15/06.......... 63
(e,n)2,550 RSL Communications plc, 9.125%, 3/01/08........... 2,474
(n)2,430 TCI Satellite Entertainment, Inc. 0.00%,
2/15/07......................................... 1,640
(e,n)1,165 Viatel, Inc., 0.00%, 4/15/08...................... 702
----------
40,996
----------
TRANSPORTATION (0.9%)
1,455 Hermes Europe Railtel BV, 11.50%, 8/15/07......... 1,644
----------
UTILITIES (1.7%)
1,935 AES Corp., 8.50%, 11/1/07......................... 1,959
541 Niagara Mowhawk Power, Series G, 7.75%,
10/01/08........................................ 555
(n)934 Niagara Mowhawk Power, Series H, 0.00%, 7/01/10... 642
----------
3,156
----------
TOTAL CORPORATE BONDS AND NOTES (Cost $147,919)............... 147,643
----------
ASSET BACKED SECURITIES (6.3%)
AEROSPACE & DEFENSE (1.0%)
1,945 Aircraft Lease Portfolio Securitization Ltd.,
Series 96-1 P1, Class D, 12.75%, 6/15/06........ 1,945
----------
BANKING (0.6%)
(e,n)1,205 SB Treasury Co. LLC, 9.40%, 12/29/49.............. 1,200
----------
FINANCIAL SERVICES (4.7%)
(e)1,686 CA FM Lease Trust, 8.50%, 7/15/17................. 1,771
1,246 DR Securitized Finance, Series 93-K1, Class A1,
6.66%, 8/15/10.................................. 1,165
2,450 DR Securitized Finance, Series 94-K1, Class A1,
7.60%, 8/15/07.................................. 2,421
1,175 DR Securitized Finance, Series 94-K1, Class A2,
8.375%, 8/15/15................................. 1,175
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
139
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FINANCIAL SERVICES (CONT.)
<TABLE>
<C> <S> <C>
$ 875 FMAC Loan Receivables Trust, Series 96-B, Class C,
(Floating Rate), 7.929%, 11/01/18............... $ 790
(e)1,575 Long Beach Auto, Series 97-1, Class B, 14.22%,
10/26/03........................................ 1,573
----------
8,895
----------
TOTAL ASSET BACKED SECURITIES (Cost $11,390).................. 12,040
----------
FOREIGN GOVERNMENT BONDS (6.9%)
(e)1,340 Cathay International Ltd., 13.00%, 4/15/08........ 1,139
(e,n)1,800 CTI Holdings, 0.00%, 4/15/08...................... 995
1,080 Grupo Minero Mexico, 8.25%, 4/01/08............... 1,031
(e)900 Multicanal, 10.50%, 4/15/18....................... 859
2,655 Pindo Deli Financial Mauritius, 10.75%,
10/01/07........................................ 1,859
2,095 Republic of Argentina, (Floating Rate), (Bearer),
6.625%, 3/31/05................................. 1,853
(e)2,825 Samsung Electronic America, 9.75%, 5/01/03........ 2,538
(e)2,695 Satelites Mexicanos, 10.125%, 11/01/04............ 2,600
----------
TOTAL FOREIGN GOVERNMENT BONDS (Cost $13,828)................. 12,874
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- ----------
COMMON STOCK (0.0%)
FOOD SERVICE & LODGING (0.0%)
(e)1,300 Motels of America, Inc. (Cost $85)................ 14
----------
PREFERRED STOCKS (5.7%)
ENTERTAINMENT (2.5%)
4,171 Time Warner, Inc., Series M, 10.25%, 7/01/16...... 4,640
----------
FINANCIAL SERVICES (1.4%)
1,015 Sinclair Broadcast Group, Inc., 9.00%, 7/15/07.... 1,045
13,500 Sinclair Capital, 11.625%, 3/15/09................ 1,499
----------
2,544
----------
TELECOMMUNICATIONS (1.8%)
(a)6,750 Concentric Network Corp., PIK, 13.50%, 6/1/10..... 672
(a)1,264 IXC Communications, Inc., Series B, PIK 12.50%,
8/15/09......................................... 1,470
(a,e)9,500 Paxson Communications Corp., PIK, 13.25%,
11/15/06........................................ 943
(a,e)3,200 Paxson Communications Corp., PIK, 9.75%,
12/31/06........................................ 319
----------
3,404
----------
TOTAL PREFERRED STOCKS (Cost $9,978).......................... 10,588
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<C> <S> <C>
- --------------------------------------------------------------------------
WARRANTS (0.1%)
BUILDING MATERIALS & COMPONENTS (0.0%)
(a)630 Concentric Network Corp., expiring 12/15/07....... $ --
----------
GAMING & LODGING (0.0%)
(a,e)1,725 Louisiana Casino Cruises, Inc., expiring
12/01/98........................................ --
----------
TELECOMMUNICATIONS (0.1%)
(a,e)600 Globalstar Telecommunications Ltd., expiring
2/15/04......................................... 74
(a) 605 Iridium World Communications, Inc., expiring
7/15/05......................................... 124
(a,d)3,000 Nextel Communications, Inc., expiring 4/25/99..... --
(a,d)9,100 Occidente y Caribe Cellular, expiring 3/15/04..... --
(a)1,024 Paxson Communications Corp., expiring 6/30/03..... --
----------
TOTAL WARRANTS (Cost $11)..................................... 198
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT TERM INVESTMENT (1.0%)
REPURCHASE AGREEMENT (1.0%)
$ 1,812 Chase Securities, Inc. 5.40%, dated 6/30/98, due
7/01/98, to be repurchased at $1,812
collateralized by U.S. Treasury Bonds, 11.25%,
due 2/15/15, valued at $1,858 (Cost $1,812)..... 1,812
----------
TOTAL INVESTMENTS (98.7%) (Cost $185,023)..................... 185,169
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.7%)
Interest Receivable........................... $ 3,112
Receivable for Portfolio Shares Sold.......... 209
Other......................................... 5 3,326
----------
LIABILITIES ( - 0.4%)
Payable for Portfolio Shares Redeemed......... (333)
Bank Overdraft Payable........................ (235)
Investment Advisory Fees Payable.............. (153)
Administrative Fees Payable................... (24)
Custodian Fees Payable........................ (14)
Directors' Fees & Expenses Payable............ (7)
Distribution Fee Payable...................... (6)
Other Liabilities............................. (71) (843)
---------- ----------
NET ASSETS (100.0%)......................................... $ 187,652
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
140
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 182,010
Undistributed Net Investment Income........................... 1,699
Accumulated Net Realized Gain................................. 3,797
Unrealized Appreciation on Investments........................ 146
----------
NET ASSETS.................................................... $ 187,652
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $177,113
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 15,181,027 outstanding $0.001 par value Shares
(authorized 500,000,000 shares)............................. $11.67
----------
----------
CLASS B:
- --------------------------------------------------------------
NET ASSETS.................................................... $10,539
ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 905,504 outstanding $0.001 par value Shares
(authorized 500,000,000 shares )............................ $11.64
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1998. Maturity date disclosed is the
ultimate maturity date.
PIK -- Payment-In-Kind. Income may be received in additional Securities or
cash at the discretion of the issuer.
Floating Rate Security -- The interest rate changes on these instruments are
based on changes in a designated base rate. The rates shown are those
ineffect on June 30, 1998.
At June 30, 1998, approximately 89% of the Portfolio's net assets consisted of
high yield securities rated below investment grade. Investments in high yield
securities are accompanied by a greater degree of credit risk and the risk tends
to be more sensitive to economic conditions than higher rated securities.
Certain securities may be valued on the basis of bid prices provided by one
principal market maker.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
141
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Fixed Rate Instruments 99.4%
Other 0.6%
</TABLE>
PERFORMANCE COMPARED TO THE LEHMAN 7-YEAR
MUNICIPAL BOND INDEX(1)
- ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
---------- ------------- ------------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A..... 2.17% 6.99% 6.34%
INDEX.................... 2.32 7.34 7.63
</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.
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 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 six months ended June 30, 1998, the Portfolio had a total return of
2.17% for the Class A shares compared to a total return of 2.32% for the Lehman
7-Year Municipal Bond Index (the "Index"). For the one year ended June 30, 1998,
the Portfolio had a total return of 6.99% for the Class A shares compared to
7.34% for the Index. From inception on January 18, 1995 through June 30, 1998,
the average annual total return of Class A was 6.34% compared to 7.63% for the
Index. As of June 30, 1998, the Portfolio had an SEC 30-day yield of 4.20% for
the Class A shares.
Performance during the first half of 1998 has closely tracked the benchmark
Index. Trading activity was limited during the quarter, with swap activity
hampered by the significant unrealized gains in the Portfolio. New positions
added during the quarter included long noncallable high quality bonds; this
structure has performed well due to strong demand and very limited supply. The
Portfolio continues to be structured with a defensive bias.
The municipal bond market posted positive returns during the second quarter as
interest rates across the U.S. fixed income spectrum reached their lowest
absolute levels on record. During the second quarter, market participants
pondered many of the same issues that have driven interest rate direction
throughout 1998. With a low inflation environment seemingly here to stay and
economic growth not accelerating at the same quick pace witnessed at the start
of 1998, the economy appears to be in a perfect environment for the Federal
Reserve to do nothing. With "fear of the Fed" not distracting the markets, other
distractions were necessary. These were easily found in the volatile dollar/yen
relationship, the Russian economic situation, southeast Asia political turmoil,
and potential longer-term repercussions from the General Motors strike. Negative
stirrings from any of these distractions sent investors worldwide running for
cover, with the U.S. Treasury bond market consistently the beneficiary. With
foreign buyers seeking a safe haven working the demand side of the equation and
the growing federal budget surplus shrinking the supply side, the Treasury
market, and, to a slightly
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
142
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO (CONT.)
lesser degree, all U.S. fixed income markets saw yield levels drop during the
quarter. As the quarter came to a close, none of the above named "distractions"
had gone away, leaving the markets to begin the third quarter waiting and
watching.
The low interest rate environment helped lead to a 51% increase in first half
1998 municipal new issue volume compared to first half 1997 levels. The
increased volume was attributable to a combined increase in refundings as
issuers took advantage of low rates to refinance higher coupon debt and a surge
in new money issuance. With the economy humming along, municipalities have
easily received approval from voters to issue debt for a variety of purposes.
First half volume was dominated by the issuance of bonds for education, health
care and transportation. In addition, the housing sector remained strong as
state housing agencies saw robust demand from first time home buyers. The
largest percentage increase in volume over 1997 belonged to the electric power
sector. Deregulation and the nationwide restructuring of the electric power
industry led many municipal public power issuers to refund all of their
outstanding debt in order to rewrite outdated bond indentures and lower their
debt service costs. With supply in abundance, the municipal market needed the
demand side of the equation to go to bat. And go to bat it did. Buyers stepped
up to the plate, albeit at yield levels that priced municipals at less expensive
ratios to comparable maturity Treasuries. As the quarter progressed, municipals
continued to underperform Treasuries, and the quarter ended with long-term
municipal bonds trading at ratios over 90% of long Treasuries. If new issue
volume keeps up the recent torrid pace, municipals should continue to trade at
or near current ratios, which represents value in the municipal market.
Lori A. Cohane
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
143
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (99.4%)
FIXED RATE INSTRUMENTS (99.4%)
$ 1,500 Baltimore County, Maryland, Consolidated Public
Improvement, General Obligation Bonds, 6.00%,
7/01/05
Prerefunded 7/01/02 at 102..................... $ 1,631
1,000 California State, Department of Water Revenue
Bonds, Series Q, 6.00%, 12/01/10............... 1,132
1,920 City of Dallas, Texas, General Obligation Bonds,
6.00%, 2/15/06................................. 2,120
250 Connecticut State, General Obligation Bonds,
Series C, 5.50%, 3/15/03....................... 264
175 Connecticut State, General Obligation Bonds,
Series C, 6.15%, 11/15/03...................... 190
1,500 Connecticut State, General Obligation Bonds,
Series E, 6.00%, 3/15/12....................... 1,690
1,565 Connecticut State, Housing Finance Authority,
Revenue Bonds, Sub. Series D-1, 6.20%,
5/15/17........................................ 1,647
500 Fairfax County, Virginia, Water Authority Revenue
Bonds, 6.00%, 4/01/22.......................... 549
500 Fairfax County, Virginia, Water Authority Revenue
Bonds, 6.00%, 4/01/22 Prerefunded 4/01/07 at
102............................................ 566
1,500 Florida State Board of Education, Capital Outlay,
Public Education, General Obligation Bonds,
6.40%, 6/01/19................................. 1,622
500 Fulton County, Georgia, School District General
Obligation Bonds, 5.375%, 1/01/16.............. 526
500 Georgia State, General Obligation Bonds, Series
F, 6.50%, 12/01/06............................. 577
1,000 Gwinnett County, Georgia, General Obligation
Bonds, 6.00%, 1/01/11.......................... 1,081
1,000 Hawaii State, General Obligation Bonds,
Series CJ, 6.20%, 1/01/12
Prerefunded 1/01/05 at 100..................... 1,107
300 Houston, Texas, Water & Sewer Systems, Revenue
Bonds, Series B, 6.25%, 12/01/05............... 335
1,500 Illinois State, Sales Tax Revenue Bonds,
Series S, 5.25%, 6/15/13....................... 1,524
1,000 Kentucky State Housing Corp., Revenue Bonds,
Series A, 6.00%, 7/01/10....................... 1,057
1,625 Michigan State Housing Development Authority,
Revenue Bonds, Series A, 6.75%, 12/01/14....... 1,742
1,400 Mississippi State, General Obligation Bonds,
6.00%, 2/01/09
Prerefunded 2/01/05 at 100..................... 1,534
1,475 Montana State, General Obligation Bonds, Long
Range Building Program, Series C, 6.00%,
8/01/13
Prerefunded 8/01/04 at 100..................... 1,610
2,000 Municipal Assistance Corp. for City of New York,
NY, Revenue Bonds, 6.00%, 7/01/04.............. 2,180
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
$ 1,000 New Jersey State, General Obligation Bonds,
Series E, 5.50%, 7/15/02....................... $ 1,053
960 Ohio State, Housing Finance Agency, Residential
Mortgage Revenue Bonds,
Series A-1, 6.20%, 9/01/14..................... 1,028
1,000 Orlando, Florida, Utilities Commission Water &
Electric, Revenue Bonds, Series D, 6.75%,
10/01/17....................................... 1,219
500 Palm Beach County, Florida, General Obligation
Bonds, Series B, 6.75%, 7/01/11................ 603
50 Puerto Rico Commonwealth Highway & Transportation
Authority, Revenue Bonds, Series T, 6.50%,
7/01/22
Prerefunded 7/01/02 at 101.50.................. 55
1,000 Reedy Creek Improvement District, Florida,
Utility, Revenue Bonds, Series 91-1, 6.50%,
10/01/16 Prerefunded 10/01/01 at 101........... 1,084
600 Salt Lake City, Utah, General Obligation Bonds,
6.375%, 6/15/11................................ 635
1,000 Shelby County, Tennessee, General Obligation
Bonds , Series A, 5.50%, 3/01/08............... 1,086
1,385 Shelby County, Tennessee, General Obligation
Bonds , Series B, 5.50%, 8/01/10............... 1,502
1,250 Texas A & M University, Revenue Bonds, Series B,
6.00%, 7/01/11................................. 1,325
1,500 Texas State, Public Finance Authority,
Series A, 5.95%, 10/01/15 Prerefunded 4/01/05
at 100......................................... 1,642
1,500 Triborough Bridge & Tunnel Authority, New York,
Revenue Bonds, Series Y, 6.00%, 1/01/12........ 1,684
1,000 Utah State, Housing Financing Agency, Single
Family Mortgage Revenue Bonds,
Series G-1, Class I, 5.50%, 7/01/16............ 1,022
1,000 Virginia Beach, Virginia, General Obligation
Bonds, 6.00%, 9/01/10
Prerefunded 9/01/04 at 102..................... 1,108
500 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.60%, 1/01/12................................. 534
1,000 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.65%, 1/01/13................................. 1,069
1,000 Washington State, General Obligation Bonds,
Series B, 6.40%, 6/01/17....................... 1,172
1,440 Wisconsin State, Clean Water Revenue Bonds,
Series 1, 6.875%, 6/01/11...................... 1,741
1,115 Wisconsin State, General Obligation Bonds, Series
2, 5.125%, 11/01/11............................ 1,166
--------
TOTAL FIXED RATE INSTRUMENTS (Cost $43,404)............... 45,412
--------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $43,404)................. 45,412
--------
TOTAL INVESTMENTS (99.4%) (Cost $43,404).................... 45,412
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
144
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -------------------------------------------------------------------------
OTHER ASSETS (1.9%)
Cash.............................................. $ 45
Interest Receivable............................... 806 $ 851
-------
LIABILITIES ( - 1.3%)
Payable for Investments Purchased................. (532)
Investment Advisory Fees Payable.................. (17)
Administrative Fees Payable....................... (7)
Director's Fees & Expenses Payable................ (4)
Custodian Fees Payable............................ (2)
Other............................................. (15) (577)
------- ---------
NET ASSETS (100%)............................................ $ 45,686
---------
---------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 43,062
Undistributed Net Investment Income........................... 229
Accumulated Net Realized Gain................................. 387
Unrealized Appreciation on Investments........................ 2,008
---------
NET ASSETS.................................................... $ 45,686
---------
---------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $ 45,686
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 4,335,260 outstanding $0.001 par value
shares (authorized 500,000,000 shares)...................... $10.54
---------
---------
</TABLE>
- ------------------------------------------------------------
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 U.S. Treasury escrow.
- ------------------------------------------------------------
SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
California............................. $ 1,132 2.5%
Connecticut............................ 3,792 8.3
Florida................................ 4,528 9.9
Georgia................................ 2,185 4.8
Hawaii................................. 1,107 2.4
Illinois............................... 1,524 3.3
Kentucky............................... 1,057 2.3
Maryland............................... 1,631 3.6
Michigan............................... 1,742 3.8
Mississippi............................ 1,533 3.3
Montana................................ 1,610 3.5
New Jersey............................. 1,053 2.3
New York............................... 3,864 8.5
Ohio................................... 1,028 2.2
Puerto Rico............................ 55 0.1
Tennessee.............................. 2,588 5.7
Texas.................................. 5,421 11.9
Utah................................... 1,657 3.6
Virginia............................... 3,826 8.4
Washington............................. 1,172 2.6
Wisconsin.............................. 2,907 6.4
-------- ---
$ 45,412 99.4%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
145
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Bankers Acceptance 1.8%
Commercial Paper 55.2%
Corporate Floating Rate Notes 9.7%
Certificates of Deposit 26.0%
U.S. Government & Agency Floating Rate Notes 6.5%
U.S. Government & Agency Fixed Rate Notes 0.6%
Other 0.2%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
- --------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO 30 DAY
YIELDS IBC MONEY FUND COMPARABLE YIELDS
<S> <C> <C>
January 5.26% 5.24%
February 5.21% 5.17%
March 5.16% 5.16%
April 5.15% 5.15%
May 5.14% 5.12%
June 5.16% 5.13%
</TABLE>
- ------------------------------------------------
INVESTMENTS IN SHARES OF THE PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Money Market Portfolio's investment objectives are to maximize current
income and preserve capital while maintaining high levels of liquidity through
investing in high quality money market instruments which have effective
maturities of one year or less. The Portfolio's average maturity (on a
dollar-weighted basis) will not exceed 90 days. The Portfolio will purchase only
securities having a remaining maturity of one year or less. The Portfolio is
expected to maintain a net asset value of $1.00 per share. There can be no
assurance, however, that the Portfolio will be successful in maintaining a net
asset value of $1.00 per share.
The seven day yield and seven day effective yield (which assumes an
annualization of the current yield with all dividends reinvested) for the
Portfolio as of June 30, 1998 were 5.14% and 5.28%, respectively. As with all
money market portfolios, the seven day yields are not necessarily indicative of
future performance.
The U.S. economy began 1998 with a robust first quarter as gross domestic
product rose 5.4% representing a healthy pace of economic growth. Inflation at
the CPI level was non-existent as commodity and producer prices fell during the
first quarter. Interest rates declined, and consumers enjoyed attractive
financing which stimulated a strong housing market. Jobs remained plentiful and
the unemployment rate held steady at 4.7%.
As the economy moved into the second quarter, economic strength continued
although at a more moderate pace. The labor market made further gains and the
unemployment rate fell to 4.5%. Wages rose in the second quarter although not
enough to trigger market fears of higher inflation and tighter corporate profit
margins. Wage growth continues to be one of the key elements in defining the
expansion's life cycle. As long as wages grow at a gradual pace, the current
balance between low inflation and healthy corporate profits can remain intact.
By the end of the second quarter interest rates had fallen to their lowest
levels of the year. The U.S. Treasury curve was flat to inverted, and the yield
on the long bond had fallen to 5.626%. Low domestic inflation played a large
part in driving interest rates lower, but so did the economic and fiscal crisis
in Asia. Asian pressures helped increase foreign demand for U.S. bonds as
foreign investors sought out higher quality markets in which to invest and
protect their capital.
- --------------------------------------------------------------------------------
Money Market Portfolio
146
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO (CONT.)
Typically in situations where the economy is as strong as it is in the U.S.,
markets would become concerned that monetary policy might turn more restrictive
in order to slow economic growth and prevent inflation. Although these concerns
exist, the markets are less concerned that the Federal Reserve might raise
interest rates to slow economic growth since other regulating factors exist.
While the Asian crisis has helped to drive bond prices higher, it has also
widened the trade deficit and may provide a slowing effect on our domestic
economy. The strength in the dollar will also have a similar effect as foreign
demand for U.S. exports will decline slowing U.S. output. Finally, there is
concern that U.S. businesses have built up excessive inventories which may put
corporate profit margins under pressure. If consumer demand is not sufficient to
relieve businesses of their surplus inventories, excessive carrying costs of
unsold goods can potentially tie up capital and stall corporate growth plans.
Going forward most economists have lowered their third and fourth quarter gross
domestic product estimates by 1-2% in anticipation of the above economic
effects. Should these economists be correct and the economy slows automatically,
the Federal Reserve may leave monetary policy unchanged throughout the remainder
of 1998. This outcome is especially likely if Greenspan persists in exercising
his influence over the other members of the FOMC.
Throughout the first half of the year we invested the Portfolio's assets in
fixed agency and corporate obligations, as well as floating rate instruments.
The Portfolio ended the second quarter with a weighted average maturity of 63
days. Our target maturity band has been and will continue to be between 55 and
65 days, keeping in line with our neutral outlook.
Current money market yields are very low and offer little protection against a
potential interest rate hike by the Federal Reserve as you move out on the
curve. While the market is not expecting a tightening by the Federal Reserve,
there is still little reason to extend our overall maturity in the Portfolio.
Yields in longer dated maturities offer almost the same return as do yields on
shorter dated maturities. We have been looking to add more floating rate
securities to the Portfolio in order to add incremental yield without taking
undue interest rate risk. By buying floaters we are protected against any
increase in interest rates by the Federal Reserve should they find the need to
tighten in early 1999.
We feel that while it is likely that there will be no tightening throughout the
remainder of 1998, the risks of higher interest rates remain and could be
realized as early as the first quarter of 1999. Additionally, we may experience
a steepening in the yield curve before the end of this year as markets
anticipate future monetary policy changes. Should the curve experience some
steepening, we would view the event as an opportunity to extend our average
maturity.
Abigail Jones Feder
PORTFOLIO MANAGER
Daniel M. Niland
PORTFOLIO MANAGER
July 1998
- --------------------------------------------------------------------------------
Money Market Portfolio
147
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (99.8%)
U.S. GOVERNMENT & AGENCY OBLIGATIONS (7.1%)
AGENCY FLOATING RATE NOTES (6.5%)
$40,000 Federal Farm Credit Bank, Series 1
5.51%, 2/10/99................................. $ 39,995
20,000 Federal Home Loan Bank
5.62%, 4/09/99................................. 19,995
Federal Home Loan Mortgage Corp.:
10,000 5.45%, 1/26/99................................... 9,996
22,000 5.46%, 4/21/99................................... 21,990
13,000 Federal National Mortgage Assoc.
5.26%, 7/26/99................................. 12,985
-----------
104,961
-----------
U.S. TREASURY NOTE (0.6%)
10,000 5.88%, 1/31/99................................... 10,028
-----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $114,989)......................................... 114,989
-----------
ASSET BACKED COMMERCIAL PAPER (7.4%)
SINGLE PURPOSE CORPORATION (7.4%)
20,000 Asset Securitization Corp. 5.51%, 7/13/98........ 19,963
22,323 Asset Securitization Corp. 5.53%, 7/14/98........ 22,278
15,195 Citation Capital Corp. 5.55%, 7/27/98............ 15,134
7,147 Citation Capital Corp. 5.54%, 8/07/98............ 7,106
7,227 Delaware Funding 5.51%, 7/17/98.................. 7,209
10,102 Delaware Funding 5.53%, 8/07/98.................. 10,045
20,000 Greenwich Funding 5.53%, 7/06/98................. 19,985
20,000 Greenwich Funding 5.53%, 7/20/98................. 19,942
-----------
TOTAL ASSET BACKED COMMERCIAL PAPER
(Cost $121,662)......................................... 121,662
-----------
BANKERS ACCEPTANCE (1.8%)
BANKS (1.8%)
30,000 First Union National Bank 5.56%, 9/22/98 (Cost
$30,000)....................................... 30,000
-----------
COMMERCIAL PAPER (47.8%)
AUTOMOTIVE (8.3%)
20,000 Associates Corp. of North America 5.47%,
7/02/98........................................ 19,997
15,000 Associates Corp. of North America 5.51%,
8/14/98........................................ 14,899
15,000 Daimler Benz North America Corp. 5.45%,
7/24/98........................................ 14,948
20,000 Daimler Benz North America Corp. 5.52%,
8/18/98........................................ 19,853
13,000 Daimler Benz North America Corp. 5.50%,
9/24/98........................................ 12,831
25,000 General Motors Acceptance Corp. 5.53%, 7/06/98... 24,981
13,300 Toyota Motor Credit Corp. 5.52%, 7/07/98......... 13,288
15,000 Toyota Motor Credit Corp. 5.50%, 7/09/98......... 14,982
-----------
135,779
-----------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
BANKS (10.8%)
$35,000 ANZ (Delaware), Inc. 5.46%, 8/24/98.............. $ 34,713
7,825 Bank of America 5.49%, 7/10/98................... 7,814
25,000 Bank of America 5.52%, 8/21/98................... 24,805
21,000 SunTrust Banks, Inc. 5.48%, 7/29/98.............. 20,910
10,000 SunTrust Banks, Inc. 5.52%, 7/30/98.............. 9,956
15,000 SunTrust Banks, Inc. 5.49%, 8/05/98.............. 14,920
25,000 UBS Finance, Inc. 5.51%, 8/04/98................. 24,870
39,000 Wachovia Bank 5.50%, 9/14/98..................... 38,553
-----------
176,541
-----------
CONSUMER GOODS (6.1%)
7,560 General Electric Capital Corp. 5.49%, 7/02/98.... 7,559
20,000 General Electric Capital Corp. 5.51%, 7/17/98.... 19,951
46,000 Kimberly Clark 5.50%, 7/24/98.................... 45,838
26,000 McDonald's Corp. 6.05%, 7/01/98.................. 26,000
-----------
99,348
-----------
ELECTRONICS (2.2%)
16,000 Eastman Kodak 5.50%, 7/21/98..................... 15,951
10,000 Eastman Kodak 5.49%, 7/23/98..................... 9,966
10,000 Panasonic Finance, Inc. 5.49%, 8/11/98........... 9,938
-----------
35,855
-----------
FINANCE (9.8%)
25,000 ABN-AMRO North American Finance, Inc. 5.46%,
7/06/98........................................ 24,981
15,000 American Express Credit Corp. 5.51%, 7/29/98..... 14,936
25,000 American Express Credit Corp. 5.51%, 8/28/98..... 24,778
15,000 Canadian Bank Imperial Holdings 5.51%, 7/08/98... 14,984
10,000 CIT Group Holdings, Inc. 5.50%, 8/25/98.......... 9,916
20,000 Ford Motor Credit Corp. 5.48%, 7/16/98........... 19,954
35,000 J.P. Morgan & Co. 5.50%, 10/09/98................ 34,465
15,000 John Deere Capital Corp. 5.50%, 7/16/98.......... 14,966
-----------
158,980
-----------
INSURANCE (6.3%)
14,885 General Reinsurance Corp. 5.52%, 8/07/98......... 14,801
9,300 General Reinsurance Corp. 5.51%, 9/03/98......... 9,209
16,258 Metlife Funding, Inc. 5.50%, 7/09/98............. 16,238
20,000 Prudential Funding Corp. 5.54%, 7/09/98.......... 19,975
17,000 USAA Capital Corp. 5.47%, 7/10/98................ 16,977
15,000 USAA Capital Corp. 5.53%, 7/24/98................ 14,947
10,000 USAA Capital Corp. 5.51%, 8/14/98................ 9,933
-----------
102,080
-----------
INVESTMENT BANKING (2.8%)
30,000 Merrill Lynch & Co. 5.49%, 7/16/98............... 29,931
15,000 Merrill Lynch & Co. 5.54%, 7/30/98............... 14,933
-----------
44,864
-----------
TELECOMMUNICATIONS (0.6%)
10,000 Bell South Telephone 5.50%, 7/24/98.............. 9,965
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Money Market Portfolio
148
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- -------------------------------------------------------------------------
<C> <S> <C>
COMMERCIAL PAPER (CONT.)
UTILITIES (0.9%)
$15,000 National Rural Utilities Cooperative Finance
Corp.
5.50%, 8/07/98................................. $ 14,915
-----------
TOTAL COMMERCIAL PAPER
(Cost $778,327)......................................... 778,327
-----------
CORPORATE FLOATING RATE NOTES (9.7%)
BANKS (7.9%)
20,000 Abbey National Treasury Services 5.54%,
2/17/99........................................ 19,991
30,000 Abbey National Treasury Services 5.49%,
6/15/99........................................ 29,970
20,000 Bank One, Columbus 5.75%, 9/16/98................ 20,002
20,000 Bank One Corp. 5.45%, 6/14/99.................... 19,987
8,500 Bank One, Dayton 5.84%, 8/21/98.................. 8,500
10,000 First Union National Bank 5.79%, 5/17/99......... 10,000
10,000 J.P. Morgan & Co., Series A 5.75%, 3/10/99....... 10,000
10,000 Soceite Generale Bank, New York, Series 1 5.59%,
1/19/99........................................ 9,997
-----------
128,447
-----------
ELECTRONICS (1.8%)
30,000 IBM Credit Corp. 5.66%, 11/20/98................. 30,000
-----------
TOTAL CORPORATE FLOATING RATE NOTES
(Cost $158,447)......................................... 158,447
-----------
CERTIFICATES OF DEPOSIT (26.0%)
BANKS (26.0%)
24,000 Bank of Austria, New York 5.74%, 4/26/99......... 23,992
23,000 Bank of Montreal, Chicago (Yankee) 5.80%,
11/6/98........................................ 22,996
13,000 Barclays Bank plc, New York 5.65%, 3/02/99....... 12,995
25,000 Bayerishe Landesbank, New York 5.52%, 6/29/99.... 24,982
20,000 Canadian Imperial Bank, New York 5.56%,
9/22/98........................................ 20,000
12,000 Canadian Imperial Bank (Yankee) 5.94%,
10/23/98....................................... 12,003
14,500 Chase Manhattan Corp. 5.54%, 7/06/98............. 14,500
18,000 Commerzbank AG, New York 5.55%, 2/11/99.......... 17,995
30,000 Credit Agricole Indosuez 5.56%, 7/20/98.......... 30,000
18,000 Credit Agricole Indosuez (Yankee) 5.66%,
3/29/99........................................ 17,989
10,000 Credit Suisse, First Boston 5.60%, 2/11/98....... 10,000
12,500 Deutsche Bank, New York 5.99%, 10/23/98.......... 12,498
19,000 Deutsche Bank, New York 5.55%, 2/11/99........... 18,994
15,000 Deutsche Bank (Yankee) 5.50%, 7/29/98............ 15,000
14,000 Landesbank Hessen Thueringen 5.94%, 10/23/98..... 13,997
18,000 National Westminister Bank 5.53%, 8/05/98........ 18,000
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
$23,000 Rabobank Nederland N.V., (Yankee) 5.70%,
4/20/99........................................ $ 22,991
25,300 Royal Bank of Canada, New York 5.53%, 6/29/99.... 25,283
20,000 Soceite Generale Bank, New York 5.80%, 4/27/99... 19,991
20,000 Soceite Generale Bank, New York 5.57%, 5/20/99... 19,989
15,000 Swiss Bank (Yankee) 5.65%, 3/24/99............... 14,994
25,000 Westdeutsche Landesbank 5.56%, 7/20/98........... 25,000
9,000 Westdeutsche Landesbank, New York 5.57%,
9/22/98........................................ 9,000
-----------
TOTAL CERTIFICATES OF DEPOSIT
(Cost $423,189)......................................... 423,189
-----------
TOTAL MONEY MARKET INSTRUMENTS (Cost $1,626,614)............ 1,626,614
-----------
TOTAL INVESTMENTS (99.8%) (Cost $1,626,614)................. 1,626,614
-----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.5%)
Cash............................................. $ 24
Interest Receivable.............................. 8,765
Other............................................ 52 8,841
-------
LIABILITIES ( - 0.3%)
Dividends Payable................................ (3,444)
Investment Advisory Fees Payable................. (1,244)
Administrative Fees Payable...................... (215)
Directors' Fees & Expenses Payable............... (78)
Other Liabilities................................ (58) (5,039)
------- -----------
NET ASSETS (100%)........................................... $ 1,630,416
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 1,630,830
Accumulated Net Realized Loss................................. (414)
-----------
NET ASSETS (100%)............................................. $ 1,630,416
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,630,834,087 outstanding $0.001 par Value
shares (authorized 4,000,000,000 shares).................... $1.00
-----------
-----------
</TABLE>
- ------------------------------------------------------------
Floating Rate Security -- The interest rate changes on these instruments are
based on changes in a designated base rate. The rates shown are those in effect
at June 30, 1998.
Maturity dates disclosed for 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.
Interest rates disclosed for Commercial Paper and Agency Discount Notes
represent effective yields at June 30, 1998.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Money Market Portfolio
149
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
- ---------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Fixed Rate Instruments 39.3%
Variable/Floating Rate Instruments 49.7%
U.S. Government & Agency Obligations 10.6%
Other 0.4%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
- --------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET PORTFOLIO 30-DAY
YIELDS IBC MUNICIPAL MONEY FUND COMPARABLE YIELDS
<S> <C> <C>
January 3.21% 3.09%
February 2.91% 2.84%
March 2.80% 2.79%
April 3.03% 3.25%
May 3.24% 3.34%
June 3.16% 3.13%
</TABLE>
- ------------------------------------------------
INVESTMENTS IN SHARES OF THE PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
The Municipal Money Market Portfolio's investment objectives are to maximize
current income that is exempt from Federal income tax and preserve capital while
maintaining high levels of liquidity through investing in high quality municipal
money market instruments which earn interest exempt from Federal income tax in
the opinion of bond counsel for the issuer. The Portfolio will purchase only
securities having a remaining maturity of one year or less. Under normal
circumstances, the Portfolio will invest at least 80% of its assets in
tax-exempt municipal securities. Additionally, the Portfolio will not purchase
private activity bonds, the interest from which is subject to alternative
minimum tax. Interest on tax-exempt municipal securities may be subject to state
and local taxes. The Portfolio's average maturity (on a dollar-weighted basis)
will not exceed 90 days. The Portfolio is expected to maintain a net asset value
of $1.00 per share. There can be no assurance, however, that the Portfolio will
be successful in maintaining a net asset value of $1.00 per share.
The seven day yield and seven day effective yield (assumes an annualization of
the current yield with all dividends reinvested) for the Municipal Money Market
Portfolio as of June 30, 1998 were 3.17% and 3.22%, respectively. The seven day
taxable equivalent yield and the seven day taxable equivalent effective yield
for the Portfolio at June 30, 1998, assuming Federal income tax rate of 39.6%
(maximum rate) were 5.25% and 5.33%, respectively. The seven day yields are not
necessarily indicative of future performance.
In general during the first half of 1998, the municipal money market did not
track the movements experienced in the taxable market. The taxable market was
driven by economic data releases in the United States as well as the Asian
crisis. Instead the municipal market was driven by shifts in supply and demand
as corporations moved between the taxable and tax-exempt sectors depending upon
where they could find the most attractive yields. Although the municipal money
market curve was flat throughout much of the first half of 1998, the variable
rate demand securities experienced dramatic swings as rates fluctuated as much
as 300 basis points. These declines in the coupons for daily and weekly variable
rate demand securities were precipitated by pronounced decreases in supply of
paper. Each time rates declined, the taxable "crossover" buyers moved out of the
tax-
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Municipal Money Market Portfolio
150
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
exempt sector. This created a dramatic increase in supply forcing dealers to
increase rates and return the curve to its characteristic flat shape.
The asset size of the Portfolio increased over 20% in the first half of 1998 The
Portfolio finished the first half of the year with assets of $984 million.
Overall the asset allocation throughout the year-to-date remained consistent.
Commercial paper ranged from 30-40%, tax-exempt notes ranged from 8-16%, and
daily and weekly variable rate puttable issues fluctuated more than the other
sectors with allocations ranging between 40% and 60% of the Portfolio. Because
of the yield curve shape, the portfolio maintained a relatively short weighted
average maturity throughout the first five months of the year ranging from 30 to
35 days. As the end of June approached, many of the tax-exempt notes matured --
these maturities coincide with the particular state or municipal issuer's fiscal
year end which is typically June 30 -- thus dropping the weighted average
maturity of the Portfolio to 17 days as of June 30.
Abigail Jones Feder
PORTFOLIO MANAGER
July 1998
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151
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (89.0%)
FIXED RATE INSTRUMENTS (39.3%)
NOTES (8.3%)
$ 1,300 Delaware, TRANS, 7.75%, 7/01/04 Prerefunded
7/01/98 at 101.50.............................. $ 1,319
3,600 Fairfax County, Virginia, General Obligation,
Series B, 6.00%, 6/01/99....................... 3,672
2,000 Indianapolis, Indiana, Local Public Improvements
Board, Series E,
4.25%, 7/09/98................................. 2,000
19,900 Michigan State, General Obligation, 4.50%,
9/30/98........................................ 19,946
1,195 Montana State, TRANS, 5.10%, 8/01/98............. 1,197
1,000 New Mexico State, General Obligation, Series B,
3.70%, 9/01/98................................. 1,000
3,000 New Mexico State, Severance Tax Revenue Bonds,
Series B, 4.80%, 7/01/98....................... 3,000
46,700 Texas State, TRANS, Series A, 4.75%, 8/31/98..... 46,776
1,000 Vermont State, General Obligation, Series A,
4.25%, 1/15/99................................. 1,003
2,205 Wisconsin State, General Obligation, Series A,
4.25%, 5/01/99................................. 2,216
----------
82,129
----------
COMMERCIAL PAPER (31.0%)
Allegheny County, Pennsylvania, Industrial
Development Authority,
3,000 3.45%, 7/08/98, Series 85........................ 3,000
2,000 3.80%, 7/09/98, Series 95........................ 2,000
10,000 Baltimore County, Maryland, Series 95, BANS,
3.80%, 7/02/98................................. 10,000
4,900 Becker, Minnesota, Pollution Control Revenue
Bonds, Series 98A,
3.75%, 7/07/98................................. 4,900
2,000 Bexar, Texas, Metropolitan Water District, 3.90%,
7/17/98........................................ 2,000
2,500 City of Burlington, Kansas, Series 87A, 3.75%,
7/21/98........................................ 2,500
6,000 City of Honolulu, Hawaii, 3.75%, 8/25/98......... 6,000
4,000 City of Petersburg, 3.70%, 7/14/98............... 4,000
7,200 City of San Antonio, Texas, Series A, 3.50%,
9/04/98........................................ 7,200
Commonwealth of Virginia,
1,100 3.60%, 7/09/98................................... 1,100
6,000 3.70%, 8/28/98................................... 6,000
2,525 Gainsville, Florida, Series C, 3.55%, 7/10/98.... 2,525
1,800 Georgia, Municipal Gas Authority, Gas Revenue
Bonds, 3.70%, 8/24/98.......................... 1,800
4,100 Gillette Campbell, Wyoming, 3.70%, 8/11/98....... 4,100
2,148 Harris County, Texas, Series A, 3.55%, 7/14/98... 2,148
Houston, Texas,
5,000 3.75%, 7/07/98, Series B......................... 5,000
2,400 3.45%, 7/13/98, Series B......................... 2,400
6,000 3.45%, 7/13/98, Series C......................... 6,000
5,500 3.65%, 7/15/98, Series B......................... 5,500
4,100 3.70%, 8/13/98, Series B......................... 4,100
8,500 3.75%, 8/13/98, Series B......................... 8,500
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
Illinois Educational Facility Authority,
$ 9,000 3.75%, 7/07/98................................... $ 9,000
9,600 3.80%, 7/09/98................................... 9,600
2,100 Illinois Health & Educational Facilities, 3.70%,
7/07/98........................................ 2,100
4,750 Independence Missouri, Water Utility Revenue,
Series 86, 3.65%, 7/24/98...................... 4,750
Jacksonville, Florida, Electric Authority,
9,500 3.40%, 7/15/98, Series C-1....................... 9,500
1,500 3.70%, 8/10/98, Series C-1....................... 1,500
5,000 3.70%, 8/27/98, Series D......................... 5,000
10,000 King County, Washington, Sewer Revenue, Series A,
BANS, 3.70%, 7/14/98........................... 10,000
2,000 Las Vegas, Nevada, Water Authority, 3.75%,
7/23/98........................................ 2,000
Louisiana Public Facilities Authority,
3,000 3.60%, 7/08/98................................... 3,000
4,500 3.70%, 8/14/98................................... 4,500
6,050 Louisiana State, General Obligation Bonds, Series
91A, 3.55%, 7/09/98............................ 6,050
2,300 Maricopa County, Arizona, Pollution Control
Revenue Bonds, Arizona Public Service Co.,
Series 85C, 3.50%, 7/09/98..................... 2,300
6,600 Massachusetts, State Health & Educational
Facilities Authority, Revenue Bonds, Capital
Assets Project, Series L,
3.65%, 7/07/98................................. 6,600
3,000 Massachusetts State Water Resource Authority,
3.65%, 8/06/98................................. 3,000
2,400 Michigan State, Economic Development Authority,
3.60%, 7/08/98................................. 2,400
3,210 Michigan State Underground Storage Facility,
Series B, 3.70%, 8/10/98....................... 3,210
6,500 Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University, 3.75%, 8/17/98..................... 6,500
2,000 Montgomery County, Alabama, Industrial
Development Board, General Electric Series,
3.70%, 7/13/98................................. 2,000
2,500 Montgomery County, Alabama, Industrial
Development Bond, 3.75%, 7/13/98............... 2,500
Montgomery County, Maryland, BANS,
4,000 3.70%, 7/16/98................................... 4,000
7,700 3.65%, 8/11/98................................... 7,700
3,000 3.65%, 8/12/98................................... 3,000
1,500 Municipal Electric Authority, North Carolina,
Revenue Bonds, Series B, 3.70%, 8/06/98........ 1,500
2,600 New York City, New York, Municipal Water Finance
Authority, Water & Sewer System Revenue Bonds,
3.60%, 7/15/98................................. 2,600
2,990 Omaha Nebraska, Public Power District, 3.55%,
8/05/98........................................ 2,990
7,700 Platte River Authority, Colorado,
3.75%, 7/20/98................................. 7,700
</TABLE>
The accompanying notes are an integral part of the financial statements.
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152
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FIXED RATE INSTRUMENTS (CONT.)
COMMERCIAL PAPER (CONT.)
<TABLE>
<C> <S> <C>
Rochester, Minnesota, Health Facilities, Mayo
Clinic,
$ 1,500 3.60%, 7/21/98, Series 92A....................... $ 1,500
6,000 3.60%, 7/21/98, Series 92C....................... 6,000
1,000 3.40%, 8/19/98, Series B......................... 1,000
1,565 3.55%, 8/19/98, Series E......................... 1,565
1,500 3.55%, 8/19/98, Series F......................... 1,500
Salt River, Arizona,
2,800 3.75%, 8/14/98................................... 2,800
6,600 3.75%, 9/14/98................................... 6,600
11,006 Salt River, Arizona, Agricultural & Power
District Revenue Bonds, 3.60%, 7/08/98......... 11,006
1,500 San Antonio Texas, 3.70%, 8/11/98................ 1,500
3,600 San Antonio, Texas, Electric & Gas Revenue Bond,
3.55%, 8/12/98................................. 3,600
1,300 State of Connecticut, Special Assessment, 3.50%,
9/11/98........................................ 1,300
Sunshine State, Florida, Government Finance
Authority,
3,400 3.70%, 7/09/98, Series B......................... 3,400
4,800 3.55%, 7/10/98, Series A......................... 4,800
3,300 3.55%, 7/10/98, Series A......................... 3,300
2,000 3.55%, 7/13/98, Series 86........................ 2,000
5,000 Sweetwater County, Wyoming, 3.70%, 8/06/98....... 5,000
5,000 Tennessee State, School Board Authority, 3.50%,
9/10/98........................................ 5,000
2,400 Texas A&M University, 3.70%, 7/16/98............. 2,400
1,000 Texas State, Public Finance Authority, Series B,
3.75%, 9/14/98................................. 1,000
6,100 Wake County, North Carolina, 3.70%, 8/10/98...... 6,100
2,428 Wisconsin State, General Obligation, 3.75%,
8/18/98........................................ 2,428
10,000 Wisconsin State Transportation Authority, Series
A, TRANS, 3.70%, 7/16/98....................... 10,000
5,122 Wisconsin State, Series A, 3.35%, 7/14/98........ 5,122
----------
304,694
----------
TOTAL FIXED RATE INSTRUMENTS................................ 386,823
----------
VARIABLE/FLOATING RATE INSTRUMENTS (49.7%)
DAILY VARIABLE RATE BONDS (26.3%)
2,600 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil Co., 4.00%, 9/01/23... 2,600
Burke County, Georgia, Development Authority
Pollution Control, Revenue Bonds,
1,000 3.90%, 7/01/24................................... 1,000
5,500 3.75%, 7/01/24, Series 94........................ 5,500
7,500 3.90%, 4/01/25................................... 7,500
3,500 3.90%, 9/01/25................................... 3,500
California Pollution Control Financing Authority,
Revenue Bonds, Southern California Edison,
1,500 3.45%, 2/28/08, Series 86B....................... 1,500
1,100 3.45%, 2/28/08, Series 86D....................... 1,100
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 4,000 Chattanooga-Hamilton County, Tennessee, Hospital
Authority Revenue Bonds, Erlanger Medical
Center,
4.00%, 10/01/17................................ $ 4,000
Chicago, Illinois, O'Hare International Airport
Special Facilities Revenue Bonds, American
Airlines, Inc.,
4.00%, 12/01/17, Series A...................... 4,200
4,200
3,500 4.00%, 12/01/17, Series B........................ 3,500
3,750 4.00%, 12/01/17, Series D........................ 3,750
2,900 City of Forsyth, Montana, Pollution Control
Revenue Bonds, 3.80%, 1/01/18.................. 2,900
2,800 Columbia, Alabama, Industrial Development Board,
Pollution Control Revenue Bonds, Series C,
3.75%, 10/01/22................................ 2,800
1,700 Delta County, Michigan, Environmental Improvement
Revenue Bonds, Mead Corp., Series C, 4.00%,
12/01/23....................................... 1,700
East Baton Rouge Parish, Louisiana, Pollution
Control Revenue Bonds,
Exxon Project,
4.00%, 11/01/19................................ 2,700
2,700
5,500 3.90%, 3/01/22................................... 5,500
4,900 Farmington, New Mexico, Pollution Control Revenue
Bonds, Series A, 3.90%, 5/01/24................ 4,900
1,000 Geisinger Authority, Pennsylvania Health System,
Series B, 4.00%, 7/01/22....................... 1,000
4,200 Gulf Coast Waste Disposal Authority, Texas,
Pollution Control Revenue Bonds, Exxon Project,
3.80%, 6/01/20................................. 4,200
1,200 Hamond, Indiana, Pollution Control Revenue Bonds,
Amoco Oil Company Project, 3.80%, 2/01/22...... 1,200
5,000 Hapeville, Georgia, Industrial Development
Authority, Series 85, 4.00%, 11/01/15.......... 5,000
Harris County, Texas, Health Facilities
Development Corp., Methodist Hospital, 4.00%,
12/01/25, Series 94............................ 20,900
20,900
1,000 4.00%, 12/01/26.................................. 1,000
Harris County, Texas, Industrial Development
Pollution Control Revenue Bonds, Exxon Project,
3.90%, 3/01/24, Series 84A..................... 2,200
2,200
2,600 3.90%, 3/01/24, Series 84B....................... 2,600
5,700 Hurley, New Mexico, Pollution Control Revenue
Bonds, Series 85,
3.85%, 12/01/15................................ 5,700
2,300 Jackson County, Mississippi, Port Facility,
Chevron Project, Series 93,
3.80%, 6/01/23................................. 2,300
900 Kansas City, Kansas, Industrial Development
Authority, Revenue Bonds, PQ Corp., 3.90%,
8/01/15........................................ 900
</TABLE>
The accompanying notes are an integral part of the financial statements.
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Municipal Money Market Portfolio
153
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
DAILY VARIABLE RATE BONDS (CONT.)
<TABLE>
<C> <S> <C>
$ 2,000 Lake Charles, Louisiana, Harbor & Terminal
District Port Facilities,
Series 84, 3.85%, 11/01/11..................... $ 2,000
Lincoln County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project, 4.00%, 11/01/14,
Series 84C..................................... 2,500
2,500
4.00%, 11/01/14, Series 84D...................... 2,500
2,500
3,120 Louisiana Public Facilities Authority, Industrial
Development, Kenner Hotel, Series 85, 4.00%,
12/01/15....................................... 3,120
1,200 Manatee County, Florida, Pollution Control,
3.75%, 9/01/24................................. 1,200
Maricopa County, Arizona, Pollution Control
Revenue Bonds, Arizona Public Service Co.,
3.90%, 5/01/29, Series C....................... 5,500
5,500
1,700 3.80%, 5/01/29, Series E......................... 1,700
3,000 3.85%, 5/01/29, Series F......................... 3,000
2,700 Metropolitan Nashville, Airport Authority,
Special Facility Revenue Bonds, American
Airlines Project, Series A, 4.00%, 10/01/12.... 2,700
Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University,
3.85%, 9/01/30, Series A....................... 2,400
2,400
3,500 3.85%, 9/01/30, Series B......................... 3,500
2,200 Missouri State, Infrastructure Development
Revenue Bonds, City Union Station, Series B,
3.80%, 12/01/03................................ 2,200
4,000 Monroe County, Georgia, Pollution Control
Revenue, Georgia Power Co., Series 95, 3.75%,
7/01/25........................................ 4,000
3,400 New Jersey, Economic Development Authority,
Revenue Bonds,
3.85%, 5/01/01................................. 3,400
1,300 New York City, New York, Cultural Resources,
Revenue Bonds, Series B, 3.85%, 12/01/15....... 1,300
2,200 New York City, New York, Sub-Series A10 4.10%,
8/01/16........................................ 2,200
New York City, New York, General Obligation
Bonds,
4.00%, 8/01/15, Sub-Series A5.................. 1,500
1,500
3,650 3.75%, 8/01/22, Sub-Series A4.................... 3,650
1,700 4.10%, 8/15/22, Series B......................... 1,700
3,250 3.75%, 8/01/23, Sub-Series A4.................... 3,250
1,500 4.10%, 10/01/23, Series C........................ 1,500
New York City, New York, Municipal Water Finance
Authority, Water & Sewer System Revenue Bonds,
4.00%, 6/15/22................................. 2,800
2,800
6,800 4.00%, 6/15/23................................... 6,800
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$10,000 New York State Energy Research & Development
Authority, Pollution Control Revenue Bonds,
Niagara
3.75%, 7/01/15................................. $ 10,000
4,100 New York State, Dormitory Authority Revenue
Bonds, Cornell University, Series B, 3.85%,
7/01/25........................................ 4,100
2,700 Nueces River Authority, Texas, Pollution Control
Revenue Bonds, Series 85, 4.10%, 12/01/99...... 2,700
5,200 Ohio State Air Quality Development Authority
Revenue Bonds, Cincinnati Gas & Electric,
Series B, 3.80%, 12/01/15...................... 5,200
4,100 Ohio State Air Quality Development Authority
Revenue Bonds, Gas & Electric, Series 95B,
3.80%, 9/01/30................................. 4,100
2,400 Peninsula Port Authority, Virginia, Coal Revenue
Bonds, 3.85%, 7/01/16.......................... 2,400
Pennsylvania Higher Education Authority Revenue
Bonds, Carnegie Mellon University,
4.00%, 11/01/29, Series 95C.................... 2,700
2,700
2,600 4.00%, 11/01/30, Series 95D...................... 2,600
3,300 Pennsylvania State Higher Educational Facilities
Authority, Colleges & Universities Revenue
Bonds,
3.75%, 10/01/09................................ 3,300
Philadelphia, Pennsylvania, Hospitals & Higher
Educational Facilities Authority, Childrens
Hospital Project,
4.00%, 3/01/27, Series 92B..................... 3,800
3,800
8,400 4.00%, 3/01/27, Series 96A....................... 8,400
Platte County, Wyoming, Pollution Control Revenue
Bonds,
3.80%, 7/01/14, Series A....................... 3,800
3,800
600 3.80%, 7/01/14, Series B......................... 600
Port of Saint Helens, Oregon, Pollution Control
Revenue Bonds, Portland General Electric Co.,
4.35%, 4/01/10, Series A....................... 2,000
2,000
1,600 4.15%, 6/01/10, Series B......................... 1,600
2,000 Putman County, New York, 3.75%, 4/01/32.......... 2,000
Raleigh-Durham, North Carolina, Airport
Authority,
3.85%, 11/01/15, Series A...................... 4,000
4000
600 3.85%, 11/01/15, Series B........................ 600
1,400 Saint Charles Parish, Louisiana, Pollution
Control Revenue Bonds, Shell Oil, Series 92B,
3.75%, 10/01/22................................ 1,400
200 Saint Lucie County, Florida, Pollution Control
Revenue Bonds, Florida Power & Light Co.,
3.75%, 1/01/26................................. 200
6,700 Salt Lake County, Utah, Pollution Control
Revenue, SVC Station Holdings,
4.00%, 8/01/07................................. 6,700
4,450 Southwest, Texas, Higher Education Authority
Revenue Bonds, Southern Methodist University,
3.85%, 7/01/15................................. 4,450
</TABLE>
The accompanying notes are an integral part of the financial statements.
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Municipal Money Market Portfolio
154
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
DAILY VARIABLE RATE BONDS (CONT.)
<TABLE>
<C> <S> <C>
$ 2,950 Sublette County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project, 3.80%,
11/01/14....................................... $ 2,950
1,100 Sweetwater County, Wyoming, Pacificorp, Series
88B, 3.80%, 1/01/14............................ 1,100
4,300 Texas State, Water Development Board Revenue
Bonds, Series A, 4.00%, 3/01/15................ 4,300
4,000 Valdez, Alaska, Marine Terminal Authority, Exxon
Project, Series 85, 3.80%, 10/01/25............ 4,000
----------
259,070
----------
WEEKLY VARIABLE RATE BONDS (23.4%)
1,900 Alaska State, Housing Finance Corp., Revenue
Bonds, Series C, 3.50%, 6/01/26................ 1,900
2,500 Albuquerque, New Mexico, Revenue Bonds, Series
91A, 3.50%, 7/01/22............................ 2,500
2,700 Allegheny County, Pennsylvania, Hospital
Development Authority, Series 95B, 3.45%,
9/01/20........................................ 2,700
300 Arkansas State, Development Finance Authority
Bond, Series B, 3.50%, 6/01/12................. 300
2,300 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Borden, Inc., 3.50%, 12/01/09... 2,300
Beaver County, Pennsylvania, Industrial
Development Authority,
Duquesne Light,
3.50%, 8/01/09, Series B....................... 1,000
1,000
1,000 3.50%, 8/01/20, Series A......................... 1,000
10,510 Burke County, Georgia, Development Authority,
Oglethorpe, Pollution Control Revenue Bonds,
3.40%, 1/01/16, Series 93A..................... 10,510
5,600 Charlotte, North Carolina, Series 93A, 7/01/16... 5,600
1,000 City of Baltimore, Maryland, Pollution Control
Revenue Bonds, General Motors Corp., 3.60%,
2/01/00........................................ 1,000
2,500 City of Columbia, Missouri, Special Revenue
Bonds, Series 88A,
3.50%, 6/01/08................................. 2,500
1,500 City of Columbia, Missouri, Water & Electric
Revenue Bonds, Series 85B, 3.50%, 12/01/15..... 1,500
2,600 City of Midlothian, Texas, Industrial Development
Corp., Pollution Control Revenue Bonds,
Box-Crow Cement Co., 3.55%, 12/01/09........... 2,600
1,000 City of Minnetonka, Minnesota, Multifamily,
Cliffs Ridgedale,
3.60%, 9/15/25................................. 1,000
1,300 City of San Antonio, Texas, Higher Education
Authority, Trinity University, 3.50%,
4/01/04........................................ 1,300
1,900 City of Seattle, Washington, Municipal Light &
Power, Revenue Bonds,
3.40%, 6/01/21................................. 1,900
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
Clark County, Nevada, Airport Revenue Bonds,
3.40%, 7/01/12, Series 93A..................... $ 12,700
$12,700
2,600 3.40%, 7/01/25, Series 95-A1..................... 2,600
2,100 Clarksville, Tennessee, Public Building
Authority, Revenue Bonds,
3.40%, 12/01/00................................ 2,100
600 Colorado Student Obligation Bond Authority,
Student Loan Revenue Bonds, Series 91-C1,
3.40%, 8/01/00................................. 600
11,700 Connecticut State, Health & Education, 3.45%,
7/01/27........................................ 11,700
4,965 Connecticut State, Revenue Bonds,
Series B, 3.30%, 5/15/14....................... 4,965
6,300 Connecticut State, Special Tax Obligation Revenue
Bonds, Series 1,
3.50%, 12/01/10................................ 6,300
4,600 Cook County, Illinois, General Obligation Bonds,
3.50%, 12/01/01................................ 4,600
5,000 Cuyahoga County, Ohio, Hospital Revenue Bonds,
The Cleveland Clinic, Series C, 3.55%,
1/01/16........................................ 5,000
1,900 Dade County, Florida, Industrial Development
Authority, Revenue Bonds, Series D 3.55%,
1/01/16........................................ 1,900
1,800 Dade County, Florida, Health Facilities Authority
Revenue Bonds, Miami Childrens Hospital, 3.40%,
9/01/25........................................ 1,800
10,500 Dade County, Florida, Water & Sewer Revenue
Bonds, Series 94,
3.40%, 10/05/22................................ 10,500
3,000 Foothill/Eastern California Toll Road, Series
95C, TRANS, 3.10%, 1/02/35..................... 3,000
2,000 Franklin County, Ohio, Series 95,
3.45%, 6/01/16................................. 2,000
Georgia, Municipal Gas Authority, Gas Revenue
Bonds,
3.40%, 9/01/07, Series B....................... 8,000
8,000
8,000 3.40%, 1/01/08, Series C......................... 8,000
2,500 Glynn, Georgia, Brunswick Memorial Hospital,
Series 96, 3.40%, 8/01/16...................... 2,500
Harris County, Texas, Toll Road Revenue Bonds,
3.50%, 8/01/15, Series 94D..................... 900
900
5,000 3.50%, 8/01/20, Series 94G....................... 5,000
5,000 3.50%, 8/01/20, Series 94H....................... 5,000
7,000 Huntsville, Alabama, Healthcare Facilities
Authority, Series A, 3.40%, 6/01/27............ 7,000
Illinois Development Finance Authority, Revenue
Bonds,
5,000 3.50%, 2/01/29................................... 5,000
3,500 3.45%, 6/01/31................................... 3,500
300 Illinois Development Finance Authority, A.E.
Staley Manufacturing, Series 85, 3.45%,
12/01/05....................................... 300
5,000 Illinois Development Finance Authority, Series
93A, 3.60%, 3/01/09............................ 5,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
155
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- ------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
VARIABLE/FLOATING RATE INSTRUMENTS (CONT.)
WEEKLY VARIABLE RATE BONDS (CONT.)
<TABLE>
<C> <S> <C>
$ 3,000 Illinois State, Toll Highway Authority, Series B,
3.40%, 1/01/10................................. $ 3,000
4,000 Jefferson Parish, Louisiana, Hospital Service
District No. 001 Revenue Bonds, West Jefferson
Medical Center,
3.60%, 1/01/26................................. 4,000
900 Lehigh County, Pennsylvania, Allegheny Electric
Cooperative, 3.70%, 12/01/15................... 900
1,000 Louisiana Public Facilities Authority, Hospital
Revenue Bonds, Series 85, 3.60%, 12/01/00...... 1,000
2,000 Maryland Health & Higher Education Facilities,
Series A, 3.50%, 7/01/27....................... 2,000
2,000 Massachusetts Health & Education Facilities
Authority, Revenue Bonds, 3.40%, 2/01/16....... 2,000
1,000 Massachusetts Health & Education Facilities
Authority, Series G-1,
3.35%, 1/01/19................................. 1,000
3,900 Mayfield, Kentucky, Multi-City Lease, Revenue
Bonds, 3.70%, 7/01/26.......................... 3,900
2,200 Mecklenburg County, North Carolina, Series B,
3.50%, 3/01/15................................. 2,200
2,400 Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University,
3.50%, 9/01/09................................. 2,400
3,300 Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University,
3.50%, 12/01/16................................ 3,300
3,000 Municipal Electric Authority, Georgia, Revenue
Bonds, Series 85C,
3.50%, 3/01/20................................. 3,000
2,900 New York State Local Government Assistance Corp.,
Series D,
3.50%, 4/01/25................................. 2,900
800 North Carolina, Educational Facilities &
Financial Agency, Revenue Bonds, Bowman Gray
School
3.50%, 9/01/26................................. 800
1,750 North Carolina, Medical Care, Community Hospital,
Revenue Bonds,
3.25%, 12/01/25................................ 1,750
3,900 Nueces County, Texas, Health Facilities, Driscoll
Childrens' Foundation,
3.65%, 7/01/15................................. 3,900
1,500 Person County, North Carolina, Carolina Power &
Light, 3.70%, 11/01/19......................... 1,500
1,140 Person County, North Carolina, Industrial
Facilities & Pollution Control, Revenue Bonds,
Series A
3.70%, 11/01/19................................ 1,140
700 Pinellas County, Florida, Health Facilities,
Bayfront Medical Center,
3.40%, 6/01/09................................. 700
200 Polk County, Iowa, Hospital Equipment &
Improvement Authority, 3.60%, 12/01/05......... 200
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 1,500 Port of Corpus Christi, Texas, Marine Terminal,
R.J. Reynolds Metals Series, 3.70%, 9/01/14.... $ 1,500
550 Putnam County, Florida, Development Authority,
Seminole Electric,
Series 84-H1, 3.65%, 3/15/14................... 550
1,000 Rapides Parish, Louisiana, Industrial Development
Revenue Bonds, Central Louisiana Electric Co.,
3.35%, 7/01/18................................. 1,000
700 Sheboygan, Wisconsin, Wisconsin Power & Light
Co., 3.70%, 8/01/14............................ 700
8,100 Texas State, General Obligation Bonds, Veterans
Housing Assistance-Fund I, 3.40%, 12/01/16..... 8,100
University of Alabama,
1,500 3.50%, 10/01/07, Series A........................ 1,500
2,000 3.50%, 10/01/07, Series B........................ 2,000
1,100 University of North Carolina, Chapel Hill Fund
Inc., Certificates of Participation, 3.65%,
10/01/09....................................... 1,100
2,200 University of Wisconsin, Hospitals & Clinics
Authority, Revenue Bonds, 3.50%, 4/01/26....... 2,200
5,000 Washington State, General Obligation Bonds,
Series VR 96B, 3.45%, 6/01/20.................. 5,000
Washington State, Public Power Supply Revenue
Bonds,
3,300 3.45%, 7/01/17, Series 1A-2...................... 3,300
1,900 3.45%, 7/01/17, Series 93-1A3.................... 1,900
520 Wake County, North Carolina, Industrial
Facilities & Pollution Control, Financing
Authority, Revenue Bonds, Series A 3.50%,
5/01/15........................................ 520
----------
230,535
----------
TOTAL VARIABLE/FLOATING RATE INSTRUMENTS.................... 489,605
----------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $876,428)................ 876,428
----------
TAXABLE INSTRUMENTS (10.6%)
U.S. GOVERNMENT & AGENCY OBLIGATIONS (10.6%)
Federal Home Loan Bank Discount Note
13,968 5.43%, 7/24/98................................... 13,919
89,800 5.40%, 7/01/98................................... 89,800
----------
TOTAL TAXABLE INSTRUMENTS (Cost $103,719)................... 103,719
----------
TOTAL INVESTMENTS (99.6%) (Cost $980,147)................... 980,147
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.6%)
Interest Receivable............................ $ 6,364
Other.......................................... 28 6,392
----------
LIABILITIES ( - 0.2%)
Dividends Payable.............................. (1,185)
Investment Advisory Fees Payable............... (664)
Administrative Fees Payable.................... (123)
Custodian Fees Payable......................... (12)
Director's Fees & Expenses Payable............. (44)
Bank Overdraft Payable......................... (6)
Other Liabilities.............................. (79) (2,113)
---------- --------
NET ASSETS (100%)............................................ $984,426
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
156
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -----------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital.................................. $984,478
Accumulated Net Realized Loss.................... (52)
--------
NET ASSETS................................................... $984,426
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 984,452,852 outstanding $0.001 par value
shares (authorized 4,000,000,000 shares).................... $1.00
--------
--------
</TABLE>
- ------------------------------------------------------------
BANS -- Bond Anticipation Notes
TRANS -- Tax & Revenue Anticipation Notes
Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based upon a designated base rate. These instruments are payable
on demand.
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 U.S. Treasury escrow.
- ------------------------------------------------------------
SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE CLASSIFICATION
<TABLE>
<CAPTION>
AMORTIZED COST PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- -------------------------------------------------------------------------
Alabama................................ $ 17,800 1.8%
Alaska................................. 5,900 0.5
Arizona................................ 32,906 3.3
Arkansas............................... 300 --
California............................. 5,600 0.5
Colorado............................... 8,300 0.9
Connecticut............................ 24,265 2.5
Florida................................ 48,875 5.0
Georgia................................ 62,310 6.1
Hawaii................................. 6,000 0.6
Illinois............................... 53,550 5.5
Indiana................................ 7,200 0.7
Iowa................................... 200 --
Kansas................................. 3,400 0.4
Kentucky............................... 3,900 0.4
Louisiana.............................. 39,170 4.0
Maryland............................... 27,700 2.8
Massachusetts.......................... 12,600 1.3
Michigan............................... 27,256 2.8
Minnesota.............................. 17,465 1.8
Mississippi............................ 2,300 0.2
Missouri............................... 29,050 3.0
Montana................................ 4,097 0.4
Nebraska............................... 2,990 0.3
Nevada................................. 17,300 1.8
New Jersey............................. 3,400 0.4
New Mexico............................. 17,100 1.7
New York............................... 44,300 4.5
North Carolina......................... 26,810 2.7
Ohio................................... 16,300 1.7
Oregon................................. 3,600 0.4
Pennsylvania........................... 33,720 3.4
Tennessee.............................. 13,800 1.4
Texas.................................. 168,773 17.2
Utah................................... 6,700 0.7
Vermont................................ 1,003 0.1
Virginia............................... 13,172 1.3
Washington............................. 22,100 2.3
Wisconsin.............................. 22,666 2.3
Wyoming................................ 22,550 2.3
--------------- ---
$ 876,428 89.0%
--------------- ---
--------------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
157
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE
INTERNATIONAL ASIAN ASIAN EMERGING EUROPEAN EUROPEAN
ALLOCATION EQUITY REAL ESTATE MARKETS EQUITY REAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 2,514 $ 1,123 $ 83 $ 16,976 $ 5,513 $ 595
Interest 1,564 176 27 6,164 437 58
Less: Foreign Taxes Withheld (289) (86) (6) (659) (679) (87)
------- ---------- ------------ --------- --------- ------
Total Income 3,789 1,213 104 22,481 5,271 566
------- ---------- ------------ --------- --------- ------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 675 354 24 9,870 1,176 132
Less: Fees Waived (233) (247) (24) -- (111) (96)
------- ---------- ------------ --------- --------- ------
Investment Advisory Fees -- Net 442 107 -- 9,870 1,065 36
Administrative Fees 180 72 6 1,228 233 28
Sub-Administrative Fees -- -- -- 80 -- --
Custodian Fees 117 169 17 2,068 78 21
Directors' Fees and Expenses 4 4 1 37 7 1
Filing and Registration Fees 47 32 24 35 56 39
Foreign Tax Expense -- 57 -- 208 -- --
Bank Overdraft Expense -- 53 1 -- 1 6
Insurance 2 4 -- 26 3 --
Interest Expense -- -- -- 412 -- --
Professional Fees 17 24 13 73 18 14
Shareholder Reports 21 19 23 31 6 25
Distribution Fees on Class B Shares -- 2 -- 13 8 2
Other Expenses 3 15 1 7 7 3
Expenses Reimbursed by Adviser -- -- (55) -- -- --
------- ---------- ------------ --------- --------- ------
Total Expenses 833 558 31 14,088 1,482 175
------- ---------- ------------ --------- --------- ------
NET INVESTMENT INCOME 2,956 655 73 8,393 3,789 391
------- ---------- ------------ --------- --------- ------
NET REALIZED GAIN (LOSS):
Investments Sold 105 (28,876) (2,002) (122,494) 16,433 1,076
Foreign Currency Transactions 3,563 (860) 21 (3,828) (16) (59)
Futures Contracts 4,756 -- -- -- -- --
Swaps -- -- -- (5,476) -- --
------- ---------- ------------ --------- --------- ------
Total Net Realized Gain (Loss) 8,424 (29,736) (1,981) (131,798) 16,417 1,017
------- ---------- ------------ --------- --------- ------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 21,930 11,683* (349) (106,199)** 40,626 908
Foreign Currency Translations (1,716) (322) 49 5,368 120 13
Futures Contracts 230 -- -- -- -- --
Swaps -- -- -- (1,011) -- --
------- ---------- ------------ --------- --------- ------
Total Net Change in Unrealized
Appreciation (Depreciation) 20,444 11,361 (300) (101,842) 40,746 921
------- ---------- ------------ --------- --------- ------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 28,868 (18,375) (2,281) (233,640) 57,163 1,938
------- ---------- ------------ --------- --------- ------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 31,824 $ (17,720) $ (2,208) $(225,247) $ 60,952 $ 2,329
------- ---------- ------------ --------- --------- ------
------- ---------- ------------ --------- --------- ------
- ---------------
</TABLE>
* Net of foreign taxes of $14,000 on unrealized appreciation.
** Net of foreign taxes of $489,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
158
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL INTERNATIONAL INTERNATIONAL INTERNATIONAL JAPANESE LATIN
EQUITY EQUITY MAGNUM SMALL CAP EQUITY AMERICAN
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 2,162 $ 47,943 $ 3,262 $ 4,166 $ 477 $ 1,298
Interest 95 4,789 558 250 135 84
Less: Foreign Taxes Withheld (197) (5,371) (407) (514) (74) (24)
---------- -------------- ------- ------- --------- ---------
Total Income 2,060 47,361 3,413 3,902 538 1,358
---------- -------------- ------- ------- --------- ---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 644 13,088 863 1,250 327 435
Less: Fees Waived -- Adviser (74) -- (120) (62) (68) --
---------- -------------- ------- ------- --------- ---------
Investment Advisory Fees -- Net 570 13,088 743 1,188 259 435
Administrative Fees 127 2,533 175 208 68 64
Sub-Administrative Fees -- -- -- -- -- 16
Bank Overdraft Expense -- 1 -- 3 74 2
Custodian Fees 35 359 85 67 22 56
Filing and Registration Fees 39 63 14 18 25 21
Insurance 1 39 2 4 2 1
Directors' Fees and Expenses 3 74 5 7 4 --
Foreign Tax Expense -- -- -- 3 -- 44
Professional Fees 18 60 38 14 15 16
Shareholder Reports 5 37 14 6 14 4
Distribution Fees on Class B Shares 11 8 38 -- 2 11
Other Expenses 4 53 2 4 3 --
---------- -------------- ------- ------- --------- ---------
Total Expenses 813 16,315 1,116 1,522 488 670
---------- -------------- ------- ------- --------- ---------
NET INVESTMENT INCOME 1,247 31,046 2,297 2,380 50 688
---------- -------------- ------- ------- --------- ---------
NET REALIZED GAIN (LOSS):
Investments Sold 5,209 166,207 3,693 7,041 (8,077) 943
Foreign Currency Transactions (12) 8,105 2,115 1,074 4,230 (70)
---------- -------------- ------- ------- --------- ---------
Total Net Realized Gain (Loss) 5,197 174,312 5,808 8,115 (3,847) 873
---------- -------------- ------- ------- --------- ---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 7,195 332,093 27,751 29,830 6,757 (13,077)*
Foreign Currency Translations (26) (14,205) (1,022) (1,271) (627) 8
---------- -------------- ------- ------- --------- ---------
Total Net Change in Unrealized
Appreciation (Depreciation) 7,169 317,888 26,729 28,559 6,130 (13,069)
---------- -------------- ------- ------- --------- ---------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE
IN UNREALIZED APPRECIATION (DEPRECIATION) 12,366 492,200 32,537 36,674 2,283 (12,196)
---------- -------------- ------- ------- --------- ---------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 13,613 $ 523,246 $ 34,834 $ 39,054 $ 2,333 $ (11,508)
---------- -------------- ------- ------- --------- ---------
---------- -------------- ------- ------- --------- ---------
</TABLE>
- ---------------
* Net of foreign tax of $4,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
159
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGRESSIVE EMERGING EQUITY SMALL CAP U.S. EQUITY
EQUITY GROWTH GROWTH VALUE EQUITY TECHNOLOGY PLUS
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 983 $ 1,153 $ 3,322 $ 215 $ 15 $ 220
Interest 318 49 692 63 56 19
Less: Foreign Taxes Withheld -- -- -- -- -- --
----------- --------- ---------- ------ ----------- ------
Total Income 1,301 1,202 4,014 278 71 239
----------- --------- ---------- ------ ----------- ------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 901 337 2,210 207 149 62
Less: Fees Waived (31) (39) (4) (92) (87) (61)
----------- --------- ---------- ------ ----------- ------
Investment Advisory Fees -- Net 870 298 2,206 115 62 1
Administrative Fees 175 56 570 41 26 25
Bank Overdraft Expense 2 -- 3 1 12 1
Custodian Fees 17 28 38 14 9 13
Filing and Registration Fees 31 11 57 15 19 23
Insurance 2 1 7 1 -- --
Directors' Fees and Expenses 4 2 15 1 1 1
Professional Fees 16 12 22 18 32 8
Shareholder Reports 8 6 21 7 34 31
Distribution Fees on Class B Shares 26 2 55 9 2 1
Dividend Expense for Securities Sold Short 2 -- -- -- -- --
Other Expenses 2 7 7 32 2 7
----------- --------- ---------- ------ ----------- ------
Total Expenses 1,155 423 3,001 254 199 111
----------- --------- ---------- ------ ----------- ------
NET INVESTMENT INCOME (LOSS) 146 779 1,013 24 (128) 128
----------- --------- ---------- ------ ----------- ------
NET REALIZED GAIN (LOSS):
Investments Sold 25,980 14,071 73,550 4,090 1,521 2,503
Foreign Currency Transactions -- -- -- -- -- --
Securities Sold Short (300) -- -- -- 159 --
----------- --------- ---------- ------ ----------- ------
Total Net Realized Gain (Loss) 25,680 14,071 73,550 4,090 1,680 2,503
----------- --------- ---------- ------ ----------- ------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investments (1,608) (2,939) 25,773 (230) 4,030 1,010
Foreign Currency Translations -- -- -- -- -- --
Short Sales (26) -- -- -- (147) --
----------- --------- ---------- ------ ----------- ------
Total Net Change in Unrealized
Appreciation (Depreciation) (1,634) (2,939) 25,773 (230) 3,883 1,010
----------- --------- ---------- ------ ----------- ------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 24,046 11,132 99,323 3,860 5,563 3,513
----------- --------- ---------- ------ ----------- ------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 24,192 $ 11,911 $ 100,336 $ 3,884 $ 5,435 $ 3,641
----------- --------- ---------- ------ ----------- ------
----------- --------- ---------- ------ ----------- ------
<CAPTION>
U.S. REAL VALUE
ESTATE EQUITY
PORTFOLIO PORTFOLIO
(000) (000)
<S> <C> <C>
- ---------------------------------------------
INVESTMENT INCOME:
Dividends $ 6,673 $ 1,043
Interest 421 42
Less: Foreign Taxes Withheld (11) --
---------- ----------
Total Income 7,083 1,085
---------- ----------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,425 249
Less: Fees Waived (28) (49)
---------- ----------
Investment Advisory Fees -- Net 1,397 200
Administrative Fees 278 79
Bank Overdraft Expense -- 5
Custodian Fees 22 13
Filing and Registration Fees 19 17
Insurance 4 --
Directors' Fees and Expenses 9 2
Professional Fees 16 24
Shareholder Reports 31 7
Distribution Fees on Class B Shares 26 3
Dividend Expense for Securities Sold Short -- --
Other Expenses 4 5
---------- ----------
Total Expenses 1,806 355
---------- ----------
NET INVESTMENT INCOME (LOSS) 5,277 730
---------- ----------
NET REALIZED GAIN (LOSS):
Investments Sold 10,010 15,127
Foreign Currency Transactions (2) --
Securities Sold Short -- --
---------- ----------
Total Net Realized Gain (Loss) 10,008 15,127
---------- ----------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investments (34,973) (6,340)
Foreign Currency Translations 2 --
Short Sales -- --
---------- ----------
Total Net Change in Unrealized
Appreciation (Depreciation) (34,971) (6,340)
---------- ----------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) (24,963) 8,787
---------- ----------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ (19,686) $ 9,517
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
160
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING GLOBAL
MARKETS FIXED FIXED HIGH MUNICIPAL
BALANCED DEBT INCOME INCOME YIELD BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 30 $ -- $ -- $ -- $ 279 $ --
Interest 80 11,027 5,999 1,962 7,254 1,296
Less: Foreign Taxes Withheld -- (12) -- (19) -- --
--------- --------- ---------- ---------- ---------- ----------
Total Income 110 11,015 5,999 1,943 7,533 1,296
--------- --------- ---------- ---------- ---------- ----------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 14 893 341 144 311 90
Less: Fees Waived (14) -- (119) (82) -- (52)
--------- --------- ---------- ---------- ---------- ----------
Investment Advisory Fees -- Net -- 893 222 62 311 38
Administrative Fees 7 140 158 59 128 46
Bank Overdraft Expense -- 1 -- 2 -- --
Custodian Fees 3 52 9 11 10 2
Filing and Registration Fees 15 34 22 23 46 11
Insurance -- 2 2 1 -- 1
Interest Expense -- 630 -- -- -- --
Directors' Fees and Expenses -- -- 4 2 -- 2
Professional Fees 10 25 13 14 14 11
Shareholder Reports 7 7 6 7 18 3
Distribution Fees on Class B shares 1 5 3 -- 11 --
Other Expenses 4 43 2 -- -- 2
Expenses Reimbursed by Adviser (27) -- -- -- -- --
--------- --------- ---------- ---------- ---------- ----------
Total Expenses 20 1,832 441 181 538 116
--------- --------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME 90 9,183 5,558 1,762 6,995 1,180
--------- --------- ---------- ---------- ---------- ----------
NET REALIZED GAIN (LOSS):
Investments Sold 439 (9,094) 2,951 1,066 3,011 388
Foreign Currency Transactions -- 73 -- (1,925) -- --
Securities Sold Short -- 13 -- -- -- --
Written Options -- 52 -- -- -- --
--------- --------- ---------- ---------- ---------- ----------
Total Net Realized Gain (Loss) 439 (8,956) 2,951 (859) 3,011 388
--------- --------- ---------- ---------- ---------- ----------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments (166) (10,876) (1,053) 1,565 (4,263) (415)
Foreign Currency Translations -- 223 -- 17 -- --
--------- --------- ---------- ---------- ---------- ----------
Total Net Change in Unrealized
Appreciation (Depreciation) (166) (10,653) (1,053) 1,582 (4,263) (415)
--------- --------- ---------- ---------- ---------- ----------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 273 (19,609) 1,898 723 (1,252) (27)
--------- --------- ---------- ---------- ---------- ----------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 363 $ (10,426) $ 7,456 $ 2,485 $ 5,743 $ 1,153
--------- --------- ---------- ---------- ---------- ----------
--------- --------- ---------- ---------- ---------- ----------
<CAPTION>
MUNICIPAL
MONEY MONEY
MARKET MARKET
PORTFOLIO PORTFOLIO
(000) (000)
<S> <C> <C>
- ---------------------------------------------
INVESTMENT INCOME:
Dividends $ -- $ --
Interest 45,952 16,053
Less: Foreign Taxes Withheld -- --
---------- ----------
Total Income 45,952 16,053
---------- ----------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 2,440 1,362
Less: Fees Waived -- --
---------- ----------
Investment Advisory Fees -- Net 2,440 1,362
Administrative Fees 1,264 725
Bank Overdraft Expense -- --
Custodian Fees 42 29
Filing and Registration Fees 97 91
Insurance 30 17
Interest Expense -- --
Directors' Fees and Expenses 36 20
Professional Fees 30 10
Shareholder Reports 24 --
Distribution Fees on Class B shares -- --
Other Expenses 14 25
Expenses Reimbursed by Adviser -- --
---------- ----------
Total Expenses 3,977 2,279
---------- ----------
NET INVESTMENT INCOME 41,975 13,774
---------- ----------
NET REALIZED GAIN (LOSS):
Investments Sold (3) (30)
Foreign Currency Transactions -- --
Securities Sold Short -- --
Written Options -- --
---------- ----------
Total Net Realized Gain (Loss) (3) (30)
---------- ----------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments -- --
Foreign Currency Translations -- --
---------- ----------
Total Net Change in Unrealized
Appreciation (Depreciation) -- --
---------- ----------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) (3) (30)
---------- ----------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 41,972 $ 13,744
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
161
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE INTERNATIONAL ALLOCATION
PORTFOLIO ASIAN EQUITY PORTFOLIO
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997 (UNAUDITED) DECEMBER 31, 1997
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,956 $ 2,394 $ 655 $ 1,278
Net Realized Gain (Loss) 8,424 14,193 (29,736) (69,153)
Change in Unrealized Appreciation
(Depreciation) 20,444 1,887 11,361 (45,989)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 31,824 18,474 (17,720) (113,864)
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (9,445) -- (42)
In Excess of Net Investment Income -- (220) -- --
Net Realized Gain -- (13,378) -- --
In Excess of Net Realized Gain -- -- -- (8,471)
CLASS B:
Net Investment Income -- (1) -- (1)
Net Realized Gain -- (2) -- --
In Excess of Net Realized Gain -- -- -- (130)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (23,046) -- (8,644)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed 115,214 44,577 135,910 191,230
Distributions Reinvested -- 20,551 -- 7,923
Redeemed (29,029) (105,088) (145,725) (356,756)
CLASS B:
Subscribed 545 53 1,544 2,594
Distributions Reinvested -- 3 -- 122
Redeemed (44) (669) (1,376) (10,134)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 86,686 (40,573) (9,647) (165,021)
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 118,510 (45,145) (27,367) (287,529)
NET ASSETS:
Beginning of Period 138,681 183,826 86,971 374,500
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 257,191 $ 138,681 $ 59,604 $ 86,971
- -----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ 2,736 $ (220) $ 2,955 $ 2,300
- -----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 9,926 3,824 15,913 12,051
Shares Issued on Distributions Reinvested -- 1,945 -- 420
Shares Redeemed (2,471) (8,432) (16,805) (22,811)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 7,455 (2,663) (892) (10,340)
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed 45 5 177 178
Shares Issued on Distributions Reinvested -- -- -- 6
Shares Redeemed (4) (59) (154) (615)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding 41 (54) 23 (431)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
162
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASIAN REAL ESTATE PORTFOLIO EMERGING MARKETS PORTFOLIO
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED OCTOBER 1, 1997* SIX MONTHS ENDED
JUNE 30, 1998 TO DECEMBER 31, JUNE 30, 1998 YEAR ENDED
(UNAUDITED) 1997 (UNAUDITED) DECEMBER 31, 1997
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 73 $ 33 $ 8,393 $ 6,730
Net Realized Gain (Loss) (1,981) (244) (131,798) 90,456
Change in Unrealized Appreciation
(Depreciation) (300) (389) (101,842) (160,459)
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (2,208) (600) (225,247) (63,273)
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (20) -- (7,299)
In Excess of Net Investment Income -- -- -- (7,147)
Net Realized Gain -- -- -- (70,779)
In Excess of Net Realized Gain -- -- -- (66,329)
CLASS B:
Net Investment Income -- -- -- (33)
In Excess of Net Investment Income -- -- -- (32)
Net Realized Gain -- -- -- (462)
In Excess of Net Realized Gain -- -- -- (433)
- -------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (20) -- (152,514)
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 8,749 3,005 309,878 651,308
Distributions Reinvested -- -- -- 141,670
Redeemed (6,030) -- (256,490) (380,590)
CLASS B:
Subscribed 576 -- 5,398 8,135
Distributions Reinvested -- -- -- 900
Redeemed (185) -- (1,907) (12,803)
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 3,110 3,005 56,879 408,620
- -------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 902 2,385 (168,368) 192,833
NET ASSETS:
Beginning of Period 2,385 -- 1,511,052 1,318,219
- -------------------------------------------------------------------------------------------------------------------------------
End of Period $ 3,287 $ 2,385 $ 1,342,684 $1,511,052
- -------------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ 53 $ (20) $ 5,658 $ (2,735)
- -------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,147 301 23,926 38,730
Shares Issued on Distributions Reinvested -- -- -- 11,430
Shares Redeemed (910) -- (19,811) (23,303)
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 237 301 4,115 26,857
- -------------------------------------------------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed 74 -- 451 488
Shares Issued on Distributions Reinvested -- -- -- 72
Shares Redeemed (28) -- (145) (784)
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding 46 -- 306 (224)
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
163
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EUROPEAN EQUITY PORTFOLIO EUROPEAN REAL ESTATE PORTFOLIO
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED SIX MONTHS ENDED OCTOBER 1, 1997*
JUNE 30, 1998 YEAR ENDED JUNE 30, 1998 TO DECEMBER 31,
(UNAUDITED) DECEMBER 31, 1997 (UNAUDITED) 1997
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 3,789 $ 4,680 $ 391 $ 81
Net Realized Gain (Loss) 16,417 24,610 1,017 (435)
Change in Unrealized Appreciation
(Depreciation) 40,746 9,365 921 (632)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 60,952 38,655 2,329 (986)
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (4,297) -- (12)
Net Realized Gain -- (15,891) -- --
CLASS B:
Net Investment Income -- (78) -- --
Net Realized Gain -- (319) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (20,585) -- (12)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
CLASS A:
Subscribed 155,502 146,810 39,192 25,148
Distributions Reinvested -- 19,418 -- 11
Redeemed (132,832) (119,644) (8,968) (9,021)
CLASS B:
Subscribed 9,371 4,098 3,002 826
Distributions Reinvested -- 374 -- --
Redeemed (5,694) (2,614) (206) --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 26,347 48,442 33,020 16,964
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 87,299 66,512 35,349 15,966
NET ASSETS:
Beginning of Period 247,522 181,010 15,966 --
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 334,821 $ 247,522 $ 51,315 $ 15,966
- -----------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income
(accumulated net investment loss)
included in end of period net assets $ 3,715 $ (74) $ 400 $ 9
- -----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 7,358 8,152 3,543 2,513
Shares Issued on Distributions Reinvested -- 1,086 -- 1
Shares Redeemed (6,326) (6,397) (806) (919)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 1,032 2,841 2,737 1,595
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed 426 222 266 83
Shares Issued on Distributions Reinvested -- 21 -- --
Shares Redeemed (260) (143) (19) --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 166 100 247 83
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
164
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL EQUITY PORTFOLIO
<S> <C> <C>
- ------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
(000) (000)
<S> <C> <C>
- ------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,247 $ 1,044
Net Realized Gain 5,197 9,315
Change in Unrealized Appreciation 7,169 9,902
- ------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 13,613 20,261
- ------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (2,113)
Net Realized Gain -- (5,966)
CLASS B:
Net Investment Income -- (105)
Net Realized Gain -- (328)
- ------------------------------------------------------------------------------------
Total Distributions -- (8,512)
- ------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 104,843 28,012
Distributions Reinvested -- 7,897
Redeemed (29,544) (19,393)
CLASS B:
Subscribed 6,191 5,204
Distributions Reinvested -- 424
Redeemed (2,314) (4,134)
- ------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 79,176 18,010
- ------------------------------------------------------------------------------------
Total Increase in Net Assets 92,789 29,759
NET ASSETS:
Beginning of Period 113,984 84,225
- ------------------------------------------------------------------------------------
End of Period $ 206,773 $ 113,984
- ------------------------------------------------------------------------------------
Undistributed net investment income
included in end of period net assets $ 1,372 $ 125
- ------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 4,873 1,503
Shares Issued on Distributions Reinvested -- 436
Shares Redeemed (1,420) (1,047)
- ------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 3,453 892
- ------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed 298 286
Shares Issued on Distributions Reinvested -- 24
Shares Redeemed (112) (232)
- ------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 186 78
- ------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
165
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY PORTFOLIO INTERNATIONAL MAGNUM PORTFOLIO
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997 (UNAUDITED) DECEMBER 31, 1997
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 31,046 $ 40,117 $ 2,297 $ 2,229
Net Realized Gain 174,312 286,219 5,808 4,430
Change in Unrealized Appreciation
(Depreciation) 317,888 8,239 26,729 (677)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 523,246 334,575 34,834 5,982
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (69,608) -- (5,428)
Net Realized Gain -- (234,828) -- (1,101)
CLASS B:
Net Investment Income -- (70) -- (938)
Net Realized Gain -- (262) -- (212)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (304,768) -- (7,679)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 393,428 593,523 65,467 108,822
Distributions Reinvested -- 274,428 -- 5,026
Redeemed (305,978) (339,313) (45,790) (38,220)
CLASS B:
Subscribed 5,924 1,717 10,034 16,947
Distributions Reinvested -- 297 -- 1,146
Redeemed (392) (4,302) (8,935) (13,200)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 92,982 526,350 20,776 80,521
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 616,228 556,157 55,610 78,824
NET ASSETS:
Beginning of Period 2,825,974 2,269,817 187,313 108,489
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 3,442,202 $ 2,825,974 $ 242,923 $ 187,313
- -----------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income
(accumulated net investment loss)
included in end of period net assets $ 27,963 $ (3,083) $ 2,360 $ 63
- -----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 20,035 32,518 5,317 9,451
Shares Issued on Distributions Reinvested -- 16,345 -- 462
Shares Redeemed (15,283) (17,950) (3,689) (3,275)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 4,752 30,913 1,628 6,638
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed 308 92 813 1,466
Shares Issued on Distributions Reinvested -- 18 -- 105
Shares Redeemed (20) (249) (745) (1,149)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding 288 (139) 68 422
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
166
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL SMALL CAP PORTFOLIO JAPANESE EQUITY PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997 (UNAUDITED) DECEMBER 31, 1997
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 2,380 $ 3,513 $ 50 $ (342)
Net Realized Gain (Loss) 8,115 11,579 (3,847) (1,306)
Change in Unrealized Appreciation
(Depreciation) 28,559 (19,088) 6,130 (9,222)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 39,054 (3,996) 2,333 (10,870)
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (4,472) -- (11,702)
In Excess of Net Investment Income -- (676) -- --
Net Realized Gain -- (10,992) -- --
CLASS B:
Net Investment Income -- -- -- (257)
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (16,140) -- (11,959)
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 65,237 64,122 54,112 126,168
Distributions Reinvested -- 14,482 -- 11,173
Redeemed (12,003) (64,267) (70,132) (190,192)
Transaction Fees 174 1,151 -- --
CLASS B:
Subscribed -- -- 1,029 2,478
Distributions Reinvested -- -- -- 256
Redeemed -- -- (1,167) (3,925)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 53,408 15,488 (16,158) (54,042)
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 92,462 (4,648) (13,825) (76,871)
NET ASSETS:
Beginning of Period 230,095 234,743 78,789 155,660
- --------------------------------------------------------------------------------------------------------------------------------
End of Period $ 322,557 $ 230,095 $ 64,964 $ 78,789
- --------------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ 1,704 $ (676) $ 2,159 $ 2,109
- --------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,505 3,683 8,688 15,980
Shares Issued on Distributions Reinvested -- 911 -- 1,916
Shares Redeemed (700) (3,803) (11,525) (23,936)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 2,805 791 (2,837) (6,040)
- --------------------------------------------------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed -- -- 162 311
Shares Issued on Distributions Reinvested -- -- -- 44
Shares Redeemed -- -- (194) (497)
- --------------------------------------------------------------------------------------------------------------------------------
Net Decrease in Class B Shares Outstanding -- -- (32) (142)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
167
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN AMERICAN PORTFOLIO AGGRESSIVE EQUITY PORTFOLIO
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997 (UNAUDITED) DECEMBER 31, 1997
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 688 $ (103) $ 146 $ 79
Net Realized Gain 873 17,285 25,680 33,177
Change in Unrealized Appreciation
(Depreciation) (13,069) 885 (1,634) 6,896
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (11,508) 18,067 24,192 40,152
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- -- -- (107)
In Excess of Net Investment Income -- -- -- (3)
Net Realized Gain -- (17,224) -- (26,339)
In Excess of Net Realized Gain -- (2,901) -- --
CLASS B:
Net Investment Income -- -- -- (4)
Net Realized Gain -- (1,101) -- (3,057)
In Excess of Net Realized Gain -- (185) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (21,411) -- (29,510)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 22,394 82,256 87,155 109,256
Distributions Reinvested -- 19,134 -- 24,425
Redeemed (31,780) (55,658) (40,889) (57,002)
CLASS B:
Subscribed 3,548 11,696 7,048 14,928
Distributions Reinvested -- 1,249 -- 3,039
Redeemed (1,654) (7,170) (4,798) (9,209)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions (7,492) 51,507 48,516 85,437
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (19,000) 48,163 72,708 96,079
NET ASSETS:
Beginning of Period 79,905 31,742 173,364 77,285
- ----------------------------------------------------------------------------------------------------------------------------
End of Period $ 60,905 $ 79,905 $ 246,072 $ 173,364
- ----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income (accumulated net
investment loss) included in end of
period net assets $ 654 $ (34) $ 143 $ (3)
- ----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,138 5,947 4,991 6,957
Shares Issued on Distributions Reinvested -- 1,858 -- 1,596
Shares Redeemed (3,058) (3,779) (2,342) (3,470)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding (920) 4,026 2,649 5,083
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed 338 875 399 939
Shares Issued on Distributions Reinvested -- 124 -- 200
Shares Redeemed (151) (496) (268) (587)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 187 503 131 552
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
168
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING GROWTH PORTFOLIO EQUITY GROWTH PORTFOLIO
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997 (UNAUDITED) DECEMBER 31, 1997
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 779 $ (535) $ 1,013 $ 1,774
Net Realized Gain 14,071 21,271 73,550 86,366
Change in Unrealized Appreciation
(Depreciation) (2,939) (14,435) 25,773 49,579
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 11,911 6,301 100,336 137,719
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- -- -- (1,761)
In Excess of Net Investment Income -- -- -- (8)
Net Realized Gain -- (30,771) -- (76,181)
CLASS B:
Net Investment Income -- -- -- (15)
Net Realized Gain -- (667) -- (3,225)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (31,438) -- (81,190)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 23,253 37,367 206,651 246,368
Distributions Reinvested -- 30,552 -- 74,499
Redeemed (22,376) (48,345) (106,622) (138,539)
CLASS B:
Subscribed 804 599 36,581 26,409
Distributions Reinvested -- 651 -- 2,614
Redeemed (915) (3,387) (8,162) (6,413)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 766 17,437 128,448 204,938
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 12,677 (7,700) 228,784 261,467
NET ASSETS:
Beginning of Period 59,090 66,790 619,668 358,201
- ----------------------------------------------------------------------------------------------------------------------------
End of Period $ 71,767 $ 59,090 $ 848,452 $ 619,668
- ----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income (accumulated net
investment loss) included in end of
period net assets $ 775 $ (4) $ 1,005 $ (8)
- ----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,759 3,007 10,933 14,949
Shares Issued on Distributions Reinvested -- 3,708 -- 4,569
Shares Redeemed (2,604) (3,885) (5,706) (8,169)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 155 2,830 5,227 11,349
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed 93 46 1,937 1,507
Shares Issued on Distributions Reinvested -- 81 -- 161
Shares Redeemed (108) (252) (439) (387)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding (15) (125) 1,498 1,281
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
169
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP VALUE EQUITY PORTFOLIO TECHNOLOGY PORTFOLIO
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997 (UNAUDITED) DECEMBER 31, 1997
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 24 $ 165 $ (128) $ (207)
Net Realized Gain 4,090 9,674 1,680 3,396
Change in Unrealized Appreciation
(Depreciation) (230) 125 3,883 (287)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 3,884 9,964 5,435 2,902
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (176) -- (525)
In Excess of Net Investment Income -- (5) -- --
Net Realized Gain -- (7,678) -- (2,563)
In Excess of Net Realized Gain -- -- -- (1,988)
Return of Capital -- -- -- (524)
CLASS B:
Net Investment Income -- (11) -- (34)
In Excess of Net Investment Income -- (1) -- --
Net Realized Gain -- (1,619) -- (176)
In Excess of Net Realized Gain -- -- -- (137)
Return of Capital -- -- -- (34)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (9,490) -- (5,981)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 15,899 27,220 9,706 42,885
Distributions Reinvested -- 7,254 -- 4,506
Redeemed (12,292) (23,846) (15,113) (16,063)
CLASS B:
Subscribed 1,550 7,628 500 1,986
Distributions Reinvested -- 1,508 -- 364
Redeemed (2,548) (2,762) (1,853) (1,499)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 2,609 17,002 (6,760) 32,179
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 6,493 17,476 (1,325) 29,100
NET ASSETS:
Beginning of Period 43,135 25,659 34,182 5,082
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 49,628 $ 43,135 $ 32,857 $ 34,182
- -----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income (accumulated net
investment loss) included in end of
period net assets $ 18 $ (6) $ (249) $ (121)
- -----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,353 2,198 741 3,154
Shares Issued on Distributions Reinvested -- 664 -- 407
Shares Redeemed (1,045) (1,895) (1,232) (1,187)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 308 967 (491) 2,374
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed 130 586 38 139
Shares Issued on Distributions Reinvested -- 139 -- 33
Shares Redeemed (213) (209) (153) (107)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding (83) 516 (115) 65
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
170
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. EQUITY PLUS PORTFOLIO U.S. REAL ESTATE PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED PERIOD FROM SIX MONTHS ENDED
JUNE 30, 1998 JULY 31, 1997* TO JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997 (UNAUDITED) DECEMBER 31, 1997
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 128 $ 110 $ 5,277 $ 8,535
Net Realized Gain 2,503 66 10,008 51,774
Change in Unrealized Appreciation
(Depreciation) 1,010 599 (34,971) 15,491
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 3,641 775 (19,686) 75,800
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (106) (2,023) (8,137)
Net Realized Gain -- (55) -- (43,130)
In Excess of Net Realized Gain -- -- -- (5,201)
CLASS B:
Net Investment Income -- (1) (118) (358)
Net Realized Gain -- -- -- (2,418)
In Excess of Net Realized Gain -- -- -- (292)
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (162) (2,141) (59,536)
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 9,877 20,231 82,572 202,155
Distributions Reinvested -- 71 1,669 51,583
Redeemed (2,858) -- (95,287) (118,383)
CLASS B:
Subscribed 1,529 100 6,359 18,735
Distributions Reinvested -- 1 107 2,799
Redeemed (563) -- (7,726) (9,475)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 7,985 20,403 (12,306) 147,414
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 11,626 21,016 (34,133) 163,678
NET ASSETS:
Beginning of Period 21,016 -- 382,780 219,102
- --------------------------------------------------------------------------------------------------------------------------------
End of Period $ 32,642 $ 21,016 $ 348,647 $ 382,780
- --------------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income
included in end of period net assets $ 131 $ 3 $ 3,174 $ 38
- --------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 879 2,022 5,538 13,083
Shares Issued on Distributions Reinvested -- 7 110 3,430
Shares Redeemed (248) -- (6,389) (7,604)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 631 2,029 (741) 8,909
- --------------------------------------------------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed 135 10 450 1,205
Shares Issued on Distributions Reinvested -- -- 7 187
Shares Redeemed (49) -- (540) (614)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding 86 10 (83) 778
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
171
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE EQUITY PORTFOLIO BALANCED PORTFOLIO
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997 (UNAUDITED) DECEMBER 31, 1997
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 730 $ 2,199 $ 90 $ 240
Net Realized Gain 15,127 20,470 439 855
Change in Unrealized Appreciation
(Depreciation) (6,340) 3,672 (166) (66)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 9,517 26,341 363 1,029
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (410) (2,134) (40) (205)
In Excess of Net Investment Income -- -- -- (1)
Net Realized Gain -- (19,817) -- (876)
CLASS B:
Net Investment Income (10) (40) (4) (37)
Net Realized Gain -- (509) -- (138)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (420) (22,500) (44) (1,257)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 28,590 26,077 292 1,474
Distributions Reinvested -- 19,651 38 1,007
Redeemed (26,712) (69,683) (263) (3,632)
CLASS B:
Subscribed 922 1,386 -- --
Distributions Reinvested -- 480 5 173
Redeemed (934) (2,135) (422) (1,756)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 1,866 (24,224) (350) (2,734)
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 10,963 (20,383) (31) (2,962)
NET ASSETS:
Beginning of Period 88,300 108,683 5,227 8,189
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 99,263 $ 88,300 $ 5,196 $ 5,227
- -----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ 342 $ 32 $ 45 $ (1)
- -----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,934 1,781 37 175
Shares Issued on Distributions Reinvested -- 1,430 5 130
Shares Redeemed (1,811) (4,530) (34) (427)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 123 (1,319) 8 (122)
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed 60 92 -- --
Shares Issued on Distributions Reinvested -- 35 1 22
Shares Redeemed (62) (146) (53) (208)
- -----------------------------------------------------------------------------------------------------------------------------
Net Decrease in Class B Shares Outstanding (2) (19) (52) (186)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
172
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING MARKETS DEBT PORTFOLIO FIXED INCOME PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997 (UNAUDITED) DECEMBER 31, 1997
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 9,183 $ 13,130 $ 5,558 $ 8,812
Net Realized Gain (Loss) (8,956) 24,939 2,951 3,117
Change in Unrealized Appreciation
(Depreciation) (10,653) (12,760) (1,053) 1,672
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (10,426) 25,309 7,456 13,601
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (12,240) (4,345) (9,164)
In Excess of Net Investment Income -- -- -- (6)
Net Realized Gain -- (37,926) -- --
In Excess of Net Realized Gain -- (1,389) -- --
Return of Capital -- (1,701) -- --
CLASS B:
Net Investment Income -- (183) (99) (176)
Net Realized Gain -- (611) -- --
In Excess of Net Realized Gain -- (22) -- --
Return of Capital -- (27) -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (54,099) (4,444) (9,346)
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 96,036 94,373 61,481 92,474
Distributions Reinvested -- 45,771 3,809 7,836
Redeemed (38,727) (121,535) (45,708) (52,011)
CLASS B:
Subscribed 3,232 2,314 128 5,117
Distributions Reinvested -- 789 58 100
Redeemed (1,159) (4,654) (888) (1,940)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 59,382 17,058 18,880 51,576
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 48,956 (11,732) 21,892 55,831
NET ASSETS:
Beginning of Period 144,663 156,395 188,026 132,195
- --------------------------------------------------------------------------------------------------------------------------------
End of Period $ 193,619 $ 144,663 $ 209,918 $ 188,026
- --------------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ 9,175 $ (8) $ 1,108 $ (6)
- --------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 16,086 11,924 5,607 8,608
Shares Issued on Distributions Reinvested -- 7,578 348 733
Shares Redeemed (6,662) (14,998) (4,165) (4,871)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 9,424 4,504 1,790 4,470
- --------------------------------------------------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed 549 288 12 478
Shares Issued on Distributions Reinvested -- 131 5 9
Shares Redeemed (195) (588) (81) (182)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding 354 (169) (64) 305
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
173
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL FIXED INCOME
PORTFOLIO HIGH YIELD PORTFOLIO MUNICIPAL BOND PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997 (UNAUDITED) 1997
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,762 $ 4,690 $ 6,995 $ 10,245 $ 1,180 $ 2,406
Net Realized Gain (Loss) (859) (1,879) 3,011 4,846 388 27
Change in Unrealized Appreciation
(Depreciation) 1,582 (2,788) (4,263) 1,740 (415) 1,474
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 2,485 23 5,743 16,831 1,153 3,907
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (793) (2,512) (5,106) (9,705) (950) (2,404)
In Excess of Net Investment Income -- -- -- -- -- (1)
Net Realized Gain -- -- -- -- -- (21)
In Excess of Net Realized Gain -- -- -- -- -- (1)
CLASS B:
Net Investment Income (4) (14) (280) (466) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total Distributions (797) (2,526) (5,386) (10,171) (950) (2,427)
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 2,978 18,508 117,237 93,559 8,114 32,474
Distributions Reinvested 716 2,096 4,270 7,844 918 2,356
Redeemed (24,568) (46,384) (57,700) (90,405) (24,090) (15,996)
CLASS B:
Subscribed -- 257 11,091 7,925 -- 4
Distributions Reinvested 4 13 256 369 -- --
Redeemed (48) (1,433) (8,078) (7,061) -- (73)
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital
Share Transactions (20,918) (26,943) 67,076 12,231 (15,058) 18,765
- -------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net
Assets (19,230) (29,446) 67,433 18,891 (14,855) 20,245
NET ASSETS:
Beginning of Period 85,001 114,447 120,219 101,328 60,541 40,296
- -------------------------------------------------------------------------------------------------------------------------------
End of Period $ 65,771 $ 85,001 $ 187,652 $ 120,219 $ 45,686 $ 60,541
- -------------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess
of) net investment income included
in end of period net assets $ 1,288 $ 323 $ 1,699 $ 90 $ 229 $ (1)
- -------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 263 1,676 9,961 8,260 771 3,162
Shares Issued on Distributions
Reinvested 64 192 362 693 87 228
Shares Redeemed (2,176) (4,264) (4,902) (7,958) (2,285) (1,554)
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A
Shares Outstanding (1,849) (2,396) 5,421 995 (1,427) 1,836
- -------------------------------------------------------------------------------------------------------------------------------
CLASS B:
Shares Subscribed -- 24 948 697 -- --
Shares Issued on Distributions
Reinvested -- 1 22 32 -- --
Shares Redeemed (4) (130) (689) (625) -- (7)
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B
Shares Outstanding (4) (105) 281 104 -- (7)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
174
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET
MONEY MARKET PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 41,975 $ 69,467 $ 13,774 $ 23,167
Net Realized Gain (Loss) (3) 71 (30) 9
- --------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 41,972 69,538 13,744 23,176
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income (41,975) (69,467) (13,774) (23,167)
- --------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 6,003,814 13,470,057 4,110,692 6,575,839
Distributions Reinvested 39,785 63,629 13,330 22,255
Redeemed (5,919,390) (13,312,180) (3,944,173) (6,514,906)
- --------------------------------------------------------------------------------------------------------
Net Increase in Capital Share
Transactions 124,209 221,506 179,849 83,188
- --------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 124,206 221,577 179,819 83,197
NET ASSETS:
Beginning of Period 1,506,210 1,284,633 804,607 721,410
- --------------------------------------------------------------------------------------------------------
End of Period $ 1,630,416 $ 1,506,210 $ 984,426 $ 804,607
- --------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 6,003,814 13,470,057 4,110,692 6,575,839
Shares Issued on Distributions
Reinvested 39,785 63,629 13,330 22,255
Shares Redeemed (5,919,390) (13,312,180) (3,944,173) (6,514,906)
- --------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares
Outstanding 124,209 221,506 179,849 83,188
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
175
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998
(UNAUDITED)
(000)
<S> <C>
- ----------------------------------------------------------
CASH FLOWS FROM INVESTING AND OPERATING
ACTIVITIES:
Proceeds from Sales of Investments $ 425,816
Purchases of Investments (494,207)
Net Increase in Short Term
Investments (1,614)
Net Realized Gain for Foreign
Currency Transactions 73
Interest Income 8,376
Interest Expense Paid (663)
Operating Expenses Paid (1,032)
- ----------------------------------------------------------
Net Cash Provided by Investing and
Operating Activities (63,251)
- ----------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Paid for Reverse Repurchase
Agreements 10,983
Net Portfolio Share Transactions 58,327
- ----------------------------------------------------------
Net Cash Used for Financing
Activities 69,310
- ----------------------------------------------------------
Net Increase in Cash 6,059
CASH AT BEGINNING OF YEAR (154)
- ----------------------------------------------------------
CASH AT END OF YEAR $ 5,905
- ----------------------------------------------------------
- ----------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH
PROVIDED BY INVESTING AND OPERATING
ACTIVITIES:
Net Investment Income $ 9,183
Proceeds from Sale of Investments 425,816
Purchase of Investments (494,207)
Net Increase in Short Term
Investments (1,614)
Net Realized Gain for Foreign
Currency Transactions 73
Net Increase in Receivables
Pertaining to Investing and
Operating Activities (1,183)
Net Increase in Payables Pertaining
to Investing and Operating
Activities 133
(Accretion)/Amortization of
Premium/Discount (1,452)
- ----------------------------------------------------------
Net Cash Provided by Investing and
Operating Activities $ (63,251)
- ----------------------------------------------------------
- ----------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
176
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1998++ --------------------------------------------------------
(UNAUDITED) 1997++ 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.39 $ 11.44 $ 11.63 $ 11.65 $ 12.21 $ 9.59
------ ------ ------ -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.17 0.18 0.24 0.17 0.19 0.13
Net Realized and Unrealized Gain(Loss) on
Investments 1.78 0.80 0.88 1.00 (0.25) 2.75
------ ------ ------ -------- -------- --------
Total from Investment Operations 1.95 0.98 1.12 1.17 (0.06) 2.88
------ ------ ------ -------- -------- --------
DISTRIBUTIONS
Net Investment Income -- (0.83) (0.81) (0.25) (0.14) (0.09)
In Excess of Net Investment Income -- (0.02) (0.02) (0.10) -- (0.08)
Net Realized Gain -- (1.18) (0.48) (0.84) (0.36) --
In Excess of Net Realized Gain -- -- -- -- -- (0.09)
------ ------ ------ -------- -------- --------
Total Distributions -- (2.03) (1.31) (1.19) (0.50) (0.26)
------ ------ ------ -------- -------- --------
NET ASSET VALUE, END OF PERIOD $12.34 $10.39 $11.44 $11.63 $11.65 $12.21
------ ------ ------ -------- -------- --------
------ ------ ------ -------- -------- --------
TOTAL RETURN 18.77% 8.61% 9.71% 10.57% (0.52)% 30.72%
------ ------ ------ -------- -------- --------
------ ------ ------ -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $256,665 $138,667 $183,193 $170,663 $182,977 $150,854
Ratio of Expenses to Average Net Assets (1) 0.80%** 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of Net Investment Income to Average Net
Assets (1) 2.84%** 1.47% 1.22% 1.26% 1.43% 1.29%
Portfolio Turnover Rate 36% 49% 65% 72% 51% 53%
- ---------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $0.01 $0.03 $0.03 $0.05 $0.03 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.02%** 1.10% 1.09% 1.18% 1.00% 1.33%
Net Investment Income to Average Net Assets 2.62%** 1.18% 0.94% 0.88% 1.23% 0.76%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998++ DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997++ 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.48 $11.44 $11.66
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.17 0.08 0.06
Net Realized and Unrealized Gain on Investments 1.79 0.87 1.00
------ ------ ------
Total from Investment Operations 1.96 0.95 1.06
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.71) (0.78)
In Excess of Net Investment Income -- (0.02) (0.02)
Net Realized Gain -- (1.18) (0.48)
------ ------ ------
Total Distributions -- (1.91) (1.28)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $12.44 $10.48 $11.44
------ ------ ------
------ ------ ------
TOTAL RETURN 18.70% 8.35% 9.22%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 526 $ 14 $ 633
Ratio of Expenses to Average Net Assets (2) 1.05%** 1.05% 1.05%**
Ratio of Net Investment Income to Average Net
Assets (2) 2.82%** 0.71% 1.09%**
Portfolio Turnover Rate 36% 49% 65%
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $0.02 $0.03 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.27%** 1.32% 1.33%**
Net Investment Income to Average Net Assets 2.60%** 0.45% 0.82%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
++ Per share amounts are based on average shares outstanding.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
177
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1998 --------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.43 $ 18.73 $ 19.48 $ 21.54 $ 26.20 $ 13.11
------ ------ ------ -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.11 0.14 0.17 0.18 0.11 0.10
Net Realized and Unrealized Gain (Loss) on
Investments (2.41) (8.93) 0.50 1.11 (4.15) 13.38
------ ------ ------ -------- -------- --------
Total from Investment Operations (2.30) (8.79) 0.67 1.29 (4.04) 13.48
------ ------ ------ -------- -------- --------
DISTRIBUTIONS
Net Investment Income -- (0.00)+ (0.15) (0.34) (0.09) (0.01)
In Excess of Net Investment Income -- -- (0.00)+ (0.00)+ -- (0.13)
Net Realized Gain -- -- (1.27) (3.01) (0.53) (0.12)
In Excess of Net Realized Gain -- (0.51) -- -- -- (0.13)
------ ------ ------ -------- -------- --------
Total Distributions -- (0.51) (1.42) (3.35) (0.62) (0.39)
------ ------ ------ -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 7.13 $ 9.43 $ 18.73 $ 19.48 $ 21.54 $ 26.20
------ ------ ------ -------- -------- --------
------ ------ ------ -------- -------- --------
TOTAL RETURN (24.39)% (48.29)% 3.49% 6.87% (15.81)% 105.71%
------ ------ ------ -------- -------- --------
------ ------ ------ -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $58,326 $85,503 $363,498 $314,884 $276,906 $287,136
Ratio of Expenses to Average Net Assets (1) 1.25%** 1.12% 1.00% 1.00% 1.00% 1.00%
Ratio of Expenses to Average Net Assets Excluding
Country Tax Expense and Interest Expense 1.00%** 1.00% N/A N/A N/A N/A
Ratio of Net Investment Income to Average Net
Assets (1) 1.48%** 0.47% 0.74% 0.97% 0.52% 0.83%
Portfolio Turnover Rate 73% 107% 69% 42% 47% 18%
- ---------------
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income $0.04 $0.05 $0.05 $0.03 $0.04 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.81%** 1.31% 1.25% 1.18% 1.20% 1.38%
Net Investment Income to Average Net Assets 0.92%** 0.29% 0.54% 0.79% 0.32% 0.45%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $9.40 $18.74 $19.55
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.04 0.03 0.11
Net Realized and Unrealized Gain (Loss) on
Investments (2.32) (8.86) 0.46
------ ------ ------
Total from Investment Operations (2.28) (8.83) 0.57
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.00)+ (0.11)
Net Realized Gain -- -- (1.27)
In Excess of Net Realized Gain -- (0.51) --
------ ------ ------
Total Distributions -- (0.51) (1.38)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 7.12 $ 9.40 $18.74
------ ------ ------
------ ------ ------
TOTAL RETURN (24.26)% (48.48)% 2.92%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,278 $1,468 $11,002
Ratio of Expenses to Average Net Assets (2) 1.50%** 1.37% 1.25%**
Ratio of Expenses to Average Net Assets Excluding
Country Tax Expense and Interest Expense 1.25%** 1.25% N/A
Ratio of Net Investment Income to Average Net
Assets (2) 1.28%** 0.18% 0.58%**
Portfolio Turnover Rate %73 107% %69
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income $0.02 $0.04 $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 2.06%** 1.56% 1.52%**
Net Investment Income (Loss) to Average Net
Assets 0.72%** (0.01)% 0.37%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
178
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------
SIX MONTHS PERIOD FROM
ENDED OCTOBER 1,
JUNE 30, 1997* TO
1998 DECEMBER
(UNAUDITED) 31, 1997
<S> <C> <C>
- ---------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.94 $ 10.00
---------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01 0.11
Net Realized and Unrealized Loss on
Investments (2.32) (2.10)
---------- -----------
Total from Investment Operations (2.31) (1.99)
---------- -----------
DISTRIBUTIONS
Net Investment Income -- (0.07)
---------- -----------
Total Distributions -- (0.07)
---------- -----------
NET ASSET VALUE, END OF PERIOD $ 5.63 $ 7.94
---------- -----------
---------- -----------
TOTAL RETURN (29.09)% (19.92)%
---------- -----------
---------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $3,024 $2,385
Ratio of Expenses to Average Net Assets
(1) 1.02%** 1.08%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.00%** 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.40%** 5.21%**
Portfolio Turnover Rate 141% 38%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.01 $0.25
Ratios before expense limitation:
Expenses to Average Net Assets 3.72%** 12.95%**
Net Investment Loss to Average Net
Assets (0.30)%** (6.66)%**
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
SIX MONTHS PERIOD FROM
ENDED OCTOBER 1,
JUNE 30, 1997* TO
1998 DECEMBER
(UNAUDITED) 31, 1997
<S> <C> <C>
- ---------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $8.03 $10.00
---------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.04 --
Net Realized and Unrealized Loss on
Investments (2.41) (1.97)
---------- -----------
Total from Investment Operations (2.37) (1.97)
---------- -----------
NET ASSET VALUE, END OF PERIOD $ 5.66 $ 8.03
---------- -----------
---------- -----------
TOTAL RETURN (29.51)% (19.70)%
---------- -----------
---------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 263 $ 0+
Ratio of Expenses to Average Net Assets
(2) 1.27%** 1.18%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.25%** N/A
Ratio of Net Investment Income to
Average Net Assets (2) 2.53%** 4.24%**
Portfolio Turnover Rate 141% 38%
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.02 N/A
Ratios before expense limitation:
Expenses to Average Net Assets 2.26%** N/A
Net Investment Income to Average
Net Assets 1.54%** N/A
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ Amount is less than $500.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
179
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 -----------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $12.97 $14.66 $13.14 $16.30 $19.00 $10.22
------ ----------- ----------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.07 0.07 0.09 0.08 (0.04) (0.01)
Net Realized and Unrealized Gain
(Loss) on Investments (1.94) (0.29) 1.51 (2.05) (1.69) 8.79
------ ----------- ----------- --------- --------- ---------
Total from Investment
Operations (1.87) (0.22) 1.60 (1.97) (1.73) 8.78
------ ----------- ----------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income -- (0.07) (0.08) (0.06) -- --
In Excess of Net Investment
Income -- (0.07) -- -- -- --
Net Realized Gain -- (0.69) -- (1.13) (0.97) --
In Excess of Net Realized Gain -- (0.64) -- -- -- --
------ ----------- ----------- --------- --------- ---------
Total Distributions -- (1.47) (0.08) (1.19) (0.97) --
------ ----------- ----------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $11.10 $12.97 $14.66 $13.14 $16.30 $19.00
------ ----------- ----------- --------- --------- ---------
------ ----------- ----------- --------- --------- ---------
TOTAL RETURN (14.42)% (1.03)% 12.19% (12.77)% (9.63)% 85.91%
------ ----------- ----------- --------- --------- ---------
------ ----------- ----------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $1,331,023 $1,501,386 $1,304,006 $876,591 $929,638 $735,352
Ratio of Expenses to Average Net
Assets (1) 1.78%** 1.75% 1.74% 1.72% 1.75% 1.75%
Ratio of Expenses to Average Net
Assets Excluding Country
Tax Expense and Interest Expense 1.75%** N/A N/A N/A N/A N/A
Ratio of Net Investment Income
(Loss) to Average Net Assets (1) 1.07%** 0.40% 0.69% 0.60% (0.26)% (0.06)%
Portfolio Turnover Rate 38% 90% 55% 54% 32% 52%
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment loss N/A N/A N/A N/A N/A $0.01
Ratios before expense
limitation:
Expenses to Average Net Assets N/A N/A N/A N/A N/A 1.79%
Net Investment Loss to Average
Net Assets N/A N/A N/A N/A N/A (0.10)%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------
PERIOD FROM
SIX MONTHS JANUARY 2,
ENDED YEAR ENDED 1996*** TO
JUNE 30, DECEMBER DECEMBER
1998 31, 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $12.98 $14.66 $13.25
------ ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.02 0.04
Net Realized and Unrealized Gain
(Loss) on Investments (1.90) (0.28) 1.42
------ ----------- -----------
Total from Investment Operations (1.88) (0.26) 1.46
------ ----------- -----------
DISTRIBUTIONS
Net Investment Income -- (0.05) (0.05)
In Excess of Net Investment Income -- (0.04) --
Net Realized Gain -- (0.69) --
In Excess of Net Realized Gain -- (0.64) --
------ ----------- -----------
Total Distributions -- (1.42) (0.05)
------ ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 11.10 $ 12.98 $ 14.66
------ ----------- -----------
------ ----------- -----------
TOTAL RETURN (14.48)% (1.31)% 11.04%
------ ----------- -----------
------ ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $11,661 $9,666 $14,213
Ratio of Expenses to Average Net Assets 2.03%** 2.00% 1.99%**
Ratio of Expenses to Average Net Assets
Excluding Country
Tax Expense and Interest Expense 2.00%** N/A N/A
Ratio of Net Investment Income to
Average Net Assets 0.84%** 0.11% 0.33%**
Portfolio Turnover Rate 38% 90% 55%
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
180
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
PERIOD FROM
SIX MONTHS APRIL 2,
ENDED YEAR ENDED 1993*
JUNE 30, DECEMBER 31, TO DECEMBER
1998 ------------------------------------------------------ 31,
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $17.96 $16.70 $13.92 $13.94 $12.91 $10.00
----------- ----------- ----------- ---------- ---------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.25 0.39 0.24 0.14 0.08 0.08
Net Realized and Unrealized
Gain on Investments 4.14 2.58 2.85 1.37 1.29 2.83
----------- ----------- ----------- ---------- ---------- ------
Total from Investment
Operations 4.39 2.97 3.09 1.51 1.37 2.91
----------- ----------- ----------- ---------- ---------- ------
DISTRIBUTIONS
Net Investment Income -- (0.37) (0.25) (0.15) (0.09) --
In Excess of Net Investment
Income -- -- (0.02) -- -- --
Net Realized Gain -- (1.34) (0.04) (1.38) (0.25) --
----------- ----------- ----------- ---------- ---------- ------
Total Distributions -- (1.71) (0.31) (1.53) (0.34) --
----------- ----------- ----------- ---------- ---------- ------
NET ASSET VALUE, END OF PERIOD $ 22.35 $ 17.96 $ 16.70 $ 13.92 $ 13.94 $ 12.91
----------- ----------- ----------- ---------- ---------- ------
----------- ----------- ----------- ---------- ---------- ------
TOTAL RETURN 24.44% 17.88% 22.29% 11.85% 10.88% 29.10%
----------- ----------- ----------- ---------- ---------- ------
----------- ----------- ----------- ---------- ---------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $325,340 $242,868 $178,356 $69,583 $27,634 $12,681
Ratio of Expenses to Average
Net Assets (1) 1.00%** 1.00% 1.00% 1.00% 1.00% 1.00%**
Ratio of Net Investment Income
to Average Net Assets (1) 2.58%** 1.96% 1.83% 1.37% 0.87% 1.23%**
Portfolio Turnover Rate 36% 43% 24% 13% 79% 15%
- ---------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.02 $0.02 $0.03 $0.06 $0.09
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.08%** 1.09% 1.16% 1.25% 1.62% 2.43%**
Net Investment Income
(Loss) to Average Net Assets 2.50%** 1.87% 1.67% 1.12% 0.25% (0.21)%**
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------------------
PERIOD FROM
SIX MONTHS JANUARY 2,
ENDED YEAR ENDED 1996***
JUNE 30, DECEMBER TO DECEMBER
1998 31, 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $17.94 $16.67 $14.05
---------- ---------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.24 0.28 0.18
Net Realized and Unrealized
Gain on Investments 4.12 2.66 2.73
---------- ---------- -----------
Total from Investment
Operations 4.36 2.94 2.91
---------- ---------- -----------
DISTRIBUTIONS
Net Investment Income -- (0.33) (0.23)
In Excess of Net Investment
Income -- -- (0.02)
Net Realized Gain -- (1.34) (0.04)
---------- ---------- -----------
Total Distributions -- (1.67) (0.29)
---------- ---------- -----------
NET ASSET VALUE, END OF PERIOD $22.30 $17.94 $16.67
---------- ---------- -----------
---------- ---------- -----------
TOTAL RETURN 24.30% 17.73% 20.76%
---------- ---------- -----------
---------- ---------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $9,481 $4,654 $2,654
Ratio of Expenses to Average
Net Assets (2) 1.25%** 1.25% 1.25%**
Ratio of Net Investment Income
to Average Net Assets (2) 2.50%** 1.55% 1.67%**
Portfolio Turnover Rate 36% 43% 24%
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01 $0.02 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.33%** 1.34% 1.40%**
Net Investment Income
(Loss) to Average Net Assets 2.42%** 1.46% 1.52%***
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
181
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------
SIX MONTHS PERIOD FROM
ENDED OCTOBER 1,
JUNE 30, 1997* TO
1988 DECEMBER 31,
(UNAUDITED) 1997
<S> <C> <C>
- --------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.52 $ 10.00
----------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.08 0.05
Net Realized and Unrealized Gain
(Loss) on Investments 1.41 (0.52)
----------- ------------
Total from Investment Operations 1.49 (0.47)
----------- ------------
DISTRIBUTIONS
Net Investment Income -- (0.01)
----------- ------------
Total Distributions -- (0.01)
----------- ------------
NET ASSET VALUE, END OF PERIOD $ 11.01 $ 9.52
----------- ------------
----------- ------------
TOTAL RETURN 15.65% (4.72)%
----------- ------------
----------- ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $47,684 $15,177
Ratio of Expenses to Average Net Assets
(1) 1.04%** 1.00%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.00%** N/A
Ratio of Net Investment Income to
Average Net Assets (1) 2.36%** 2.08%**
Portfolio Turnover Rate 51% 47%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.02 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.62%** 3.05%**
Net Investment Income to Average
Net Assets 1.78%** 0.03%**
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------
SIX MONTHS PERIOD FROM
ENDED OCTOBER 1,
JUNE 30, 1997* TO
1998 DECEMBER 31,
(UNAUDITED) 1997
<S> <C> <C>
- --------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.52 $ 10.00
----------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.08 0.02
Net Realized and Unrealized Gain
(Loss) on Investments 1.40 (0.50)
----------- ------------
Total from Investment Operations 1.48 (0.48)
----------- ------------
NET ASSET VALUE, END OF PERIOD $ 11.00 $ 9.52
----------- ------------
----------- ------------
TOTAL RETURN 15.55% (4.76)%
----------- ------------
----------- ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $3,631 $789
Ratio of Expenses to Average Net Assets
(2) 1.29%** 1.25%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.25%** N/A
Ratio of Net Investment Income to
Average Net Assets (2) 2.25%** 1.51%**
Portfolio Turnover Rate 51% 47%
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.02 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.84%** 3.12%**
Net Investment Income (Loss) to
Average Net Assets 1.70%** (0.36)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
182
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1998++ --------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 18.52 $ 16.24 $ 14.31 $ 13.40 $ 13.87 $ 9.75
------ -------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.16 0.21 0.23 0.18 0.08 0.08
Net Realized and Unrealized
Gain on Investments 2.44 3.61 3.02 2.26 0.79 4.18
------ -------- ------- ------- ------- -------
Total from Investment
Operations 2.60 3.82 3.25 2.44 0.87 4.26
------ -------- ------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income -- (0.40) (0.23) (0.22) (0.12) (0.02)
In Excess of Net Investment
Income -- -- -- -- -- (0.03)
Net Realized Gain -- (1.14) (1.09) (1.31) (1.22) (0.09)
------ -------- ------- ------- ------- -------
Total Distributions -- (1.54) (1.32) (1.53) (1.34) (0.14)
------ -------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $21.12 $18.52 $16.24 $14.31 $13.40 $13.87
------ -------- ------- ------- ------- -------
------ -------- ------- ------- ------- -------
TOTAL RETURN 14.04% 23.75% 22.83% 18.66% 6.95% 44.24%
------ -------- ------- ------- ------- -------
------ -------- ------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $196,145 $108,074 $80,297 $91,675 $78,935 $19,918
Ratio of Expenses to Average
Net Assets (1) 1.00%** 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income
to Average Net Assets (1) 1.57%** 1.07% 1.38% 1.17% 0.87% 0.84%
Portfolio Turnover Rate 11% 30% 26% 28% 12% 42%
- ---------------
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.02 $0.03 $0.02 $0.02 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.09%** 1.11% 1.15% 1.13% 1.24% 1.66%
Net Investment Income to
Average Net Assets 1.48%** 0.96% 1.23% 1.04% 0.63% 0.18%
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998++ DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 18.46 $ 16.21 $ 14.36
------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.13 0.16 0.13
Net Realized and Unrealized
Gain on Investments 2.41 3.60 3.02
------ ------ ------
Total from Investment
Operations 2.54 3.76 3.15
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.37) (0.21)
Net Realized Gain -- (1.14) (1.09)
------ ------ ------
Total Distributions -- (1.51) (1.30)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 21.00 $ 18.46 $ 16.21
------ ------ ------
------ ------ ------
TOTAL RETURN 13.76% 23.37% 22.04%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $10,628 $5,910 $3,928
Ratio of Expenses to Average
Net Assets (2) 1.25%** 1.25% 1.25%**
Ratio of Net Investment Income
to Average Net Assets (2) 1.23%** 0.80% 1.29%**
Portfolio Turnover Rate 11% 30% 26%
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.02 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.34%** 1.36% 1.39%**
Net Investment Income to
Average Net Assets 1.14%** 0.69% 1.15%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
++ Per share amounts for the period ended June 30, 1998 are based on
average shares outstanding.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
183
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIO:
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1998 --------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.16 $ 16.95 $ 15.15 $ 15.34 $ 14.09 $ 9.98
----------- ---------- ---------- ---------- ---------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.19 0.30 0.25 0.16 0.16 0.15
Net Realized and Unrealized Gain on
Investments 2.93 2.01 2.71 1.55 1.54 4.36
----------- ---------- ---------- ---------- ---------- --------
Total from Investment Operations 3.12 2.31 2.96 1.71 1.70 4.51
----------- ---------- ---------- ---------- ---------- --------
DISTRIBUTIONS
Net Investment Income -- (0.48) (0.36) (0.06) (0.18) (0.01)
In Excess of Net Investment Income -- -- -- -- -- (0.13)
Net Realized Gain -- (1.62) (0.80) (1.84) (0.27) (0.26)
----------- ---------- ---------- ---------- ---------- --------
Total Distributions -- (2.10) (1.16) (1.90) (0.45) (0.40)
----------- ---------- ---------- ---------- ---------- --------
NET ASSET VALUE, END OF PERIOD $ 20.28 $ 17.16 $ 16.95 $ 15.15 $ 15.34 $ 14.09
----------- ---------- ---------- ---------- ---------- --------
----------- ---------- ---------- ---------- ---------- --------
TOTAL RETURN 18.18% 13.91% 19.64% 11.77% 12.39% 46.50%
----------- ---------- ---------- ---------- ---------- --------
----------- ---------- ---------- ---------- ---------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $3,432,750 $2,822,900 $2,264,424 $1,598,530 $1,304,770 $947,045
Ratio of Expenses to Average Net Assets
(1) 1.00%** 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 1.90%** 1.49% 1.64% 1.38% 1.12% 1.25%
Portfolio Turnover Rate 17% 33% 18% 27% 16% 23%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income N/A $0.00+ $0.00 $0.003 $0.004 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets N/A 1.02% 1.02% 1.03% 1.03% 1.06%
Net Investment Income to Average
Net Assets N/A 1.47% 1.61% 1.35% 1.09% 1.19%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.13 $ 16.93 $ 15.24
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.17 0.23 0.23
Net Realized and Unrealized Gain on
Investments 2.93 2.02 2.59
------ ------ ------
Total from Investment Operations 3.10 2.25 2.82
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.43) (0.33)
Net Realized Gain -- (1.62) (0.80)
------ ------ ------
Total Distributions -- (2.05) (1.13)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 20.23 $ 17.13 $ 16.93
------ ------ ------
------ ------ ------
TOTAL RETURN 18.10% 13.57% 18.58%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $9,452 $3,074 $5,393
Ratio of Expenses to Average Net Assets
(2) 1.25%** 1.25% 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.86%** 1.21% 1.68%**
Portfolio Turnover Rate 17% 33% 18%
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income N/A $0.00+ $0.00
Ratios before expense limitation:
Expenses to Average Net Assets N/A 1.27% 1.27%**
Net Investment Income to Average
Net Assets N/A 1.19% 1.66%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
184
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------
SIX MONTHS PERIOD FROM
ENDED MARCH 15,
JUNE 30, YEAR ENDED 1996* TO
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.87 $ 10.66 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.12 0.17 0.06
Net Realized and Unrealized Gain on
Investments 1.84 0.54 0.76
------ ------ ------
Total from Investment Operations 1.96 0.71 0.82
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.41) (0.13)
In Excess of Net Investment Income -- -- (0.02)
Net Realized Gain -- (0.09) (0.01)
------ ------ ------
Total Distributions -- (0.50) (0.16)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 12.83 $ 10.87 $ 10.66
------ ------ ------
------ ------ ------
TOTAL RETURN 18.03% 6.58% 8.25%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $208,780 $159,096 $85,316
Ratio of Expenses to Average Net Assets
(1) 1.00%** 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.16%** 1.44% 0.99%**
Portfolio Turnover Rate 17% 41% 18%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $ 0.01 $ 0.02 $ 0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.11%** 1.19% 1.54%**
Net Investment Income to Average
Net Assets 2.05%** 1.25% 0.44%**
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------
SIX MONTHS PERIOD FROM
ENDED MARCH 15,
JUNE 30, YEAR ENDED 1996* TO
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.84 $ 10.63 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.11 0.16 0.01
Net Realized and Unrealized Gain on
Investments 1.84 0.52 0.78
------ ------ ------
Total from Investment Operations 1.95 0.68 0.79
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.38) (0.13)
In Excess of Net Investment Income -- -- (0.02)
Net Realized Gain -- (0.09) (0.01)
------ ------ ------
Total Distributions -- (0.47) (0.16)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 12.79 $ 10.84 $ 10.63
------ ------ ------
------ ------ ------
TOTAL RETURN 17.99% 6.33% 7.90%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $34,143 $28,217 $23,173
Ratio of Expenses to Average Net Assets
(2) 1.25%** 1.25% 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.91%** 1.19% 0.60%**
Portfolio Turnover Rate 17% 41% 18%
- ---------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $ 0.01 $ 0.02 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.36%** 1.44% 1.69%**
Net Investment Income to Average
Net Assets 1.80%** 1.00% 0.15%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
185
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1998 -----------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993++
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.61 $ 16.83 $ 14.94 $ 15.15 $ 14.64 $10.09
------ -------- -------- -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.14 0.25 0.21 0.24 0.14 0.09
Net Realized and Unrealized Gain
(Loss) on Investments 2.62 (0.42) 2.29* 0.15* 0.62* 4.48*
------ -------- -------- -------- -------- ------
Total from Investment Operations 2.76 (0.17) 2.50 0.39 0.76 4.57
------ -------- -------- -------- -------- ------
DISTRIBUTIONS
Net Investment Income -- (0.31) (0.22) (0.23) (0.03) 0.00+
In Excess of Net Investment Income -- (0.05) -- -- -- (0.02)
Net Realized Gain -- (0.77) (0.39) (0.37) (0.22) --
------ -------- -------- -------- -------- ------
Total Distributions -- (1.13) (0.61) (0.60) (0.25) (0.02)
------ -------- -------- -------- -------- ------
TRANSACTION FEES 0.01 0.08 -- -- -- --
------ -------- -------- -------- -------- ------
NET ASSET VALUE, END OF PERIOD $ 18.38 $ 15.61 $ 16.83 $ 14.94 $ 15.15 $14.64
------ -------- -------- -------- -------- ------
------ -------- -------- -------- -------- ------
TOTAL RETURN 17.75% (0.55)% 16.82% 2.60% 5.25% 45.34%
------ -------- -------- -------- -------- ------
------ -------- -------- -------- -------- ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $322,557 $230,095 $234,743 $198,669 $160,101 $52,834
Ratio of Expenses to Average Net
Assets (1) 1.15%** 1.15% 1.15% 1.15% 1.15% 1.15%
Ratio of Net Investment Income to
Average Net Assets (1) 1.80%** 1.37% 1.29% 1.72% 1.18% 0.66%
Portfolio Turnover Rate 16% 39% 35% 24% 8% 14%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.00+ $0.01 $0.01 $0.01 $0.02 $0.10
Ratios before expense limitation:
Expenses to Average Net Assets 1.20%** 1.22% 1.23% 1.24% 1.29% 1.86%
Net Investment Income (Loss) to
Average Net Assets 1.75%** 1.30% 1.20% 1.63% 1.04% (0.05)%
</TABLE>
- --------------------------------------------------------------------------------
* Includes a 1% transaction fee on purchases and redemptions of capital
shares.
** Annualized
+ Amount is less than $0.01 per share.
++ Per share amounts for the year ended December 31, 1993 are based on
average shares outstanding.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
186
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------
SIX MONTH PERIOD FROM
ENDED APRIL 25,
JUNE 30, YEAR ENDED DECEMBER 31, 1994* TO
1998 ------------------------------------- DECEMBER 31
(UNAUDITED) 1997 1996++ 1995 1994
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 5.89 $ 7.96 $ 9.27 $ 9.83 $ 10.00
----- --------- --------- --------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.05 0.17 -- 0.04 (0.01)
Net Realized and Unrealized Gain
(Loss) on Investments+ 0.24 (0.94) (0.13) (0.40) (0.16)
----- --------- --------- --------- ------
Total from Investment Operations 0.29 (0.77) (0.13) (0.36) (0.17)
----- --------- --------- --------- ------
DISTRIBUTIONS
Net Investment Income -- (1.30) (0.66) -- --
In Excess of Net Investment Income -- -- (0.52) (0.20) --
----- --------- --------- --------- ------
Total Distributions -- (1.30) (1.18) (0.20) --
----- --------- --------- --------- ------
NET ASSET VALUE, END OF PERIOD $ 6.18 $ 5.89 $ 7.96 $ 9.27 $ 9.83
----- --------- --------- --------- ------
----- --------- --------- --------- ------
TOTAL RETURN 4.92% (9.23)% (1.40)% (3.64)% (1.70)%
----- --------- --------- --------- ------
----- --------- --------- --------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $63,378 $77,086 $152,229 $119,278 $50,332
Ratio of Expenses to Average Net
Assets (1) 1.18%** 1.06% 1.00% 1.00% 1.00%**
Ratio of Expenses to Average Net
Assets Excluding Interest Expense 1.00%** 1.00% N/A N/A N/A
Ratio of Net Investment Income
(Loss) to Average Net Assets (1) 0.13%** (0.21)% (0.04)% 0.15% (0.10)%**
Portfolio Turnover Rate 47% 40% 38% 52% 1%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income (Loss) $0.06 $0.01 $0.01 $0.06 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.35%** 1.14% 1.07% 1.20% 1.27%**
Net Investment Loss to Average
Net Assets (0.04)%** (0.28)% (0.11)% (0.05)% (0.37)%**
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------
PERIOD FROM
SIX MONTH JANUARY 2,
ENDED YEAR ENDED 1996*** TO
JUNE 30, 1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996++
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 5.87 $ 7.94 $ 9.25
----- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (2) -- 0.09 (0.02)
Net Realized and Unrealized Gain
(Loss) on Investments 0.27 (0.89) (0.14)
----- ------ ------
Total from Investment Operations 0.27 (0.80) (0.16)
----- ------ ------
DISTRIBUTIONS
Net Investment Income -- (1.27) (0.64)
In Excess of Net Investment Income -- -- (0.51)
----- ------ ------
Total Distributions -- (1.27) (1.15)
----- ------ ------
NET ASSET VALUE, END OF PERIOD $ 6.14 $ 5.87 $ 7.94
----- ------ ------
----- ------ ------
TOTAL RETURN 4.60% (9.64)% (1.67)%
----- ------ ------
----- ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $1,586 $1,703 $3,431
Ratio of Expenses to Average Net
Assets (2) 1.43%** 1.31% 1.25%**
Ratio of Expenses to Average Net
Assets Excluding Interest Expense 1.25%** 1.25% N/A
Ratio of Net Investment Loss to
Average Net Assets (2) (0.11)%** (0.53)% (0.26)%**
Portfolio Turnover Rate 47% 40% 38%
- ---------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income (loss) $0.00+++ $0.01 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.60%** 1.38% 1.31%**
Net Investment Loss to Average
Net Assets (0.28)%** (0.60)% (0.32)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ The amount shown for the year ended December 31, 1995 for a share
outstanding throughout the year does not agree with the amount of
aggregate net gains on investments for the year because of the timing
of sales and repurchases of the Portfolio shares in relation to
fluctuating market value of the investments in the Portfolio.
++ Per share amounts for the year ended December 31, 1996 are based on
average shares outstanding.
+++ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
187
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED YEAR ENDED DECEMBER JANUARY 18,
JUNE 30, 31, 1995* TO
1998 -------------------- DECEMBER 31,
(UNAUDITED) 1997 1996 1995
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.91 $ 11.32 $ 9.06 $ 10.00
------ -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.11 (0.01) 0.14 0.05
Net Realized and Unrealized Gain
(Loss) on Investments (1.78) 4.32 4.27 (0.92)
------ -------- -------- ------
Total from Investment Operations (1.67) 4.31 4.41 (0.87)
------ -------- -------- ------
DISTRIBUTIONS
Net Investment Income -- -- (0.13) (0.04)
Net Realized Gain -- (4.04) (2.02) --
In Excess of Net Realized Gain -- (0.68) -- --
Return of Capital -- -- -- (0.03)
------ -------- -------- ------
Total Distributions -- (4.72) (2.15) (0.07)
------ -------- -------- ------
NET ASSET VALUE, END OF PERIOD $ 9.24 $ 10.91 $ 11.32 $ 9.06
------ -------- -------- ------
------ -------- -------- ------
TOTAL RETURN (15.31)% 41.28% 48.77% (8.68)%
------ -------- -------- ------
------ -------- -------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $53,518 $73,196 $30,409 $15,376
Ratio of Expenses to Average Net Assets
(1) 1.67%** 1.89% 1.70% 1.70%**
Ratio of Expenses to Average Net Assets
Excluding Country Tax
Expense and Interest Expense 1.55%** 1.70% N/A N/A
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) 1.78%** (0.14)% 1.21% 1.62%**
Portfolio Turnover Rate 100% 286% 192% 137%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income N/A $0.01 $0.05 $0.09
Ratios before expense limitation:
Expenses to Average Net Assets N/A 1.96% 2.18% 3.13%**
Net Investment Income (Loss) to
Average Net Assets N/A (0.21)% 0.75% (0.48)%**
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.80 $ 11.31 $ 9.44
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.08 -- 0.09
Net Realized and Unrealized Gain on
Investments (1.74) 4.21 3.90
------ ------ ------
Total from Investment Operations (1.66) 4.21 3.99
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- -- (0.10)
Net Realized Gain -- (4.04) (2.02)
In Excess of Net Realized Gain -- (0.68) --
------ ------ ------
Total Distributions -- (4.72) (2.12)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.14 $ 10.80 $ 11.31
------ ------ ------
------ ------ ------
TOTAL RETURN (15.37)% 40.37% 42.44%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $7,387 $6,709 $1,333
Ratio of Expenses to Average Net Assets
(2) 1.92%** 2.14% 1.95%**
Ratio of Expenses to Average Net Assets
Excluding Country Tax
Expense and Interest Expense 1.80%** 1.95% N/A
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) 1.50%** (0.34)% 0.89%**
Portfolio Turnover Rate 100% 286% 192%
- ---------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income N/A $ 0.00+ $ 0.05
Ratios before expense limitation:
Expenses to Average Net Assets N/A 2.21% 2.43%**
Net Investment Income (Loss) to
Average Net Assets N/A (0.41)% 0.42%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
188
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED YEAR ENDED DECEMBER MARCH 8,
JUNE 30, 31, 1995* TO
1998 --------------------- DECEMBER 31,
(UNAUDITED) 1997 1996 1995
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.78 $ 14.43 $ 12.17 $ 10.00
------ --------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01 0.01 0.18 0.15
Net Realized and Unrealized Gain on
Investments 2.08 4.58 4.73 3.95
------ --------- -------- ------
Total from Investment Operations 2.09 4.59 4.91 4.10
------ --------- -------- ------
DISTRIBUTIONS
Net Investment Income -- (0.01) (0.17) (0.15)
In Excess of Net Investment Income -- (0.00)+ -- --
Net Realized Gain -- (3.23) (2.48) (1.78)
------ --------- -------- ------
Total Distributions -- (3.24) (2.65) (1.93)
------ --------- -------- ------
NET ASSET VALUE, END OF PERIOD $17.87 $15.78 $14.43 $12.17
------ --------- -------- ------
------ --------- -------- ------
TOTAL RETURN 13.25% 33.31% 40.90% 41.25%
------ --------- -------- ------
------ --------- -------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $223,039 $155,087 $68,480 $28,548
Ratio of Expenses to Average Net Assets
(1) 1.00%** 1.02% 1.00% 1.00%**
Ratio of Expenses to Average Net Assets
Excluding Dividend Expense on
Securities Sold Short and Interest
Expense N/A 1.00% N/A N/A
Ratio of Net Investment Income to
Average Net Assets (1) 0.15%** 0.08% 1.26% 1.64%**
Portfolio Turnover Rate 192% 302% 380% 309%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.00+ $0.01 $0.03 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.03%** 1.08% 1.24% 1.59%**
Net Investment Income to Average
Net Assets 0.12%** 0.02% 1.02% 1.05%**
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $15.72 $14.42 $12.25
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (2) (0.01) (0.01) 0.13
Net Realized and Unrealized Gain on
Investments 2.09 4.55 4.67
------ ------ ------
Total from Investment Operations 2.08 4.54 4.80
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.01) (0.15)
In Excess of Net Investment Income -- (0.00)+ --
Net Realized Gain -- (3.23) (2.48)
------ ------ ------
Total Distributions -- (3.24) (2.63)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 17.80 $ 15.72 $ 14.42
------ ------ ------
------ ------ ------
TOTAL RETURN 13.23% 32.90% 39.72%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $23,033 $18,277 $8,805
Ratio of Expenses to Average Net Assets
(2) 1.25%** 1.27% 1.25%**
Ratio of Expenses to Average Net Assets
Excluding Dividend Expense on
Securities Sold Short and Interest
Expense N/A 1.25% N/A
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (0.10)%** (0.18)% 0.95%**
Portfolio Turnover Rate 192% 302% 380%
- ---------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income (loss) $0.00+ $0.00+ $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.28%** 1.33% 1.47%**
Net Investment Income (Loss) to
Average Net Assets (0.13)%** (0.24)% 0.73%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
189
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 --------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.72 $ 13.50 $ 21.49 $ 16.12 $ 16.22 $ 16.22
------ ------- ------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.10 (0.07) (0.19) (0.18) (0.09) (0.11)
Net Realized and Unrealized Gain
(Loss) on Investments 1.39 1.09 0.89 5.55 (0.01) 0.11
------ ------- ------- -------- -------- --------
Total from Investment Operations 1.49 1.02 0.70 5.37 (0.10) 0.00
------ ------- ------- -------- -------- --------
DISTRIBUTIONS
Net Realized Gain -- (6.80) (8.69) -- -- --
------ ------- ------- -------- -------- --------
Total Distributions -- (6.80) (8.69) -- -- --
------ ------- ------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.21 $ 7.72 $ 13.50 $ 21.49 $ 16.12 $ 16.22
------ ------- ------- -------- -------- --------
------ ------- ------- -------- -------- --------
TOTAL RETURN 19.30% 11.36% 3.72% 33.31% (0.62)% 0.00%
------ ------- ------- -------- -------- --------
------ ------- ------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $70,339 $57,777 $62,793 $119,378 $117,669 $103,621
Ratio of Expenses to Average Net Assets
(1) 1.25%** 1.25% 1.25% 1.25% 1.25% 1.25%
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) 2.32%** (0.87)% (0.88)% (0.76)% (0.61)% (0.77)%
Portfolio Turnover Rate 185% 228% 33% 25% 24% 25%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to Net
Investment Income (Loss) $0.01 $0.01 $0.01 $0.003 $0.002 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.37%** 1.34% 1.30% 1.26% 1.26% 1.31%
Net Investment Income (Loss) to
Average Net Assets 2.20%** (0.95)% (0.92)% (0.77)% (0.62)% (0.83)%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------
PERIOD FROM
SIX MONTHS JANUARY 2,
ENDED YEAR ENDED 1996*** TO
JUNE 30, 1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.63 $ 13.45 $ 21.47
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (2) 0.09 (0.06) (0.15)
Net Realized and Unrealized Gain on
Investments 1.37 1.04 0.82
------ ------ ------
Total From Operations 1.46 0.98 0.67
------ ------ ------
DISTRIBUTIONS
Net Realized Gain -- (6.80) (8.69)
------ ------ ------
Total Distributions -- (6.80) (8.69)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.09 $ 7.63 $ 13.45
------ ------ ------
------ ------ ------
TOTAL RETURN 19.14% 11.13% 3.58%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,428 $1,313 $3,997
Ratio of Expenses to Average Net Assets
(2) 1.50%** 1.50% 1.50%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) 2.09%** (1.12)% (1.09)%**
Portfolio Turnover Rate 185% 228% 33%
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to Net
Investment Income (Loss) $0.01 $0.00+ $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.62%** 1.58% 1.54%**
Net Investment Income (Loss) to
Average Net Assets 1.97%** (1.21)% (1.14)%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
190
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1998 -----------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $16.93 $14.94 $14.14 $12.02 $12.14 $11.88
------ -------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.02 0.06 0.17 0.22 0.17 0.22
Net Realized and Unrealized Gain on
Investments 2.63 4.48 4.07 4.93 0.21 0.28
------ -------- -------- -------- ------- -------
Total from Investment Operations 2.65 4.54 4.24 5.15 0.38 0.50
------ -------- -------- -------- ------- -------
DISTRIBUTIONS
Net Investment Income -- (0.06) (0.17) (0.28) (0.13) (0.23)
In Excess of Net Investment Income -- (0.00)+ -- -- -- (0.01)
Net Realized Gain -- (2.49) (3.27) (2.75) (0.37) --
------ -------- -------- -------- ------- -------
Total Distributions -- (2.55) (3.44) (3.03) (0.50) (0.24)
------ -------- -------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD $19.58 $16.93 $14.94 $14.14 $12.02 $12.14
------ -------- -------- -------- ------- -------
------ -------- -------- -------- ------- -------
TOTAL RETURN 15.65% 31.32% 30.97% 45.02% 3.26% 4.33%
------ -------- -------- -------- ------- -------
------ -------- -------- -------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $786,976 $591,789 $352,703 $158,112 $97,259 $73,789
Ratio of Expenses to Average Net Assets
(1) 0.80%** 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of Net Investment Income to
Average Net Assets (1) 0.29%** 0.35% 1.12% 1.57% 1.44% 1.59%
Portfolio Turnover Rate 80% 177% 186% 186% 146% 172%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.00+ $0.00+ $0.01 $0.01 $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.80%** 0.82% 0.88% 0.88% 0.89% 0.93%
Net Investment Income to Average
Net Assets 0.29%** 0.33% 1.04% 1.49% 1.35% 1.46%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $16.91 $14.92 $14.22
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.01 0.04 0.13
Net Realized and Unrealized Gain on
Investments 2.61 4.46 3.99
------ ------ ------
Total from Investment Operations 2.62 4.50 4.12
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.02) (0.15)
Net Realized Gain -- (2.49) (3.27)
------ ------ ------
Total Distributions -- (2.51) (3.42)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 19.53 $ 16.91 $ 14.92
------ ------ ------
------ ------ ------
TOTAL RETURN 15.49% 31.05% 29.92%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $61,476 $27,879 $5,498
Ratio of Expenses to Average Net Assets
(2) 1.05%** 1.05% 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.07%** 0.10% 0.91%**
Portfolio Turnover Rate 80% 177% 186%
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.00+ $0.01 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.05%** 1.07% 1.12%**
Net Investment Income to Average
Net Assets 0.07%** 0.08% 0.84%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
191
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ----------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.24 $10.89 $11.91 $10.80 $11.10 $10.14
------ ------ ------- ------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01 0.07 0.32 0.30 0.28 0.24
Net Realized and Unrealized Gain
(Loss) on Investments 0.97 3.72 2.36 1.82 (0.01) 0.90
------ ------ ------- ------- -------- --------
Total from Investment Operations 0.98 3.79 2.68 2.12 0.27 1.14
------ ------ ------- ------- -------- --------
DISTRIBUTIONS
Net Investment Income -- (0.08) (0.32) (0.38) (0.27) (0.18)
In excess of Net Investment Income -- (0.00)+ -- -- -- --
Net Realized Gain -- (3.36) (3.38) (0.63) (0.30) --
------ ------ ------- ------- -------- --------
Total Distributions -- (3.44) (3.70) (1.01) (0.57) (0.18)
------ ------ ------- ------- -------- --------
NET ASSET VALUE, END OF PERIOD $12.22 $11.24 $10.89 $11.91 $10.80 $11.10
------ ------ ------- ------- -------- --------
------ ------ ------- ------- -------- --------
TOTAL RETURN 8.72% 36.80% 22.99% 20.63% 2.53% 11.33%
------ ------ ------- ------- -------- --------
------ ------ ------- ------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $42,472 $35,612 $23,970 $51,919 $40,033 $26,775
Ratio of Expenses to Average Net Assets
(1) 1.01%** 1.01% 1.00% 1.00% 1.00% 1.00%
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.00%** 1.00% N/A N/A N/A N/A
Ratio of Net Investment Income to
Average Net Assets (1) 0.14%** 0.55% 2.20% 2.60% 2.67% 2.56%
Portfolio Turnover Rate 90% 178% 32% 36% 22% 29%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.03 $0.04 $0.04 $0.02 $0.03 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.39%** 1.32% 1.32% 1.21% 1.26% 1.68%
Net Investment Income (Loss) to
Average Net Assets (0.24)%** 0.24% 1.89% 2.39% 2.41% 1.88%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.21 $ 10.88 $ 11.95
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (2) (0.01) 0.10 0.23
Net Realized and Unrealized Gain on
Investments 0.97 3.65 2.38
------ ------ ------
Total from Investment Operations 0.96 3.75 2.61
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.06) (0.30)
In excess of Net Investment Income -- (0.00)+ --
Net Realized Gain -- (3.36) (3.38)
------ ------ ------
Total Distributions -- (3.42) (3.68)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 12.17 $ 11.21 $ 10.88
------ ------ ------
------ ------ ------
TOTAL RETURN 8.56% 36.51% 22.33%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $7,156 $7,523 $1,689
Ratio of Expenses to Average Net Assets
(2) 1.26%** 1.26% 1.24%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.25%** 1.25% N/A
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (0.10)%** (0.06)% 1.93%**
Portfolio Turnover Rate 90% 178% 32%
- ---------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income (loss) $0.04 $0.02 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.64%** 1.56% 1.69%**
Net Investment Income (Loss) to
Average Net Assets (0.48)%** (0.36)% 1.50%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
192
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED SEPTEMBER 16,
JUNE 30, YEAR ENDED 1996* TO
1998++ DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.73 $ 10.71 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) (0.06) 0.07 (0.02)
Net Realized and Unrealized Gain on
Investments 2.56 3.75 0.73
------ ------ ------
Total from Investment Operations 2.50 3.82 0.71
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.26) --
Net Realized Gain -- (1.28) --
In Excess of Net Realized Gain -- (1.00) --
Return of Capital -- (0.26) --
------ ------ ------
Total Distributions -- (2.80) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 14.23 $ 11.73 $ 10.71
------ ------ ------
------ ------ ------
TOTAL RETURN 21.31% 37.27% 7.10%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $31,585 $31,788 $3,595
Ratio of Expenses to Average Net Assets
(1) 1.34%** 1.25% 1.25%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.25%** N/A N/A
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) (0.85)%** (1.07)% (0.70)%**
Portfolio Turnover Rate 150% 622% 77%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to Net
Investment Income (Loss) $0.04 $0.08 $0.22
Ratios before expense limitation:
Expenses to Average Net Assets 1.93%** 2.47% 8.51%**
Net Investment Loss to Average Net
Assets (1.44)%** (2.30)% (7.96)%**
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED SEPTEMBER 16,
JUNE 30, YEAR ENDED 1996* TO
1998++ DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.72 $ 10.71 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (2) (0.07) 0.04 (0.02)
Net Realized and Unrealized Gain on
Investments 2.55 3.74 0.73
------ ------ ------
Total from Investment Operations 2.48 3.78 0.71
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.25) --
Net Realized Gain -- (1.28) --
In Excess of Net Realized Gain -- (1.00) --
Return of Capital -- (0.24) --
------ ------ ------
Total Distributions -- (2.77) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 14.20 $ 11.72 $ 10.71
------ ------ ------
------ ------ ------
TOTAL RETURN 21.16% 36.90% 7.10%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,272 $2,394 $1,487
Ratio of Expenses to Average Net Assets
(2) 1.59%** 1.50% 1.50%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.50%** N/A N/A
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (1.08)%** (1.41)% (1.00)%**
Portfolio Turnover Rate 150% 622% 77%
- ---------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment loss $0.04 $0.04 $0.19
Ratios before expense limitation:
Expenses to Average Net Assets 2.18%** 2.72% 9.14%**
Net Investment Income (Loss) to
Average Net Assets (1.67)%** (2.63)% (8.65)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
++ Per share amounts for the six months ended June 30, 1998 are based on
average shares outstanding.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
193
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------
SIX MONTHS PERIOD FROM
ENDED JULY 31,
JUNE 30, 1997* TO
1998++ DECEMBER 31,
(UNAUDITED) 1997++
<S> <C> <C>
- --------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.31 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.05 0.06
Net Realized and Unrealized Gain on
Investments 1.48 0.33
------ ------
Total from Investment Operations 1.53 0.39
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.05)
Net Realized Gain -- (0.03)
------ ------
Total Distributions -- (0.08)
------ ------
NET ASSET VALUE, END OF PERIOD $11.84 $10.31
------ ------
------ ------
TOTAL RETURN 14.84% 3.94%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $31,504 $20,914
Ratio of Expenses to Average Net Assets
(1) 0.80%** 0.80%**
Ratio of Net Investment Income to
Average Net Assets (1) 0.94%** 1.32%**
Portfolio Turnover Rate 131% 15%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.02 $0.07
Ratios before expense limitation:
Expenses to Average Net Assets 1.24%** 2.37%**
Net Investment Income to Average
Net Assets 0.50%** (0.25)%**
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------
SIX MONTHS PERIOD FROM
ENDED JULY 31,
JUNE 30, 1997* TO
1998++ DECEMBER 31,
(UNAUDITED) 1997++
<S> <C> <C>
- --------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.31 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.03 0.02
Net Realized and Unrealized Gain on
Investments 1.49 0.37
------ ------
Total from Investment Operations 1.52 0.39
------ ------
DISTRIBUTIONS
Net Investment Income -- (0.05)
Net Realized Gain -- (0.03)
------ ------
Total Distributions -- (0.08)
------ ------
NET ASSET VALUE, END OF PERIOD $ 11.83 $ 10.31
------ ------
------ ------
TOTAL RETURN 14.74% 3.93%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,138 $102
Ratio of Expenses to Average Net Assets
(1) 1.05%** 1.05%**
Ratio of Net Investment Income to
Average Net Assets (1) 0.54%** 0.48%**
Portfolio Turnover Rate 131% 15%
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.03 $0.00+
Ratios before expense limitation:
Expenses to Average Net Assets 1.49%** 2.63%**
Net Investment Income to Average
Net Assets 0.10%** (0.32)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
+ Amount is less than $0.01 per share.
++ Per share amounts are based on average shares oustanding.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
194
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED YEAR ENDED FEBRUARY 24,
JUNE 30, DECEMBER 31, 1995* TO
1998 ------------------ DECEMBER 31,
(UNAUDITED) 1997 1996 1995
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.38 $ 14.41 $ 11.42 $ 10.00
------ -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.22 0.42 0.37 0.26
Net Realized and Unrealized Gain
(Loss) on Investments (1.02) 3.40 4.02 1.84
------ -------- -------- ------
Total from Investment Operations (0.80) 3.82 4.39 2.10
------ -------- -------- ------
DISTRIBUTIONS
Net Investment Income (0.09) (0.43) (0.39) (0.24)
Net Realized Gain -- (2.16) (1.01) (0.44)
In Excess of Net Realized Gain -- (0.26) -- --
------ -------- -------- ------
Total Distributions (0.09) (2.85) (1.40) (0.68)
------ -------- -------- ------
NET ASSET VALUE, END OF PERIOD $ 14.49 $ 15.38 $ 14.41 $ 11.42
------ -------- -------- ------
------ -------- -------- ------
TOTAL RETURN (5.23)% 27.62% 39.56% 21.07%
------ -------- -------- ------
------ -------- -------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $329,871 $361,549 $210,368 $69,509
Ratio of Expenses to Average Net Assets
(1) 1.00%** 1.00% 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.97%** 2.72% 3.08% 4.04%**
Portfolio Turnover Rate 71% 135% 171% 158%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.00+ $0.01 $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.01%** 1.04% 1.14% 1.33%**
Net Investment Income to Average
Net Assets 2.96%** 2.68% 2.93% 3.71%**
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.34 $ 14.39 $ 11.50
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.24 0.47 0.35
Net Realized and Unrealized Gain
(Loss) on Investments (1.07) 3.29 3.92
------ ------ ------
Total from Investment Operations (0.83) 3.76 4.27
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.08) (0.39) (0.37)
Net Realized Gain -- (2.16) (1.01)
In Excess of Net Realized Gain -- (0.26) --
------ ------ ------
Total Distributions (0.08) (2.81) (1.38)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 14.43 $ 15.34 $ 14.39
------ ------ ------
------ ------ ------
TOTAL RETURN (5.43)% 27.21% 38.23%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $18,776 $21,231 $8,734
Ratio of Expenses to Average Net Assets
(2) 1.25%** 1.25% 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 2.84%** 3.49% 2.91%**
Portfolio Turnover Rate 71% 135% 171%
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.00+ $0.00+ $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.26%** 1.28% 1.37%**
Net Investment Income to Average
Net Assets 2.83%** 3.46% 2.79%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
195
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------
SIX
MONTHS
ENDED
JUNE
30, YEAR ENDED DECEMBER 31,
1998 ----------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.62 $ 13.89 $ 13.94 $ 11.50 $ 12.63 $ 11.31
------- ------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.11 0.35 0.41 0.38 0.40 0.37
Net Realized and Unrealized Gain
(Loss) on Investments 1.36 3.51 2.27 3.30 (0.55) 1.31
------- ------- -------- -------- ------- -------
Total from Investment Operations 1.47 3.86 2.68 3.68 (0.15) 1.68
------- ------- -------- -------- ------- -------
DISTRIBUTIONS
Net Investment Income (0.06) (0.35) (0.41) (0.47) (0.40) (0.36)
Net Realized Gain -- (3.78) (2.32) (0.77) (0.58) --
------- ------- -------- -------- ------- -------
Total Distributions (0.06) (4.13) (2.73) (1.24) (0.98) (0.36)
------- ------- -------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 15.03 $ 13.62 $ 13.89 $ 13.94 $ 11.50 $ 12.63
------- ------- -------- -------- ------- -------
------- ------- -------- -------- ------- -------
TOTAL RETURN 10.78% 29.20% 19.73% 33.69% (1.29)% 15.14%
------- ------- -------- -------- ------- -------
------- ------- -------- -------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $96,806 $86,054 $106,128 $147,365 $73,406 $54,598
Ratio of Expenses to Average Net Assets
(1) 0.71%** 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 0.70%** N/A N/A N/A N/A N/A
Ratio of Net Investment Income to
Average Net Assets (1) 1.47%** 2.15% 2.62% 3.01% 3.37% 3.23%
Portfolio Turnover Rate 68% 36% 42% 43% 33% 51%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.01 $0.02 $0.01 $0.01 $0.01 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.81%** 0.80% 0.78% 0.77% 0.80% 0.95%
Net Investment Income to Average
Net Assets 1.38%** 2.06% 2.55% 2.94% 3.27% 2.98%
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------------
SIX MONTHS PERIOD FROM
ENDED YEAR ENDED JANUARY 2,
JUNE 30, DECEMBER 1996*** TO
1998 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.59 $ 13.89 $ 14.06
----------- ----------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.08 0.28 0.29
Net Realized and Unrealized Gain on
Investments 1.37 3.51 2.25
----------- ----------- ------
Total from Investment Operations 1.45 3.79 2.54
----------- ----------- ------
DISTRIBUTIONS
Net Investment Income (0.05) (0.31) (0.39)
Net Realized Gain -- (3.78) (2.32)
----------- ----------- ------
Total Distributions (0.05) (4.09) (2.71)
----------- ----------- ------
NET ASSET VALUE, END OF PERIOD $ 14.99 $ 13.59 $ 13.89
----------- ----------- ------
----------- ----------- ------
TOTAL RETURN 10.68% 28.70% 18.57%
----------- ----------- ------
----------- ----------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $2,457 $2,246 $2,555
Ratio of Expenses to Average Net Assets
(2) 0.96%** 0.95% 0.95%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 0.95%** N/A N/A
Ratio of Net Investment Income to
Average Net Assets (2) 1.22%** 1.86% 2.33%**
Portfolio Turnover Rate 68% 36% 42%
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.01 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.06%** 1.04% 1.03%**
Net Investment Income to Average
Net Assets 1.12%** 1.77% 2.26%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
196
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------
SIX
MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1998++ ------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.55 $ 8.19 $ 9.98 $ 8.96 $ 11.13 $ 11.31
--------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.13 0.36 0.52 0.39 0.42 0.44
Net Realized and Unrealized Gain
(Loss) on Investments 0.41 0.99 0.54 1.62 (0.64) 0.79
--------- --------- --------- --------- --------- ---------
Total from Investment Operations 0.54 1.35 1.06 2.01 (0.22) 1.23
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income (0.07) (0.36) (0.48) (0.50) (0.49) (0.41)
In Excess of Net Investment Income -- (0.00)+ 0.00+ -- -- (0.08)
Net Realized Gain -- (1.63) (2.37) (0.49) (1.46) (0.06)
In Excess of Net Realized Gain -- -- -- -- -- (0.86)
--------- --------- --------- --------- --------- ---------
Total Distributions (0.07) (1.99) (2.85) (0.99) (1.95) (1.41)
--------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 8.02 $ 7.55 $ 8.19 $ 9.98 $ 8.96 $ 11.13
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
TOTAL RETURN 7.08% 17.30% 10.93% 23.63% (2.32)% 12.09%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $4,957 $4,606 $5,992 $22,642 $18,492 $29,684
Ratio of Expenses to Average Net Assets
(1) 0.70%** 0.71% 0.70% 0.70% 0.70% 0.70%
Ratio of Expenses to Average Net Assets
Excluding Interest Expense N/A 0.70% N/A N/A N/A N/A
Ratio of Net Investment Income to
Average Net Assets (1) 3.32%** 3.82% 3.93% 4.10% 4.13% 3.88%
Portfolio Turnover Rate 30% 25% 22% 26% 44% 136%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.06 $0.11 $0.08 $0.03 $0.03 $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 2.20%** 1.83% 1.32% 1.02% 0.95% 1.02%
Net Investment Income to Average
Net Assets 1.81%** 2.71% 3.31% 3.78% 3.88% 3.56%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998++ DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.53 $ 8.18 $ 10.02
------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.12 0.08 0.34
Net Realized and Unrealized
Gain on Investments 0.40 1.24 0.65
------ ------ ------
Total from Investment
Operations 0.52 1.32 0.99
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.06) (0.34) (0.46)
Net Realized Gain -- (1.63) (2.37)
------ ------ ------
Total Distributions (0.06) (1.97) (2.83)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 7.99 $ 7.53 $ 8.18
------ ------ ------
------ ------ ------
TOTAL RETURN 6.90% 16.94% 10.24%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $239 $621 $2,197
Ratio of Expenses to Average
Net Assets (2) 0.95%** 0.96% 0.95%**
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense N/A 0.95% N/A
Ratio of Net Investment Income
to Average Net Assets (2) 3.06%** 3.60% 3.73%**
Portfolio Turnover Rate 30% 25% 22%
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.05 $0.14 $0.07
Ratios before expense
limitation:
Expenses to Average Net
Assets 2.30%** 2.05% 1.68%**
Net Investment Income to
Average Net Assets 1.71%** 2.50% 3.00%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
++ Per share amounts for the period ended June 30, 1998 are based on
average shares outstanding.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
197
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
PERIOD
FROM
SIX FEBRUARY
MONTHS 1,
ENDED 1994* TO
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER
1998++ ------------------------------- 31,
(UNAUDITED) 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 5.77 $ 7.54 $ 8.59 $ 8.59 $ 10.00
--------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.30 0.74 1.54 1.36 0.50
Net Realized and Unrealized Gain
(Loss) on Investments (0.52) 0.55 2.79 0.91 (1.91)
--------- --------- --------- --------- --------
Total from Investment Operations (0.22) 1.29 4.33 2.27 (1.41)
--------- --------- --------- --------- --------
DISTRIBUTIONS
Net Investment Income -- (0.71) (1.17) (1.86) --
In Excess of Net Investment Income -- -- (0.01) -- --
Net Realized Gain -- (2.17) (4.20) (0.41) --
In Excess of Net Realized Gain -- (0.08) -- -- --
Return of Capital -- (0.10) -- -- --
--------- --------- --------- --------- --------
Total Distributions -- (3.06) (5.38) (2.27) --
--------- --------- --------- --------- --------
NET ASSET VALUE, END OF PERIOD $ 5.55 $ 5.77 $ 7.54 $ 8.59 $ 8.59
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
TOTAL RETURN (3.81)% 18.29% 50.52% 28.23% (14.10)%
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $189,461 $142,382 $152,142 $181,878 $144,949
Ratio of Expenses to Average Net Assets 2.04%** 1.60% 2.70% 1.75% 1.49%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense and Short
Sale Dividend Expense 1.30%** N/A N/A N/A N/A
Ratio of Net Investment Income to
Average Net Assets 10.28%** 8.06% 11.66% 14.70% 9.97%**
Portfolio Turnover Rate 226% 417% 560% 406% 273%
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998++ DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 5.77 $ 7.53 $ 8.68
------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.29 0.69 1.01
Net Realized and Unrealized
Gain on Investments (0.51) 0.59 3.20
------ ------ ------
Total from Investment
Operations (0.22) 1.28 4.21
------ ------ ------
DISTRIBUTIONS
Net Investment Income -- (0.69) (1.15)
In Excess of Net Investment
Income -- -- (0.01)
Net Realized Gain -- (2.17) (4.20)
In Excess of Net Realized
Gain -- (0.08) --
Return of Capital -- (0.10) --
------ ------ ------
Total Distributions -- (3.04) (5.36)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 5.55 $ 5.77 $ 7.53
------ ------ ------
------ ------ ------
TOTAL RETURN (3.81)% 18.05% 48.52%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $4,158 $2,281 $4,253
Ratio of Expenses to Average
Net Assets 2.29%** 1.91% 2.81%**
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense and Short
Sale Dividend Expense 1.55%** N/A N/A
Ratio of Net Investment Income
to Average Net Assets 9.98%** 7.87% 11.09%**
Portfolio Turnover Rate 226% 417% 560%
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
++ Per share amounts for the period ended June 30, 1998 are based on
average shares outstanding.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
198
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------
SIX
MONTHS
ENDED
JUNE
30, YEAR ENDED DECEMBER 31,
1998 ---------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.88 $ 10.58 $ 10.81 $ 9.82 $ 11.05 $ 10.93
------- ------- ------- ------- ------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.31 0.65 0.67 0.72 0.59 0.54
Net Realized and Unrealized Gain
(Loss) on Investments 0.11 0.33 (0.20) 1.06 (0.92) 0.41
------- ------- ------- ------- ------- --------
Total from Investment Operations 0.42 0.98 0.47 1.78 (0.33) 0.95
------- ------- ------- ------- ------- --------
DISTRIBUTIONS
Net Investment Income (0.25) (0.68) (0.70) (0.79) (0.53) (0.56)
In Excess of Net Investment Income -- (0.00)+ (0.00)+ -- -- (0.01)
Net Realized Gain -- -- -- -- (0.37) (0.26)
In Excess of Net Realized Gain -- -- -- -- (0.00)+ --
------- ------- ------- ------- ------- --------
Total Distributions (0.25) (0.68) (0.70) (0.79) (0.90) (0.83)
------- ------- ------- ------- ------- --------
NET ASSET VALUE, END OF PERIOD $ 11.05 $ 10.88 $ 10.58 $ 10.81 $ 9.82 $ 11.05
------- ------- ------- ------- ------- --------
------- ------- ------- ------- ------- --------
TOTAL RETURN 3.91% 9.54% 4.61% 18.76% (3.10)% 9.07%
------- ------- ------- ------- ------- --------
------- ------- ------- ------- ------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $205,720 $183,192 $130,733 $165,527 $209,331 $240,668
Ratio of Expenses to Average Net Assets
(1) 0.45%** 0.45% 0.45% 0.45% 0.45% 0.45%
Ratio of Net Investment Income to
Average Net Assets (1) 5.71%** 6.11% 6.30% 6.85% 5.73% 4.97%
Portfolio Turnover Rate 94% 163% 183% 172% 388% 240%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.01 $0.02 $0.02 $0.01 $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.57%** 0.60% 0.60% 0.59% 0.58% 0.60%
Net Investment Income to Average
Net Assets 5.59%** 5.97% 6.15% 6.71% 5.60% 4.82%
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.89 $10.58 $10.81
------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.30 0.64 0.64
Net Realized and Unrealized
Gain (Loss) on Investments 0.11 0.33 (0.19)
------ ------ ------
Total from Investment
Operations 0.41 0.97 0.45
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.24) (0.66) (0.68)
------ ------ ------
Total Distributions (0.24) (0.66) (0.68)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $11.06 $10.89 $10.58
------ ------ ------
------ ------ ------
TOTAL RETURN 3.84% 9.48% 4.35%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $4,198 $4,834 $1,462
Ratio of Expenses to Average
Net Assets (2) 0.60%** 0.60% 0.60%**
Ratio of Net Investment Income
to Average Net Assets (2) 5.57%** 5.93% 6.15%**
Portfolio Turnover Rate 94% 163% 183%
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.02 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.72%** 0.74% 0.74%**
Net Investment Income to
Average Net Assets 5.45%** 5.78% 6.01%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
199
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 --------------------------------------------------
(UNAUDITED) 1997++ 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.15 $11.30 $ 11.22 $ 10.29 $ 11.68 $ 11.26
------ ------ --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.31 0.56 0.61 0.76 0.70 0.69
Net Realized and Unrealized Gain
(Loss) on Investments 0.07 (0.40) 0.08 1.15 (1.38) 0.90
------ ------ --------- --------- --------- --------
Total from Investment Operations 0.38 0.16 0.69 1.91 (0.68) 1.59
------ ------ --------- --------- --------- --------
DISTRIBUTIONS
Net Investment Income (0.13) (0.31) (0.61) (0.98) (0.40) (0.79)
In Excess of Net Investment Income -- -- -- -- -- (0.22)
Net Realized Gain -- -- -- -- (0.31) (0.16)
------ ------ --------- --------- --------- --------
Total Distributions (0.13) (0.31) (0.61) (0.98) (0.71) (1.17)
------ ------ --------- --------- --------- --------
NET ASSET VALUE, END OF PERIOD $ 11.40 $11.15 $ 11.30 $ 11.22 $ 10.29 $ 11.68
------ ------ --------- --------- --------- --------
------ ------ --------- --------- --------- --------
TOTAL RETURN 3.43% 1.50% 6.44% 19.32% (6.08)% 15.34%
------ ------ --------- --------- --------- --------
------ ------ --------- --------- --------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $65,441 $84,635 $112,888 $102,852 $130,675 $172,468
Ratio of Expenses to Average Net Assets
(1) 0.50%** 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of Net Investment Income to
Average Net Assets (1) 4.90%** 5.05% 5.50% 6.79% 6.34% 5.99%
Portfolio Turnover Rate 48% 116% 258% 207% 171% 108%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.01 $0.02 $0.02 $0.02 $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.73%** 0.71% 0.72% 0.71% 0.66% 0.70%
Net Investment Income to Average
Net Assets 4.67%** 4.84% 5.29% 6.58% 6.18% 5.79%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997++ 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.13 $11.29 $11.23
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.21 0.54 0.48
Net Realized and Unrealized Gain
(Loss) on Investments 0.17 (0.40) 0.18
------ ------ ------
Total from Investment Operations 0.38 0.14 0.66
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.13) (0.30) (0.60)
------ ------ ------
Total Distributions (0.13) (0.30) (0.60)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $11.38 $11.13 $11.29
------ ------ ------
------ ------ ------
TOTAL RETURN 3.39% 1.29% 6.12%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $330 $366 $1,559
Ratio of Expenses to Average Net Assets
(2) 0.65%** 0.65% 0.65%**
Ratio of Net Investment Income to
Average Net Assets (2) 4.75%** 4.88% 5.28%**
Portfolio Turnover Rate 46% 116% 258%
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.01 $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.88%** 0.86% 0.86%**
Net Investment Income to Average
Net Assets 4.52%** 4.68% 5.08%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
++ Per share amounts for the period ended December 31, 1997 are based on
average shares outstanding.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
200
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ----------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.58 $ 10.91 $ 10.46 $ 9.55 $ 11.16 $ 9.95
------ --------- --------- --------- ------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.48 1.00 1.03 1.14 0.97 0.90
Net Realized and Unrealized Gain
(Loss) on Investments (0.01) 0.67 0.47 0.97 (1.40) 1.21
------ --------- --------- --------- ------- ---------
Total from Investment Operations 0.47 1.67 1.50 2.11 (0.43) 2.11
------ --------- --------- --------- ------- ---------
DISTRIBUTIONS
Net Investment Income (0.38) (1.00) (1.05) (1.20) (0.97) (0.90)
In Excess of Net Investment Income -- -- (0.00)+ -- -- --
Net Realized Gain -- -- -- -- (0.21) --
------ --------- --------- --------- ------- ---------
Total Distributions (0.38) (1.00) (1.05) (1.20) (1.18) (0.90)
------ --------- --------- --------- ------- ---------
NET ASSET VALUE, END OF PERIOD $ 11.67 $ 11.58 $ 10.91 $ 10.46 $ 9.55 $ 11.16
------ --------- --------- --------- ------- ---------
------ --------- --------- --------- ------- ---------
TOTAL RETURN 4.09% 15.87% 15.01% 23.35% (4.18)% 22.11%
------ --------- --------- --------- ------- ---------
------ --------- --------- --------- ------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $177,113 $113,006 $95,663 $62,245 $97,223 $74,500
Ratio of Expenses to Average Net Assets
(1) 0.64%** 0.69% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to
Average Net Assets (1) 8.45%** 8.70% 9.78% 11.09% 9.42% 8.70%
Portfolio Turnover Rate 44% 111% 117% 90% 74% 104%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income N/A N/A $0.01 $0.01 $ 0.001 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A 0.82% 0.83% 0.76% 0.96%
Net Investment Income to Average
Net Assets N/A N/A 9.71% 11.01% 9.41% 8.49%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED JANUARY 2,
JUNE 30, YEAR ENDED 1996*** TO
1998 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1997 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.56 $ 10.90 $ 10.49
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.47 0.97 0.98
Net Realized and Unrealized Gain
(Loss) on Investments (0.02) 0.65 0.45
------ ------ ------
Total from Investment Operations 0.45 1.62 1.43
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.37) (0.96) (1.02)
------ ------ ------
Total Distributions (0.37) (0.96) (1.02)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 11.64 $ 11.56 $ 10.90
------ ------ ------
------ ------ ------
TOTAL RETURN 3.91% 15.48% 14.37%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $10,539 $7,213 $5,665
Ratio of Expenses to Average Net Assets
(2) 0.89%** 0.93% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (2) 8.18%** 8.48% 9.49%**
Portfolio Turnover Rate 44% 111% 117%
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income N/A N/A $0.01
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A 1.05%**
Net Investment Income to Average
Net Assets N/A N/A 9.44%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
+ Amount is less than $0.01 per share
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
201
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------
SIX MONTHS PERIOD FROM
ENDED YEAR ENDED DECEMBER 31, JANUARY 18,
JUNE 30, 1995* TO
1998 ---------------------------- DECEMBER 31,
(UNAUDITED) 1997++ 1996 1995
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.51 $ 10.25 $ 10.37 $ 10.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.25 0.47 0.49 0.44
Net Realized and Unrealized Gain
(Loss) on Investments (0.02) 0.25 (0.12) 0.42
------ ------ ------ ------
Total from Investment Operations 0.23 0.72 0.37 0.86
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.20) (0.46) (0.49) (0.45)
In Excess of Net Investment Income -- (0.00)+ -- (0.00)+
Net Realized Gain -- (0.00)+ -- (0.04)
In Excess of Net Realized Gain -- (0.00)+ -- --
------ ------ ------ ------
Total Distributions (0.20) (0.46) (0.49) (0.49)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.54 $ 10.51 $ 10.25 $ 10.37
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 2.17% 7.25% 3.67% 8.80%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $45,686 $60,541 $40,227 $45,869
Ratio of Expenses to Average Net Assets
(1) 0.45%** 0.45% 0.45% 0.45%**
Ratio of Net Investment Income to
Average Net Assets (1) 4.60%** 4.55% 4.77% 4.61%**
Portfolio Turnover Rate 23% 80% 45% 180%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.01 $0.02 $0.03 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.66%** 0.68% 0.73% 0.73%**
Net Investment Income to Average
Net Assets 4.40%** 4.33% 4.50% 4.33%**
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------
PERIOD FROM
JANUARY 2,
PERIOD ENDED 1996*** TO
NOVEMBER 5, DECEMBER 31,
1997++ 1996
<S> <C> <C>
- --------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.24 $ 10.37
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.08 0.44
Net Realized and Unrealized Gain
(Loss) on Investments 0.14 (0.08)
------ ------
Total from Investment Operations 0.22 0.36
------ ------
DISTRIBUTIONS
Net Investment Income (0.08) (0.49)
------ ------
Total Distributions (0.08) (0.49)
------ ------
NET ASSET VALUE, END OF PERIOD $ 10.38 $ 10.24
------ ------
------ ------
TOTAL RETURN (0.01)% 3.55%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $0 $69
Ratio of Expenses to Average Net Assets
(2) 0.70%** 0.70%**
Ratio of Net Investment Income to
Average Net Assets (2) 4.43%** 4.56%**
Portfolio Turnover Rate N/A 45%
- ---------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.00+ $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.93%** 0.98%**
Net Investment Income to Average
Net Assets 4.19%** 4.28%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
*** The Portfolio began offering Class B shares on January 2, 1996.
+ Amount is less than $0.01 per share.
++ Per share amounts for the year ended December 31, 1997 and for the
period ended November 5, 1997 are based on average shares outstanding.
As of November 5, 1997, and for the period from March 19 through
October 30, 1997, there were no outstanding Class B shares for the
Municipal Bond Portfolio.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
202
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ----------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------ ---------- ---------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.026 0.051 0.049 0.054 0.040 0.027
------ ---------- ---------- -------- -------- --------
DISTRIBUTIONS
Net Investment Income (0.026) (0.051) (0.049) (0.054) (0.040) (0.027)
In Excess of Net Investment Income -- -- -- -- -- 0.000+
------ ---------- ---------- -------- -------- --------
Total Distributions (0.026) (0.051) (0.049) (0.054) (0.040) (0.027)
------ ---------- ---------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------ ---------- ---------- -------- -------- --------
------ ---------- ---------- -------- -------- --------
TOTAL RETURN 2.59% 5.20% 5.03% 5.51% 3.84% 2.76%
------ ---------- ---------- -------- -------- --------
------ ---------- ---------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,630,416 $1,506,210 $1,284,633 $836,693 $690,503 $657,163
Ratio of Expenses to Average Net Assets
(1) 0.49%** 0.49% 0.52% 0.51% 0.49% 0.53%
Ratio of Net Investment Income to
Average Net Assets (1) 5.17%** 5.12% 4.92% 5.37% 3.77% 2.71%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income N/A N/A N/A N/A N/A $ 0.000+
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A N/A N/A N/A 0.54%
Net Investment Income to Average
Net Assets N/A N/A N/A N/A N/A 2.70%
</TABLE>
- --------------------------------------------------------------------------------
+ Amount is less than $0.001 per share.
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 ------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------ -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.015 0.031 0.030 0.034 0.020 0.019
------ -------- -------- -------- -------- --------
DISTRIBUTIONS
Net Investment Income (0.015) (0.031) (0.030) (0.034) (0.020) (0.019)
In Excess of Net Investment Income -- -- -- -- -- (0.000)+
------ -------- -------- -------- -------- --------
Total Distributions (0.015) (0.031) (0.030) (0.034) (0.020) (0.019)
------ -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------ -------- -------- -------- -------- --------
------ -------- -------- -------- -------- --------
TOTAL RETURN 1.51% 3.17% 3.02% 3.44% 2.44% 1.91%
------ -------- -------- -------- -------- --------
------ -------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $984,426 $804,607 $721,410 $451,519 $359,444 $266,524
Ratio of Expenses to Average Net Assets
(1) 0.50% 0.50% 0.53% 0.52% 0.51% 0.54%
Ratio of Net Investment Income to
Average Net Assets (1) 3.04% 3.14% 2.98% 3.38% 2.42% 1.89%
- ---------------
(1) Effect of voluntary expense
limitation during the
period:
Per share benefit to net
investment income N/A N/A N/A N/A N/A $ 0.000+
Ratios before expense limitation:
Expenses to Average Net Assets N/A N/A N/A N/A N/A 0.56%
Net Investment Income to Average
Net Assets N/A N/A N/A N/A N/A 1.87%
</TABLE>
- --------------------------------------------------------------------------------
+ Amount is less than $0.001 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
203
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. As of June 30, 1998, the Fund was comprised of 28 separate active,
diversified and non-diversified portfolios (individually referred to as a
"Portfolio", collectively as the "Portfolios"). At June 30, 1998, each Portfolio
(with the exception of the International Small Cap and Municipal Money Market
Portfolios) offers two classes of shares -- Class A and Class B. Both classes of
shares have identical voting rights (except shareholders of a Class have
exclusive voting rights regarding any matter relating solely to that Class of
shares), dividend, liquidation and other rights. Effective February 1998, the
Money Market Portfolio began offering Class B shares. Effective August 1998, the
Active Country Allocation Portfolio was renamed Active International Allocation
Portfolio. Please refer to the manager's reports included elsewhere in this
report for a description of each Portfolio's investment objective.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average of the mean between the current bid and asked prices obtained from
reputable brokers. Bonds and other fixed income securities may be valued
according to the broadest and most representative market. In addition, bonds and
other fixed income securities may be valued on the basis of prices provided by a
pricing service which are based primarily on institutional size trading in
similar groups of securities. The prices provided by a pricing service are
determined without regard to bid or last sale prices, but take into account
institutional size trading in similar groups of securities and any developments
related to the specific securities. Debt securities purchased with remaining
maturities of 60 days or less are valued at amortized cost, if it approximates
market value. Securities owned by the Money Market and Municipal Money Market
Portfolios are stated at amortized cost which approximates market value. All
other securities and assets for which market values are not readily available,
including restricted securities, are valued at fair value as determined in good
faith by the Board of Directors, although the actual calculations may be done by
others.
2. INCOME TAXES: It is each Portfolio's intention to qualify as a regulated
investment company and distribute all of its taxable and tax-exempt income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.
A Portfolio may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income and/or capital gains earned or
repatriated. Taxes are accrued and applied to net investment income, net
realized gains and net unrealized appreciation as income and/or capital gains
are earned. Taxes may also be based on the movement of foreign currency and are
accrued based on the value of investments denominated in such currency.
3. REPURCHASE AGREEMENTS: The Portfolios may enter into repurchase agreements
under which a Portfolio lends excess cash and takes possession of securities
with an agreement that the counterparty will repurchase such securities. In
connection with transactions in repurchase agreements, a bank as custodian for
the Fund takes possession of the underlying securities which are held as
collateral, with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/ or retention of the collateral or proceeds may be
subject to legal proceedings.
4. REVERSE REPURCHASE AGREEMENTS: The Emerging Markets Debt Portfolio may enter
into reverse repurchase agreements with institutions that the Portfolio's
investment adviser has determined are creditworthy. Under a reverse repurchase
agreement, the Portfolio receives cash from the sale of securities and agrees to
repurchase the securities at a mutually agreed upon date and price. Reverse
repurchase agreements involve market risk that the value of the securities
purchased with the proceeds from the sale of securities received by the
Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase. The Portfolio is also subject to credit risk
- --------------------------------------------------------------------------------
204
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
equal to the amount by which the value of securities subject to repurchase
exceeds the Portfolio's liability under the reverse repurchase agreement.
Securities subject to repurchase under reverse repurchase agreements are
designated as such in the Statements of Net Assets.
At June 30, 1998, the Emerging Markets Debt Portfolio had reverse repurchase
agreements outstanding as follows:
<TABLE>
<CAPTION>
MATURITY IN
LESS
THAN 365 DAYS
---------------
<S> <C>
Value of securities subject to
repurchase................................ $36,533,706
---------------
Liability for Reverse Repurchase
Agreement................................. 31,749,000
Weighted Average Interest Rate............. 5.65%
---------------
</TABLE>
For the Emerging Markets Debt Portfolio, the average weekly balance of reverse
repurchase agreements outstanding during the six months ended June 30, 1998 was
approximately $25,268,000, at a weighted average interest rate of 4.71%.
5. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, gains and losses from certain foreign currency transactions and
the foreign currency portion of gains and losses realized on sales and
maturities of foreign denominated debt securities are treated as ordinary income
for U.S. Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from foreign currency exchange contracts,
disposition of foreign currencies, currency gains or losses realized between the
trade and settlement dates on securities transactions, and the difference
between the amount of investment income and foreign withholding taxes recorded
on the Fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period-end exchange rates are reflected as
a component of unrealized appreciation (depreciation) on the Statement of Net
Assets. The change in net unrealized currency gains (losses) for the period is
reflected on the Statement of Operations.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investments
in domestic companies may be subject to limitation in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as "Foreign"
in the Statement of Net Assets) may be created and offered for investment. The
"local" and "foreign" shares' market values may differ. In the absence of
trading of the foreign shares in such markets, the Portfolios may value the
foreign shares at the closing exchange price of the local shares. Such
securities are identified as fair valued in the Statements of Net Assets.
6. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into
foreign currency exchange contracts generally to attempt to protect securities
and related receivables and payables against changes in future foreign currency
exchange rates and, in certain situations, to gain exposure to foreign
currencies. A foreign currency exchange contract is an agreement between two
parties to buy or sell currency at a set price on a future date. The market
value of the contract will fluctuate with changes in currency exchange rates.
The contract is marked-to-market daily and the change in market value is
recorded by the Portfolios as unrealized gain or loss. The Portfolios record
realized gains or losses when the contract is closed equal to the difference
between the value of the contract at the time it was opened and the value
- --------------------------------------------------------------------------------
205
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
at the time it was closed. Risk may arise upon entering into these contracts
from the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of the unrealized gain on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the U.S.
dollar.
7. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each
Portfolio may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days) after
the date of the transaction. Additionally, certain Portfolios may purchase
securities on a when-issued or delayed delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield, and no income accrues to the
Portfolio on such securities prior to delivery. When the Portfolio enters into a
purchase transaction on a when-issued or delayed delivery basis, it establishes
either a segregated account in which it maintains liquid assets in an amount at
least equal in value to the Portfolio's commitments to purchase such securities
or designates such assets as segregated on the custodian's records for the
Portfolio's regular custody account. Purchasing securities on a forward
commitment or when-issued or delayed-delivery basis may involve a risk that the
market price at the time of delivery may be lower than the agreed upon purchase
price, in which case there could be an unrealized loss at the time of delivery.
8. LOAN AGREEMENTS: Certain Portfolios may invest in fixed and floating rate
loans ("Loans") arranged through private negotiations between an issuer of
sovereign debt obligations and one or more financial institutions ("Lenders")
deemed to be creditworthy by the investment adviser. A Portfolio's investments
in Loans may be in the form of participations in Loans ("Participations") or
assignments of all or a portion of Loans ("Assignments") from third parties. A
Portfolio's investment in Participations typically results in the Portfolio
having a contractual relationship with only the Lender and not with the
borrower. The Portfolios have the right to receive payments of principal,
interest and any fees to which it is entitled only upon receipt by the Lender of
the payments from the borrower. The Portfolios generally have no right to
enforce compliance by the borrower in the terms of the loan agreement. As a
result, the Portfolio may be subject to the credit risk of both the borrower and
the Lender that is selling the Participation. When a Portfolio purchases
Assignments from Lenders, it typically acquires direct rights against the
borrower on the Loan. Because Assignments are arranged through private
negotiations between potential assignees and potential assignors, the rights and
obligations acquired by the Portfolio as the purchaser of an Assignment may
differ from, and be more limited than, those held by the assigning Lender.
9. SHORT SALES: Certain Portfolios may sell securities short. A short sale is a
transaction in which the Portfolios sell securities it may or may not own, but
has borrowed, in anticipation of a decline in the market price of the
securities. The Portfolios are obligated to replace the borrowed securities at
the market price at the time of replacement. The Portfolio may have to pay a
premium to borrow the securities as well as pay any dividends or interest
payable on the securities until they are replaced. A Portfolio's obligation to
replace the securities borrowed in connection with a short sale will generally
be secured by collateral deposited with the broker that consists of cash, U.S.
government securities or other liquid, high grade debt obligations. In addition,
the Portfolios will either designate on the custodian's records in its regular
custody account or place in a segregated account with its Custodian an amount of
cash, U.S. government securities or other liquid high grade debt obligations
equal to the difference, if any, between (1) the market value of the securities
sold at the time they were sold short and (2) any cash, U.S. government
securities or other liquid high grade debt obligations deposited as collateral
with the broker in connection with the short sale. Short sales by the Portfolios
involve certain risks and special considerations. Possible losses from short
sales differ from losses that could be incurred from a purchase of a security,
because losses from short sales may be unlimited, whereas losses from purchases
cannot exceed the total amount invested.
10. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and
put options on their portfolio securities and other financial instruments.
Premiums are received and are recorded as liabilities. The liabilities are
subsequently adjusted to reflect the current value of the options written.
Premiums received from writing options which expire are treated as realized
gains. Premiums received from writing options which are exercised or are closed
are added to or offset against the proceeds or amount paid on the transaction to
determine the net realized gain or loss. By writing a covered call option, a
Portfolio, in exchange for the premium, foregoes the opportunity for capital
appreciation above the exercise price should the market price of the underlying
security increase. By writing a covered put option, a Portfolio,
- --------------------------------------------------------------------------------
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
in exchange for the premium, accepts the risk of a decline in the market value
of the underlying security below the exercise price.
Certain Portfolios may purchase call and put options on their portfolio
securities or other financial instruments. Each Portfolio may purchase call
options to protect against an increase in the price of the security or financial
instrument it anticipates purchasing. Each Portfolio may purchase put options on
securities which it holds or other financial instrument to protect against a
decline in the value of the security or financial instrument or to close out
covered written put positions. Risks may arise from an imperfect correlation
between the change in market value of the securities held by the Portfolio and
the prices of options relating to the securities purchased or sold by the
Portfolio and from the possible lack of a liquid secondary market for an option.
The maximum exposure to loss for any purchased option is limited to the premium
initially paid for the option.
11. SECURITY LENDING: Certain Portfolios may lend investment securities to
certain qualified institutional investors who borrow securities in order to
complete certain transactions. By lending investment securities, a Portfolio
attempts to increase its net investment income through the receipt of interest
on the loan. Any gain or loss in the market price of the securities loaned that
might occur and any interest earned or dividends declared during the term of the
loan would be for the account of the Portfolio. Risks of delay in recovery of
the securities or even loss of rights in the collateral may occur should the
borrower of the securities fail financially. Risks may also arise to the extent
that the value of the securities loaned increases above the value of the
collateral received.
Portfolios that lend securities receive cash as collateral in an amount equal to
or exceeding 100% of the current market value of the loaned securities. Any cash
received as collateral is invested in U.S. Government securities or interest
bearing repurchase agreements with approved counterparties. A portion of the
interest received on the repurchase agreements is retained by the Fund and the
remainder is rebated to the borrower of the securities. The net amount of
interest earned, after the interest rebate, is included in the Statement of
Operations as interest income. The value of loaned securities and related
collateral outstanding at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- -------------------------------- --------------- -----------
<S> <C> <C>
Active International
Allocation..................... $ 23,432 $ 24,641
Asian Equity.................... 8,135 9,331
International Equity............ 242,942 259,824
International Magnum............ 18,944 19,892
</TABLE>
Morgan Stanley Trust Company, an affiliate of the investment adviser,
administers the security lending program and has earned fees for its services
totaling approximately $19,000, $23,000, $277,000 and $9,000 for the Active
International Allocation, Asian Equity, International Equity and International
Magnum Portfolios, respectively, for the six months ended June 30, 1998.
12. STRUCTURED SECURITIES: The Emerging Markets Debt Portfolio may invest in
interests in entities organized and operated solely for the purpose of
restructuring the investment characteristics of sovereign debt obligations. This
type of restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing interests in,
the underlying instruments. Structured Securities generally will expose the
Portfolio to credit risks of the underlying instruments as well as of the issuer
of the structured security. Structured securities are typically sold in private
placement transactions with no active trading market. Investments in Structured
Securities may be more volatile than their underlying instruments, however, any
loss is limited to the amount of the original investment.
13. FUTURES: Certain Portfolios may purchase and sell futures contracts. Futures
contracts provide for the sale by one party and purchase by another party of a
specified amount of a specified security, index, instrument or basket of
instruments. Futures contracts (secured by cash or government securities
deposited with brokers or custodians as "initial margin") are valued based upon
their quoted daily settlement prices; changes in initial settlement value
(represented by cash paid to or received from brokers as "variation margin") are
accounted for as unrealized appreciation (depreciation). When futures contracts
are closed, the difference between the opening value at the date of purchase and
the value at closing is recorded as realized gains or losses in the Statement of
Operations.
Certain Portfolios may use futures contracts in order to manage its exposure to
the stock and bond markets, to hedge against unfavorable changes in the value of
securities or to remain fully invested and to reduce transaction costs. Futures
contracts involve market risk in excess of the amounts recognized in the
Statement of Net Assets. Risks arise from the possible movements in security
values underlying these instruments. The change in value of futures contracts
primarily corresponds with the value of their underlying instruments, which may
not correlate with the
- --------------------------------------------------------------------------------
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
change in value of the hedged investments. In addition, there is the risk that a
Portfolio may not be able to enter into a closing transaction because of an
illiquid secondary market.
14. SWAP AGREEMENTS: Certain Portfolios may enter into swap agreements to
exchange one return or cash flow for another return or cash flow in order to
hedge against unfavorable changes in the value of securities or to remain fully
invested and to reduce transaction costs. The following summarizes swaps which
may be entered into by the Portfolios:
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of commitments to
pay and receive interest based on a notional principal amount. Net periodic
interest payments to be received or paid are accrued daily and are recorded in
the Statement of Operations as an adjustment to interest income. Interest rate
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest in
exchange for a market-linked return based on a notional amount. To the extent
the total return of the security or index underlying the transaction exceeds or
falls short of the offsetting interest obligation, the Portfolio will receive a
payment from or make a payment to the counterparty, respectively. Total return
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized gains or losses in the Statement
of Operations. Periodic payments received or made at the end of each measurement
period, but prior to termination, are recorded as realized gains or losses in
the Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and total
return swaps are presented in the Statement of Operations. Because there is no
organized market for these swap agreements, the value reported in the Statement
of Net Assets may differ from that which would be realized in the event the
Portfolio terminated its position in the agreement. Risks may arise upon
entering into these agreements from the potential inability of the
counterparties to meet the terms of the agreements and are generally limited to
the amount of net interest payments to be received and/or favorable movements in
the value of the underlying security, if any, at the date of default.
15. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the identified cost basis. Dividend income is
recorded on the ex-dividend date (except for certain foreign dividends which may
be recorded as soon as the Fund is informed of such dividends) net of applicable
withholding taxes where recovery of such taxes is not reasonably assured.
Interest income is recognized on the accrual basis except where collection is in
doubt. Discounts and premiums on securities purchased (other than
mortgage-backed securities) are amortized according to the effective yield
method over their respective lives. Most expenses of the Fund can be directly
attributed to a particular Portfolio. Expenses which cannot be directly
attributed are apportioned among the Portfolios based upon relative net assets.
Income, expenses (other than class specific expenses) and realized and
unrealized gains or losses are allocated to each class of shares based upon
their relative net assets. Dividends to the shareholders of the Money Market and
the Municipal Money Market Portfolios are accrued daily and are distributed on
or about the 15th of each month. Distributions for the remaining Portfolios are
recorded on the ex-distribution date.
The U.S. Real Estate Portfolio owns shares of real estate investment trusts
("REITs") which report information on the source of their distributions
annually. A portion of distributions received from REITs during the year is
estimated to be a return of capital and is recorded as a reduction of their
cost.
The amount and character of income and capital gain distributions to be paid by
the Fund are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles. These differences are
primarily due to differing book and tax treatments for the character and timing
of the recognition of gains or losses on securities and forward foreign currency
exchange contracts, the timing of the deductibility of certain foreign taxes,
and dividends received from real estate investment trusts.
Permanent book and tax basis differences relating to shareholder distributions
may result in reclassifications among undistributed net investment income
(loss), accumulated net realized gain (loss) and paid in capital.
Permanent book and tax differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income/accumulated net
investment loss for the purpose of calculating net investment income (loss) per
share in the Financial Highlights.
A transaction fee of one percent is charged on subscriptions and redemptions of
capital shares of the International Small Cap Portfolio and are included in paid
in capital.
Settlement and registration of foreign securities transactions may be subject to
significant risk not normally
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<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
associated with investments in the United States. In certain markets, including
Russia, ownership of shares is defined according to entries in the issuer's
share register. In Russia, there currently exists no central registration system
and the share register may not be subject to effective state supervision. It is
possible that a Portfolio could lose its share registration through fraud,
negligence or even mere oversight. In addition, shares being delivered for sales
and cash being paid for purchases may be delivered before the exchange is
complete. This may subject the Portfolio to further risk of loss in the event of
a failure to complete the transaction by the counterparty.
B. ADVISER: Morgan Stanley Asset Management Inc. (the "Adviser" or "MSAM"), a
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., provides the Fund
with investment advisory services under the terms of an Investment Advisory and
Management Agreement (the "Agreement") at the annual rates of average daily net
assets indicated below. MSAM has agreed to reduce fees payable to it and to
reimburse the Portfolios, if necessary, if the annual operating expenses, as
defined, expressed as a percentage of average daily net assets, exceed the
maximum ratios indicated as follows:
<TABLE>
<CAPTION>
MAXIMUM
EXPENSE RATIO
--------------------------
PORTFOLIO ADVISORY FEE CLASS A CLASS B
- ------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Active International
Allocation.................... 0.65% 0.80% 1.05%
Asian Equity................... 0.80 1.00 1.25
Asian Real Estate.............. 0.80 1.00 1.25
Emerging Markets............... 1.25 1.75 2.00
European Equity................ 0.80 1.00 1.25
European Real Estate........... 0.80 1.00 1.25
Global Equity.................. 0.80 1.00 1.25
International Equity........... 0.80 1.00 1.25
International Magnum........... 0.80 1.00 1.25
International Small Cap........ 0.95 1.15 N/A
Japanese Equity................ 0.80 1.00 1.25
Latin American................. 1.10 1.70 1.95
Aggressive Equity.............. 0.80 1.00 1.25
Emerging Growth................ 1.00 1.25 1.50
Equity Growth.................. 0.60 0.80 1.05
Small Cap Value Equity......... 0.85 1.00 1.25
Technology..................... 1.00 1.25 1.50
U.S. Equity Plus............... 0.45 0.80 1.05
U.S. Real Estate............... 0.80 1.00 1.25
Value Equity................... 0.50 0.70 0.95
Balanced....................... 0.50 0.70 0.95
Emerging Markets Debt.......... 1.00 1.75 2.00
Fixed Income................... 0.35 0.45 0.60
Global Fixed Income............ 0.40 0.50 0.65
High Yield..................... 0.375 0.695 0.945
Municipal Bond................. 0.35 0.45 0.70
Money Market................... 0.30 0.55 N/A
Municipal Money Market......... 0.30 0.57 N/A
</TABLE>
C. ADMINISTRATOR: MSAM also provides the Fund with administrative services
pursuant to an administrative agreement for a monthly fee which on an annual
basis equals 0.15% of the average daily net assets of each Portfolio, plus
reimbursement of out-of-pocket expenses. Under an agreement between MSAM and The
Chase Manhattan Bank ("Chase"), Chase through its corporate affiliate Chase
Global Funds Services Company ("CGFSC"), provides certain administrative
services to the Fund. For such services, MSAM pays Chase a portion of the fee
MSAM receives from the Fund. Certain employees of CGFSC are officers of the
Fund. In addition, the Fund incurs local administration fees in connection with
doing business in certain emerging market countries.
D. DISTRIBUTOR: Morgan Stanley & Co., Incorporated (the "Distributor"), a
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., and an affiliate of
MSAM, serves as the distributor of the Fund and provides Class B shareholders of
the applicable Portfolios with distribution services pursuant to a Distribution
Plan (the "Plan") in accordance with Rule 12b-1 under the Investment Company Act
of 1940. Under the Plan, the Distributor is entitled to receive from each
applicable Portfolio, a distribution fee, which is accrued daily and paid
quarterly, at an annual rate of 0.25% of the Class B shares' average daily net
assets. The Distributor may voluntarily waive from time to time all or any
portion of its distribution fee. The Distributor has agreed to reduce its fees
to 0.15% of the Class B shares' average daily net assets for the Fixed Income
and Global Fixed Income Portfolios.
E. CUSTODIAN: Morgan Stanley Trust Company ("MSTC"), a wholly-owned subsidiary
of Morgan Stanley Dean Witter & Co., acts as custodian for the Fund's assets
held outside the United States in accordance with a custodian agreement.
Custodian fees are computed and payable monthly based on assets held, investment
purchases and sales activity, an account maintenance fee, plus reimbursement for
certain out-of-pocket expenses.
- --------------------------------------------------------------------------------
209
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
For the six months ended June 30, 1998, the following Portfolios incurred
custody fees and had amounts payable to MSTC at June 30, 1998:
<TABLE>
<CAPTION>
MSTC CUSTODY
CUSTODY FEES FEES PAYABLE TO
INCURRED MSTC
(000) (000)
--------------- -----------------
<S> <C> <C>
Active International
Allocation.................. $ 112 $ 145
Asian Equity................. 167 152
Asian Real Estate............ 15 19
Emerging Markets............. 2,059 1,819
European Equity.............. 75 76
European Real Estate......... 18 20
Global Equity................ 32 30
International Equity......... 352 419
International Magnum......... 82 78
International Small Cap...... 65 62
Japanese Equity.............. 20 18
Latin American............... 53 62
Emerging Markets Debt........ 49 114
Global Fixed................. 8 11
</TABLE>
In addition, for the six months ended June 30, 1998, the following Portfolios
have earned interest income and incurred interest expense on balances with MSTC
as follows:
<TABLE>
<CAPTION>
INTEREST INCOME INTEREST EXPENSE
(000) (000)
------------------- -------------------
<S> <C> <C>
Asian Equity.............. $ 1 $ 1
Emerging Markets.......... 51 11
European Equity........... -- 3
European Real Estate...... -- 2
International Equity...... 2 1
Latin American............ 1 1
Emerging Markets Debt..... 13 31
</TABLE>
F. DIRECTORS' FEES: The Fund and other funds managed by MSAM (the "Fund
Complex") pays each Director, who is not an officer or affiliated person, an
aggregate annual fee of $65,000, plus out-of-pocket expenses. Such fees are
allocated among the funds in the Fund Complex in proportion of their respective
average net assets.
Each Director of the Fund who is not an officer of the Fund or an affiliated
person as defined under the Investment Company Act of 1940, as amended, may
elect to participate in the Directors' Deferred Compensation Plan (the
"Compensation Plan"). Under the Compensation Plan, such Directors may elect to
defer their total fees earned as a Director of the Fund. These deferred portions
are treated, based on an election by the Director, as if they were either
invested in the Fund's shares or invested in U.S. Treasury Bills, as defined
under the Compensation Plan. The total deferred fees payable, under the
Compensation Plan, at June 30, 1998 totaled $490,000 and are included in
Directors' Fees and Expenses Payable on the Statements of Net Assets of the
Portfolio.
G. PURCHASES AND SALES: During the six months ended June 30, 1998, purchases and
sales of investment securities, other than long-term U.S. Government securities
and short-term investments, were:
<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- ------------------------------------- ----------- ---------
<S> <C> <C>
Active International Allocation...... $ 92,708 $ 54,570
Asian Equity......................... 58,510 65,497
Asian Real Estate.................... 9,633 6,686
Emerging Markets..................... 660,840 546,566
European Equity...................... 101,869 1,955,003
European Real Estate................. 46,773 15,998
Global Equity........................ 103,201 17,975
International Equity................. 535,735 513,628
International Magnum................. 59,705 33,600
International Small Cap.............. 83,159 40,569
Japanese Equity...................... 36,027 40,857
Latin American....................... 75,266 82,251
Aggressive Equity.................... 457,970 410,542
Emerging Growth...................... 122,800 122,578
Equity Growth........................ 691,848 572,681
Small Cap Value Equity............... 44,330 41,913
Technology........................... 42,549 48,035
U.S. Equity Plus..................... 43,172 35,246
U.S. Real Estate..................... 246,681 250,124
Value Equity......................... 67,631 66,054
Balanced............................. 1,457 1,788
Emerging Markets Debt................ 503,836 424,555
Fixed Income......................... 94,576 150,769
Global Fixed Income.................. 23,088 31,770
High Yield........................... 141,802 66,748
Municipal Bond....................... 11,896 26,385
</TABLE>
Purchases and sales during the six months ended June 30, 1998 of long-term U.S.
Government securities occurred in the Emerging Markets Debt, Fixed Income and
Global Fixed Income Portfolios as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- --------------------------------------- ----------- ---------
<S> <C> <C>
Emerging Markets Debt.................. $ -- $ 4,918
Fixed Income........................... 100,061 23,073
Global Fixed Income.................... 7,779 15,795
</TABLE>
During the six months ended June 30, 1998, the following Portfolios paid
brokerage commissions to
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210
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
Morgan Stanley & Co., Incorporated and Dean Witter Reynolds, Inc., affiliated
broker/dealers, totaling approximately:
<TABLE>
<CAPTION>
BROKERAGE COMMISSION
(000)
------------------------------------
MORGAN STANLEY DEAN WITTER
PORTFOLIO & CO. REYNOLDS, INC.
- ---------------------------- ----------------- -----------------
<S> <C> <C>
Active International
Allocation................. $ 2 $ --
Asian Equity................ 40 --
Asian Real Estate........... 12 --
Emerging Markets............ 203 --
European Equity............. 17 --
European Real Estate........ 6 --
Global Equity............... 15 --
International Magnum........ 3 --
International Small Cap..... 6 --
Japanese Equity............. 57 --
Latin American.............. 13 --
</TABLE>
H. OTHER: At June 30, 1998, cost, unrealized appreciation, unrealized
depreciation, and net unrealized appreciation (depreciation) for U.S. Federal
income tax purposes of the investments of each Portfolio were:
<TABLE>
<CAPTION>
NET APPREC.
COST APPREC. DEPREC. (DEPREC.)
PORTFOLIO (000) (000) (000) (000)
- -------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Active International
Allocation............... $ 222,774 $ 37,852 $ (7,064) $ 30,788
Asian Equity.............. 71,431 2,534 (18,196) (15,662)
Asian Real Estate......... 3,699 23 (785) (762)
Emerging Markets.......... 1,578,245 126,460 (357,850) (231,390)
European Equity........... 258,940 81,728 (6,487) 75,241
European Real Estate...... 52,467 2,500 (2,215) 285
Global Equity............. 173,075 43,078 (9,345) 33,733
International Equity...... 2,448,817 954,230 (147,630) 806,600
International Magnum...... 211,608 43,056 (13,941) 29,115
International Small Cap... 308,555 57,553 (33,393) 24,160
Japanese Equity........... 76,920 665 (14,845) (14,180)
Latin American............ 69,767 290 (9,668) (9,378)
Aggressive Equity......... 243,560 16,647 (9,521) 7,126
Emerging Growth........... 71,071 6,272 (1,849) 4,423
Equity Growth............. 779,024 130,053 (27,527) 102,526
Small Cap Value Equity.... 45,627 5,960 (2,013) 3,947
Technology................ 28,496 5,309 (1,417) 3,892
U.S. Equity Plus.......... 30,697 2,690 (1,081) 1,609
U.S. Real Estate.......... 327,692 24,110 (11,236) 12,874
Value Equity.............. 83,009 15,930 (1,373) 14,557
Balanced.................. 4,518 638 (36) 602
Emerging Markets Debt..... 241,488 296 (17,734) (17,438)
Fixed Income.............. 212,885 3,019 (458) 2,561
Global Fixed Income....... 61,497 1,821 (1,194) 627
High Yield................ 185,023 4,070 (3,924) 146
Municipal Bond............ 43,404 2,035 (27) 2,008
Money Market.............. 1,626,614 -- -- --
Municipal Money Market.... 980,147 -- -- --
</TABLE>
During the six months ended June 30, 1998, the Emerging Markets Portfolio owned
shares of affiliated funds for which the Portfolio earned dividend income of
approximately $1,000.
At December 31, 1997, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by
regulations, through the indicated expiration dates:
<TABLE>
<CAPTION>
EXPIRATION DATE
DECEMBER 31,
(000)
------------------------------------------
PORTFOLIO 2002 2003 2004 2005 TOTAL
- ------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Asian Equity............. $ -- $ -- $ -- $ 37,963 $ 37,963
European Real Estate..... -- -- -- 40 40
Japanese Equity.......... -- 1,668 -- 11,325 12,993
Fixed Income............. 2,946 -- -- -- 2,946
Global Fixed Income...... 2,210 1,780 -- -- 3,990
Money Market............. -- -- 411 -- 411
Municipal Money Market... -- -- 22 -- 22
</TABLE>
To the extent that capital loss carryovers are used to offset any future capital
gains realized during the carryover period as provided by U.S. Federal income
tax regulations, no capital gains tax liability will be incurred by a Portfolio
for gains realized and not distributed. To the extent that capital gains are
offset, such gains will not be distributed to the shareholders.
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first day of the Portfolio's next
taxable year. For the period from November 1, 1997 to December 31, 1997 certain
Portfolios incurred and elected to defer until January 1, 1998 for U.S. Federal
income tax purposes, net capital and net currency losses of approximately:
<TABLE>
<CAPTION>
CAPITAL CURRENCY
LOSSES LOSSES
PORTFOLIO (000) (000)
- ----------------------------------------- --------- -----------
<S> <C> <C>
Active International Allocation.......... $ 3,209 $ --
Asian Equity............................. 32,015 451
Asian Real Estate........................ 124 25
Emerging Markets......................... 41,323 2,054
European Equity.......................... -- 64
European Real Estate..................... 281 --
International Magnum..................... 211 --
Japanese Equity.......................... 16,223 --
Latin American........................... -- 31
Technology............................... 1,716 --
Emerging Markets Debt.................... 2,193 --
Municipal Bond........................... 1 --
</TABLE>
During the six months ended June 30, 1998, transactions in written call options
were as follows:
COVERED CALL OPTIONS:
<TABLE>
<CAPTION>
EMERGING MARKETS DEBT PORTFOLIO FACE AMOUNT (000) PREMIUM (000)
- -------------------------------------- ----------------- -------------
<S> <C> <C>
Options outstanding at December 31,
1997................................. $ -- $ --
Options written during the period..... 103 88
Options expired during the period..... (73) (24)
Options exercised during the period... (30) (64)
--- ---
Options outstanding at June 30,
1998................................. $ -- $ --
--- ---
--- ---
</TABLE>
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211
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
At June 30, 1998, the net assets of certain Portfolios were substantially
comprised of foreign denominated securities and currency. Changes in currency
exchange rates will affect the U.S. dollar value of and investment income from
such securities.
Assets and liabilities, including Portfolio securities and foreign currency
holdings, were translated at the following exchange rates as of June 30, 1998:
<TABLE>
<S> <C> <C> <C>
Argentine Peso.......................... 0.99986 = $1.00
Australian Dollar....................... 1.61290 = $1.00
Austrian Shilling....................... 12.69550 = $1.00
Belgian Franc........................... 37.22000 = $1.00
Brazilian Real.......................... 1.15655 = $1.00
British Pound........................... 0.59880 = $1.00
Canadian Dollar......................... 1.47155 = $1.00
Colombian Peso.......................... 1,369.60500 = $1.00
Danish Krone............................ 6.87100 = $1.00
Egyptian Pound.......................... 3.41125 = $1.00
Finnish Markka.......................... 5.48255 = $1.00
French Franc............................ 6.04750 = $1.00
German Mark............................. 1.80350 = $1.00
Hong Kong Dollar........................ 7.74800 = $1.00
Hungarian Forint........................ 218.68000 = $1.00
Indian Rupee............................ 42.40000 = $1.00
Indonesian Rupiah....................... 14,750.00000 = $1.00
Italian Lira............................ 1,776.85000 = $1.00
Japanese Yen............................ 138.62000 = $1.00
Malaysian Ringgit....................... 4.15025 = $1.00
Mexican Peso............................ 8.99050 = $1.00
Morrocan Dhiram......................... 9.75270 = $1.00
Netherlands Guilder..................... 2.03330 = $1.00
New Zealand Dollar...................... 1.92474 = $1.00
Norwegian Krone......................... 7.66500 = $1.00
Pakistani Rupee......................... 46.10500 = $1.00
Peruvian New Sol........................ 2.93750 = $1.00
Philippines Peso........................ 41.70000 = $1.00
Poland Zloty............................ 3.48700 = $1.00
Singapore Dollar........................ 1.68950 = $1.00
South African Rand...................... 5.91925 = $1.00
South Korean Won........................ 1,373.00000 = $1.00
Spanish Peseta.......................... 153.35000 = $1.00
Sri Lankan Rupee........................ 65.40000 = $1.00
Swedish Krona........................... 7.97700 = $1.00
Swiss Franc............................. 1.51570 = $1.00
Taiwan Dollar........................... 34.36050 = $1.00
Thai Baht............................... 42.20000 = $1.00
Turkish Lira............................ 266,300.00000 = $1.00
Venezuelan Bolivar...................... 553.00000 = $1.00
</TABLE>
From time to time, certain Portfolios of the Fund have shareholders that hold a
significant portion of a Portfolio's outstanding shares. Investment activities
of these shareholders could have a material impact on those Portfolios.
SHAREHOLDER MEETING:
At a special shareholder meeting held on June 19, 1998, shareholders of the
Small Cap Value Equity and Balanced Portfolios voted on the following proposals:
<TABLE>
<C> <S>
1. To approve an agreement and plan of reorganization and
liquidation providing for 1) the transfer of all of the
assets and liabilities of the MSIF Small Cap Value
Equity Portfolio to the MAS Funds ("MAS") Mid Cap Value
Portfolio in exchange for shares of the MAS Mid Cap
Value Portfolio; 2) the distribution of the MAS Mid Cap
Value Portfolio shares so received to shareholders of
the MSIF Small Cap Value Equity Portfolio; and 3) the
termination under state law of the MSIF Small Cap Value
Equity Portfolio.
</TABLE>
<TABLE>
<CAPTION>
TOTAL
VOTED SHARES
VOTED FOR AGAINST ABSTENTIONS VOTED
- --------- ----------- ------------- -----------
<S> <C> <C> <C>
2,157,645 3,175 29,412 2,190,232
- --------- ----- ------ -----------
- --------- ----- ------ -----------
</TABLE>
<TABLE>
<C> <S>
2. To approve an agreement and plan of reorganization and
liquidation providing for 1) the transfer of all of the
assets and liabilities of the MSIF Balanced Portfolio to
the MAS Balanced Portfolio in exchange for shares of MAS
Balanced Portfolio; 2) the distribution of the MAS
Balanced Portfolio shares so received to shareholders of
the MSIF Balanced Portfolio; and 3) the termination
under state law of the MSIF Balanced Portfolio.
</TABLE>
<TABLE>
<CAPTION>
VOTED TOTAL SHARES
VOTED FOR AGAINST ABSTENTIONS VOTED
- --------- ----------- --------------- -------------
<S> <C> <C> <C>
350,232 -- -- 350,232
- --------- --- --- -------------
- --------- --- --- -------------
</TABLE>
On July 20, 1998, the approved plan of reorganization and liquidation was
effected. All of the assets and liabilities of the MSIF Balanced and Small Cap
Value Equity Portfolios were transferred to the MAS Balanced and Mid Cap Value
Portfolios, respectively. The shareholders who owned shares of the MSIF Balanced
and Small Cap Value Equity Portfolios received shares of an equivalent class in
the MAS Funds Balanced and Mid Cap Value Portfolios, respectively.
FEDERAL TAX INFORMATION
For the period ended July 17, 1998, the percentage of dividends paid that
qualify for the 70% dividend received deduction for corporate shareholders for
the Small Cap Value Equity and Balanced Portfolios are 6.7% and 17.0%,
respectively.
For the period ended July 17, 1998, the following Portfolios designate long-term
capital gains as follows:
<TABLE>
<CAPTION>
LONG-TERM LONG-TERM
CAPITAL GAINS -- 20% CAPITAL GAINS -- 28%
PORTFOLIO (000) (000)
- --------------- ----------------------- -----------------------
<S> <C> <C>
Small Cap Value
Equity........ $ 10 $ 873
Balanced....... 321 67
</TABLE>
For the period ended July 17, 1998, the percentage of income earned from direct
U.S. treasury obligations was 69.20% for the Balanced Portfolio.
- --------------------------------------------------------------------------------
212
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
- -----------------------------------------------------------------------------
DIRECTORS
Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley
Asset Management Inc. and Morgan Stanley Asset
Management Limited; Managing Director,
Morgan Stanley & Co. Incorporated
Michael F. Klein
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Asset Management Inc. and
Morgan Stanley & Co. Incorporated
John D. Barrett II
Chairman and Director,
Barrett Associates, Inc.
Gerard E. Jones
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.
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, New York 10020
CUSTODIANS
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
OFFICERS
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Karl O. Hartmann
ASSISTANT SECRETARY
Joanna M. Haigney
TREASURER
Rene Feuerman
ASSISTANT TREASURER
FOR CURRENT PERFORMANCE, CURRENT NET ASSET VALUE, OR FOR ASSISTANCE WITH YOUR
ACCOUNT, PLEASE CONTACT THE FUND AT (800) 548-7786.
- --------------------------------------------------------------------------------
213
