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<TABLE>
<S> <C>
DIRECTORS OFFICERS
Barton M. Biggs Stefanie V. Chang
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Asset Harold J. Schaaff,
Management Inc. and Morgan Stanley Asset Jr.
Management Limited; Managing Director, VICE PRESIDENT
Morgan Stanley & Co. Incorporated Joseph P. Stadler
Michael F. Klein VICE PRESIDENT
DIRECTOR AND PRESIDENT Valerie Y. Lewis
Principal, Morgan Stanley Asset Management SECRETARY
Inc. and Morgan Stanley & Co. Incorporated Karl O. Hartmann
John D. Barrett II ASSISTANT SECRETARY
Chairman and Director, Joanna M. Haigney
Barrett Associates, Inc. TREASURER
Gerard E. Jones Rene J. Feuerman
Partner, Richards & O'Neil LLP ASSISTANT TREASURER
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.
</TABLE>
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INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------------------
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
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
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For current performance, current net asset value, or for assistance with your
account, please contact the Fund at (800) 548-7786. This report is authorized
for distribution only when preceded or accompanied by prospectuses of the Morgan
Stanley Institutional Fund, Inc.
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. Box 2798
Boston, MA 02208-2798
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
INTERNATIONAL SMALL CAP PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- -------
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 three months ended March 31, 1998, the Portfolio had a total return of
14.22% compared to a total return of 18.33% for the Morgan Stanley Capital
International (MSCI) EAFE Index (the "Index"). For the one
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE
INDEX(1)
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<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------------------------
ONE AVERAGE ANNUAL AVERAGE ANNUAL
YTD YEAR FIVE YEARS SINCE INCEPTION
--------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
PORTFOLIO.... 14.22% 9.62% 12.13% 15.06%
INDEX........ 18.33 -8.34 2.06 5.03
</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 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.
year ended March 31, 1998, the Portfolio had a total return of 9.62% compared to
- -8.34% for the Index. For the five-year period ended March 31, 1998, the average
annual total return for the Portfolio was 12.13% compared to 2.06% for the
Index. From inception on December 15, 1992 through March 31, 1998, the average
annual total return of the Portfolio for the period was 15.06% compared to 5.03%
for the Index.
For the first quarter of 1998 the Portfolio benefited from being underweight in
the non-Japan Asian markets (Hong Kong, Singapore, Malaysia) and enjoyed strong
stock selection in Hong Kong, France, Sweden and the U.K. Its underweighting of
the Japanese market and of the very strong Italian market, however, coupled with
poor relative stock performance in the Australian, German, Swiss, Finnish and
Danish markets, hurt the Portfolio's overall return. While we were delighted to
see smaller companies gaining more attention and outperforming the primarily
large cap EAFE Index, this reflected primarily the strong returns from small
caps in the Japanese market in January and the Southeast Asian market in
February. Also, European small caps, where the Portfolio is heavily overweight,
only started to outperform large caps in March and then more modestly.
Turnover for the quarter was moderate at 8%, with the Portfolio's positions in
Country Road in Australia and Sediver in France sold following successful bids.
Van Ommeren in the Netherlands and Northern Leisure in the U.K. were both sold
following strong outperformance and reflected fair value.
A new position was established in Metsa Tissue, the leading supplier of consumer
tissue paper in the Nordic region and Poland. Growth will come from further
development of the Polish market combined with expansion of its Away From Home
business in France, Germany and the United Kingdom. The shares were purchased on
a 1997 price/earnings multiple of 12.9
2
<PAGE>
times, price/cash multiple of 7.4 times and price/free cash flows of 12.9 times
which does not fully reflect the cash flow generating capability of this
company.
Looking forward, we do not anticipate any major changes in the Portfolio's
geographic exposure, although the Japanese and South East Asian weightings may
rise modestly following recent company visits.
In South East Asia we believe there is some value to be found, although we
remain extremely cautious. While reality appears to have set-in in Hong Kong,
there are no signs yet of such realism in Malaysia be it over corporate debt
levels, non-performing loans or gross oversupply in every segment of the
property sector. The February rally largely benefited those companies most
heavily sold off in preceding months--namely property and financial companies.
We believe these companies have yet to see the worst of the Asian crisis.
In Japan, small cap valuations remain fairly compelling despite their strong
bounce in January. Although none of our concerns over the parlous state of the
economy and lack of political will to seek change have diminished, there are
companies available at such depressed prices that all the bad news appears to be
more than discounted.
Attractive valuations are still available in small cap Europe, especially the
U.K. While sterling strength is clearly hurting the export sector, many small
caps have been unfairly sold off on this basis and can be purchased on extremely
depressed multiples. We continue to be concerned, however, over the roll-on
impact of the Asian crisis on many export-driven capital goods companies, and we
have continued to top slice profits on a number of the Portfolio's positions.
Small caps finally appear to be enjoying some renewed attention although their
outperformance in the first quarter is modest when compared with the lag of
previous quarters, especially in Europe. Valuations remain attractive, and
corporate activity is likely to continue to intervene.
Margaret Naylor
PORTFOLIO MANAGER
April 1998
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (91.3%)
AUSTRALIA (6.8%)
612,000 Auspine Ltd. $ 1,174
1,089,543 Australian Hospital Care Ltd. 1,348
1,057,866 Bains Harding Ltd. 168
361,560 BRL Hardy Ltd. 1,229
1,476,631 Eltin Ltd. 1,338
5,417,800 E.R.G. Ltd. 4,515
1,041,000 Morgan & Banks Ltd. 2,016
7,298,696 Parbury Ltd. 2,052
537,000 Ramsay Health Care Ltd. 835
1,272,340 Skilled Engineering Ltd. 1,549
1,990,900 Solution 6 Holdings Ltd. 1,133
338,525 W.D. & H.O. Wills Holdings Ltd. 477
---------
17,834
---------
DENMARK (1.3%)
68,600 SYD-Sonderjylland Holdings 3,405
---------
FINLAND (6.8%)
70,100 KCI Konecranes International 3,223
46,375 Kone Oyj, Class B 6,280
209,900 Metsa Tissue Oyj 2,319
150,000 Rautaruukki Oyj 1,248
200,200 Tamro Oyj 1,241
181,240 The Rauma Group 3,359
---------
17,670
---------
FRANCE (6.2%)
30,579 Dauphin O.T.A. 2,740
75,523 De Dietrich et Compagnie 4,755
48,578 Europeene d'Extincteurs 4,219
102,500 Legris Industries 4,468
---------
16,182
---------
GERMANY (4.3%)
75,850 Gerresheimer Glas AG 1,005
92,595 Marseille-Kliniken AG 1,202
81,170 Moebel Walther AG 2,436
10,570 Philipp Holzmann AG 2,458
17,080 Plettac AG 2,689
7,962 Sinn AG 1,356
---------
11,146
---------
HONG KONG (2.0%)
1,685,000 Li & Fung Ltd. 2,675
6,734,000 Vitasoy International Holdings
Ltd. 2,433
---------
5,108
---------
IRELAND (3.2%)
157,530 Clondalkin Group plc 1,606
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
931,914 Green Property plc $ 6,651
---------
8,257
---------
ITALY (1.4%)
459,000 Sogefi S.p.A. 2,036
19,000 Vincenzo Zucchi S.p.A. 195
207,050 Vincenzo Zucchi S.p.A. (NCS) 1,352
---------
3,583
---------
JAPAN (11.5%)
18,700 Asatsu, Inc. 328
231,000 Foster Electric Co., Ltd. 1,117
538,000 Hankyu Realty 2,764
155,000 Hanshin Department Stores 500
852,000 Japan Oil Transportation Co., Ltd. 2,236
361,000 Kansei Corp. 1,868
321,000 Kirin Beverage Corp. 6,138
49,300 Maezawa Kasei Industries 592
56,000 Mirai Industry Co., Ltd. 706
335,000 Nifco, Inc. 2,412
676,000 Nissan Fire & Insurance Co. 2,585
41,000 Nissei Industries 329
81,000 Rock Field Co., Ltd. 1,014
31,000 Sotoh Co., Ltd. 212
484,100 Toc Co. 4,066
239,000 Toyoda Gosei Co. 749
308,000 Ushio, Inc. 2,379
---------
29,995
---------
NETHERLANDS (8.0%)
65,000 Ahrend Groep N.V. 2,301
92,805 Apothekers Cooperatie OPG 2,871
29,281 Atag Holding N.V. 1,805
68,000 Benckiser N.V., Class B 3,754
93,000 GTI Holding N.V. 3,234
238,000 Hollandsche Beton Groep N.V. 4,646
61,600 Nutreco Holding N.V. 2,039
4,122 Samas Groep N.V. 242
---------
20,892
---------
NEW ZEALAND (1.0%)
876,736 Fisher & Paykel Industries Ltd. 2,641
---------
NORWAY (1.4%)
73,850 Adelsten ASA, Class B 765
137,100 Kverneland ASA 2,841
228,020 Oceanor --
---------
3,606
---------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
SINGAPORE (1.0%)
824,000 GP Batteries International Ltd. $ 2,705
---------
SPAIN (2.6%)
63,089 Bodegas y Bebidas 2,895
74,878 Miquel y Costas & Miquel 3,898
---------
6,793
---------
SWEDEN (2.3%)
88,200 Marieberg Tidnings AB 2,681
23,650 Nobel Biocare AB 263
99,880 Scandic Hotels AB 3,136
---------
6,080
---------
SWITZERLAND (8.2%)
1,469 Bobst AG (Bearer) 2,805
3,014 Bucher Holdings AG (Bearer) 3,105
9,112 Edipresse (Bearer) 3,211
2,750 LEM Holdings AG 584
7,540 PubliGroupe 1,682
2,183 SIG-Schweizerische Industrie-
Gesellschaft Holdings AG
(Registered) 3,409
13,934 Valora Holding AG 3,502
5,995 Zehnder Holding AG, Class B 3,088
---------
21,386
---------
UNITED KINGDOM (23.3%)
2,289,527 Anglo Irish Bank Corp. plc
(British Pound Shares) 5,295
1,330,900 Bluebird Toys plc 2,442
282,170 Capital Radio plc 3,358
299,700 Corporate Services Group plc 1,218
689,300 Devro plc 5,857
2,540,850 Donelon Tyson plc --
2,044,098 GEI International plc 3,460
1,982,300 Industrial Control Services Group
plc (Sub Notes) 1,395
442,389 International Business
Communications (Holdings) plc 2,992
1,608,965 John Mowlem & Co. plc 3,317
33,795,100 Kendell plc --
213,535 Le Riches Stores plc 1,925
543,600 Litho Supplies plc 2,045
206,335 Mallett plc 375
2,575,600 Matthews (Bernard) plc 3,885
553,600 Oriflame International 4,008
2,659,393 Pentos plc --
449,200 Quadramatic plc 1,250
238,000 Ricardo Group plc 814
525,800 SGB Group plc 1,895
732,600 SIG plc 2,480
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
373,500 Scholl plc $ 2,072
1,287,000 The 600 Group plc 2,772
718,850 UniChem plc 5,301
469,400 Waterman Partnership Holdings plc 433
310,000 Westminster Health Care Holdings
plc 2,112
---------
60,701
---------
TOTAL COMMON STOCKS (Cost $215,855) 237,984
---------
PREFERRED STOCKS (4.4%)
GERMANY (4.4%)
8,155 Dyckerhoff AG 2,263
27,111 Hornbach Holding AG 2,096
7,902 STO AG-Vorzug 2,906
15,065 Villeroy & Boch AG 2,159
14,700 Wuerttembergische
Metallwarenfabrik AG 2,067
---------
TOTAL PREFERRED STOCKS (Cost $12,297) 11,491
---------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
CONVERTIBLE DEBENTURE (0.2%)
ITALY (0.2%)
ITL 518,000 Mediobanca S.p.A. 5.50%, 1/01/00,
(Cost $328) 472
---------
TOTAL FOREIGN SECURITIES (95.9%) (Cost $228,480) 249,947
---------
SHORT-TERM INVESTMENT (1.5%)
REPURCHASE AGREEMENT (1.5%)
$ 3,935 Chase Securities, Inc. 5.60%,
dated 3/31/98, due 4/01/98, to be
repurchased at $3,936,
collateralized by U.S. Treasury
Notes, 5.875%, due 9/30/02,
valued at $4,022 (Cost $3,935) 3,935
---------
FOREIGN CURRENCY (2.3%)
AUD 634 Australian Dollar 419
GBP 207 British Pound 346
FIM 247 Finnish Markka 44
FRF 140 French Franc 23
DEM 690 German Mark 373
IEP 159 Irish Punt 216
ITL 3,561 Italian Lira 2
JPY 519,349 Japanese Yen 3,895
ESP 3,571 Spanish Peseta 23
SEK 2,518 Swedish Krona 315
CHF 720 Swiss Franc 472
---------
TOTAL FOREIGN CURRENCY (Cost $6,333) 6,128
---------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
(000)
---------
<C> <S> <C>
TOTAL INVESTMENTS (99.7%) (Cost $238,748) $260,010
---------
OTHER ASSETS AND LIABILITIES (0.3%)
Other Assets 12,355
Liabilities (11,683)
---------
672
---------
NET ASSETS (100%) $260,682
---------
---------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 14,620,551 outstanding $0.001 par
value shares (authorized 1,000,000,000 shares) $ 17.83
---------
---------
</TABLE>
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NCS -- Non Convertible Shares
6
