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MORGAN STANLEY
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
ANNUAL REPORT
DECEMBER 31, 1997
[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 Country Allocation................. 4
Asian Equity.............................. 14
Asian Real Estate......................... 19
Emerging Markets.......................... 23
European Equity .......................... 33
European Real Estate...................... 39
Global Equity ............................ 43
Gold...................................... 49
International Equity ..................... 51
International Magnum ..................... 56
International Small Cap................... 63
Japanese Equity........................... 69
Latin American............................ 73
U.S. Equity Portfolios:
Aggressive Equity......................... 77
Emerging Growth........................... 81
Equity Growth............................. 87
Small Cap Value Equity.................... 93
Technology................................ 98
U.S. Equity Plus.......................... 104
U.S. Real Estate.......................... 110
Value Equity.............................. 116
Balanced Portfolio.......................... 121
Fixed Income Portfolios:
Emerging Markets Debt..................... 127
Fixed Income.............................. 132
Global Fixed Income....................... 137
High Yield................................ 141
Municipal Bond............................ 146
Money Market Portfolios:
Money Market.............................. 150
Municipal Money Market.................... 154
Statements of Operations.................... 162
Statements of Changes in Net Assets......... 166
Statement of Cash Flows..................... 180
Financial Highlights ....................... 181
Notes to Financial Statements............... 209
Report of Independant Accountants........... 219
Federal Tax Information..................... 220
Officers and Directors ..................... 221
</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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<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
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PRESIDENT'S LETTER
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FELLOW SHAREHOLDERS:
We are very pleased to present to you the Fund's Annual Report for the year
ended December 31, 1997. Our Fund now offers 29 portfolios including 13 global
and international portfolios, 8 U.S. equity portfolios, 5 fixed income
portfolios, a balanced portfolio and two money market portfolios.
The performance of each of the portfolios and commentaries by portfolio
managers discussing the results of each portfolio are contained in this Report.
The investment performance of each portfolio relative to its respective
benchmark is summarized in the performance table on pages 2 and 3.
Despite the dismal events unfolding in Asia, world equities managed to
produce strong returns and global bonds produced modest gains for 1997. The
fourth quarter brought increased volatility in equity markets as a sharp
correction was touched off by concern over the spread of the Asian crisis. Bonds
moved higher as investors anticipated lower inflation and slower growth as a
result of the Asian currency devaluations. Dollar strength over the quarter
diminished most of the impact from international bond returns in local
currencies.
Among the equity markets, the U.S. ended 1997 on a positive note, shrugging
off the October correction with support from a strong bond market and lower
yields. Standard and Poor's 500 Index returned 33% for the year, after gains of
23% and 38% in 1996 and 1995, respectively. Internationally, European equities
delivered another impressive year of investment returns, while 1997 was a
difficult year in Japan. Asia ex-Japan, of course, saw significant wealth
destruction in 1997, with its regional stock markets collectively putting in
their worst performance in the past 20 years. Macroeconomics and current account
concerns put pressure on the Asian currencies and debt service problems
accelerated the trend. Fourth quarter stock market declines in Latin America
were precipitated by an over-flow of Asian troubles to other emerging markets,
leading to attacks on currency pegs and higher interest rates required to
maintain those pegs.
Among our global and international equity portfolios, the Latin American
Portfolio returned 41.28%, our Global Equity Portfolio gained 23.75% and our
International Equity Portfolio returned 13.91% (each for Class A shares), all
substantially outperforming their benchmarks. Among fixed income asset classes,
declining long-term interest rates and a strong U.S. stock market provided a
favorable backdrop to the high yield market which experienced another very good
year. Our High Yield Portfolio once again performed very well in both absolute
and relative terms, as did our Emerging Markets Debt Portfolio, which returned
18.29% (Class A shares) despite experiencing the spill-over effects of the
weakness across Asia in the fourth quarter.
As we enter 1998, our focus remains to provide you with world class
investment performance and service across a full range of investment products.
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
February 11, 1998
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1
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
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PERFORMANCE SUMMARY (UNAUDITED)
DECEMBER 31, 1997
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<TABLE>
<CAPTION>
NET ASSETS NET ASSET VALUE
INCEPTION DATES (000) PER SHARE
------------------ ------------------- ----------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
-------- -------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
GLOBAL AND INTERNATIONAL
EQUITY PORTFOLIOS:
Active Country Allocation 1/17/92 1/02/96 $ 138,667 $ 14 $ 10.39 $ 10.48
Asian Equity 7/01/91 1/02/96 85,503 1,468 9.43 9.40
Asian Real Estate 10/01/97 10/01/97 2,385 --** 7.94 8.03
Emerging Markets 9/25/92 1/02/96 1,501,386 9,666 12.97 12.98
European Equity 4/02/93 1/02/96 242,868 4,654 17.96 17.94
European Real Estate 10/01/97 10/01/97 15,177 789 9.52 9.52
Global Equity 7/15/92 1/02/96 108,074 5,910 18.52 18.46
Gold 2/01/94 1/02/96 436 690 4.10 4.14
International Equity 8/04/89 1/02/96 2,822,900 3,074 17.16 17.13
International Magnum 3/15/96 3/15/96 159,096 28,217 10.87 10.84
International Small Cap 12/15/92 -- 230,095 -- 15.61 --
Japanese Equity 4/25/94 1/02/96 77,086 1,703 5.89 5.87
Latin American 1/18/95 1/02/96 73,196 6,709 10.91 10.80
U.S. EQUITY PORTFOLIOS:
Aggressive Equity 3/08/95 1/02/96 155,087 18,277 15.78 15.72
Emerging Growth 11/01/89 1/02/96 57,777 1,313 7.72 7.63
Equity Growth 4/02/91 1/02/96 591,789 27,879 16.93 16.91
Small Cap Value Equity 12/17/92 1/02/96 35,612 7,523 11.24 11.21
Technology 9/16/96 9/16/96 31,788 2,394 11.73 11.72
U.S. Equity Plus 7/31/97 7/31/97 20,914 102 10.31 10.31
U.S. Real Estate 2/24/95 1/02/96 361,549 21,231 15.38 15.34
Value Equity 1/31/90 1/02/96 86,054 2,246 13.62 13.59
BALANCED PORTFOLIO 2/20/90 1/02/96 4,606 621 7.55 7.53
FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 2/01/94 1/02/96 142,382 2,281 5.77 5.77
Fixed Income 5/15/91 1/02/96 183,192 4,834 10.88 10.89
Global Fixed Income 5/01/91 1/02/96 84,635 366 11.15 11.13
High Yield 9/28/92 1/02/96 113,006 7,213 11.58 11.56
Municipal Bond 1/18/95 1/02/96 60,541 -- 10.51 --
MONEY MARKET PORTFOLIOS:
Money Market 11/15/88 -- 1,506,210 -- 1.00 --
Municipal Money Market 2/10/89 -- 804,607 -- 1.00 --
</TABLE>
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**Amount is less than $500.
<TABLE>
<CAPTION>
YIELD INFORMATION AS OF DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
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 10.24% 9.95% Money Market 5.25% 5.39% 5.24% 5.44%(19)
Fixed Income 5.95 5.80 Municipal Money Market 3.40 3.46 3.22 3.44(20)
Global Fixed Income 4.87 4.72
High Yield 8.34 8.10
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 December 31, 1997 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>
AVERAGE ANNUAL FIVE YEAR 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>
8.61% 8.35% 1.78%(1) 11.37% 11.39%(1) 8.69% 7.96%(1) 7.65% 3.87%(1)
- -48.29 -48.48 -45.48(2) -0.19 0.47(2) 4.16 3.90(2) -27.21 -23.01(2)
- -19.92* -19.70* -33.91*(21) -- -- -- -- -- --
-1.03 -1.31 -14.42(3) 10.23 6.16(3) 10.13 6.93(3) 4.69 -4.08(3)
17.88 17.73 23.80(4) -- -- 19.25 18.55(4) 19.26 22.11(4)
-4.72* -4.76* 0.13*(22) -- -- -- -- -- --
23.75 23.37 15.76(5) 22.71 15.34(5) 20.03 13.69(5) 22.74 14.41(5)
- -55.64 -55.17 -35.82(6) -- -- -14.67 -12.84(6) -28.79 -22.78(6)
13.91 13.57 1.78(1) 20.19 11.39(1) 12.19 3.84(1) 16.07 3.87(1)
6.58 6.33 1.78(1) -- -- 8.28 4.52(1) 7.94 4.52(1)
-0.55 -- 1.78(1) 12.76 11.39(1) 12.84 11.24(1) -- --(1)
-9.23 -9.64 -23.67(7) -- -- -4.38 -10.59(7) -5.75 -19.42(7)
41.28 40.37 31.66(8) -- -- 24.70 14.12(8) 41.47 25.29(8)
33.31 32.90 33.36(10) -- -- 41.36 30.90(10) 36.32 27.63(10)
11.36 11.13 21.64(9) 8.88 18.33(9) 11.88 16.36(9) 7.30 21.86(9)
31.32 31.05 33.36(10) 21.86 20.27(10) 19.07 17.79(10) 30.53 27.63(10)
36.80 36.51 24.35(11) 18.30 17.59(11) 18.46 18.16(11) 29.27 21.55(11)
37.27 36.90 33.36(10) -- -- 34.80 33.61(10) 34.52 33.61(10)
3.94* 3.93* 2.44*(10) -- -- -- -- -- --
27.62 27.21 20.29(12) -- -- 30.92 24.58(12) 32.66 27.63(12)
29.20 28.70 33.36(10) 18.64 20.27(10) 14.89 17.85(10) 23.56 27.63(10)
17.30 16.94 18.22(13) 11.98 13.06(13) 11.25 12.44(13) 13.56 16.34(13)
18.29 18.05 13.02(14) -- -- 18.77 13.18(14) 32.46 24.83(14)
9.54 9.48 9.65(15) 7.54 7.48(15) 8.53 8.52(15) 6.89 6.62(15)
1.50 1.29 1.40(16) 6.91 7.51(16) 7.42 8.54(16) 3.68 2.90(16)
15.87 15.48 12.65(17) 13.98 11.84(17) 13.46 11.56(17) 14.94 12.49(17)
7.25 -- 7.67(18) -- -- 6.66 8.12(18) -- --(18)
5.20 -- -- -- -- -- -- -- --
3.17 -- -- -- -- -- -- -- --
</TABLE>
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* Cumulative (unannualized) total return since inception of the Portfolio.
<TABLE>
<C> <S>
INDICES:
(1) MSCI EAFE (Europe, Australasia, and Far East)
(2) MSCI Combined Far East Free ex-Japan
(3) IFC Global Total Return Composite
(4) MSCI Europe
(5) MSCI World
(6) Philadelphia Gold and Silver
(7) MSCI Japan
(8) MSCI Emerging Markets Global Latin America
(9) NASDAQ Composite
(10) S&P 500
(11) Russell 2500
(12) NAREIT Equity
(13) Indata Balanced-Median
(14) J.P. Morgan Emerging Markets Bond Plus
(15) Lehman Aggregate Bond
(16) J.P. Morgan Traded Global Bond
(17) CS First Boston High Yield
(18) Lehman 7 Year Municipal Bond
(19) IBC Money Fund Comparable Yield
(20) IBC Municipal Money Market Fund Comparable Yield
(21) GPR Life Far East Asia Real Estate T.R.
(22) GPR Life European Real Estate T.R.
</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
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
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OVERVIEW
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australia 2.2 %
Austria 0.5 %
Finland 0.8 %
France 8.1 %
Germany 9.4 %
Italy 7.2 %
Japan 18.9 %
Netherlands 3.3 %
Norway 0.5 %
Portugal 1.4 %
Singapore 0.8 %
Spain 3.8 %
Sweden 3.4 %
Switzerland 7.6 %
United Kingdom 17.3 %
Other 14.8 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ACTIVE COUNTRY
MSCI EAFE ALLOCATION
INDEX (1) PORTFOLIO--CLASS A
<S> <C> <C>
01/17/92* 500,000 500,000
10/31/92 452,945 468,500
12/31/92 459,595 479,500
12/31/93 609,250 626,820
12/31/94 656,600 623,550
12/31/95 730,205 689,459
12/31/96 774,382 756,405
12/31/97 788,166 821,531
* Commencement of Operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO THE MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------- ----------------- ------------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 8.61% 11.37% 8.69%
PORTFOLIO -- CLASS
B..................... 8.35 N/A 7.65
INDEX -- CLASS A...... 1.78 11.39 7.96
INDEX -- CLASS B...... 1.78 N/A 3.87
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 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 provides an effective way to
maximize the return potential and minimize the risk associated with global
investing.
For the year ended December 31, 1997, the Portfolio had a total return of 8.61%
for the Class A shares and 8.35% for the Class B shares, as compared to a total
return of 1.78% for the Morgan Stanley Capital International (MSCI) EAFE Index
(the "Index"). For the five-year period ended December 31, 1997, the average
annual total return for Class A was 11.37% compared to 11.39% for the Index.
From inception on January 17, 1992 to December 31, 1997, the average annual
total return of Class A was 8.69% compared to 7.96% for the Index. From
inception on January 2, 1996 to December 31, 1997, the average annual total
return of Class B was 7.65% as compared to 3.87% for the Index.
The Portfolio outperformed in the fourth quarter due to our cash position and
our underweights in Asia and Japan. During the quarter, market returns were very
volatile. We had underweights in Malaysia (-38%), Hong Kong (-29%), Finland
(-17%), and New Zealand (-16%). Overweight positions in Europe included: Italy
(3.3%), Spain and the U.K.
In 1997, the Japanese economy moved from a potentially robust recovery to the
brink of recession. Europe's vision of a single currency went from a dream to a
near-certainty, and what began as pressure on the Thai baht, turned into an ever
widening Asian currency/asset price debacle.
Of the developed international regions, Europe has the most investment promise
for 1998. Though valuations are high by historic measures, earnings expectations
remain strong (though falling) and there is substantial potential for corporate
restructuring and government deregulation. Though much downsizing and balance
sheet recovery has already taken place in the manufacturing/industrial sectors,
restructuring has just begun in the financial and service industries. With
regard to deregulation, European telecommunication markets officially opened to
cross border competition January 1, and more is to follow. In countries where
the politics are too rigid or splintered to push through necessary pension and
labor market reforms (e.g.
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ACTIVE COUNTRY ALLOCATION PORTFOLIO
4
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
Germany, France, and Italy), many corporations are showing dynamism and
entrepreneurship on their own.
One of the major themes for the European markets this year will be the run-up to
the introduction of the euro in January 1999. By the close of 1998, short-term
interest rates in the countries participating in the single currency will have
to be identical, as there will be one short rate for the whole new currency
area. Our economists and currency strategists expect short rates to converge at
around 4.25% by late 1998. This implies an easing of monetary conditions in the
peripheral countries of Italy, Spain, Portugal, and Ireland (rates are currently
5%-6%) and a tightening of short rates in Germany, France, Benelux, Austria and
Finland (rates are currently 3.7%) This divergence of monetary policy, in
combination with high German and French export exposure to Asia, should lead to
a slight easing of growth in the core and an acceleration of growth in the
periphery. We have recently increased our Portfolio overweights to Italy and
Spain and have moved back to neutral in France and Germany.
With regard to Japan, 1997 was a difficult year, and the outlook for 1998 is not
very different. Restrictive Japanese fiscal policy in April, brought the long-
faltering recovery to a standstill and renewed pressure on Japanese banks. The
banks, profligate lenders for years, have become extremely risk averse in the
face of bankruptcies and tougher government regulations. Though tighter lending
standards are necessary for the financial system in the long run, small and
medium sized companies are facing a severe credit squeeze and consumer and
business confidence has plummeted. Export growth potential is dampened by the
fallout from Asia and U.S. trade pressures, while the government's anti-deficit
stance implies no major fiscal stimulus or personal/corporate tax relief.
The silver lining is that as the economic and market strain increases, the odds
for a more aggressive policy response increase. Effective policy will need to
both stimulate the economy and reform the financial sector. Unfortunately, up to
this point, economic stimulus has emphasized deregulation and structural reform
rather than direct pump priming. Bank reform has focused on guaranteeing
depositors and recapitalizing the banks -- all banks. Government officials we
met in mid-December assured us that the old bank convoy system of "good banks"
bailing out "bad banks" was over, but they had no RTC-type proposals to clear
bank balance sheets and no plans to close down insolvent institutions.
We are underweight Japan, with a significant hedge out of the Yen. Within our
Japanese basket we are underweight in banks.
As we write this letter, the Asian crisis is worsening as markets continue to
savagely mark down Asian currencies and share prices. In U.S. dollar terms
through January 12, Hong Kong is down -26%, Malaysia -33%, Singapore -32%, not
to mention Indonesia -49% and Thailand -27%. While these precipitous drops have
all the earmarkings of a panic, even contrarian investors hesitate to re-invest
until the currencies stabilize and local governments show sufficient resolve to
let the asset bubbles dissolve. Malaysia is an interesting example. While we
concur with the Central Bank that an IMF type program of high rates and severe
fiscal tightening would not necessarily stabilize the currency and may serve to
kill off the economy, we don't think the Central Bank should be suppressing
interest rates and printing money to keep banks and companies afloat.
Unfortunately, as the crisis deepens, even countries like Malaysia and
Singapore, that initially hoped to grow their way out of the price deflation,
are now looking at negative to flat economic growth.
We remain underweight Asia-Ex Japan but have begun to initiate small positions
in some oversold markets.
Going into 1998, the US economy continues to be the prime global growth engine,
but we believe Europe is slowly picking up some slack. While all markets would
probably fall in sympathy with a US pullback, we think Europe, Japan and Asia
would outperform in a down market and have more upside if the US keeps chugging
along. In sum, we remain cautious, but are fully invested for the moment. We
have no regional bets, except for a slight underweight in Asia.
Ann D. Thivierge
PORTFOLIO MANAGER
Barton M. Biggs
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
5
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (84.1%)
AUSTRALIA (2.0%)
13,800 Amcor Ltd......................................... $ 61
7,400 Australian Gas Light Co., Ltd..................... 52
18,700 Australian National Industries Ltd................ 17
25,629 Boral Ltd......................................... 65
4,700 Brambles Industries Ltd........................... 93
40,383 Broken Hill Proprietary Co., Ltd.................. 375
10,297 Burns, Philip & Co., Ltd.......................... 2
16,433 Coca Cola Amatil Ltd.............................. 123
22,941 Coles Myer Ltd.................................... 110
11,783 Crown Ltd......................................... 5
23,400 CSR Ltd........................................... 79
39,700 Fosters Brewing Group Ltd......................... 76
13,881 Gio Australia Holdings Ltd........................ 35
26,110 Goodman Fielder Ltd............................... 42
6,100 ICI Australia Ltd................................. 43
5,200 Leighton Holdings Ltd............................. 18
5,072 Lend Lease Corp., Ltd............................. 99
30,123 MIM Holdings Ltd.................................. 18
28,672 National Australia Bank Ltd....................... 400
(a)5,437 Newcrest Mining Ltd............................... 6
38,027 News Corp., Ltd................................... 210
33,153 Normandy Mining Ltd............................... 32
14,520 North Ltd......................................... 38
18,900 Pacific Dunlop Ltd................................ 40
19,300 Pioneer International Ltd......................... 53
4,700 Plutonic Resources Ltd............................ 13
4,202 RGC Ltd........................................... 6
6,800 Rio Tinto Ltd..................................... 79
12,725 Santos Ltd........................................ 52
4,300 Smith (Howard) Ltd................................ 36
2,600 Sons of Gwalia Ltd................................ 6
13,408 Southcorp Holdings Ltd............................ 44
6,900 TABCORP Holdings Ltd.............................. 32
(a)47,200 Telstra Corp., Ltd. (Installment Receipts-Final
Installment: AUD 1.35/shr due 11/17/98)......... 100
36,000 Westpac Banking Corp.............................. 230
20,858 WMC Ltd........................................... 73
----------
2,763
----------
AUSTRIA (0.5%)
100 Austria Mikro Systeme Int'l AG.................... 5
(a)400 Austrian Airlines/Oesterreiche Luftverkehrs AG.... 9
200 Brau-Beteiligungs AG.............................. 10
100 BWT AG............................................ 15
1,400 Bank Austria AG................................... 71
(a)1,200 Bank Austria AG (New)............................. 59
200 Bau Holding AG.................................... 12
400 Boehler-Uddeholm AG............................... 23
200 EA-Generali AG.................................... 53
800 Flughafen Wien AG................................. 32
(a)100 Lenzing AG........................................ 6
400 Mayr-Melnhof Karton AG............................ 22
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
800 OMV AG............................................ $ 111
1,000 Oest Elektrizatswirts AG, Class A................. 106
500 Radex-Heraklith Industriebet AG................... 17
300 Steyr-Daimler-Puch AG............................. 8
400 VA Technologie AG................................. 61
300 Wienerberger Baustoffindustrie AG................. 58
----------
678
----------
FINLAND (0.5%)
(a)600 Amer-Yhtymae Oyj, Class A......................... 11
400 Cultor Oyj........................................ 22
300 Instrumentarium Group, Class B Free............... 10
3,600 Kemira Oyj........................................ 34
2,600 Kesko Oyj......................................... 41
200 Kone Oyj, Class B................................. 24
21,200 Merita Ltd., Class A.............................. 116
1,100 Metra Oyj, Class B................................ 26
2,100 Nokia Oyj, Class K................................ 150
3,300 Outokumpu Oyj..................................... 40
600 Pohjola Insurance Co., Class A.................... 23
500 Pohjola Insurance Co., Class B.................... 19
1,600 Sampo Insurance Co., Ltd., Class A................ 52
400 Stockmann AB, Class B Free........................ 25
7,000 UPM-Kymmene Oyj................................... 140
----------
733
----------
FRANCE (8.0%)
958 Accor............................................. 178
3,639 Alcatel Alsthom................................... 463
7,617 Axa-UAP........................................... 589
5,131 Banque Nationale de Paris......................... 273
690 Bouygues.......................................... 78
808 Canal Plus........................................ 150
925 Carrefour......................................... 483
2,150 Casino Guichard-Perrachon......................... 120
701 Cie Bancaire...................................... 113
2,182 Cie de Saint Gobain............................... 310
2,661 Cie Financiere de Paribas, Class A................ 231
3,088 Cie Generale des Eaux............................. 431
3,041 Cie Generale des Establissements Michelin, Class
B............................................... 153
6,300 Elf Aquitaine..................................... 733
725 Eridania Beghin-Say............................... 113
275 Essilor International............................. 82
(a)18,900 France Telecom.................................... 686
1,883 Groupe Danone..................................... 336
1,819 Havas............................................. 131
400 Imetal............................................ 50
3,240 L'Air Liquide..................................... 507
2,342 Lafarge........................................... 154
2,719 Lagardere S.C.A................................... 90
755 Legrand........................................... 150
1,635 L'OREAL........................................... 640
2,100 LVMH Moet Hennessy Louis Vuitton.................. 349
200 Pathe............................................. 39
1,650 Pernod Ricard..................................... 97
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
6
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FRANCE (CONT.)
<TABLE>
<C> <S> <C>
505 Pinault-Printemps-Redoute......................... $ 269
470 Promodes.......................................... 195
1,250 PSA Peugeot Citroen............................... 158
8,342 Rhone-Poulenc, Class A............................ 374
130 Sagem............................................. 58
2,626 Sanofi............................................ 292
3,241 Schneider......................................... 176
658 Simco (RFD)....................................... 44
1,650 Societe BIC....................................... 120
100 Societe Eurafrance................................ 41
2,381 Societe Generale, Class A......................... 324
175 Sodexho Alliance.................................. 94
(a)19 Sodexho Alliance.................................. 10
2,994 Suez Lyonnaise des Eaux........................... 331
2,996 Thomson CSF....................................... 94
5,754 Total, Class B.................................... 626
6,100 Usinor Sacilor.................................... 88
1,600 Valeo............................................. 109
----------
11,132
----------
GERMANY (9.0%)
1,100 Adidas AG......................................... 145
(a)750 AGIV AG........................................... 14
5,050 Allianz AG........................................ 1,303
1,000 AMB AG............................................ 110
13,200 BASF AG........................................... 471
16,150 Bayer AG.......................................... 599
6,100 Bayerische Hypotheken Bank AG..................... 296
5,800 Bayerische Vereinsbank AG......................... 374
1,300 Bilfinger & Berger Bau AG......................... 41
(a)150 Brau Und Brunnen AG............................... 15
600 CKAG AG........................................... 57
1,800 Continential AG................................... 40
11,900 Daimler-Benz AG................................... 840
2,150 Degussa AG........................................ 106
11,250 Deutsche Bank AG.................................. 787
49,256 Deutsche Telekom AG............................... 912
10,100 Dresdner Bank AG.................................. 459
1,185 Heidelberger Zement AG............................ 83
2,300 Hochtief AG....................................... 95
250 Karstadt AG....................................... 86
(a)1,150 Kloeckner-Humboldt-Deutz AG....................... 8
250 Linde AG.......................................... 152
8,050 Lufthansa AG...................................... 151
300 MAN AG............................................ 87
850 Mannesmann AG..................................... 427
4,150 Merck KGaA........................................ 140
5,976 Metro AG.......................................... 212
2,090 Muechener Rueck AG (Registered)................... 795
400 Preussag AG....................................... 123
7,850 RWE AG............................................ 421
1,400 SAP AG............................................ 424
1,800 Schering AG....................................... 174
12,750 Siemens AG........................................ 769
(a)100 STRABAG AG........................................ 7
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
800 Thyssen AG........................................ $ 171
11,550 VEBA AG........................................... 787
856 Viag AG........................................... 469
650 Volkswagen AG..................................... 363
----------
12,513
----------
ITALY (7.1%)
39,762 Assicurazioni Generali S.p.A...................... 977
62,700 Banca Commerciale Italiana........................ 218
24,300 Banco Ambrosiano Veneto S.p.A..................... 93
8,344 Benetton Group S.p.A.............................. 136
7,500 Cartiere Burgo.................................... 45
108,500 Credito Italiano.................................. 334
29,000 Edison S.p.A...................................... 175
343,000 ENI S.p.A......................................... 1,945
4,800 Falck Acciaierie & Ferriere Lombarde.............. 22
158,950 Fiat S.p.A........................................ 462
34,980 Fiat S.p.A. Di Risp (NCS)......................... 58
11,500 Impregilo S.p.A................................... 9
38,000 Istituto Bancario San Paolo....................... 363
27,450 Istituto Mobiliare Italiano S.p.A................. 326
181,900 Istituto Nazionale delle Assicurazioni............ 369
10,350 Italcementi S.p.A................................. 72
7,300 Italcementi S.p.A. (RNC).......................... 22
28,800 Italgas........................................... 119
11,400 La Rinascente S.p.A............................... 85
21,400 Magneti Marelli S.p.A............................. 37
52,000 Mediaset S.p.A.................................... 255
22,000 Mediobanca S.p.A.................................. 173
125,574 Montedison S.p.A.................................. 113
41,900 Montedison S.p.A. Di Risp (NCS)................... 27
(a)99,680 Olivetti S.p.A.................................... 60
66,920 Parmalat Finanziaria S.p.A........................ 96
73,000 Pirelli S.p.A..................................... 195
16,260 R.A.S. S.p.A...................................... 159
1,705 R.A.S. S.p.A. (RNC)............................... 12
5,900 SAI............................................... 66
13,500 Sirti S.p.A....................................... 82
28,000 Snia BPD S.p.A.................................... 29
154,444 Telecom Italia S.p.A.............................. 987
(a)39,534 Telecom Italia S.p.A. Di Risp (NCS)............... 174
283,900 Telecom Italia Mobile S.p.A....................... 1,310
67,500 Telecom Italia Mobile S.p.A. (RNC)................ 192
----------
9,797
----------
JAPAN (18.9%)
2,100 Advantest Corp.................................... 119
28,400 Ajinomoto Co...................................... 277
(a)16,600 Aoki Corp......................................... 5
2,300 Aoyama Trading Co................................. 41
900 Asahi Bank Ltd.................................... 4
16,600 Asahi Breweries Ltd............................... 242
50,000 Asahi Chemical Industry Co., Ltd.................. 169
47,800 Asahi Glass Co., Ltd.............................. 227
60,000 Bank of Tokyo-Mitsubushi Ltd...................... 828
800 Bank of Yokohama Ltd.............................. 2
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
7
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
16,600 Bridgestone Co.................................... $ 360
20,600 Canon, Inc........................................ 480
9,800 Casio Computer Co................................. 70
5,400 Chiba Bank Ltd.................................... 17
16,600 Chugai Pharmaceuticals Co......................... 85
19,600 Dai Nippon Printing Co., Ltd...................... 368
17,600 Daiei, Inc........................................ 73
16,600 Daikin Industries Ltd............................. 63
16,600 Daiwa House Industry Co., Ltd..................... 88
20,600 Denso Corp........................................ 371
98 East Japan Railway Co............................. 442
10,800 Ebara Corp........................................ 114
7,200 Fanuc Ltd......................................... 273
9,000 Fuji Photo Film Ltd............................... 345
43,200 Fujitsu Ltd....................................... 464
12,800 Furukawa Electric Co.............................. 55
22,600 Hankyu Corp....................................... 106
16,600 Hazama Corp....................................... 8
83,200 Hitachi Ltd....................................... 593
21,000 Honda Motor Co.................................... 771
800 Industrial Bank of Japan Ltd...................... 6
10,800 Ito-Yokado Co., Ltd............................... 550
52,000 Japan Airlines Co................................. 141
42,000 Japan Energy Corp................................. 40
600 Joyo Bank......................................... 2
7,800 Jusco Co., Ltd.................................... 110
33,400 Kajima Corp....................................... 84
22,300 Kansai Electric Power Co.......................... 378
29,000 Kao Corp.......................................... 418
26,400 Kawasaki Steel Corp............................... 36
40,200 Kinki Nippon Railway Co., Ltd..................... 215
33,400 Kirin Brewery Co., Ltd............................ 243
33,400 Komatsu Ltd....................................... 168
50,000 Kubota Corp....................................... 132
33,400 Kumagai Gumi Co................................... 18
5,000 Kyocera Corp...................................... 227
16,600 Kyowa Hakko Kogyo Co., Ltd........................ 72
41,000 Long-Term Credit Bank of Japan Ltd................ 66
48,000 Marubeni Corp..................................... 84
3,800 Marui Co., Ltd.................................... 59
50,000 Matsushita Electric Industrial Co., Ltd........... 732
50,000 Mitsubishi Chemical Corp.......................... 72
44,000 Mitsubishi Corp................................... 347
58,800 Mitsubishi Electric Corp.......................... 151
91,000 Mitsubishi Heavy Industries Ltd................... 379
33,400 Mitsubishi Materials Corp......................... 54
17,000 Mitsubishi Trust & Banking Co..................... 171
48,800 Mitsui & Co....................................... 289
(a)33,400 Mitsui Engineering & Shipbuilding Co., Ltd........ 21
400 Mitsui Fudosan Co., Ltd........................... 4
200 Mitsui Trust & Banking Co., Ltd................... --
17,800 Mitsukoshi Ltd.................................... 47
5,000 Murata Manufacturing Co., Ltd..................... 126
10,800 Mycal Corp........................................ 90
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
28,400 NEC Corp.......................................... $ 303
16,600 NGK Insulators Ltd................................ 148
12,800 Nippon Express Co., Ltd........................... 64
16,600 Nippon Fire & Marine Insurance Co................. 62
15,800 Nippon Light Metal Co............................. 23
16,600 Nippon Meat Packers, Inc.......................... 226
47,800 Nippon Oil Co..................................... 123
185,000 Nippon Steel Co................................... 274
250 Nippon Telegraph & Telephone Corp................. 2,146
50,000 Nippon Yusen Kabushiki Kaisha..................... 137
63,600 Nissan Motor Co................................... 263
97,800 NKK Corp.......................................... 78
19,600 Odakyu Electric Railway Corp...................... 85
33,400 Oji Paper Co., Ltd. (New)......................... 133
73,600 Osaka Gas Co...................................... 168
16,600 Penta-Ocean Construction Co., Ltd................. 23
4,000 Pioneer Electric Corp............................. 62
1,000 Rohm Co........................................... 102
44,000 Sakura Bank Ltd................................... 126
12,800 Sankyo Co., Ltd................................... 289
55,000 Sanwa Bank Ltd.................................... 556
50,000 Sanyo Electric Co., Ltd........................... 130
3,800 Secom Co., Ltd.................................... 243
3,300 Sega Enterprises Ltd.............................. 60
16,600 Sekisui House Ltd................................. 107
33,200 Sharp Corp........................................ 229
4,800 Shimano, Inc...................................... 88
23,600 Shimizu Corp...................................... 55
7,000 Shin-Etsu Chemical Co............................. 134
7,000 Shiseido Co., Ltd................................. 95
600 Shizuoka Bank Ltd................................. 6
33,400 Showa Denko....................................... 29
7,800 Sony Corp......................................... 693
66,600 Sumitomo Chemical Co.............................. 153
31,400 Sumitomo Corp..................................... 176
22,400 Sumitomo Electric Industries...................... 306
6,800 Sumitomo Forestry Co., Ltd........................ 33
15,800 Sumitomo Metal & Mining Co........................ 52
59,800 Sumitomo Metal Industries......................... 77
16,600 Sumitomo Osaka Cement Co., Ltd.................... 21
33,400 Taisei Corp., Ltd................................. 55
9,800 Taisho Pharmaceutical Co.......................... 250
20,600 Takeda Chemical Industries........................ 587
33,400 Teijin Ltd........................................ 70
23,400 Tobu Railway Co................................... 73
12,000 Tohoku Electric Power Co., Inc.................... 182
800 Tokai Bank Ltd.................................... 4
50,000 Tokio Marine & Fire Insurance Co.................. 567
31,000 Tokyo Electric Power Co........................... 565
2,000 Tokyo Electron Ltd................................ 64
66,600 Tokyo Gas Co...................................... 151
28,400 Tokyu Corp........................................ 110
22,600 Toppan Printing Co., Ltd.......................... 294
50,100 Toray Industries, Inc............................. 225
16,600 Toto Ltd.......................................... 106
33,400 Toyoba Co......................................... 40
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
8
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
73,400 Toyota Motor Corp................................. $ 2,104
33,400 Ube Industries Ltd................................ 42
600 Yamaichi Securities Co............................ --
----------
26,159
----------
NETHERLANDS (3.3%)
19,017 ABN Amro Holding N.V.............................. 370
1,150 Akzo Nobel N.V.................................... 198
9,900 Elsevier N.V...................................... 160
1,200 Getronics N.V..................................... 38
650 Heineken N.V...................................... 113
10,913 ING Groep N.V..................................... 460
1,270 KLM Royal Dutch Airlines N.V...................... 47
7,133 Koninklijke Ahold N.V............................. 186
1,500 Koninklijke KNP BT N.V............................ 35
6,348 Koninklijke PTT Nederland N.V..................... 265
350 Nedlloyd Groep N.V................................ 8
301 Oce N.V........................................... 33
4,800 Philips Electronics N.V........................... 288
29,100 Royal Dutch Petroleum Co.......................... 1,597
539 Stork N.V......................................... 19
9,800 Unilever N.V...................................... 604
985 Wolters Kluwer N.V................................ 127
----------
4,548
----------
NORWAY (0.5%)
1,400 Aker RGI ASA, Class A............................. 25
1,200 Bergesen d.y. ASA, Class A........................ 28
500 Bergesen d.y. ASA, Class B........................ 12
11,900 Christiania Bank Og Kreditkasse................... 48
700 Dyno Industrier ASA - Oslo........................ 14
1,100 Elkem ASA......................................... 15
2,200 Hafslund ASA, Class A............................. 13
500 Helikopter Services Group ASA..................... 6
900 Kvaerner ASA...................................... 46
700 Leif Hoegh & Co. ASA.............................. 14
(a)3,000 NCL Holdings ASA.................................. 11
5,100 Norsk Hydro ASA................................... 248
600 Norske Skogindustrier ASA, Class A................ 17
1,000 Orkla ASA, Class A................................ 86
(a)700 Petroleum Geo-Services ASA........................ 44
(a)6,200 Storebrand ASA.................................... 44
400 Unitor ASA........................................ 5
----------
676
----------
PORTUGAL (1.4%)
8,900 Banco Commercial Portugues (Registered)........... 182
4,700 Banco Espirito Santo (Registered)................. 140
4,500 BPI SGPS (Registered)............................. 109
3,400 Banco Totta & Acores, Class B (Registered)........ 67
400 Cia de Seguros Tranquilidade (Registered)......... 10
4,700 Cimpor SGPS....................................... 123
200 CIN............................................... 13
(a)700 Sociedade de Construcoes Soares da Costa.......... 5
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
1,100 Corticeira Amorim................................. $ 13
20,800 EDP-Electricidade de Portugal..................... 394
400 Engil-SGPS........................................ 4
700 INAPA-Investimentos Participacoes e Gestao........ 8
5,950 Jeronimo Martins SGPS............................. 189
5,100 Portucel Industrial Empressa Produtora de
Celulose........................................ 31
10,700 Portugal Telecom, (Registered).................... 496
2,400 Sonae Investimentos............................... 97
700 UNICER-Uniao Cervejeira........................... 10
----------
1,891
----------
SINGAPORE (0.8%)
(a)32,000 Asia Food & Properties Ltd........................ 5
18,000 City Developments Ltd............................. 84
(a)2,000 Creative Technology Ltd........................... 41
5,000 Cycle & Carriage Ltd.............................. 21
22,000 DBS Land Ltd...................................... 34
11,000 Development Bank of Singapore Ltd. (Foreign)...... 94
7,000 First Capital Corp., Ltd.......................... 6
6,800 Fraser & Neave Ltd................................ 30
13,000 Hai Sun Hup Group Ltd............................. 5
11,000 Hotel Properties Ltd.............................. 7
5,000 Inchcape Bhd...................................... 8
16,750 Keppel Corp., Ltd................................. 48
2,000 Metro Holdings Ltd................................ 2
8,000 NatSteel Ltd...................................... 11
20,000 Neptune Orient Lines Ltd. (Foreign)............... 8
19,560 Oversea-Chinese Banking Corp. (Foreign)........... 114
4,000 Overseas Union Enterprise Ltd..................... 10
8,000 Parkway Holdings Ltd.............................. 18
1,200 Robinson & Co., Ltd............................... 4
3,600 Shangri-La Hotel Ltd.............................. 7
20,000 Singapore Airlines Ltd. (Foreign)................. 131
4,800 Singapore Press Holdings Ltd. (Foreign)........... 60
17,000 Singapore Technologies Industrial Corp............ 16
141,000 Singapore Telecommunications Ltd.................. 263
8,000 Straits Trading Co., Ltd.......................... 10
34,000 United Industrial Corp., Ltd...................... 13
20,000 United Overseas Bank Ltd. (Foreign)............... 111
13,000 United Overseas Land Ltd.......................... 11
----------
1,172
----------
SPAIN (3.8%)
435 Acerinox.......................................... 64
1,489 Aguas de Barcelona................................ 61
18 Aguas de Barcelona (New).......................... --
4,200 Argentaria........................................ 256
7,107 Autopistas Concesionaria Espanola................. 95
22,500 Banco Bilbao Vizcaya (Registered)................. 728
11,000 Banco Central Hispano Americano................... 268
16,000 Banco Santander................................... 535
500 Corporacion Financiera Alba....................... 53
1,890 Corporacion Mapfre................................ 50
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
9
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SPAIN (CONT.)
<TABLE>
<C> <S> <C>
1,900 Dragados y Construccion........................... $ 40
1,650 Ebro Agricolas.................................... 29
750 ENCE.............................................. 10
34,400 Endesa............................................ 611
(a)5,700 Ercros............................................ 6
2,200 Fomento Construction y Cantractas................. 84
5,000 Gas Natural SDG................................... 259
31,200 Iberdrola......................................... 411
735 Inmobiliaria Metropolitana Vasco Central.......... 33
200 Portland Valderrivas.............................. 18
10,100 Repsol............................................ 431
1,200 Tabacalera, Class A............................... 97
31,500 Telefonica de Espana.............................. 899
9,800 Union Electrica Fenosa............................ 94
1,750 Uralita........................................... 20
1,467 Vallehermoso...................................... 45
750 Viscofan Envolturas Celulosicas................... 19
284 Zardoya Otis...................................... 33
----------
5,249
----------
SWEDEN (3.4%)
24,400 ABB AB, Class A................................... 289
4,500 AGA AB, Class A................................... 62
3,700 AGA AB, Class B................................... 49
49,633 Astra AB, Class A................................. 860
4,650 Atlas Copco AB, Class A........................... 139
2,600 Electrolux AB, Series B........................... 180
30,300 Ericsson LM, Class B.............................. 1,139
1,300 Esselte AB, Class A............................... 25
6,500 Hennes & Mauritz AB, Class B...................... 287
3,000 Securitas AB, Class B............................. 91
3,900 Skandia Forsakrings AB............................ 184
17,600 Skandinaviska Enskilda Banken, Class A............ 223
4,400 Skanska AB, Class B............................... 180
2,700 S.K.F. AB, Class B................................ 57
11,050 Stora Kopparbergs Bergslags AB, Class A........... 139
6,800 Svenska Cellulosa AB, Class B..................... 153
7,100 Svenska Handelsbanken, Class A.................... 245
16,900 Swedish Match AB.................................. 56
4,600 Trelleborg AB, Class B............................ 58
13,650 Volvo AB, Class B................................. 366
----------
4,782
----------
SWITZERLAND (7.6%)
225 ABB AG............................................ 283
425 Adecco............................................ 123
135 Alusuisse-Lonza Holdings Ltd. (Registered)........ 130
6,150 CS Holding AG (Registered)........................ 952
25 Georg Fischer AG (Bearer)......................... 34
160 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 130
915 Nestle (Registered)............................... 1,371
1,485 Novartis AG (Registered).......................... 2,410
38 Roche Holding AG (Bearer)......................... 585
161 Roche Holding AG (Registered)..................... 1,599
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
40 SGS Surveillance.................................. $ 77
120 SMH AG (Bearer)................................... 66
90 Sulzer AG (Registered)............................ 57
1,760 Swiss Bank Corp. (Registered)..................... 547
340 Swiss Reinsurance (Registered).................... 636
(a)80 SwissAir (Registered)............................. 110
450 Union Bank of Switzerland (Bearer)................ 651
540 Union Bank of Switzerland (Registered)............ 156
155 Valora Holding AG................................. 33
1,100 Zuerich Versicherung (Registered)................. 524
----------
10,474
----------
THAILAND (0.0%)
(d)8,000 CMIC Finance & Securities PCL (Foreign)........... 1
(d)18,600 General Finance & Securities PCL (Foreign)........ 3
10,657 Land & House Co., Ltd. (Foreign).................. 2
(d)34,700 Siam City Bank PCL (Foreign)...................... 2
(d)14,600 TPI Polene PCL (Foreign).......................... 1
----------
9
----------
UNITED KINGDOM (17.3%)
28,800 Abbey National plc................................ 516
14,400 Arjo Wiggins Appleton plc......................... 38
10,300 Associated British Foods plc...................... 90
35,017 Barclays plc...................................... 931
22,700 Bass plc.......................................... 352
63,835 B.A.T. Industries plc............................. 581
79,941 BG plc............................................ 360
14,454 BICC plc.......................................... 41
26,810 Blue Circle Industries plc........................ 151
14,470 BOC Group plc..................................... 238
22,700 Boots Co. plc..................................... 327
14,400 BPB Industries plc................................ 81
86,505 BTR plc........................................... 262
10,275 British Aerospace plc............................. 293
24,725 British Airways plc............................... 228
118,323 British Petroleum Co. plc......................... 1,556
33,000 British Sky Broadcasting plc...................... 247
41,200 British Steel plc................................. 88
119,500 British Telecommunications plc.................... 940
6,226 Burmah Castrol plc................................ 109
51,472 Cable & Wireless plc.............................. 453
22,680 Cadbury Schweppes plc............................. 229
16,540 Caradon plc....................................... 48
(a)90,600 Centrica plc...................................... 133
18,543 Coats Viyella plc................................. 28
14,396 Commercial Union plc.............................. 201
10,300 Courtaulds plc.................................... 50
2,116 De La Rue Co. plc................................. 14
87,594 Diageo plc........................................ 806
10,289 EMI Group plc..................................... 86
1 Energy Group plc.................................. --
59,700 General Electric plc.............................. 387
12,415 GKN plc........................................... 254
65,900 Glaxo Wellcome plc................................ 1,559
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
10
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
14,472 Granada Group plc................................. $ 221
24,700 Great Universal Stores plc........................ 311
16,463 Guardian Royal Exchange plc....................... 89
12,340 Hanson plc........................................ 55
26,800 Harrisons & Crosfield plc......................... 62
45,288 HSBC Holdings plc................................. 1,118
18,600 Imperial Chemical Industries plc.................. 291
24,719 Ladbroke Group plc................................ 107
16,500 Land Securities plc............................... 263
16,500 Lasmo plc......................................... 75
24,700 Legal & General Group plc......................... 216
113,300 Lloyds TSB Group plc.............................. 1,465
16,496 Lonrho plc........................................ 25
72,100 Marks and Spencer plc............................. 710
12,400 MEPC plc.......................................... 104
28,800 National Power plc................................ 284
16,870 Peninsular & Oriental Steam Navigation Co......... 192
30,920 Pilkington plc.................................... 65
41,162 Prudential Corp. plc.............................. 496
18,500 Rank Group plc.................................... 103
12,416 Redland plc....................................... 70
28,800 Reed International plc............................ 289
35,000 Reuters Holdings plc.............................. 382
12,400 Rexam plc......................................... 61
24,748 Rio Tinto plc..................................... 305
6,200 RMC Group plc..................................... 87
28,828 Royal & Sun Alliance Insurance Group plc.......... 290
10,270 Royal Bank of Scotland Group plc.................. 130
18,527 Safeway plc....................................... 104
32,923 Sainsbury (J) plc................................. 275
4,100 Schroders plc..................................... 129
20,630 Scottish Power plc................................ 182
41,200 Sears plc......................................... 36
12,346 Sedgwick Group plc................................ 29
10,300 Slough Estates plc................................ 58
102,996 Smithkline Beecham plc............................ 1,055
10,338 Southern Electric plc............................. 86
28,807 Tarmac plc........................................ 54
16,516 Taylor Woodrow plc................................ 48
39,120 Tesco plc......................................... 318
14,452 Thames Water plc.................................. 215
10,328 Thorn plc......................................... 27
10,317 TI Group plc...................................... 79
57,600 Unilever plc...................................... 493
14,386 United Utilities plc.............................. 184
67,956 Vodafone Group plc................................ 490
18,500 Zeneca Group plc.................................. 650
----------
24,055
----------
TOTAL COMMON STOCKS (Cost $108,000)........................... 116,631
----------
PREFERRED STOCKS (0.9%)
AUSTRALIA (0.1%)
28,063 News Corp., Ltd................................... 139
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
AUSTRIA (0.0%)
664 Bank Austria AG (New)............................. $ 30
500 Bank Austria AG-Vorzug............................ 24
100 Bau Holding AG.................................... 4
----------
58
----------
FINLAND (0.3%)
5,400 Nokia Oyj, Series A............................... 383
----------
GERMANY (0.4%)
5,250 RWE AG............................................ 225
1,000 SAP AG............................................ 325
----------
550
----------
ITALY (0.1%)
53,900 Fiat S.p.A........................................ 82
----------
TOTAL PREFERRED STOCKS (Cost $1,052).......................... 1,212
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------
RIGHTS (0.0%)
AUSTRALIA (0.0%)
(a)4,284 Crown Ltd., expiring 2/04/98...................... --
----------
NORWAY (0.0%)
(a)3,000 NCL Holdings ASA.................................. --
----------
PORTUGAL (0.0%)
(a)1,100 Jeronimo Martins SGPS, expiring 1/02/98........... --
----------
TOTAL RIGHTS (Cost $0)........................................ --
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.0%)
FRANCE (0.0%)
(a)620 Casino Guichard-Perrachon, expiring 12/31/99...... 13
(a)4,333 Cie Generale des Eaux, expiring 5/02/01........... 3
----------
16
----------
HONG KONG (0.0%)
(a)845 Peregrine Investment Holdings Ltd., expiring
5/15/98......................................... --
----------
ITALY (0.0%)
(a)1,400 La Rinascente S.p.A., CW99, expiring 12/31/99..... 1
(a)2,450 La Rinascente S.p.A., CW99, expiring 12/31/99..... 3
----------
4
----------
SINGAPORE (0.0%)
(a)2,400 Asia Food & Properties Ltd., expiring 7/12/02..... --
(a)11,750 Keppel Land Ltd., expiring 12/20/00............... 3
----------
3
----------
SWITZERLAND (0.0%)
(a)112 Roche Holding AG, expiring 5/05/98................ 12
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
11
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- --------------------------------------------------------------------------
<C> <S> <C>
WARRANTS (CONT.)
THAILAND (0.0%)
(a)6,349 National Finance & Securities PCL, expiring
11/15/99........................................ $ --
----------
TOTAL WARRANTS (Cost $10)..................................... 35
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- ----------
UNITS (0.1%)
AUSTRALIA (0.1%)
25,921 General Property Trust............................ 46
26,954 Westfield Trust................................... 51
----------
TOTAL UNITS (Cost $98)........................................ 97
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
CONVERTIBLE DEBENTURES (0.1%)
FRANCE (0.1%)
FRF 60 Sanofi 4.00%, 1/01/00............................. 74
18 Simco 3.25%, 1/01/06.............................. 16
----------
TOTAL CONVERTIBLE DEBENTURES (Cost $53)....................... 90
----------
FIXED INCOME SECURITIES (0.0%)
FRANCE (0.0%)
62 Casino Guichard-Perrachon, Series XW, 4.50%,
7/12/01......................................... 35
----------
ITALY (0.0%)
ITL 11,200 Mediobanca S.p.A., Series XW 4.50%, 1/01/00....... 6
----------
TOTAL FIXED INCOME SECURITIES (Cost $33)...................... 41
----------
TOTAL FOREIGN SECURITIES (85.2%) (Cost $109,246).............. 118,106
----------
</TABLE>
<TABLE>
<C> <S> <C>
SHORT-TERM INVESTMENT (12.3%)
REPURCHASE AGREEMENT (12.3%)
$ 17,041 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $17,047,
collateralized by U.S. Treasury Notes, 6.00%,
due 6/30/99, valued at $17,409 (Cost $17,041)... 17,041
----------
FOREIGN CURRENCY (0.4%)
ATS 10 Austrian Schilling................................ 1
BEF 15 Belgian Franc..................................... --
GBP 9 British Pound..................................... 15
FRF 8 French Franc...................................... 1
DEM 46 German Mark....................................... 25
IDR 115,705 Indonesian Rupiah................................. 21
ITL 212,542 Italian Lira...................................... 120
JPY 1,025 Japanese Yen...................................... 8
NLG 14 Netherlands Guilder............................... 7
PTE 960 Portuguese Escudo................................. 5
KRW 21,851 South Korean Won.................................. 13
ESP 3,184 Spanish Peseta.................................... 21
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SEK 30 Swedish Krona..................................... $ 4
CHF 502 Swiss Franc....................................... 344
----------
TOTAL FOREIGN CURRENCY (Cost $631)............................ 585
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (97.9%) (Cost $126,918)..................... 135,732
----------
OTHER ASSETS (17.4%)
Securities at Value, Held as Collateral for
Securities Lending............................ $ 20,612
Net Unrealized Gain on Foreign Currency Exchange
Contracts..................................... 1,544
Margin Deposit on Futures Contracts............. 1,326
Receivable for Daily Variation on Futures
Contracts..................................... 419
Dividends Receivable............................ 205
Foreign Withholding Tax Reclaim Receivable...... 63
Security Lending Income Receivable.............. 14
Interest Receivable............................. 3
Other........................................... 12 24,198
----------
LIABILITIES (-15.3%)
Collateral on Securities Loaned................. (20,612)
Payable for Investments Purchased............... (344)
Investment Advisory Fees Payable................ (141)
Custodian Fees Payable.......................... (41)
Administrative Fees Payable..................... (23)
Security Lending Fees Payable................... (18)
Payable for Portfolio Shares Redeemed........... (12)
Directors' Fees & Expenses Payable.............. (9)
Bank Overdraft.................................. (1)
Other Liabilities............................... (48) (21,249)
---------- ----------
NET ASSETS (100%)............................................. $ 138,681
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 132,252
Distributions in Excess of Net Investment Income.............. (220)
Accumulated Net Realized Loss................................. (4,098)
Unrealized Appreciation on Investments, Foreign Currency
Translations and Futures Contracts.......................... 10,747
----------
NET ASSETS.................................................... $ 138,681
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $138,667
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 13,346,092 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $10.39
----------
----------
CLASS B:
- --------------------------------------------------------------
NET ASSETS.................................................... $14
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,326 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $10.48
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
12
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, 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 TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- --------------- -------- ----------- --------------- -------- ------------
ESP 3,141 $ 21 1/02/98 U.S.$ 21 $ 21 $ --
IDR 115,705 21 1/02/98 U.S.$ 21 21 --
U.S.$ 1,250 1,250 1/16/98 DEM 2,145 1,193 (57)
U.S.$ 55 55 1/16/98 DEM 95 53 (2)
U.S.$ 3,409 3,409 1/16/98 DEM 5,797 3,226 (183)
DEM 8,037 4,472 1/16/98 U.S.$ 4,589 4,589 117
U.S.$ 1,100 1,100 1/21/98 FRF 6,313 1,050 (50)
U.S.$ 206 206 1/21/98 FRF 1,178 196 (10)
U.S.$ 2,425 2,425 1/21/98 ITL 4,145,237 2,343 (82)
FRF 7,491 1,246 1/21/98 U.S.$ 1,285 1,285 39
ITL 4,523,160 2,556 1/21/98 U.S.$ 2,644 2,644 88
ITL 3,772,946 2,132 1/21/98 U.S.$ 2,203 2,203 71
JPY 1,284,947 9,891 1/29/98 U.S.$ 10,687 10,687 796
JPY 1,588,688 12,239 2/05/98 U.S.$ 13,387 13,387 1,148
U.S.$ 5,090 5,090 2/05/98 JPY 605,048 4,662 (428)
NLG 1,028 508 2/12/98 U.S.$ 530 530 22
ESP 40,905 269 2/12/98 U.S.$ 280 280 11
U.S.$ 535 535 2/12/98 NLG 1,028 509 (26)
U.S.$ 282 282 2/12/98 ESP 40,905 269 (13)
AUD 1,703 1,111 2/19/98 U.S.$ 1,210 1,210 99
ITL 1,426,260 806 2/19/98 U.S.$ 838 838 32
NLG 709 351 2/19/98 U.S.$ 367 367 16
SEK 9,767 1,232 2/19/98 U.S.$ 1,295 1,295 63
GBP 909 1,490 2/19/98 U.S.$ 1,512 1,512 22
U.S.$ 2,042 2,042 2/19/98 ITL 3,453,780 1,952 (90)
U.S.$ 368 368 2/19/98 NLG 709 351 (17)
U.S.$ 9,418 9,418 2/19/98 GBP 5,582 9,152 (266)
JPY 144,843 1,119 2/26/98 U.S.$ 1,185 1,185 66
JPY 275,339 2,128 2/26/98 U.S.$ 2,230 2,230 102
DEM 2,905 1,620 2/26/98 U.S.$ 1,715 1,715 95
U.S.$ 1,700 1,700 2/26/98 DEM 2,905 1,620 (80)
U.S.$ 3,096 3,096 2/26/98 JPY 398,473 3,079 (17)
SGD 1,763 1,042 3/05/98 U.S.$ 1,091 1,091 49
U.S.$ 1,108 1,108 3/05/98 SGD 1,763 1,042 (66)
FRF 6,380 1,065 3/16/98 U.S.$ 1,089 1,089 24
DEM 2,220 1,240 3/16/98 U.S.$ 1,268 1,268 28
U.S.$ 1,859 1,859 3/16/98 FRF 11,038 1,842 (17)
U.S.$ 33 33 3/16/98 JPY 4,185 32 (1)
SGD 432 255 3/23/98 U.S.$ 262 262 7
U.S.$ 250 250 3/23/98 SGD 432 255 5
JPY 250,430 1,951 4/20/98 U.S.$ 2,000 2,000 49
-------- -------- ------
$ 82,991 $ 84,535 $ 1,544
--------
-------- -------- ------
-------- ------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see note A-1 to financial statements.
AUD -- Australian Dollar
NCS -- Non Convertible Shares
PCL -- Public Company Limited
RFD -- Ranked for Dividend
RNC -- Non Convertible Savings Shares
SGD -- Singapore Dollar
- ------------------------------------------------------------
FUTURES CONTRACTS:
At December 31, 1997 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:
CAC 40 Index 21 FRF 12,637 Jan-98 $ 112
FT-SE 100 Index 37 GBP 4,794 Mar-98 159
SALES:
OMX Index 42 SEK 10,118 Jan-98 (31)
Aust All Ord. 28 AUD 1,845 Mar-98 (22)
Milan MIB30 Index 9 ITL 2,276,550 Mar-98 (69)
TOPIX Index 60 JPY 714,600 Mar-98 277
-----
$426
-----
-----
</TABLE>
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ----------------------------------------------------------------
Capital Equipment...................... $ 15,234 11.0%
Consumer Goods......................... 25,425 18.3
Energy................................. 12,170 8.8
Finance................................ 26,137 18.9
Gold Mines............................. 50 --
Materials.............................. 17,599 12.7
Multi-Industry......................... 2,457 1.8
Services............................... 19,034 13.7
--------- ---
$ 118,106 85.2%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Active Country Allocation Portfolio
13
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
China 4.5 %
Hong Kong 30.5 %
India 8.7 %
Indonesia 2.5 %
Korea 2.8 %
Malaysia 2.6 %
Philippines 6.1 %
Singapore 15.3 %
Taiwan 15.2 %
Thailand 3.4 %
Other 8.4 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ASIAN EQUITY MSCI COMBINED FAR
PORTFOLIO--CLASS
A EAST FREE EX-JAPAN INDEX(1)
<S> <C> <C>
7/01/91* $500,000 $500,000
10/31/91 483,500 493,080
10/31/92 684,130 676,180
12/31/92 658,030 630,045
12/31/93 1,353,595 1,252,425
12/31/94 1,139,550 1,014,350
12/31/95 1,217,837 1,083,427
12/31/96 1,260,340 1,182,886
12/31/97 651,722 644,909
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI)
COMBINED FAR EAST FREE EX-JAPAN INDEX(1)
- ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
----------- --------------- ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... -48.29% -0.19% 4.16%
PORTFOLIO -- CLASS
B..................... -48.48 N/A -27.21
INDEX -- CLASS A...... -45.48 0.47 3.90
INDEX -- CLASS B...... -45.48 N/A -23.01
</TABLE>
1. The MSCI Combined 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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE COUNTRY SPECIFIC PERFORMANCE
RESULTS PROVIDED ARE AS MEASURED BY THE MSCI COMBINED 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 year ended December 31, 1997, the Portfolio had a total return of
- -48.29% for the Class A shares and -48.48% for the Class B shares, as compared
to a total return of -45.48% for the Morgan Stanley Capital International (MSCI)
Combined Far East Free ex-Japan Index (the "Index"). For the five-year period
ending December 31, 1997, the average annual total return for Class A was -0.19%
compared to 0.47% for the Index. From inception on July 1, 1991 to December 31,
1997, the average annual total return of Class A was 4.16% compared to 3.90% for
the Index. From inception on January 2, 1996 to December 31, 1997 the average
annual total return of Class B was -27.21% compared to -23.01% for the Index
MARKET REVIEW
Asian markets witnessed a disastrous year in 1997, as the Index suffered its
largest yearly decline since its inception. Of the core East Asian markets, not
a single individual country managed a positive return for the year, as the
region's best performers were Taiwan (-6.3%) and Hong Kong (-23.3%). Five of the
nine countries encompassed within the Index suffered declines of more than 60%,
led by Indonesia (-74.1%) followed by Thailand (-73.4%), Malaysia (-68.0%),
Korea (-66.7%) and the Philippines (-62.6%).
Though the meltdown in the region can be traced to factors which existed in many
countries, the collapse was precipitated by the de-pegging of the Thai baht on
July 2, 1997, which subsequently forced the currency and equity markets into a
vicious downward spiral. A large current account deficit coupled with unhedged
U.S. dollar loans going into a property bubble first attracted the speculators
who eventually triggered the depreciation of the currency. Despite a change of
government and an IMF led bailout package, the equity market remains badly
beaten,
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
14
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
down close to 90% from its peak two years ago. Though the IMF has been
successful in closing shaky financial institutions, a complete lack of
confidence in the currency and illiquidity in the markets has led most
international equity investors to desert Thailand.
The currency depreciation quickly spread to other Southeast Asian countries,
most severely to Indonesia. Despite reasonably solid macroeconomic fundamentals,
domestic and international holders of the currency quickly fled to U.S. dollars,
forcing the rupiah down 56% by the year end. Indonesian corporates and banks
with large exposure to U.S. dollar-denominated debt led the market down, as
interest costs skyrocketed throughout the economy. The ensuing economic
slowdown, as well as concerns over the health of Indonesia's ailing patriarch
Suharto, allowed little upside to the equity market through year end.
The contagion effect which lashed Southeast Asia quickly spread to Northeast
Asia with the Korean won depreciating by 47%. In the fourth quarter, the stock
market declined sharply amidst concern over the credit quality of the financial
sector and the ability of Korea to repay its foreign short-term obligations.
Korea's downturn was a result of the excessive expansion and over-leverage by
Korean chaebols, the business conglomerates of Korea, which comprise over 70% of
GDP. Several large chaebols entered into court receivership including Sammi,
Hanbo, Kia and Jinro with net debt to equity ratios well above 500%,
respectively. In the latter part of the year, the IMF stepped in and Korea was
forced to undertake quick liberalization and reform measures, including the
opening of its capital markets.
Lastly, even Hong Kong did not remain unscathed from the regional turmoil.
Though its currency board system allowed it to maintain the Hong Kong dollar peg
to the U.S. dollar, the cost was levied through a rapid increase in interest
rates. The equity market, dominated by interest sensitive stocks such as
property and banks, reversed the 20% return it had made through September and
plummeted to a final -25% performance for the year. Hong Kong property prices,
among the most expensive in the world dropped 30% in 4 months, as asset
deflation took the place of currency depreciation.
OUTLOOK
As the crash takes its initial victims in ASEAN to below 70% from their peaks,
focus has now shifted to North-East Asia. The imminent demise of the Korean
economy (the 11(th) largest in the world) as we know it today has finally
awakened the world to the risk of a worldwide contagion and begun to elicit some
concerted response from the U.S. and the international community.
At the same time, however, as the other currencies and markets fall, the
remaining markets like Hong Kong, Singapore and Taiwan are looking more and more
expensive and vulnerable. The risk in Hong Kong is that China is obviously
slowing rapidly and its currency peg to the U.S. dollar is exacting a heavy toll
on its economy. Should the U.S. equity markets crash, Hong Kong's position could
become untenable.
Similarly, should China falter, Taiwan would be seriously impacted, and its
problems compounded by the current weakness in the technology and electronics
area. Any fallout in the electronics area will also be problematic for Singapore
which is already contending with the devastation of its ASEAN partners and
hinterland.
We would therefore look to reduce our Hong Kong and China exposure and seek to
hedge our currency exposure to the Hong Kong dollar, the New Taiwan dollar and
the Singapore dollar. Concurrently, we would be seeking to put money to work in
selected stocks in the more devastated markets which are beginning to offer
compelling values for the patient investor.
It is anticipated that 1998 will be a very difficult year for the region. The
effect of the fallout in the regional markets is just beginning to filter
through into the real economy and 1998 will be marked by corporate collapses and
massive layoffs which are likely to cause many of the economies to descend into
economic recessions and possible political and social unrest.
Although the currency turmoil and confidence crisis continues and there are no
signs of the stock markets stabilizing, the speed at which some of the regional
currencies and markets are sliding would seem to indicate a climatic condition.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
15
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
It is therefore our view that now is not the time for serious investors to exit
these markets. Indeed, we believe investors with the luxury of a longer term
horizon stand to reap considerable long term gains through capitalizing on this
monumental meltdown in the Asian markets.
Our strategy would be to concentrate on identifying for acquisition, the
companies and stocks that represent irreplaceable franchises which are currently
available at bargain prices.
In closing, we are pleased to inform you that Vinod Sethi has joined Ean Wah
Chin and assumed portfolio management responsibility for the Portfolio. As
Managing Director in charge of our Bombay office, Vinod has expanded his duties
to include oversight of all stock selection in Asia.
Ean Wah Chin
PORTFOLIO MANAGER
Vinod Sethi
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
16
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (91.6%)
CHINA (4.5%)
3,299,000 Qingling Motors Co., Class H..................... $ 1,618
61,340 Shenzhen Fangda Co., Ltd., Class B............... 70
(a)4,901,000 Zhejiang Expressway Co., Ltd., Class H........... 993
(a)2,029,000 Zhejiang Southeast Electric Power Co., Ltd.,
Class B........................................ 653
1,359,000 Zhenhai Refining & Chemical Co., Ltd., Class H... 566
--------
3,900
--------
HONG KONG (30.5%)
1,228,000 Cheung Kong Holdings Ltd......................... 8,042
785,000 China Light & Power Co., Ltd..................... 4,356
615,000 Dao Heng Bank Group Ltd.......................... 1,536
206,000 HSBC Holdings plc................................ 5,077
602,000 Hutchison Whampoa Ltd............................ 3,776
966,000 Ng Fung Hong Ltd................................. 1,016
379,400 Sun Hung Kai Properties Ltd...................... 2,644
23,000 Television Broadcasts Ltd........................ 66
--------
26,513
--------
INDIA (8.7%)
117,500 Bharat Heavy Electricals, Ltd.................... 1,061
31,500 Castrol (India) Ltd.............................. 599
20,000 Container Corp of India, Ltd..................... 214
32,000 Housing Development Finance Corp.,
Ltd............................................ 2,512
37,600 Reckitt & Coleman of India Ltd................... 373
61,450 Smithkline Beecham Pharmaceuticals (India)
Ltd............................................ 838
158,050 State Bank of India.............................. 980
130,000 Tata Engineering & Locomotive Co., Ltd........... 982
--------
7,559
--------
INDONESIA (2.5%)
53,000 Bat Indonesia.................................... 250
203,500 Gudang Garam..................................... 310
(a)45,400 Gulf Indonesia Resources Ltd..................... 999
921,000 Telekomunikasi Indonesia......................... 490
(d)17,900 Unilever Indonesia............................... 98
--------
2,147
--------
KOREA (2.8%)
(e)16,167 Housing & Commercial Bank, Korea GDR............. 85
(a)48,600 Korea Fund, Inc., (The).......................... 322
15,645 LG Information & Communication Ltd............... 439
22,020 Pohang Iron & Steel Co., Ltd..................... 614
290 SK Telecom Co. Ltd............................... 88
(a)1,000 Samsung Electronics Co. GDR...................... 14
39,878 Samsung Electronics Co........................... 903
--------
2,465
--------
MALAYSIA (2.6%)
220,000 Dialog Group Bhd................................. 379
44,000 Kuala Lumpur Kepong Bhd.......................... 94
25,000 Telekom Malaysia Bhd............................. 74
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
744,000 Tenaga Nasional Bhd.............................. $ 1,588
117,000 United Engineers Bhd............................. 97
--------
2,232
--------
PHILIPPINES (6.1%)
2,926,971 Ayala Land, Inc., Class B........................ 1,156
206,034 Manila Electric Co., Class B..................... 682
(a)4,697,000 Music Corp....................................... 1,682
6,997,000 SM Prime Holdings................................ 1,037
637,000 San Miguel Corp., Class B........................ 778
--------
5,335
--------
SINGAPORE (15.3%)
(a)73,600 Creative Technology Ltd.......................... 1,619
179,500 Development Bank of Singapore Ltd. (Foreign)..... 1,537
197,000 Electronic Resources Ltd......................... 201
(a)384,000 Natsteel Electronics Ltd......................... 493
559,378 Oversea-Chinese Banking Corp. (Foreign).......... 3,260
396,000 Parkway Holdings Ltd............................. 895
142,400 Singapore Press Holdings Ltd. (Foreign).......... 1,787
573,200 United Overseas Bank Ltd. (Foreign).............. 3,187
131,000 Venture Manufacturing (Singapore) Ltd............ 366
--------
13,345
--------
TAIWAN (15.2%)
(a)245,000 Asustek Computer, Inc............................ 3,882
(a)14,300 Asustek Computer, Inc. GDR....................... 228
247,000 Cathay Construction Corp......................... 282
(a)168,000 China Development Corp........................... 479
(a)730,398 Compal Electronics............................... 2,127
75,000 Delta Electronics, Inc........................... 299
2,085,056 Far East Textile Ltd............................. 2,262
(a)304,000 Hon Hai Precision Industry....................... 1,538
(a)239,740 Kuoyang Construction............................. 452
(a)58,000 Pou Chen Corp.................................... 238
604,200 Siliconware Precision Industries Co.............. 1,426
--------
13,213
--------
THAILAND (3.4%)
12,000 Advanced Info Service PCL (Foreign).............. 57
(d)24,000 BEC World PLC (Foreign).......................... 96
(a,d)95,000 Bangkok Expressway PCL (Foreign)................. 53
(d)174,000 CVD Entertainment PCL (Foreign).................. 91
784,200 Eastern Water Resources Development & Management
PCL (Foreign).................................. 814
(a,d)459,400 Nation Multimedia Group PCL
(Foreign)...................................... 119
(d)911,700 National Petrochemical PCL (Foreign)............. 483
(d)25,000 Siam Makro PCL (Foreign)......................... 30
554,270 Thai Farmers Bank PCL (Foreign).................. 1,007
(d)33,000 Thai Storage Battery PCL (Foreign)............... 28
(d)166,500 Thai Theparos Food Product PCL (Foreign)......... 161
--------
2,939
--------
TOTAL COMMON STOCKS (Cost $106,978)................................ 79,648
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
17
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
FOREIGN CURRENCY (1.7%)
INR 4,208 Indian Rupee..................................... $ 107
MYR 28 Malaysian Ringgit................................ 7
PHP 21,144 Philippine Peso.................................. 522
KRW 614,778 South Korean Won................................. 363
TWD 9,427 Taiwan Dollar.................................... 289
THB 12,058 Thai Baht........................................ 251
--------
TOTAL FOREIGN CURRENCY (Cost $1,583)............................... 1,539
--------
TOTAL INVESTMENTS (93.3%) (Cost $108,561).......................... 81,187
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (19.8%)
Receivable for Investments Sold.................... $ 9,319
Securities at Value, Held as Collateral for
Securities Lending............................... 7,197
Net Unrealized Gain on Foreign Currency Exchange
Contracts........................................ 392
Receivable for Portfolio Shares Sold............... 204
Dividends Receivable............................... 37
Security Lending Income Receivable................. 33
Foreign Withholding Tax Reclaim Receivable......... 19
Other.............................................. 21 17,222
----------
LIABILITIES (-13.1%)
Collateral on Securities Loaned.................... (7,197)
Bank Overdraft..................................... (2,645)
Payable for Portfolio Shares Redeemed.............. (1,108)
Investment Advisory Fees Payable................... (179)
Payable for Investments Purchased.................. (96)
Custodian Fees Payable............................. (70)
Security Lending Fees Payable...................... (36)
Deferred Foreign Taxes Payable..................... (28)
Administrative Fees Payable........................ (18)
Directors' Fees and Expenses Payable............... (18)
Distribution Fees Payable.......................... (2)
Other Liabilities.................................. (41) (11,438)
---------- ----------
NET ASSETS (100%)................................................ $ 86,971
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................. 183,074
Undistributed Net Investment Income.............................. 2,300
Accumulated Net Realized Loss.................................... (71,344)
Unrealized Depreciation on Investments and Foreign Currency
Translations (Net of accrual for foreign taxes of $28 on
unrealized appreciation on investments)........................ (27,059)
----------
NET ASSETS....................................................... $ 86,971
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -----------------------------------------------------------------
NET ASSETS....................................................... $85,503
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,068,014 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $9.43
----------
----------
CLASS B:
- -----------------------------------------------------------------
NET ASSETS....................................................... $1,468
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 156,228 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $9.40
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver foreign currency in exchange for
U.S. dollars as indicated below:
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- -------------- -------- ----------- ----------- -------- ------------
HKD 34,754 $ 4,485 1/2/98 U.S.$ 4,485 $ 4,485 $ --
KRW 638,345 377 1/2/98 U.S.$ 357 357 (20)
MYR 7,461 1,918 1/2/98 U.S.$ 1,917 1,917 (1)
PHP 21,101 521 1/2/98 U.S.$ 520 520 (1)
SGD 956 569 1/2/98 U.S.$ 570 570 1
KRW 1,533,000 900 2/25/98 U.S.$ 1,400 1,400 500
SGD 16,129 9,519 3/18/98 U.S.$ 9,432 9,432 (87)
-------- -------- -----
$ 18,289 $ 18,681 $ 392
--------
-------- -------- ------------
-------- ------------
</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.
GDR -- Global Depositary Receipt
HKD -- Hong Kong Dollar
PCL -- Public Company Limited
SGD -- Singapore Dollar
- ------------------------------------------------------------
SUMMARY OF COMMON STOCKS BY INDUSTRY CLASSIFICATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment...................... $ 13,927 16.0%
Consumer Goods......................... 14,155 16.3
Energy................................. 6,625 7.6
Finance................................ 33,887 39.0
Materials.............................. 3,565 4.1
Multi-Industry......................... 4,192 4.8
Services............................... 3,297 3.8
-------- ---
$ 79,648 91.6%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Equity Portfolio
18
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australia 14.2 %
Hong Kong 52.6 %
Japan 8.9 %
New Zealand 1.6 %
Philippines 2.1 %
Singapore 18.0 %
Other 2.6 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ASIAN REAL ESTATE ASIAN REAL ESTATE
PORTFOLIO-- PORTFOLIO-- GPR LIFE FAR EAST
ASIA REAL ESTATE T.R.
CLASS A CLASS B INDEX(1)
<S> <C> <C> <C>
10/01/97* $500,000 $100,000 $500,000
12/31/97 400,400 80,300 330,450
* Commencement of operations
** Minimum Investment--Class A
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different fees assessed to that class. The GPR Life Far East Asia Real
Estate T.R. value at December 31, 1997 assumes a minimum initial investment of
$500,000; if a minimum initial investment of $100,000 (the minimum investment
for Class B shares) is assumed, the value at December 31, 1997 would be $66,090.
PERFORMANCE COMPARED TO THE GPR LIFE
FAR EAST ASIA REAL ESTATE T.R. INDEX(1)
- -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
SINCE INCEPTION
---------------
<S> <C>
PORTFOLIO -- CLASS A(3)..................... -19.92%
PORTFOLIO -- CLASS B(3)..................... -19.70
INDEX....................................... -33.91
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 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 period from October 1, 1997 (commencement of operations) through
December 31, 1997, the Portfolio had a total return for Class A and Class B
shares of -19.92% and -19.70%, respectively compared to -33.91% for the GPR Life
Far East Asia Real Estate T.R. Index.
The contagion effect of the Asian currency debacle continued unabated into the
final quarter of 1997. What was originally a Southeast Asian problem, quickly
spread onto South Korea, Hong Kong and Japan, leading to the collapse of the
Korean won, speculative attacks on the Hong Kong dollar and a sharp weakening of
the Japanese yen. Equity markets punished governments whose policies disregarded
economic reality. Investors confidence was shaken by a spate of corporate
bankruptcies in Korea and Japan, as weaker Asian currencies eroded the debt
servicing ability of corporations with huge foreign-currency denominated
borrowings. Domestic economic conditions of Asian countries have continued to
deteriorate as rising interest rates eliminate profits and purchasing power.
Equity market valuations have adjusted for a higher risk premium of investing in
Asia.
During the period, the Portfolio maintained overweight positions in Hong Kong,
Singapore, and Australia. Mass residential housing in Hong Kong met with good
sales after a swift 25.30% price cut by property developers. Hong Kong offers an
attractive potential return as soon as the currency situation stabilizes because
housing demand continued to be strong and buyers and sellers were quick to
arrive at a new asset price clearing level. Demand for residential and
commercial real estate in Singapore had slowed as a result of the currency
turmoil and growing tension in Indonesia. The government on its part had cut
back its land supply by 30% in 1997 and frozen land sales during the first half
of 1998. We believe the supply-demand imbalance will be gradually restored. The
risk-reward profile of property stocks appears favorable. Australia remains the
least affected by the currency crisis, as stock prices remain stable with
- --------------------------------------------------------------------------------
Asian Real Estate Portfolio
19
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO (CONT.)
improving office market yields. We continue to avoid markets plagued by external
debt overhang, rising political risk and widespread corporate insolvency.
Although we expect the market to remain volatile in the near term, current share
prices have already discounted sharp declines in asset prices throughout Asia.
Attractive investment opportunities abound, especially in fundamentally sound
economies like Hong Kong, Singapore and Australia. Stock selection is key. Our
Portfolio is primarily focused on companies with a strong balance sheet, good
operating cash flow and quality land banks to take advantage of either a
technical or cyclical upswing when the currency crisis subsides.
Kiat Seng Seah
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
20
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------
COMMON STOCKS (96.6%)
AUSTRALIA (14.2%)
39,000 Australian Growth Properties Ltd................. $ 23
(a)23,000 Australand Holdings Ltd.......................... 22
58,000 BT Office Trust.................................. 58
(a)14,000 BT Sydney Development Trust...................... 21
42,000 Capital Property Trust........................... 63
37,000 Grand Hotel Group................................ 47
13,000 Westfield Trust.................................. 25
69,000 Westpac Property Trust........................... 80
-------
339
-------
HONG KONG (52.6%)
34,000 Cheung Kong Holdings Ltd......................... 223
319,000 China Overseas Land & Investment................. 98
200,000 China Resources Beijing Land..................... 95
156,600 HKR International Ltd............................ 115
27,000 Henderson Land Development Co., Ltd.............. 127
30,000 Hysan Development Co., Ltd....................... 60
180,000 Lai Sun Development Co., Ltd..................... 59
49,000 New World Development Co., Ltd................... 169
29,000 Sun Hung Kai Properties Ltd...................... 202
57,000 Wheelock & Co., Ltd.............................. 67
(a)480,000 Winsan (China) Investment Group Co., Ltd......... 38
-------
1,253
-------
JAPAN (8.9%)
10,000 Mitsubishi Estate Co., Ltd....................... 109
9,000 Mitsui Fudosan Co., Ltd.......................... 87
3,000 Sumitomo Realty & Development Co., Ltd........... 17
-------
213
-------
NEW ZEALAND (0.8%)
(a)34,000 AMP NZ Office Trust.............................. 20
-------
PHILIPPINES (2.1%)
(a)123,000 Ayala Land, Inc., Class B........................ 49
-------
SINGAPORE (18.0%)
26,000 City Developments Ltd............................ 121
27,000 DBS Land Ltd..................................... 41
49,000 Keppel Land Ltd.................................. 68
60,000 Marco Polo Developments Ltd...................... 91
93,000 Wing Tai Holdings Ltd............................ 109
-------
430
-------
TOTAL COMMON STOCKS (Cost $2,716)............................... 2,304
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------
CONVERTIBLE DEBENTURE (0.8%)
NEW ZEALAND (0.8%)
NZD 34 AMP NZ Office Trust 7.50%, 6/30/03............... 20
-------
TOTAL CONVERTIBLE DEBENTURE (Cost $20).......................... 20
-------
TOTAL FOREIGN SECURITIES (97.4%) (Cost $2,736).................. 2,324
-------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
FOREIGN CURRENCY (5.0%)
JPY 13,459 Japanese Yen..................................... $ 103
TWD 516 Taiwan Dollar.................................... 16
-------
TOTAL FOREIGN CURRENCY (Cost $121).............................. 119
-------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (102.4%) (Cost $2,857)....................... 2,443
--------
OTHER ASSETS (4.7%)
Due from Adviser................................... $ 71
Net Unrealized Gain on Foreign Currency Exchange
Contracts........................................ 22
Dividends Receivable............................... 18 111
----------
LIABILITIES (-7.1%)
Payable for Investments Purchased.................. (103)
Bank Overdraft..................................... (11)
Custodian Fees Payable............................. (8)
Administrative Fees Payable........................ (1)
Other Liabilities.................................. (46) (169)
---------- --------
NET ASSETS (100%).............................................. $ 2,385
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................................ $ 3,005
Distributions in Excess of Net Investment Income............... (20)
Accumulated Net Realized Loss.................................. (211)
Unrealized Depreciation on Investments and Foreign Currency
Translations................................................. (389)
--------
NET ASSETS..................................................... $ 2,385
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------------------
NET ASSETS..................................................... $2,385
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 300,517 outstanding $0.001 par value shares
(authorized 500,000,000 shares).............................. $7.94
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver foreign currency in exchange for
U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY TO IN EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------ ------ ----------- ------------ ------ ------------
SGD 729 $ 429 6/04/98 U.S.$ 450 $ 450 $ 21
SGD 731 429 6/29/98 U.S.$ 430 430 1
------ ------ ---
$ 858 $ 880 $ 22
------
------ ------ ---
------ ---
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
NZD -- New Zealand Dollar
SGD -- Singapore Dollar
- ------------------------------------------------------------
As of December 31, 1997, Class B had a Net Asset Value, Offering and Redemption
Price Per Share, of $8.03, applicable to 1 outstanding $0.001 par value share
(authorized 500,000,000 shares).
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Real Estate Portfolio
21
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
SECTOR DIVERSIFICATION (000) NET ASSETS
<S> <C> <C>
- --------------------------------------------------------------
Apartments............................. $ 113 4.7%
Diversified............................ 1,380 57.9
Land................................... 296 12.4
Lodging/Leisure........................ 137 5.7
Office and Industrial.................. 373 15.6
Shopping Center........................ 25 1.1
------- ---
$ 2,324 97.4%
------- ---
------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Asian Real Estate Portfolio
22
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 2.6%
Brazil 15.6%
Canada 0.0%
Chile 0.7%
China 0.3%
Colombia 0.0%
Egypt 2.0%
Hong Kong 1.9%
Hungary 0.7%
India 8.4%
Indonesia 2.3%
Israel 3.0%
Korea 3.2%
Malaysia 2.9%
Mexico 11.3%
Morocco 0.5%
Pakistan 4.4%
Peru 0.5%
Philippines 1.8%
Poland 2.1%
Russia 7.9%
South Africa 6.2%
Taiwan 4.0%
Thailand 2.8%
Turkey 5.5%
United States 1.3%
Venezuela 0.5%
Zimbabwe 0.6%
Other 7.0%
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EMERGING MARKETS IFC GLOBAL TOTAL
PORTFOLIO--CLASS A RETURN COMPOSITE INDEX(1)
<S> <C> <C>
9/25/92* $500,000 $500,000
10/31/92 505,500 525,300
12/31/92 511,000 527,370
12/31/93 950,000 880,750
12/31/94 858,500 878,950
12/31/95 748,870 770,488
12/31/96 840,157 831,280
12/31/97 831,503 711,409
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO THE IFC GLOBAL
TOTAL RETURN COMPOSITE INDEX(1)
- -------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
----------- --------------- ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... -1.03% 10.23% 10.13%
PORTFOLIO -- CLASS
B..................... -1.31 N/A 4.69
INDEX -- CLASS A...... -14.42 6.16 6.93
INDEX -- CLASS B...... -14.42 N/A -4.08
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had a total return of -1.03%
for the Class A shares and -1.31% for the Class B shares, as compared to a total
return of -14.42% for the IFC Global Total Return Composite Index (the "Index").
For the five-year period ended December 31, 1997, the average annual total
return for Class A was 10.23% as compared to 6.16% for the Index. From inception
on September 25, 1992 to December 31, 1997, the average annual total return of
Class A was 10.13% as compared to 6.93% for the Index. From inception on January
2, 1996 to December 31, 1997, the average annual total return of Class B was
4.69% as compared to -4.08% for the Index.
The currency crisis in Asia and the contagion effect of Asian devaluations
triggered a collapse of practically every emerging market in the fourth quarter
of 1997. The selling panic which ensued across all emerging markets left Asia
down 33%, Latin America down 11% and Russia down 18%. Even India, insulated and
isolated, was off 12% during the quarter. The Portfolio underperformed its
benchmark during this period. Negatives included our overweight positions in
Russia, Indonesia, Korea and Thailand.
For the year we outperformed the Index, as the Portfolio's Class A shares
returned -1.03% vs. -14.42%. Country allocation drove performance, as
overweights in Russia, India, Pakistan and Turkey, combined with underweights in
Asia in general helped the relative results. We began easing into Asia in the
third and fourth quarters of 1997 as we felt that both the currency and stock
markets had dramatically overshot fair-value benchmarks. Asian markets are down
70% -- 85% from their highs and have discounted economic devastation and
corporate bankruptcies. While we do believe that the near-term economic and
earnings outlook for the Asian countries is grim, and that economic pain with
its commensurate political convulsions are ahead (particularly in countries like
Indonesia and Korea), we believe that the worst has been discounted in the
prices of stocks and the currencies. These markets have been tremendously
oversold, and in the face of such negative sentiment, any marginally positive
news could ignite a huge rally in the region.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
23
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
We have been discriminating in the selection of both markets and stocks as we
believe that the markets will bifurcate (as in Japan in the last few years). We
envision a distinction between winners and losers as the era of "Asian Value"
crony-capitalism comes to an end. We feel that Korea has the best chance of
transforming its economy and its corporate structure for the benefit of the
shareholder. World class companies such as Samsung Electronics, LG
Semiconductors and Pohang Iron and Steel are at bargain basement levels. We are
overweight Korea and concentrated in these stocks.
The closure of 56 out of 58 finance companies in Thailand last month signaled to
us the start of the corporate restructuring that is inevitable in Thailand.
After an agonizing six months it appears that the Thai government and the
corporate sector have seen the writing on the wall as slow, fitful, ambivalent
restructuring has begun. We are overweight Thailand since we feel that, although
positive economic and corporate news will be scarce over the next year, the
market in its discounting wisdom may have seen the worst.
Indonesia has fallen the furthest and the fastest of all Asian markets. Although
this market is currently capitalized at 10% of its value in U.S. dollars from a
year earlier, we hesitate to add to positions. While Indonesia is very cheap, it
is deservedly so. The country is poised on a razor's edge as the fate of a
country of 200 million people depends on the will of one man. The corrupt nexus
between politics and business remains intractable, and it appears that no real
progress on economic reform can be made with the current political regime.
President Suharto has made some concessions and conciliatory noises under duress
from the IMF and a phone call from President Clinton. However, a true embracing
of the IMF reform package implies a fundamental reformation of the political
system and abdication of economic largesse by the Suharto family. Resentment for
the First Family, particularly toward the Suharto children, runs deep and may
prove incendiary in the coming months. The scenario developing in Indonesia
includes sharply higher inflation, a recession, a dramatic rise in unemployment,
food shortages and an election. We maintain a neutral weight in Indonesia as the
market is dramatically oversold. Although we expect a significant upward move
from these levels, we would expect to sell into a rally, assuming no change in
underlying fundamentals.
Malaysia has earned the dubious distinction of the "least-worst" Asian market.
Its banking system is sound, politics stable and its corporate sector is in
reasonable shape. Our hesitancy towards Malaysia has been valuation-based. Given
the recent correction, we are in the process of increasing our long underweight
position.
We are slightly underweight Latin America and expect to decrease our exposure
even further. We remain upbeat on the government and corporate leadership
witnessed during the post-Mexico devaluation crisis and the more recent Asian
crisis. In Mexico, the consumer recovery continues and in Brazil the
privatization program is moving ahead. However, the Brazilian real is perhaps
one of the more overvalued currencies in the emerging market universe, and the
high real interest rates required to support it in the aftermath of the Asian
crisis will prove burdensome both for the corporate sector and for equity market
performance. Mexico has performed spectacularly in the past 12 months as it has
enjoyed the unique position of having taken its devaluation "medicine" early as
well as being geographically situated to capitalize on the phenomenal strength
of the U.S. economy. As a result, though, many of the Mexican stocks we own no
longer offer compelling value, and will likely be trimmed to gain exposure to
other investments in Asia.
We continue to view India and South Africa as a source of funds for our
increased exposure in Asia. India is well underpinned by both valuations and
corporate fundamentals; however, we believe that political uncertainty and
slightly higher interest rates will cap some of the upside in the market.
In Europe, Russia has had a big correction after a stellar run. We continue to
remain sanguine about its long term prospects but have trimmed our position a
bit. Likewise, Turkey experienced tremendous returns over the last year, and
remains one of the last markets that have yet to conquer inflation. Positive
news on this front could trigger another move up. As valuations remain at
attractive levels, we are overweight the Turkish market. Cash has built up and
is slowly being redeployed as the entire asset class has been joltingly repriced
significantly below fair value.
In closing, we are happy to inform you that we have added Tim Jensen to the
Emerging Market team as a portfolio manager covering the Asian markets. Tim will
be the point person in New York coordinating
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
24
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
investments in the Asian markets for the global emerging market funds. He will
work with our Singapore based team. Tim has eight years of investment experience
and was most recently a partner at Ardsley. Additionally, Vinod Sethi, Managing
Director in charge of our India investment team, has expanded his
responsibilities to include oversight of stock selection in Asia. He will act as
the CIO for the team in Asia and will maintain his responsibility for stock
selection in India. Ean Wah Chin, Managing Director, is now Chairman of the
overall investment management business for Asia ex-Japan.
Madhav Dhar
PORTFOLIO MANAGER
Robert L. Meyer
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
25
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
COMMON STOCKS (UNLESS OTHERWISE NOTED) (92.2%)
ARGENTINA (2.6%)
(a)6 Acindar, Class B................................. $ --
(a)119,870 Nortel ADR....................................... 3,057
163,876 Telecom Argentina ADR............................ 5,859
619,465 Telefonica de Argentina ADR...................... 23,075
211,357 YPF ADR.......................................... 7,226
-----------
39,217
-----------
BRAZIL (15.5%)
609,989,448 Banco Bradesco (Preferred)....................... 6,012
(a,d)295,998,880 Banco Nacional (Preferred)....................... 13
26,935,030 Brahma (Preferred)............................... 18,101
296,000 Brahma ADR (Preferred)........................... 4,200
307,152,993 CEMIG (Preferred)................................ 13,345
(e)84,361 CEMIG ADR........................................ 3,628
80,351 CEMIG ADR........................................ 3,491
12,714,900 Coteminas........................................ 4,557
(e)98,865 Coteminas........................................ 1,639
(a)38,011,600 CRT (Preferred).................................. 46,831
(a)276,100 CVRD (Preferred)................................. 5,554
185,219 CVRD ADR (Preferred)............................. 3,646
11,559,000 Encorpar......................................... 9
14,931,800 Itaubanco (Preferred)............................ 8,027
1,277,207 Light-Servicos de Eletricidade................... 532
4,012,000 Lightpar......................................... 1,204
119,019,000 Lojas Arapua (Preferred)......................... 427
(e)120,830 Lojas Arapua ADR (Preferred)..................... 404
(a)52,673,000 Lojas Renner (Preferred)......................... 1,652
198,559 Pao de Acucar ADR................................ 3,847
(a)39,236,000 Pao de Acucar ADR (Preferred).................... 717
(e)98,915 Petrobras ADR.................................... 2,362
56,777,333 Petrobras (Preferred)............................ 13,278
(a,e)137,875 Rossi GDR........................................ 672
52,673,000 Telebras......................................... 5,357
159,269,000 Telebras (Preferred)............................. 18,167
481,530 Telebras ADR..................................... 56,068
(a)1 TELESP........................................... --
478,299 TELESP (Preferred)............................... 127
(a)334,420 Unibanco GDR (Preferred)......................... 10,764
-----------
234,631
-----------
CANADA (0.0%)
2,085,038 International UNP Holdings Ltd................... 175
-----------
CHILE (0.7%)
147,900 CCU ADR.......................................... 4,345
71,100 Enersis ADR...................................... 2,062
203,972 Santa Isabel ADR................................. 3,570
-----------
9,977
-----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
CHINA (0.3%)
2,029,000 Qingling Motors Co., Class H..................... $ 995
8,647,000 Zhejiang Expressway Co., Ltd., Class H........... 1,752
3,331,000 Zhenhai Refining & Chemical Co., Ltd., Class H... 1,386
-----------
4,133
-----------
COLOMBIA (0.0%)
989,763 Banco de Colombia................................ 343
-----------
EGYPT (2.0%)
54,000 Al-Ahram Beverages Co., GDR...................... 1,499
89,993 Ameriyah Cement Co............................... 2,103
185,840 Commercial International Bank.................... 3,750
(a)175,500 Commercial International Bank GDR (Registered)... 3,672
130,160 Eastern Tobacco.................................. 3,022
49,350 Egyptian Finance & Industrial.................... 2,973
(a)78,000 Helwan Cement.................................... 1,570
50,603 Industrial & Engineering......................... 848
80,460 Madinet Nasr Housing & Development............... 5,202
21,655 North Cairo Flour Mills Co....................... 617
2,500 Paints & Chemical Industry....................... 80
255,400 Paints & Chemical Industry GDR................... 2,554
125,765 Torah Portland Cement............................ 2,883
-----------
30,773
-----------
HONG KONG (1.9%)
677,000 Cheung Kong Holdings Ltd......................... 4,434
917,000 China Light & Power Co., Ltd..................... 5,089
1,228,000 China Resources Enterprise Ltd................... 2,742
202,600 HSBC Holdings plc................................ 4,994
3,573,000 Ng Fung Hong Ltd................................. 3,758
643,000 Shanghai Industrial Holdings Ltd................. 2,390
654,000 Sun Hung Kai Properties Ltd...................... 4,557
-----------
27,964
-----------
HUNGARY (0.7%)
(a)21,178 Borsod Chem Rt. GDR (Registered)................. 763
7,700 Gedeon Richter Rt................................ 876
28,300 Gedeon Richter Rt. GDR (Registered).............. 2,972
(a)158,984 MOL Magyar Olaj-es Gazipari Rt. GDR
(Registered)................................... 3,879
(a)49,300 OTP Bank Rt...................................... 1,871
-----------
10,361
-----------
INDIA (8.3%)
(a)7,570 Apollo Tyres Ltd................................. 15
658 Associated Cement Cos., Ltd...................... 23
4,663,400 Bharat Heavy Electricals Ltd..................... 42,107
(a)151,400 Bharat Pipes & Fittings Ltd., Class B............ 2
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
26
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
INDIA (CONT.)
<TABLE>
<C> <S> <C>
300 Birla VXL Ltd.................................... $ --
20,875 Carrier Aircon Ltd............................... 115
8,031 Ceat Ltd......................................... 5
209,490 Century Textiles and Industries Ltd.............. 371
1,058,400 Container Corp of India Ltd...................... 11,340
27,700 Dabur India Ltd.................................. 147
(a)475,450 DCL Polyesters Ltd............................... 42
260,300 Esab India Ltd................................... 720
(a,d)2,000 Federal Bank Ltd. (New).......................... 4
(a)575,300 Garware Plastics & Polyester Ltd.,
Class A........................................ 305
347,700 Godrej Soaps Ltd................................. 303
500 Great Eastern Shipping Co........................ 1
100 Gujarat Narmada Valley Fertilizers Co., Ltd...... --
(a)635,421 Hero Honda Motors Ltd., Class B.................. 14,958
88,100 Hindustan Development Corp., Ltd................. 20
113,386 Housing Development Finance Corp................. 8,902
190,300 ICI India Ltd.................................... 857
4,500 Industrial Credit & Investment Corp.............. 4
(a,g)55,194 India Magnum Fund Ltd., (The) Class A............ 2,125
(a,f,g)78,000 India Magnum Fund Ltd., (The) Class A............ 3,003
(a)2,800 Indian Petrochemicals Corp., Ltd................. 5
(a)726,601 Indo Rama Synthetics Ltd......................... 185
140 Industrial Credit & Investment Corp. of India
Ltd............................................ --
207,500 Infosys Technology Ltd........................... 6,525
100 ITC Agrotech Ltd., Class B....................... --
544,063 ITC Bhadrachalam Paperboards Ltd................. 482
330,467 ITC Ltd.......................................... 5,214
(a)1,288,662 JK Synthetics Ltd................................ 53
361,300 KEC International Ltd............................ 249
175,000 Kirloskar Cummins Ltd............................ 2,121
145,450 Lakme Ltd., Class B.............................. 1,062
145,800 Lakshmi Precision Screws......................... 45
6,000 Mahanagar Telephone Nigam........................ 39
180 Mahavir Spinning Mills Ltd....................... --
(a,g)42,697,100 Morgan Stanley Growth Fund....................... 6,590
136,581 MRF Ltd., Class B................................ 6,736
25,000 OM Sindoori Hotels Ltd........................... 26
130 PCS Data Products Ltd., Class B.................. --
223,300 Patheja Forgings & Auto Parts, Class B........... 37
(a)218,440 Philips India Ltd................................ 362
(a)625 Raymond Ltd...................................... 1
190,900 Shanti Gears Ltd................................. 409
180,800 Shriram Honda Power Equipment, Class B........... 1,266
(a)45,000 Sri Venkatesa Mills Ltd.......................... 65
1,082,500 State Bank of India Ltd.......................... 6,710
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
67,000 Sudarshan Chemical Industries Ltd................ $ 93
258,150 Supreme Industries Ltd........................... 1,199
1,221 Tata Engineering & Locomotive Ltd., Class A...... 9
50 Tata Hydro-Electric Power Supply Co.............. --
50 Tata Iron and Steel Co., Ltd..................... --
196,017 Tube Investments of India........................ 173
941,000 Uttam Steels Ltd., Class A....................... 150
100 Videocon International Ltd., Class A............. --
10,450 Wartsila Diesel Ltd.............................. 41
-----------
125,216
-----------
INDONESIA (2.3%)
3,592,000 Astra International.............................. 931
(a,d)18,273,808 Astra International (Foreign).................... 4,735
(a,d)28,603,960 Bank International Indonesia (Foreign)........... 1,690
(d)16,409,400 Bank Negara Indonesia (Foreign).................. 1,566
711,600 Barito Pacific Timber (Foreign).................. 204
2,825,569 Bimantara Citra (Foreign)........................ 539
1,359,400 Citra Marga Nusaphala Persada.................... 148
412,504 Daya Guna Samudera............................... 313
379,500 Gudang Garam..................................... 578
(d)3,973,841 Gudang Garam (Foreign)........................... 6,051
34,900 Gulf Indonesia Resources Ltd..................... 768
(d)2,473,000 Hanjaya Mandala Sampoerna (Foreign).............. 1,866
(d)12,964,855 Indah Kiat Pulp & Paper Corp. (Foreign).......... 2,298
(a,d)5,622,000 Indofood Sukses Makmur (Foreign)................. 1,840
(d)303,900 London Sumatra Indonesia......................... 173
(a,d)1,483,000 Matahari Putra Prima (Foreign)................... 121
(d)10,849,000 Mayora Indah (Foreign)........................... 937
431,500 Tambang Timah.................................... 463
(d)9,383,000 Putra Surya Multidana (Foreign).................. 896
9,464,000 Telekomunikasi Indonesia......................... 5,033
53,300 Telekomunikasi Indonesia ADR..................... 590
(d)6,216,300 Telekomunikasi Indonesia (Foreign)............... 3,306
-----------
35,046
-----------
ISRAEL (3.0%)
(a)2,208,000 Bank Hapoalim Ltd. (Registered).................. 5,300
413,803 Elbit Systems Ltd................................ 5,463
5,250 First International Bank of Israel, Class 1...... 717
7,680 First International Bank of Israel, Class 5...... 5,637
113,485 Koor Industries Ltd.............................. 12,577
469,000 Osem Investment Ltd.............................. 2,271
4,198,150 Supersol Ltd..................................... 11,904
122,100 Supersol Ltd ADR................................. 1,717
-----------
45,586
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
27
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
KOREA (3.2%)
235,820 Hansol Paper Co., Ltd............................ $ 1,036
(a,e)260,361 Housing & Commercial Bank Korea.................. 1,751
448,221 Housing & Commercial Bank Korea GDR.............. 2,351
405,100 Korea Fund, Inc.................................. 2,684
358,458 LG Information & Communication Ltd............... 10,045
239,000 Pohang Iron & Steel Co., Ltd..................... 6,666
(d)258,150 Pohang Iron & Steel Co., Ltd. ADR................ 7,200
(a)437,820 Samsung Electronics Co........................... 9,918
258,354 Samsung Electronics Co. GDR (New)................ 3,669
(d)8,997 Telecom Co., Ltd................................. 2,716
-----------
48,036
-----------
MALAYSIA (2.9%)
568,800 AMMB Holdings Bhd................................ 373
144,000 Berjaya Sports Toto Bhd.......................... 368
202,000 Carlsberg Brewery Malaysia Bhd................... 649
1,338,000 Commerce Asset Holdings Bhd...................... 640
1,010,200 Genting Bhd...................................... 2,532
1,922,000 Golden Hope Plantations Bhd...................... 2,224
1,014,000 IOI Corp. Bhd.................................... 328
1,204,000 Kuala Lumpur Kepong Bhd.......................... 2,585
1,352,000 Magnum Corp. Bhd................................. 813
1,253,600 Malayan Banking Bhd.............................. 3,642
1,269,000 Malayan United Industries Bhd.................... 222
491,000 Malaysian International Shipping Corp. Bhd
(Foreign)...................................... 720
156,000 Malaysian Pacific Industries Bhd................. 375
385,000 Nestle Bhd....................................... 1,782
252,000 New Straits Times Press Bhd...................... 312
415,000 Perusahaan Otomobil Nasional Bhd................. 405
1,502,000 Petronas Gas Bhd................................. 3,418
503,000 Rashid Hussain Bhd............................... 391
479,000 Resorts World Bhd................................ 807
2,062,000 RHB Capital Bhd.................................. 997
492,000 R.J. Reynolds Bhd................................ 803
498,000 Rothmans of Pall Mall Bhd........................ 3,873
2,626,000 Sime Darby Bhd................................... 2,525
838,000 Technology Resources Industries Bhd.............. 496
2,039,000 Telekom Malaysia Bhd............................. 6,029
2,659,000 Tenaga Nasional Bhd.............................. 5,674
1,708,000 United Engineers Bhd............................. 1,423
-----------
44,406
-----------
MEXICO (11.3%)
397,452 Apasco........................................... 2,737
(a)1,244,479 Banacci, Class B................................. 3,729
(a)966,103 Banacci, Class L................................. 2,493
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
(a)846,000 Bancomer, Class B................................ $ 550
(a,e)326,595 Bancomer, Class B ADR............................ 4,225
(a)747,338 Cemex CPO........................................ 3,384
940,462 Cemex CPO ADR.................................... 8,464
146,858 Cifra, Class A................................... 361
142,485 Cifra, Class B................................... 350
256,080 Cifra, Class B ADR............................... 629
1,158,857 Cifra, Class C................................... 2,602
5,206,197 FEMSA, Class B................................... 41,856
4,531,961 Kimberly-Clark, Class A.......................... 21,535
(a)747,803 Televisa CPO GDR................................. 28,931
707,645 Telmex, Class L ADR.............................. 39,672
402,450 TV Azteca ADR.................................... 9,080
-----------
170,598
-----------
MOROCCO (0.5%)
82,900 SNI Maroc, Series `V' (Bearer)................... 7,101
-----------
PAKISTAN (4.4%)
(a)3,162 D.G. Khan Cement Ltd............................. 1
32,800 Engro Chemical Ltd............................... 85
6,639,600 Fauji Fertilizer Co., Ltd........................ 12,712
(a)10,043,700 Hub Power Co..................................... 13,078
(a)327,860 Karachi Electric Supply Corp..................... 177
(a)1,377,865 Pakistan State Oil Co., Ltd...................... 11,726
(a)38,350 Pakistan Telecommunications Corp. GDS............ 2,646
29,528,600 Pakistan Telecommunications Corp., Class A....... 22,311
(a)4,893,654 Sui Northern Gas................................. 2,991
-----------
65,727
-----------
PERU (0.5%)
47 Cementos Lima.................................... --
351,960 Tel Peru, Class B ADR............................ 8,205
-----------
8,205
-----------
PHILIPPINES (1.8%)
13,409,500 Ayala Corp....................................... 5,215
1,723,520 Ayala Land, Inc., Class B........................ 681
2,840,720 C&P Homes, Inc................................... 166
2,311,950 Filinvest Land, Inc.............................. 91
1,571,270 Manila Electric Co., Class B..................... 5,199
1,512,240 Metro Pacific Corp............................... 42
145,068 Metropolitan Bank & Trust Co..................... 976
2,075,750 Petron Corp...................................... 172
346,170 Philippine Long Distance Telephone Co............ 7,522
26,100 Phillipine Long Distance Telephone Co., ADR...... 587
71,500 Philippine National Bank......................... 157
3,176,360 San Miguel Corp., Class B........................ 3,882
18,875,000 SM Prime Holdings, Inc........................... 2,796
-----------
27,486
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
28
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
POLAND (2.1%)
(a)233,000 Agros Holding, Class C........................... $ 4,825
38,860 Bank Slaski...................................... 2,150
72,900 Bank of Handlowy W Warszawie..................... 931
(a)1,650,000 BIG Bank Gdanski................................. 1,615
194,000 BIG Bank Gdanski GDR............................. 3,007
68,000 BRE Bank......................................... 1,408
160,560 Debica........................................... 3,917
(a)33,400 Eastbridge NV.................................... 2,245
727,000 Elektrim......................................... 7,033
(a)188,468 Exbud............................................ 1,764
(a)373,740 Mostostal Exports................................ 944
491,000 Polifarb Wroclaw................................. 2,326
-----------
32,165
-----------
RUSSIA (7.8%)
(a,d)592,359 Alliance Cellulose Ltd........................... 2,358
54,736,000 Unified Energy Systems (2nd Issue)............... 16,421
(a,d)400,000 Global Tele-Systems Group, Inc. (Registered)..... 8,000
(a)13,765,000 Irkutskenergo.................................... 2,712
(a)214,733 Lukoil Holding................................... 4,960
(a,e)138,153 Lukoil Holding ADR............................... 12,745
6,523,333 Mosenergo ADR.................................... 8,278
(d)37,259,635 Mustcom.......................................... 31,671
(a)813,200 Rostelecom (New)................................. 2,887
(a,d)317,851 Russian Telecom Development Corp................. 1,510
406,000 Surgutneftgaz ADR................................ 4,150
(d)21,882,643 Svyaz Finance.................................... 19,038
(a)26,300 Tatneft ADR...................................... 3,737
-----------
118,467
-----------
SOUTH AFRICA (6.1%)
563,400 Barlow Rand Ltd.................................. 4,781
192,312 Bidvest Group Ltd................................ 1,591
33,000 Coronation Holdings Ltd.......................... 498
90,900 Coronation Holdings Ltd. (New)................... 1,324
1,078,300 Ellerine Holdings Ltd............................ 6,957
564,968 Foodcorp Ltd..................................... 2,902
842,400 Forbes Group Ltd................................. 1,558
(a)1,608,300 Illovo Sugar Ltd................................. 2,743
2,020,275 Malbak Ltd....................................... 1,972
(g)224,490 Morgan Stanley Africa Investment Fund, Inc....... 2,582
2,537,470 NBS Boland Group Ltd............................. 6,283
7,974,500 New Africa Investments Ltd., Class N............. 7,620
1,903,300 Orion Selections Holdings Ltd.................... 4,889
1,287,000 Orion Selections Ltd............................. 2,777
549,700 Persetel Holdings Ltd............................ 3,016
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
4,250,000 Protea Furnishers Ltd............................ $ 2,113
1,710,500 Rembrandt Group Ltd.............................. 12,478
2,358,400 Sasol Ltd........................................ 24,667
800,000 Spur Holdings Ltd................................ 995
-----------
91,746
-----------
TAIWAN (4.0%)
(a)1,604,000 Asustek Computer, Inc............................ 25,418
3,008,000 Cathay Construction Corp......................... 3,430
(a)1,916,759 Compal Electronics............................... 5,581
9,838,441 Far Eastern Textile Ltd.......................... 10,675
1,693,000 Hon Hai Precision Industry....................... 8,562
2,905,200 Siliconware Precision Industries Co.............. 6,857
-----------
60,523
-----------
THAILAND (2.8%)
66,500 Advance Agro PCL................................. 56
158,200 Advance Agro PCL (Foreign)....................... 132
1,157,650 Advanced Info Service PCL (Foreign).............. 5,530
116,800 Bangkok Bank PCL (Foreign)....................... 291
(d)6,396,800 Bangkok Expressway PCL (Foreign)................. 3,554
26,700 Bank of Ayudhya PCL (Foreign).................... 11
(d)305,500 BEC World PCL (Foreign).......................... 1,218
(d)818,000 Central Pattana PCL (Foreign).................... 255
(d)412,900 Delta Electronics PCL (Foreign).................. 3,396
226,700 Electricity Generating PCL (Foreign)............. 424
(d)715,000 Grammy Entertainment PCL (Foreign)............... 3,118
3,206,200 Industrial Finance Corp. of Thailand PCL
(Foreign)...................................... 493
(a,d)224,000 Lanna Lignite PCL (Foreign)...................... 456
2,469,000 National Finance & Securities PCL (Foreign)...... 456
(d)2,433,400 National Petrochemical PCL (Foreign)............. 1,289
830,700 PTT Exploration & Production PCL (Foreign)....... 9,558
1,048,400 Shinawatra Computer Co. PCL (Foreign)............ 3,484
34,600 Siam Cement PCL (Foreign)........................ 38
4,082,533 Siam Commercial Bank PCL (Foreign)............... 4,663
126,500 TelecomAsia Corp. PCL (Foreign).................. 24
(d)1,881,000 Thai Airways International PCL (Foreign)......... 2,031
(d)268,100 Thai Engine Manufacturing PCL (Foreign).......... 451
336,200 Thai Farmers Bank PCL (Foreign).................. 611
68,600 Thai Petrochemical Industry PCL.................. 7
1,569,900 United Communication Industry PCL (Foreign)...... 636
-----------
42,182
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
29
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------------
<C> <S> <C>
TURKEY (5.5%)
62,099,500 Arcelik.......................................... $ 5,843
84,122,100 Ege Biracilik.................................... 7,611
43,205,000 Erciyas Biracilik................................ 6,046
116,214,000 Eregli Demir Celik............................... 17,944
927,000 Migros Turk T.A.S................................ 839
74,655,208 Turkiye Garanti Bankasi A.S...................... 3,692
212,010 Turkiye Garanti Bankasi A.S. ADR................. 1,049
60,437,000 Vestel Elektronik Sanayi Ve Ticaret A.S.......... 4,957
(a)925,996,710 Yapi Ve Kredi Bankasi A.S........................ 35,297
-----------
83,278
-----------
UNITED STATES (0.9%)
(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
-----------
13,646
-----------
VENEZUELA (0.5%)
141,050 CANTV ADR........................................ 5,871
1,868,532 Electricidad de Caracas.......................... 2,242
-----------
8,113
-----------
ZIMBABWE (0.6%)
3,819,900 Delta Corp. Ltd.................................. 2,599
(a)290,800 Meikles Africa Ltd............................... 332
1,495,500 Meikles Africa Ltd. ADR.......................... 1,346
(e)9,900,000 Trans Zambesi Industries Ltd..................... 3,152
3,800,000 Trans Zambesi Industries Ltd. (Registered)....... 1,210
-----------
8,639
-----------
TOTAL COMMON STOCKS (Cost $1,516,762)................................ 1,393,740
-----------
PREFERRED STOCK (0.0%)
RUSSIA (0.0%)
85,000 Norilsk Nickel (Cost $357)....................... 493
-----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------------
RIGHTS (0.1%)
BRAZIL (0.1%)
(a,d)609,989,448 Banco Bradesco (Preferred)....................... 55
(a)1,111,637 CRT RFD.......................................... 1,370
(a)478,299 TELESP (Preferred)............................... --
-----------
1,425
-----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
INDIA (0.0%)
(a)30 Philips India Ltd................................ $ --
-----------
SOUTH AFRICA (0.0%)
(a)20,000 Coronation Holdings Ltd.......................... --
-----------
THAILAND (0.0%)
(a)2,469,000 National Finance & Securities PCL (Foreign)...... --
-----------
TOTAL RIGHTS (Cost $1,436)........................................... 1,425
-----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------------
WARRANTS (0.0%)
INDIA (0.0%)
(a,d)100 Apollo Tyres Ltd., expiring 2/28/98.............. --
-----------
INDONESIA (0.0%)
(a)1,003,404 Bank International Indonesia (Foreign), expiring
1/17/00........................................ 14
(a)1,093,112 Indah Kiat Pulp & Paper Corp. (Foreign), expiring
7/11/02........................................ 30
-----------
44
-----------
MALAYSIA (0.0%)
(a)244,500 Commerce Asset Holdings Bhd, expiring 7/11/02.... 35
(a)61,571 Rashid Hussain Bhd, expiring 12/31/02............ 11
-----------
46
-----------
THAILAND (0.0%)
(a)1,020,633 Siam Commercial Bank PCL......................... --
-----------
TOTAL WARRANTS (Cost $230)........................................... 90
-----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- ----------------
UNITS (0.4%)
UNITED STATES (0.4%)
(a,d)722 Storyfirst Communications, Inc.,
First Section, Tranche I, 25.00%, 1/31/98...... 1,032
(a,d)840 Storyfirst Communications, Inc., Second Section,
Tranche I, 25.00%, 1/31/98..................... 1,201
(a,d)376 Storyfirst Communications, Inc., Tranche II,
26.00%, 1/31/98................................ 566
(a,d)643 Storyfirst Communications, Inc., Tranche IV,
28.00%, 1/31/98................................ 919
(a,d)654 Storyfirst Communications, Inc., Tranche V,
29.00%, 1/31/98................................ 936
(a,d)550 Storyfirst Communications, Inc., Tranche VI
30.00%, 1/31/98................................ 787
-----------
TOTAL UNITS (Cost $4,537)............................................ 5,441
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
30
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
FIXED INCOME SECURITIES (0.1%)
RUSSIA (0.1%)
U.S.$ 1,954 Russian Interest Anticipation Notes, (Floating
Rate), 6.719%, 12/15/15 (Cost $1,549).......... $ 1,387
-----------
CONVERTIBLE DEBENTURES (0.1%)
INDIA (0.0%)
INR (d)336 DCM Shriram Industries Ltd.,
7.50%, 2/21/02................................. 341
-----------
SOUTH AFRICA (0.1%)
ZAR 111 Sasol Ltd. 8.50%................................. 1,116
-----------
TOTAL CONVERTIBLE DEBENTURES (Cost $1,862)........................... 1,457
-----------
NON-CONVERTIBLE DEBENTURES (0.1%)
INDIA (0.1%)
INR (d)341 DCM Shriram Industries Ltd., (Floating Rate),
9.90%, 2/21/02................................. 437
(d)700 Saurashtra Cement & Chemicals Ltd., 18.00%,
11/27/98....................................... 1,657
-----------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $2,865)....................... 2,094
-----------
LOAN AGREEMENTS (0.0%)
POLAND (0.0%)
U.S.$ (e,n)54 Republic of Poland Interest Arrears PDI Bonds,
4.00%, 10/27/14 (Cost $0)...................... 47
-----------
TOTAL FOREIGN SECURITIES (93.0%) (Cost $1,529,598)................... 1,406,174
-----------
SHORT-TERM INVESTMENT (4.9%)
REPURCHASE AGREEMENT (4.9%)
74,001 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $74,025,
collateralized by U.S. Treasury Notes, 6.00%,
due 6/30/99, valued at $75,588 (Cost
$74,001)....................................... 74,001
-----------
FOREIGN CURRENCY (1.2%)
ARP 4 Argentine Peso................................... 4
BRL 430 Brazilian Real................................... 385
GBP 11 British Pound.................................... 18
COP 195,968 Colombian Peso................................... 151
EGP 1,889 Egyptian Pound................................... 555
HUF 359,010 Hungarian Forint................................. 1,760
INR 86,739 Indian Rupee..................................... 2,213
IDR 11,696 Indonesian Rupiah................................ 2
ILS 2,236 Israeli Shekel................................... 632
MYR 126 Malaysian Ringgit................................ 32
MXP 8,562 Mexican Peso..................................... 1,062
MAD 895 Morrocan Dhiram.................................. 92
PKR 8,251 Pakistani Rupee.................................. 187
</TABLE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------------
PLN 3,056 Polish Zloty..................................... $ 867
ZAR 28,078 South African Rand............................... 5,770
KRW 2,883,662 South Korean Won................................. 1,701
LKR 2 Sri Lankan Rupee................................. --
TWD 2,669 Taiwan Dollar.................................... 82
THB 9,773 Thai Baht........................................ 203
TRL 433,775,821 Turkish Lira..................................... 2,093
VEB 10,010 Venezuelan Bolivar............................... 20
-----------
TOTAL FOREIGN CURRENCY (Cost $18,367)................................ 17,829
-----------
TOTAL INVESTMENTS (99.1%) (Cost $1,621,966).......................... 1,498,004
-----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (3.3%)
Cash.................................................... $ 1,103
Receivable for Investments Sold......................... 38,781
Receivable for Portfolio Shares Sold.................... 5,083
Dividends Receivable.................................... 3,643
Interest Receivable..................................... 276
Foreign Withholding Tax Reclaim Receivable.............. 25
Net Unrealized Gain on Foreign Currency Exchange
Contracts............................................. 6
Other................................................... 96 49,013
----------
LIABILITIES (-2.4%)
Payable for Investments Purchased....................... (21,318)
Investment Advisory Fees Payable........................ (5,256)
Net Unrealized Loss on Swap Agreements.................. (5,232)
Payable for Foreign Taxes............................... (2,255)
Custodian Fees Payable.................................. (703)
Dividends Payable....................................... (287)
Administrative Fees Payable............................. (198)
Payable for Stamp Duty Tax.............................. (88)
Directors' Fees and Expenses Payable.................... (67)
Sub-Administrative Fees Payable......................... (52)
Distribution Fees Payable............................... (7)
Other Liabilities....................................... (502) (35,965)
---------- ----------
NET ASSETS (100%)..................................................... $1,511,052
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital....................................................... $1,710,768
Distributions in Excess of Net Investment Income...................... (2,735)
Accumulated Net Realized Loss......................................... (66,762)
Unrealized Depreciation on Investments, Foreign Currency Translations
and Swaps (Net of accrual for foreign taxes of $2,255 on unrealized
appreciation on investments)........................................ (130,219)
----------
NET ASSETS............................................................ $1,511,052
----------
----------
</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
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ----------------------------------------------------------------------------------
CLASS A:
- ----------------------------------------------------------
NET ASSETS................................................ $1,501,386
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 115,786,391 outstanding $0.001 par value
shares (authorized 500,000,000 shares).................. $12.97
----------
----------
CLASS B:
- ----------------------------------------------------------
NET ASSETS................................................ $9,666
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 744,744 outstanding $0.001 par value
shares (authorized 500,000,000 shares).................. $12.98
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, 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>
- ---------- ------ ----------- ------------ ------ ------------
THB 9,773 $ 203 1/5/98 U.S.$ 209 $ 209 $ 6
------
------ ------
------
--
--
</TABLE>
SWAP AGREEMENTS:
The Potfolio had the following Total Return Swap Agreements open at December 31,
1997:
<TABLE>
<CAPTION>
NET
UNREALIZED
NOTIONAL APPRECIATION
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 $ (2,149)
(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 (877)
(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 (735)
(d)4,000 Agreement with Goldman Sachs
International terminating May 8, 1998 to
pay 6 month USD-LIBOR minus 4.50% and to
receive the SET Index converted into USD
at the mid-market rate on May 6, 1998 (1,471)
-----------
$ (5,232)
-----------
-----------
</TABLE>
- ------------------------------------------------
(a) -- Non-income producing security
(d) -- Securities (totaling $135,334 or 9.0% of net assets at December 31,
1997) were valued at fair value -- see note A-1 to financial
statements.
(e) -- 144A Security -- Certain conditions for public sale may exist.
(f) -- Restricted as to public resale. Total value of restricted securities
at December 31, 1997 was $3,003 or 0.2% of net assets. (Total Cost
$3,782).
(g) -- The fund is advised by an affiliate.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1997. Maturity date disclosed is the
ultimate maturity.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
LIBOR -- London Interbank Offer Rate
PCL -- Public Company Limited
PDI -- Past Due Interest
RFD -- Ranked for Dividend
Floating Rate Security -- Interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown are those in
effect on December 31, 1997.
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------
Capital Equipment...................... $ 97,301 6.4%
Consumer Products...................... 270,076 17.9
Energy................................. 190,933 12.6
Finance................................ 231,044 15.3
Materials.............................. 202,612 13.4
Multi-Industry......................... 137,415 9.1
Services............................... 276,793 18.3
----------- ---
$ 1,406,174 93.0%
----------- ---
----------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Portfolio
32
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Austria 0.7 %
Belgium 1.0 %
Denmark 2.2 %
Finland 4.8 %
France 10.4 %
Germany 12.6 %
Italy 5.6 %
Netherlands 9.4 %
Norway 1.2 %
Spain 3.6 %
Sweden 5.4 %
Switzerland 10.0 %
United Kingdom 25.8 %
Other 7.3 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EUROPEAN EQUITY MSCI EUROPE
PORTFOLIO--CLASS
A INDEX(1)
<S> <C> <C>
4/02/93* $500,000 $500,000
12/31/93 645,500 606,800
12/31/94 715,750 620,650
12/31/95 800,566 754,835
12/31/96 979,012 914,030
12/31/97 1,154,059 1,131,569
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX(1)
- ---------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 17.88% 19.25%
PORTFOLIO -- CLASS B............. 17.73 19.26
INDEX -- CLASS A................. 23.80 18.55
INDEX -- CLASS B................. 23.80 22.11
</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 (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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had a total return of 17.88%
for the Class A shares and 17.73% for the Class B shares as compared to a total
return of 23.80% for the Morgan Stanley Capital International (MSCI) Europe
Index (the "Index"). From inception on April 2, 1993 to December 31, 1997, the
average annual total return of Class A was 19.25% compared to 18.55% for the
Index. From inception on January 2, 1996 to December 31, 1997, the average
annual total return of Class B was 19.26% compared to 22.11% for the Index.
Underperformance during 1997 was largely due to our underweighting in banks and
pharmaceutical stocks, notably in Switzerland and Germany and our overweighting
in basic industry and consumer cyclical stocks as they faced increasing
competition from cheaper Asian exports and weakening commodity prices. Another
feature was the "flight to safety" which has led investors away from smaller cap
names. Offsetting this to a degree was good stock performance in Italy and
Sweden, while our underweighting in the U.K. also contributed.
In Europe, weaker currencies, lower yields, accelerating restructuring and
consolidation played a significant part in driving exceptional local currency
returns, with the MSCI Europe Index up 38% in local currency terms, and 24% in
U.S. dollars. Exporters, particularly in Germany and Switzerland, made strong
- --------------------------------------------------------------------------------
European Equity Portfolio
33
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
gains. While restructuring remained a central investment theme throughout 1997
it was hampered by double digit unemployment, difficult labor laws and the
election, across the region, of socialist governments. EMU driven interest rate
convergence was a key feature with increasing confidence that Italy would join
in the first wave. The U.K. lagged its continental counterparts (up 28% in local
currency) as the newly independent Bank of England hiked interest rates 1 1/4%
in an attempt to subdue the conservatives' legacy of an overheated domestic
economy. Sterling strength has begun to impact exporters, placing pressure on
New Labor following their landslide election in May.
Following the strong performance of the European banking sector on the back of
restructuring and mergers, we believe this sector is now looking fully valued.
That said, we are always looking for new value opportunities and are currently
investigating some names that have been hit due to their exposure to South East
Asia. Having added several new U.K. names to the Portfolio in recent months, we
continue to find attractive stocks across the industrial spectrum which benefit
from strong business franchises and an environment in which management are
dedicated to returning shareholder value. Hence, the Portfolio is moving from
under, closer to market weight in the U.K. Compelling investment ideas are also
continuing to come from Scandinavia, notably Finland, and we expect to remain
overweight the Index in this region in the coming months. Our weightings in
southern Europe have been reduced recently as our holdings in the region have
reached full value.
RECENT ADDITIONS TO THE PORTFOLIO
VALMET (Finland) is the world's leading paper machine manufacturer. It has
expanded from a strong European base and is well established globally. The group
has recently reduced its cyclicality by increasing the use of subcontractors and
expanding service and maintenance.
MAGNETTI MARELLI -- an Italian auto components manufacturer, it is seeking to
reduce exposure to Fiat to 30% of OEM sales over the next 3 years. Expansion is
driven by competitive new products including fuel injection, air conditioning
and engine cooling systems.
PLETTAC -- a leading German scaffolding manufacturer/ service provider, recently
diversified into security systems. Aiming to grow the business organically and
by acquisition helped by strong cashflow. The market sees this as a cyclical
construction stock, allowing us to buy at cheap levels.
BUNZL (United Kingdom) is a tightly managed company enjoying high returns on low
technology businesses due to its dominant market shares and focus on working
capital. The company has a long history of intelligent and return enhancing
growth by acquisition.
CHARTER PLC (United Kingdom) is an engineering conglomerate, consisting of Esab
(welding), Pandrol (railtrack equipment) and Howden (engineering). Charter has
strong management, while its businesses enjoy genuinely global franchises and
good levels of profitability.
Traditionally known as a major United Kingdom mail-order retailer GREAT
UNIVERSAL STORES also has a number of international retailing businesses.
Appointed in 1996 the new Chairman, David Wolfson, has a great track record
including the turnaround of Next PLC.
MEDEVA (United Kingdom) is a pharmaceutical company specializing in generic
drugs for the prescription market; being controlled these drugs are protected
from open competition. Two-thirds of output is to the USA, generating greater
than 80% of operating profit. Medeva is heavily undervalued relative to its
peers.
SCAPA (United Kingdom) manufactures consumables for global industries.
Traditionally supplies the paper manufacturing industry with Paper Machine
Clothing and Paper Machine roll covers which are consumed in the production and
are crucial to the efficient running of the machines.
WESTMINSTER HEALTH CARE is the United Kingdom's second largest nursing home
operator and the leading retirement home operator. Perceived as the quality
operator in the U.K., it aims to offer a complete range of services, with non
nursing homes accounting for 50% of PBT.
FRANCE TELECOM is the last major European telecommunications company to be
privatized. FT benefits from a stable, transparent regulatory environment. FT is
rebalancing its tariff structure, the best defense against looming competition.
BANK OF IRELAND is a leading financial organization in Ireland. It has offices
located throughout Ireland, the U.K. and Europe. It also operates a subsidiary
bank in
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
34
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
New Hampshire. The bank remains cheap, relative to its European and U.K. peers,
whilst offering an attractive yield.
TELECOM ITALIA has a monopoly on local and cellular telephone usage and a
virtual monopoly in the domestic long distance market. Traffic has grown at an
average 10% over the past four years and the number of telephone subscribers per
capita at 40% is among the lowest in Europe. The anticipated tariff reform will
allow TI to link tariff charges more directly to costs.
One of the cheapest telecoms in Europe TELEFONICA DE ESPANA provides all Spain's
domestic and international telephone services. It owns the public exchanges,
exchange equipment and nationwide network connecting subscribers and exchanges.
TdE has good growth potential in its Peruvian business and is set to benefit
from the liberalization of European telecommunications industry.
ASSOCIATED BRITISH FOODS (U.K.) dominates the U.K. flour milling and bread
baking industry, with further involvement in Australia and in food retailing in
Northern Ireland. The net cash position is being steadily built up again
following the 1991 acquisition of British Sugar.
BASS (U.K.): leading market position in U.K. brewing, pub retailing, and the
international franchise hotel business, Holiday Inn. Bass's management team is
highly disciplined in capital allocation in an industry where these skills are
insufficiently rigorous.
Stock sales during the latter part of the year included:
BONGRAIN (France) was sold after successfully reaching price target.
EDITORALE L'ESPRESSO (Italy) was sold after reaching price target.
BALOISE HOLDING (Switzerland) was eliminated on strength.
ZUERICH VERSICHERUNGS (Switzerland) was eliminated on strength.
SCOTTISH HYDRO-ELECTRIC (U.K.) was sold on strength and after reaching price
target.
MANNESMANN (Germany) was eliminated on strength.
OLIVETTI (Italy) was sold due to operating environment fears.
STOREBRAND (Norway) was sold on strength after our price target had been
reached.
OERLIKON BUEHRLE (Switzerland) was sold on strength after our price target had
been reached.
COURTAULDS TEXTILES (U.K.) was sold due to operating environment fears.
Robert Sargent
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
European Equity Portfolio
35
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS (89.8%)
AUSTRIA (0.7%)
27,890 Boehler-Uddeholm AG.............................. $ 1,635
---------
BELGIUM (1.0%)
52,900 G.I.B. Holdings Ltd.............................. 2,570
55 G.I.B. Holdings Ltd. VVPR (New).................. 2
---------
2,572
---------
DENMARK (2.2%)
40,400 BG Bank A/S...................................... 2,718
35,800 Unidanmark A/S, Class A (Registered)............. 2,628
---------
5,346
---------
FINLAND (4.8%)
(a)55,300 Amer-Yhtymae Oyj, Class A........................ 1,060
48,600 Huhtamaki Oyj, Series 1.......................... 2,006
14,945 Kone Oyj, Class B................................ 1,810
300,000 Merita Ltd., Class A............................. 1,640
(a)47,650 Metra Oyj, Class B............................... 1,119
301,000 Rautaruukki Oyj.................................. 2,430
130,350 Valmet Oyj....................................... 1,798
---------
11,863
---------
FRANCE (10.4%)
10,800 Alcatel Alsthom.................................. 1,373
22,517 Cie de Saint Gobain.............................. 3,199
30,800 Elf Aquitaine.................................... 3,582
(a)48,000 France Telecom................................... 1,741
17,400 Groupe Danone.................................... 3,108
48,511 Lafarge.......................................... 3,183
53,600 Legris Industries................................ 1,861
(a)29,400 SGS-Thompson Microelectronics N.V................ 1,820
5,300 Scor............................................. 253
31,100 Total, Class B................................... 3,385
163,500 Usinor Sacilor................................... 2,361
---------
25,866
---------
GERMANY (9.7%)
76,100 BASF AG.......................................... 2,716
62,550 Bayer AG......................................... 2,321
5,340 Buderus AG....................................... 2,395
93,150 Gerresheimer Glas AG............................. 1,305
128,400 Lufthansa AG..................................... 2,412
28,320 Metro AG......................................... 1,004
(a)4,020 Philipp Holzmann AG.............................. 1,037
10,943 Plettac AG....................................... 1,509
37,500 VEBA AG.......................................... 2,554
7,360 Viag AG.......................................... 4,030
5,000 Volkswagen AG.................................... 2,793
---------
24,076
---------
ITALY (5.6%)
673,000 Magneti Marelli S.p.A............................ 1,151
270,800 Marzotto (Gaetano) & Figli S.p.A................. 3,383
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
324,350 Mediaset S.p.A................................... $ 1,593
1,009,000 Sogefi S.p.A..................................... 2,567
400,001 Telecom Italia S.p.A............................. 2,555
595,360 Telecom Italia S.p.A. Di Risp (NCS).............. 2,625
---------
13,874
---------
NETHERLANDS (9.4%)
102,400 ABN Amro Holding N.V............................. 1,995
22,200 Akzo Nobel N.V................................... 3,828
(a)15,600 Benckiser N.V., Class B.......................... 645
103,570 Hollandsche Beton Groep N.V...................... 1,926
86,300 ING Groep N.V.................................... 3,635
40,800 KLM Royal Dutch Airlines N.V..................... 1,509
35,000 Koninklijke Bijenkorf Beheer N.V................. 2,192
138,380 Koninklijke KNP BT N.V........................... 3,187
41,900 Koninklijke Van Ommeren N.V...................... 1,405
47,550 Philips Electronics N.V.......................... 2,852
---------
23,174
---------
NORWAY (1.2%)
130,120 Saga Petroleum A/S, Class B...................... 1,973
26,050 Sparebanken...................................... 928
---------
2,901
---------
SPAIN (3.6%)
11,518 Bodegas y Bebidas................................ 445
204,000 Iberdrola........................................ 2,685
92,700 Telefonica de Espana............................. 2,647
280,200 Uralita.......................................... 3,200
---------
8,977
---------
SWEDEN (5.4%)
88,350 Esselte AB, Class B.............................. 1,792
(a)667,000 Nordbanken AB.................................... 3,772
65,000 Pharmacia & Upjohn, Inc.......................... 2,390
43,100 S.K.F. AB, Class B............................... 917
50,600 Forenings Sparbanken AB.......................... 1,150
69,300 Spectra-Physics AB, Class A...................... 1,314
61,000 Svenska Handelsbanken, Class A................... 2,109
---------
13,444
---------
SWITZERLAND (10.0%)
(a)1,870 Ascom Holdings AG (Bearer)....................... 2,407
1,710 Bobst AG (Bearer)................................ 2,517
6,500 Forbo Holding AG (Registered).................... 2,657
3,800 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 3,101
3,300 Nestle (Registered).............................. 4,946
633 Novartis AG (Registered)......................... 1,027
600 Schindler Holding AG (Participating
Certificates).................................. 625
1,320 Schindler Holding AG (Registered)................ 1,418
1,760 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered)................................... 2,404
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
36
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
3,030 Sulzer AG (Registered)........................... $ 1,921
7,950 Valora Holding AG................................ 1,677
---------
24,700
---------
UNITED KINGDOM (25.8%)
(a)462,134 Aggreko plc...................................... 1,185
14,600 Associated British Foods plc..................... 127
171,394 B.A.T. Industries plc............................ 1,560
299,205 BG plc........................................... 1,347
190,000 Bank of Ireland.................................. 2,919
194,910 Bank of Scotland................................. 1,794
85,700 Bass plc......................................... 1,330
255,900 Booker plc....................................... 1,346
319,800 British Telecommunications plc................... 2,515
328,700 Bunzl plc........................................ 1,277
220,150 Burmah Castrol plc............................... 3,835
152,300 Charter plc...................................... 1,875
462,134 Christian Salvesen plc........................... 744
95,050 Commercial Union plc............................. 1,326
60,200 Danka Business Systems plc....................... 234
384,000 Diageo plc....................................... 3,531
40,300 Glynwed International plc........................ 172
252,800 Great Universal Stores plc....................... 3,186
542,000 Imperial Tobacco Group plc....................... 3,411
916,654 John Mowlem & Co. plc............................ 1,341
460,000 Kwik Save Group plc.............................. 2,215
603,900 Medeva plc....................................... 1,608
184,400 Peninsular & Oriental Steam Navigation Co........ 2,098
184,800 Premier Farnell plc.............................. 1,330
928,800 Premier Oil plc.................................. 809
302,900 Racal Electronic plc............................. 1,329
260,632 Reckitt & Colman plc............................. 4,090
372,172 Royal & Sun Alliance Insurance Group
plc............................................ 3,749
537,200 Scapa Group plc.................................. 2,057
254,218 Tate & Lyle plc.................................. 2,093
299,500 Unilever plc..................................... 2,564
728,600 WPP Group plc.................................... 3,245
286,900 Westminster Health Care Holdings plc............. 1,721
---------
63,963
---------
TOTAL COMMON STOCKS (Cost $188,632).............................. 222,391
---------
PREFERRED STOCKS (2.9%)
GERMANY (2.9%)
5,373 Dyckerhoff AG.................................... 1,377
36,000 Hornbach Holding AG.............................. 2,481
3,845 Suedzucker AG.................................... 1,892
3,200 Volkswagen AG.................................... 1,372
---------
TOTAL PREFERRED STOCKS (Cost $6,266)............................. 7,122
---------
TOTAL FOREIGN SECURITIES (92.7%) (Cost $194,898)................. 229,513
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.2%)
REPURCHASE AGREEMENT (2.2%)
$ 5,494 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $5,496,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $5,607
(Cost $5,494).................................. $ 5,494
---------
FOREIGN CURRENCY (1.1%)
GBP 11 British Pound.................................... 18
FIM 900 Finnish Markka................................... 165
DEM 450 German Mark...................................... 250
ITL 150,742 Italian Lira..................................... 85
NLG 1,261 Netherlands Guilder.............................. 622
ESP 25 Spanish Peseta................................... --
CHF 2,163 Swiss Franc...................................... 1,481
---------
TOTAL FOREIGN CURRENCY (Cost $2,631)............................. 2,621
---------
TOTAL INVESTMENTS (96.0%) (Cost $203,023)........................ 237,628
---------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (4.6%)
Receivable for Investments Sold..................... $ 10,152
Dividends Receivable................................ 808
Foreign Withholding Tax Reclaim Receivable.......... 271
Receivable for Portfolio Shares Sold................ 237
Net Unrealized Gain on Foreign Currency Exchange
Contracts......................................... 5
Interest Receivable................................. 1
Other............................................... 6 11,480
----------
LIABILITIES (-0.6%)
Payable for Investments Purchased................... (890)
Investment Advisory Fees Payable.................... (473)
Bank Overdraft...................................... (75)
Administrative Fees Payable......................... (33)
Payable for Portfolio Shares Redeemed............... (27)
Custodian Fees Payable.............................. (24)
Directors' Fees & Expenses Payable.................. (8)
Distribution Fees Payable........................... (3)
Other Liabilities................................... (53) (1,586)
---------- --------
NET ASSETS (100%)................................................. $247,522
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................................... $202,996
Distributions in Excess of Net Investment Income.................. (74)
Accumulated Net Realized Gain..................................... 10,115
Unrealized Appreciation on Investments and Foreign Currency
Translations.................................................... 34,485
--------
NET ASSETS........................................................ $247,522
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
37
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ------------------------------------------------------------------
NET ASSETS........................................................ $242,868
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 13,522,329 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $17.96
--------
--------
CLASS B:
- ------------------------------------------------------------------
NET ASSETS........................................................ $4,654
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 259,447 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $17.94
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, 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>
- ---------- ------- ----------- ------------ ------- ------------
ESP 60,156 $ 395 1/02/98 U.S.$ 396 $ 396 $ 1
U.S.$ 81 81 1/02/98 FRF 484 80 (1)
U.S.$ 353 353 1/02/98 DEM 632 352 (1)
CHF 2,163 1,481 1/05/98 U.S.$ 1,485 1,485 4
FIM 380 70 1/05/98 U.S.$ 70 70 --
NLG 1,729 853 1/05/98 U.S.$ 855 855 2
------- -------
--
$ 3,233 $ 3,238
$ 5
-------
------- -------
-------
--
--
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
FRF -- French Franc
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -------------------------------------------------------------------
Capital Equipment...................... $ 42,333 17.1%
Consumer Goods......................... 44,709 18.1
Energy................................. 11,494 4.6
Finance................................ 30,616 12.4
Materials.............................. 47,861 19.3
Multi-Industry......................... 12,500 5.0
Services............................... 40,000 16.2
--------- ---
$ 229,513 92.7%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Equity Portfolio
38
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Belgium 4.9 %
Denmark 5.6 %
France 19.8 %
Netherlands 6.8 %
Norway 9.0 %
Spain 1.0 %
Sweden 11.9 %
United Kingdom 35.9 %
Other 5.1 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EUROPEAN REAL EUROPEAN REAL THE GRP LIFE EUROPEAN
Estate Portfolio--Class Estate Portfolio--Class
A B Real Estate T.R. Index
<S> <C> <C> <C>
10/01/97* $500,000 $100,000 $500,000
12/31/97 476,400 95,240 500,650
* Commencement of operations
** Minimum Investment--Class A
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different fees assessed to that class. The GPR Life European Real
Estate T.R. value at December 31, 1997 assumes a minimum initial investment of
$500,000; if a minimum initial investment of $100,000 (the minimum investment
for Class B shares) is assumed, the value at December 31, 1997 would be
$100,130.
PERFORMANCE COMPARED TO THE GPR LIFE
EUROPEAN REAL ESTATE T.R. INDEX(1)
- -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN(2)
SINCE INCEPTION
---------------
<S> <C>
PORTFOLIO -- CLASS A(3)..................... -4.72%
PORTFOLIO -- CLASS B(3)..................... -4.76
INDEX....................................... 0.13
</TABLE>
1. The GPR Life European Real Estate T.R. Index is a 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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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-term capital appreciation by investing primarily in
equity securities of companies in the European real estate industry.
For the period from October 1, 1997 (commencement of operations) through
December 31, 1997, the Portfolio had a total return of -4.72% for the Class A
shares and -4.76% for the Class B shares compared to 0.13% for the GPR Life
European Real Estate T.R. Index.
The fourth quarter activity in the European property markets was dominated by
speculation on early entry of the Great Britain Pound ("GBP") to the common
currency and the unrest in the Asian markets. The speculation on early entry of
the GBP drove U.K. bond yields down. This caused a re-rating of the property
share sector on the assumption of lower property yields. The U.K. property
market was up 7.9% in the month of October. A rise in German interest rates
pushed bond yields higher in Sweden, which, combined with the expected economic
slowdown from the Asian crisis, effected property shares negatively. The Swedish
property shares fell -3.7% and -5.5% in October and November, respectively. The
GPR Life European Real Estate Index posted a total return of 0.13% for the
quarter based on strong performance in the U.K.. The Portfolio was hurt by a
strong overweight in Sweden and underweight the U.K. registering a total return
of -4.7%.
With the increased volatility in the capital markets, we added exposure to the
more stable Dutch market through Uni-Invest. The company has a very high
dividend yield (8.0%) and trades at net asset value. Looking forward, we believe
London office, retail warehousing, and shopping centers will continue to see
increases in rents and strengthening yields. Thus, we remain overweight in these
areas even though underweight the U.K. market as a whole. We continue to see
strong rental growth in Sweden and the rest of the Nordic market and are
maintaining an overweight position albeit at a decreased level. We have also
started to build an exposure to the Spanish property market through Urbis. We
expect a reduction in Spanish yields and increases in rents and housing sales
due to strong economic growth. Finally, we remain slightly underweight in the
French market, but
- --------------------------------------------------------------------------------
European Real Estate Portfolio
39
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO (CONT.)
strongly overweight the commercial sector in anticipation of a cyclical rebound
while underweighting the apartment sector.
The Portfolio performance was also negatively affected by two non-property
events: strong currency fluctuations and an extraordinarily large cash
redemption at the end of the period. The global turmoil sparked by the Asian
meltdown drove investors into traditional safe-havens, i.e., the U.S. and U.K.
markets. The result of this capital shift was a re-adjustment in the currency
markets. The Nordic region was the hardest hit, as Sweden, Norway and Denmark
fell 4.6%, 4.4%, and 2.2%, respectively, while the British pound appreciated by
1.8%. These currency moves resulted in an increased cost to our strong Nordic
exposure, while again penalizing an underweight U.K. position.
Jan Willem de Geus
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
40
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS (94.9%)
BELGIUM (4.9%)
3,850 Befimmo S.C.A.................................... $ 247
(a)8,450 Befimmo S.C.A. (New)............................. 541
--------
788
--------
DENMARK (5.6%)
19,900 EjendomsSelskabet Norden A/S..................... 900
--------
FRANCE (19.8%)
1,600 Bail Investissement.............................. 212
4,152 Klepierre........................................ 522
2,474 Locindus......................................... 305
6,000 Sefimeg.......................................... 299
8,300 Sophia........................................... 315
4,200 Silic............................................ 565
7,550 Unibail.......................................... 754
5,224 Union Pour le Financement d'Immeubles de
Societes....................................... 183
--------
3,155
--------
NETHERLANDS (6.8%)
35,000 Schroders International Property Fund N.V........ 599
33,700 UNI-INVEST N.V................................... 479
--------
1,078
--------
NORWAY (9.0%)
86,700 Avantor ASA...................................... 857
(a)42,417 Steen & Strom ASA................................ 574
--------
1,431
--------
SPAIN (1.0%)
17,100 Inmobiliaria Urbis............................... 162
--------
SWEDEN (11.9%)
(a)86,400 Castellum AB..................................... 859
260,300 Platzer Bygg AB, Class B......................... 387
32,800 PriFast AB....................................... 306
76,300 Storheden AB..................................... 341
--------
1,893
--------
UNITED KINGDOM (35.9%)
29,700 British Land Co. plc............................. 332
112,800 Brixton Estate plc............................... 393
337,000 Buford Holdings plc.............................. 554
55,500 Capital Shopping Centers plc..................... 374
227,400 Freeport Leisure plc............................. 848
168,500 Great Portland Estates plc....................... 668
25,000 Hammerson plc.................................... 193
241,000 Jarvis Hotels plc................................ 594
30,500 Land Securities plc.............................. 486
113,400 MEPC plc......................................... 947
299,200 St. Modwen Properties plc........................ 352
--------
5,741
--------
TOTAL FOREIGN SECURITIES (94.9%) (Cost $15,771)................... 15,148
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
FOREIGN CURRENCY (1.3%)
BEF 477 Belgian Franc.................................... $ 13
GBP 2 British Pound.................................... 3
FRF 1 French Franc..................................... --
NOK 1,417 Norwegian Krone.................................. 192
SEK 1 Swedish Krona.................................... --
--------
TOTAL FOREIGN CURRENCY (Cost $212)................................ 208
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (96.2%) (Cost $15,983).......................... 15,356
--------
OTHER ASSETS (7.7%)
Receivable for Investments Sold..................... $ 1,132
Due from Adviser.................................... 49
Dividends Receivable................................ 46
Net Unrealized Gain on Foreign Currency Exchange
Contracts......................................... 4
Foreign Withholding Tax Reclaim Receivable.......... 3 1,234
----------
LIABILITIES (-3.9%)
Payable for Investments Purchased................... (310)
Bank Overdraft...................................... (153)
Payable for Portfolio Shares Redeemed............... (107)
Custodian Fees Payable.............................. (9)
Administrative Fees Payable......................... (3)
Other Liabilities................................... (42) (624)
---------- --------
NET ASSETS (100%)................................................. $ 15,966
--------
--------
NET ASSETS CONSIST OF:
Paid in Capital....................................... $ 16,964
Undistributed Net Investment Income................... 9
Accumulated Net Realized Loss......................... (375)
Unrealized Depreciation on Investments and Foreign
Currency Translations............................... (632)
--------
NET ASSETS............................................ $ 15,966
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
NET ASSETS........................................................ $15,177
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 1,594,897 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $9.52
--------
--------
CLASS B:
NET ASSETS........................................................ $789
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Applicable to 82,947 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $9.52
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Real Estate Portfolio
41
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, 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>
- ---------- ------ ----------- ------------ ------ ------------
SEK 1,788 $ 225 1/02/98 U.S.$ 226 $ 226 $ 1
GBP 218 358 1/05/98 U.S.$ 361 361 3
SEK 826 104 1/05/98 U.S.$ 104 104 --
------ ------ ---
$ 687 $ 691 $ 4
------
------ ------ ---
------ ---
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------
Apartment.............................. $ 640 4.0%
Diversified............................ 4,280 26.8
Land................................... 1,692 10.6
Lodging/Leisure........................ 594 3.7
Office & Industrial.................... 3,856 24.2
Shopping Centers....................... 4,086 25.6
-------- ---
Net Assets............................. $ 15,148 94.9%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
European Real Estate Portfolio
42
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australia 1.3 %
Canada 1.6 %
France 2.4 %
Germany 6.2 %
Hong Kong 0.5 %
Ireland 5.7 %
Italy 3.7 %
Japan 7.6 %
Netherlands 4.4 %
New Zealand 0.7 %
Portugal 0.3 %
Spain 3.0 %
Sweden 1.6 %
Switzerland 4.3 %
United Kingdom 13.7 %
United States 38.5 %
Other 4.5 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GLOBAL EQUITY MSCI WORLD
PORTFOLIO--CLASS
A INDEX(1)
<S> <C> <C>
7/15/92* $500,000 $500,000
10/31/92 467,500 482,000
12/31/92 455,813 475,879
12/31/93 703,145 604,750
12/31/94 752,000 635,450
12/31/95 892,323 767,115
12/31/96 1,096,041 870,522
12/31/97 1,356,351 1,007,716
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
----------- --------------- ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 23.75% 22.71% 20.03%
PORTFOLIO -- CLASS
B..................... 23.37 N/A 22.74
INDEX -- CLASS A...... 15.76 15.34 13.69
INDEX -- CLASS B...... 15.76 N/A 14.41
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had a total return of 23.75%
for the Class A shares and 23.37% for the Class B shares, compared to a total
return of 15.76% for the Morgan Stanley Capital International (MSCI) World Index
(the "Index"). For the five-year period ended December 31, 1997, the average
annual total return for Class A was 22.71% compared to 15.34% for the Index,
from inception on July 15, 1992 to December 31, 1997, the average annual total
return of Class A was 20.03% compared to 13.69% for the Index. From inception on
January 2, 1996 to December 31, 1997, the average annual total return of Class B
was 22.74% compared to 14.41% 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.
Outperformance during 1997 came largely from the combination of our heavily
underweight position in Japan and Southeast Asia and strong Japanese stock
selection, notably the large exporters which continued to benefit from yen
weakness. Stock selection in many European markets, particularly financials,
also contributed, as did our overweighting in continental Europe.
After beginning 1997 as perceivably one of the most "at risk" markets on a
valuation basis, the U.S. ended the year again among the strongest developed
markets, despite high volatility. As the economic expansion continued into its
seventh year, the "Goldilocks" investment scenario prevailed: a firming dollar,
robust growth, benign inflation (despite full employment), shrinking supply in
both debt and equities and booming demand (another U.S.$250 billion of net
equity mutual fund inflows). This was despite a 1/4% rise in the Federal Funds
rate in February (first in over two years) and warnings from
- --------------------------------------------------------------------------------
Global Equity Portfolio
43
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
the Federal Reserve Chairman of "irrational exuberance". In Europe, weaker
currencies, lower yields, accelerating restructuring and consolidation drove
exceptional local currency returns. While restructuring remained a central
investment theme throughout 1997, it was hampered by double digit unemployment,
difficult labor laws and the election, across the region, of socialist
governments. EMU driven interest rate convergence was a feature with increasing
confidence that Italy would join in the first wave. The U.K. lagged its
continental counterparts as the newly independent Bank of England hiked interest
rates 1 1/4% in an attempt to subdue the overheated domestic economy.
In Japan, a weak domestic economy following April's VAT hike, the spectre of
deregulation and the deepening banking crisis, brought a further loss of
confidence. Some hope was extended by year end tax cuts, and increasing
government willingness to restructure its banking system. Changing sentiment was
also evident in the collapse of Yamaichi, Japan's 4th largest broker, perhaps
heralding a breakdown in the traditional keiretsu "convoy" system. Significant
risks remain, however, not least of which is the threat to corporate earnings
posed by Asian devaluations and the inevitable corporate collapses, to which
Japan Inc. is the major creditor. Southeast Asia's problems have been widely
documented, with much of the region's growth based on hard currency financing
which has become exorbitantly expensive. Despite the IMF "bail out" of Korea,
Indonesia and Thailand, the austerity programmes, recessions and necessary
reforms in these economies have barely begun and the political willingness to
achieve this not yet demonstrated.
Given a projected slowdown in global growth, the U.S. Treasury market is now
predicting the Federal Reserve Board will ease rates. If mid single digit
earnings growth can be maintained, and inflation remains quiescent, the U.S.
market is arguably fairly valued with long bond yields at current levels. While
equity mutual fund inflows should slow, merger activity is expected to continue.
We remain slightly underweight in the U.S., finding better relative value in
Europe, particularly Ireland and the U.K.. We have moved from market to over
weight in the U.K. recently having found several strong business franchises with
management dedicated to maximizing shareholder value. Despite continued
underperformance, we still struggle to find value in Japan, other than in
selected sectors such as pharmaceuticals. Hence we expect to remain underweight
in the foreseeable future. We also remain cautious about Asia as a whole despite
the exceptionally steep sell off.
Additions to the Portfolio in the past six months included:
LION NATHAN (New Zealand) is the dominant name, along with Fosters, in the
Australasian brewing market. The stock is currently undervalued due to concern
over recent market share losses and management turnover.
The Portuguese cement company, CIMPOR, is benefiting from growth in its core
domestic market. With its strong balance sheet it is well positioned to exploit
opportunities in emerging markets such as Brazil.
GENERAL SIGNAL (USA) is a leading manufacturer of process and electronic control
equipment. New management (ex General Electric) has focused the company on cash
flow generation. Underperforming businesses are being sold. A stock buy back may
be forthcoming in the near term.
B F GOODRICH (USA) has transformed from a commodity manufacturer into an
aerospace and specialty chemical company. Asset sales have left BFG in a strong
financial position. Jet production is strong; OE sales, spares and overhaul
provide some protection from production slowdown.
NOBLE DRILLING (USA) is a leading operator of jackup rigs for the oil and gas
industry, with growing deep water focus and strong earnings growth prospects
over the next 3-4 years. Conservative management and a favorable industry
outlook provide further comfort in a highly cyclical industry.
TENNECO (USA), after five years of restructuring is a leading global
consolidator in automotive equipment and packaging. The company plans to exit
the unprofitable commodities businesses and use the proceeds to make further
specialty acquisitions, pay down debt and buy back stock.
UNITED MERIDIAN (USA) is a mid-cap gas weighted U.S. E&P company which has grown
production and cash flow by 30% per annum over the past four years. Despite
strong management and locked in production gains over the next 2-3 years, UM
trades at an unjustified discount to its peers.
Following the sale of Camas (building materials) ENGLISH CHINA CLAYS (U.K.) has
refocused on core areas: producing kaolin and calcium carbonates for
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
44
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
the paper industry, and the supply of specialty chemicals for water treatment.
ECC will benefit from the worldwide recovery in the paper industry.
ROYAL & SUN ALLIANCE (U.K.) is a global insurer writing most classes of
insurance, created in 1996 from the merger of Royal Insurance Holdings and Sun
Alliance. The company's U.S. operations are improving under better management
and proactive resolution of major U.S. pollution liabilities.
BANK OF IRELAND provides a wide range of banking and financial services. It has
offices throughout Ireland, the U.K. and Europe and has a subsidiary bank in New
Hampshire. BoI remains cheap, relative to its European and U.K. peers, while
offering an attractive yield.
BENCKISER focuses on household cleaning products with leading niche positions in
dish washing products, laundry products and home cleaners. Strong management
have steadily grown Benckiser's market shares, together with strong growth in
its niche categories.
FRANCE TELECOM is the last major European telco to be privatized. FT benefits
from a stable, transparent regulatory environment. FT is rebalancing its tariff
structure, the best defense against looming competition.
FUJISAWA, a medium sized Japanese pharmaceutical company, has moderate growth
prospects and a difficult domestic environment. Its value attractions are its
free cash generation and strong financials. We believe its latent value will be
realized when inevitable industry rationalization takes place.
POTASH CORP. OF SASKATCHEWAN (Canada) is the world's lowest cost, highest
reserved producer of potash and is one of the most efficient producers of
phosphate and nitrogen, the other key fertilizer applications. Potash is
renowned for its supply management and generates substantial free cash flow.
Rescued by the Swedish government during the Scandinavian banking crisis,
NORDBANKEN has arguably the best asset quality of the Swedish banks. The 1997
merger with Finland's largest bank, Merita, gives it a unique retail network in
the Nordic region.
NCR CORP (USA) has leading global market shares in its core automated teller
machine and retail scanning products, and should benefit from its independence
after several years of AT&T ownership.
PENINSULAR & ORIENTAL STEAM NAVIGATION (U.K.) includes the Peninsular & Oriental
and Princess brands. Management have recently taken radical action to improve
return on capital through joint ventures and are investing cash flow in the
higher yielding Peninsular & Oriental Cruise business.
PREMIER FARNELL (U.K.), the world's largest catalogue distributor of
electronic/industrial components, provides engineers needing guaranteed
availability and delivery, giving PF pricing power. Price weakness followed the
acquisition of its large U.S. competitor. PF is well placed for global
expansion.
Stock sales during the second half of the year included:
MANNESMANN (Germany) was eliminated on strength.
VARTA (Germany) was sold as better value was found elsewhere.
OLIVETTI (Italy) was sold due to operating environment fears.
AMR (USA) was sold on strength after our price target had been reached.
TANDY (USA) was sold on strength after our price target had been reached.
SCOTTISH HYDRO-ELECTRIC (U.K.) was eliminated on strength.
BANQUE NATIONALE DE PARIS (France) successfully reached our target price.
GREENFIELD INDUSTRIES (USA) sold to takeover offer from Kennemetal. Greenpoint
Financial Corp (USA) successfully reached our price target.
GREENPOINT FINANCIAL CORP (USA) successfully reached our price target.
MCI COMMUNICATIONS CORP (USA) subject to successive takeover bids; we took
advantage of Worldcom's offer.
Frances Campion
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
Global Equity Portfolio
45
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
COMMON STOCKS (94.4%)
AUSTRALIA (1.3%)
205,100 CSR Ltd.......................................... $ 695
90,298 Coles Myer Ltd................................... 434
(a)186,800 Telstra Corp., Ltd. (Installment Receipts-Final
Installment: AUD 1.35/shr due 11/17/98)........ 394
---------
1,523
---------
CANADA (1.6%)
13,480 Potash Corp. of Saskatchewan, Inc................ 1,123
32,120 TELUS Corp....................................... 712
---------
1,835
---------
FRANCE (2.4%)
2,010 Bongrain......................................... 848
9,266 Elf Aquitaine.................................... 1,078
(a)8,200 France Telecom................................... 297
11,000 Scor............................................. 526
---------
2,749
---------
GERMANY (5.1%)
25,900 BASF AG.......................................... 924
32,920 Bayer AG......................................... 1,222
3,470 Karstadt AG...................................... 1,200
(a)2,364 Sinn AG.......................................... 482
14,100 VEBA AG.......................................... 960
800 Viag AG.......................................... 438
1,000 Volkswagen AG.................................... 559
---------
5,785
---------
HONG KONG (0.5%)
196,481 Jardine Strategic Holdings, Inc.................. 519
---------
IRELAND (5.7%)
703,737 Anglo Irish Bank Corp. plc....................... 1,372
69,200 Clondalkin Group plc............................. 559
340,503 Green Property plc............................... 1,938
467,394 Irish Life plc................................... 2,680
---------
6,549
---------
ITALY (3.7%)
164,800 Mediaset S.p.A................................... 810
781,813 Telecom Italia S.p.A. Di Risp (NCS).............. 3,447
---------
4,257
---------
JAPAN (7.6%)
66,000 Fuji Photo Film Ltd.............................. 2,529
60,000 Fujisawa Pharmaceutical Co., Ltd................. 524
21,000 Hitachi Ltd...................................... 150
81,000 Kao Corp......................................... 1,167
47,000 Matsushita Electric Industrial Co., Ltd.......... 688
222,000 NKK Corp......................................... 177
140,000 Nichido Fire & Marine Insurance Co., Ltd......... 730
9,000 Sony Corp........................................ 800
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
86,000 Sumitomo Rubber Industries....................... $ 363
13,000 TDK Corp......................................... 981
37,000 Toyo Seikan Kaisha Ltd........................... 527
---------
8,636
---------
NETHERLANDS (4.4%)
83,012 ABN Amro Holding N.V............................. 1,617
(a)12,800 Benckiser N.V., Class B.......................... 530
18,880 Hollandsche Beton Groep N.V...................... 351
35,324 ING Groep N.V.................................... 1,488
17,200 Philips Electronics N.V.......................... 1,031
---------
5,017
---------
NEW ZEALAND (0.7%)
362,100 Lion Nathan Ltd.................................. 811
---------
PORTUGAL (0.3%)
13,450 Cimpor SGPS...................................... 352
---------
SPAIN (3.0%)
93,700 Iberdrola........................................ 1,233
74,800 Telefonica de Espana............................. 2,136
---------
3,369
---------
SWEDEN (1.6%)
(a)201,800 Nordbanken AB.................................... 1,141
14,300 Skandia Forsakrings AB........................... 675
---------
1,816
---------
SWITZERLAND (4.3%)
300 ABB AG (Bearer).................................. 377
(a)800 Ascom Holdings AG (Bearer)....................... 1,030
370 Bobst AG (Bearer)................................ 545
2,500 Forbo Holding AG (Registered).................... 1,022
835 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 681
780 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered)................................... 1,065
189 Sulzer AG (Registered)........................... 120
---------
4,840
---------
UNITED KINGDOM (13.7%)
(a)228,888 Aggreko plc...................................... 587
79,900 Bank of Ireland.................................. 1,228
61,400 Bass plc......................................... 953
45,500 Burmah Castrol plc............................... 792
228,888 Christian Salvesen plc........................... 369
37,850 Danka Business Systems plc ADR................... 603
92,700 English China Clays plc.......................... 408
78,000 Imperial Tobacco Group plc....................... 491
105,028 John Mowlem & Co. plc............................ 154
241,400 Matthews (Bernard) plc........................... 389
94,600 Peninsular & Oriental Steam Navigation Co........ 1,077
(a,d)653,333 Pentos plc....................................... --
118,100 Premier Farnell plc.............................. 850
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
46
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
137,100 Racal Electronic plc............................. $ 601
138,491 Reckitt & Colman plc............................. 2,173
64,567 Rolls-Royce plc.................................. 249
139,300 Royal & Sun Alliance Insurance Group plc......... 1,403
81,453 Southern Electric plc............................ 677
91,077 Tate & Lyle plc.................................. 750
160,000 Unilever plc..................................... 1,370
113,800 WPP Group plc.................................... 507
---------
15,631
---------
UNITED STATES (38.5%)
16,200 AT&T Corp........................................ 992
29,600 Albertson's, Inc................................. 1,402
17,750 Aluminum Company of America...................... 1,249
(a)36,904 Ascent Entertainment Group, Inc.................. 383
25,000 B.F. Goodrich Co................................. 1,036
(a)47,400 BJ's Wholesale Club, Inc......................... 1,487
(a)26,300 Beazer Homes USA, Inc............................ 524
28,700 Borg-Warner Automotive, Inc...................... 1,493
12,307 Browning-Ferris Industries, Inc.................. 455
(a)129,300 Cadiz Land Co., Inc.............................. 1,108
98,100 Comsat Corp...................................... 2,379
(a)69,000 Data General Corp................................ 1,203
(a)109,000 Egghead, Inc..................................... 709
43,100 Enhance Financial Services Group, Inc............ 2,565
47,000 Finova Group, Inc................................ 2,335
(a)90,600 GenRad, Inc...................................... 2,735
11,700 General Signal Corp.............................. 494
13,800 Georgia Pacific Corp............................. 838
(a)13,800 Georgia Pacific Corp. (Timber Group)............. 313
(a)47,400 Homebase, Inc.................................... 373
68,000 Houghton Mifflin Co.............................. 2,610
22,500 IBP, Inc......................................... 471
(a)83,000 InteliData Technologies Corp..................... 153
20,900 Lukens, Inc...................................... 597
22,400 MBIA, Inc........................................ 1,497
24,600 Mellon Bank Corp................................. 1,491
(a)29,562 NCR Corp......................................... 822
(a)13,650 Noble Drilling Corp.............................. 418
53,200 Penncorp Financial Group, Inc.................... 1,899
3,250 Pennzoil Co...................................... 217
55,400 Pharmacia & Upjohn, Inc.......................... 2,029
67,500 Philip Morris Cos., Inc.......................... 3,059
700 Polaroid Corp.................................... 34
3,800 Prime Retail, Inc................................ 54
11,300 Tecumseh Products Co., Class A................... 551
17,780 Tenneco, Inc..................................... 702
38,100 Terra Nova (Bermuda) Holdings Ltd., Class A...... 1,000
(a)16,800 Toys "R" Us, Inc................................. 528
28,800 UST Corp......................................... 799
6,400 United Dominion Industries Ltd................... 162
(a)21,150 United Meridian Corp............................. 595
(a)135,400 WorldCorp, Inc................................... 152
---------
43,913
---------
TOTAL COMMON STOCKS (Cost $81,702)................................. 107,602
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
PREFERRED STOCK (1.1%)
GERMANY (1.1%)
3,000 Volkswagen AG (Cost $647)........................ $ 1,286
---------
TOTAL FOREIGN & U.S. SECURITIES (95.5%) (Cost $82,349)............. 108,888
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$3,642 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $3,643,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $3,717 (Cost $3,642).... 3,642
---------
FOREIGN CURRENCY (1.5%)
AUD 145 Australian Dollar................................ 94
GBP 13 British Pound.................................... 21
FRF 8,889 French Franc..................................... 1,477
DEM 1 German Mark...................................... --
JPY 9,534 Japanese Yen..................................... 73
NZD 20 New Zealand Dollar............................... 12
---------
TOTAL FOREIGN CURRENCY (Cost $1,682)............................... 1,677
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.2%) (Cost $87,673)................ 114,207
--------
OTHER ASSETS (0.3%)
Cash....................................... $ 1
Dividends Receivable....................... 241
Receivable for Portfolio Shares Sold....... 67
Foreign Withholding Tax Reclaim
Receivable............................... 53
Interest Receivable........................ 1
Other...................................... 6 369
----------
LIABILITIES (-0.5%)
Payable for Investments Purchased.......... (285)
Investment Advisory Fees Payable........... (190)
Net Unrealized Loss on Foreign Currency
Exchange Contracts....................... (44)
Administrative Fees Payable................ (14)
Custodian Fees Payable..................... (8)
Directors' Fees and Expenses Payable....... (5)
Distribution Fees Payable.................. (3)
Other Liabilities.......................... (43) (592)
---------- --------
NET ASSETS (100%)........................................ $113,984
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
47
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- -------------------------------------------------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................... $ 85,533
Undistributed Net Investment Income............... 125
Accumulated Net Realized Gain..................... 1,842
Unrealized Appreciation on Investments and Foreign
Currency Translations........................... 26,484
--------
NET ASSETS........................................ $113,984
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------
NET ASSETS........................................ $108,074
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 5,835,884 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $18.52
--------
--------
CLASS B:
- --------------------------------------------------
NET ASSETS........................................ $5,910
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 320,196 outstanding $0.001 par
value shares (authorized 500,000,000 shares).... $18.46
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------ -------- ----------- ------------ -------- ------------
U.S.$ 24 $ 24 1/5/98 ITL 42,229 $ 24 $ --
GBP 2,150 3,525 2/16/98 U.S.$ 3,495 3,495 (30)
NLG 6,000 2,969 2/25/98 U.S.$ 2,918 2,918 (51)
FRF 18,500 3,086 3/12/98 U.S.$ 3,090 3,090 4
GBP 1,300 2,104 12/16/98 U.S.$ 2,137 2,137 33
-------- -------- ------
$ 11,708 $ 11,664 $ (44)
--------
-------- -------- ------
-------- ------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value - see note A-1 to financial statements.
ADR -- American Depositary Receipt
ITL -- Italian Lira
NCS -- Non Convertible Shares
NLG -- Netherland Guilder
- ------------------------------------------------------------
SUMMARY OF FOREIGN AND U.S. SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -------------------------------------------------------------------
Capital Equipment...................... $ 24,982 21.9%
Consumer Goods......................... 1,286 1.1
Consumer Products...................... 16,502 14.5
Energy................................. 3,271 2.9
Finance................................ 26,760 23.5
Materials.............................. 10,119 8.9
Multi-Industry......................... 5,651 4.9
Services............................... 19,714 17.3
Technology............................. 603 0.5
--------- ---
$ 108,888 95.5%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Equity Portfolio
48
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GOLD PORTFOLIO
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GOLD
PORTFOLIO-- PHILADELPHIA GOLD
CLASS A AND SILVER INDEX(1)
<S> <C> <C>
2/01/94* $500,000 $500,000
12/31/94 228,775 198,075
12/31/95 258,996 220,141
12/31/96 605,740 430,243
12/31/97 268,706 276,130
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO THE PHILADELPHIA
GOLD AND SILVER INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------- ---------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. -55.64% -14.67%
PORTFOLIO -- CLASS B............. -55.17 -28.79
INDEX -- CLASS A................. -35.82 -12.84
INDEX -- CLASS B................. -35.82 -22.78
</TABLE>
1. The Philadelphia Gold and Silver Index is an unmanaged index comprised of the
leading companies involved in the mining of gold and silver.
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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 Gold Portfolio seeks to provide long-term capital appreciation by investing
primarily in the equity securities of foreign and domestic issuers engaged in
gold-related activities.
Companies involved in the exploration, mining, fabrication, processing,
distribution or trading of gold (or, to a lesser degree, silver, platinum, or
other precious metals or minerals) qualify as Portfolio candidates. Mining
shares differ fundamentally from investments in gold bullion. Because companies
can produce positive cash flows and increase gold reserves in the ground through
exploration and discovery, mining company equity shares provide investors with a
more dynamic investment vehicle. Portfolio securities are selected on the basis
of relative valuation, liquidity, and risk diversification.
For the year ended December 31, 1997, the Portfolio had a total return of
- -55.64% for the Class A shares and -55.17% for the Class B shares as compared to
- -35.82% for the Philadelphia Gold and Silver Index (the "Index"). From inception
on February 1, 1994 through December 31, 1997, the average annual total return
of Class A was -14.67% compared to -12.84% for the Index. From inception on
January 2, 1996 through December 31, 1997, the average annual total return of
Class B was -28.79% compared to -22.78% for the Index.
The price of gold declined 13.6% in the fourth quarter primarily due to
continued fears of central bank selling, high levels of speculative short
positions held by funds, and hedging by producers who are trying to protect
marginal cash flows. The XAU, which is representative of a narrow large cap
group, was down 32.0%, the JSE index was down 21.8%, and the Aussie index was
down 21.6%. The damage has been universal and severe.
The basic premise we have been using is that gold is part of a portfolio to
provide risk diversification and some negative correlation in an asset class
which is out of favor, but still has solid long-term fundamentals. Gold is
acting as one would expect, negatively correlated to U.S. financial stocks. The
challenge to the industry right now is the belief that gold will be permanently
demonitized, an argument we are not willing to accept in the current state of
generally high global financial risks.
Nonetheless, by year end, the Portfolio moved into cash in the face of
widespread shareholder redemptions. At this writing, substantially all of the
shareholders have redeemed and we have begun the process of winding down the
Portfolio.
Peter F. Palmedo
PORTFOLIO MANAGER
Michael F. Klein
PRESIDENT
January 1998
- --------------------------------------------------------------------------------
Gold Portfolio
49
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -------------------------------------------------------------
ASSETS
Receivable for Investments Sold........ $ 4,851
Receivable for Portfolio Shares Sold... 1
Foreign Withholding Tax Reclaim
Receivable........................... 1
Dividends Receivable................... 1
Other.................................. 1 $ 4,855
--------
LIABILITIES
Bank Overdraft Payable................. (2,623)
Payable for Portfolio Shares
Redeemed............................. (1,046)
Sub-Advisory Fees Payable.............. (11)
Custodian Fees Payable................. (4)
Administrative Fees Payable............ (2)
Distribution Fees Payable.............. (2)
Directors' Fees and Expenses Payable... (2)
Other Liabilities...................... (39) (3,729)
-------- ---------
NET ASSETS....................................... $ 1,126
---------
---------
NET ASSETS CONSIST OF:
Paid in Capital........................ $ 27,618
Distributions in Excess of Net
Investment Income.................... (26)
Accumulated Net Realized Loss.......... (26,443)
Unrealized Depreciation on Foreign
Currency Translations................ (23)
---------
NET ASSETS............................. $ 1,126
---------
---------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $ 436
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 106,584 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $4.10
---------
---------
CLASS B:
- --------------------------------------------------------------
NET ASSETS.................................................... $ 690
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 166,717 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $4.14
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Gold Portfolio
50
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australia 2.7 %
Belgium 0.4 %
Canada 2.5 %
Denmark 2.1 %
Finland 0.5 %
France 11.5 %
Germany 7.3 %
Hong Kong 2.3 %
Italy 3.8 %
Japan 16.2 %
Netherlands 6.2 %
New Zealand 0.8 %
Portugal 0.5 %
Spain 2.1 %
Singapore 0.4 %
Sweden 3.9 %
Switzerland 4.7 %
United Kingdom 26.1 %
Other 6.0 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY MSCI EAFE
PORTFOLIO--CLASS A INDEX(1)
<S> <C> <C>
8/04/89* $500,000 $500,000
10/31/90 505,380 417,750
10/31/91 541,635 446,800
10/31/92 516,940 387,750
12/31/92 524,830 393,450
12/31/93 769,000 521,500
12/31/94 864,150 562,100
12/31/95 965,860 625,111
12/31/96 1,155,555 662,930
12/31/97 1,316,293 674,730
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
----------- --------------- ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 13.91% 20.19% 12.19%
PORTFOLIO -- CLASS
B..................... 13.57 N/A 16.07
INDEX -- CLASS A...... 1.78 11.39 3.84
INDEX -- CLASS B...... 1.78 N/A 3.87
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had a total return of 13.91%
for the Class A shares and 13.57% for the Class B shares as compared to a total
return of 1.78% for the Morgan Stanley Capital International (MSCI) EAFE Index
(the "Index"). For the five-year period ended December 31, 1997, the average
annual total return of Class A was 20.19% compared to 11.39% for the Index. From
inception on August 4, 1989 to December 31, 1997, the average annual total
return of Class A was 12.19% compared to 3.84% for the Index. From inception on
January 2, 1996 to December 31, 1997, the average annual total return of Class B
was 16.07% compared to 3.87% for the Index.
For the three month period ended December 31, 1997, the Portfolio had a total
return of -4.84% for the Class A shares and -4.91% for the Class B shares as
compared to -7.83% for the Index. The Portfolio's meaningful outperformance of
its benchmark in the final quarter of 1997 was driven by the underweight
position in Japan, the overweight position in Spain and superior returns from
Germany, Japan, Italy and Spain. Poor French returns was the most notable
negative factor for the quarter, while currency was broadly neutral.
Though some outperformance of the benchmark was achieved in the final quarter,
it didn't feel good with stock selection actually lagging local market returns
in aggregate, good relative returns only being seen in Japan and the United
Kingdom. Continental European stock returns were notably weak with the
underweight position in the financial sectors proving a particular handicap.
Returns for the year were substantially above that of the Index with both market
and stock returns making positive contributions and moderate currency hedging
more than offsetting the moderate negative return from the Portfolio's natural
currency position. However, as for the final quarter, the Portfolio over the
year suffered from its underweight positions in bank and insurance stocks which
accounted for sub-market returns for the year
- --------------------------------------------------------------------------------
International Equity Portfolio
51
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
in Switzerland, Spain and Germany. Disappointing relative returns in the United
Kingdom were also attributable to failed investments in busted growth stocks of
middle capitalization. One final regret for 1997 is our small exposure to
domestic Japanese issues which gradually got smaller and our poor timing in
switching some money out of Japanese exporters into mid cap pharmaceuticals in
December.
Turnover for the fourth quarter was moderate at 7.60% with profits being taken
in European bank stocks like BNP and the problematic holding in Redland being
solved by a surprise takeover bid. Coles Myer was sold on strength in Australia
while new positions were established in the Canadian special situations Potash
and Renaissance Energy. The quarter saw the establishment of new initial
positions in Asian stocks while in Japan blue chip exporters were sold in part
in favor of cash rich domestic pharmaceutical companies. Turnover for the year
at 33% was above the Portfolio's long term average reflecting the huge relative
return differentials observed in different markets over the year.
Looking forward to 1998 there are two clear concentrations of value in
international stock markets, South East Asia and certain domestic sectors in
Japan. Recent visits to South East Asia have left us convinced that the
Singapore banking sector is the only area where risk and reward favors the
investor and accordingly we are building a position in Development Bank of
Singapore despite having to pay a moderate foreign premium, which we find
acceptable in a bank with tier one capital of 18.5%. In Hong Kong we find high
corporate quality, good management and relatively strong balance sheets but the
overwhelming dominance of the stock market and the bank loan books by property
leaves us gingerly picking up well capitalized property investment companies at
price levels below those discounting Armageddon. The factor precluding a more
virile buying stance on Hong Kong is our suspicion that China's economy will
confront structural challenges in the quarters ahead and our belief that Hong
Kong's authorities will do anything necessary to avoid a breaking of the
currency peg to the U.S. dollar.
The Japanese stock market can be broadly split into three sectors: the heavily
owned and strongly performing export sector, the quality end of the domestic
economy which embraces everything from the non life insurance companies to the
better managed retailers, the pharmaceutical companies and the national
telephone, tobacco and railway companies. The third sector comprises the low
quality components of the domestic economy which includes the heavy cyclicals,
the banks, the construction sector and anything with too much debt. It is
important that most of the value resides in the third sector where,
unsurprisingly, lies most of the risk. So far we have identified nothing where
potential reward outweighs risk because contact with these companies reveals a
remarkable reluctance to cut capital expenditure back to prudent levels. We have
lost substantial amounts on our half holdings in Daicel Chemical and Nippon
Kokan but management at both companies remain unrepentant as do the management
of similar companies where we are not invested. Until our quarterly visits to
Japan reveal a change of attitude, we will focus our buying on higher quality
domestic sectors including cash rich pharmaceutical companies, financially sound
housing stocks and non life insurance stocks. We are not buyers of exporters as
their current cash flow multiples reflect their buoyant operating conditions and
their strong management. So far our switch out of exporters into drug stocks has
not been profitable but we will persevere.
In Europe we believe takeover activity has taken bank and insurance valuations
beyond fundamental value other than in Scandinavia and the U.K. where valuations
are at least full. Meanwhile, restructuring stocks are largely running ahead of
reality, particularly in Germany, and valuations for industrial companies with a
high degree of cyclicality are less than compelling outside the areas of highest
capital intensity like steel and paper. In this environment we favor defensive
sectors such as telecom companies, chemicals with a high pharmaceutical exposure
and reasonably valued household product companies with high cash flow
generation. Our significant overweight in this area is driven far more by a
preference for quality than outstanding valuations. This preference reflects our
lingering concerns as to the prospects for the world economy in 1998.
Dominic Caldecott
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
52
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
COMMON STOCKS (92.4)
AUSTRALIA (2.7%)
1,418,400 Brambles Industries Ltd.......................... $ 28,136
5,991,700 CSR Ltd.......................................... 20,297
14,299,100 Fosters Brewing Group Ltd........................ 27,200
486,000 WMC Ltd.......................................... 1,694
-----------
77,327
-----------
BELGIUM (0.4%)
243,350 G.I.B. Holdings Ltd.............................. 11,822
2,156 G.I.B. Holdings Ltd. VVPR (New).................. 102
-----------
11,924
-----------
CANADA (2.5%)
214,580 Potash Corp. of Saskatchewan, Inc................ 17,871
(a)659,700 Renaissance Energy Ltd........................... 13,614
1,750,650 TELUS Corp....................................... 38,823
-----------
70,308
-----------
DENMARK (2.1%)
161,600 Den Danske Bank A/S.............................. 21,533
98,000 Novo-Nordisk A/S, Class B........................ 14,017
309,308 Unidanmark A/S, Class A (Registered)............. 22,706
-----------
58,256
-----------
FINLAND (0.5%)
350,000 Huhtamaki Oyj, Series I.......................... 14,447
168,467 Merita Ltd., Class A............................. 921
-----------
15,368
-----------
FRANCE (11.5)
389,600 Alcatel Alsthom.................................. 49,521
16,110 Bongrain......................................... 6,799
164,682 Cie de Saint Gobain.............................. 23,395
419,300 Elf Aquitaine.................................... 48,768
(a)809,100 France Telecom................................... 29,347
270,300 Groupe Danone.................................... 48,280
347,600 Lafarge.......................................... 22,808
116,800 PSA Peugeot Citroen.............................. 14,730
68,000 Pernod Ricard.................................... 4,000
410,654 Schneider........................................ 22,298
264,750 Scor............................................. 12,660
255,000 Total, Class B................................... 27,752
904,198 Usinor Sacilor................................... 13,056
-----------
323,414
-----------
GERMANY (5.7%)
673,100 BASF AG.......................................... 24,021
1,024,500 Bayer AG......................................... 38,014
198,450 Commerzbank AG................................... 7,722
389,300 Hoechst AG....................................... 13,482
37,750 Karstadt AG...................................... 13,052
(a)24,900 Varta AG......................................... 3,467
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
364,000 VEBA AG.......................................... $ 24,787
67,110 Viag AG.......................................... 36,746
-----------
161,291
-----------
HONG KONG (2.3%)
237,000 Amoy Properties Ltd.............................. 208
7,763,855 Hong Kong Land Holdings Ltd...................... 14,907
3,849,000 Hysan Development Co., Ltd....................... 7,674
16,090,537 Jardine Strategic Holdings, Inc.................. 42,479
-----------
65,268
-----------
ITALY (3.8%)
5,971,300 Mediaset S.p.A................................... 29,333
17,948,487 Telecom Italia S.p.A. (RNC)...................... 79,140
-----------
108,473
-----------
JAPAN (16.2%)
1,120,000 Aisin Seiki Co., Ltd............................. 11,588
635,600 Aoyama Trading Co., Ltd.......................... 11,350
608,000 Canon, Inc....................................... 14,166
348,000 Chudenko Corp.................................... 7,601
1,640,000 Daibiru Corp..................................... 12,004
2,952,000 Daicel Chemical Industries Ltd................... 3,846
687,000 Eisai Co., Ltd................................... 10,478
2,484,000 Fuji Photo Film Ltd.............................. 95,191
487,000 Fujisawa Pharmaceutical Co., Ltd................. 4,255
1,511,000 Hitachi Ltd...................................... 10,770
4,640 Japan Tobacco, Inc............................... 32,931
3,142,000 Kao Corp......................................... 45,273
1,461,000 Matsushita Electric Industrial Co., Ltd.......... 21,387
909,000 NEC Corp......................................... 9,684
7,750,000 NKK Corp......................................... 6,177
3,626,000 Nichido Fire & Marine Insurance Co., Ltd......... 18,898
512,000 Ono Pharmaceutical Co., Ltd...................... 9,928
232,000 Ryosan Co........................................ 3,254
2,018,000 Shionogi & Co., Ltd.............................. 9,249
167,000 Sony Corp........................................ 14,847
4,224,000 Sumitomo Marine & Fire Insurance Co.............. 22,338
1,303,000 Sumitomo Rubber Industries....................... 5,503
165,000 TDK Corp......................................... 12,444
2,306,000 Toyo Seikan Kaisha Ltd........................... 32,873
1,470,000 Yamanouchi Pharmaceutical Co..................... 31,546
-----------
457,581
-----------
NETHERLANDS (6.2%)
726,800 ABN Amro Holding N.V............................. 14,159
209,000 Akzo Nobel N.V................................... 36,035
844,360 Hollandsche Beton Groep N.V...................... 15,699
823,783 ING Groep N.V.................................... 34,696
271,100 Koninklijke Bijenkorf Beheer N.V................. 16,980
642,340 Koninklijke KNP BT N.V........................... 14,794
724,400 Philips Electronics N.V.......................... 43,443
-----------
175,806
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
53
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
<C> <S> <C>
NEW ZEALAND (0.8%)
2,323,579 Fisher & Paykel Industries Ltd................... $ 7,421
6,322,500 Lion Nathan Ltd.................................. 14,171
(a)392,500 Smith City Group Ltd............................. --
-----------
21,592
-----------
PORTUGAL (0.5%)
501,650 Cimpor SGPS...................................... 13,148
-----------
SINGAPORE (0.4%)
1,220,000 Development Bank of Singapore Ltd. (Foreign)..... 10,448
-----------
SPAIN (2.1%)
2,569,600 Iberdrola........................................ 33,817
228,400 Repsol........................................... 9,745
559,300 Telefonica de Espana............................. 15,970
-----------
59,532
-----------
SWEDEN (3.9%)
26,170 Electrolux AB, Series B.......................... 1,816
(a)44,935 Granges AB....................................... 705
(a)3,259,900 Nordbanken Holding AB............................ 18,435
690,400 Pharmacia & Upjohn, Inc., ADR.................... 25,390
376,100 S.K.F. AB, Class B............................... 8,005
229,600 Skandia Forsakrings AB........................... 10,830
1,017,400 Sparbanken Sverige AB, Class A................... 23,129
970,100 Svenska Cellulosa AB, Class B.................... 21,809
-----------
110,119
-----------
SWITZERLAND (4.7%)
17,840 ABB AG........................................... 22,415
23,040 Forbo Holding AG (Registered).................... 9,418
20,981 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 17,124
38,400 Nestle (Registered).............................. 57,554
4,677 Novartis AG (Registered)......................... 7,590
13,814 Schindler Holding AG (Participating
Certificates).................................. 14,396
5,670 Sulzer AG (Registered)........................... 3,595
-----------
132,092
-----------
UNITED KINGDOM (26.1%)
(a)6,355,200 Aggreko plc...................................... 16,292
573,700 Associated British Foods plc..................... 4,997
3,491,798 B.A.T. Industries plc............................ 31,789
4,916,719 BG plc........................................... 22,138
2,729,867 Bank of Scotland................................. 25,122
2,434,300 British Telecommunications plc................... 19,141
5,200,800 Bunzl plc........................................ 20,212
2,490,450 Burmah Castrol plc............................... 43,381
6,355,200 Christian Salvesen plc........................... 10,235
2,212,500 Commercial Union plc............................. 30,868
1,240,900 Danka Business Systems plc....................... 4,833
4,950,000 Diageo plc....................................... 45,512
3,693,028 English China Clays plc.......................... 16,264
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
2,910,000 Great Universal Stores plc....................... $ 36,678
2,551,400 Imperial Tobacco Group plc....................... 16,058
5,082,251 John Mowlem & Co. plc............................ 7,433
2,783,500 Kwik Save Group plc.............................. 13,402
2,370,068 National Westminster Bank plc.................... 39,415
2,903,520 Peninsular & Oriental Steam Navigation Co........ 33,042
2,027,800 Premier Farnell plc.............................. 14,595
3,509,500 Racal Electronic plc............................. 15,398
4,238,002 Reckitt & Colman plc............................. 66,509
3,603,368 Rolls-Royce plc.................................. 13,915
3,579,757 Royal & Sun Alliance Insurance Group plc......... 36,061
1,005,100 Sedgwick Group plc............................... 2,345
2,041,150 Southern Electric plc............................ 16,972
2,057,102 Tate & Lyle plc.................................. 16,936
6,610,300 Unilever plc..................................... 56,595
13,151,000 WPP Group plc.................................... 58,566
577,333 Williams plc..................................... 3,207
-----------
737,911
-----------
TOTAL COMMON STOCKS (Cost $2,160,148)............................... 2,609,858
-----------
PREFERRED STOCK (1.6%)
GERMANY (1.6%)
106,950 Volkswagen AG (Cost $21,041)..................... 45,837
-----------
TOTAL FOREIGN SECURITIES (94.0%) (Cost $2,181,189).................. 2,655,695
-----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
SHORT-TERM INVESTMENT (4.3%)
REPURCHASE AGREEMENT (4.3%)
$ 122,073 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $122,113,
collateralized by U.S. Treasury Notes
6.00%-6.875%, due 8/15/99-5/15/06, valued at
$124,693 (Cost $122,073)....................... 122,073
-----------
FOREIGN CURRENCY (0.4%)
GBP 8 British Pound.................................... 13
FIM 61 Finnish Markka................................... 11
FRF 17 French Franc..................................... 3
DEM 20,243 German Mark...................................... 11,253
HKD 64 Hong Kong Dollar................................. 8
JPY 39,947 Japanese Yen..................................... 306
NLG 1 Netherlands Guilder.............................. --
NZD 454 New Zealand Dollar............................... 263
NOK 9 Norwegian Krone.................................. 1
ESP 230 Spanish Peseta................................... 2
SEK 1,064 Swedish Krona.................................... 134
-----------
TOTAL FOREIGN CURRENCY (Cost $12,051)............................... 11,994
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
54
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.7%) (Cost $2,315,313).......................... $2,789,762
----------
OTHER ASSETS (12.7%)
Securities at Value, Held as Collateral for Securities
Loaned............................................... $ 313,615
Receivable for Portfolio Shares Sold................... 26,729
Net Unrealized Gain on Foreign Currency Exchange
Contracts............................................ 11,049
Dividends Receivable................................... 5,909
Foreign Withholding Tax Reclaim Receivable............. 1,713
Receivable for Investments Sold........................ 240
Interest Receivable.................................... 20
Other.................................................. 128 359,403
----------
LIABILITIES (-11.4%)
Collateral on Securities Loaned........................ (313,615)
Investment Advisory Fees Payable....................... (5,663)
Payable for Investments Purchased...................... (1,984)
Payable for Portfolio Shares Redeemed.................. (559)
Administrative Fees Payable............................ (361)
Bank Overdraft......................................... (271)
Securities Lending Fees Payable........................ (200)
Custodian Fees Payable................................. (128)
Directors' Fees and Expenses Payable................... (107)
Distribution Fees Payable.............................. (2)
Other Liabilities...................................... (301) (323,191)
---------- ----------
NET ASSETS (100%).................................................... $2,825,974
----------
----------
NET ASSETS CONSIST OF:
Paid in Capital...................................................... $2,299,569
Distributions in Excess of Net Investment Income..................... (3,083)
Accumulated Net Realized Gain........................................ 44,116
Unrealized Appreciation on Investments and Foreign Currency
Translations....................................................... 485,372
----------
NET ASSETS........................................................... $2,825,974
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -----------------------------------------------------------------------
NET ASSETS............................................................. $2,822,900
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 164,531,600 outstanding $0.001 par value shares
(authorized 500,000,000 shares)...................................... $17.16
----------
----------
CLASS B:
- -----------------------------------------------------------------------
NET ASSETS............................................................. $3,074
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 179,438 outstanding $0.001 par value shares (authorized
500,000,000 shares).................................................. $17.13
----------
----------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, 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>
- ------------ --------- ----------- ------------ --------- ------------
DEM 29 $ 16 1/02/98 GBP 86 $ 141 $ 125
DEM 241 134 1/02/98 GBP 81 133 (1)
AUD 51,000 33,233 1/12/98 U.S.$39,913 39,913 6,680
FRF 970,000 162,703 6/19/98 U.S.$170,095 170,095 7,392
U.S.$113,300 113,300 6/19/98 FRF 645,000 108,189 (5,111)
GBP 68,500 111,023 11/09/98 U.S.$112,987 112,987 1,964
--------- --------- ------------
$ 420,409 $ 431,458 $ 11,049
---------
--------- --------- ------------
--------- ------------
</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
RNC -- Non Convertible Savings Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------------
Capital Equipment...................... $ 400,143 14.2%
Consumer Goods......................... 747,443 26.4
Energy................................. 231,230 8.2
Finance................................ 401,253 14.2
Materials.............................. 325,505 11.5
Multi-Industry......................... 143,968 5.1
Services............................... 406,153 14.4
----------- ---
$ 2,655,695 94.0%
----------- ---
----------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Equity Portfolio
55
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australia 2.0 %
Austria 0.5 %
Belgium 0.7 %
Denmark 1.3 %
Finland 3.2 %
France 7.9 %
Germany 8.4 %
Hong Kong 1.4 %
Italy 3.8 %
Japan 17.0 %
Malaysia 0.2 %
Netherlands 5.9 %
Norway 0.9 %
Singapore 1.0 %
Spain 3.2 %
Sweden 4.0 %
Switzerland 7.0 %
United Kingdom 17.6 %
Other 14.0 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INTERNATIONAL MAGNUM INTERNATIONAL MAGNUM MSCI EAFE
PORTFOLIO--CLASS A PORTFOLIO--CLASS B INDEX(1)
<S> <C> <C> <C>
3/15/96* $500,000 $100,000 $500,000
12/31/96 541,250 107,900 526,300
12/31/97 576,864 114,730 535,668
* Commencement of operations
** Minimum Investment--Class A
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different fees assessed to that class. The MSCI EAFE Index value at
December 31, 1997 assumes a minimum initial investment of $500,000; if a minimum
initial investment of $100,000 (the minimum investment for Class B shares) is
assumed the value at December 31, 1997 would be $107,134.
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 6.58% 8.28%
PORTFOLIO -- CLASS B............. 6.33 7.94
INDEX............................ 1.78 4.52
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had a total return of 6.58%
for the Class A shares and 6.33% for the Class B shares compared to 1.78% for
the Morgan Stanley Capital International (MSCI) EAFE Index (the "Index"). From
inception on March 15, 1996 to December 31, 1997 the average annual total return
of Class A was 8.28% and 7.94% for Class B compared to 4.52% for the Index.
The fourth quarter of 1997 saw most international markets registering losses in
U.S. dollar terms as the turmoil in Asia continued to rattle investors around
the globe. While the contagion continued to have its greatest impact on the
nations in the Pacific Rim, investors in the more distant markets such as the
U.S. and Europe began to consider the effects of cheap Asian exports, slower
global growth and lower Asian demand on corporate earnings.
The Asian currency crisis began mid-year with the devaluation of the Thai baht
on July 2, and quickly spread throughout the region. The countries that have
succumbed to the Asian crisis, including Thailand, Malaysia, the Philippines,
Indonesia and South Korea, share common traits: their companies have largely
financed themselves with readily available bank credit, and have used much of
this money in unproductive ways that have earned a less than economic return on
investment. Much of this debt was borrowed in U.S. dollars to take advantage of
lower U.S. interest rates, and, as these countries' currencies have devalued,
corporate debt obligations have ballooned, pushing many firms toward bankruptcy.
Because loans were often granted based on relationships and cronyism rather than
sound credit analysis, banks within these countries have also suffered, leading
to a banking crisis as well. Although the International Monetary Fund (IMF) has
stepped in to help shore up the financial system and stabilize the currencies in
the region, a lack of political will to implement the IMF's austere policies in
several countries has left the region vulnerable and sent investors fleeing, at
least until there are signs of real progress.
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
56
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
Virtually no country in the region has escaped the debacle. Although the Hong
Kong dollar's peg to the U.S. dollar has stubbornly held to-date, despite
speculators' attacks, it has come at a high cost to the Hong Kong economy. In
order to defend its currency, the Hong Kong Monetary Authority was forced in
October to raise interest rates to painfully high levels, thereby putting
pressure on the interest sensitive stocks (e.g., real estate and banks) that
comprise the bulk of the Hong Kong market. As a result, the Hong Kong market
fell nearly 29% for the quarter. Even markets with relatively healthy
fundamentals were not spared; for the quarter, the supposed "safe haven"
Singapore market fell 20.6% in U.S. dollar terms (-10.0% local currency) while
Australia declined 12.9% (-3.2% local).
The Japanese market also experienced a difficult quarter as the MSCI Japan index
fell 19.8% in U.S. dollar terms and 13.6% in local currency terms. December was
the Japanese market's sixth consecutive month in the red. Business, consumer and
investor confidence has plummeted, contributing to the market's downward spiral.
Sentiment worsened as a string of high-profile bankruptcies in the financial
sector including Sanyo Securities, Hokkaido-Takushoku Bank and Yamaichi
Securities, one of Japan's "big four" brokerage houses, caught the market and
the Japanese government by surprise. The bankruptcies were caused in part by a
credit crunch ahead of stricter capital requirements for Japanese banks
beginning in 1999 (delayed from 1998). Small and mid-size companies are being
especially hard hit by the bank's reticence to lend. The market was also clearly
disappointed by the Japanese government's inaction; the government thus far has
failed to announce a meaningful plan to shore up the financial sector or pass a
fiscal stimulus package able to jump start the economy. And if domestic problems
were not enough, the uncertainty in Asia and in particular in Korea, one of
Japan's major competitors, helped propel Japan's equity markets by year end to
lows set in 1995.
Relatively speaking, the brightest spot for the quarter was Europe, which
registered a mere 0.1% gain in U.S. dollars and 0.7% in local currencies for the
quarter. Performance throughout the region was mixed, with Switzerland the
strongest performer (+8.2% U.S. dollars, +8.7% local). The Swiss market
benefited from the $25 billion merger of UBS and Swiss Bank Corp., as well as
from its heavy weighting in defensive pharmaceutical stocks. Financial stocks
throughout Europe have performed well during the past several months as interest
rates have fallen and restructuring has just begun within the industry. In
addition, a "flight to quality" prompted by the Asian crisis saw investors
moving toward the more liquid markets and currencies of Germany, Switzerland and
France. Exporters and other companies with exposure to Asia also suffered during
the quarter with capital goods, electronics, autos, metals and paper all
noticeably weak. Among the weakest European markets was Finland, which suffered
as Nokia, the cellular telephone manufacturer which comprises a third of the
Finnish index, fell over 10% during December alone. On the positive side,
restructuring and merger activity continues at a robust pace in Europe, with six
mergers/acquisitions worth approximately $87 billion announced on a single day
in October. Industry consolidation should continue as EMU is forcing companies
to reevaluate their competitive positions and seek partners across borders.
Against this backdrop, the Portfolio performed in line with the benchmark MSCI
EAFE Index over the fourth quarter. Near the start of the quarter, we further
reduced our exposure to both Asia and Japan, preferring to increase cash levels
given our bearish outlook. Our regional allocation, in which we were underweight
in Japan and Asia and neutral in Europe, contributed to performance, while stock
selection particularly in Europe provided an offset. Specifically, our
underweight in European financials and our exposure to smaller capitalization
stocks in Germany and Switzerland were negatives for the Portfolio. Small caps
suffered during the fourth quarter as investors sought safety in the liquidity
of large cap names. Certain export-oriented companies, like SGS Thompson
Microelectronics (34%/ for the quarter) and Volkswagen (-19%/ for the quarter)
and Philips Electronics (-29%/ for the quarter) detracted from performance. Our
Hong Kong property stocks were hurt as interest rates there rose. On the
positive side, stock selection in the U.K. and in Australia were strong with
some of the British consumer products stocks including Tate & Lyle and Bass
contributing strongly to performance.
Looking ahead, we expect the beginning of 1998 to continue to be volatile,
particularly as the Asian crisis plays itself out. The financial sector in both
Asia and Japan are both in fragile shape, and the world will be
- --------------------------------------------------------------------------------
International Magnum Portfolio
57
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
watching carefully to see how these difficulties are resolved. The wildcard in
Asia will be whether or not China and in turn Hong Kong allow their currencies
to devalue in light of the competitive devaluations sweeping the region.
Although we do not believe such a devaluation is likely near term, the
possibility nonetheless makes us cautious about the outlook for the Hong Kong
market and the region overall, as another round of devaluations would likely
ensue. We currently are underweight in Asia relative to the benchmark EAFE
Index, with the majority of our Asian holdings in Australia. In Japan, we
believe that the government will come under increasing pressure to implement
policies to stimulate the domestic economy and reform the banking sector. Thus
far, however, the government's anti-deficit stance has precluded any government
spending package or meaningful tax cut, and no approach has been announced to
deal with the weakest banks or the huge amount of bad debt on bank balance
sheets. Therefore, despite valuations that have become increasingly attractive,
we will remain wary and underweight with regard to the Japanese market until we
begin to see signs of a change. Because of our bearishness regarding these two
markets, we have been holding a higher-than-average amount of cash -- something
we view as a temporary, defensive measure.
Of the developed international regions, Europe offers the most investment
potential for the coming year. As a result, Europe currently represents our
largest weighting, with nearly 70% of the Portfolio's net assets invested there.
Restructuring, consolidation and deregulation should continue as EMU approaches,
with companies jockeying for better strategic position in the new pan-European
world. Additionally, with the introduction of the new euro currency scheduled
for 1999, interest rates will continue to converge with rates falling in the
peripheral nations and rising in the core countries. Although we expect growth
to slow as exports of European luxury and capital goods moderate due to lower
Asian demand, overall the environment is benign for European equities. In
particular, we are finding new investment opportunities in the U.K. in companies
offering the attractive combination of strong business franchises with low
capital requirements and managements focused on shareholder value. Overall, we
will continue to monitor conditions around the world, seeking the best
investment opportunities available. We strive to remain agile regarding stock
selection, and will put cash to work as soon as we find suitable opportunities
to do so.
Francine J. Bovich
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
58
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
COMMON STOCKS (84.5%)
AUSTRALIA (2.0%)
83,200 Australia & New Zealand Banking Group Ltd........ $ 549
57,600 Commonwealth Bank Of Australia................... 660
32,630 Lend Lease Corp., Ltd............................ 638
46,030 National Australia Bank Ltd...................... 643
141,400 News Corp., Ltd.................................. 780
(a)227,200 Telstra Corp., Ltd. (Installment Receipts--Final
installment: AUD 1.35/Share due on 11/17/98)... 480
------------
3,750
------------
AUSTRIA (0.5%)
16,100 Boehler-Uddeholm AG.............................. 944
------------
BELGIUM (0.7%)
26,325 G.I.B. Holdings Ltd.............................. 1,279
------------
DENMARK (1.3%)
18,500 BG Bank A/S...................................... 1,245
16,800 Unidanmark A/S, Class A
(Registered)................................... 1,233
------------
2,478
------------
FINLAND (3.2%)
(a)26,900 Amer-Yhtymae Oyj, Class A........................ 516
20,200 Huhtamaki Oyj, Series 1.......................... 834
8,000 Kone Oyj, Class B................................ 969
176,300 Merita Ltd., Class A............................. 964
23,050 Metra Oyj, Class B............................... 541
159,100 Rautaruukki Oyj.................................. 1,284
64,900 Valmet Oyj....................................... 895
------------
6,003
------------
FRANCE (7.9%)
5,200 Alcatel Alsthom.................................. 661
1,600 Bongrain......................................... 675
12,821 Cie de Saint Gobain.............................. 1,821
17,700 Elf Aquitaine.................................... 2,059
(a)24,000 France Telecom................................... 871
8,930 Groupe Danone.................................... 1,595
22,600 Lafarge.......................................... 1,483
28,800 Legris Industries................................ 1,000
(a)14,400 SGS-Thomson Microelectronics N.V................. 891
7,900 Scor............................................. 378
18,800 Total, Class B................................... 2,046
88,300 Usinor Sacilor................................... 1,275
------------
14,755
------------
GERMANY (6.9%)
37,900 BASF AG.......................................... 1,352
31,650 Bayer AG......................................... 1,174
2,670 Buderus AG....................................... 1,198
58,100 Gerresheimer Glas AG............................. 814
61,200 Lufthansa AG..................................... 1,150
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
16,320 Metro AG......................................... $ 579
(a)2,170 Philipp Holzmann AG.............................. 560
5,632 Plettac AG....................................... 776
23,800 VEBA AG.......................................... 1,621
3,700 Viag AG.......................................... 2,026
3,000 Volkswagen AG.................................... 1,676
------------
12,926
------------
HONG KONG (1.4%)
110,000 Cheung Kong Holdings Ltd......................... 720
50,000 China Light & Power Co., Ltd..................... 277
55,000 Dao Heng Bank Group Ltd.......................... 137
98,000 Hong Kong Telecommunications
Ltd............................................ 202
16,900 HSBC Holdings plc................................ 417
61,000 Hutchison Whampoa Ltd............................ 382
84,000 Ng Fung Hong Ltd................................. 88
38,000 Shanghai Industrial Holdings Ltd................. 141
33,000 Sun Hung Kai Properties Ltd...................... 230
18,000 Swire Pacific Ltd., Class A...................... 99
------------
2,693
------------
ITALY (3.8%)
78,300 Editoriale L'Expresso S.p.A...................... 376
327,900 Magneti Marelli S.p.A............................ 561
89,000 Marzotto (Gaetano) & Figli S.p.A................. 1,112
162,300 Mediaset S.p.A................................... 797
415,200 Sogefi S.p.A..................................... 1,056
(a)730,611 Telecom Italia S.p.A. Di Risp (NCS).............. 3,221
------------
7,123
------------
JAPAN (17.0%)
126,000 Amada Co., Ltd................................... 468
78,000 Asahi Tec Corp................................... 124
45,000 Canon, Inc....................................... 1,048
33,000 Dai Nippon Printing Co., Ltd..................... 620
187,000 Daicel Chemical Industries Ltd................... 244
59,000 Daifuku Co., Ltd................................. 287
100,000 Daikin Industries Ltd............................ 377
10,020 Family Mart Co., Ltd............................. 359
40,000 Fuji Machine Manufacturing Co.................... 966
27,000 Fuji Photo Film Ltd.............................. 1,035
59,000 Fujitec Co., Ltd................................. 325
108,000 Fujitsu Ltd...................................... 1,159
153,000 Furukawa Electric Co............................. 656
22,000 Hitachi Credit Corp.............................. 363
149,000 Hitachi Ltd...................................... 1,062
60,000 Inabata & Co..................................... 188
130,000 Kaneka Corp...................................... 587
36,000 Kurita Water Industries.......................... 367
13,300 Kyocera Corp..................................... 603
59,000 Kyudenko Co., Ltd................................ 298
25,000 Lintec Corp...................................... 387
67,000 Matsushita Electric Industrial Co., Ltd.......... 981
190,000 Mitsubishi Chemical Corp......................... 272
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
59
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
57,000 Mitsubishi Estate Co., Ltd....................... $ 620
164,000 Mitsubishi Heavy Industries Ltd.................. 684
54,000 Mitsumi Electric Co., Ltd........................ 770
12,000 Murata Manufacturing Co., Ltd.................... 302
104,000 NEC Corp......................................... 1,108
47,000 Nifco, Inc....................................... 306
12,000 Nintendo Corp., Ltd.............................. 1,177
29,000 Nippon Pillar Packing............................ 156
127 Nippon Telegraph & Telephone
Corp........................................... 1,090
126,000 Nissan Motor Co.................................. 521
45,000 Nissha Printing Co., Ltd......................... 271
88,000 Ricoh Co., Ltd................................... 1,093
41,000 Rinnai Corp...................................... 619
18,000 Sangetsu Co., Ltd................................ 185
36,000 Sankyo Co., Ltd.................................. 814
74,000 Sanwa Shutter Corp............................... 372
54,000 Sekisui Chemical Co.............................. 274
43,000 Sekisui House Co., Ltd........................... 277
16,000 Shimamura Co., Ltd............................... 278
90,000 Shin-Etsu Polymer Co., Ltd....................... 297
15,700 Sony Corp........................................ 1,396
31,000 Sumitomo Marine & Fire Insurance
Co............................................. 164
61,000 Suzuki Motor Co., Ltd............................ 552
16,000 TDK Corp......................................... 1,207
19,000 Tokyo Electron Ltd............................... 609
256,000 Toshiba Corp..................................... 1,065
38,000 Toyota Motor Corp................................ 1,089
132,000 Tsubakimoto Chain Co............................. 475
34,000 Yamaha Corp...................................... 386
41,000 Yamanouchi Pharmaceutical Co..................... 880
------------
31,813
------------
MALAYSIA (0.2%)
6,000 Dialog Group Bhd................................. 10
151,000 Tenaga Nasional Bhd.............................. 322
------------
332
------------
NETHERLANDS (5.9%)
51,600 ABN Amro Holding N.V............................. 1,005
13,100 Akzo Nobel N.V................................... 2,259
(a)7,400 Benckiser N.V., Class B.......................... 306
30,000 Hollandsche Beton Groep N.V...................... 558
44,405 ING Groep N.V.................................... 1,870
19,000 KLM Royal Dutch Airlines N.V..................... 703
12,000 Koninklijke Bijenkorf Beheer N.V................. 752
66,800 Koninklijke KNP BT N.V........................... 1,539
21,000 Koninklijke Van Ommeren N.V...................... 704
23,500 Philips Electronics N.V.......................... 1,409
------------
11,105
------------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
NEW ZEALAND (0.0%)
(a)127,000 AMP NZ Office Trust.............................. $ 76
7,280 Fletcher Challenge Forest........................ 6
------------
82
------------
NORWAY (0.9%)
75,900 Saga Petroleum ASA, Class B...................... 1,151
14,400 Sparebanken NOR.................................. 513
------------
1,664
------------
SINGAPORE (1.0%)
(a)1,750 Creative Technology Ltd. (U.S. Dollar)........... 39
(a)12,500 Creative Technology Ltd.......................... 254
15,000 Development Bank of Singapore Ltd. (Foreign)..... 128
10,000 Electronic Resources Ltd......................... 10
(a)53,000 Natsteel Electronics Ltd......................... 68
62,040 Oversea-Chinese Banking Corp.
(Foreign)...................................... 362
42,000 Parkway Holdings Ltd............................. 95
20,000 Singapore Press Holdings Ltd. (Foreign).......... 251
283,000 Summit Holdings Ltd.............................. 60
18,000 Super Coffeemix Manufacturing Ltd................ 3
61,000 United Overseas Bank Ltd. (Foreign).............. 339
47,000 Venture Manufacturing Ltd........................ 131
(a)43,000 WBL Corp., Ltd................................... 40
------------
1,780
------------
SPAIN (3.2%)
48,600 Banco Bilbao Vizcaya (Registered)................ 1,573
125,800 Iberdrola........................................ 1,656
43,650 Telefonica de Espana............................. 1,246
138,900 Uralita.......................................... 1,586
------------
6,061
------------
SWEDEN (4.0%)
48,530 Esselte AB, Class B.............................. 984
(a)382,900 Nordbanken Holding AB............................ 2,165
32,800 Pharmacia & Upjohn, Inc.......................... 1,206
30,800 S.K.F. AB, Class B............................... 656
25,300 Sparbanken Sverige AB, Class A................... 575
48,400 Spectra-Physics AB, Class A...................... 918
30,600 Svenska Handelsbanken, Class A................... 1,058
------------
7,562
------------
SWITZERLAND (7.0%)
(a)790 Ascom Holdings AG (Bearer)....................... 1,017
710 Bobst AG (Bearer)................................ 1,045
4,270 Forbo Holding AG (Registered).................... 1,745
2,090 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 1,706
1,960 Nestle (Registered).............................. 2,938
258 Novartis AG (Registered)......................... 419
150 Schindler Holding AG (Participating
Certificates).................................. 156
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
60
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SWITZERLAND (CONT.)
<TABLE>
<C> <S> <C>
815 Schindler Holding AG (Registered)................ $ 876
820 Schweizerische Industrie-Gesellschaft Holdings AG
(Registered)................................... 1,120
1,313 Sulzer AG (Registered)........................... 832
5,670 Valora Holding AG (Registered)................... 1,196
------------
13,050
------------
UNITED KINGDOM (17.6%)
(a)206,744 Aggreko plc...................................... 530
8,700 Associated British Foods plc..................... 76
159,517 BG plc........................................... 718
100,100 Bank of Ireland.................................. 1,538
104,683 Bank of Scotland................................. 963
43,300 Bass plc......................................... 672
60,455 B.A.T. Industries plc............................ 550
139,500 Booker plc....................................... 734
162,100 British Telecommunications plc................... 1,275
(a)157,500 Bunzl plc........................................ 612
120,400 Burmah Castrol plc............................... 2,097
82,300 Charter plc...................................... 1,013
206,744 Christian Salvesen plc........................... 333
55,725 Commercial Union plc............................. 778
32,300 Danka Business Systems plc....................... 126
198,700 Diageo plc....................................... 1,827
(a)33,600 Glynwed International
plc............................................ 143
135,600 Great Universal Stores plc....................... 1,709
332,700 Imperial Tobacco Group plc....................... 2,094
275,761 John Mowlem & Co. plc............................ 403
183,200 Kwik Save Group plc.............................. 882
288,200 Medeva plc....................................... 767
112,500 Peninsular & Oriental Steam Navigation Co........ 1,280
98,100 Premier Farnell plc.............................. 706
503,100 Premier Oil plc.................................. 438
168,200 Racal Electronic plc............................. 738
139,296 Reckitt & Colman plc............................. 2,186
178,789 Royal & Sun Alliance Insurance Group
plc............................................ 1,801
286,100 Scapa Group plc.................................. 1,095
114,300 Tate & Lyle plc.................................. 941
144,800 Unilever plc..................................... 1,240
135,700 Westminster Health Care Holdings
plc............................................ 814
405,100 WPP Group plc.................................... 1,804
------------
32,883
------------
TOTAL COMMON STOCKS (Cost $156,263)............................. 158,283
------------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
PREFERRED STOCKS (1.5%)
GERMANY (1.5%)
3,000 Dyckerhoff AG.................................... $ 769
12,700 Hornbach Holding AG.............................. 875
2,130 Suedzucker AG.................................... 1,048
------------
TOTAL PREFERRED STOCKS (Cost $2,699)............................ 2,692
------------
</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).... 76
------------
TOTAL FOREIGN SECURITIES (86.0%) (Cost $159,037)................ 161,051
------------
SHORT-TERM INVESTMENT (13.2%)
REPURCHASE AGREEMENT (13.2%)
$ 24,699 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $24,707,
collateralized by U.S. Treasury Notes, 7.875%,
due 11/15/04, valued at $25,198 (Cost
$24,699)....................................... 24,699
------------
FOREIGN CURRENCY (0.3%)
GBP 274 British Pound.................................... 450
FRF 404 French Franc..................................... 67
JPY 16,613 Japanese Yen..................................... 127
------------
TOTAL FOREIGN CURRENCY (Cost $650).............................. 644
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.5%) (Cost $184,386)........................... 186,394
--------
OTHER ASSETS (1.8%)
Net Unrealized Gain on Foreign Currency Exchange
Contracts........................................... $ 1,607
Receivable for Investments Sold....................... 738
Dividends Receivable.................................. 528
Receivable for Portfolio Shares Sold.................. 400
Foreign Withholding Tax Reclaim Receivable............ 117
Interest Receivable................................... 4
Other Assets.......................................... 4 3,398
----------
LIABILITIES (-1.3%)
Payable for Investments Purchased..................... (2,029)
Investment Advisory Fees Payable...................... (308)
Custodian Fees Payable................................ (26)
Administrative Fees Payable........................... (24)
Distribution Fees Payable............................. (18)
Bank Overdraft Payable................................ (11)
Payable for Portfolio Shares Redeemed................. (7)
Directors' Fees and Expenses Payable.................. (4)
Other Liabilities..................................... (52) (2,479)
---------- --------
NET ASSETS (100%)................................................... $187,313
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
61
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
<S> <C>
Paid in Capital..................................................... $185,180
Undistributed Net Investment Income................................. 63
Accumulated Net Realized Loss....................................... (896)
Unrealized Appreciation on Investments and Foreign Currency
Translations...................................................... 2,966
--------
NET ASSETS.......................................................... $187,313
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------------
NET ASSETS.......................................................... $159,096
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 14,642,404 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................... $10.87
--------
--------
CLASS B:
- --------------------------------------------------------------------
NET ASSETS.......................................................... $28,217
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,601,986 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................... $10.84
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- ------- ---------- ------------ ------- ------------
U.S.$ 50 $ 50 1/02/98 FRF 298 $ 50 $ --
U.S.$ 208 208 1/02/98 DEM 372 207 (1)
JPY 16,613 127 1/05/98 U.S.$ 128 128 1
JPY 1,328,133 10,223 1/29/98 U.S.$ 10,957 10,957 734
JPY 859,360 6,621 2/05/98 U.S.$ 7,305 7,305 684
JPY 446,832 3,443 2/05/98 U.S.$ 3,653 3,653 210
SGD 2,510 1,483 3/05/98 U.S.$ 1,552 1,552 69
U.S.$ 1,562 1,562 3/05/98 SGD 2,510 1,483 (79)
U.S.$ 220 220 3/18/98 SGD 371 219 (1)
SGD 1,850 1,092 3/18/98 U.S.$ 1,082 1,082 (10)
------- ------- ------
$25,029 $26,636 $ 1,607
-------
------- ------- ------
------- ------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
AUD -- Australian Dollar
DEM -- German Mark
NCS -- Non Convertible Shares
SGD -- Singapore Dollar
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Capital Equipment...................... $43,230 23.0%
Consumer Goods......................... 32,143 17.2
Energy................................. 8,607 4.6
Finance................................ 25,876 13.9
Materials.............................. 19,766 10.5
Multi-Industry......................... 8,436 4.5
Services............................... 22,993 12.3
------- ---
$161,051 86.0%
------- ---
------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Magnum Portfolio
62
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australia 9.2 %
Denmark 1.7 %
Finland 5.7 %
France 6.3 %
Germany 8.8 %
Hong Kong 2.2 %
Ireland 3.6 %
Italy 2.0 %
Japan 8.1 %
Netherlands 8.7 %
New Zealand 1.2 %
Norway 1.3 %
Singapore 0.9 %
Spain 2.4 %
Sweden 2.5 %
Switzerland 8.5 %
United Kingdom 22.6 %
Other 4.3 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INTERNATIONAL MSCI EAFE MSCI EAFE
SMALL CAP PORTFOLIO INDEX(1) SMALL CAP INDEX(2)
<S> <C> <C> <C>
12/15/92* $500,000 $500,000 $ 500,000
12/31/92 504,500 498,985 500,000
12/31/93 718,245 661,450 665,450
12/31/94 756,343 712,900 742,952
12/31/95 776,008 792,816 727,944
12/31/96 906,533 840,781 726,925
12/31/97 901,547 855,747 547,811
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(3)
---------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
----------- --------------- ---------------
<S> <C> <C> <C>
PORTFOLIO............. -0.55% 12.76% 12.84%
MSCI EAFE INDEX....... 1.78 11.39 11.24
MSCI EAFE SMALL CAP
INDEX -24.64 1.83 1.83
</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. 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).
3. 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 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 year ended December 31, 1997, the Portfolio had a total return of -0.55%
as compared to a total return of 1.78% for the Morgan Stanley Capital
International (MSCI) EAFE Index and -24.64% for the Morgan Stanley Capital
International (MSCI) EAFE Small Cap Index. For the five-year period ended
December 31, 1997, the average annual total return for Class A was 12.76%
compared to 11.39% for the MSCI EAFE Index and 1.83% for the MSCI EAFE Small Cap
Index. From inception on December 15, 1992 through December 31, 1997 the average
annual total return of Class A was 12.84% compared to 11.24% for the MSCI EAFE
Index and 1.83% for the MSCI EAFE Small Cap Index.
The Portfolio fell 5.97% in the fourth quarter compared to -17.25% the newly
launched MSCI EAFE Small Cap Index in U.S. Dollar terms. Beginning with this
report, the Portfolio's performance will be compared to the MSCI EAFE Small Cap
Index as it more closely represents the investment characteristics of the
Portfolio. The Portfolio's outperformance reflected its very low weighting in
the tumbling Japanese and South East Asian markets and currencies together with
strong stock selection in Hong Kong, the U.K., Australia and the four
Scandinavian markets. This was despite small caps substantially lagging in the
year-end rally and some marked underperformance from small caps in all the major
Continental European markets. Japanese stock selection was broadly neutral for
the fourth quarter but reflected strong outperformance in the October sell off,
followed by marked underperformance in the latter weeks of the quarter. The
Portfolio's Australian Dollar and French Franc hedges went some way towards
mitigating the strength of the dollar. Returns for the full year were
substantially above that of the
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
63
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
EAFE Small Cap Index with both market and stock returns making very positive
contributions. The Portfolio's currency hedging also contributed positively.
Turnover for the fourth quarter was moderate at 7% with profits taken on a
number of the Portfolio's European capital goods stocks reflecting our concerns
over the likely impact of the turmoil in Asia, and a couple of Japanese
positions were sold following relative strength but disappointing meetings with
management. A new initial position was established in Rock Field in Japan which
stood out during a recent visit to Japan for its interesting market niche in
pre-prepared food, management's strength and attractive valuations. New
positions were also established in Moebel Walther in Germany and Quadramatic and
Capital Radio in the U.K., all three of which had been substantially oversold
despite each having solid franchises, management and cash flow characteristics.
Rock Field is a successful food retailer offering quality convenience food and
has been a leader in this growing market. Its brand is already a household name
and cash flow should improve with growing economies of scale, higher added value
products and better inventory controls. Rock Field is trading at low valuation
multiples relative to the Japanese food sector and to comparable companies
particularly given the company's superior profitability and growth prospects.
Moebel Walther was purchased following extreme price weakness after
disappointing interim results. Moebel Walther is one of Germany's leading
furniture retailers which is growing rapidly via new site openings in Germany
and Eastern Europe combined with acquisitions. Earnings should rebound sharply
next year as one-off costs relating to the recent Mutschler acquisition and the
refurbishment program of its flagship store at Grundau should not reoccur. The
shares were purchased on a Price Earnings of 9.4, Price Cash Flows of 4.4 times
and Price-forecasted cash flows 6.8 times.
Quadramatic is a U.K. specialist engineering manufacturer active in coin
handling equipment, specialist mouldings and high precision monitoring
instruments. The company focuses on high margin, technically demanding, niche
products in which it is a market leader. The business is highly cash generative
and enjoys good growth prospects. The stock has been hammered by the strength of
the British Pound (although Quadramatic only has translational, not
transactional, risk) and by a couple of teething manufacturing problems with new
products. At 9.8-times 1997 Price earnings and 8.2-times 1997 Price-cash flows,
the company is trading at a substantial discount to the U.K. engineering sector.
The 1997 P/FCF is an undemanding 9.2-times. The icing on the cake is the
attractive yield, 5.2% for 1997.
Capital Radio is the leading commercial radio station in the United Kingdom and
is well positioned to benefit from the continued growth of radio advertising in
the United Kingdom. Purchased on a 1997 price earning multiple of 14.4-times and
price cash multiple of 13.5-times the shares do not fully reflect the earnings
potential and cash flow dynamics of this company.
Sangetsu, a Japanese trader of interior materials, was sold following a meeting
with management. The decision to sell the stock was taken in light of a marked
deterioration in operating performance due to a decline in turnover and higher
operating costs, combined with severe price pressure due to overcapacity in the
industry and a shift in customer buying patterns. The changing nature of the
Japanese distribution system will reduce Sangetsu's pricing power long term.
Looking forward to 1998 we are concerned over the impact of the Asian crisis on
the global economy and Japan in particular, but remain optimistic on the outlook
for small cap valuations which have singularly failed to participate in the
large cap bull market of the last few years.
Having avoided chasing the boom and resultant bust of the Asian markets, some
value now appears to be emerging and we will be looking to follow up with a
number of company visits across the region in the weeks ahead. We remain
extremely cautious however on the extent of the fallout from contracting Hong
Kong property valuations and the clear strains on the Chinese economy. The
market appears to be largely overlooking the proposed reform of the grossly
inefficient and loss making state sector in China and the viability of this
strategy without a competitive export sector and continuing inward foreign
investment to create new employment. Any increase in the Hong Kong weighting
will be made with extreme caution.
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
64
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
In Japan, small cap valuations are fairly compelling following their dramatic
underperformance with many companies available for little more than the cash on
their balance sheets. In many instances, however, these companies will continue
to face declining demand, price deflation through overcapacity and have little
by way of franchise to differentiate themselves from the competition. Moreover,
an absence of merger and acquisition activity or improving attitudes to
shareholder value such as share buybacks will continue to hold back the shares.
The Japanese market has been reasonably efficient at paying up for quality and
growth leaving value investors a minefield of rubbish and risk. The Portfolio's
Japanese weighting is likely to rise but again with extreme caution. The
escalating credit crunch, with its deleterious impact on consumer sentiment
combined with political inaction are major causes for concern.
Attractive valuations are available in small cap Europe and the Portfolio is
likely to remain broadly overweight. We do not, however, underestimate the
potential impact of the Asian crisis on many export driven capital goods
companies and the tendency to be overweight in this sector in small caps. Too
many European companies with weak domestic demand saw Asia as their panacea and
have been building up their cost bases in the region. We have reduced the
Portfolio's positions in a number of names reflecting these concerns. Our focus
remains service-sector companies, particularly health where the Portfolio has
already enjoyed some strong performance, together with media where some very
strong franchises are available at attractive valuations.
There are some signs of a revival in domestic demand in both France and Germany,
despite depressingly high levels of unemployment. Politics however are unlikely
to take a backstage in 1998 with the French Socialist Government facing an
unemployment backlash and the Germans facing constitutional issues over EMU in
an election year. Meanwhile management attitudes to shareholders, while
improving, remain patchy. The depth of the U.K. small cap universe together with
solidly shareholder friendly management and some oversold franchise stocks leads
us to anticipate the U.K. weighting continuing to rise at the expense of
Continental Europe.
The defensive nature of small caps during the market sell-off in August and
again in October contradicts normal small cap behavior but reflects the
concentration of liquidity and thus performance in the large cap sector. The
valuation gap between small caps and large caps is at an unprecedented level and
strongly supports our optimism for international small caps. While we would be
concerned over the impact of a prolonged market sell-off, if the market is not
prepared to rerate some compelling small cap valuations, corporate activity is
likely to continue to intervene.
Margaret Naylor
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
International Small Cap Portfolio
65
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------------
COMMON STOCKS (90.4%)
AUSTRALIA (9.2%)
(a)783,000 Auspine Ltd...................................... $ 1,530
(a)1,057,866 Bains Harding Ltd................................ 155
466,160 BRL Hardy Ltd.................................... 1,434
2,560,636 Country Road Ltd................................. 3,470
1,476,631 Eltin Ltd........................................ 1,116
5,417,800 E.R.G. Ltd....................................... 4,553
347,000 Morgan & Banks Ltd............................... 2,272
7,298,696 Parbury Ltd...................................... 2,235
(a)537,000 Ramsay Health Care Ltd........................... 742
1,272,340 Skilled Engineering Ltd.......................... 1,641
(a)1,990,900 Solution 6 Holdings Ltd.......................... 1,128
699,748 W.D. & H.O. Wills Holdings Ltd................... 866
---------
21,142
---------
DENMARK (1.7%)
68,600 SYD-Sonderjylland Holdings....................... 3,905
---------
FINLAND (5.7%)
8,360 Aamulehti Yhtymae Oyj, Series II................. 279
64,000 KCI Konecranes International..................... 2,113
46,375 Kone Oyj, Class B................................ 5,615
151,300 Rauma Oyj........................................ 2,360
150,000 Rautaruukki Oyj.................................. 1,211
270,200 Tamro Oyj........................................ 1,482
---------
13,060
---------
FRANCE (6.3%)
38,569 Dauphin O.T.A.................................... 2,551
75,523 De Dietrich et Compagnie......................... 3,488
49,093 Europeene d'Extincteurs.......................... 3,304
102,500 Legris Industries................................ 3,559
(a)59,768 Sediver.......................................... 1,599
---------
14,501
---------
GERMANY (3.6%)
75,850 Gerresheimer Glas AG............................. 1,063
83,695 Marseille-Kliniken AG............................ 930
35,500 Moebel Walther AG................................ 975
(a)2,572 Philipp Holzmann AG.............................. 663
17,080 Plettac AG....................................... 2,355
(a)11,330 Sinn AG.......................................... 2,311
---------
8,297
---------
HONG KONG (2.2%)
1,685,000 Li & Fung Ltd.................................... 2,359
6,480,000 Vitasoy International Holdings Ltd............... 2,739
---------
5,098
---------
IRELAND (3.6%)
178,330 Clondalkin Group plc............................. 1,441
1,187,066 Green Property plc............................... 6,756
---------
8,197
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------------
ITALY (1.9%)
459,000 Sogefi S.p.A..................................... $ 1,168
628,000 Unicem Di Risp (NCS)............................. 2,237
19,000 Vincenzo Zucchi S.p.A............................ 118
207,050 Vincenzo Zucchi S.p.A. (NCS)..................... 744
---------
4,267
---------
JAPAN (8.1%)
231,000 Foster Electric Co., Ltd......................... 717
510,000 Hankyu Realty.................................... 2,384
783,000 Japan Oil Transportation Co., Ltd................ 1,134
102,000 Japan Vilene Co., Ltd............................ 227
176,000 Kansei Corp...................................... 957
321,000 Kirin Beverage Corp.............................. 5,314
165,000 Nifco, Inc....................................... 1,075
676,000 Nissan Fire & Insurance Co....................... 2,057
(a)33,000 Rock Field Co., Ltd.............................. 440
470,000 Toc Co........................................... 3,566
239,000 Toyoda Gosei Co.................................. 865
---------
18,736
---------
NETHERLANDS (8.7%)
76,000 Ahrend Groep N.V................................. 2,387
92,805 Apothekers Cooperatie OPG........................ 2,769
37,081 Atag Holding N.V................................. 2,308
(a)68,000 Benckiser N.V., Class B.......................... 2,814
93,000 GTI Holding N.V.................................. 2,330
250,000 Hollandsche Beton Groep N.V...................... 4,648
32,730 Koninklijke Van Ommeren N.V...................... 1,098
(a)61,600 Nutreco Holding N.V.............................. 1,404
4,122 Samas Groep N.V.................................. 192
---------
19,950
---------
NEW ZEALAND (1.2%)
876,736 Fisher & Paykel Industries Ltd................... 2,800
---------
NORWAY (1.3%)
73,850 Adelsten ASA, Class B............................ 950
119,700 Kverneland ASA................................... 1,945
(a,d)228,020 Oceanor.......................................... --
---------
2,895
---------
SINGAPORE (0.9%)
824,000 GP Batteries International Ltd................... 2,146
---------
SPAIN (2.4%)
69,248 Bodegas y Bebidas................................ 2,677
74,251 Miquel y Costas & Miquel......................... 2,885
---------
5,562
---------
SWEDEN (2.5%)
88,200 Marieberg Tidnings AB............................ 2,066
23,650 Nobel Biocare AB................................. 310
(a)137,412 Scandic Hotels AB................................ 3,357
---------
5,733
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
66
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<C> <S> <C>
SWITZERLAND (8.5%)
1,610 Bobst AG (Bearer)................................ $ 2,370
3,007 Bucher Holdings AG (Bearer)...................... 2,615
9,112 Edipresse (Bearer)............................... 2,645
2,750 LEM Holdings AG.................................. 557
10,500 PubliGroupe...................................... 2,293
2,618 SIG-Schweizerische Industrie-Gesellschaft
Holdings AG (Registered)....................... 3,576
14,630 Valora Holding AG................................ 3,085
5,950 Zehnder Holding AG, Class B...................... 2,436
---------
19,577
---------
UNITED KINGDOM (22.6%)
2,610,000 Anglo Irish Bank Corp. plc (British Pound
Shares)........................................ 5,061
1,330,900 Bluebird Toys plc................................ 1,957
140,970 Capital Radio plc................................ 1,147
598,900 Corporate Services Group plc..................... 2,096
666,200 Devro plc........................................ 4,149
(a,d)2,540,850 Donelon Tyson plc................................ --
2,032,800 GEI International plc............................ 3,307
(a)1,309,000 Industrial Control Services Group plc (Sub
Notes)......................................... --
654,500 Industrial Control Services Group plc............ 414
442,389 International Business Communications (Holdings)
plc............................................ 2,868
1,608,965 John Mowlem & Co. plc............................ 2,353
(a,d)33,795,100 Kendell plc...................................... --
213,535 Le Riches Stores plc............................. 1,737
543,600 Litho Supplies plc............................... 2,104
206,335 Mallett plc...................................... 358
2,575,600 Matthews (Bernard) plc........................... 4,148
120,000 Northern Leisure plc............................. 793
762,800 Oriflame International........................... 5,578
(a,d)2,659,393 Pentos plc....................................... --
368,400 Quadramatic plc.................................. 1,268
485,000 Ricardo Group plc................................ 1,196
(a)443,900 SGB Group plc.................................... 1,105
373,500 Scholl plc....................................... 1,584
(a)539,300 Tandem Group plc................................. 35
1,287,000 The 600 Group plc................................ 2,728
718,850 UniChem plc...................................... 3,780
487,800 Waterman Partnership Holdings plc................ 373
(a)310,000 Westminster Health Care Holdings plc............. 1,859
---------
51,998
---------
TOTAL COMMON STOCKS (Cost $211,968).................................. 207,864
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------------
PREFERRED STOCKS (5.2%)
GERMANY (5.2%)
9,785 Dyckerhoff AG.................................... $ 2,508
26,811 Hornbach Holding AG.............................. 1,848
9,862 STO AG-Vorzug.................................... 3,563
(a)15,065 Villeroy & Boch AG............................... 1,851
14,700 Wuerttembergische Metallwarenfabrik AG........... 2,288
---------
TOTAL PREFERRED STOCKS (Cost $13,627)................................ 12,058
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------------
CONVERTIBLE DEBENTURE (0.1%)
ITALY (0.1%)
ITL 518,000 Mediobanca S.p.A. 5.50%, 1/01/00, (Cost $328).... 331
---------
TOTAL FOREIGN SECURITIES (95.7%) (Cost $225,923)..................... 220,253
---------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$ 7,257 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at 7,259,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $7,406 (Cost $7,257).... 7,257
---------
FOREIGN CURRENCY (0.8%)
AUD 148 Australian Dollar................................ 97
GBP 651 British Pound.................................... 1,070
FRF 797 French Franc..................................... 132
DEM 728 German Mark...................................... 405
HKD 283 Hong Kong Dollar................................. 36
IEP 1 Irish Punt....................................... 2
JPY 16,370 Japanese Yen..................................... 125
NLG 57 Netherlands Guilder.............................. 28
---------
TOTAL FOREIGN CURRENCY (Cost $1,909)................................. 1,895
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
67
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%) (Cost $235,089)................ $229,405
--------
OTHER ASSETS (2.4%)
Cash....................................... $ 1,681
Receivable for Investments Sold............ 1,574
Net Unrealized Gain on Foreign Currency
Exchange Contracts....................... 1,300
Dividends Receivable....................... 472
Receivable for Portfolio Shares Sold....... 343
Foreign Withholding Tax Reclaim
Receivable............................... 188
Interest Receivable........................ 17
Other...................................... 13 5,588
----------
LIABILITIES (-2.1%)
Payable for Portfolio Shares Redeemed...... (2,419)
Payable for Investments Purchased.......... (1,761)
Investment Advisory Fees Payable........... (591)
Administrative Fees Payable................ (32)
Custodian Fees Payable..................... (25)
Directors' Fees and Expenses Payable....... (12)
Other Liabilities.......................... (58) (4,898)
---------- --------
NET ASSETS (100%)........................................ $230,095
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $232,284
Distributions in Excess of Net Investment Income.............. (676)
Accumulated Net Realized Gain................................. 2,886
Unrealized Depreciation on Investments and Foreign Currency
Translations................................................ (4,399)
--------
NET ASSETS.................................................... $230,095
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 14,741,753 outstanding $0.001 par value shares
(authorized 1,000,000,000 shares)........................... $15.61
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ----------- -------- ----------- ------------ -------- ------------
U.S.$ 251 $ 251 1/02/98 DEM 450 $ 250 $ (1)
SEK 865 109 1/05/98 U.S.$ 109 109 --
DEM 96 53 1/05/98 U.S.$ 54 54 1
AUD 9,100 5,930 1/12/98 U.S.$ 7,076 7,076 1,146
FRF 17,000 2,836 3/12/98 U.S.$ 2,843 2,843 7
GBP 3,250 5,267 11/09/98 U.S.$ 5,414 5,414 147
-------- -------- ------
$ 14,446 $ 15,746 $ 1,300
--------
-------- -------- ------
-------- ------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value - see note A-1 to financial statements.
ITL -- Italian Lira
NCS -- Non Convertible Shares
SEK -- Swedish Krona
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- -------------------------------------------------------------------
Capital Equipment...................... $ 59,421 25.8%
Consumer Goods......................... 59,970 26.2
Finance................................ 26,332 11.4
Materials.............................. 24,724 10.7
Multi-Industry......................... 7,341 3.2
Services............................... 42,465 18.4
--------- ---
$ 220,253 95.7%
--------- ---
--------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
International Small Cap Portfolio
68
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Appliances & Household Durables 7.3 %
Automobiles 5.9 %
Banking 0.3 %
Business & Public Services 3.0 %
Chemicals 3.4 %
Construction & Housing 2.4 %
Data Processing & Reproduction 7.5 %
Electrical & Electronics 13.7 %
Electrical Components & Instruments 7.8 %
Financial Services 1.2 %
Health & Personal Care 5.3 %
Industrial Components 1.3 %
Machinery & Engineering 11.4 %
Merchandising 2.0 %
Metals--Non-Ferrous 1.1 %
Miscellaneous Materials & Components 2.3 %
Real Estate 1.3 %
Recreation, Other Consumer Goods 3.8 %
Telecommunications 2.6 %
Textiles & Apparel 1.1 %
Other 15.3 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
JAPANESE EQUITY MSCI JAPAN
PORTFOLIO--CLASS
A INDEX(1)
<S> <C> <C>
4/25/94* $500,000 $500,000
12/31/94 491,500 512,000
12/31/95 473,609 515,533
12/31/96 466,979 435,625
12/31/97 423,877 332,513
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) JAPAN INDEX(1)
- --------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------- ---------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. -9.23% -4.38%
PORTFOLIO -- CLASS B............. -9.64 -5.75
INDEX -- CLASS A................. -23.67 -10.59
INDEX -- CLASS B................. -23.67 -19.42
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 puchase common stocks.
For the year ended December 31, 1997, the Portfolio had a total return of -9.23%
for the Class A shares and -9.64% for the Class B shares as compared to a total
return of -23.67% for the Morgan Stanley Capital International (MSCI) Japan
Index (the "Index"). From inception on April 25, 1994 to December 31, 1997, the
average annual total return of Class A was -4.38% compared to -10.59% for the
Index. From inception on January 2, 1996 to December 31, 1997, the average
annual total return of Class B was -5.75% compared to -19.42% for the Index.
During the fourth quarter of 1997, economic conditions deteriorated
substantially faster than market expectations. In fact, the Tankan survey of
Japanese corporations released in December showed almost all economic indicators
to be accelerating lower than most pessimists had been predicting.
A vicious downward spiral, starting with a weak economy leading to declining
stock prices and erosion of "hidden profits" held by Japanese institutions
resulted in a sharply higher Japan premium. This self-feeding economic downturn
further depressed investor confidence and consumer spending. Moreover, in order
to meet international BIS standards, Japanese banks were forced to liquidate
cross-holdings of equities to raise capital while their lending activity was
also curtailed to avoid unnecessary exposure, particularly to medium to smaller
companies. These events, coupled with a severe economic climate led to the
collapse of several major Japanese corporations in the fourth quarter,
unprecedented since WWII, including Sanyo & Yamaichi Securities and Hokkaido
Takushoku Bank. The mounting credit crunch from the rising Japan premium for
interbank loans also forced Toshoku, a medium sized trading company, into
bankruptcy. The Japanese Government in an act of desperation announced plans for
a new type of bond to provide capital for the DIC (Deposit Insurance
Corporations) and also proposed to purchase preferred stocks from Japanese
banks. Also, in order to boost public confidence, the government announced a one
time two trillion yen individual tax cut in mid December.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
69
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO (CONT.)
However, investors' reactions to such proposals were largely cool as most
participants believe that only a massive fiscal stimulus program will help the
ailing economy. Foreign investors in particular were disappointed with the lack
of fiscal stimulus and became large net sellers, preferring to shore-up overseas
investments and flee to "quality" and back to the dollar. The combined unstable
Asian economies and Korea's economic uncertainty propelled Japan's equity
markets to lows set in 1995 and the year ended amid clouds of uncertainty over
the future of Japan.
For the full year of 1997, most Japanese government authorities and investors
grossly underestimated the severely negative implications on the Japanese
economy by changes made in fiscal policy at the beginning of the year.
In particular, the consumption tax hike in April followed by depressed consumer
sentiment during a stagnant economy resulted in a sharp reversal of gradually
improving economic indicators from the previous year. Moreover, most bureaucrats
firmly believed that austerity measures together with a deregulated economy
would lead to long term growth despite the weakening economic back drop. From
July 1997, such an environment created a severe credit crunch for non-performing
loans held by banks. In addition, the collapse of several Asian currencies
during the second half of 1997 further impacted an already faltering economy.
With a mounting domestic financial crisis looming, Japanese authorities seemed
to sense little urgency in responding with necessary stimulus measures.
Judging by both the Asian crisis and the critically slowing Japanese economy,
foreign investors became net sellers of Japanese equity in an increasingly
deteriorating demand environment for equities by domestic institutions and which
led to sharply higher volatility and selling pressures. However, a pronounced
and polarized market developed within Japanese equities whereby those companies
participating in a favorable global economy provided relatively good returns. In
particular, sectors in new technologies and consumer growth products withheld
sharp declines in indexes heavily weighted by financial companies and banks. The
overweight position in these sectors provided the basis for the Portfolio's
outperformance for 1997.
Our view on the outlook for the overall Japanese equity market is based on
whether Japanese authorities seriously recognize the need to massively change
fiscal policy. Specifically, we believe "supply side" measures must be
implemented together with deregulation. Although a two trillion yen one time
personal income tax cut was announced in December, we believe additional and
more permanent corporate and individual tax cuts must also be made.
The current economic woes in Japan have yet to fully discount the slowdown in
non-Japan Asia, in our view, and although some attention has been paid to bank
on non-performing loans, more drastic proposals should be implemented to provide
the necessary liquidity in real estate for sustainable economic growth.
Unfortunately, politicians seem more preoccupied with the status quo rather than
risk votes by implementing major changes. However, increasing pressure from G7
and leaders of the Japanese business community will likely grow significantly
during the coming months as the economy remains weak. A meaningful and
sustainable recovery will occur, in our view, if there is enough pressure for
such change by the G7 Summit in May or July 1998 when Upper House elections will
take place.
Meanwhile, while we are hopeful that authorities will make the necessary fiscal
stimulus changes to invigorate Japan, we will maintain our current portfolio
weighting in electronics, blue chips and globally competitive Japanese
companies. If a massive fiscal policy change is implemented, however our
strategy is to remain flexible for sector and stock selection.
The paternal guidance both politicians and bureaucrats have exercised on
governing the Japanese economy, favoring the corporate sector over individuals
since WWII, will need to change in order for new sustainable growth for Japan.
This radical departure from the past is beginning to emerge but in order for us
to become bullish for the entire market we believe additional empowerment must
be made for consumers to play a greater role in overall economic policies of
Japan.
John R. Alkire
PORTFOLIO MANAGER
Kunihiko Sugio
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
70
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (84.7%)
APPLIANCES & HOUSEHOLD DURABLES (7.3%)
147,000 Matsushita Electric Industrial Co., Ltd.......... $ 2,152
57,400 Rinnai Corp...................................... 867
31,000 Sony Corp........................................ 2,756
---------
5,775
---------
AUTOMOBILES (5.9%)
298,000 Nissan Motor Co.................................. 1,233
146,000 Suzuki Motor Co., Ltd............................ 1,320
73,000 Toyota Motor Corp................................ 2,093
---------
4,646
---------
BANKING (0.3%)
79,000 Inabata & Co..................................... 248
---------
BUSINESS & PUBLIC SERVICES (3.0%)
76,000 Dai Nippon Printing Co., Ltd..................... 1,427
68,000 Sangetsu Co., Ltd................................ 698
70,000 Shin-Etsu Polymer Co., Ltd....................... 231
---------
2,356
---------
CHEMICALS (3.4%)
391,000 Daicel Chemical Industries Ltd................... 509
299,000 Kaneka Corp...................................... 1,350
203,000 Mitsubishi Chemical Corp......................... 291
109,000 Sekisui Chemical Co.............................. 554
---------
2,704
---------
CONSTRUCTION & HOUSING (2.4%)
116,000 Sekisui House Ltd................................ 746
312,000 Tsubakimoto Chain Co............................. 1,124
---------
1,870
---------
DATA PROCESSING & REPRODUCTION (7.5%)
90,000 Canon, Inc....................................... 2,097
285,000 Furukawa Electric Co............................. 1,221
70,000 Nissha Printing Co., Ltd......................... 422
174,000 Ricoh Co., Ltd................................... 2,160
---------
5,900
---------
ELECTRICAL & ELECTRONICS (13.7%)
297,000 Hitachi Ltd...................................... 2,117
70,000 Kyudenko Co., Ltd................................ 354
110,000 Mitsumi Electric Co., Ltd........................ 1,568
213,000 NEC Corp......................................... 2,269
24,000 Nintendo Corp., Ltd.............................. 2,354
518,000 Toshiba Corp..................................... 2,156
---------
10,818
---------
ELECTRONIC COMPONENTS & INSTRUMENTS (7.8%)
33,000 Kyocera Corp..................................... 1,497
40,000 Murata Manufacturing Co., Ltd.................... 1,006
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
29,000 TDK Corp......................................... $ 2,187
45,000 Tokyo Electron Ltd............................... 1,442
---------
6,132
---------
FINANCIAL SERVICES (1.2%)
58,000 Hitachi Credit Corp.............................. 956
---------
HEALTH & PERSONAL CARE (5.3%)
20,000 Ono Pharmaceutical Co., Ltd...................... 388
80,000 Sankyo Co., Ltd.................................. 1,809
92,000 Yamanouchi Pharmaceutical Co..................... 1,974
---------
4,171
---------
INDUSTRIAL COMPONENTS (1.3%)
146,000 Fujitec Co., Ltd................................. 806
30,000 Nifco, Inc....................................... 195
---------
1,001
---------
MACHINERY & ENGINEERING (11.4%)
288,000 Amada Co., Ltd................................... 1,071
175,000 Daifuku Co., Ltd................................. 852
242,000 Daikin Industries Ltd............................ 912
75,000 Fuji Machine Manufacturing Co.................... 1,811
207,000 Fujitsu Ltd...................................... 2,221
81,000 Kurita Water Industries Ltd...................... 826
298,000 Mitsubishi Heavy Industries Ltd.................. 1,242
---------
8,935
---------
MERCHANDISING (2.0%)
116,000 Asahi Tec Corp................................... 184
10,000 Autobacs Seven Co., Ltd.......................... 287
30,020 FamilyMart....................................... 1,077
---------
1,548
---------
METALS--NON-FERROUS (1.1%)
177,000 Sanwa Shutter Corp............................... 890
---------
MISCELLANEOUS MATERIALS & COMPONENTS (2.3%)
67,000 Lintec Corp...................................... 1,037
145,000 Nippon Pillar Packing............................ 780
---------
1,817
---------
REAL ESTATE (1.3%)
97,000 Mitsubishi Estate Co., Ltd....................... 1,056
---------
RECREATION, OTHER CONSUMER GOODS (3.8%)
54,000 Fuji Photo Film Ltd.............................. 2,069
85,000 Yamaha Corp...................................... 964
---------
3,033
---------
TELECOMMUNICATIONS (2.6%)
240 Nippon Telegraph & Telephone Corp................ 2,060
---------
TEXTILES & APPAREL (1.1%)
50,000 Shimamura Co., Ltd............................... 870
---------
TOTAL COMMON STOCKS (Cost $87,723)................................ 66,786
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
71
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (14.2%)
REPURCHASE AGREEMENT (14.2%)
$ 11,153 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at 11,157,
collateralized by U.S. Treasury Notes, 5.25%,
due 1/31/01, valued at $11,391 (Cost
$11,153)....................................... $ 11,153
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.9%) (Cost $98,876)........................... 77,939
--------
OTHER ASSETS (6.5%)
Receivable for Investments Sold...................... $ 3,771
Receivable for Portfolio Shares Sold................. 858
Interest Receivable.................................. 252
Net Unrealized Gain on Foreign Currency Exchange
Contracts.......................................... 241
Dividends Receivable................................. 12
Other................................................ 7 5,141
----------
LIABILITIES (-5.4%)
Bank Overdraft....................................... (3,763)
Payable for Portfolio Shares Redeemed................ (242)
Investment Advisory Fees Payable..................... (233)
Administrative Fees Payable.......................... (13)
Directors' Fees & Expenses Payable................... (9)
Custodian Fees Payable............................... (7)
Distribution Fees Payable............................ (1)
Other Liabilities.................................... (23) (4,291)
---------- --------
NET ASSETS (100%).................................................. $ 78,789
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $127,549
Undistributed Net Investment Income................................ 2,109
Accumulated Net Realized Loss...................................... (30,161)
Unrealized Depreciation on Investments and Foreign Currency
Translations..................................................... (20,708)
--------
NET ASSETS......................................................... $ 78,789
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -------------------------------------------------------------------
NET ASSETS......................................................... $77,086
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 13,085,022 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $5.89
--------
--------
CLASS B:
- -------------------------------------------------------------------
NET ASSETS......................................................... $1,703
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 290,286 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $5.87
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, 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
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- -------------- -------- ----------- ------------ -------- -----------
JPY 5,572,600 $ 43,759 6/11/98 U.S.$ 44,000 $ 44,000 $ 241
--------
-------- -------- -----
-------- -----
</TABLE>
- ------------------------------------------------------------
JPY -- Japanese Yen
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Japanese Equity Portfolio
72
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Argentina 8.4 %
Brazil 44.4 %
Chile 5.0 %
Colombia 1.1 %
Mexico 34.0 %
Peru 1.7 %
Venezuela 1.8 %
Other 3.6 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LATIN AMERICAN PORTFOLIO--CLASS
A MSCI EMERGING MARKETS GLOBAL LATIN AMERICA INDEX(1)
<S> <C> <C>
1/18/95* $500,000 $500,000
12/31/95 456,600 459,800
12/31/96 679,284 560,726
12/31/97 959,692 738,252
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO MORGAN STANLEY
CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS
GLOBAL LATIN AMERICA INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------- ---------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 41.28% 24.70%
PORTFOLIO -- CLASS B............. 40.37 41.47
INDEX -- CLASS A................. 31.66 14.12
INDEX -- CLASS B................. 31.66 25.29
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had a total return of 41.28%
for the Class A shares and 40.37% for the Class B shares, as compared to a total
return of 31.66% for the Morgan Stanley Capital International (MSCI) Emerging
Markets Global Latin America Index (the "Index"). From inception on January 18,
1995 to December 31, 1997, the average annual total return of Class A was 24.70%
compared to 14.12% for the Index. From inception on January 2, 1996 to December
31, 1997, the average annual total return of Class B was 41.47% compared to
25.29% for the Index.
The continuation of the Asian crisis and its contagion throughout the emerging
markets resulted in poor performance across all the Latin markets. The largest
contributors to the Portfolio's outperformance relative to its benchmark were
strong stock selection in Mexico, where we are focusing on the consumer related
companies, and increasing our Brazil exposure to an overweight position at
November month-end such that we were able to take full advantage of the December
rally.
The Brazilian stock market fell 15.1% during the fourth quarter, with most of
the decline occurring during the first half of the quarter. Brazil was
particularly vulnerable to the contagion as it follows a fixed exchange rate
regime and has both a large current account and fiscal deficit. Additionally,
given the Brazilian market had performed well prior to the Asian crisis,
investors took profits as Brazil's risk premium increased.
Nevertheless Brazil was able to pull away from its recent Asian focus and look
to the strong U.S. market as well as its own good news to begin recouping its
losses. The positive moves made by the authorities which supported the equity
market included an aggressive, well thought out response to the crisis,
including the doubling of interest rates and a significant tightening of fiscal
policy. Even the Brazilian Congress lent a hand in building confidence. Not only
was the fiscal package quickly passed with few amendments but, the Asian
currency crisis provided the spur for action on the reform process.
- --------------------------------------------------------------------------------
Latin American Portfolio
73
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO (CONT.)
Since the eruption of the crisis in late-October, the Lower House has passed the
administrative reform package, which allows government at all levels (federal,
state, and city) to fire workers when payroll costs exceed 60% of total costs.
Mexico was the best performing market in this region, declining 3.6% over the
fourth quarter Mexico is less vulnerable to the Asian crisis, as most of its
exports are sent to the U.S. Another positive for Mexico has been its economic
strength, as its economy expanded 8.1% during the third quarter. Additionally,
while the Mexican peso was briefly under pressure as a result of a currency
contagion from Asia, it was able to recover nicely with the aid of the central
bank.
The Chilean market fell 18.3% over the fourth quarter as a result of commodity
deflation. Given the woes in Asia, prices for copper, pulp and paper have
fallen. As Chile's economic structure is dependent on commodity prices, the
recent price cuts have negatively impacted Chile's economy and equity market.
In the other markets, none were immune to the Asian contagion. Argentina and
Colombia fell 8.3% and 6.3%, respectively, over the fourth quarter in sympathy
with the region. Venezuela fell 18.5% fueled by weakening oil prices.
Robert L. Meyer
PORTFOLIO MANAGER
Andy Skov
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
74
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
COMMON STOCKS (UNLESS OTHERWISE NOTED) (96.4%)
ARGENTINA (8.4%)
(a)178,548 Acindar, Class B................................. $ 425
(a)63,085 Banco Rio de La Plata ADR........................ 883
104,283 Banco del Suquia, Class B........................ 271
(e)8,940 Siderar ADR...................................... 304
13,190 Siderar, Class A................................. 56
21,830 Telecom Argentina ADR............................ 781
65,218 Telefonica de Argentina ADR...................... 2,429
44,975 YPF ADR.......................................... 1,538
---------
6,687
---------
BRAZIL (44.4%)
126,080,000 Banco Bradesco (Preferred)....................... 1,243
(a,d)11,847,000 Banco Nacional (Preferred)....................... 1
31,630,010 CEMIG (Preferred)................................ 1,374
(e)1,042 CEMIG ADR (Preferred)............................ 45
20,179 CEMIG ADR (Preferred)............................ 877
(a)7,274,358 CRT (Preferred).................................. 8,962
78,686 CVRD (Preferred)................................. 1,583
62,925 CVRD ADR (Preferred)............................. 1,239
(a,d)34,986 CVRD, Class B (Preferred)........................ --
1,340,000 Cia Cimento Portland Itau (Preferred)............ 258
18,290 Copel, Class B ADR (Preferred)................... 250
2,557,830 Coteminas (Preferred)............................ 848
(a,e)14,355 Coteminas ADR.................................... 238
(a)2,588,000 Encorpar......................................... 2
52,306,328 Gerdau (Preferred)............................... 656
5,000 Globex Utilidades (Preferred).................... 29
458,900 Iven (Preferred)................................. 261
10,009,300 Lojas Arapua (Preferred)......................... 36
(e)13,460 Lojas Arapua ADR (Preferred)..................... 45
17,339,000 Lojas Renner (Preferred)......................... 544
7,329,000 Petrobras (Preferred)............................ 1,714
(a,e)42,925 Petrobras ADR.................................... 1,025
(a,e)68,065 Rossi Residential GDR............................ 332
(a)101,175 Rossi Residential GDS............................ 493
44,067,400 Telebras (Preferred)............................. 5,026
37,624 Telebras ADR (Preferred)......................... 4,381
(a)124,495 Unibanco GDR (Preferred)......................... 4,007
---------
35,469
---------
CHILE (5.0%)
41,050 CCU ADR.......................................... 1,206
51,832 Chilectra ADR.................................... 1,438
77,108 Santa Isabel ADR................................. 1,349
---------
3,993
---------
COLOMBIA (1.1%)
2,523 Banco de Colombia................................ 1
88,878 Bavaria.......................................... 912
---------
913
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
MEXICO (34.0%)
(a)399,074 Banacci, Class B................................. $ 1,196
(a)78,246 Banacci, Class L................................. 202
(a)149,060 Bancomer, Class B................................ 97
(a)34,620 Cemex CPO ADR.................................... 311
(a)17,240 Cemex, Class B................................... 92
(a)45,009 Cemex, Class B ADR............................... 478
(a)205,094 Cemex CPO........................................ 929
1,120 Cifra, Class B ADR............................... 28
525,911 Cifra, Class C................................... 1,181
214,185 Cifra, Class V................................... 527
(e)46,440 FEMSA ADR........................................ 371
429,895 FEMSA, Class B................................... 3,456
44,930 Grupo Modelo, Class C............................ 377
(a)48,210 Interamericana................................... 374
668,846 Kimberly, Class A................................ 3,178
10,463 Panamco.......................................... 341
590,140 Soriana, Class B................................. 2,614
(a)114,558 TV Azteca ADR.................................... 2,585
(a)79,257 Televisa CPO GDR................................. 3,066
103,129 Telmex, Class L ADR.............................. 5,782
---------
27,185
---------
PERU (1.7%)
40,355 Banco Wiese ADR.................................. 202
48,356 Tel Peru, Class B ADR............................ 1,127
---------
1,329
---------
VENEZUELA (1.8%)
19,330 CANTV ADR........................................ 804
334,786 Electricidad de Caracas.......................... 402
67,375 Sivensa ADR...................................... 282
---------
1,488
---------
TOTAL COMMON STOCKS (Cost $73,376).................................... 77,064
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -----------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)126,865,000 Banco Bradesco (Preferred), expiring 2/02/98
(Cost $0)...................................... 11
---------
TOTAL FOREIGN SECURITIES (96.4%) (Cost $73,376)....................... 77,075
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------------
SHORT-TERM INVESTMENT (7.4%)
REPURCHASE AGREEMENT (7.4%)
$ 5,934 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $5,936,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $6,057 (Cost $5,934).... 5,934
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Latin American Portfolio
75
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------------
FOREIGN CURRENCY (1.1%)
ARP 148 Argentine Peso................................... $ 148
BRL 116 Brazilian Real................................... 104
COP 248,301 Colombian Peso................................... 192
MXP 28 Mexican Peso..................................... 3
PSS 1,095 Peruvian New Sol................................. 402
VEB 7,191 Venezuelan Bolivar............................... 14
--------
TOTAL FOREIGN CURRENCY (Cost $875).................................... 863
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (104.9%) (Cost $80,185)............................. 83,872
--------
OTHER ASSETS (1.6%)
Cash.................................................... $ 30
Receivable for Investments Sold......................... 823
Receivable for Portfolio Shares Sold.................... 281
Dividends Receivable.................................... 104
Interest Receivable..................................... 1
Net Unrealized Gain on Foreign Currency Exchange
Contracts............................................. 1
Other................................................... 2 1,242
----------
LIABILITIES (-6.5%)
Payable for Investments Purchased....................... (4,753)
Investment Advisory Fees Payable........................ (223)
Payable for Portfolio Shares Redeemed................... (118)
Custodian Fees Payable.................................. (39)
Administrative Fees Payable............................. (10)
Sub-Administrative Fees Payable......................... (6)
Payable for Foreign Taxes............................... (4)
Distribution Fees Payable............................... (3)
Directors' Fees and Expenses Payable.................... (3)
Other Liabilities....................................... (50) (5,209)
---------- --------
NET ASSETS (100%)..................................................... $ 79,905
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.......................................................
$ 79,340
Accumulated Net Investment Loss.......................................
(34)
Accumulated Net Realized Loss.........................................
(3,086)
Unrealized Appreciation on Investments and Foreign Currency
Translations (Net of accrual for foreign tax of $4 on unrealized
appreciation on investments)........................................
3,685
--------
NET ASSETS............................................................
$ 79,905
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ----------------------------------------------------------------------
NET ASSETS............................................................ $73,196
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 6,711,283 outstanding $0.001 par value shares
(authorized 500,000,000 shares)..................................... $10.91
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS B:
- ----------------------------------------------------------------------
NET ASSETS............................................................ $6,709
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 621,020 outstanding $0.001 par value shares
(authorized 500,000,000 shares)..................................... $10.80
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, the Portfolio is obligated to deliver U.S. dollars in exchange for
foreign currency as indicated below:
<TABLE>
<CAPTION>
IN NET
CURRENCY EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ----------- ------- ----------- ---------- ------- -----------
U.S.$ 460 $ 460 1/02/98 BRL 514 $ 460 $ --
U.S.$ 384 384 1/02/98 MXP 3,091 384 --
U.S.$ 695 695 1/05/98 BRL 777 696 1
------- ------- ---
$ 1,539 $ 1,540 $ 1
-------
------- ------- ---
------- ---
</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
GDS -- Global Depositary Shares
- ------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------
Capital Equipment...................... $ 2,102 2.6%
Consumer Goods......................... 11,665 14.6
Energy................................. 7,387 9.2
Finance................................ 8,113 10.1
Materials.............................. 10,596 13.3
Multi-Industry......................... 2,268 2.9
Services............................... 34,944 43.7
-------- ---
$ 77,075 96.4%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Latin American Portfolio
76
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Capital Goods 40.4 %
Communication Services 0.5 %
Consumer Cyclicals 17.6 %
Consumer Staples 15.7 %
Energy 1.0 %
Financial 13.6 %
Technology 7.2 %
Other 4.0 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AGGRESSIVE EQUITY LIPPER CAPITAL APPRECIATION
PORTFOLIO--CLASS A INDEX(1) S&P 500
<S> <C> <C> <C>
3/08/95 $500,000 $500,000 $500,000
12/31/95 $706,250 $629,000 $650,860
12/31/96 $995,106 $723,098 $800,285
12/31/97 $1,326,576 $866,705 $1,067,260
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO THE LIPPER CAPITAL
APPRECIATION INDEX AND THE S&P 500 INDEX(1)
- ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------
AVERAGE
ANNUAL
SINCE
ONE YEAR INCEPTION
----------- -----------
<S> <C> <C>
PORTFOLIO -- CLASS A...................... 33.31% 41.36%
PORTFOLIO -- CLASS B...................... 32.90 36.32
LIPPER CAP. APPRECIATION INDEX -- CLASS
A....................................... 19.86 21.86
S&P 500 INDEX -- CLASS A.................. 33.36 30.90
LIPPER CAP. APPRECIATION INDEX -- CLASS
B....................................... 19.86 17.24
S&P 500 INDEX -- CLASS B.................. 33.36 27.63
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE PORTFOLIO'S CONCENTRATION OF ITS
ASSETS IN A SMALLER NUMBER OF ISSUERS AND ITS USE OF EQUITY-LINKED SECURITIES
WILL SUBJECT IT TO GREATER RISKS. 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 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. It is
anticipated that the Portfolio will hold thirty names or less, although it may
hold more from time to time.
For the year ended December 31, 1997, the Portfolio had a total return of 33.31%
for the Class A shares and 32.90% for the Class B shares, as compared to a total
return of 19.86% for the Lipper Capital Appreciation Index and 33.36% for the
S&P 500 Index. From inception on March 8, 1995 through December 31, 1997, the
average annual total return of Class A was 41.36% compared to 21.86% for the
Lipper Capital Appreciation Index and 30.90% for the S&P 500 Index. From
inception on January 2, 1996 through December 31, 1997, the average annual total
return of Class B was 36.32% compared to 17.24% for the Lipper Capital
Appreciation Index and 27.63% for the S&P 500 Index.
The Portfolio had a very strong fourth quarter, with a total return of 5.85% for
Class A and 5.68% Class B compared to 2.87% for the S&P 500 and -2.41% for the
Lipper Capital Appreciation Index.
For the year the Portfolio performed in line with the S&P 500 and outperformed
the Lipper Capital Appreciation Index dramatically. The Portfolio's mix of
"low-flying" growth and higher beta growth outperformed the S&P 500 in every
quarter last year but the second during which two of our higher beta names
underperformed (HFS and Boston Chicken). Boston Chicken was sold but we held and
added to the HFS position which subsequently surged 59% off its lows in the June
quarter to make it one of our most important contributors to performance for the
year. Another important contributor to performance was Clear Channel
Communications, which doubled.
After three heady years for the market, Wall Street futurists are, as usual,
divided firmly in the bull and bear camps. We are first and foremost bottom up
investors, focusing on companies, not markets, and tend not to care which way
the U.S. market moves in 1998. But if pushed we are bullish because the backdrop
for financial assets is so positive: 1) inflation and interest rates are at
30-year lows; 2) the U.S. budget is balanced and U.S. companies seem as strong
as ever in terms of global competitiveness; 3) the Fed has enormous flexibility,
due to dollar strength and
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
77
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONT.)
low inflation, so that short rates will come down quickly if the economy slows;
and 4) company managements are very focused on shareholder value creation, much
more so than in prior cycles.
There are some negatives in that the strong dollar and
disinflationary/deflationary trends are combining to put pressure on corporate
profits and valuations are high on an absolute basis.
This, in our view, sets up a classic stockpickers' market. We will take earnings
risk over upward interest rate pressure any day. If you can find companies that
are able to rise above the profit pressures and achieve significant earnings
growth, this will be richly rewarded. However, the "safe growth" part of the
U.S. market -- stocks like Coca Cola and General Electric -- look extended and
pricey to us. We do not see why these stocks need to go down, but on the other
hand they have gone up much more than their respective earnings in recent years
and should at some point enter a phase where the opposite is true. We think
there is much more money to be made in "unsafe growth," -- i.e., stocks of
companies which have strong fundamentals but where investors still have doubts.
We would divide the "unsafe growth" stocks we find compelling into two
categories: stocks infected with investor fears stemming from the turmoil in
Asia and stocks that should be insulated against the negative factors pressuring
U.S. corporate profits. In the first category we would put stocks such as United
Technologies where earnings are growing 17-18%, and Gulfstream Aerospace, the
leading producer of executive jets with a debt-free balance sheet and EPS
estimates on the rise. In the second category we would put Cendant, the new
company formed by the merger of HFS and CUC International, which should reap
tremendous revenue and margin gains from the combination of the country's
largest franchiser with the preeminent direct marketing company. We would also
include Cracker Barrel, the 300 unit chain of restaurant/gift shops which is
seeing margin improvement after several sluggish years and Lockheed Martin, the
largest defense company in the world after it closes the Northrop Grumman
acquisition, which is generating massive free cash flow.
Kurt A. Feuerman
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
78
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
COMMON STOCKS (95.4%)
CAPITAL GOODS (40.4%)
AEROSPACE/DEFENSE (15.8%)
(a)38,000 AVTEAM, Inc., Class A............................ $ 337
(a)142,200 Gulfstream Aerospace Corp. ...................... 4,159
215,700 Lockheed Martin Corp. ........................... 21,246
1 Raytheon Co., Class A............................ --
19,600 Thiokol Corp. ................................... 1,593
---------
27,335
---------
MANUFACTURING (DIVERSIFIED) (24.6%)
65,100 Loews Corp. ..................................... 6,909
93,800 ITT Industries, Inc. ............................ 2,943
450,400 United Technologies Corp. ....................... 32,795
---------
42,647
---------
TOTAL CAPITAL GOODS........................................... 69,982
---------
COMMUNICATION SERVICES (0.5%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS) (0.5%)
(a)15,800 Associated Group, Inc., Class A.................. 468
(a)13,300 Associated Group, Inc., Class B.................. 387
---------
855
---------
CONSUMER CYCLICALS (17.6%)
AUTO PARTS & EQUIPMENT (1.0%)
33,400 Borg-Warner Automotive, Inc. .................... 1,737
---------
AUTOMOBILES (1.3%)
36,300 General Motors Corp. ............................ 2,201
---------
AUTO RELATED (2.1%)
(a)114,400 Avis Rent A Car, Inc. ........................... 3,654
---------
GAMING, LOTTERY & PARI-MUTUEL COMPANIES (1.0%)
65,100 International Game Technology.................... 1,644
---------
SERVICES (COMMERCIAL & CONSUMER) (12.2%)
(a)616,162 Cendant Corp. ................................... 21,180
(a)2,600 IRI International Corp. ......................... 36
---------
21,216
---------
TOTAL CONSUMER CYCLICALS...................................... 30,452
---------
CONSUMER STAPLES (15.7%)
BEVERAGES (NON-ALCOHOLIC) (1.1%)
53,900 Coca Cola Enterprises, Inc. ..................... 1,917
---------
BROADCASTING (TV, RADIO, CABLE) (6.1%)
(a)17,200 American Radio Systems Corp. .................... 917
95,300 CBS Corp. ....................................... 2,805
(a)85,700 Clear Channel Communications, Inc. .............. 6,808
---------
10,530
---------
ENTERTAINMENT (0.6%)
(a)27,000 Viacom, Inc., Class B............................ 1,119
---------
FOODS (1.1%)
20,300 Ralston-Ralston Purina Group..................... 1,887
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
RESTAURANTS (2.6%)
(a)72,100 Brinker International, Inc. ..................... $ 1,154
103,500 Cracker Barrel Old Country Store, Inc. .......... 3,454
---------
4,608
---------
TOBACCO (4.2%)
(a)32,500 Consolidated Cigar Holdings, Inc. ............... 896
116,600 Philip Morris Cos., Inc. ........................ 5,283
28,800 RJR Nabisco Holdings Corp. ...................... 1,080
---------
7,259
---------
TOTAL CONSUMER STAPLES........................................ 27,320
---------
ENERGY (1.0%)
OIL & GAS (DRILLING) (1.0%)
36,000 Diamond Offshore Drilling, Inc. ................. 1,732
---------
FINANCIAL (13.0%)
BANKS (MAJOR REGIONAL) (0.9%)
4,500 Wells Fargo & Co. ............................... 1,527
---------
CONSUMER FINANCE (3.1%)
38,600 SLM Holding Corp. ............................... 5,370
---------
FINANCIAL (DIVERSIFIED) (1.5%)
29,400 American Express Co. ............................ 2,624
---------
FINANCIAL SERVICES (1.2%)
39,750 Travelers Group, Inc. ........................... 2,142
---------
INSURANCE (MULTI-LINE) (2.1%)
55,900 American Bankers Insurance Group, Inc. .......... 2,568
31,000 Nationwide Financial Services, Inc.,
Class A........................................ 1,120
---------
3,688
---------
INSURANCE (PROPERTY-CASUALTY) (3.6%)
(a)114 Berkshire Hathaway, Inc., Class A................ 5,244
7,000 Cincinnati Financial Corp. ...................... 985
---------
6,229
---------
INVESTMENT BANKING & BROKERAGE (0.6%)
(a)52,600 Friedman, Billings, Ramsey Group, Inc., Class
A.............................................. 944
---------
TOTAL FINANCIAL............................................... 22,524
---------
TECHNOLOGY (7.2%)
COMPUTERS (HARDWARE) (2.1%)
34,800 International Business Machines Corp. ........... 3,639
---------
COMPUTERS (SOFTWARE SERVICES) (2.5%)
(a)33,700 Microsoft Corp. ................................. 4,356
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
79
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<C> <S> <C>
ELECTRONICS (DEFENSE) (1.9%)
(a)56,700 Litton Industries, Inc. ......................... $ 3,260
---------
ELECTRONICS (SEMICONDUCTORS) (0.7%)
21,700 Linear Technology Corp. ......................... 1,250
---------
TOTAL TECHNOLOGY.............................................. 12,505
---------
TOTAL COMMON STOCKS (Cost $156,662)............................. 165,370
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -----------
RIGHTS (0.6%)
FINANCIAL (0.6%)
CONSUMER FINANCE (0.6%)
(a)32,300 Newcourt Credit Group, Inc., expiring 1/23/98
(Cost $1,052).................................. 1,078
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------
SHORT-TERM INVESTMENT (4.0%)
REPURCHASE AGREEMENT (4.0%)
$ 6,892 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $6,894,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $7,037 (Cost $6,892).... 6,892
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.0%) (Cost $164,606)....................... 173,340
--------
OTHER ASSETS (4.9%)
Cash............................................... $ 597
Receivable for Investments Sold.................... 6,077
Receivable for Securities Sold Short............... 1,104
Receivable due from Broker......................... 553
Receivable for Portfolio Shares Sold............... 165
Dividends Receivable............................... 95
Interest Receivable................................ 1
Other.............................................. 4 8,596
----------
LIABILITIES (-4.9%)
Payable for Investments Purchased.................. (6,871)
Securities Sold Short, at Value (Proceeds
$1,104).......................................... (1,078)
Investment Advisory Fees Payable................... (320)
Payable for Portfolio Shares Redeemed.............. (200)
Administrative Fees Payable........................ (22)
Custodian Fees Payable............................. (11)
Distribution Fees Payable.......................... (11)
Directors' Fees and Expenses Payable............... (4)
Other Liabilities.................................. (55) (8,572)
---------- --------
NET ASSETS (100%)................................................ $173,364
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................. $156,124
Distributions in Excess of Net Investment Income................. (3)
Accumulated Net Realized Gain.................................... 8,483
Unrealized Appreciation on Investments and Securities Sold
Short.......................................................... 8,760
--------
NET ASSETS....................................................... $173,364
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -----------------------------------------------------------------
NET ASSETS....................................................... $155,087
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,829,754 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $15.78
--------
--------
CLASS B:
NET ASSETS....................................................... $18,277
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,162,366 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $15.72
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
SECURITIES SOLD SHORT (NOTE A-9)
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
32,300 Newcourt Credit Group, Inc.
(Total Proceeds $1,104)....................................... $ 1,078
-----------
-----------
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio
80
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Auto & Transportation 1.2 %
Consumer Discretionary 23.4 %
Consumer Staples 1.1 %
Financial Services 12.1 %
Health Care 13.2 %
Materials & Processing 0.2 %
Other Energy 8.0 %
Producer Durables 3.7 %
Technology 31.5 %
Utilities 3.0 %
Other 2.6 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EMERGING GROWTH PORTFOLIO--CLASS
A NASDAQ COMPOSITE INDEX(1)
<S> <C> <C>
11/01/89* $500,000 $500,000
10/31/90 $453,500 $362,000
10/31/91 $815,393 $596,214
10/31/92 $754,239 $664,779
12/31/92 $671,046 $767,487
12/31/93 $671,046 $881,075
12/31/94 $666,886 $852,881
12/31/95 $889,025 $1,193,350
12/31/96 $922,097 $1,464,360
12/31/97 $1,026,847 $1,781,248
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO THE NASDAQ
COMPOSITE INDEX(1)
- -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
----------- --------------- ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 11.36% 8.88% 11.88%
PORTFOLIO -- CLASS
B..................... 11.13 N/A 7.30
INDEX -- CLASS A...... 21.64 18.33 16.36
INDEX -- CLASS B...... 21.64 N/A 21.86
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had a total return of 11.36%
for the Class A shares and 11.13% for the Class B shares, as compared to a total
return of 21.64% for the NASDAQ Composite Index (the "Index"). For the five year
period ended December 31, 1997, the average annual total return of Class A was
8.88% compared to 18.33% for the Index. From inception on November 1, 1989,
through December 31, 1997, the average annual total return of Class A was 11.88%
compared to 16.36% for the Index. From inception on January 2, 1996 through
December 31, 1997, the average annual total return of Class B was 7.30% compared
to 21.86% for the Index.
The fourth quarter was marked by extreme volatility with the most notable event
being the sharp decline on October 27th. In volatile markets, smaller companies
tend to underperform due to their lower liquidity and higher risk profiles. This
quarter was no exception as investors flocked into stocks represented in the S&P
500 which ended the quarter up 2.87% while the small capitalization indices all
ended in negative territory.
The market backdrop throughout the fourth quarter presented a significant
challenge to performance in the small cap arena. In our view, over the next
several quarters, liquidity concerns will gradually be supplanted as a risk
factor by a concern for reliable and strong earnings growth. We believe
investors will increasingly focus on domestic-oriented companies whose
businesses generally have minimal exposure to foreign markets and whose earnings
are therefore less at risk in the current environment.
In terms of sector weightings in the fourth quarter we reduced our exposure to
healthcare, finance and retail stocks while increasing our weighting in business
service stocks.
Overall, in the fourth quarter we have reduced the number of companies in the
Portfolio and we plan further reductions in the months ahead. As is to be
expected, the majority of the Portfolio's performance has been driven by its
largest positions. We therefore have made a concerted effort to limit the number
of names in the "farm team", i.e. names representing
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
81
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
less than fifty basis point positions. We believe by increasing the weighting in
our top positions through reductions in the Portfolio's bottom category we will
more fully leverage the benefits of our research effort.
Despite the uneven and generally disappointing performance of emerging growth
stocks this year we remain ardent believers that emerging growth is the place to
be invested in 1998. The relative valuation of the small cap sector of the
market versus its larger cap brethren has reached a level last seen in April of
1997, a time which represented an inflection point and was followed by five
months of strong absolute and strong relative performance.
The weakness in small cap growth stocks has presented numerous opportunities to
invest in premier growth companies at highly attractive valuation levels. We
believe that if we remain focused on company fundamentals, investing only in
companies with superior business models enjoying strong competitive positions
with the highest quality management teams, then eventually other investors will
follow our lead. By sticking to our knitting, thorough fundamental analysis, we
believe the market will come around once again and cast us a favorable eye.
Kurt A. Feuerman
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
82
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (97.4%)
AUTO & TRANSPORTATION (1.2%)
AUTOMOBILES (1.1%)
(a)20,600 Avis Rent A Car, Inc. ........................... $ 658
---------
AUTO PARTS: AFTER MARKET (0.1%)
(a)3,100 O'Reilly Automotive, Inc. ....................... 81
---------
TOTAL AUTO & TRANSPORTATION..................................... 739
---------
CONSUMER DISCRETIONARY (23.4%)
ADVERTISING AGENCIES (0.7%)
(a)11,100 Lamar Advertising Co. ........................... 441
---------
CASINOS & GAMBLING (0.7%)
(a)12,900 GTECH Holdings Corp. ............................ 412
---------
COMMERCIAL INFORMATION SERVICES (1.2%)
(a)8,100 America Online, Inc. ............................ 723
---------
CONSUMER ELECTRONICS (0.9%)
(a)8,900 Broderbund Software, Inc. ....................... 227
(a)8,300 Electronic Arts, Inc. ........................... 314
---------
541
---------
EDUCATION SERVICES (2.6%)
(a)8,400 Apollo Group, Inc., Class A ..................... 397
(a)5,100 CBT Group plc ADR ............................... 417
(a)3,900 Computer Learning Centers, Inc. ................. 239
(a)10,400 DeVry, Inc. ..................................... 332
(a)10,400 ITI Education Corp. ............................. 63
(a)4,900 Learning Company, Inc. .......................... 79
---------
1,527
---------
HOTEL/MOTEL (0.3%)
(a)13,300 Extended Stay America, Inc. ..................... 165
---------
PUBLISHING: MISCELLANEOUS (0.5%)
(a)22,600 PRIMEDIA, Inc. .................................. 285
---------
RADIO & TV BROADCASTERS (2.8%)
(a)14,300 Clear Channel Communications, Inc. .............. 1,136
(a)4,500 HSN, Inc. ....................................... 232
(a)6,000 Heftel Broadcasting Corp., Class A .............. 280
---------
1,648
---------
RESTAURANTS (0.5%)
3,900 Cracker Barrel Old Country Store, Inc. .......... 130
(a)5,700 Papa John's International, Inc. ................. 199
---------
329
---------
RETAIL (5.4%)
(a)15,100 Abercrombie & Fitch Co., Class A ................ 472
(a)2,300 Amazon.com, Inc. ................................ 138
(a)13,300 Bed, Bath & Beyond, Inc. ........................ 510
(a)13,000 CompUSA, Inc. ................................... 403
(a)10,000 Dollar Tree Stores, Inc. ........................ 414
(a)9,100 Dress Barn, Inc. ................................ 255
(a)7,400 Gymboree Corp. .................................. 203
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
6,400 Intimate Brands, Inc. ........................... $ 154
17,100 Pier 1 Imports, Inc. ............................ 387
(a)11,000 Viking Office Products, Inc. .................... 240
---------
3,176
---------
SERVICE ORGANIZATIONS (0.2%)
(a)5,800 American Coin Merchandising, Inc. ............... 102
---------
SERVICES: COMMERCIAL (7.6%)
(a)30,039 Cendant Corp. ................................... 1,032
(a)11,800 Data Processing Resources Corp. ................. 301
3,800 G & K Services, Inc., Class A ................... 159
(a)18,000 NFO Worldwide, Inc. ............................. 377
(a)21,950 Robert Half International, Inc. ................. 878
(a)40,400 Romac International, Inc. ....................... 985
(a)12,200 TeleTech Holdings, Inc. ......................... 139
(a)11,600 Volt Information Sciences, Inc. ................. 625
---------
4,496
---------
TOTAL CONSUMER DISCRETIONARY.................................... 13,845
---------
CONSUMER STAPLES (1.1%)
DRUG & GROCERY STORE CHAINS (0.5%)
(a)5,400 Whole Foods Market, Inc. ........................ 276
---------
TOBACCO (0.6%)
(a)10,300 Consolidated Cigar Holdings, Inc. ............... 284
(a)4,300 General Cigar Holdings, Inc. .................... 92
---------
376
---------
TOTAL CONSUMER STAPLES.......................................... 652
---------
FINANCIAL SERVICES (12.1%)
BANKS: OUTSIDE NEW YORK CITY (0.5%)
1,600 Compass Bancshares, Inc. ........................ 70
3,500 Mercantile Bancorp., Inc. ....................... 215
---------
285
---------
DIVERSIFIED FINANCIAL SERVICES (0.5%)
(a)9,200 BISYS Group, Inc. ............................... 306
1 Mutual Risk Management Ltd. ..................... --
---------
306
---------
FINANCE COMPANIES (0.7%)
(a)4,200 FIRSTPLUS Financial Group, Inc. ................. 160
4,800 Finova Group, Inc. .............................. 239
---------
399
---------
FINANCIAL DATA PROCESSING SERVICES & SYSTEMS (3.3%)
20,750 Paychex, Inc. ................................... 1,050
(a)29,700 SunGard Data Systems, Inc. ...................... 921
---------
1,971
---------
FINANCIAL MISCELLANEOUS (1.6%)
8,500 CMAC Investment Corp. ........................... 513
(a)2,200 Federal Agricultural Mortgage Corp., Class C .... 130
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
83
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FINANCIAL SERVICES (CONT.)
FINANCIAL MISCELLANEOUS (CONT.)
<TABLE>
<C> <S> <C>
(a)8,200 Ocwen Financial Corp. ........................... $ 208
(a)3,400 Triad Guaranty, Inc. ............................ 99
---------
950
---------
INVESTMENT MANAGEMENT COMPANIES (0.2%)
2,300 T. Rowe Price Associates, Inc. .................. 145
---------
REAL ESTATE INVESTMENT TRUSTS (REIT)(2.9%)
9,300 CarrAmerica Realty Corp. ........................ 294
10,000 Crescent Real Estate Equities, Inc. ............. 394
9,844 Equity Office Properties Trust .................. 311
7,600 Federal Realty .................................. 196
18,200 Taubman Centers, Inc. ........................... 236
12,200 TrizecHahn Corp. ................................ 283
---------
1,714
---------
RENTAL & LEASING SERVICES: COMMERCIAL (0.3%)
3,000 Xtra Corp. ...................................... 176
---------
SAVINGS & LOAN (1.6%)
2,700 Astoria Financial Corp. ......................... 151
2,050 Charter One Financial, Inc. ..................... 129
5,900 Dime Bancorp, Inc. .............................. 178
(a)4,700 FirstFed Financial Corp. ........................ 182
(a)3,800 Golden State Bancorp., Inc. ..................... 142
5,100 TCF Financial Corp. ............................. 173
---------
955
---------
SECURITIES BROKERAGE & SERVICES (0.5%)
3,800 A.G. Edwards, Inc. .............................. 151
2,133 Legg Mason, Inc. ................................ 119
---------
270
---------
TOTAL FINANCIAL SERVICES........................................ 7,171
---------
HEALTH CARE (13.2%)
BIOTECHNOLOGY RESEARCH & PRODUCTION (1.2%)
4,200 Genzyme Corp.-General Division .................. 116
(a)4,500 Human Genome Sciences, Inc. ..................... 179
(a)5,200 MedImmune, Inc. ................................. 223
(a)6,700 Ortec International, Inc. ....................... 87
(a)3,300 Transkaryotic Therapies, Inc. ................... 115
---------
720
---------
DRUGS & PHARMACEUTICALS (3.6%)
(a)5,400 Dura Pharmaceuticals, Inc. ...................... 248
(a)7,800 Elan Corp. plc ADR .............................. 399
8,000 Jones Medical Industries, Inc. .................. 306
(a)7,700 Medicis Pharmaceutical, Class A ................. 395
(a)4,000 Miravant Medical Technologies ................... 160
(a)15,200 SangStat Medical Corp. .......................... 614
---------
2,122
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
HEALTH CARE FACILITIES (2.5%)
(a)700 Amsurg Corp., Class A ........................... $ 5
(a)4,513 Amsurg Corp., Class B ........................... 34
(a)16,400 Chromatics Color Science International, Inc. .... 244
(a)4,200 Corrections Corp. of America .................... 156
(a)6,500 HEALTHSOUTH Corp. ............................... 180
(a)11,600 Health Management Associates, Inc., Class A ..... 293
(a)9,500 PhyCor, Inc. .................................... 257
(a)10,833 Total Renal Care Holdings, Inc. ................. 298
---------
1,467
---------
HEALTH CARE MANAGEMENT SERVICES (2.6%)
7,600 American Healthcorp, Inc. ....................... 53
(a)30,400 American Oncology Resources, Inc. ............... 486
(a)17,416 Concentra Managed Care, Inc. .................... 586
(a)9,600 Horizon Health Corp. ............................ 218
(a)5,900 Parexel International Corp. ..................... 218
---------
1,561
---------
HEALTH CARE SERVICES (1.0%)
(a)7,650 MedQuist, Inc. .................................. 264
(a)10,900 QuadraMed Corp. ................................. 300
---------
564
---------
MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (2.3%)
(a)6,800 Arterial Vascular Engineering, Inc. ............. 442
(a)8,300 Cooper Cos., Inc. ............................... 339
(a)5,000 Henry Schein, Inc. .............................. 175
(a)9,400 Inhale Therapeutic Systems ...................... 242
4,100 Mentor Corp. .................................... 150
---------
1,348
---------
TOTAL HEALTH CARE............................................... 7,782
---------
MATERIALS & PROCESSING (0.2%)
METALS & MINERALS MISC. (0.2%)
(a)9,300 Metals USA, Inc. ................................ 142
---------
OTHER ENERGY (8.0%)
MACHINERY: OIL WELL EQUIPMENT & SERVICES (2.5%)
5,400 Camco International, Inc. ....................... 344
(a)4,000 Cooper Cameron Corp. ............................ 244
(a)3,700 Dril-Quip, Inc. ................................. 130
(a)8,000 EVI, Inc. ....................................... 414
(a)5,900 J. Ray McDermott ................................ 254
(a)4,500 TransCoastal Marine Services, Inc. .............. 62
---------
1,448
---------
OFFSHORE DRILLING (2.7%)
(a)8,900 Bayard Drilling Technologies, Inc. .............. 145
9,100 ENSCO International, Inc. ....................... 305
(a)7,600 Falcon Drilling Co., Inc. ....................... 266
(a)6,900 Noble Drilling Corp. ............................ 211
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
84
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
OTHER ENERGY (CONT.)
OFFSHORE DRILLING (CONT.)
<TABLE>
<C> <S> <C>
(a)9,400 Patterson Energy, Inc. .......................... $ 364
(a)12,700 Precision Drilling Corp. ........................ 309
---------
1,600
---------
OIL: CRUDE PRODUCERS (2.8%)
(a)6,300 Barret Resources Corp. .......................... 191
31,000 Chesapeake Energy Corp. ......................... 234
(a)5,100 Forecenergy, Inc. ............................... 133
(a)49,600 Grey Wolf, Inc. ................................. 267
(a)13,400 Newfield Exploration Co. ........................ 312
(a)2,100 Ocean Energy, Inc. .............................. 104
(a)27,400 Unit Corp. ...................................... 264
8,200 Vintage Petroleum, Inc. ......................... 156
---------
1,661
---------
TOTAL OTHER ENERGY.............................................. 4,709
---------
PRODUCER DURABLES (3.7%)
AEROSPACE (0.2%)
(a)11,400 AVTEAM, Inc., Class A ........................... 97
---------
ELECTRICAL EQUIPMENT & COMPONENTS (1.2%)
(a)2,100 Ballard Power Systems, Inc. ..................... 159
15,237 Molex, Inc., Class A ............................ 438
(a)3,500 Triumph Group, Inc. ............................. 117
---------
714
---------
MISCELLANEOUS PRODUCER DURABLES (0.7%)
(a)14,000 JLK Direct Distribution, Inc., Class A .......... 392
---------
OFFICE FURNITURE & BUSINESS EQUIPMENT (0.2%)
(a)6,000 U.S. Office Products Co. ........................ 116
---------
POLLUTION CONTROL & ENVIRONMENTAL SERVICES (0.5%)
(a)6,200 Allied Waste Industries, Inc. ................... 144
(a)8,400 Republic Industries, Inc. ....................... 196
---------
340
---------
PRODUCTION TECHNOLOGY EQUIPMENT (0.2%)
(a)2,400 Uniphase Corp. .................................. 98
---------
TELECOMMUNICATIONS EQUIPMENT (0.7%)
(a)5,000 Excel Switching Corp. ........................... 89
5,100 Inter-Tel, Inc. ................................. 99
(a)12,900 MAS Technology Ltd. ADR ......................... 213
---------
401
---------
TOTAL PRODUCER DURABLES......................................... 2,158
---------
TECHNOLOGY (31.5%)
COMMUNICATIONS TECHNOLOGY (10.3%)
(a)23,800 ADC Telecommunications, Inc. .................... 994
(a)17,200 Advanced Fibre Communications, Inc. ............. 501
(a)23,400 Ascend Communications, Inc. ..................... 575
(a)3,700 China Telecomm (Hong Kong) Ltd. ADR ............. 124
(a)12,100 CIENA Corp. ..................................... 740
(a)3,000 Globalstar Telecommunications Ltd. .............. 147
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
(a)8,900 International Network Services .................. $ 203
(a)9,750 Level One Communications, Inc. .................. 274
(a)4,000 Orbital Sciences Corp. .......................... 119
(a)10,300 Premisys Communications, Inc. ................... 267
(a)15,600 Proxim, Inc. .................................... 177
(a)3,200 Tekelec, Inc. ................................... 98
(a)4,100 Teligent, Inc., Class A ......................... 99
(a)29,900 Tellabs, Inc. ................................... 1,575
(a)11,100 VideoServer, Inc. ............................... 176
---------
6,069
---------
COMPUTER SERVICES SOFTWARE & SYSTEMS (9.7%)
6,700 Autodesk, Inc. .................................. 246
(a)9,100 Cadence Design Systems, Inc. .................... 223
(a)6,500 Citrix Systems, Inc. ............................ 494
(a)20,400 Compuware Corp. ................................. 653
(a)6,800 ECsoft Group plc ADR ............................ 118
(a)1,800 Intersolv, Inc. ................................. 37
(a)2,600 Keane, Inc. ..................................... 106
(a)5,100 MetaCreations Corp. ............................. 56
(a)6,500 PSW Technologies, Inc. .......................... 92
(a)34,700 Peoplesoft, Inc. ................................ 1,345
(a)9,800 Progress Software Corp. ......................... 211
(a)1,518 Structural Dynamics Research Corp. .............. 34
(a)13,700 Sybase, Inc. .................................... 182
(a)6,400 Symantec Corp. .................................. 140
(a)36,000 USCS International, Inc. ........................ 612
(a)30,200 Whittman-Hart, Inc. ............................. 1,034
(a)2,100 Yahoo!, Inc. .................................... 145
---------
5,728
---------
COMPUTER TECHNOLOGY (1.5%)
(a)31,600 FORE Systems, Inc. .............................. 482
(a)7,800 Tech Data Corp. ................................. 303
(a)14,500 TranSwitch Corp. ................................ 108
---------
893
---------
ELECTRONICS (0.4%)
(a)1,200 Flextronics International Ltd. .................. 41
(a)3,000 Semtech Corp. ................................... 117
(a)27,500 Syquest Technology, Inc. ........................ 89
---------
247
---------
ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (9.6%)
(a)7,500 Aavid Thermal Technologies, Inc. ................ 176
(a)6,200 Altera Corp. .................................... 205
(a)17,100 FlexiInternational Software, Inc. ............... 265
(a)5,300 Fusion Systems Corp. CVR ........................ 4
(a)7,800 Integrated Process Equipment Corp. .............. 122
(a)5,900 Lattice Semiconductor Corp. ..................... 280
31,200 Linear Technology Corp. ......................... 1,794
(a)45,800 Maxim Integrated Products, Inc. ................. 1,580
(a)11,800 PMC-Sierra, Inc. ................................ 366
(a)2,000 Rambus, Inc. .................................... 92
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
85
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
TECHNOLOGY (CONT.)
ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (CONT.)
<TABLE>
<C> <S> <C>
(a)5,600 Vitesse Semiconductor Corp. ..................... $ 211
(a)16,600 Xilinx, Inc. .................................... 581
---------
5,676
---------
TOTAL TECHNOLOGY................................................ 18,613
---------
UTILITIES (3.0%)
UTILITIES: TELECOMMUNICATIONS (3.0%)
(a)2,800 ICG Communications, Inc. ........................ 76
(a)1,200 Intermedia Communications, Inc. ................. 73
(a)37,500 Mobile Telecommunications Technologies Corp. .... 825
(a)9,700 Teleport Communications Group, Inc., Class A .... 532
(a)11,000 WinStar Communications, Inc. .................... 274
---------
TOTAL UTILITIES................................................. 1,780
---------
TOTAL COMMON STOCKS (Cost $50,229)................................ 57,591
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -------------
SHORT-TERM INVESTMENT (3.2%)
REPURCHASE AGREEMENT (3.2%)
$1,874 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $1,875,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $1,915 (Cost $1,874).... 1,874
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.6%) (Cost $52,103).......................... 59,465
--------
OTHER ASSETS (0.8%)
Receivable for Investments Sold...................... $ 457
Dividends Receivable................................. 12
Other................................................ 9 478
----------
LIABILITIES (-1.4%)
Payable for Portfolio Shares Redeemed................ (484)
Payable for Investments Purchased.................... (189)
Investment Advisory Fees Payable..................... (136)
Adminstrative Fees Payable........................... (8)
Directors' Fees and Expenses Payable................. (5)
Distribution Fees Payable............................ (1)
Other Liabilities.................................... (30) (853)
---------- --------
NET ASSETS (100%).................................................. $ 59,090
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $ 52,161
Accumulated Net Investment Loss.................................... (4)
Accumulated Net Realized Loss...................................... (429)
Unrealized Appreciation on Investments............................. 7,362
--------
NET ASSETS......................................................... $ 59,090
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -------------------------------------------------------------------
NET ASSETS......................................................... $57,777
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 7,479,583 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $7.72
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS B:
- -------------------------------------------------------------------
NET ASSETS......................................................... $1,313
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 172,160 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $7.63
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
CVR -- Contingent Value Rights
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Growth Portfolio
86
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Basic Materials 0.5 %
Capital Goods 29.8 %
Communication Services 1.6 %
Consumer--Cyclicals 16.2 %
Consumer--Staples 15.6 %
Energy 1.4 %
Finance 17.6 %
Health Care 2.2 %
Technology 10.9 %
Transportation 2.1 %
Utilities 0.6 %
Other 1.5 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EQUITY GROWTH PORTFOLIO--CLASS
A S&P 500 INDEX(1)
<S> <C> <C>
4/02/91* $500,000 $500,000
10/31/91 $533,000 $533,090
10/31/92 $582,330 $585,450
12/31/92 $604,725 $612,760
12/31/93 $630,900 $674,400
12/31/94 $651,450 $683,250
12/31/95 $944,733 $939,742
12/31/96 $1,237,317 $1,155,507
12/31/97 $1,624,845 $1,540,984
* Commencement of operations
* Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
----------- --------------- ---------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 31.32% 21.86% 19.07%
PORTFOLIO -- CLASS
B..................... 31.05 N/A 30.53
INDEX -- CLASS A...... 33.36 20.27 17.79
INDEX -- CLASS B...... 33.36 N/A 27.63
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997 the Portfolio had a total return of 31.32%
for the Class A shares and 31.05% for the Class B shares, as compared to a total
return of 33.36% for the S&P 500 Index (the "Index"). For the five year period
ended December 31, 1997, the average annual total return of Class A was 21.86%
compared to 20.27% for the Index. From inception April 2, 1991, through December
31, 1997, the average annual total retrun of class A was 19.07% compared to
17.79% for the Index. From inception on January 2, 1996 through December 31,
1997 the average annual total return of Class B was 30.53% compared to 27.63%
for the Index.
After three heady years for the market, Wall Street futurists are, as usual,
divided firmly in the bull and bear camps. We are first and foremost bottom up
investors, focusing on companies, not markets, and tend not to care which way
the U.S. market moves in 1998. But if pushed we are bullish because the backdrop
for financial assets is so positive:
- inflation and interest rates are at 30-year lows
- the U.S. budget is balanced and U.S. companies seem as strong as ever in
terms of global competitiveness
- the Fed has enormous flexibility, due to dollar strength and low
inflation, so that short rates will come down quickly if the economy slows
- company managements are very focused on shareholder value creation, much
more so than in prior cycles.
There are some negatives:
- the strong dollar and disinflationary/ deflationary trends are combining
to put pressure on corporate profits
- valuations are high on an absolute basis
This, in our view, sets up a classic stockpickers' market. We will take earnings
risk over upward interest rate pressure any day. If you can find companies that
are able to rise above the profit
- --------------------------------------------------------------------------------
Equity Growth Portfolio
87
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
pressures and achieve significant earnings growth, this will be richly rewarded.
However, the "safe growth" part of the U.S. market -- stocks like Coca Cola and
General Electric -- look extended and pricey to us. We do not see why these
stocks need to go down, but on the other hand they have gone up much more than
their respective earnings in recent years and should at some point enter a phase
where the opposite is true. We think there is much more money to be made in
"unsafe growth," -- i.e., stocks of companies which have strong fundamentals but
where investors still have doubts.
Which brings us to our investment strategy for 1998 which may be best
characterized in terms of a Chinese restaurant menu or "two from column A and
three from column B". Column A consists of stocks infected with investor fears
of "Asian flu," currency and/or economic sensitivity. Column B consists of
stocks of companies that should be insulated against the negative factors
weighing against U.S. corporate profits.
<TABLE>
<CAPTION>
A B
- ----------------------------- -----------------------------
<S> <C>
United Technologies Cendant
Gulfstream Aerospace Cracker Barrel
Lockheed Martin
</TABLE>
United Technologies was the largest holding of the Portfolio at December 31,
accounting for 9.6% of net assets. United Technologies has been a significant
holding of ours for several years and it has performed quite well. In late 1997,
however, investor concerns over Asian exposure (15% of profits) and cyclicality
(several competitors, such as York, blew up) combined to cause the stock to
correct very sharply. From a peak of $89, the stock declined to the high $60's
and closed out the year at $73. We responded by redoubling our research efforts
during this "breakdown" period for the stock and came away with the following:
- While Asian operations will get hit in 1998 and 1999, UTX should gain
share in that region and find it much easier to make accretive
acquisitions.
- Dramatic margin gain opportunities, strength in certain businesses (e.g.
Pratt & Whitney) and restructuring activities should more than offset the
operating profit shortfall from Asia, currency and a weakening global
economy.
- We believe the company has become more aggressive in the share repurchase
front than at any time in its history.
- In short, despite what the stock is "telling us," Earnings Per Share (EPS)
growth should be robust and above expectations in 1998 and 1999.
We believe that UTX stock is in a win-win position following the recent sharp
sell-off. If concerns over Asia fade and the global economy strengthens, the
stock could trade up quickly. If not, the company's buyback should remain
aggressive, enhancing EPS prospects in 1999 and beyond. One year out, we think
United Technologies should trade somewhere between $83 (15 times 1999 EPS of
$5.55) and $111(20 times).
Gulfstream Aerospace, a leading producer of executive jets, is enjoying robust
operating fundamentals, yet the stock has been listless over the past year as
investors fear the effects of a potential economic slowdown. Also worrying
investors is the possibility that Forstman Little, the LBO firm and owner of
about 43% of the company, will pressure the stock by selling shares. At year
end, the stock traded at only $29 1/4, despite consensus EPS expectations of
$2.50 in 1998 and $3.10 in 1999. The balance sheet had no net debt and EPS
estimates had risen over the past several months. Does this seem rather
depressed with a stock market trading at over 20 times? The company obviously
thought so, because on January 5 it announced a stock repurchase for about 10%
of shares. This is highly accretive and caused consensus EPS estimates to rise
to $2.60 and $3.25 for 1998 and 1999, respectively. The stock will probably
never get a market multiple, but if it gets up to 15 times in one year that is a
juicy $49.
On the less controversial side, we own some stocks of companies that seem
totally insulated from what the world may throw at them. First on the list is
Cendant, the new company formed by the merger of HFS and CUC International. The
merger closed in December, creating a $28 billion market cap growth company that
most investors still do not know very well. HFS became our largest holding early
last year when unfounded investor concerns drove the stock down. At its low
point in early 1997, HFS was down 13% from its 1996 close. It closed 1997 up
38%, or 59% higher than its low of the year, adjusting for the conversion into
Cendant shares.
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
88
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- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
While not as cheap as it was in early 1997, Cendant's valuation looks fine and
the underlying growth story is the most powerful we know of today. Cendant
combines the country's largest franchiser (HFS) with the preeminent direct
marketing company (CUC). Both companies were exciting on their own but the
combination should be incredible for a variety of reasons. Unlike most
megamergers, cost cutting is not the primary driver of this marriage. Rather,
tremendous revenue and margin gains should accrue from the combination of a huge
inbound telemarketer with the number one outbound telemarketer. Consensus EPS
estimates have drifted higher recently, and currently stand at about $1.28 and
$1.58 for 1998 and 1999, respectively. We believe $1.33 and $1.70 are more
likely, with dynamic growth off the 1999 base expected. One year out, the stock
could trade conservatively at $43 (25 times 1999) or, less conservatively, at
$51 (30 times).
Another stock which should be somewhat insulated from broader corporate profit
pressures is Cracker Barrel, a 300-unit chain of restaurant/gift shops located
largely on interstate highways throughout the east coast and Midwest. Like many
other restaurant companies and retailers, Cracker Barrel spent 1993 to 1996
battling overbuilding and margin pressure. The best companies came through this
period stronger and with a higher market share. Cracker Barrel is one of the
winners, and is beginning to see margin increases for the first time in many
years, allowing the company to return to its traditional 20% + EPS growth rate.
While the stock has done well over the past two years, it is now still only back
to where it was in mid-1993, with earnings growing every year during this
period. We think Cracker Barrel can earn $1.85 and $2.25 in calendar 1998 and
1999, respectively, and could trade between 20-25 times earnings one year out,
or $45-56.
A final example of a stock somewhat protected from generalized corporate profit
pressure is Lockheed Martin. Pending the closing of its acquisition of Northrop
Grumman, it will be the largest defense company in the world. Significant cost
savings will be achieved from the merger, while increased scale will give
Lockheed Martin an even greater advantage in bidding for large defense
contracts. At the same time, non-defense businesses are growing nicely.
Moreover, the balanced budget in the United States bodes well for defense and
space exploration spending. Finally, the company's huge free cash flow is an
ongoing major positive. Despite all this, Lockheed Martin stock under performed
the market in 1996 and 1997. In fact, in 1997 it was up a lowly 7.7%. Why? The
most important factor in our view, was the two downward revisions to EPS that
occurred in late 1997. From our perspective, however, they were "false" negative
surprises and we believe the stage has now been set for positive surprises,
hopefully in 1998 but likely in 1999.
The first downward revision came from weakness in a non-core business that will
eventually be sold. The second downward revision was an upward revision in
disguise. In order to be able to buy back GE's large stake in Lockheed Martin
(10% of the company pro forma) Lockheed was forced to change from pooling to
purchase accounting on its Northrop acquisition. This means goodwill, a phantom,
non-cash expense, must be amortized, which leads to lower reported EPS but
higher cash flow or economic earnings. Hence, while EPS in 1998 should be about
$6.50, economic earnings will exceed $9.00. We expect 12-15% compounded EPS
growth over the longer term. If we are right and consensus estimates start to
rise over the next 12 months, the valuation should improve. A reasonable one
year price target would be 18-20 times reported 1999 EPS of $7.40, or $133 to
$148.
Kurt Feuerman
PORTFOLIO MANAGER
Margaret K. Johnson
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
Equity Growth Portfolio
89
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (98.5%)
BASIC MATERIALS (0.5%)
CHEMICALS (0.5%)
46,300 E.I. du Pont de Nemours & Co. ................... $ 2,781
---------
CAPITAL GOODS (29.8%)
AEROSPACE & DEFENSE (10.4%)
(a)107,400 AVTEAM, Inc., Class A............................ 953
(a)386,900 Gulfstream Aerospace Corp. ...................... 11,317
(a)180,600 Howmet International, Inc. ...................... 2,709
451,000 Lockheed Martin Corp. ........................... 44,424
6,800 Nothrop Grumman Corp. ........................... 782
35 Raytheon Co., Class A............................ 2
53,600 Thiokol Corp. ................................... 4,355
---------
64,542
---------
DIVERSIFIED (18.3%)
(a)346 Berkshire Hathaway, Inc., Class A ............... 15,916
346,600 ITT Industries, Inc. ............................ 10,875
190,400 Loews Corp. ..................................... 20,206
116,000 Textron, Inc. ................................... 7,250
813,400 United Technologies Corp. ....................... 59,226
---------
113,473
---------
OFFICE EQUIPMENT & SUPPLIES (1.1%)
95,000 Xerox Corp. ..................................... 7,012
---------
TOTAL CAPITAL GOODS............................................. 185,027
---------
COMMUNICATION SERVICES (1.6%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS) (0.5%)
(a)58,000 Associated Group, Inc., Class A.................. 1,718
(a)48,700 Associated Group, Inc., Class B.................. 1,418
---------
3,136
---------
TELECOMMUNICATIONS (LONG DISTANCE) (1.1%)
51,900 AT&T Corp. ...................................... 3,179
(a)115,900 WorldCom, Inc. .................................. 3,506
---------
6,685
---------
TOTAL COMMUNICATION SERVICES.................................... 9,821
---------
CONSUMER-CYCLICALS (16.2%)
AUTO PARTS & EQUIPMENT (1.0%)
121,800 Borg-Warner Automotive, Inc. .................... 6,334
---------
AUTOMOBILES (1.9%)
(a)175,200 Avis Rent A Car, Inc. ........................... 5,595
101,300 General Motors Corp. ............................ 6,141
---------
11,736
---------
GAMING, LOTTERY & PHARMACEUTICAL COMPANIES (0.9%)
224,000 International Game Technology.................... 5,656
---------
LEISURE TIME PRODUCTS (0.8%)
(a)151,700 GTECH Holdings Corp. ............................ 4,845
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
PUBLISHING (2.3%)
(a)855,400 PRIMEDIA, Inc.................................... $ 10,799
54,200 Gannett Co., Inc. ............................... 3,350
---------
14,149
---------
RETAIL (BUILDING SUPPLIES) (1.3%)
132,950 Home Depot, Inc. ................................ 7,827
---------
RETAIL (SPECIALTY/APPAREL) (0.2%)
(a)60,900 O'Reilly Automotive, Inc......................... 1,599
---------
SERVICES (COMMERCIAL & CONSUMER) (7.8%)
(a)1,404,755 Cendant Corp. ................................... 48,288
---------
TOTAL CONSUMER-CYCLICALS........................................ 100,434
---------
CONSUMER-STAPLES (15.6%)
BEVERAGES (NON-ALCOHOLIC) (1.1%)
202,900 Coca Cola Enterprises, Inc. ..................... 7,216
---------
BROADCASTING (TV, RADIO, CABLE) (5.1%)
303,400 CBS Corp. ....................................... 8,931
(a)282,800 Clear Channel Communications, Inc. .............. 22,465
---------
31,396
---------
ENTERTAINMENT (1.2%)
55,200 Time Warner, Inc. ............................... 3,422
(a)98,200 Viacom, Inc., Class B............................ 4,069
---------
7,491
---------
FOODS (1.4%)
69,400 Kellogg Co. ..................................... 3,444
58,500 Ralston-Ralston Purina Group..................... 5,437
---------
8,881
---------
RESTAURANTS (2.4%)
(a)264,000 Brinker International, Inc. ..................... 4,224
314,700 Cracker Barrel Old Country Store, Inc. .......... 10,503
---------
14,727
---------
TOBACCO (4.4%)
(a)118,600 Consolidated Cigar Holdings, Inc. ............... 3,269
441,700 Philip Morris Cos., Inc. ........................ 20,014
105,300 RJR Nabisco Holdings Corp. ...................... 3,949
---------
27,232
---------
TOTAL CONSUMER-STAPLES.......................................... 96,943
---------
ENERGY (1.4%)
OIL & GAS (DRILLING) (1.4%)
110,900 Diamond Offshore Drilling, Inc. ................. 5,337
40,300 Schlumberger, Ltd. .............................. 3,244
---------
TOTAL ENERGY.................................................... 8,581
---------
FINANCE (17.6%)
BANKS (3.2%)
42,500 BankAmerica Corp................................. 3,103
48,668 Chase Manhattan Corp. ........................... 5,329
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
90
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FINANCE (CONT.)
BANKS (CONT.)
<TABLE>
<C> <S> <C>
46,100 Citicorp ........................................ $ 5,829
16,433 Wells Fargo & Co. ............................... 5,578
---------
19,839
---------
CONSUMER FINANCE (2.8%)
70,900 MBNA Corp........................................ 1,936
109,200 SLM Holding Corp. ............................... 15,192
---------
17,128
---------
FINANCIAL (DIVERSIFIED) (3.8%)
105,600 American Express Co. ............................ 9,425
30,300 Federal Home Loan Mortgage Corp. ................ 1,271
94,600 MGIC Investment Corp. ........................... 6,291
123,450 Travelers Group, Inc. ........................... 6,651
---------
23,638
---------
INSURANCE (LIFE & HEALTH) (0.5%)
(a)15,600 ESG Re Ltd. ..................................... 367
53,300 Hartford Life, Inc., Class A .................... 2,415
---------
2,782
---------
INSURANCE (MULTI-LINE) (2.7%)
187,300 American Bankers Insurance Group, Inc. .......... 8,604
(a)40,600 CNA Financial Corp. ............................. 5,187
88,100 Nationwide Financial Services, Inc., Class A .... 3,183
---------
16,974
---------
INSURANCE (PROPERTY--CASUALTY) (3.3%)
98,250 Ace Ltd. ........................................ 9,481
75,100 CMAC Investment Corp. ........................... 4,534
11,000 Cincinnati Financial Corp. ...................... 1,548
39,400 NAC Re Corp. .................................... 1,923
26,300 Progressive Corp. ............................... 3,153
---------
20,639
---------
INVESTMENT BANKING & BROKERAGE (1.3%)
(a)142,200 Friedman, Billings, Ramsey Group, Inc., Class
A ............................................. 2,551
76,700 Merrill Lynch & Co. ............................. 5,594
---------
8,145
---------
INVESTMENT MANAGEMENT (0.0%)
(a)17,100 Conning Corp. ................................... 287
---------
TOTAL FINANCE................................................... 109,432
---------
HEALTH CARE (2.2%)
HEALTH CARE (DIVERSIFIED) (0.3%)
24,800 American Home Products Corp...................... 1,897
---------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
HEALTH CARE (DRUGS-MAJOR PHARMS) (1.9%)
50,600 Eli Lilly & Co. ................................. $ 3,523
54,600 Merck & Co., Inc. ............................... 5,801
31,100 Pfizer, Inc. .................................... 2,319
---------
11,643
---------
TOTAL HEALTH CARE............................................... 13,540
---------
TECHNOLOGY (10.9%)
COMMUNICATION EQUIPMENT (0.9%)
(a)41,300 ADC Telecommunications, Inc. .................... 1,724
18,402 Lucent Technologies, Inc. ....................... 1,470
(a)49,500 Tellabs, Inc. ................................... 2,617
---------
5,811
---------
COMPUTERS (HARDWARE) (2.0%)
32,850 Compaq Computer Corp. ........................... 1,854
(a)35,100 Dell Computer Corp. ............................. 2,948
10,800 Hewlett Packard Co. ............................. 675
63,900 International Business Machines Corp. ........... 6,682
---------
12,159
---------
COMPUTERS (NETWORKING) (1.2%)
(a)138,150 Cisco Systems, Inc. ............................. 7,702
---------
COMPUTERS (SOFTWARE & SERVICES) (2.5%)
(a)36,400 America Online, Inc. ............................ 3,246
(a)29,600 Compuware Corp. ................................. 947
(a)76,700 Microsoft Corp. ................................. 9,914
(a)55,250 Oracle Corp. .................................... 1,233
---------
15,340
---------
ELECTRONICS (COMPONENT DISTRIBUTORS) (0.6%)
(a)130,100 Ingram Micro, Inc., Class A...................... 3,789
---------
ELECTRONICS (DEFENSE) (1.7%)
(a)183,000 Litton Industries, Inc. ......................... 10,523
---------
ELECTRONICS (SEMICONDUCTORS) (2.0%)
50,500 Intel Corp. ..................................... 3,548
79,700 Linear Technology Corp. ......................... 4,593
(a)121,200 Maxim Integrated Products, Inc. ................. 4,181
---------
12,322
---------
TOTAL TECHNOLOGY................................................ 67,646
---------
TRANSPORTATION (2.1%)
AIRLINES (2.1%)
(a)44,500 AMR Corp. ....................................... 5,718
(a)118,800 US Airways Group, Inc. .......................... 7,425
---------
TOTAL TRANSPORTATION............................................ 13,143
---------
UTILITIES (0.6%)
POWER PRODUCERS (INDEPENDENT) (0.6%)
(a)73,400 AES Corp. ....................................... 3,422
---------
TOTAL COMMON STOCKS (Cost $534,017)............................... 610,770
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
91
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.2%)
REPURCHASE AGREEMENT (0.2%)
$ 1,097 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $1,098,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $1,121 (Cost $1,097).... $ 1,097
---------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.7%) (Cost $535,114).......................... 611,867
--------
OTHER ASSETS (2.4%)
Cash................................................. $ 1
Receivable for Investments Sold...................... 13,135
Receivable for Portfolio Shares Sold................. 1,519
Dividends Receivable................................. 505
Other................................................ 17 15,177
----------
LIABILITIES (-1.1%)
Payable for Investments Purchased.................... (5,495)
Investment Advisory Fees Payable..................... (877)
Payable for Portfolio Shares Redeemed................ (768)
Administrative Fees Payable.......................... (77)
Custodian Fees Payable............................... (16)
Distribution Fees Payable............................ (15)
Directors' Fees and Expenses Payable................. (15)
Other Liabilities.................................... (113) (7,376)
---------- --------
NET ASSETS (100%).................................................. $619,668
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $529,188
Distributions in Excess of Net Investment Income................... (8)
Accumulated Net Realized Gain...................................... 13,735
Unrealized Appreciation on Investments............................. 76,753
--------
NET ASSETS......................................................... $619,668
--------
--------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -------------------------------------------------------------------
NET ASSETS......................................................... $591,789
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 34,957,180 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $16.93
--------
--------
CLASS B:
- -------------------------------------------------------------------
NET ASSETS......................................................... $27,879
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,649,100 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $16.91
--------
--------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Equity Growth Portfolio
92
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Aerospace 0.3 %
Banking 13.1 %
Building 2.5 %
Capital Goods 3.3 %
Chemicals 1.3 %
Communications 4.8 %
Computers 5.4 %
Consumer--Durables 2.9 %
Consumer--Retail 7.2 %
Consumer--Service & Growth 0.9 %
Consumer--Staples 4.3 %
Electric 1.3 %
Energy 5.9 %
Entertainment 3.2 %
Financial--Diversified 3.0 %
Health Care 3.1 %
Industrial 7.5 %
Insurance 2.7 %
Metals 2.0 %
Paper & Packaging 1.0 %
Restaurants 0.7 %
Services 3.2 %
Technology 4.5 %
Tobacco 0.6 %
Transportation 5.4 %
Utilities 5.3 %
Other 4.6 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SMALL CAP VALUE EQUITY PORTFOLIO--CLASS
A RUSSELL 2500 INDEX(1)
<S> <C> <C>
12/17/92* $500,000 $500,000
12/31/92 $507,000 $515,665
12/31/93 $564,420 $601,000
12/31/94 $578,700 $595,350
12/31/95 $698,086 $784,076
12/31/96 $858,576 $933,443
12/31/97 $1,174,532 $1,160,736
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO THE RUSSELL 2500 INDEX
AND S&P 500 INDEX(1)
- -------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 36.80% 18.30% 18.46%
PORTFOLIO -- CLASS
B..................... 36.51 N/A 29.27
RUSSELL 2500 -- CLASS
A..................... 24.35 17.59 18.16
RUSSELL 2500 -- CLASS
B..................... 24.35 N/A 21.55
S&P 500 -- CLASS A.... 33.36 20.27 20.13
S&P 500 -- CLASS B.... 33.36 N/A 27.63
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 will 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 year ended December 31, 1997, the Portfolio had a total return of 36.80%
for the Class A shares and 36.51% for the Class B shares, compared to a total
return of 24.35% and 33.36% for the Russell 2500 Index and the S&P 500 Index,
respectively. For the five year period ended December 31, 1997, the average
annual total return of Class A was 18.30% compared to 17.59% for the Russell
2500 Index and 20.27% for the S&P 500 Index. From inception on December 17, 1992
through December 31, 1997, the average annual total return of Class A was 18.46%
compared to 18.16% for the Russell 2500 Index and 20.13% for the S&P 500
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
93
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
Index. From inception on January 2, 1996 through December 31, 1997, the average
annual total return of Class B was 29.27% compared to 21.55% for the Russell
2500 Index and 27.63% for the S&P 500 Index.
For the three months ended December 31, 1997, the Portfolio had a total return
of -2.30% for Class A and -2.37% for Class B compared to -2.25% for the Russell
2500 Index and 2.87% for the S&P 500 Index.
Both stock and sector selection played roles in the slight underperformance for
the fourth quarter. Asian worries led to unusual market and economic events.
Electric utilities, despite high valuations, competitive risk, strict regulation
and anemic long-term growth, provided average returns of over 20% in the fourth
quarter, due to their credit sensitivity and perceived safety. Meanwhile, long
interest rates fell despite surging economic growth. Under normal circumstances
the Federal Reserve would likely have tightened rates but could not risk
draining liquidity from the market. In general, companies with stable, domestic
earnings exposure were rewarded, regardless of valuation or long-term growth
prospects. As such, food, beverage, consumer service and utility stocks faired
well. Our underweighted positions in utility and beverage stocks hurt
performance, while our overweighting in financial stocks and under weighting of
energy stocks aided performance. As value investors we continue to search for
companies with low valuations and better than average growth prospects.
Individual stocks which boosted performance included, First of America Bank
(+44.6%), Nationwide Financial Services (+29.8%) and Storage Technology
(+29.0%). Underperforming stocks included Danka Business Systems (-63.9%),
Microage (-48.1%), and Teradyne (-40.5%) .
Asian turmoil has simultaneously raised the possibility of deflation and
inflation. In the event of a worldwide financial crisis/recession commodity
prices will fall, demand will slow and interest rates and profits will decline.
Conversely, if Asian problems remain localized, the current state of low
inflation, low unemployment, falling interest rates and strong economic growth
is unsustainable. Inflation and interest rates are likely to rise. This
uncertainty has led us to increase holdings in utilities, REITs and food stocks,
while reducing Asian-exposed cyclicals and technology stocks.
Gary G. Schlarbaum
PORTFOLIO MANAGER
William Gerlach
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
94
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (95.4%)
AEROSPACE (0.3%)
(a)3,100 Coltec Industries, Inc. .......................... $ 72
(a)2,600 DONCASTERS plc ADR................................ 55
----------
127
----------
BANKING (13.1%)
2,000 Affiliated Community Bancorp, Inc. ............... 76
4,131 Associated Banc-Corp. ............................ 228
6,300 City National Corp. .............................. 233
7,400 Colonial Bancgroup, Inc. ......................... 255
5,700 Comerica, Inc. ................................... 514
7,400 Community First Bankshares, Inc. ................. 394
2,900 Compass Bancshares, Inc. ......................... 127
4,800 Crestar Financial Corp. .......................... 274
5,000 Cullen/Frost Bankers, Inc. ....................... 303
(a)8,300 First Alliance Corp. ............................. 153
5,700 Long Island Bancorp, Inc. ........................ 283
6,200 Money Store, Inc. (The)........................... 130
10,500 North Fork Bancorp, Inc. ......................... 352
4,000 Northern Trust Corp. ............................. 279
(a)2,600 PFF Bancorp, Inc. ................................ 52
(a)2,500 Silicon Valley Bancshares......................... 141
7,800 Southtrust Corp. ................................. 495
6,200 Sovereign Bancorp, Inc. .......................... 129
8,400 Summit Bancorp.................................... 447
7,200 Trans Financial, Inc. ............................ 280
5,500 Webster Financial Corp. .......................... 366
2,500 Wilmington Trust Corp. ........................... 156
----------
5,667
----------
BUILDING (2.5%)
3,450 Hughes Supply, Inc. .............................. 121
10,100 Southdown, Inc. .................................. 596
(a)7,300 USG Corp. ........................................ 358
----------
1,075
----------
CAPITAL GOODS (3.3%)
5,400 Case Corp. ....................................... 326
(a)4,300 Dril-Quip, Inc. .................................. 151
(a)3,400 Electro Scientific Industries, Inc. .............. 129
(a)11,200 Essex International, Inc. ........................ 333
5,700 Herman Miller, Inc. .............................. 311
(a)2,100 IRI International Corp. .......................... 29
(a)2,500 Lattice Semiconductor Corp. ...................... 118
(a)2,700 Stoneridge, Inc. ................................. 43
----------
1,440
----------
CHEMICALS (1.3%)
15,400 Solutia, Inc. .................................... 411
(a)4,200 USA Waste Services, Inc. ......................... 165
----------
576
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMUNICATIONS (4.8%)
(a)2,400 ADC Telecommunications, Inc. ..................... $ 100
(a)25,200 Journal Register Co. ............................. 529
1,700 New York Times Co., Class A....................... 112
(a)12,600 Nextel Communications, Inc., Class A.............. 328
(a)20,900 Valassis Communications, Inc. .................... 773
500 Washington Post Co., Class B...................... 243
----------
2,085
----------
COMPUTERS (5.4%)
(a)5,600 Altera Corp. ..................................... 186
(a)5,800 BMC Software, Inc. ............................... 381
(a)2,100 Box Hill Systems Corp. ........................... 22
(a)10,000 Cadence Design Systems, Inc. ..................... 245
(a)9,400 Computer Products, Inc. .......................... 213
6,800 Elbit Systems, Ltd. .............................. 94
(a)5,800 Fiserv, Inc. ..................................... 285
(a)2,000 HMT Technology Corp. ............................. 26
(a)6,700 MicroAge, Inc. ................................... 101
(a)3,800 Storage Technology Corp. ......................... 235
(a)6,700 Stratus Computer, Inc. ........................... 253
(a)5,700 Tech Data Corp. .................................. 222
(a)6,200 Technology Modeling Associates, Inc. ............. 66
----------
2,329
----------
CONSUMER-DURABLES (2.9%)
3,200 Arvin Industries, Inc. ........................... 107
(a)7,800 Dan River, Inc., Class A.......................... 128
(a)8,000 Datascope Corp. .................................. 207
(a)6,700 HEALTHSOUTH Corp. ................................ 186
(a)7,800 I.C Isaacs & Co. Inc. ............................ 79
6,500 Mylan Laboratories, Inc. ......................... 136
(a)8,900 Physicians Sales & Service, Inc. ................. 191
(a)11,900 VIVUS, Inc. ...................................... 126
(a)2,700 VWR Scientific Products Corp. .................... 76
----------
1,236
----------
CONSUMER-RETAIL (7.2%)
(a)6,300 Brylane, Inc. .................................... 310
4,900 CVS Corp. ........................................ 314
5,100 DIAL Corp. ....................................... 106
(a)4,400 Fred Meyer, Inc. ................................. 160
(a)6,400 Neiman Marcus Group, Inc. ........................ 194
(a)12,300 Office Depot, Inc. ............................... 294
15,250 Pier 1 Imports, Inc. ............................. 345
14,900 Ross Stores, Inc. ................................ 542
(a)5,800 ShopKo Stores, Inc. .............................. 126
20,300 TJX Cos., Inc. ................................... 698
----------
3,089
----------
CONSUMER-SERVICE & GROWTH (0.9%)
14,700 Danka Business Systems plc ADR.................... 234
(a)500 EVI, Inc. ........................................ 26
7,400 Select Appointments Holdings, plc ADR............. 135
----------
395
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
95
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
CONSUMER-STAPLES (4.3%)
7,950 Arbor Drugs, Inc. ................................ $ 147
4,900 Dean Foods Co. ................................... 291
(a)4,400 ESG Re, Ltd. ..................................... 103
9,200 Interstate Bakeries Corp. ........................ 344
1,400 Lancaster Colony Corp. ........................... 79
2,700 Mack-Cali Realty Corp. REIT....................... 111
12,000 Richfood Holdings, Inc. .......................... 339
4,000 SL Green Realty Corp. REIT........................ 104
(a)5,100 Security Capital Group, Inc., Class B............. 166
(a)7,400 Stirling Cooke Brown Holdings, Ltd. .............. 181
----------
1,865
----------
ELECTRIC (1.3%)
5,100 Black Hills Corp. ................................ 180
(a)8,300 SCI Systems, Inc. ................................ 361
----------
541
----------
ENERGY (5.9%)
200 Arch Coal, Inc. .................................. 5
3,800 Columbia Gas System, Inc. ........................ 299
6,900 Diamond Offshore Drilling, Inc. .................. 332
(a)3,500 Grey Wolf, Inc. .................................. 19
(a)4,700 Marine Drilling Cos., Inc. ....................... 98
4,300 New Century Energies, Inc. ....................... 206
(a)2,600 Noble Affiliates, Inc. ........................... 92
15,800 Noble Drilling Corp. ............................. 484
2,400 Sun Co., Inc. .................................... 101
5,100 Transocean Offshore, Inc. ........................ 246
(a)4,000 United Meridian Corp. ............................ 113
4,000 Valero Energy Corp. .............................. 126
4,800 Vintage Petroleum, Inc. .......................... 91
(a)6,700 Weatherford Enterra, Inc. ........................ 293
(a)1,700 Willbros Group, Inc. ............................. 26
----------
2,531
----------
ENTERTAINMENT (3.2%)
(a)6,200 AMF Bowling, Inc. ................................ 155
(a)3,500 MGM Grand, Inc. .................................. 126
26,700 Universal Corp. .................................. 1,098
----------
1,379
----------
FINANCIAL-DIVERSIFIED (3.0%)
11,100 Bear Stearns Cos., Inc. .......................... 527
2,800 Capital One Financial Corp. ...................... 152
(a)9,400 CIT Group, Inc. (The), Class A.................... 303
2,400 Lehman Brothers Holdings, Inc. ................... 122
5,600 National Commerce Bancorp......................... 197
(a)725 Wellsford Real Properties, Inc. .................. 11
----------
1,312
----------
HEALTH CARE (3.1%)
(a)3,900 Biogen, Inc. ..................................... 142
(a)18,100 FPA Medical Management, Inc. ..................... 337
(a)1,700 Health Care & Retirement Corp. ................... 68
2,600 ICN Pharmaceuticals, Inc. ........................ 127
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)4,200 Marquette Medical Systems, Class A................ $ 112
(a)4,500 Universal Health Services, Inc., Class B.......... 227
(a)3,100 Vencor, Inc. ..................................... 76
(a)6,300 Wellpoint Health Networks, Inc. .................. 266
----------
1,355
----------
INDUSTRIAL (7.5%)
5,000 AGCO Corp. ....................................... 146
(a)1,600 BJ Services Co. .................................. 115
(a)7,700 CDI Corp. ........................................ 352
4,900 Culp, Inc. ....................................... 98
6,200 Franklin Resources, Inc. ......................... 539
(a)7,000 Intevac, Inc. .................................... 68
(a)6,000 Lear Corp. ....................................... 285
4,800 Lone Star Industries, Inc. ....................... 255
20,300 MascoTech, Inc. .................................. 373
(a)2,100 NS Group, Inc. ................................... 36
(a)7,600 National Steel Corp., Class B..................... 88
(a)3,700 Precision Drilling Corp. ......................... 90
(a)7,200 Teradyne, Inc. ................................... 230
(a)11,600 Tetra Technologies, Inc. ......................... 244
4,700 Trinity Industries, Inc. ......................... 210
(a)3,800 Triumph Group, Inc. .............................. 126
----------
3,255
----------
INSURANCE (2.7%)
3,000 Ambac Financial Group, Inc. ...................... 138
4,700 CMAC Investment Corp. ............................ 284
6,200 Mercury General Corp. ............................ 343
10,800 Nationwide Financial Services, Inc., Class A...... 390
----------
1,155
----------
METALS (2.0%)
9,600 General Cable Corp. .............................. 347
5,400 Kaydon Corp. ..................................... 176
5,300 Precision Castparts Corp. ........................ 320
----------
843
----------
PAPER & PACKAGING (1.0%)
600 Central Newspapers, Inc., Class A................. 44
(a)20,600 U.S. Office Products.............................. 404
----------
448
----------
RESTAURANTS (0.7%)
8,400 Applebee's International, Inc. ................... 152
5,600 Michael Foods, Inc. .............................. 136
----------
288
----------
SERVICES (3.2%)
(a)20,200 AccuStaff, Inc. .................................. 465
(a)11,600 Interim Services, Inc. ........................... 300
(a)3,900 Personnel Group of America, Inc. ................. 129
(a)14,100 Philip Service Corp. ............................. 203
10,000 Russ Berrie & Co., Inc. .......................... 263
----------
1,360
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
96
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY (4.5%)
(a)6,100 CTB International Corp. .......................... $ 87
(a)1,600 Coherent, Inc. ................................... 56
(a)1,800 Cooper Cameron Corp. ............................. 110
(a)25,300 Healthdyne Technologies, Inc. .................... 515
(a)6,400 Inacom Corp. ..................................... 180
1,900 Linear Technology Corp. .......................... 109
(a)26,300 Symantec Corp. ................................... 577
3,300 Tektronix, Inc. .................................. 131
(a)700 Veritas DGC, Inc. ................................ 28
(a)4,200 Watson Pharmaceuticals, Inc. ..................... 136
----------
1,929
----------
TOBACCO (0.6%)
(a)900 Consolidated Cigar Holdings, Inc. ................ 25
9,600 DIMON, Inc. ...................................... 252
----------
277
----------
TRANSPORTATION (5.4%)
15,200 Air Express International Corp. .................. 464
2,000 Airborne Freight Corp. ........................... 124
14,600 Arnold Industries, Inc. .......................... 252
(a)14,700 Atlas Air, Inc. .................................. 353
11,500 CNF Transportation, Inc. ......................... 441
7,200 Harley-Davidson, Inc. ............................ 197
4,700 Hertz Corp., Class A.............................. 189
3,000 Lubrizol Corp. ................................... 111
(a)1,500 Midway Airlines Corp. ............................ 23
(a)4,100 Tower Automotive, Inc. ........................... 172
----------
2,326
----------
UTILITIES (5.3%)
12,900 Allegheny Energy, Inc. ........................... 419
4,600 CMS Energy Corp. ................................. 203
10,300 Florida Progress Corp. ........................... 404
7,500 Illinova Corp. ................................... 202
5,600 IPALCO Enterprises, Inc. ......................... 235
6,200 LG&E Energy Corp. ................................ 153
2,700 NICOR, Inc. ...................................... 114
3,000 Oneok, Inc. ...................................... 121
4,700 Pinnacle West Capital Corp. ...................... 199
7,000 TECO Energy, Inc. ................................ 197
1,000 Washington Gas Light Co. ......................... 31
----------
2,278
----------
TOTAL COMMON STOCKS (Cost $36,984)............................ 41,161
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (5.1%)
REPURCHASE AGREEMENT (5.1%)
$ 2,172 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $2,173,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $2,218 (Cost $2,172)..... 2,172
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (100.5%) (Cost $39,156)................ $ 43,333
-----------
OTHER ASSETS (2.9%)
Receivable for Investments Sold............ $ 625
Receivable for Portfolio Shares Sold....... 603
Dividends Receivable....................... 24
Other...................................... 3 1,255
----------
LIABILITIES (-3.4%)
Payable for Investments Purchased.......... (976)
Payable for Portfolio Shares Redeemed...... (379)
Investment Advisory Fees Payable........... (58)
Administrative Fees Payable................ (6)
Distribution Fees Payable.................. (5)
Custodian Fees Payable..................... (2)
Directors' Fees and Expenses Payable....... (2)
Bank Overdraft............................. (1)
Other Liabilities.......................... (24) (1,453)
---------- -----------
NET ASSETS (100%)........................................ $ 43,135
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 37,604
Distributions in Excess of Net Investment Income.............. (6)
Accumulated Net Realized Gain................................. 1,360
Unrealized Appreciation on Investments........................ 4,177
-----------
NET ASSETS.................................................... $ 43,135
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $35,612
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,168,977 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $11.24
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
CLASS B:
- --------------------------------------------------------------
NET ASSETS.................................................... $7,523
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 671,073 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $11.21
-----------
-----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Small Cap Value Equity Portfolio
97
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Communication Equipment 32.0 %
Communication Services 6.0 %
Diversified Technology 1.3 %
Other Technology 33.3 %
Software 20.7 %
Other 6.7 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $250,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TECHNOLOGY PORTFOLIO--CLASS TECHNOLOGY PORTFOLIO--CLASS
A B S&P 500 INDEX(1)
<S> <C> <C> <C>
9/16/96* $250,000 $50,000 $250,000
12/31/96 267,750 53,550 272,200
12/31/97 367,540 73,310 363,006
* Commencement of operations
** Minimum Investment--Class A
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different fees assessed to that class. The S&P 500 Index value at
December 31, 1997 assumes a minimum initial investment of $250,000; if a minimum
initial investment of $50,000 (the minimum investment for Class B shares) is
assumed the value at December 31, 1997 would be $72,601.
PERFORMANCE COMPARED TO THE S&P 500 INDEX AND THE
LIPPER SCIENCE AND TECHNOLOGY FUNDS INDEX(1)
- -----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------- ---------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 37.27% 34.80%
PORTFOLIO -- CLASS B............. 36.90 34.52
S&P 500 INDEX.................... 33.36 33.61
LIPPER SCIENCE AND TECHNOLOGY
FUNDS INDEX...................... 7.84 14.00
</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 mutual 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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had total returns of 37.27%
and 36.90% for Class A shares and Class B shares, respectively, compared to
33.36% for the S&P 500 Index and 7.84% for the Lipper Science and Technology
Funds Index. From inception on September 16, 1996 through December 31, 1997, the
average annual total return of Class A was 34.80% and 34.52% for Class B
compared to 33.61% for the S&P 500 Index and 14.00% for the Lipper Science and
Technology Funds Index.
Overall, we have been quite pleased with the Portfolio's performance in 1997 as
it has performed well on an absolute and relative basis in both up and down
market periods. Despite the extreme volatility in the equity markets, in
general, and in the technology sector, in particular, we managed to sustain much
of the gain recorded in the first nine months to finish the year with an
extremely strong performance. The outperformance for the fourth quarter was due
to the strength of several of our networking, telecom and software stocks
offsetting weakness in semiconductors.
It is noteworthy that we maintained our leadership throughout 1997 finishing
each quarter ahead of all our relevant benchmarks. The declines experienced in
technology in the fourth quarter were attributed to three factors (i)
bellweather technology companies such as Intel and Oracle reporting
disappointing earnings (ii) the economic crisis in Asia and its perceived and
actual spill-over impact on the tech sector and (iii) investor concern regarding
valuation levels for growth stocks in an environment where the prospect of a
U.S. recession in 1998 was increasing. Furthermore, the technology sector
experienced several major dislocations due to such developments
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
98
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
as the shift in average selling prices for PCs and overcapacity of commodity
items such as disk drives and memory.
We look forward to 1998. Despite concerns regarding a slowdown in the U.S.
economy as a result of 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. Some high profile companies will continue to
face obstacles but it is our job to identify opportunities as these events
unfold. Our goal remains the same; identify the premier sectors and companies
which present compelling investment opportunities and avoid the sectors and
companies with deteriorating fundamentals.
Stephen C. Sexauer
PORTFOLIO MANAGER
Terry T. Corcoran
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
Technology Portfolio
99
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (92.4%)
COMMUNICATION EQUIPMENT (31.8%)
COMPUTER INTEGRATED SYSTEMS DESIGN (14.3%)
(a)22,400 Ascend Communications, Inc. ...................... $ 549
(a)6,000 Bay Networks, Inc. ............................... 153
(a)39,700 Cisco Systems, Inc. .............................. 2,213
(a)8,700 ECsoft Group plc ADR.............................. 157
(a)23,600 FORE Systems, Inc. ............................... 360
(a)11,200 Gateway 2000, Inc. ............................... 365
4,600 Hewlett-Packard Co. .............................. 288
(a)4,600 Jyra Research, Inc. .............................. 45
(a)8,400 MetaCreations Corp. .............................. 93
(a)7,200 Premisys Communications, Inc. .................... 188
(a)20,700 Secure Computing Corp. ........................... 245
(a)1,600 Storage Technology Corp. ......................... 99
(a)7,700 VideoServer, Inc. ................................ 122
----------
4,877
----------
COMPUTER PERIPHERAL EQUIPMENT (1.8%)
(a)32,900 Acclaim Entertainment, Inc. ...................... 119
(a)7,000 CompUSA, Inc. .................................... 217
(a)8,300 PMC-Sierra, Inc. ................................. 258
----------
594
----------
ELECTRICAL WORK (0.4%)
(a)1,900 Ballard Power Systems, Inc. ...................... 145
----------
ELECTRONIC COMPONENTS & ACCESSORIES (1.3%)
(a)4,000 Aavid Thermal Technologies, Inc. ................. 96
(a)400 Flextronics International Ltd. ................... 14
(a)4,500 Integrated Process Equipment Corp. ............... 71
(a)1,700 MMC Networks, Inc. ............................... 29
5,844 Molex, Inc., Class A.............................. 168
(a)20,600 Syquest Technology, Inc. ......................... 69
----------
447
----------
MISCELLANEOUS COMMUNICATION EQUIPMENT (3.5%)
(a)3,800 Cidco, Inc. ...................................... 74
(a)9,600 CIENA Corp. ...................................... 587
(a)7,700 Excell Switching Corp. ........................... 138
(a)2,200 JDS Fitel, Inc. .................................. 131
(a)6,700 MAS Technology Ltd. ADR........................... 116
(a)3,300 Uniphase Corp. ................................... 136
----------
1,182
----------
RADIO & TELEVISION BROADCASTING (0.3%)
(a)1,400 Clear Channel Communications, Inc. ............... 111
----------
SPECIAL INDUSTRY MACHINERY (0.2%)
(a)1,200 ASM Lithography Holding N.V....................... 81
----------
TELEPHONE & TELEGRAPH APPARATUS (10.0%)
(a)19,600 ADC Telecommunications, Inc. ..................... 818
(a)14,000 Advanced Fibre Communications, Inc. .............. 408
(a)4,100 Bell Canada International, Inc. .................. 63
(a)1,100 Intermedia Communications, Inc. .................. 67
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
4,600 Lucent Technologies, Inc. ........................ $ 367
(a)4,200 Newbridge Networks Corp. ......................... 146
1,900 Northern Telecommunications Ltd. ................. 169
(a)5,300 Tekelec, Inc. .................................... 162
(a)23,300 Tellabs, Inc. .................................... 1,232
----------
3,432
----------
TOTAL COMMUNICATION EQUIPMENT............................... 10,869
----------
COMMUNICATION SERVICES (6.0%)
COMPUTER PROGRAMMING (0.8%)
2,400 Electronic Data Systems Corp. .................... 105
(a)7,000 International Network Services.................... 162
----------
267
----------
DIRECT MAIL ADVERTISING SERVICE (0.2%)
(a)1,700 Tele-Communications, Inc., Class A................ 62
----------
MISCELLANEOUS COMMUNICATION SERVICES (1.2%)
(a)3,400 AirTouch Communications, Inc. .................... 141
(a)3,700 Metromedia Fiber Network, Inc., Class A........... 61
(a)1,800 RSL Communications Ltd., Class A.................. 40
(a)3,200 Teligent, Inc., Class A........................... 79
(a)1,800 Telstra Corp., Ltd. ADR........................... 75
----------
396
----------
RADIO/TELEPHONE COMMUNICATIONS (1.8%)
(a)14,800 Mobile Telecommunications Technologies Corp. ..... 325
(a)13,000 Proxim, Inc. ..................................... 147
(a)6,400 WinStar Communications, Inc. ..................... 160
----------
632
----------
TELEPHONE COMMUNICATIONS (2.0%)
(a)4,600 American Communications Services, Inc. ........... 59
(a)4,100 China Telecom (Hong Kong) Ltd. ADR................ 138
(a)3,200 France Telecom ADR................................ 115
(a)2,400 ICG Communications, Inc. ......................... 65
(a)2,200 Matav Rt. ADR..................................... 57
1,400 Sprint Corp. ..................................... 82
(a)3,200 Teleport Communications Group, Inc., Class A...... 176
----------
692
----------
TOTAL COMMUNICATION SERVICES................................ 2,049
----------
DIVERSIFIED TECHNOLOGY (1.3%)
4,900 CBS Corp. ........................................ 144
(a)4,100 ITI Education Corp. .............................. 25
(a)3,100 Tech Data Corp. .................................. 121
(a)13,500 Unisys Corp. ..................................... 187
----------
477
----------
OTHER TECHNOLOGY (32.7%)
BUSINESS SERVICES (6.5%)
(a)800 BISYS Group, Inc. ................................ 26
(a)2,700 CBT Group plc ADR................................. 222
(a)6,100 Data Processing Resources Corp. .................. 155
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
100
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
OTHER TECHNOLOGY (CONT.)
BUSINESS SERVICES (CONT.)
<TABLE>
<C> <S> <C>
(a)900 Dril-Quip, Inc. .................................. $ 32
1,900 ENSCO International, Inc. ........................ 64
(a)1,300 EVI, Inc. ........................................ 67
(a)100 Home Side, Inc. .................................. 3
(a)1,800 Patterson Energy, Inc. ........................... 70
6,800 Paychex, Inc. .................................... 344
(a)4,000 Precision Drilling Corp. ......................... 97
(a)100 Reading & Bates Corp. ............................ 4
(a)2,900 Robert Half International, Inc. .................. 116
(a)11,700 Romac International, Inc. ........................ 286
(a)5,100 SunGard Data Systems, Inc. ....................... 158
(a)7,800 TeleTech Holdings, Inc. .......................... 89
(a)9,700 USCS International, Inc. ......................... 165
(a)9,400 Whittman-Hart, Inc. .............................. 322
----------
2,220
----------
ELECTRONIC COMPUTERS (6.2%)
4,385 Compaq Computer Corp. ............................ 248
(a)8,000 Dell Computer Corp. .............................. 672
11,500 International Business Machines Corp. ............ 1,202
----------
2,122
----------
MISCELLANEOUS TECHNOLOGY (0.5%)
(a)7,400 Electronics For Imaging, Inc. .................... 123
(a)2,100 Orbital Sciences Corp. ........................... 63
----------
186
----------
PERSONAL SERVICE (4.4%)
(a)3,400 Amazon.com, Inc. ................................. 205
(a)11,100 America Online, Inc. ............................. 990
(a)800 At Home Corp., Series A........................... 20
(a)1,900 Cendant Corp. .................................... 65
(a)1,400 Vocaltec Communications Ltd. ..................... 29
(a)2,600 Yahoo!, Inc. ..................................... 180
----------
1,489
----------
SEMICONDUCTORS & RELATED SERVICES (15.1%)
(a)3,300 Altera Corp. ..................................... 109
(a)5,200 Applied Materials, Inc. .......................... 157
(a)8,400 Intel Corp. ...................................... 590
(a)4,800 Lattice Semiconductor Corp. ...................... 227
(a)10,000 Level One Communications, Inc. ................... 283
23,500 Linear Technology Corp. .......................... 1,354
(a)45,200 Maxim Integrated Products, Inc. .................. 1,559
(a)4,000 Rambus, Inc. ..................................... 183
(a)700 Semtech Corp. .................................... 27
(a)12,000 TranSwitch Corp. ................................. 90
(a)5,900 Vitesse Semiconductor Corp. ...................... 223
(a)10,200 Xilinx, Inc. ..................................... 358
----------
5,160
----------
TOTAL OTHER TECHNOLOGY...................................... 11,177
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SOFTWARE (20.6%)
COMMUNICATIONS SOFTWARE (1.0%)
(a)41,600 Executone Information Systems, Inc. .............. $ 91
(a)8,300 Infoseek Corp. ................................... 89
2,400 Inter-Tel, Inc. .................................. 47
(a)5,000 Netscape Communications Corp. .................... 122
----------
349
----------
MANAGEMENT CONSULTING SERVICES(1.2%)
(a)6,300 Intersolv, Inc. .................................. 127
(a)4,900 Volt Information Sciences, Inc. .................. 264
----------
391
----------
MISCELLANEOUS SOFTWARE (1.2%)
(a)4,800 Cadence Design Systems, Inc. ..................... 117
(a)1,000 Manugistics Group, Inc. .......................... 45
(a)8,600 Progress Software Corp. .......................... 186
(a)4,100 RealNetworks, Inc. ............................... 57
----------
405
----------
PREPACKAGED SOFTWARE (17.2%)
4,400 Autodesk, Inc. ................................... 163
(a)7,400 Broderbund Software, Inc. ........................ 190
(a)5,700 Citrix Systems, Inc. ............................. 433
8,700 Computer Associates International, Inc. .......... 460
(a)18,900 Compuware Corp. .................................. 605
(a)4,700 Electronic Arts, Inc. ............................ 178
(a)10,300 FlexiInternational Software, Inc. ................ 160
(a)600 Keane, Inc. ...................................... 24
(a)1,900 Learning Company, Inc. ........................... 31
(a)14,700 Microsoft Corp. .................................. 1,900
(a)13,000 Oracle System, Corp. ............................. 290
(a)5,000 PSW Technologies, Inc. ........................... 72
(a)27,100 Peoplesoft, Inc. ................................. 1,057
(a)6,000 Quadramed Corp. .................................. 165
(a)3,200 Symantec Corp. ................................... 70
(a)2,000 Viasoft, Inc. .................................... 84
----------
5,882
----------
TOTAL SOFTWARE.............................................. 7,027
----------
TOTAL COMMON STOCKS (Cost $31,703)............................ 31,599
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
CONTRACTS
<C> <S> <C>
- ----------
PURCHASED CALL OPTIONS (0.5%)
COMMUNICATION EQUIPMENT (0.2%)
COMPUTER INTEGRATED SYSTEMS DESIGN (0.1%)
(a)9,500 3COM Corp., expiring 1/17/98, strike price
U.S.$80......................................... --
(a)7,000 Bay Networks, Inc., expiring 2/21/98, strike price
U.S.$30......................................... 6
(a)9,900 Cisco Systems, Inc., expiring 1/17/98, strike
price U.S.$56.625............................... 16
(a)1,500 Cisco Systems, Inc., expiring 1/17/98, strike
price U.S.$53.375............................... 5
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Technology Portfolio
101
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NO. OF VALUE
CONTRACTS (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
COMMUNICATION EQUIPMENT (CONT.)
COMPUTER INTEGRATED SYSTEMS DESIGN (CONT.)
<TABLE>
<C> <S> <C>
(a)6,000 Cisco Systems, Inc., expiring 1/17/98, strike
price U.S.$60................................... $ 3
(a)10,000 Secure Computing Corp., expiring 1/17/98, strike
price U.S.$12.50................................ 13
----------
43
----------
TELEPHONE & TELEGRAPH APPARATUS (0.1%)
(a)6,500 Tellabs, Inc., expiring 1/17/98, strike price
U.S.$55......................................... 11
(a)2,000 Tellabs, Inc., expiring 3/21/98, strike price
U.S.$60......................................... 5
----------
16
----------
TOTAL COMMUNICATION EQUIPMENT............................... 59
----------
COMMUNICATION SERVICES (0.0%)
COMPUTER PROCESSING & DATA PREPARATION (0.0%)
(a)1,400 Applied Magnetics Corp., expiring 4/18/98, strike
price U.S.$20................................... 12
----------
OTHER TECHNOLOGY (0.2%)
ELECTRONIC COMPUTERS (0.0%)
(a)3,000 International Business Machines Corp., expiring
1/17/98, strike price U.S.$105.................. 9
(a)1,000 International Business Machines Corp., expiring
1/17/98, strike price U.S.$120.................. --
----------
9
----------
SEMICONDUCTORS & RELATED SERVICES (0.2%)
(a)13,600 Altera Corp., expiring 1/17/98, strike price
U.S.$35......................................... 16
(a)1,000 Intel Corp., expiring 1/17/98, strike price
U.S.$90......................................... --
(a)3,300 Linear Technology Corp., expiring 1/17/98, strike
price U.S.$60................................... 8
(a)1,000 Linear Technology Corp., expiring 2/21/98, strike
price U.S.$70................................... 1
(a)6,200 Maxim Integrated Products, Inc., expiring 1/17/98,
strike price U.S.$32.50......................... 17
(a)8,000 Maxim Intergrated Products, Inc., expiring
2/21/98, strike price U.S.$35................... 23
(a)2,800 Xilinx, Inc., expiring 1/17/98, strike price
U.S.$35......................................... 8
----------
73
----------
TOTAL OTHER TECHNOLOGY...................................... 82
----------
<CAPTION>
NO. OF VALUE
CONTRACTS (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SOFTWARE (0.1%)
PREPACKAGED SOFTWARE (0.1%)
(a)1,000 Microsoft Corp., expiring 1/17/98, strike price
U.S.$170........................................ $ --
(a)2,000 Microsoft Corp., expiring 1/17/98, strike price
U.S.$145........................................ 1
(a)4,000 Peoplesoft, Inc., expiring 1/17/98, strike price
U.S.$35......................................... 17
----------
18
----------
TOTAL PURCHASED OPTIONS (Cost $204)........................... 171
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.4%)
OTHER TECHNOLOGY (0.4%)
SEMICONDUCTORS & RELATED SERVICES (0.4%)
3,000 Intel Corp., expiring 3/14/98 (Cost $150)......... 149
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (93.3%) (Cost $32,057).................... 31,919
----------
OTHER ASSETS (18.8%)
Cash.......................................... $ 1,382
Receivable for Investments Sold............... 2,252
Receivable for Securities Sold Short.......... 921
Dividends Receivable.......................... 724
Receivable due from Broker.................... 537
Receivable for Portfolio Shares Sold.......... 128
Other......................................... 456 6,400
----------
LIABILITIES (-12.1%)
Payable for Investments Purchased............. (2,804)
Securities Sold Short, at Value (Proceeds
$921)....................................... (774)
Investment Advisory Fees Payable.............. (21)
Custodian Fees Payable........................ (25)
Administrative Fees Payable................... (4)
Directors' Fees and Expenses Payable.......... (4)
Distribution Fees Payable..................... (1)
Other Liabilities............................. (504) (4,137)
---------- ----------
NET ASSETS (100%)........................................... $ 34,182
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 36,419
Distributions in Excess of Net Investment Income.............. (121)
Accumulated Net Realized Loss................................. (2,125)
Unrealized Appreciation on Investments and Securities Sold
Short....................................................... 9
----------
NET ASSETS.................................................... $ 34,182
----------
----------
</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
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
------------------------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $31,788
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,709,977 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $11.73
----------
----------
CLASS B:
- --------------------------------------------------------------
NET ASSETS.................................................... $2,394
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 204,379 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $11.72
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
ADR -- American Depositary Receipt
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ---------------------------------------------------------------------------
SECURITIES SOLD SHORT (NOTE A-9)
4,000 3Com Corp...................................... $ 140
2,000 Adobe Systems, Inc............................. 82
9,900 Applied Magnetics Corp......................... 110
3,500 Crystal System Solutions Ltd................... 89
5,800 DSC Communications Corp........................ 139
3,600 Hutchinson Technology, Inc..................... 79
3,400 LSI Logic Corp................................. 67
3,400 Ultratech Stepper, Inc......................... 68
-----
(Total Proceeds $921)...................................... $ 774
-----
-----
</TABLE>
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 DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Capital Goods--Construction 5.2 %
Consumer--Cyclical 10.2 %
Consumer--Staples 21.9 %
Diversified 2.9 %
Energy 11.3 %
Finance 16.0 %
Materials 5.1 %
Services 2.4 %
Technology 22.4 %
Other 2.6 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. EQUITY PLUS--CLASS U.S. EQUITY PLUS--CLASS
A B S&P 500 INDEX(1)
<S> <C> <C> <C>
7/13/97* $500,000 $100,000 $500,000
12/31/97 519,700 103,930 512,200
* Commencement of operations
** Minimum Investment--Class A
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different fees assessed to that class. The S&P 500 Index value at
December 31, 1997 assumes a minimum initial investment of $500,000; if a minimum
initial investment of $100,000 (the minimum investment for Class B shares) is
assumed, the value at December 31, 1997 would be $102,440.
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
SINCE INCEPTION
------------------
<S> <C>
PORTFOLIO -- CLASS A(3)..................... 3.94%
PORTFOLIO -- CLASS B(3)..................... 3.93
INDEX....................................... 2.44
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 period from inception on July 31, 1997 to December 31, 1997, the
Portfolio had a total return of 3.94% for Class A shares and 3.93% for Class B
shares compared to 2.44% for the S&P 500 Index (the "Index").
After an exceptional performance during the first three quarters of 1997, U.S.
equity markets drifted sideways during the final three months. As investors
began to focus on the potential consequences of disinflation (and possibly even
deflation), stock and bonds began to de-couple. Bond yields eased throughout the
quarter as favorable price data continued to emerge.
The Portfolio is sector neutral to the S&P 500, 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 technology, capital
goods, consumer non-durables and basic industries. Our worst performing sectors
were consumer services, banking, telephones and airlines.
Virtually all of the differential performance between the Portfolio and the
benchmark came from active stock selection. The five largest contributions to
our performance relative to the S&P 500 came from the following stocks: 1)
Unicom, a producer and
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO
104
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO (CONT.)
distributor of electricity in the Mid-West, rose by 33% benefiting from news
about pending legislation that could result in significant cost savings and more
stable revenues in the future; 2) Sara Lee, a worldwide producer and marketer of
consumer products, rose 9% during the period responding well to the first phase
of its resturcturing programs and the reiteration of a plan to buyback $3
billion in stock. 3) Exxon, a diversified petroleum company, underperformed the
market as a result of concerns over increasing supplies of crude weighed on the
shares of major oil companies. An underweight position in Exxon contributed to
our performance. 4) Likewise, software supplier Oracle had significant troubles
during the quarter. Our underweight position in the stock was rewarded as
Oracle's shares plunged by 39% on news of weak database software sales and
failing expansion plans. 5) Eastern Enterprises, a distributor of natural gas in
New England, returned 22%. Investor interest in the sector was heightened during
the quarter as a result of takeover activity, very attractive dividend yields
and the prospect of stable returns -- a welcomed safe haven given the
uncertainties currently facing many other sectors.
On the other side, the five most negative contributions to our performance
relative to the S&P 500 came from the following stocks. 1) Amoco, a diversified
petroleum company, registered sluggish performance falling by 11% due to falling
refining margins and concerns about increasing global crude supplies. 2) USX -
US Steel, an integrated steel producer, declined by 9%. Robust demand for steel
in the U.S. was not enough to support its shares in the face of tumbling
flat-rolled prices and the threat of increased competition from Asia due to
currency realignments. 3) Phelps Dodge, a major North American producer of
copper, fell by 19%. With supply exceeding demand for copper, near-term earnings
prospects crumbled. 4) International financial service provider Chase Manhattan
Bank slipped by 7% as a flattening term structure of interest rates and Emerging
Market trading missteps hurt profit margins. 5) Entertainment giant Disney
enjoyed a strong quarter. An underweight position in this stock proved painful
as its share price climbed by 23% on the success of holiday films and optimism
about 1998 projects.
Some concluding thoughts... it is difficult to envision an economic scenario
under which U.S. stocks could put in another year like 1997. A "low interest
rate/low inflation" theme has clearly materialized. Low interest rates are
normally good news for stocks. However, the low inflation twist to the theme
makes the environment more complex. There is considerable uncertainty about what
disinflation will mean for the growth rate of corporate earnings in 1998. The
current woes in Asia only serve to further cloud the picture. As investors begin
to reign in their expectations regarding growth, stocks may be hard-pressed to
achieve any significant overall gains. The good news is that the U.S. economy
remains healthy and employment gains have been robust. This positive tone may
help to offset some of the negative influences in the months ahead.
Narayan Ramachandran
PORTFOLIO MANAGER
Eugene Flood
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
U.S. Equity Plus Portfolio
105
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (97.4%)
CAPITAL GOODS-CONSTRUCTION (5.2%)
AEROSPACE & DEFENSE (1.8%)
1,200 Boeing Co. ....................................... $ 59
1,100 EG&G, Inc. ....................................... 23
100 General Dynamics Corp. ........................... 9
1,100 Goodrich (BF) Co. ................................ 46
600 Lockheed Martin Corp. ............................ 59
500 Northrop Grumman Corp. ........................... 57
96 Raytheon Co., Class A............................. 5
1,100 Raytheon Co., Class B............................. 56
800 United Technologies Corp. ........................ 58
----------
372
----------
BUILDING & CONSTRUCTION (0.8%)
2,400 Armstrong World Industries, Inc. ................. 179
----------
ELECTRICAL EQUIPMENT (0.0%)
100 Cooper Industries, Inc. .......................... 5
----------
MACHINERY (2.6%)
600 Briggs & Stratton Corp. .......................... 29
2,700 Caterpillar, Inc. ................................ 131
600 Cincinnati Milacron, Inc. ........................ 16
400 Cummins Engine Co., Inc. ......................... 23
2,500 Deere & Co. ...................................... 146
4,200 Dresser Industries, Inc. ......................... 176
450 Parker-Hannifin Corp. ............................ 21
----------
542
----------
TOTAL CAPITAL GOODS-CONSTRUCTION............................ 1,098
----------
CONSUMER-CYCLICAL (10.2%)
AUTOMOTIVE (2.2%)
2,600 Chrysler Corp. ................................... 91
200 Dana Corp. ....................................... 10
4,300 Ford Motor Co. ................................... 209
1,500 General Motors Corp. ............................. 91
1,100 Goodyear Tire & Rubber Co. ....................... 70
66 Meritor Automotive, Inc. ......................... 1
----------
472
----------
FOOD SERVICE & LODGING (0.2%)
1,200 Hilton Hotels Corp. .............................. 36
----------
HOUSEHOLD FURNISHINGS & APPLIANCES (0.2%)
600 Maytag Corp. ..................................... 22
400 Springs Industries, Inc., Class A................. 21
100 Tupperware Corp. ................................. 3
----------
46
----------
LEISURE RELATED (0.1%)
200 The Walt Disney Co. .............................. 20
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
PRINTING & PUBLISHING (1.2%)
800 American Greetings Corp., Class A................. $ 31
3,000 Gannett Co., Inc. ................................ 185
400 New York Times Co., Class A....................... 26
----------
242
----------
RETAIL-GENERAL (6.3%)
2,000 American Stores Co. .............................. 41
4,100 Dayton Hudson Corp. .............................. 277
900 Gap, Inc. ........................................ 32
700 Harcourt General, Inc. ........................... 38
1,500 Home Depot, Inc. ................................. 88
300 Longs Drug Stores, Inc. .......................... 10
1,500 May Department Stores, Co. ....................... 79
1,400 Mercantile Stores Co. ............................ 85
400 Pep Boys-Manny, Moe & Jack........................ 10
800 Rite Aid Corp. ................................... 47
3,000 Sears Roebuck & Co. .............................. 136
2,800 SUPERVALU, Inc. .................................. 117
4,000 TJX Cos., Inc. ................................... 138
6,000 Wal-Mart Stores, Inc. ............................ 237
----------
1,335
----------
TOTAL CONSUMER-CYCLICAL..................................... 2,151
----------
CONSUMER-STAPLES (21.9%)
BEVERAGES & TOBACCO (6.2%)
1,200 Brown-Forman Corp., Class B....................... 66
7,200 Coca Cola Co. .................................... 480
700 Coors (Adolph), Inc., Class B..................... 23
900 Fortune Brands, Inc. ............................. 33
3,000 Great Atlantic & Pacific Tea Co., Inc. ........... 89
10,400 Philip Morris Cos., Inc. ......................... 471
3,800 UST, Inc. ........................................ 140
----------
1,302
----------
FOOD (3.0%)
300 Campbell Soup Co. ................................ 17
800 ConAgra, Inc. .................................... 26
100 CPC International, Inc. .......................... 11
10,100 Sara Lee Corp. ................................... 569
----------
623
----------
HEALTH CARE SUPPLIES & SERVICE (10.4%)
100 Abbott Laboratories............................... 7
3,900 American Home Products Corp. ..................... 298
1,200 Baxter International, Inc. ....................... 61
2,700 Becton Dickinson & Co. ........................... 135
1,400 Biomet, Inc. ..................................... 36
4,500 Bristol-Myers Squibb Co. ......................... 426
5,300 Columbia/HCA Healthcare Corp. .................... 157
2,000 Eli Lilly & Co. .................................. 139
4,400 Johnson & Johnson................................. 290
1,200 Mallinckrodt, Inc. ............................... 46
700 Manor Care, Inc. ................................. 25
</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
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
CONSUMER-STAPLES (CONT.)
HEALTH CARE SUPPLIES & SERVICE (CONT.)
<TABLE>
<C> <S> <C>
200 Medtronic, Inc. .................................. $ 10
3,600 Merck & Co., Inc. ................................ 383
2,100 Pfizer, Inc. ..................................... 157
300 Shared Medical Systems Corp. ..................... 20
----------
2,190
----------
PERSONAL CARE PRODUCTS (2.3%)
400 Avon Products, Inc. .............................. 25
600 Bausch & Lomb, Inc. .............................. 24
100 International Flavors & Fragrances, Inc. ......... 5
5,200 Procter & Gamble Co. ............................. 415
----------
469
----------
TEXTILES & APPAREL (0.0%)
300 Russell Corp. .................................... 8
----------
TOTAL CONSUMER-STAPLES...................................... 4,592
----------
DIVERSIFIED (2.9%)
400 Eaton Corp. ...................................... 36
1,300 ITT Industries, Inc. ............................. 41
100 Johnson Controls, Inc. ........................... 5
1,500 Loews Corp. ...................................... 159
1,300 National Service Industries, Inc. ................ 64
2,200 Raychem, Corp. ................................... 95
1,600 Unilever NV....................................... 100
3,800 Whitman Corp. .................................... 99
----------
TOTAL DIVERSIFIED........................................... 599
----------
ENERGY (11.3%)
COAL, OIL & GAS (6.8%)
4,200 Amoco Corp. ...................................... 358
800 Burlington Resources, Inc. ....................... 36
4,200 Chevron Corp. .................................... 323
600 Coastal Corp. .................................... 37
3,000 Mobil Corp. ...................................... 217
100 Occidental Petroleum Corp. ....................... 3
300 Oneok, Inc. ...................................... 12
5,900 Phillips Petroleum Co. ........................... 287
1,200 Sun Co., Inc. .................................... 50
3,400 USX-Marathon Group................................ 115
----------
1,438
----------
UTILITIES (4.5%)
1,500 Central & South West Corp. ....................... 41
3,700 Eastern Enterprises............................... 167
6,000 Entergy Corp. .................................... 180
1,500 NICOR, Inc. ...................................... 63
1,600 PECO Energy Co. .................................. 39
900 Public Service Enterprise Group, Inc. ............ 28
5,800 Southern Co. ..................................... 150
2,100 Texas Utilities Co. .............................. 87
5,900 Unicom Corp. ..................................... 181
----------
936
----------
TOTAL ENERGY................................................ 2,374
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FINANCE (16.0%)
BANKING (8.3%)
200 Banc One Corp. ................................... $ 11
1,500 Bank of New York Co., Inc. ....................... 87
3,000 BankAmerica Corp. ................................ 219
900 BankBoston Corp. ................................. 85
100 Barnett Banks, Inc. .............................. 7
3,600 Chase Manhattan Corp. ............................ 394
1,900 Citicorp.......................................... 240
1,400 Comerica, Inc. ................................... 126
3,300 First Union Corp. ................................ 169
2,200 KeyCorp........................................... 156
1,300 National City Corp. .............................. 85
2,100 NationsBank Corp. ................................ 128
800 Norwest Corp. .................................... 31
----------
1,738
----------
FINANCIAL SERVICES (2.5%)
1,600 American Express Co. ............................. 143
900 Federal Home Loan Mortgage Corp. ................. 38
2,900 Federal National Mortgage Association............. 165
1,600 Hartford Financial Service Group, Inc. ........... 149
600 Merrill Lynch & Co. .............................. 44
----------
539
----------
INSURANCE (5.2%)
2,100 Allstate Corp. ................................... 191
3,100 American International Group, Inc. ............... 337
600 Chubb Corp. ...................................... 45
1,500 Lincoln National Corp. ........................... 117
1,600 MBIA, Inc. ....................................... 107
5,359 Travelers Group, Inc. ............................ 289
----------
1,086
----------
TOTAL FINANCE............................................... 3,363
----------
MATERIALS (5.1%)
CHEMICALS (3.2%)
1,000 Air Products & Chemicals, Inc. ................... 82
700 Dow Chemical Co. ................................. 71
3,400 E.I. Du Pont De Nemours & Co. .................... 204
2,700 Engelhard Corp. .................................. 47
900 Hercules, Inc. ................................... 45
300 Millipore, Corp. ................................. 10
1,700 Monsanto Co. ..................................... 71
200 Perkin-Elmer Corp. ............................... 14
500 Rohm & Haas Co. .................................. 48
340 Solutia, Inc. .................................... 9
1,600 Union Carbide Corp. .............................. 69
----------
670
----------
METALS (1.9%)
2,000 Phelps Dodge Corp. ............................... 124
8,500 USX - U.S. Steel Group, Inc. ..................... 266
----------
390
----------
</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
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
PACKAGING & CONTAINERS (0.0%)
200 Tyco International Ltd. .......................... $ 9
----------
TOTAL MATERIALS............................................. 1,069
----------
SERVICES (2.4%)
BUSINESS SERVICES (1.3%)
600 Automatic Data Processing, Inc. .................. 37
1,000 Deluxe Corp. ..................................... 34
800 Eastman Kodak Co. ................................ 49
(a)500 Federal Express Corp. ............................ 31
200 John H. Harland Co. .............................. 4
4,700 Jostens, Inc. .................................... 108
400 Safety-Kleen Corp. ............................... 11
----------
274
----------
PROFESSIONAL SERVICES (0.1%)
500 Service Corp. International....................... 18
----------
TRANSPORTATION (1.0%)
600 Burlington Northern Santa Fe Corp. ............... 56
1,500 CSX Corp. ........................................ 81
500 Delta Air Lines, Inc. ............................ 60
150 Southwest Airlines, Co. .......................... 4
300 Union Pacific Corp. .............................. 19
----------
220
----------
TOTAL SERVICES.............................................. 512
----------
TECHNOLOGY (22.4%)
COMPUTERS (9.1%)
100 Adobe Systems, Inc. .............................. 4
(a)4,350 Cisco Systems, Inc. .............................. 242
3,200 Compaq Computer Corp. ............................ 181
3,150 Computer Associates International, Inc. .......... 167
(a)300 Dell Computer Corp. .............................. 25
(a)2,400 EMC Corp. ........................................ 66
4,500 Intel Corp. ...................................... 316
3,400 International Business Machines Corp. ............ 356
(a)3,600 Microsoft Corp. .................................. 465
(a)900 Oracle System, Corp. ............................. 20
(a)2,000 Sun Microsystems, Inc. ........................... 80
----------
1,922
----------
ELECTRONICS (4.6%)
100 AMP, Inc. ........................................ 4
(a)400 Applied Materials, Inc. .......................... 12
10,900 General Electric Co. ............................. 800
(a)400 Micron Technology, Inc. .......................... 10
400 Motorola, Inc. ................................... 23
200 Rockwell International Corp. ..................... 10
900 Scientific-Atlanta, Inc. ......................... 15
1,350 Tektronix, Inc. .................................. 53
200 Texas Instruments, Inc. .......................... 9
500 Textron, Inc. .................................... 31
----------
967
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
OFFICE EQUIPMENT (1.1%)
2,700 Hewlett Packard Co. .............................. $ 169
900 Xerox Corp. ...................................... 66
----------
235
----------
TELECOMMUNICATIONS (7.6%)
(a)1,600 3Com Corp. ....................................... 56
2,400 Alltel Corp. ..................................... 99
200 Ameritech Corp. .................................. 16
5,300 AT&T Corp. ....................................... 325
3,900 Bell Atlantic Corp. .............................. 355
600 Bellsouth Corp. .................................. 34
5,000 GTE Corp. ........................................ 261
3,200 Harris Corp. ..................................... 147
700 Lucent Technologies, Inc. ........................ 56
100 MCI Communications Corp. ......................... 4
600 SBC Communications, Inc. ......................... 44
1,800 Sprint Corp. ..................................... 105
1,600 U.S. West Communications Group.................... 72
(a)400 WorldCom, Inc. ................................... 12
----------
1,586
----------
TOTAL TECHNOLOGY............................................ 4,710
----------
TOTAL COMMON STOCKS (Cost $19,869)............................ 20,468
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (97.4%) (Cost $19,869)........................ 20,468
--------
OTHER ASSETS (2.7%)
Cash.............................................. $ 81
Receivable for Portfolio Shares Sold.............. 380
Due from Adviser.................................. 74
Dividends Receivable.............................. 36
Other............................................. 6 577
-----
LIABILITIES (-0.1%)
Administrative Fees Payable....................... (3)
Custodian Fees Payable............................ (1)
Directors' Fees and Expenses Payable.............. (1)
Other Liabilities................................. (24) (29)
----- --------
NET ASSETS (100%)............................................... $ 21,016
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................................. $ 20,403
Undistributed Net Investment Income............................. 3
Accumulated Net Realized Gain................................... 11
Unrealized Appreciation on Investments.......................... 599
--------
NET ASSETS...................................................... $ 21,016
--------
--------
</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
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- --------------------------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ----------------------------------------------------------------
NET ASSETS...................................................... $20,914
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,029,088 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................... $10.31
--------
--------
CLASS B:
- ----------------------------------------------------------------
NET ASSETS...................................................... $102
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,893 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................... $10.31
--------
--------
</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 DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Apartment 17.6 %
Diversified 2.7 %
Healthcare 6.2 %
Land 1.8 %
Lodging/Leisure 10.0 %
Manufactured Home 6.0 %
Office and
Industrial 28.9 %
Retail 18.2 %
Self Storage 3.2 %
Other 5.4 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. REAL ESTATE
PORTFOLIO--CLASS A NAREIT INDEX(1)
<S> <C> <C>
2/24/95* $500,000 $500,000
12/31/95 605,350 572,300
12/31/96 844,826 780,617
12/31/97 1,078,167 939,004
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION OF
REAL ESTATE INVESTMENT TRUSTS (NAREIT) EQUITY INDEX(1)
- ----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------- ---------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 27.62% 30.92%
PORTFOLIO -- CLASS B............. 27.21 32.66
INDEX -- CLASS A................. 20.29 24.58
INDEX -- CLASS B................. 20.29 27.63
</TABLE>
1. The NARIET 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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had a total return of 27.62%
for the Class A shares and 27.21% for the Class B shares, compared to a total
return of 20.29% for the National Association of Real Estate Investment Trusts
(NAREIT) Equity Index (the "Index").
From inception on February 24, 1995 through December 31, 1997, the average
annual total return of Class A was 30.92% compared to 24.58% for the Index. From
inception on January 2, 1996 through December 31, 1997, the average annual total
return of Class B was 32.66% compared to 27.63% for the Index.
This past year was a very exciting one in the REIT industry and can
appropriately be characterized as a year in which REITs became much more widely
accepted in the investment community. The largest reasons for this acceptance
have been the tremendous growth of the industry, the continued strong
performance of the sector, and, potentially of equal importance, positive
attention from the business media.
Total equity capitalization of the REIT industry grew to $145 billion, which
represents a 65% increase over the previous year. The year featured a record
level of new equity issuance of approximately $23 billion. This amount of
issuance exceeded the past three years combined and was double the previous
record year of 1993 in which the market had been dominated by IPOs. Although the
majority of the issuance was for follow-on offerings by existing REITs, this
year featured a reopening of the window for IPOs with approximately $3 billion
raised in 12 separate transactions. Noteworthy IPOs included several regional
office companies: Boston Properties with a focus in the Northeast, Tower Realty
and S.L. Green Realty both with a focus on the Manhattan market and Prime Group
focused on Chicago. Potentially of greater interest were the IPOs of Equity
Office Properties and AMB Property Corporation, which involved essentially the
conversion of a pension fund advisory business to a REIT. (It is noteworthy that
the office and industrial sectors accounted for almost one half of the total
equity issuance.) We expect equity
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
110
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
issuance to continue at a high rate albeit lower than 1997's pace. We believe
that given current valuations we will continue to see a modest level of IPOs
both from regional operators and from pension fund advisors.
In 1997, we witnessed the continuation of the securitization of real estate
assets. For the private real estate companies in general, and specifically for
those active in the office and industrial sectors, there appeared to be a bit of
a frenzy in which these companies debated proposals to sell their assets, merge
into public companies or proceed with their own IPO. The growth described above
continues the evolution of properties moving from private ownership into the
publicly-listed securities arena. Beyond private real estate companies, the
other large owners of institutional real estate in the U.S. are pension funds.
This past year a number of significant events occurred to indicate that these
pension-controlled assets will also continue to move into the hands of public
companies. They include the strategy of swapping properties for shares of a
public company as well as pension fund advisors rolling-up their real estate
business and converting into public REITs, thus providing their current pension
fund clients with shares in a public company as opposed to interests in a
commingled fund which owns assets.
Participants in the REIT industry have speculated on the timing of a merger wave
as the public real estate market matures beyond its initial proliferation of
IPOs. This past year the merger wave appears to have officially commenced. The
groundbreaking deal was the friendly and surprising merger between Equity Office
Properties (the nation's largest office REIT) with Beacon Properties (Equity's
largest national rival). Generally, the majority of the other merger deals
involved a process of companies expanding to become super-regional or national
players in their sector. The multifamily sector produced the most mergers;
representative transactions include the mergers of Equity Residential Properties
(the nation's largest multifamily REIT) with both Wellsford Residential
(Southwest focus) and Evans Withycombe (regional player in Arizona), Post
Properties (Southeast focus) with Columbus Properties (Southwest focus), Camden
Property Trust (Sunbelt focus) both with Paragon Group (Sunbelt) and then Oasis
Residential (Las Vegas), and Apartment Investment and Management (national) with
Ambassador Apartments (Sunbelt).
The largest amount of media attention was generated by the two "paired share"
hotel REITs, Starwood Lodging and Patriot American Hospitality (by virtue of
being grandfathered by Congress these two REITs are able to both own their
hotels as well as the operating company which leases the hotels), with the
greatest excitement coming from the bidding war between Starwood and Hilton
Hotels to purchase ITT Corporation, a battle won by Starwood. Not wanting to be
outdone, Patriot American, which had previously announced a merger with Wyndham
Hotels, has entered into an agreement to purchase Interstate Hotels (both are
public C-corporation hotel companies).
The battle over ITT had a high profile, featuring daily articles in the Wall
Street Journal and other business publications. The maneuvering by Hilton
included an apparent dose of heavy campaigning in Washington D.C. to overturn
the grandfathered-paired share REIT structure. These events caused significant
discussion within the REIT industry and were highlighted at the annual October
NAREIT Conference in which experts discussed the potential for Congress to
tinker not only with the paired share structure but also with other aspects of
the REIT regulations.
This merger activity set off an interesting discussion involving whether it is
more favorable to own the consolidators or the targets. Given our approach of
selecting securities that offer the best value relative to their underlying net
property assets it is not surprising that we often own the targets. Although we
are not opposed to owning the consolidators, if they are in the Portfolio it
will likely be as a result of their underlying relative valuation as opposed to
a stated goal to be a large participant in a sector.
This past year also witnessed certain evolutions in the use of the REIT
structure. Several REITs have or plan to create a "paper-clipped structure"
which attempts to mirror the paired share structure through the creation of an
additional C-corporation with similar Boards and management. If investors owned
shares in both companies they would theoretically have the same effect as owning
a paired share REIT. In addition a number of companies, such as Vornado and
Crescent, have broken the basic mold of focusing on primarily one asset class.
We have also seen the REIT structure utilized for new asset types including
prisons and movie theaters. Finally there were announcements from a multitude of
REITs that have determined that they plan to supplement their current
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
111
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
business plans by investing in or creating an opportunity fund. Clearly, with
healthy investor interest in REITs combined with REITs trading at significant
premiums to asset value, a number of companies are attempting to position
themselves as growth companies. While this objective may be achievable at this
stage of the real estate cycle, it may be far more difficult to implement this
type of approach to real estate investing and strategic direction in other
phases of the real estate cycle. We expect that as the current recovery in the
U.S. real estate market continues toward equilibrium we will see a decline in
the average premiums to net asset value at which the companies trade.
SECTOR REVIEW
With regard to the property markets, we are seeing evidence of an emerging
recovery in the area of new construction of real estate. Despite the disfavor
that real estate development faced in virtually every property sector in the
early 1990's, we have witnessed the financial community, once again, opening
their doors to finance development. Although the real estate market generally
remains in a favorable part of the cycle, this new supply causes us to raise the
following issues. In our modeling of companies we have implemented a negative
reversionary value calculation (to reflect our anticipation of declines in
occupancy caused by oversupply) in calculating the net asset value of companies.
This is particularly true in the limited service hotel business as well for
companies with a concentration of multifamily properties in the Southeast. In
addition we are monitoring a number of industrial markets for oversupply and the
potential for a decline in occupancy. Finally, although we have discussed our
rationale for overweighting the office and upscale full-service hotel markets
since inception of the Portfolio, we have begun shifting the Portfolio in order
to favor those companies with properties in the most supply constrained
locations, which include urban markets as well as those in California and the
Northeast.
The majority of sell-side analysts had proclaimed that 1997 would be a year for
stock-picking as opposed to sector allocation. At the beginning of the year we
declared that there was still room for outperformance through sector allocation.
The chart below outlines the total return performance of the various sectors in
the real estate industry for 1996 and 1997:
<TABLE>
<CAPTION>
TOTAL PERFORMANCE
--------------------
SECTOR 1997 1996
- ----------------------------------------- --------- ---------
<S> <C> <C>
Apartments 16.0% 28.4%
Manufactured Homes 18.1% 34.9%
Strip Centers 21.4% 32.8%
Regional Malls 13.7% 44.6%
Outlet Centers 0.1% 3.5%
Industrial 19.0% 37.0%
Office 29.0% 51.8%
Self Storage 3.4% 42.0%
Triple Net Lease 17.7% 30.8%
Hotel 30.1% 49.2%
Total 20.3% 35.3%
</TABLE>
Source: NAREIT
From a market perspective the office and hotel sectors provided the best
performance for the third year in a row. We believe that the increasing supply
in both these markets combined with the prevailing prices of the securities in
these sectors may cause overall returns in 1998 to be substantially less than in
previous years. The self storage and factory outlet sectors drastically
underperformed the Index for two very different reasons. The poor returns in the
factory outlet sector were the result of a continued deterioration in the
fundamentals in the market. Looking forward, we believe this market will
continue to trail due to continued weakness in occupancies and rents. The self
storage market, by contrast, is in equilibrium from a demand-supply perspective,
however share prices had run too far in 1996 and there was not any room for
appreciation in 1997. In 1998 we expect this market will likely return to be a
market performer. As we discussed last year we were unable to explain the
outperformance of the regional mall sector and despite improving occupancies and
reduced bankruptcies this sector trailed the Index in 1997. The other major
sectors in the Index provided returns similar to the market.
With respect to the performance of the Portfolio from a top down perspective, we
created outperformance through our overweighting of both the office and hotel
sectors and through the underweighting of the self storage and factory outlet
sectors. From a bottom up perspective we created significant outperformance from
our stock-picking in the apartment, manufactured home, industrial, and regional
mall sectors.
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
112
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
INVESTMENT STRATEGY
From an investment perspective we will continue to pursue a strategy of
overweighting those sectors that offer the best underlying real estate
fundamentals. We believe that in 1998 our overall sector weightings will
probably come closer to approximating market weightings. This is due to two
factors, the first and most relevant is that the relative weightings in the
Index have changed materially and are now more in line with our Portfolio. For
example we have maintained a hotel weighting ranging from 8 to 15% during the
last several years, in this time the Index weighting has progressed from 4% to a
likely weighting of 13 to 15% after the Starwood and Patriot transactions are
closed and incorporated into the Index. The other factor is that the underlying
valuations have generally adjusted to reflect the relative attractiveness of
each sector. We will continue to provide basic sector weighting guidelines but
it is important to note that we focus in great detail on sub-sectors within
those sectors. As outlined below, we describe which sub-sectors we intend to
overweight and underweight in the coming year:
<TABLE>
<CAPTION>
UNDERPERFORM MARKET PERFORMER OUTPERFORM
<S> <C> <C>
Class A Apartments Class B Apartment CBD Office
Sunbelt Self Storage Upscale Hotels
Economy Lodging Suburban Office Northeast/
Factory Outlets Industrial Pacific Coast
Class B Regional Class A Regional
Malls Malls
Midwest
Manufactured Housing
Strip Shopping
Centers
</TABLE>
Within this framework, we will, as discussed above, continue to select those
securities that we believe offer the best value relative to our estimate of
their intrinsic asset value.
Russell C. Platt
PORTFOLIO MANAGER
Theodore R. Bigman
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
113
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
COMMON STOCKS (92.2%)
APARTMENT (17.6%)
33,800 Amli Residential Properties Trust REIT........... $ 752
314,200 Avalon Properties, Inc. REIT..................... 9,721
397,700 Bay Apartment Communities, Inc. REIT............. 15,510
424,200 Essex Property Trust, Inc. REIT.................. 14,847
59,700 Irvine Apartment Communities, Inc. REIT.......... 1,899
359,400 Oasis Residential, Inc. REIT..................... 8,019
457,510 Security Capital Atlantic, Inc. REIT............. 9,665
280,100 Walden Residential Properties, Inc. REIT......... 7,143
---------
67,556
---------
DIVERSIFIED (2.7%)
(a)654,898 Wellsford Real Properties, Inc. ................. 10,233
---------
HEALTHCARE (6.2%)
653,000 Nationwide Health Properties, Inc. REIT.......... 16,652
179,400 Omega Healthcare Investors, Inc. REIT............ 6,929
---------
23,581
---------
LAND (1.1%)
(a)589,684 Atlantic Gulf Communities Corp. ................. 2,654
(a)80,200 Catellus Development Corp. ...................... 1,604
---------
4,258
---------
LODGING/LEISURE (10.0%)
53,600 American General Hospitality Corp. REIT.......... 1,434
(a)308,300 CapStar Hotel Co. ............................... 10,579
(a)344,400 Extended Stay America, Inc. ..................... 4,283
(a)776,700 Host Marriott Corp. ............................. 15,243
(a)3,300 ITT Corp. ....................................... 274
(a)417,900 John Q Hammons Hotels, Inc., Class A............. 3,761
(a)126,300 Suburban Lodges of America, Inc. ................ 1,681
(a)34,400 Vail Resorts, Inc. .............................. 892
---------
38,147
---------
MANUFACTURED HOME (6.0%)
531,652 Chateau Communities, Inc. REIT................... 16,747
234,200 Manufactured Home Communities, Inc. REIT......... 6,323
---------
23,070
---------
OFFICE AND INDUSTRIAL (27.9%)
INDUSTRIAL (6.1%)
410,400 Bedford Property Investors, Inc. REIT............ 8,977
607,200 Pacific Gulf Properties, Inc. REIT............... 14,421
---------
23,398
---------
OFFICE (21.8%)
566,200 Arden Realty Group, Inc. ........................ 17,411
71,600 Brandywine Realty Trust REIT..................... 1,799
425,454 Brandywine Realty Trust REIT..................... 10,690
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
512,000 Brookfield Properties Corp. ..................... $ 8,544
(a)263,200 Brookfield Properties Corp. (Installment
Receipts-second installment: CAD 6.50/Shr due
on 2/13/98).................................... 3,131
370,000 CarrAmerica Realty Corp. REIT.................... 11,724
153,427 Equity Office Properties Trust REIT.............. 4,843
610,000 Great Lakes, Inc. REIT........................... 11,857
337,800 Prime Group Realty Trust REIT.................... 6,840
78,500 Reckson Associates Realty Corp. ................. 1,992
194,182 Trizec Hahn Corp. REIT........................... 4,503
---------
83,334
---------
TOTAL OFFICE AND INDUSTRIAL...................................... 106,732
---------
RETAIL (17.5%)
REGIONAL MALL (10.3%)
367,500 CBL & Associates Properties, Inc. REIT........... 9,073
191,600 First Union Real Estate REIT..................... 3,114
1,597,800 Taubman Centers, Inc. REIT....................... 20,771
184,500 Urban Shopping Centers, Inc. REIT................ 6,434
---------
39,392
---------
SHOPPING CENTER (7.2%)
427,300 Burnham Pacific Property Trust REIT.............. 6,543
490,600 Federal Realty Investment Trust REIT............. 12,633
196,000 Pan Pacific Retail Properties, Inc. REIT......... 4,190
97,400 Pennsylvania REIT................................ 2,392
2,200 Ramco-Gershenson Properties Trust REIT........... 43
135,800 Western Investment Real Estate Trust REIT........ 1,867
---------
27,668
---------
TOTAL RETAIL..................................................... 67,060
---------
SELF STORAGE (3.2%)
89,000 Public Storage, Inc. ............................ 2,614
335,900 Shurgard Storage Centers, Inc., Series A REIT.... 9,741
---------
12,355
---------
TOTAL COMMON STOCKS (Cost $308,744)................................ 352,992
---------
PREFERRED STOCKS (0.7%)
OFFICE AND INDUSTRIAL (0.0%)
OFFICE (0.0%)
(d,e)33,150 Great Lakes, Inc. REIT........................... --
---------
RETAIL (0.7%)
SHOPPING CENTER (0.7%)
80,600 First Washington Realty Trust, Series A REIT..... 2,700
---------
TOTAL PREFERRED STOCKS (Cost $2,257)............................... 2,700
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
114
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
CONVERTIBLE PREFERRED STOCKS (0.5%)
LAND (0.5%)
(a)107,021 Atlantic Gulf Communities Corp. ................. $ 1,177
(a)75,765 Atlantic Gulf Communities Corp., Series B........ 833
---------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $1,828)................... 2,010
---------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- --------------
WARRANTS (0.6%)
OFFICE AND INDUSTRIAL (0.4%)
INDUSTRIAL (0.4%)
(a)184,843 Meridian Industrial Trust, Inc. REIT, expiring
2/23/99........................................ 1,629
---------
LAND(0.2%)
(a,d)112,509 Atlantic Gulf Communities Corp., Class A,
expiring 6/24/04............................... 164
(a,d)112,509 Atlantic Gulf Communities Corp., Class B,
expiring 6/24/04............................... 164
(a,d)112,509 Atlantic Gulf Communities Corp., Class C,
expiring 6/24/04............................... 164
---------
492
---------
TOTAL WARRANTS (Cost $300)......................................... 2,121
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- --------------
CORPORATE BOND (0.6%)
OFFICE AND INDUSTRIAL (0.6%)
OFFICE (0.6%)
$ 2,934 Brookfield Properties Corp. 6.00%, 2/14/07
(Installment Receipts -- second installment:
CAD50.00 per debenture due at 2/13/98) (Cost
$1,209)........................................ 2,361
---------
SHORT-TERM INVESTMENT (5.8%)
REPURCHASE AGREEMENT (5.8%)
21,976 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at 21,983,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $22,424 (Cost
$21,976)....................................... 21,976
---------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.4%) (Cost $336,314)........................ $ 384,160
----------
OTHER ASSETS (2.0%)
Receivable for Portfolio Shares Sold................ $ 4,255
Dividends Receivable................................ 2,512
Receivable for Investments Sold..................... 788
Interest Receivable................................. 57
Other............................................... 8 7,620
----------
LIABILITIES (-2.4%)
Payable for Investments Purchased................... (4,192)
Bank Overdraft...................................... (3,381)
Investment Advisory Fees Payable.................... (722)
Payable for Portfolio Shares Redeemed............... (537)
Administrative Fees Payable......................... (46)
Custodian Fees Payable.............................. (19)
Distribution Fees Payable........................... (12)
Directors' Fees and Expenses Payable................ (7)
Other Liabilities................................... (84) (9,000)
---------- ----------
NET ASSETS (100%)................................................. $ 382,780
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital................................................... $ 328,570
Undistributed Net Investment Income............................... 38
Accumulated Net Realized Gain..................................... 6,327
Unrealized Appreciation on Investments and Foreign Currency
Translations.................................................... 47,845
----------
NET ASSETS........................................................ $ 382,780
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ------------------------------------------------------------------
NET ASSETS........................................................ $361,549
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 23,506,716 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $15.38
----------
----------
CLASS B:
- ------------------------------------------------------------------
NET ASSETS........................................................ $21,231
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 1,384,422 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $15.34
----------
----------
</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.
CAD -- Canadian Dollar
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
U.S. Real Estate Portfolio
115
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Aerospace 10.8 %
Banking 17.3 %
Capital Goods 5.9 %
Chemicals 1.9 %
Communications 6.9 %
Consumer--Durables 1.7 %
Consumer--Retail 6.2 %
Consumer--Staples 5.8 %
Energy 7.2 %
Financial-Diversified 3.1 %
Health Care 1.8 %
Insurance 6.8 %
Metals 1.7 %
Paper & Packaging 2.4 %
Services 1.6 %
Technology 4.6 %
Transportation 4.4 %
Utilities 7.8 %
Other 2.1 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
VALUE EQUITY PORTFOLIO--CLASS
A S&P 500 INDEX(1)
<S> <C> <C>
1/31/90* $500,000 $500,000
10/31/90 $557,460 $557,460
10/31/91 $604,880 $633,500
10/31/92 $638,765 $695,700
12/31/92 $735,485 $728,150
12/31/93 $735,485 $801,400
12/31/94 $726,000 $811,900
12/31/95 $970,589 $1,116,687
12/31/96 $1,162,086 $1,373,078
12/31/97 $1,501,415 $1,831,137
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
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
ONE YEAR YEARS INCEPTION
------------ ----------- ------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS A................ 29.20% 18.64% 14.89%
PORTFOLIO -- CLASS B................ 28.70 N/A 23.56
S&P 500 INDEX -- CLASS A............ 33.36 20.27 17.85
INDATA EQUITY-MEDIAN INDEX -- CLASS
A................................. 28.95 18.23 16.59
S&P 500 INDEX -- CLASS B............ 33.36 N/A 27.63
INDATA EQUITY-MEDIAN INDEX -- CLASS
B................................. 28.95 N/A 25.15
</TABLE>
1. The S&P 500 and the Indata Equity-Median Index are unmanaged indices of
common stocks. The Indata Equity-Median Index includes an average asset
allocation of 8.3% cash and 91.7% equity based on $491.5 billion in assets
among 979 portfolios for the period ended December 31, 1997.
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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had a total return of 29.20%
for the Class A shares and 28.70% for the Class B shares, as compared to a total
return of 33.36% for the S&P 500 Index and 28.95% for the Indata Equity-Median
Index. For the five year period ended December 31, 1997, the average annual
total return of Class A was 18.64% compared to 20.27% for the S&P 500 Index and
18.23% for the Indata Equity-Median Index. From inception on January 31, 1990
through December 31, 1997, the average annual total return of Class A was 14.89%
compared to 17.85% for the S&P 500 Index and 16.59% for the Indata Equity-Median
Index. From inception a January 2, 1996 through December 31, 1997, the average
annual total return of Class B was 23.56% compared to 27.63% for the S&P 500
Index and 25.15% for the Indata Equity-Median Index.
The Portfolio holds undervalued companies with a wide valuation gap as compared
to the characteristics of the S&P 500:
<TABLE>
<CAPTION>
PRICE EARNINGS PRICE BOOK
--------------- -------------
<S> <C> <C>
Portfolio 17.7x 3.3x
S&P 500 23.9x 5.5x
</TABLE>
In 1997, major market indices achieved strong double digit returns for the third
consecutive year. Large cap stocks once again significantly outperformed small
cap stocks as investors sought relative safety, liquidity and earnings
certainty. The larger cap Russell 1000 returned 32.86% compared to the smaller
cap Russell
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
116
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO (CONT.)
2000 return of 22.28%. Growth stocks outperformed value, with the S&P/Barra
Growth Index up 36.42% for the year compared to 29.96% for the S&P/Barra Value
Index.
A progressively weak first quarter, followed by a solid rebound in the second
quarter resulted in an overall very strong first half. Major market indices
bottomed in April and then advanced to new highs through June. Sentiment in the
first quarter, including escalating fears of interest rate increases, and strong
economic growth of 4.9%, contrasted with subsiding fears of rate increases and a
moderating economy in the second quarter. The market continued to advance in the
third quarter, although it declined in August as concerns mounted about the
potential impact of the growing Southeast Asian financial crisis and currency
devaluations. These concerns intensified during the fourth quarter, as the
Southeast Asian turmoil spread to Hong Kong. As a result, the market declined
again in October, a month that saw the largest point decline ever in the Dow
Jones Industrial Average and a record volume day of 1.2 billion shares traded on
the NYSE. The market decline reflected investor concern that slowing economic
growth in Asia and imported Asian deflation would weaken U.S. economic and
earnings growth. Although the market recovered in November and December, profit
concerns overshadowed the very positive declining interest rate environment,
continued benign inflation and a moderating but growing economy.
The best performing sectors in the Portfolio for the year on an absolute basis
were financial services, up 54%, transportation, up 47%, and capital goods, up
46%. Underperforming sectors included shelter, down 8%, raw materials, up 1%,
and consumer non-durables, up 6%. Relative to the S&P 500, the Portfolio
benefited from being overweight in financial services and underweight in
consumer non-durables, while the underweight position in healthcare and in
consumer services hurt the Portfolio. The best performing stocks in 1997 were
First of America, up 98%, Mellon Bank, up 76%, Wal-Mart, up 75%, Ogden, up 57%,
and PNC Financial, also up 57%. Underperforming stocks included Fleming, down
22%, Louisiana-Pacific, down 8%, Woolworth, down 7%, and Phelps Dodge, down 5%.
The overweight position in financial services and stock selection within the
sector meaningfully contributed to performance in 1997. Banking stocks continued
to benefit from industry consolidation activity and the declining interest rate
environment, which more than offset concerns about the Asian crisis that arose
in the second half of the year. We pared back First of America after the company
agreed to merge with National City Corp. for a 36% premium. To maintain an
overweight position in banking, we added Fleet Financial and Banc One during the
year. We also increased our weighting in Sallie Mae. Shareholders of Sallie Mae
voted in new management during the year, and approved a reorganization plan to
restructure the company as a fully privatized corporation and eventually
eliminate its government charter. The company continues to generate strong
earnings growth, repurchase stock, and cut costs, and is well positioned to gain
market share in the education finance market.
We increased exposure in the transportation and aerospace/defense sectors due to
favorable industry trends and attractive valuations. The commercial airline
cycle has maintained its strength during the year, supported by the strong
economy, higher business and consumer travel spending and more rational fare
pricing. The commercial aircraft manufacturing cycle is also very favorable. To
participate, we added to the United Technologies position, and established
positions in Parker Hannifin and Continental Airlines. The aerospace/defense
sector is seeing the benefits from past industry consolidation. During the year,
we added Lockheed Martin and Litton Industries to the Portfolio. We also added
Gulfstream Aerospace, which is benefiting from a strong backlog in its business
jet aircraft manufacturing operations and a healthy annual stock repurchase
program.
In the capital goods sector, another strong performer in 1997, we added Case
Corp. in addition to holding Deere & Co. Strong farm income and secular
worldwide growth in agricultural spending have been the major themes supporting
the industry. Deere continues to generate strong cash flow and repurchase stock.
Case possesses significant margin expansion opportunities, and trades at
attractive valuation levels. We adjusted the consumer durable sector by selling
Chrysler and adding Meritor Automotive and Borg Warner Automotive. Both of these
stocks are trading below 11 times 1998 estimated earnings. We expect them to
benefit from the continued globalization and consolidation in the auto and truck
supplier market.
We pared back on consumer staples, primarily tobacco stocks, as a preliminary
industry litigation settlement was reached mid-year. While the settlement would
provide protection from certain lawsuits, the industry
- --------------------------------------------------------------------------------
Value Equity Portfolio
117
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO (CONT.)
still faces a lengthy government approval process for the agreement during 1998.
Until the settlement nears approval, the stocks will most likely remain at
attractive valuations of 12-14 times 1998 estimated earnings. In the retail
sector, we added Wal Mart at the start of 1997, which finished the year as one
of the top performers in the Portfolio. Wal Mart began generating positive free
cash flow in 1996, and subsequently announced a 30% dividend increase and a
stock buyback program in early 1997. The company then delivered both sales and
earnings growth and consistency throughout the year. In the services and growth
sector, we sold the remaining position in Eastman Kodak. The company continues
to struggle with intensified film price competition, continuing losses from new
business initiatives and an inflated cost structure. We also sold McGraw Hill
and pared back on Ogden Corp. due to strong price appreciation.
Our exposure to the telecommunications industry increased throughout the year,
as we added to U.S. WEST Communications, and as consolidation activity and
improved investor sentiment toward the group drove the stocks higher. AT&T
announced the appointment of a new CEO, and undertook several steps to improve
earnings, including cutting costs and selling non core businesses. In utilities,
we decreased the exposure to the sector by paring back on GPU, Nipsco Industries
and Texas Utilities. Regulatory concerns related to the resolution of stranded
asset costs and continued rate reductions remain a risk within the industry.
However, the sector benefited in the fourth quarter due to the extremely
favorable interest rate environment and improved investor sentiment toward the
group.
Within the commodity industry sectors, we lowered the exposure to energy and
paper and forest products, as oil prices weakened throughout the year, and as
the Asian turmoil hurt the paper cycle recovery. Within energy, we sold Exxon
and added USX-Marathon Group. Exxon, which had outperformed other integrated oil
stocks, had begun trading at a premium to the industry group and the market,
whereas Marathon traded at a more attractive valuation level. We also sold
Occidental Petroleum which had seen strong price appreciation throughout the
year, but which also has a large commodity chemical exposure. In the paper and
forest products sector, we swapped Willamette Industries for a partial position
in Georgia-Pac. Management at Georgia-Pac has taken aggressive steps toward
improving shareholder value, including cutting costs, reducing capital spending,
and repurchasing stock. We adjusted the composition of the chemicals sector by
selling Eastman Chemical and Olin, and adding DuPont. DuPont appears to be
better positioned to deliver earnings growth as it has strengthened key areas of
its business portfolio with acquisitions and has begun to build the higher
growth, higher margin life sciences business.
We maintain a cautious view going into 1998 as valuations levels remain at
fairly high levels, and as uncertainty to the earnings cycle has increased with
the Asian financial crisis. We continue to overweight financial services and
utilities, and underweight technology and healthcare.
Stephen C. Sexauer
PORTFOLIO MANAGER
Philip W. Friedman
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
118
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (97.9%)
AEROSPACE (10.8%)
(a)29,700 Gulfstream Aerospace Corp. ....................... $ 869
(a)35,200 Litton Industries, Inc. .......................... 2,024
27,500 Lockheed Martin Corp. ............................ 2,709
20,500 Parker-Hannifin Corp. ............................ 940
1,639 Raytheon Co., Class A............................. 81
39,900 United Technologies Corp. ........................ 2,905
----------
9,528
----------
BANKING (17.3%)
16,500 Banc One Corp. ................................... 896
22,000 BankAmerica Corp. ................................ 1,606
17,100 BankBoston Corp. ................................. 1,606
18,300 Bankers Trust (New York) Corp. ................... 2,058
15,600 Chase Manhattan Corp. ............................ 1,708
32,900 First of America Bank Corp. ...................... 2,537
11,500 Fleet Financial Group, Inc. ...................... 862
37,800 Mellon Bank Corp. ................................ 2,292
30,000 PNC Bank Corp. ................................... 1,712
----------
15,277
----------
CAPITAL GOODS (5.9%)
17,100 Borg-Warner Automotive, Inc. ..................... 889
15,200 Case Corp. ....................................... 919
30,000 Deere & Co. ...................................... 1,749
80,166 Meritor Automotive, Inc. ......................... 1,688
----------
5,245
----------
CHEMICALS (1.9%)
28,100 E.I. du Pont de Nemours & Co. .................... 1,688
----------
COMMUNICATIONS (6.9%)
41,800 AT&T Corp. ....................................... 2,560
29,100 Sprint Corp. ..................................... 1,706
39,800 U.S. WEST Communications Group.................... 1,796
----------
6,062
----------
CONSUMER-DURABLES (1.7%)
25,100 General Motors Corp. ............................. 1,522
----------
CONSUMER-RETAIL (6.2%)
36,100 J.C. Penney Co., Inc. ............................ 2,177
32,100 Wal-Mart Stores, Inc. ............................ 1,266
(a)97,500 Woolworth Corp. .................................. 1,987
----------
5,430
----------
CONSUMER-STAPLES (5.8%)
66,200 Fleming Cos., Inc. ............................... 890
46,100 Philip Morris Cos., Inc. ......................... 2,089
56,700 RJR Nabisco Holdings Corp. ....................... 2,126
----------
5,105
----------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
ENERGY (7.2%)
40,000 Ashland, Inc. .................................... $ 2,147
19,900 Atlantic Richfield Co. ........................... 1,594
22,100 Mobil Corp. ...................................... 1,595
30,300 USX-Marathon Group................................ 1,023
----------
6,359
----------
FINANCIAL-DIVERSIFIED (3.1%)
19,650 SLM Holding Corp. ................................ 2,734
----------
HEALTH CARE (1.8%)
40,800 Bausch & Lomb, Inc. .............................. 1,617
----------
INSURANCE (6.8%)
32,300 American General Corp. ........................... 1,746
32,200 Lincoln National Corp. ........................... 2,516
21,400 St. Paul Cos., Inc. .............................. 1,756
----------
6,018
----------
METALS (1.7%)
23,700 Phelps Dodge Corp. ............................... 1,475
----------
PAPER & PACKAGING (2.4%)
10,500 Georgia-Pac....................................... 638
78,500 Louisiana-Pacific Corp. .......................... 1,491
----------
2,129
----------
SERVICES (1.6%)
48,900 Ogden Corp. ...................................... 1,378
----------
TECHNOLOGY (4.6%)
39,000 Harris Corp. ..................................... 1,789
17,300 Philips Electronics N.V. (New York Shares)........ 1,047
28,378 Texas Instruments, Inc. .......................... 1,277
----------
4,113
----------
TRANSPORTATION (4.4%)
(a)9,000 AMR Corp. ........................................ 1,157
(a)23,200 Continental Airlines, Inc., Class B............... 1,117
48,500 Ryder System, Inc. ............................... 1,588
----------
3,862
----------
UTILITIES (7.8%)
30,100 GPU, Inc. ........................................ 1,268
38,100 NIPSCO Industries, Inc. .......................... 1,884
48,900 Pinnacle West Capital Corp. ...................... 2,072
40,900 Texas Utilities Co. .............................. 1,700
----------
6,924
----------
TOTAL COMMON STOCKS (Cost $65,569)............................ 86,466
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Value Equity Portfolio
119
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (2.0%)
REPURCHASE AGREEMENT (2.0%)
$ 1,784 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $1,785,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $1,824 (Cost $1,784)..... $ 1,784
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (99.9%) (Cost $67,353)..................... 88,250
-----------
OTHER ASSETS (0.7%)
Cash........................................... $ 239
Dividends Receivable........................... 175
Receivable for Investments Sold................ 105
Receivable for Portfolio Shares Sold........... 84
Other.......................................... 6 609
-----
LIABILITIES (-0.6%)
Payable for Investments Purchased.............. (296)
Investment Advisory Fees Payable............... (108)
Dividends Payable.............................. (91)
Administrative Fees Payable.................... (13)
Custodian Fees Payable......................... (8)
Payable for Portfolio Shares Redeemed.......... (7)
Directors' Fees & Expenses Payable............. (6)
Distribution Fees Payable...................... (1)
Other Liabilities.............................. (29) (559)
----- -----------
NET ASSETS (100%)............................................ $ 88,300
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.............................................. $ 62,801
Undistributed Net Investment Income.......................... 32
Accumulated Net Realized Gain................................ 4,570
Unrealized Appreciation on Investments....................... 20,897
-----------
NET ASSETS................................................... $ 88,300
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -------------------------------------------------------------
NET ASSETS................................................... $86,054
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 6,319,486 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................ $13.62
-----------
-----------
CLASS B:
- -------------------------------------------------------------
NET ASSETS................................................... $2,246
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 165,256 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................ $13.59
-----------
-----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Value Equity Portfolio
120
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Aerospace 5.5 %
Banking 9.4 %
Capital Goods 3.0 %
Chemicals 0.9 %
Communications 3.6 %
Consumer--Durables 1.1 %
Consumer--Retail 3.4 %
Consumer--Staples 2.9 %
Energy 4.2 %
Financial-Diversified 1.5 %
Health Care 0.9 %
Insurance 3.5 %
Metals 0.8 %
Paper & Packaging 1.2 %
Services 0.8 %
Technology 2.5 %
Transportation 1.9 %
Utilities 4.3 %
U.S. Treasury Notes 40.2 %
Other 8.4 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BALANCED PORTFOLIO--CLASS
INDATA BALANCED--MEDIAN INDEX(1) A
<S> <C> <C>
2/20/90* $500,000 $500,000
10/31/91 601,750 582,845
10/31/92 659,000 638,635
12/31/92 680,250 656,635
12/31/93 747,350 736,015
12/31/94 743,800 718,950
12/31/95 929,081 888,838
12/31/96 1,062,776 985,988
12/31/97 1,256,414 1,156,564
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO INDATA
BALANCED-MEDIAN INDEX(1)
- -----------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 17.30% 11.98% 11.25%
PORTFOLIO -- CLASS
B..................... 16.94 N/A 13.56
INDEX -- CLASS A...... 18.22 13.06 12.44
INDEX -- CLASS B...... 18.22 N/A 16.34
</TABLE>
1. The Indata Balanced-Median Index is an unmanaged index and includes an asset
allocation of 0.5% cash, 37.9% bonds and 61.6% equity based on $52.5 billion
in assets among 431 portfolios for the period ended December 31, 1997
(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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had a total return of 17.30%
for the Class A shares and 16.94% for the Class B shares, as compared to a total
return of 18.22% for the Indata Balanced-Median Index (the "Index"). For the
five year period ended December 31, 1997, the average annual total return of
Class A was 11.98% compared to 13.06% for the Index. From inception on February
20, 1990 through December 31, 1997, the average annual total return of Class A
was 11.25% compared to 12.44% for the Index. From inception on January 2, 1996
through December 31, 1997, the average annual total return of Class B was 13.56%
compared to 16.34% for the Index.
According to LIPPER MUTUAL FUNDS QUARTERLY, the average Balanced mutual fund
returned 19.00% for the year ended December 31, 1997.
Our asset allocation, based on market value at December 31, 1997, is as follows:
<TABLE>
<S> <C>
Equities................................. 51.4%
Fixed Income............................. 40.1
Cash..................................... 8.5
---
100%
---
---
</TABLE>
EQUITIES
For the quarter ended December 31, 1997, the equity component of the Balanced
Portfolio had a gross return of 2.80% and for year ended December 31, 1997
returned 30.23%. The S&P 500 returned 2.87% for the quarter ended December 31,
1997 and 33.36% for the year ended December 31, 1997.
In 1997, major market indices achieved strong double digit returns for the third
consecutive year. Large cap stocks once again significantly outperformed small
cap stocks as investors sought relative safety, liquidity and earnings
certainty. The larger cap Russell 1000
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121
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- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
returned 32.86% compared to the smaller cap Russell 2000 return of 22.28%.
Growth stocks outperformed value, with the S&P/Barra Growth Index up 36.42% for
the year compared to 29.96% for the S&P/Barra Value Index.
A progressively weak first quarter, followed by a solid rebound in the second
quarter resulted in an overall very strong first half. Major market indices
bottomed in April and then advanced to new highs through June. Sentiment in the
first quarter, including escalating fears of interest rate increases, and strong
economic growth of 4.9%, contrasted with subsiding fears of rate increases and a
moderating economy in the second quarter. The market continued to advance in the
third quarter, although it declined in August as concerns mounted about the
potential impact of the growing Southeast Asian financial crisis and currency
devaluations. These concerns intensified during the fourth quarter, as the
Southeast Asian turmoil spread to Hong Kong. As a result, the market declined
again in October, a month that saw the largest point decline ever in the Dow
Jones Industrial Average and a record volume day of 1.2 billion shares traded on
the NYSE. The market decline reflected investor concern that slowing economic
growth in Asia and imported Asian deflation would weaken U.S. economic and
earnings growth. Although the market recovered in November and December, profit
concerns overshadowed the very positive declining interest rate environment,
continued benign inflation and a moderating but growing economy.
The equity component of the Balanced 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>
PRICE PRICE
EARNINGS BREAK
------------ ------------
<S> <C> <C>
Portfolio -- equity portion............ 17.7x 3.3x
S&P 500................................ 23.9x 5.5x
</TABLE>
The best performing sectors in the equity portion of the Portfolio for the year
on an absolute basis were financial services, up 54%, transportation, up 47%,
and capital goods, up 46%. Underperforming sectors included shelter, down 8%,
raw materials, up 1%, and consumer non-durables, up 6%. Relative to the S&P 500,
the equity portion of the Portfolio benefited from being overweight in financial
services and underweight in consumer non-durables, while the underweight
position in healthcare and in consumer services hurt the equity portion of the
Portfolio. The best performing stocks in 1997 were First of America, up 98%,
Mellon Bank, up 76%, Wal Mart, up 75%, Ogden, up 57%, and PNC Financial, also up
57%. Underperforming stocks included Fleming, down 22%, Louisiana-Pacific, down
8%, Woolworth, down 7%, and Phelps Dodge, down 5%.
The overweight position in financial services and stock selection within the
sector meaningfully contributed to performance in 1997. Banking stocks continued
to benefit from industry consolidation activity and the declining interest rate
environment, which more than offset concerns about the Asian crisis that arose
in the second half of the year. We pared back First of America after the company
agreed to be acquired by National City Corp. for a 30% premium. To maintain an
overweight position in banking, we added Fleet Financial and Banc One during the
year. We also increased our weighting in Sallie Mae. Shareholders of Sallie Mae
voted in new management during the year, and approved a reorganization plan to
restructure the company as a fully privatized corporation and eventually
eliminate its government charter. The company continues to generate strong
earnings growth, repurchase stock, and cut costs, and is well positioned to gain
market share in the education finance market.
We increased exposure in the transportation and aerospace/defense due to
favorable industry trends and attractive valuations. The commercial airline
cycle has maintained its strength during the year, supported by the strong
economy, higher business and consumer travel spending and more rational fare
pricing. The commercial aircraft manufacturing cycle is also very favorable. To
participate, we added to the United Technologies position, and established
positions in Parker Hannifin and Continental Airlines. The aerospace/defense
sector is seeing the benefits from past industry consolidation. During the year,
we added Lockheed Martin and Litton Industries to the portfolio. We also added
Gulfstream Aerospace, which is benefiting from a strong backlog in its business
jet aircraft manufacturing operations and a healthy annual repurchase program.
In the capital goods sector, another strong performer in 1997, we added Case
Corp. in addition to holding Deere & Co. Strong farm income and secular
worldwide growth in agricultural spending have been the major themes supporting
the industry. Deere continues to generate strong cash flow and repurchase
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- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
stock. Case possesses significant margin expansion opportunities, and trades at
attractive valuation levels. We adjusted the consumer durable sector by selling
Chrysler and adding Meritor Automotive and Borg Warner Automotive. Both of these
stocks are trading below 11 times 1998 estimated earnings. We expect them to
benefit from the continued globalization and consolidation in the auto and truck
supplier market.
We pared back on consumer staples, primarily tobacco stocks, as a preliminary
industry litigation settlement was reached mid-year. While the settlement would
provide protection from certain lawsuits, the industry still faces a lengthy
government approval process for the agreement during 1998. Until a settlement
nears approval, the stocks will most likely remain at attractive valuations of
12-14 times 1998 expected earnings. In the retail sector, we added Wal Mart at
the start of 1997, which finished the year as one of the top performers in the
Portfolio. Wal Mart began generating positive free cash flow in 1996, and
subsequently announced a 30% dividend increase and a stock buyback program in
early 1997. The company then delivered both sales and earnings growth and
consistency throughout the year. In the services and growth sector, we sold the
remaining position in Eastman Kodak. The company continues to struggle with
intensified film price competition, continuing losses from new business
initiatives and an inflated cost structure. We also sold McGraw Hill and pared
back on Ogden Corp. due to strong price appreciation.
Our exposure to the telecommunications industry increased throughout the year,
as we added to US West Communications, and as consolidation activity and
improved investor sentiment toward the group drove the stocks higher. AT&T
announced the appointment of a new CEO, and undertook several steps to improve
earnings, including cutting costs and selling non core businesses. In utilities,
we decreased the exposure to the sector by paring back on GPU, Nipsco Industries
and Texas Utilities. Regulatory concerns related to the resolution of stranded
asset costs and continued rate reductions remain a risk within the industry.
However, the sector benefited in the fourth quarter due to the extremely
favorable interest rate environment and improved investor sentiment toward the
group.
Within the commodity industry sectors, we lowered the exposure to energy and
paper and forest products, as oil prices weakened throughout the year, and as
the Asian turmoil hurt the paper cycle recovery. Within energy, we sold Exxon
and added USX-Marathon Group. Exxon, which had outperformed other integrated oil
stocks, had begun trading at a premium to the industry group and the market,
whereas Marathon traded at a more attractive valuation level. We also sold
Occidental Petroleum which had seen strong price appreciation throughout the
year, but which also has a large commodity chemical exposure. In the paper and
forest products sector, we swapped Willamette Industries for a partial position
in Georgia-Pacific. Management at Georgia-Pacific has taken aggressive steps
toward improving shareholder value, including cutting costs, reducing capital
spending, and repurchasing stock. We adjusted the composition of the chemicals
sector by selling Eastman Chemical and Olin, and adding DuPont. DuPont appears
to be better positioned to deliver earnings growth as it has strengthened key
areas of its business portfolio with acquisitions and has begun to build the
higher growth, higher margin life sciences business.
We maintain a cautious view going into 1998 as valuations levels remain at
fairly high levels, and as uncertainty to the earnings cycle has increased with
the Asian financial crisis. We continue to overweight financial services and
utilities, and underweight technology and healthcare.
FIXED INCOME
The fixed income portion of the Balanced Portfolio continues to maintain 100%
exposure to intermediate-term U.S. Government securities. For the quarter ended
December 31, 1997, the fixed income portion of the Balanced Portfolio had a
gross return of 2.33% and for the year ended December 31, 1997, returned 7.93%.
The Lehman Intermediate-Government/ Corporate Index returned 2.14% for the
quarter ended December 31, 1997, and 7.87% for the year.
The fixed income portion of the Portfolio began the year at a weighted average
maturity of 3.3 years and average duration of 3.0. During the first quarter,
rates increased across all maturity spectrums, as investors anticipated the
Federal Reserve Bank's raising of the fed funds rate in late March by 25 basis
points. However, for the year, interest rates ended lower across maturity
spectrums of one year and greater. The largest decrease in rates occurred in the
five, ten and thirty year bonds, as investors anticipated the prospect of
deflation from the Asian crisis. This
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- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
downward shift in long rates flattened the yield curve. During the third
quarter, when long bond rates approached 6.7%, we lengthened the weighted
average maturity and average duration of the portfolio to take advantage of a
temporary increase in rates. The moderation in interest rates later in the year
and the decline in long bond rates below the 6% level helped performance. At
year-end, the weighted average maturity was 3.6 years, and average duration was
3.2.
Stephen C. Sexauer
PORTFOLIO MANAGER
Alford E. Zick, Jr.
PORTFOLIO MANAGER
January 1998
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BALANCED PORTFOLIO
124
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- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (51.4%)
AEROSPACE (5.5%)
(a)900 Gulfstream Aerospace Corp. ....................... $ 26
(a)1,000 Litton Industries, Inc. .......................... 58
800 Lockheed Martin Corp. ............................ 79
600 Parker-Hannifin Corp. ............................ 28
61 Raytheon Co., Class A............................. 3
1,250 United Technologies Corp. ........................ 91
----------
285
----------
BANKING (9.4%)
500 Banc One Corp. ................................... 27
700 BankAmerica Corp. ................................ 51
600 BankBoston Corp. ................................. 57
550 Bankers Trust (New York) Corp. ................... 62
550 Chase Manhattan Corp. ............................ 60
1,000 First of America Bank Corp. ...................... 77
400 Fleet Financial Group, Inc. ...................... 30
1,200 Mellon Bank Corp. ................................ 73
950 PNC Bank Corp. ................................... 54
----------
491
----------
CAPITAL GOODS (3.0%)
500 Borg-Warner Automotive, Inc. ..................... 26
400 Case Corp. ....................................... 24
1,000 Deere & Co. ...................................... 58
2,383 Meritor Automotive, Inc. ......................... 50
----------
158
----------
CHEMICALS (0.9%)
800 E.I. du Pont de Nemours & Co. .................... 48
----------
COMMUNICATIONS (3.6%)
1,400 AT&T Corp. ....................................... 86
850 Sprint Corp. ..................................... 50
1,200 U.S. WEST Communications Group.................... 54
----------
190
----------
CONSUMER-DURABLES (1.1%)
950 General Motors Corp. ............................. 58
----------
CONSUMER-RETAIL (3.4%)
1,150 J.C. Penney Co., Inc. ............................ 70
1,000 Wal-Mart Stores, Inc. ............................ 39
(a)3,400 Woolworth Corp. .................................. 69
----------
178
----------
CONSUMER-STAPLES (2.9%)
1,600 Fleming Cos., Inc. ............................... 21
1,425 Philip Morris Cos., Inc. ......................... 65
1,800 RJR Nabisco Holdings Corp. ....................... 68
----------
154
----------
ENERGY (4.2%)
1,200 Ashland, Inc. .................................... 64
600 Atlantic Richfield Co. ........................... 48
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
900 Mobil Corp. ...................................... $ 65
1,200 USX-Marathon Group................................ 41
----------
218
----------
FINANCIAL-DIVERSIFIED (1.5%)
550 SLM Holding Corp. ................................ 77
----------
HEALTH CARE (0.9%)
1,250 Bausch & Lomb, Inc. .............................. 49
----------
INSURANCE (3.5%)
850 American General Corp. ........................... 46
1,050 Lincoln National Corp. ........................... 82
700 St. Paul Cos., Inc. .............................. 57
----------
185
----------
METALS (0.8%)
650 Phelps Dodge Corp. ............................... 40
----------
PAPER & PACKAGING (1.2%)
300 Georgia-Pac....................................... 18
2,200 Louisiana-Pacific Corp. .......................... 42
----------
60
----------
SERVICES (0.8%)
1,500 Ogden Corp. ...................................... 42
----------
TECHNOLOGY (2.5%)
1,150 Harris Corp. ..................................... 53
500 Philips Electronics N.V. (New York Shares)........ 30
1,000 Texas Instruments, Inc. .......................... 45
----------
128
----------
TRANSPORTATION (1.9%)
(a)200 AMR Corp. ........................................ 26
(a)700 Continental Airlines, Inc., Class B............... 33
1,250 Ryder System, Inc. ............................... 41
----------
100
----------
UTILITIES (4.3%)
1,050 GPU, Inc. ........................................ 44
1,200 NIPSCO Industries, Inc. .......................... 59
1,500 Pinnacle West Capital Corp. ...................... 64
1,450 Texas Utilities Co. .............................. 60
----------
227
----------
TOTAL COMMON STOCKS (Cost $1,959)............................. 2,688
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
FIXED INCOME SECURITIES (40.2%)
U.S. TREASURY NOTES (40.2%)
$ 1,603 5.50%, 4/15/00.................................... 1,597
500 5.875%, 11/15/05.................................. 503
----------
TOTAL FIXED INCOME SECURITIES (Cost $2,061)................... 2,100
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
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125
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[LOGO] Morgan Stanley
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- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (8.5%)
REPURCHASE AGREEMENT (8.5%)
$ 447 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $447,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $460 (Cost $447)......... $ 447
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (100.1%) (Cost $4,467).................... 5,235
----------
OTHER ASSETS (0.7%)
Cash.......................................... $ 1
Interest Receivable........................... 23
Dividends Receivable.......................... 5
Due from Adviser.............................. 5 34
----------
LIABILITIES (-0.8%)
Payable for Investments Purchased............. (12)
Custodian Fees Payable........................ (5)
Adminstrative Fees Payable.................... (1)
Directors' Fees and Expenses Payable.......... (1)
Other Liabilities............................. (23) (42)
---------- ----------
NET ASSETS (100%)........................................... $ 5,227
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 4,407
Distributions in Excess of Net Investment Income.............. (1)
Accumulated Net Realized Gain................................. 53
Unrealized Appreciation on Investments........................ 768
----------
NET ASSETS.................................................... $ 5,227
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $4,606
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 609,718 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $7.55
----------
----------
CLASS B:
- --------------------------------------------------------------
NET ASSETS.................................................... $621
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 82,499 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $7.53
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
The accompanying notes are an integral part of the financial statements.
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- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Argentina 14.6 %
Brazil 24.0 %
Bulgaria 3.4 %
Cayman Islands 4.3 %
Ecuador 1.4 %
Ivory Coast 2.9 %
Jamaica 5.3 %
Mauritius 1.0 %
Mexico 16.6 %
Morocco 2.2 %
Netherlands 0.6 %
Panama 1.5 %
Peru 2.8 %
Russia 15.3 %
United Kingdom 1.8 %
Venezuela 11.4 %
Other -9.1 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
JP MORGAN EMERGING EMERGING MARKETS DEBT
<S> <C> <C>
Markets Bond Plus Index (1) Portfolio--Class A
2/1/94* $500,000 $500,000
12/31/94 $406,550 $429,500
12/31/95 $518,514 $550,748
12/31/96 $694,653 $828,986
12/31/97 $785,097 $978,950
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO THE J.P. MORGAN EMERGING
MARKETS BOND PLUS INDEX(1)
- ----------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------ -----------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 18.29% 18.77%
PORTFOLIO -- CLASS B............. 18.05 32.46
INDEX -- CLASS A................. 13.02 13.18
INDEX -- CLASS B................. 13.02 24.83
</TABLE>
1. The J.P. Morgan Emerging Markets Bond Plus Index is a market weighted index
composed of all Brady bonds outstanding loans and Eurobonds, as well as U.S.
Dollar local market instruments of Argentina, Brazil, Bulgaria, Mexico,
Morocco, Russia, Nigeria, the Philippines, Poland and Venezuela.
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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 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 year ended December 31, 1997, the Portfolio had a total return of 18.29%
for the Class A shares and 18.05% for the Class B shares as compared to a total
return of 13.02% for the J.P. Morgan Emerging Markets Bond Plus Index (the
"Index"). From inception on February 1, 1994 through December 31, 1997, the
average annual total return of Class A was 18.77% compared to 13.18% for the
Index. From inception on January 2, 1996, through December 31, 1997, the average
annual total return of Class B was 32.46% compared to 24.83% for the Index. As
of December 31, 1997, the Portfolio had a 30-day yield of 10.24% for the Class A
shares and 9.95% for the Class B shares. This yield has been computed using the
SEC formula modifed to exclude the effect of the Portfolio's per share amount of
realized gains distributed during December 1997. Including this amount, the
30-day yield would be 13.38% for Class A shares and 13.00% for Class B shares.
1997 was another remarkable year for the emerging debt markets, in several ways.
While the asset class matured, and credit improvements in the broad emerging
world were the order for most of the year, the Asian financial crisis unfolding
at mid-year abruptly changed the risk profile for nearly all emerging countries,
changing investor perceptions as to the proper risk premium for emerging
markets. The weakness across Asia reached full pitch at the end of the fourth
quarter, with sharp sell-offs in the Hong Kong and Korean markets. It continues
into January with serious fears over the solvency of Indonesia. The spill-over
effects into emerging debt have been devastating, and in the last quarter of the
year the EMD markets experienced their first significant down quarter for the
first time since early 1995.
Broad gains in the monetary, foreign exchange and fiscal areas characterized
many emerging countries for the better part of 1997. The result was a pick-up in
real growth, accompanied by significant declines in inflation, along with
reasonable fiscal and current account balances. In Brazil, inflation came
solidly into annualized single-digit range, as tight monetary policy and fiscal
reform continued. In Russia, progress on the privatization front and sound money
policy also
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OVERVIEW
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
brought inflation close to G10 levels, and allowed interest rates to fall to
real rates of 8-10%, alongside a steady ruble. Venezuelan reforms and buoyant
crude oil prices improved that country's debt profile, and Mexico continued
along the path of accelerating growth and improved trade accounts.
A significant theme in 1997 was active external debt management by several large
sovereigns, including Argentina, Brazil, Venezuela and Panama. A declining U.S.
interest rate environment and ample global liquidity allowed these countries to
achieve real present value savings through re-financing relatively expensive
"Brady" (restructured) debt, by issuing new "global" bonds. This trend
significantly improved these borrowers' debt profiles going forward.
For much of the year our Portfolio maintained healthy exposure to the large
Latin and Eastern European markets, while avoiding exposure to Asian borrowers.
During the first half of the year we held overweight positions in Venezuela,
Argentina, Russia and Bulgaria and shifted the Portfolio to an overweight
interest rate posture following the back-up in U.S. rates in the first quarter.
These country overweights helped the Portfolio return 17.2% by mid-year, versus
the index return of 10.3%, with Russia and Bulgaria leading the way. As spreads
on the benchmark index tightened into 375 basis points over the U.S. yield
curve, the portfolio switched positions out of higher-risk, higher-yielding
markets into better quality credits. By the end of the third quarter the
emerging markets bond index spread had reached a "full value" level of 350 basis
points over Treasuries, and we reduced duration in the Portfolio accordingly.
The final quarter of the year brought a crisis atmosphere in Asia, and severe
downturns in Hong Kong, Korea and Indonesia hammered prices and pushed up
volatility in the debt markets. Spreads widened out to as far as 800 basis
points over the U.S. curve, before ending the year at roughly 500 basis points
over the curve.
The Portfolio's weak performance versus its benchmark during the quarter came as
a result of an overweight position in Venezuela, as well as an underweight
position against U.S. interest rates.
The Asian financial crisis will continue to impact all emerging markets into
1998. Severe dislocations in Asia have created several areas of value for our
Portfolio, and for the first time since the inception of the Portfolio we are
(gradually) building exposure in Asia to what we consider solid sovereign and
corporate issuers with good medium-term prospects. The ripple effects of Asia
will likely keep the overall risk spreads in the broad emerging debt universe
high, as fair value may be deemed to be 400-500 basis points of spread, rather
than 300-400 basis points. More yield is in the market today, and importantly
several non-Asian countries, e.g. Brazil, Mexico, Russia, have been forced by
the Asian crisis to address more forcefully and accelerate long overdue
structural reform. While the stabilization and recovery process in Asia will
take many quarters to materialize, the re-pricing of the overall debt market
over the past four months, along with a re-commitment to a proper policy mix in
many countries, makes the 1998 outlook attractive from a total return
standpoint.
Paul Ghaffari
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
128
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Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
DEBT INSTRUMENTS (102.4%)
ARGENTINA (14.6%)
BONDS (14.6%)
U.S.$ (e)1,900 Acindar Industria, (Floating Rate), 11.656%,
11/12/98........................................ $ 1,910
ARP (e)6,810 CIA International Telecommunications, 10.375%,
8/01/04......................................... 5,517
U.S.$ 7,392 Republic of Argentina, (Floating Rate), 6.688%,
3/31/05......................................... 6,614
ARP 2,800 Republic of Argentina, 'Euro', 8.75%, 7/10/02..... 2,437
(e)700 Republic of Argentina, 'Euro', 11.75%, 2/12/07.... 665
1,300 Republic of Argentina, 'Euro', 11.75%, 2/12/07.... 1,235
U.S.$ 2,850 Republic of Argentina Global Bond, 9.75%,
9/19/27......................................... 2,731
----------
21,109
----------
BRAZIL (19.1%)
BONDS (19.1%)
2,000 CSN Iron, 9.125%, 6/01/07......................... 1,728
5,268 Federative Republic of Brazil, C Bond, (Floating
Rate), (Bearer) PIK, 8.00%, 4/15/14............. 4,142
(n)4,700 Federative Republic of Brazil Front Loaded
Interest Reduction Bond, Series L, 4.50%,
4/15/09......................................... 3,478
(s)8,620 Federative Republic of Brazil Global Bond,
10.125%, 5/15/27................................ 8,092
(s)6,123 Federative Republic of Brazil, Series A, (Floating
Rate), 6.875%, 1/01/01.......................... 5,844
2,509 Federative Republic of Brazil, Series C, (Floating
Rate), (Registered) PIK, 8.00%, 4/15/14......... 1,972
3,000 Federative Republic of Brazil, Series L, (Floating
Rate), 6.75%, 4/15/09........................... 2,424
----------
27,680
----------
BULGARIA (3.4%)
BONDS (3.4%)
(n)5,200 Republic of Bulgaria Front Loaded Interest
Reduction Bond, Series A, 2.25%, 7/28/12........ 3,167
2,275 Republic of Bulgaria Interest Arrears PDI Bond,
(Floating Rate), 6.688%, 7/28/11................ 1,669
----------
4,836
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
CAYMAN ISLANDS (4.3%)
BONDS (4.3%)
ZAR 8,000 Nacional Financiera SNC, 'Euro', 17.00%,
2/26/99......................................... $ 1,641
U.S.$ (e)4,900 Pera Financial Services Co., 9.375%, 10/15/02..... 4,606
----------
6,247
----------
ECUADOR (1.4%)
BONDS (1.3%)
1,500 Conecel, 14.00%, 5/01/02.......................... 1,500
525 Republic of Ecuador PDI Bond, (Floating Rate),
(Registered) PIK, 6.688%, 2/27/15............... 344
----------
1,844
----------
NOTES (0.1%)
(e)100 Consorcio Ecuatorian Notes, 14.00%, 5/01/02....... 100
----------
1,944
----------
IVORY COAST (2.9%)
LOAN AGREEMENTS (2.9%)
DEM (l)2,295 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00 (Participation: Paribas
Corp.).......................................... 504
FRF (l)41,600 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00 (Participation: Salomon
Brothers, Paribas Corp., and Chase Securities,
Inc.)........................................... 3,007
U.S.$ (l)1,800 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00 (Participation: Salomon
Brothers)....................................... 711
----------
4,222
----------
JAMAICA (5.3%)
BONDS (5.3%)
4,000 Government of Jamaica, 9.625%, 7/02/02............ 3,800
(e)4,000 Mechala Group, Jamaica, Series B, 12.75%,
12/30/99........................................ 3,800
----------
7,600
----------
MAURITIUS (1.0%)
BONDS (1.0%)
(e)1,650 Pindo Deli Financial Mauritius, 10.75%,
10/01/07........................................ 1,345
50 Pindo Deli Financial Mauritus, 'Euro', 10.75%,
10/01/07........................................ 41
----------
1,386
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
129
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
MEXICO (16.6%)
BONDS (15.5%)
U.S.$ 1,540 Bancomex Global Bond, 7.25%,
2/02/04......................................... $ 1,423
(e)3,000 Bufete Industrial, 11.375%, 7/15/99............... 3,094
4,500 Empresas ICA Sociedad Controladora, (Registered),
11.875%, 5/30/01................................ 4,883
600 United Mexican States Discount Bond, Series A,
(Floating Rate), 6.693%, 12/31/19............... 556
250 United Mexican States Discount Bond, Series B,
(Floating Rate), 6.617%, 12/31/19............... 232
(s)4,400 United Mexican States Discount Bond, Series D,
(Floating Rate), 6.75%, 12/31/19................ 4,078
2,100 United Mexican States Global Bond, 11.375%,
9/15/16......................................... 2,411
(s)4,450 United Mexican States Global Bond, 11.50%,
5/15/26......................................... 5,284
650 United Mexican States Par Bond, Series W-A, 6.25%,
12/31/19........................................ 543
----------
22,504
----------
NOTES (1.1%)
(e)1,550 Innova S De R.L. Senior Notes, 12.875%, 4/01/07... 1,554
----------
24,058
----------
MOROCCO (2.2%)
LOAN AGREEMENTS (2.2%)
(l)3,700 Kingdom of Morocco
Restructuring & Consolidation Agreement, Tranche
A,
(Floating Rate), 6.656%, 1/01/09
(Participation: J.P. Morgan and Salomon
Brothers)....................................... 3,211
----------
NETHERLANDS (0.6%)
BONDS (0.6%)
(e)1,000 UnExim International Finance BV, 9.875%,
8/01/00......................................... 885
----------
PANAMA (1.5%)
BONDS (1.5%)
2,000 Republic of Panama Global Bonds, 8.875%,
9/30/27......................................... 1,882
259 Republic of Panama PDI Bond, (Floating Rate), PIK,
6.688%, 7/17/16................................. 211
----------
2,093
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
PERU (2.8%)
BONDS (2.8%)
U.S.$ (n)1,050 Republic of Peru Front Loaded Interest Reduction
Bond, Series US, 3.25%, 3/07/17................. $ 625
(e,n)5,798 Republic of Peru Front Loaded Interest Reduction
Bond, Series US, 3.25%, 3/07/17................. 3,450
----------
4,075
----------
RUSSIA (15.3%)
LOAN AGREEMENTS (10.4%)
DEM (l)6,200 International Bank for Economic Cooperation,
12/31/99 (Participation: Salomon
Brothers)....................................... 2,016
U.S.$ (l)4,600 International Bank for Economic Cooperation,
12/31/00 (Participation: Salomon
Brothers)....................................... 2,691
(l)14,150 Russian Principal Loans, (Floating Rate), 6.719%,
12/15/20 (Participation: J.P. Morgan)........... 8,791
(l)2,500 Russia Principal Notes IIB, 12/31/99
(Participation: Salomon
Brothers)....................................... 1,525
----------
15,023
----------
NOTES (4.9%)
10,066 Russian Interest Arrears Note, (Floating Rate),
6.719%,
12/15/15........................................ 7,147
----------
22,170
----------
VENEZUELA (11.4%)
BONDS (11.4%)
(s)8,571 Republic of Venezuela Debt Conversion Bond, Series
DL, (Floating Rate), 6.813%,
12/18/07........................................ 7,693
(s)9,832 Republic of Venezuela Debt Conversion Bond, 9.25%,
9/15/27......................................... 8,841
----------
16,534
----------
TOTAL DEBT INSTRUMENTS (Cost $154,119)............................. 148,050
----------
STRUCTURED INVESTMENTS (6.7%)
BRAZIL (4.9%)
7,500 Salomon Brothers Federative Republic of Brazil
Credit Linked Enhanced Note, 9.00%, 1/05/99..... 7,155
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
130
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
UNITED KINGDOM (1.8%)
U.S.$ (e)2,600 ING Bank N.V. Libor or T-Bill Linked Note,
8/14/98......................................... $ 2,542
----------
TOTAL STRUCTURED INVESTMENTS (Cost $10,160)........................ 9,697
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ---------------
RIGHTS (0.0%)
MEXICO (0.0%)
8,077 United Mexican States, Value Recovery Rights,
expiring 6/30/03 (Cost $0)...................... --
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
SHORT-TERM INVESTMENT (7.0%)
REPURCHASE AGREEMENT (7.0%)
U.S.$ 10,116 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98 to be repuchased at $10,119,
collateralized by U.S. Treasury Notes, 5.25%,
due 1/31/01, valued at $10,330 (Cost $10,116)... 10,116
----------
FOREIGN CURRENCY (0.0%)
FRF 2 French Franc (Cost $0)............................ --
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (116.1%) (Cost $174,395)............... 167,863
--------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (6.9%)
Receivable for Investments Sold...................... $ 6,035
Interest Receivable.................................. 4,003
Dividends Receivable................................. 7
Other................................................ 11 10,056
----------
LIABILITIES (-23.0%)
Payable for Reverse Repurchase Agreement............. (29,740)
Payable for Portfolio Shares Redeemed................ (1,843)
Payable for Investments Purchased.................... (886)
Investment Advisory Fees Payable..................... (402)
Bank Overdraft....................................... (154)
Custodian Fees Payable............................... (77)
Administrative Fees Payable.......................... (21)
Directors' Fees and Expenses Payable................. (9)
Distribution Fees Payable............................ (2)
Other Liabilities.................................... (122) (33,256)
---------- ----------
NET ASSETS (100%).................................................. $ 144,663
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $ 154,427
Distributions in Excess of Net Investment Income................... (8)
Accumulated Net Realized Loss...................................... (3,138)
Unrealized Depreciation on Investments and Foreign Currency
Translations..................................................... (6,618)
----------
NET ASSETS......................................................... $ 144,663
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -------------------------------------------------------------------
NET ASSETS......................................................... $142,382
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 24,696,655 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................. $5.77
----------
----------
CLASS B:
- -------------------------------------------------------------------
NET ASSETS......................................................... $2,281
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 395,394 outstanding $0.001 par value
shares(authorized 500,000,000 shares)............................ $5.77
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(e) -- 144A security -- certain conditions for public sale may exist.
(l) -- Participation interests were acquired through the financial
institutions listed parenthetically.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1997. Maturity date disclosed is the
ultimate maturity.
(s) -- Denotes all or portion of securities subject to repurchase under
Reverse Repurchase Agreements as of December 31, 1997 -- see note A-4
to financial statements.
ARP -- Argentine Peso
DEM -- German Mark
PIK -- Payment-In-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
PDI -- Past Due Interest
ZAR -- South African Rand
Floating Rate Security -- Interest rate changes on these instruments are based
on changes in a designated base rate. The rates shown are those in
effect on December 31, 1997.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Emerging Markets Debt Portfolio
131
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Asset Backed Securities 6.6 %
Corporate Bonds & Notes 18.4 %
Foreign Government & Agency Obligation 4.1 %
U.S. Government & Agency Obligation 60.2 %
Other 10.7 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FIXED INCOME PORTFOLIO--CLASS
LEHMAN AGGREGATE BOND INDEX (1) A
<S> <C> <C>
5/15/91* $500,000 $500,000
10/31/91 $537,100 $535,590
10/31/92 $589,900 $592,415
12/31/92 $599,400 $598,440
12/31/93 $657,800 $652,710
12/31/94 $638,650 $632,500
12/31/95 $756,673 $751,157
12/31/96 $784,140 $785,785
12/31/97 $859,810 $860,749
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO THE LEHMAN
AGGREGATE BOND INDEX(1)
- ----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------- ------------------ ------------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 9.54% 7.54% 8.53%
PORTFOLIO -- CLASS
B..................... 9.48 N/A 6.89
INDEX -- CLASS A...... 9.65 7.48 8.52
INDEX -- CLASS B...... 9.65 N/A 6.62
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had a total return of 9.54%
for the Class A shares and 9.48% for the Class B shares as compared to a total
return of 9.65% for the Lehman Aggregate Bond Index (the "Index"). For the five
year period ended December 31, 1997, the average annual total return of Class A
was 7.54% compared to 7.48% for the Index. From inception on May 15, 1991
through December 31, 1997, the average annual total return of Class A was 8.53%
compared to 8.52% for the Index. From inception on January 2, 1996 through
December 31, 1997, the average annual total return of Class B was 6.89% compared
to 6.62% for the Index. As of December 31, 1997, the Portfolio had an SEC 30-day
yield of 5.95% for the Class A shares and 5.80% for the Class B shares.
The fixed income markets again provided solid returns during the fourth quarter
of 1997. Benefiting from turmoil in the broader global marketplace, long U.S.
Treasury yields fell by almost 50 basis points over the quarter, the third
consecutive quarter in which they have declined. The Lehman Aggregate Bond Index
returned 2.94% and the Lehman Government Corporate Index returned 3.21% for the
quarter. While a weak first quarter prevented full-year returns from reaching
double digits, these returns were still a very respectable 9.65% and 9.76% for
the Lehman Aggregate and Lehman Government Corporate Indices, respectively.
Unlike prior quarters in which domestic economic considerations had been the
prime determinant of bond market returns, global events were a far more
important influence during the fourth quarter. Severe financial stress in
various parts of Asia produced a strong preference in the financial markets for
the perceived quality and safety of the U.S. Treasury markets. The Asian
problems involved a vicious circle of rapidly declining currency and equity
markets, banking system deterioration, falling foreign exchange reserves and
ultimately questions about the ability of some countries to service foreign
currency debt. Despite efforts by the International Monetary Fund to
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
132
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (CONT.)
contain the crisis initially to Thailand, it quickly spread to other parts of
Southeast Asia and then to Korea, the world's 11(th) largest economy.
The Asian problems should have a sizable effect on the global economy. Beyond
the direct contractionary effects on the growth rates of the impacted countries,
secondary effects could be sizable for those countries with significant trade or
lending exposure to the region, particularly for Japan, which already had a weak
economy and a fragile banking system. In terms of the response of the Federal
Reserve to the Asian problems, from a price perspective, the collapse in Asian
currency values relative to the dollar should have a restraining effect on U.S.
inflation. Perhaps most importantly, given the close integration of the global
financial system, the Fed is concerned that balance of payment crises in one
region can spread rapidly through the global financial system, causing serious
problems for the real economy. As a result, the primary focus of the Federal
Reserve appears to have shifted from a concern with the strength of the U.S.
domestic economy, to one of closely monitoring the situation in Asia and
assuring that it does not adversely impact the global financial system. Thus,
despite the lowest unemployment rates since 1970 and strong GDP growth, the Fed
shows no inclination to tighten monetary policy. Indeed, recognizing the
fragility of many global markets, should the Asian crisis worsen, the Fed's next
move could be to ease.
Recognizing these forces, the U.S. Treasury market rallied over the fourth
quarter. The yield curve flattened considerably during the rally, with long
rates falling almost 50 basis points, while two year rates fell less then 15
basis points. While the major inflation indices had already been remarkably well
behaved, the Asian crisis has further reduced inflation expectations, causing
long rates to fall. In addition, the rapid decline in the U.S. budget deficit
has reduced the outlook for future issuance of Treasury securities, further
supporting the rally.
From a sector standpoint, after an extended period of strong performance
relative to Treasuries, the corporate market performed very poorly during the
fourth quarter. Relative to Treasuries of comparable duration, the corporate
sector underperformed by roughly 90 basis points, its worst performance since
the recession of 1990. Given the turmoil in Asia, the yankee sector performed
particularly poorly, but other sectors underperformed Treasuries as well.
Surprisingly, the mortgage pass-through market managed to outperform comparable
duration Treasuries during the quarter, although only by a small margin. Given
the low level of nominal interest rates, the market remained remarkably
complacent about prepayment risk and spreads were far more stable than in the
corporate sector. Other parts of the mortgage market did not perform as well.
Both commercial mortgage-backed and asset backed securities widened in response
to heavy issuance as well as pressure from widening corporate bond spreads.
We have continued to maintain our slightly longer duration position, exceeding
the duration of our benchmark by roughly 1/2 year. While bond valuation was not
as compelling as earlier in the year, real yields still represent fair value and
the interest rate trend has been consistently favorable. We have underweighted
mortgage-backed pass-throughs because of their rich valuations and increased
level of prepayment risk given the decline in interest rates and have been
surprised that the market has not demanded more compensation for this risk. We
remained slightly overweighted in corporate bonds and note that in general, the
credit fundamentals of U.S. corporations remain strong. While we unfortunately
had some exposure to the yankee sector, we reduced our holdings by mid-quarter
and thereby the impact of its spread widening. We continue to add asset-backed
and commercial mortgage-backed securities as spreads on these sectors remain
attractive. Given their high quality, these areas provided attractive value
relative to corporate bonds and given their better convexity, they provided
attractive value relative to mortgage pass-throughs as well.
We begin 1998 still long in duration by about 1/2 year relative to our
benchmarks. Again our focus remains on market valuation and interest rate trend,
and we expect to maintain a long duration position until either of these becomes
unfavorable. We are overweighted in yield advantaged sectors, and we will
probably hold these positions. While the increased risk to financial markets
represented by the Asian crisis is not likely to go away quickly, and some U.S.
corporate spreads have already widened significantly, we believe long run the
credit fundamentals for these companies remain strong and yield spreads should
eventually return to tighter levels. We are generally comfortable with our
asset-backed and commercial mortgage-backed securities positions. Mortgage pass-
- --------------------------------------------------------------------------------
Fixed Income Portfolio
133
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (CONT.)
throughs, the one spread sector in which we are underweighted, appear richly
valued, and we would need to see wider spread levels before adding to this
sector.
Warren Ackerman, III
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
134
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
FIXED INCOME SECURITIES (89.3%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (60.2%)
U.S. TREASURY BOND (6.8%)
$ 12,500 6.25%, 8/15/23.................................... $ 12,875
----------
U.S. TREASURY NOTES (40.5%)
30,000 7.25%, 8/15/04.................................... 32,424
37,000 6.50%, 8/15/05.................................... 38,607
5,000 6.25%, 2/15/07.................................... 5,159
----------
76,190
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION (0.0%)
8 13.00%, 9/01/10................................... 10
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (11.0%)
3,896 6.00%, 9/01/10.................................... 3,841
5,087 6.00%, 2/01/11.................................... 5,015
3,346 8.00%, 2/01/12.................................... 3,456
8,405 6.50%, 4/01/24.................................... 8,339
----------
20,651
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II ARM (1.9%)
3,475 6.00%, 7/20/27.................................... 3,524
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS....................... 113,250
----------
FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS (4.1%)
2,000 Republic of Colombia, 8.70%, 2/15/16.............. 1,946
6,000 Republic of Poland, "Euro", (Floating Rate),
6.6875%, 10/27/24............................... 5,839
----------
TOTAL FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS.................... 7,785
----------
CORPORATE BONDS AND NOTES (18.4%)
BROADCAST-RADIO & TELEVISION (1.4%)
(n)3,000 Bell Cablemedia plc, 0.00%, 9/15/05............... 2,658
----------
FINANCE (17.0%)
(e)2,500 American General Institutional Capital, Series A,
7.57%, 12/01/45................................. 2,597
(e)1,500 BT Capital Trust, Series B1, 7.90%, 1/15/27....... 1,548
(e)2,000 BankAmerica, 7.70%, 12/31/26...................... 2,059
(e)2,000 First Chicago Corp., 7.75%, 12/01/26.............. 2,087
1,500 First Plus Home Loan Trust, 97-2 M1, 7.60%,
4/10/23......................................... 1,536
3,470 First Union-Lehman Brothers Commercial Mortgage,
Series 97-C2 A1, 6.479%, 3/18/04................ 3,491
2,500 General Motors Acceptance Corp., 7.375%,
6/22/00......................................... 2,567
(e)3,000 Goldman Sachs Group, 6.25%, 2/01/03............... 3,004
(e)2,500 Hutchison Whampoa Ltd., Class B, 7.45%, 8/01/17... 2,418
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------------------
$ 1,300 Lehman Brothers Holdings, Inc., 7.375%, 5/15/04... $ 1,346
4,135 Lehman Brothers Large Loan, Series 97-LLI A1,
6.79%, 10/12/34................................. 4,223
(e)1,500 Liberty Mutual Insurance Co., 7.697%,
10/15/2097...................................... 1,580
(e)1,500 Lumbermens Mutual Casualty Co., 9.15%, 7/01/26.... 1,735
(e)1,500 USF&G Capital Corp., I, 8.50%, 12/15/45........... 1,699
----------
31,890
----------
TOTAL CORPORATE BONDS AND NOTES.................................... 34,548
----------
ASSET BACKED SECURITIES (6.6%)
7 Federal National Mortgage Association, REMIC,
Series 92-59F, (Floating Rate), 6.525%,
8/25/06......................................... 7
2,960 Mid-State Trust, Series IV A, 8.33%, 4/01/30...... 3,206
2,138 Resolution Trust Corp., Series 91-M5, Class A,
9.00%, 3/25/17.................................. 2,138
4,000 Standard Credit Card Trust, 6.75%, 6/07/00........ 4,011
(e)3,000 Team Fleet Financing Corp., 7.35%, 5/15/03........ 3,066
----------
TOTAL ASSET BACKED SECURITIES...................................... 12,428
----------
TOTAL FIXED INCOME SECURITIES (Cost $164,397)........................ 168,011
----------
SHORT-TERM INVESTMENT (8.8%)
REPURCHASE AGREEMENT (8.8%)
16,515 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $16,520,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $16,852 (Cost $16,515)... 16,515
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.1%) (Cost $180,912).............................. 184,526
--------
OTHER ASSETS (2.1%)
Cash..................................................... $ 101
Interest Receivable...................................... 3,037
Receivable for Portfolio Shares Sold..................... 754
Other.................................................... 13 3,905
----------
LIABILITIES (-0.2%)
Payable for Portfolio Shares Redeemed.................... (242)
Investment Advisory Fees Payable......................... (85)
Adminstrative Fees Payable............................... (25)
Directors' Fees and Expenses Payable..................... (8)
Custodian Fees Payable................................... (5)
Distribution Fees Payable................................ (2)
Other Liabilities........................................ (38) (405)
---------- --------
NET ASSETS (100%)...................................................... $188,026
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
135
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
(000)
- ---------------------------------------------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital...................................................... $ 187,414
Distributions in Excess of Net Investment Income..................... (6)
Accumulated Net Realized Loss........................................ (2,996)
Unrealized Appreciation on Investments............................... 3,614
----------
NET ASSETS........................................................... $ 188,026
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- ---------------------------------------------------------------------
NET ASSETS........................................................... $183,192
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 16,831,566 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................... $10.88
----------
----------
CLASS B:
- ---------------------------------------------------------------------
NET ASSETS........................................................... $4,834
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 443,708 outstanding $0.001 par value shares
(authorized 500,000,000 shares).................................... $10.89
----------
----------
</TABLE>
- ------------------------------------------------------------
(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 December 31, 1997. Maturity date disclosed is the
ultimate maturity date.
Floating Rate Security -- Interest rate changes on these
instruments are based on changes in a designated base rate. The rates
shown are those in effect on December 31, 1997.
REMIC -- Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Fixed Income Portfolio
136
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Australian Dollar 3.9 %
British Pound 7.9 %
Canadian Dollar 3.7 %
Danish Krone 3.0 %
Deutsche Mark 14.5 %
Irish Punt 1.9 %
Italian Lira 5.9 %
Japanese Yen 8.3 %
Spanish Peseta 3.0 %
Swedish Krona 7.1 %
United States Dollar 33.4 %
Other 7.4 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
J.P. MORGAN TRADED GLOBAL BOND GLOBAL FIXED INCOME PORTFOLIO--CLASS
INDEX(1) A
<S> <C> <C>
5/1/91* $500,000 $500,000
10/31/91 $538,720 $530,500
10/31/92 $606,455 $585,090
12/31/92 $601,365 $577,395
12/31/93 $675,100 $665,985
12/31/94 $683,750 $625,500
12/31/95 $815,782 $746,347
12/31/96 $851,676 $794,412
12/31/97 $863,599 $806,328
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO THE J.P. MORGAN TRADED GLOBAL BOND INDEX(1)
- --------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
-----------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------- ------------------ ------------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 1.50% 6.91% 7.42%
PORTFOLIO -- CLASS
B..................... 1.29 N/A 3.68
INDEX -- CLASS A...... 1.40 7.51 8.54
INDEX -- CLASS B...... 1.40 N/A 2.90
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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. 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 and corporations with
varying maturities in various currencies.
For the year ended December 31, 1997, the Portfolio had a total return of 1.50%
for the Class A shares and 1.29% for the Class B shares as compared to a total
return of 1.40% for the J.P. Morgan Traded Global Bond Index (the "Index"). For
the five year period ended December 31, 1997, the average annual total return of
Class A was 6.91% compared to 7.51% for the Index. From inception on May 1, 1991
through December 31, 1997, the average annual total return of Class A was 7.42%
compared to 8.54% for the Index. From inception on January 2, 1996 through
December 31, 1997, the average annual total return of Class B was 3.68% compared
to 2.90% for the Index. As of December 31, 1997, the Portfolio had an SEC 30-day
yield of 4.87% for the Class A shares and 4.72% for the Class B shares.
All global bond markets performed well during 1997 within an environment of
improving economic growth but still benign inflation and local market indices
appreciated between 6% in Germany and 15% in the U.K. More recently, the Asian
economic crisis has given a further boost to fixed income assets given the
expectation of a significant negative impact to both global growth and
inflation.
Despite beginning the year with nominal and real yields at very low levels, the
Japanese market continued to rally, and 10-year yields fell 81 basis points
despite concerns about the stability of the financial sector. The U.S. market in
particular benefited from its safe haven status in the second half of the year
and the belief that any tightening in monetary policy by the Fed was now
delayed. 10-year treasury yields ended the year down 68 basis points with the
long bond at close to 5.90%. The core European markets also performed well and
10-year yields fell 37-47 basis points. However this was as part of an overall
flattening of the curve, as yields rose at the short end in response to monetary
tightening in the fourth quarter. The continued political momentum toward
monetary union was a dominant theme throughout the year and this was reflected
in the further convergence of the high yielding markets to Germany. Spain and
Italy rallied strongly and their 10-year yields ended the period down 125 and
192
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
137
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO (CONT.)
basis points, respectively, with both markets responding positively to rate cuts
during December. Those markets which may be part of the second phase of EMU also
benefited from the convergence euphoria and yield spreads of U.K. and Swedish
bonds also contracted to Germany.
The Portfolio maintained a position of broadly neutral the dollar bloc and
European markets and underweight the Japanese market throughout the year.
On the foreign exchanges the dollar remained well supported by interest rate
differentials, the position of the U.S. economic cycle relative to Europe and
Japan, and more recently by its safe haven status. Over the year, the dollar
rose 14% against the deutschemark and 11% against the Japanese yen. The
Portfolio maintained an overweight position to the U.S. dollar over the year
largely at the expense of the yen.
J. David Germany
PORTFOLIO MANAGER
Michael B. Kushma
PORTFOLIO MANAGER
Paul F. O'Brien
PORTFOLIO MANAGER
Robert M. Smith
PORTFOLIO MANAGER
Richard B. Worley
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
138
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
FIXED INCOME SECURITIES (92.6%)
AUSTRALIAN DOLLAR (3.9%)
GOVERNMENT BONDS (2.5%)
AUD 1,800 Government of Australia 9.00%, 9/15/04........... $ 1,373
1,000 Government of Australia 7.50%, 9/15/09........... 727
--------
2,100
--------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS-GLOBAL (1.4%)
1,800 Federal National Mortgage Association-Global
6.50%, 7/10/02................................. 1,199
--------
3,299
--------
BRITISH POUND (7.9%)
GOVERNMENT BONDS (7.9%)
GBP 370 United Kingdom Conversion Gilt 9.00%, 7/12/11.... 754
1,080 United Kingdom Treasury Gilt 8.50%, 12/07/05..... 2,003
1,350 United Kingdom Treasury Gilt 8.50%, 7/16/07...... 2,546
700 United Kingdom Treasury Gilt 8.00%, 6/07/21...... 1,397
--------
6,700
--------
CANADIAN DOLLAR (3.7%)
GOVERNMENT BONDS (3.7%)
CAD 2,700 Government of Canada 7.50%, 3/01/01.............. 2,005
1,400 Government of Canada 8.75%, 12/01/05............. 1,175
--------
3,180
--------
DANISH KRONE (3.0%)
GOVERNMENT BONDS (3.0%)
DKK 15,400 Kingdom of Denmark 8.00%, 5/15/03................ 2,538
--------
GERMAN MARK (14.5%)
EUROBONDS (3.4%)
DEM 1,300 KFW International Finance, Inc. 7.50%, 1/24/00... 766
3,500 Landeskreditbank Baden-Wuerttemberg Financial
6.625%, 8/20/03................................ 2,082
--------
2,848
--------
GOVERNMENT BONDS (11.1%)
4,450 German Unity Bond 8.00%, 1/21/02................. 2,768
800 Government of Germany 6.875%, 5/12/05............ 491
1,100 Government of Germany 6.25%, 1/04/24............. 642
4,800 Treuhandanstalt 7.00%, 11/25/99.................. 2,825
4,300 Treuhandanstalt 7.50%, 9/09/04................... 2,709
--------
9,435
--------
12,283
--------
IRISH PUNT (1.9%)
GOVERNMENT BONDS (1.9%)
IEP 980 Irish Government 8.00%, 8/18/06.................. 1,626
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
ITALIAN LIRA (5.9%)
GOVERNMENT BONDS (5.9%)
ITL 3,700,000 BTPS 10.00%, 8/01/03............................. $ 2,552
1,450,000 BTPS 9.50%, 1/01/05.............................. 1,006
2,100,000 BTPS 9.50%, 2/01/06.............................. 1,486
--------
5,044
--------
JAPANESE YEN (8.3%)
EUROBONDS (8.3%)
JPY 100,000 European Investment Bank 6.625%, 3/15/00......... 866
230,000 Export Import Bank of Japan 4.375%, 10/01/03..... 2,043
215,000 International Bank for Reconstruction &
Development 4.50%, 6/20/00..................... 1,799
100,000 International Bank for Reconstruction &
Development 4.75%, 12/20/04.................... 925
145,000 Republic of Austria 6.25%, 10/16/03.............. 1,404
--------
7,037
--------
SPANISH PESETA (3.0%)
GOVERNMENT BONDS (3.0%)
ESP 380,000 Spanish Government 8.30%, 12/15/98............... 2,578
--------
SWEDISH KRONA (7.1%)
GOVERNMENT BONDS (7.1%)
SEK 19,300 Swedish Government 13.00%, 6/15/01............... 2,986
24,000 Swedish Government 6.00%, 2/09/05................ 3,044
--------
6,030
--------
UNITED STATES DOLLAR (33.4%)
ASSET BACKED SECURITIES (4.0%)
U.S.$ 750 Asset Securitization Corp., CMO,
Series 1996-D3 A1 B 7.21%, 10/13/26............ 780
540 Asset Securitization Corp., CMO,
Series 1995-MD4 A1 7.10%, 8/13/29.............. 561
130 CISCE Series 1997-1 Class A7 Seq, 6.42%,
12/26/09....................................... 131
460 Delta Funding Home Equity Loan Trust, Series
1997-1 7.21%, 4/25/29.......................... 473
819 LB Commercial Conduit Mortgage Trust, (Floating
Rate), CMO 7.14%, 8/25/04...................... 842
540 Mid-State Trust, Series IV A 8.33%, 4/01/30...... 584
--------
3,371
--------
CORPORATE BONDS AND NOTES (2.6%)
(e)500 BankAmerica, 7.70%, 12/31/26..................... 516
(e)150 First Chicago Corp., 7.75%, 12/01/26............. 156
(e)385 Goldman Sachs Group, 6.25%, 2/01/03.............. 386
(e)400 Liberty Mutual Insurance Co., 7.697%,
10/15/2097..................................... 421
(e)300 Lumbermens Mutual Casualty Co., Series AI, 9.15%,
7/01/26........................................ 350
365 NB Capital Trust II 7.83%, 12/15/26.............. 384
--------
2,213
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
139
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (26.8%)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (1.0%)
U.S.$ 890 6.00%, 8/20/27................................... $ 902
--------
U.S. TREASURY BONDS (8.9%)
670 9.25%, 2/15/16................................... 909
4,660 8.125%, 8/15/19.................................. 5,832
800 6.25%, 8/15/23................................... 825
--------
7,566
--------
U.S. TREASURY NOTES (16.9%)
1,000 6.375%, 5/15/99.................................. 1,009
2,000 5.75%, 10/31/00.................................. 2,003
4,110 6.375%, 3/31/01.................................. 4,187
1,612 3.625%, 7/15/02 (Inflation Indexed).............. 1,605
2,990 7.25%, 5/15/04................................... 3,227
1,300 7.50%, 2/15/05................................... 1,428
905 6.25%, 2/15/07................................... 934
--------
14,393
--------
22,861
--------
28,445
--------
TOTAL FIXED INCOME SECURITIES (92.6%) (Cost $79,699)............. 78,760
--------
SHORT-TERM INVESTMENT (4.7%)
REPURCHASE AGREEMENT (4.7%)
3,991 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $3,992,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $4,077 (Cost $3,991).... 3,991
--------
FOREIGN CURRENCY (0.7%)
ITL 966 Italian Lira..................................... 1
JPY 74,840 Japanese Yen..................................... 574
--------
TOTAL FOREIGN CURRENCY (Cost $576)................................. 575
--------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (98.0%) (Cost $84,266)........................... 83,326
--------
OTHER ASSETS (2.6%)
Cash................................................. $ 134
Interest Receivable.................................. 1,859
Net Unrealized Gain on Foreign Currency Exchange
Contracts.......................................... 176
Foreign Withholding Tax Reclaim Receivable........... 26
Other................................................ 8 2,203
----------
LIABILITIES (-0.6%)
Payable for Portfolio Shares Redeemed................ (403)
Investment Advisory Fees Payable..................... (46)
Dividend Payable..................................... (21)
Administrative Fees Payable.......................... (12)
Custodian Fees Payable............................... (8)
Directors' Fees and Expenses Payable................. (6)
Other Liabilities.................................... (32) (528)
---------- --------
NET ASSETS (100%).................................................. $ 85,001
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital.................................................... $ 89,647
Undistributed Net Investment Income................................ 323
Accumulated Net Realized Loss...................................... (4,164)
Unrealized Depreciation on Investments and Foreign Currency
Translations..................................................... (805)
--------
NET ASSETS....................................................... $ 85,001
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- -------------------------------------------------------------------
NET ASSETS......................................................... $ 84,635
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 7,590,467 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................... $11.15
--------
--------
CLASS B:
- -------------------------------------------------------------------
NET ASSETS......................................................... $ 366
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 32,886 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................... $11.13
--------
--------
</TABLE>
- ------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1997, 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 TO IN EXCHANGE GAIN
DELIVER VALUE SETTLEMENT FOR VALUE (LOSS)
(000) (000) DATE (000) (000) (000)
<S> <C> <C> <C> <C> <C>
- ------------- -------- ---------- ------------- -------- --------
ESP 125,000 $ 821 1/16/98 U.S.$ 832 $ 832 $ 11
AUD 3,675 2,395 1/16/98 U.S.$ 2,484 2,484 89
IEP 1,065 1,515 1/16/98 U.S.$ 1,565 1,565 50
SEK 17,750 2,236 1/16/98 U.S.$ 2,292 2,292 56
GBP 478 785 1/16/98 U.S.$ 803 803 18
U.S.$ 689 689 1/16/98 CAD 975 682 (7)
U.S.$ 1,273 1,273 1/16/98 DEM 2,245 1,249 (24)
U.S.$ 838 838 1/16/98 ESP 125,000 821 (17)
-------- -------- --------
$ 10,552 $ 10,728 $ 176
--------
-------- -------- --------
-------- --------
</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 December 31, 1997.
InflationIndex 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 December 31, 1997.
- ------------------------------------------------------------
SUMMARY OF FIXED INCOME SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
SECTOR DIVERSIFICATION (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
Finance................................ $ 15,469 18.2%
Foreign Government and Agency
Obligations.......................... 39,231 46.1
U.S. Government and Agency
Obligations.......................... 24,060 28.3
-------- ---
$ 78,760 92.6%
-------- ---
-------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Global Fixed Income Portfolio
140
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Aerospace & Defense 3.5 %
Banking 1.6 %
Broadcast-Radio & Television 10.9 %
Building Materials and Components 2.2 %
Chemicals 2.3 %
Computers 2.4 %
Electrical Equipment 0.2 %
Electronics 0.8 %
Energy 3.2 %
Entertainment & Leisure 3.4 %
Environmental Controls 2.2 %
Financial Services 10.2 %
Food Services & Lodging 0.5 %
Foreign Government Bonds 1.8 %
Forest Products & Paper 1.4 %
Gaming & Lodging 4.5 %
Health Care Supplies & Services 1.5 %
Hospital Management 1.0 %
Multi-Industry 3.8 %
Packaging & Container 1.2 %
Printing & Publishing 0.8 %
Real Estate 1.1 %
Retail-General 6.0 %
Telecommunications 21.2 %
Technology 0.4 %
Utilities 2.1 %
Other 9.8 %
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CS FIRST BOSTON HIGH YIELD
PORTFOLIO--CLASS
HIGH YIELD INDEX(1) A
<S> <C> <C>
9/28/92* $500,000 $500,000
10/31/92 $490,500 $494,800
12/31/92 $503,435 $507,897
12/31/93 $593,400 $616,865
12/31/94 $598,050 $591,000
12/31/95 $701,991 $729,122
12/31/96 $789,038 $838,563
12/31/97 $888,851 $971,643
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO THE CS FIRST BOSTON HIGH YIELD INDEX(1)
- -----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
<S> <C> <C> <C>
PORTFOLIO -- CLASS
A..................... 15.87% 13.98% 13.46%
PORTFOLIO -- CLASS
B..................... 15.48 N/A 14.94
INDEX -- CLASS A...... 12.65 11.84 11.56
INDEX -- CLASS B...... 12.65 N/A 12.49
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. INVESTING IN HIGH YIELD FIXED INCOME
SECURITIES, OTHERWISE KNOWN AS "JUNK BONDS", IS SPECULATIVE AND INVOLVES GREATER
RISK OF LOSS OF PRINCIPAL AND INTEREST. 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 year ended December 31, 1997, the Portfolio had a total return of 15.87%
for the Class A shares and 15.48% for the Class B shares, as compared to a total
return of 12.65% for the CS First Boston High Yield Index (the "Index"). For the
five year period ended December 31, 1997, the average annual total return of
Class A was 13.98% compared to 11.84% for the Index. From inception on September
28, 1992 through December 31, 1997, the average annual total return of Class A
was 13.46% compared to 11.56% for the Index. From inception on January 2, 1996
through December 31, 1997, the average annual total return of Class B was 14.94%
compared to 12.49% for the Index. As of December 31, 1997, the Portfolio had an
SEC 30-day yield of 8.34% for the Class A shares and 8.10% for the Class B
shares.
The high yield bond market had another good year in 1997. The Salomon Brothers
High-Yield Market Index returned 13.54% compared to the 10.14% return registered
by the Salomon Brothers Broad Investment Grade Index. Declining long term
interest rates and a strong stock market provided a favorable backdrop to high
yield market.
Ten year Treasury rates declined 67 basis points and thirty year rates declined
72 basis points from the beginning to the end of the year. However short term
interest rates rose resulting in a relatively flat yield curve. The Federal
Reserve boosted short term rates in March because of the fear of future
inflation given the strong economy and tight labor market. These fears have not
materialized so far however and the market retreat in March was short lived.
Inflation reports continue to be excellent and the problems in Asia will only
help keep inflation down.
The strong stock market also supported the high yield market. The S&P 500's 33%
rise increased investors' confidence that earnings will continue upwards and
that companies will have ready access to capital. Portfolio holdings such as
Qwest and Outdoor Systems benefited from IPOs and equity issuance.
The merger and acquisition activity also continued at a high pace.
Stock-for-stock transactions and mergers into high grade companies effectively
delevered many
- --------------------------------------------------------------------------------
High Yield Portfolio
141
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
high yield companies and boosted bond prices. Portfolio holdings Brooks Fiber
and recently Teleport were beneficiaries in this category.
The telecommunications sector was by far the best performer during 1997. The
sector benefited from acquisition activity and from the fact that many of the
securities in the industry tend to have a high duration, so declining rates
helped performance also. This was by far our most heavily weighted sector.
We also did a good job avoiding many landmines in 1997. The supermarket
industry, generally a popular one in the market, had several high profile credit
problems which we avoided. Subprime finance companies and auto suppliers were
also sectors that experienced problems that we successfully avoided.
Emerging markets is another area of importance to our Portfolio. We started the
year with nearly a twenty percent weighting in emerging markets debt. This area
performed spectacularly and as spreads narrowed dramatically we cut our position
by approximately a third. Our timing was fortunate in that this was accomplished
shortly before the Asian crisis. Although we had little exposure to Asia at the
time, Latin credits were also hammered during the rout. Latin bonds rebounded
fairly quickly as opposed to the Asians, but volatility still is evident in
these markets. We have increased our exposure to the Asians as we believe the
IMF bailouts will enable the sovereigns and some of the major corporates to
avoid default.
We are well positioned for 1998. We currently have little exposure to cyclical
credits. We maintain a high allocation to the telecommunications sector where
fundamentals continue to appear very positive. The emerging markets sector is
where we hope for more aggressive returns, but we acknowledge the potential
risks. We attempt to mitigate this risk by investing primarily in what we
consider world class companies or those that have very strong sponsorship and in
sovereign issues where we believe there is significant value.
Robert Angevine
PORTFOLIO MANAGER
Thomas L. Bennett
PORTFOLIO MANAGER
Stephen F. Esser
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
142
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
CORPORATE BONDS AND NOTES (71.3%)
BANKING (1.6%)
$ 355 Korea Development Bank, 7.375%, 9/17/04........... $ 286
1,660 Western Financial Bank, 8.875%, 8/01/07........... 1,648
----------
1,934
----------
BROADCAST-RADIO & TELEVISION (10.9%)
2,360 Cablevision Systems Corp., 9.875%, 5/15/06........ 2,593
(e)625 Fox/Liberty Networks LLC, 8.875%, 8/15/07......... 626
(e,n)1,545 Fox/Liberty Networks LLC, 0.00%, 8/15/07.......... 989
390 Lenfest Communications, Inc., 8.375%, 11/01/05.... 402
1,050 Multicanal, 10.50%, 2/01/07....................... 1,040
1,850 Paramount Communications, Inc., 8.25%, 8/01/22.... 1,865
(e)1,100 RBS Participacoes, 11.00%, 4/01/07................ 1,015
1,500 Rogers Cantel, Inc., 8.30%, 10/01/07.............. 1,491
200 Rogers Cablesystems of America, 10.125%,
9/01/12......................................... 219
(e)1,015 Sinclair Broadcast Group, Inc., 9.00%, 7/15/07.... 1,035
1,770 TV Azteca, 10.50%, 2/15/07........................ 1,830
----------
13,105
----------
BUILDING MATERIALS & COMPONENTS (2.2%)
2,505 Outdoor Systems, Inc., 8.875%, 6/15/07............ 2,611
----------
CHEMICALS (2.3%)
(e)1,075 Huntsman Corp., (Floating Rate), 9.09375%,
7/01/07......................................... 1,123
1,620 ISP Holdings, Inc., Series B, 9.00%, 10/15/03..... 1,682
----------
2,805
----------
COMPUTERS (2.4%)
2,405 Advanced Micro Devices, Inc., 11.00%, 8/01/03..... 2,585
(e)300 Concentric Network Corp., 12.75%, 12/15/07........ 308
----------
2,893
----------
ELECTRONICS (0.8%)
(e)1,060 Hyundai Semiconductor, 8.625%, 5/15/07............ 779
(e)200 Samsung Electronics Co., 7.45%, 10/01/02.......... 154
----------
933
----------
ENERGY (3.2%)
(e)950 Newpark Resources, Inc., 8.625%, 12/15/07......... 967
1,000 Nuevo Energy Co., 9.50%, 4/15/06.................. 1,068
1,250 Snyder Oil Corp., 8.75%, 6/15/07.................. 1,272
(e,n)675 Transamerican Energy, 0.00%, 6/15/02.............. 533
----------
3,840
----------
ENVIRONMENTAL CONTROLS (2.2%)
(n)2,300 Norcal Waste Systems, Inc., Series B, 13.50%,
11/15/05........................................ 2,674
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FINANCIAL SERVICES (1.8%)
$ 500 Criimi Mae, Inc., 9.125%, 12/01/02................ $ 503
415 Navistar Financial Corp., 9.00%, 6/01/02.......... 427
(e,n)1,835 PTC International Finance BV, 0.00%, 7/01/07...... 1,184
----------
2,114
----------
FOOD SERVICE & LODGING (0.5%)
(e)550 AmeriServ Food Co., 10.125%, 7/15/07.............. 571
----------
FOREST PRODUCTS & PAPER (1.4%)
(n)2,020 APP Fin II Mauritius Ltd., 12.00%, 2/15/04........ 1,702
----------
GAMING & LODGING (4.5%)
1,740 Grand Casinos, Inc., 10.125%, 12/01/03............ 1,879
(e)1,230 Horseshoe Gaming LLC, Series B, 9.375%, 6/15/07... 1,285
496 Louisiana Casino Cruises, Inc., 11.50%,
12/01/98........................................ 501
1,690 Station Casinos, Inc., 10.125%, 3/15/06........... 1,779
----------
5,444
----------
HEALTH CARE SUPPLIES & SERVICES (1.5%)
1,730 Tenet Healthcare Corp., 8.625%, 1/15/07........... 1,784
----------
HOSPITAL MANAGEMENT (1.0%)
(e)1,200 Vencor, Inc., 8.625%, 7/15/07..................... 1,202
----------
MULTI-INDUSTRY (3.8%)
(e)355 Hermes Europe Railtel BV, 11.50%, 8/15/07......... 392
(e)900 HYLSA S.A. de C.V., 9.25%, 9/15/07................ 883
(e)1,905 Murrin Murrin Holdings, PTY, 9.375%, 8/31/07...... 1,898
2,100 Revlon Worldwide Corp., Series B, Zero Coupon,
3/15/01......................................... 1,449
----------
4,622
----------
PACKAGING & CONTAINER (1.2%)
1,245 SD Warren Co., 12.00%, 12/15/04................... 1,391
----------
PRINTING & PUBLISHING (0.8%)
(e)1,000 Big Flower Holdings, Inc., 8.875%, 7/01/07........ 1,010
----------
REAL ESTATE (1.1%)
1,250 HMC Acquisition Properties, Series B, 9.00%,
12/15/07........................................ 1,303
----------
RETAIL-GENERAL (6.0%)
(e)1,205 Fleming Cos., Inc., 10.50%, 12/01/04.............. 1,261
(e)385 Fleming Cos., Inc., 10.625%, 7/31/07.............. 406
1,900 Host Marriott Travel Plaza, Series B, 9.50%,
5/15/05......................................... 2,014
650 Kmart Corp., 7.75%, 10/01/12...................... 632
3,285 Southland Corp., 5.00%, 12/15/03.................. 2,874
----------
7,187
----------
TECHNOLOGY (0.4%)
665 AST Research, Inc., 7.45%, 10/01/02............... 513
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
143
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS (19.6%)
$ (e)1,840 Comcast Cellular Corp., Series B, 9.50%,
5/01/07......................................... $ 1,918
810 Comcast Corp., 1.125%, 4/15/07.................... 534
(n)2,175 Dial Call Communications, 0.00%, 4/15/04.......... 2,077
650 Esprit Telecom Group plc, 11.50%, 12/15/07........ 671
(e)1,195 Globalstar Capital Corp., 11.375%, 2/15/04........ 1,216
(e)680 Globo Communicacoes e Participacoes Ltd., 10.50%,
12/20/06........................................ 653
600 InterAmericas Communications Corp., 14.00%,
10/27/07........................................ 606
605 Iridium LLC/Capital Corp., Series A, 13.00%,
7/15/05......................................... 635
1,655 IXC Communications, Inc., Series B, 12.50%,
10/01/05........................................ 1,903
(e,n)2,985 Nextel Communications, Inc., 0.00%, 8/15/04....... 2,649
(n)2,275 Occidente y Caribe Cellular, 0.00%, 3/15/04
(Colombia)...................................... 1,706
555 Qwest Communications International, Inc., Series
B, 10.875%, 4/01/07............................. 627
690 Rogers Communications, Inc., 9.125%, 1/15/06...... 701
925 Rogers Communications, Inc., 8.875%, 7/15/07...... 926
(e,n)3,420 TCI Satellite Entertainment, Inc., 0.00%,
2/15/07......................................... 2,283
(n)3,025 Teleport Communications Group, Inc., 0.00%,
7/01/07......................................... 2,473
(e,n)1,855 Telesystem International Wireless, Inc., 0.00%,
11/01/07........................................ 1,039
1,010 Teligent, Inc., 11.50%, 12/01/07.................. 1,014
----------
23,631
----------
UTILITIES (2.1%)
(e)1,135 AES Corp., 8.50%, 11/01/07........................ 1,138
541 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................. 579
650 Midland Funding II, Series A, 11.75%, 7/23/05..... 764
----------
2,481
----------
TOTAL CORPORATE BONDS AND NOTES (Cost $83,567)................ 85,750
----------
ASSET BACKED SECURITIES (10.7%)
AEROSPACE & DEFENSE (3.5%)
1,945 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1 P1, Class D, 12.75%, 6/15/06...... 2,101
(e)525 Jet Equipment Trust, Series 95-D, 11.44%,
11/01/14........................................ 701
(e)1,050 Jet Equipment Trust, Series C-1, 11.79%,
6/15/13......................................... 1,414
----------
4,216
----------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
BANKING (0.0%)
$ 1 PNC Mortgage Securities Corp., Series 1995-2,
Class B4, REMIC, 7.50%, 9/25/25................. $ --
----------
FINANCIAL SERVICES (7.2%)
(e)979 CA FM Lease Trust, 8.50%, 7/15/17................. 1,031
1,277 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10.............................. 1,182
2,537 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07.............................. 2,492
1,175 DR Securitized Lease Trust, Series 1994-K1, Class
A2, 8.375%, 8/15/15............................. 1,154
(e)879 FMAC Loan Receivables Trust, Series 1996-B, Class
C, (Floating Rate), 7.929%, 11/01/18............ 787
(e)904 Long Beach Auto, Series 1997-1, Class B, 14.22%,
10/26/03........................................ 905
(e)1,000 Riggs Capital Trust II, 8.875%, 3/15/27........... 1,106
----------
8,657
----------
TOTAL ASSET BACKED SECURITIES (Cost $11,662).................. 12,873
----------
FOREIGN GOVERNMENT BONDS (1.8%)
(n)2,375 Republic of Argentina Par Bonds, Series L, Euro,
5.50%, 3/31/23.................................. 1,745
14 Republic of Argentina, Series L, Euro, (Floating
Rate), 6.6875%, 3/31/05......................... 13
400 Republic of Colombia, 8.70%, 2/15/16.............. 388
----------
TOTAL FOREIGN GOVERNMENT BONDS (Cost $1,954).................. 2,146
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- ----------
COMMON STOCKS (0.3%)
FINANCIAL SERVICES (0.0%)
(a,d) WestFed Holdings, Inc., Class B................... --
1,268
----------
FOOD SERVICE & LODGING (0.0%)
(a,e) Motels of America, Inc............................ 14
1,300
----------
TELECOMMUNICATIONS (0.3%)
(a) 10,689 Nextel Communications, Inc., Class A.............. 278
----------
TOTAL COMMON STOCKS (Cost $258)............................... 292
----------
PREFERRED STOCKS (5.7%)
ENTERTAINMENT & LEISURE (3.4%)
3,576 Time Warner Inc., Series M, 10.25%, 7/01/16....... 4,028
----------
FINANCIAL SERVICES (1.2%)
13,500 Sinclair Capital, 11.625%, 3/15/09................ 1,485
3,239 WestFed Holdings, Inc., Series A, PIK, Zero
Coupon, 1/01/01................................. --
----------
1,485
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
High Yield Portfolio
144
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS (1.1%)
(a) 1,189 IXC Communications, Inc., PIK, 12.50%, 8/15/09.... $ 1,367
----------
TOTAL PREFERRED STOCKS (Cost $6,403).......................... 6,880
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.4%)
AEROSPACE & DEFENSE (0.0%)
(a) 500 Sabreliner Corp., expiring 4/15/03................ --
----------
ELECTRICAL EQUIPMENT (0.2%)
(a,e) Protection One Alarm, Inc., expiring 11/01/03..... 185
28,000
----------
GAMING & LODGING (0.0%)
(a) 1,725 Louisiana Casino Cruises, Inc., expiring
12/01/98........................................ --
----------
INSURANCE (0.0%)
(a,d) 500 Horace Mann Educators Corp., expiring 8/15/99..... 7
----------
PACKAGING & CONTAINER (0.0%)
(a,e) Crown Packaging Holdings, Ltd., expiring
1,000 11/01/03........................................ --
----------
TELECOMMUNICATIONS (0.2%)
(a,e) Globalstar Telecommunications Ltd., expiring
1,830 2/15/04......................................... 201
(a,e) 605 Iridium World Communications, Inc., expiring
07/15/05........................................ 73
(a,d) Nextel Communications, Inc., expiring 4/25/99..... --
3,000
(a,d) Occidente y Caribe Cellular, expiring 3/15/04..... --
9,100
----------
274
----------
TOTAL WARRANTS (Cost $154).................................... 466
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENT (13.7%)
REPURCHASE AGREEMENT (13.7%)
$ 16,502 Chase Securities, Inc. 5.95%, dated 12/31/97, due
1/02/98, to be repurchased at $16,507,
collateralized by U.S. Treasury Notes, 5.625%,
due 2/15/06, valued at $16,842 (Cost $16,502)... 16,502
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
------------------------------------------------------------------------
TOTAL INVESTMENTS (103.9%) (Cost $120,500).................. $ 124,909
----------
OTHER ASSETS (1.8%)
Interest Receivable........................... $ 1,890
Receivable for Portfolio Shares Sold.......... 236
Other......................................... 8 2,134
----------
LIABILITIES (-5.7%)
Payable for Investments Purchased............. (6,486)
Payable for Portfolio Shares Redeemed......... (142)
Investment Advisory Fees Payable.............. (82)
Bank Overdraft................................ (28)
Administrative Fees Payable................... (14)
Directors' Fees & Expenses Payable............ (5)
Custodian Fees Payable........................ (4)
Distribution Fees Payable..................... (4)
Other Liabilities............................. (59) (6,824)
---------- ----------
NET ASSETS (100.0%)......................................... $ 120,219
----------
----------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSISTS OF:
Paid in Capital............................................... $ 114,934
Undistributed Net Investment Income........................... 90
Accumulated Net Realized Gain................................. 786
Unrealized Appreciation on Investments........................ 4,409
----------
NET ASSETS.................................................... $ 120,219
----------
----------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $113,006
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,760,251 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $11.58
----------
----------
CLASS B:
- --------------------------------------------------------------
NET ASSETS.................................................... $7,213
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 624,162 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $11.56
----------
----------
</TABLE>
- ------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair market 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 December 31, 1997. 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.
REMIC -- Real Estate Mortgage Investment Conduit
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 December 31, 1997.
At December 31, 1997, approximately 87% 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
145
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
%
Daily Variable Rate Bonds 1.5
Fixed Rate Instruments 97.7
Other 0.8
</TABLE>
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
- ---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LEHMAN 7-YEAR MUNICIPAL MUNICIPAL BOND
PORTFOLIO--CLASS
BOND INDEX(1) A
<S> <C> <C>
1/18/95* $500,000 $500,000
12/31/95 $560,150 $544,000
12/31/96 $584,629 $563,965
12/31/97 $629,470 $604,852
* Commencement of operations
** Minimum Investment
</TABLE>
In accordance with SEC regulations, Portfolio performance shown assumes that all
recurring fees (including management fees) were deducted and all dividends and
distributions were reinvested.
PERFORMANCE COMPARED TO THE LEHMAN 7-YEAR
MUNICIPAL BOND INDEX(1)
- ----------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------- ---------------
<S> <C> <C>
PORTFOLIO -- CLASS A............. 7.25% 6.66%
INDEX............................ 7.67 8.12
</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.
- ------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 year ended December 31, 1997, the Portfolio had a total return of 7.25%
for the Class A shares compared to a total return of 7.67% for the Lehman 7-Year
Municipal Bond Index (the "Index"). From inception on January 18, 1995 through
December 31, 1997, the average annual total return of Classs A was 6.66%
compared to 8.12% for the Index. As of December 31, 1997, the Portfolio had an
SEC 30-day yield of 4.20% for the Class A shares.
The municipal bond market produced another quarter of solid returns during the
fourth quarter of 1997. Benefitting from turmoil in the broader global
marketplace, Municipals, while lagging Treasuries, still produced the third
consecutive quarter in which yields have declined. The municipal yield curve
flattened considerably during the quarter, with long rates falling almost
twenty-five basis points, while two year rates were unchanged to five basis
points lower. While the major inflationary measures had already been remarkably
well behaved, the Asian crisis further reduced inflation expectations, causing
long rates to fall. In addition, the rapid decline in the U.S. budget deficit
has reduced the outlook for future issuance of Treasury securities, further
supporting the Treasury rally which spilled over into the municipal bond market.
Unlike prior quarters in which domestic economic considerations had been the
prime determinant of bond market returns, global events were a far more
important influence during the fourth quarter. Severe financial stress in
various parts of Asia produced a strong preference in the financial markets for
the perceived quality and safety of the U.S. fixed income markets. The Asian
problems involved a vicious cycle of rapidly declining currency and equity
markets, banking system deterioration, falling foreign exchange reserves and
ultimately questions about the ability of some countries to service foreign
currency debt. Despite efforts by the International Monetary Fund to contain the
crisis initially to Thailand, it quickly spread to other parts of Southeast Asia
and then to Korea, the world's 11th largest economy.
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
146
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO (CONT.)
The Asian problems should have a sizeable effect on the global economy. Beyond
the direct contractionary effects on the growth rates of the impacted countries,
secondary effects could be sizeable for those countries with significant trade
or lending exposure to the region. In terms of the response of the Federal
Reserve to the Asian problems, from a price perspective, the collapse in Asian
currency values relative to the dollar should have a restraining effect on U.S.
inflation. Perhaps most importantly, given the close integration of the global
financial system, the Fed is concerned that balance of payment crises in one
region can spread rapidly through the global financial system, causing serious
problems for the real economy. As a result, the primary focus of the Federal
Reserve appears to have shifted from a concern with the strength of the U.S.
domestic economy, to one of closely monitoring the situation in Asia and
assuring that it does not adversely impact the global financial system. Thus,
despite the lowest unemployment rates since 1970 and strong GDP growth, the Fed
shows no inclination to tighten monetary policy. Indeed, recognizing the
fragility of many global markets, should the Asian crisis worsen, the Fed's next
move could potentially be to ease.
The low interest rate levels in 1997 led to an increase in both new money and
refunding issuance in the municipal bond market. Total 1997 new issue supply of
$220.4 billion was a 19% increase from 1996 levels and the third busiest year
ever. The portion representing new money (vs. refundings) of $140.2 billion was
the biggest year ever for new money issuance. The growing demand for public
works along with lower absolute interest rates and improving state and local
finances together combined to fuel the increase. Bonds issued for educational
purposes led the stampede of issuance, followed by the health care and
transportation sectors. With primary and secondary school enrollments across the
country continuing to grow, the pressure on school districts to construct
additional educational facilities has been strong. We expect 1998 total new
issue supply to be slightly lower than 1997 issuance levels. The demand side of
the equation was led by the healthy appetite of insurance companies spurred on
by attractive Municipal/Treasury ratios and individual investors who became
enamored with bonds as they were not so subtly reminded that equity markets can
go down.
The Portfolio ended the year with an average maturity of 7.89 years, slightly
longer than the Index. The Portfolio is largely comprised of high credit quality
premium coupon bonds, with an emphasis placed on the current income of the
Portfolio. Going into 1998, we intend to maintain this emphasis, and will
continue to look for opportunities to enhance the value of the Portfolio.
Lori A. Cohane
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
147
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (99.2%)
DAILY VARIABLE RATE BONDS (1.5%)
$ 400 Lincoln County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project, Series 84-D,
5.10%, 11/01/14................................ $ 400
300 New York City, New York, General Obligation
Bonds, Sub. Series A-4, 5.00%, 8/01/22......... 300
200 Ohio State, Air Quality Development Authority
Revenue Bonds, Series 95-B, 4.50%, 12/01/15.... 200
-------
TOTAL DAILY VARIABLE RATE BONDS (Cost $900)............... 900
-------
FIXED RATE INSTRUMENTS (97.7%)
825 Albuquerque, New Mexico, General Obligation
Bonds, Series B, 4.70%, 7/01/98................ 829
1,500 Baltimore County, Maryland, Consolidated Public
Improvement, General Obligation Bonds, 6.00%,
7/01/05........................................ 1,628
1,000 California State, Department of Water Revenue
Bonds, Series Q, 6.00%, 12/01/10............... 1,140
1,920 City of Dallas, Texas, General Obligation Bonds,
6.00%, 2/15/06................................. 2,137
100 Connecticut State, General Obligation Bonds,
Series A, 4.75%, 11/15/01...................... 103
250 Connecticut State, General Obligation Bonds,
Series A, 9.875%, 3/01/01...................... 293
250 Connecticut State, General Obligation Bonds,
Series C, 5.50%, 3/15/03....................... 265
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....................... 1,689
1,565 Connecticut State, Housing Finance Authority,
Revenue Bonds, Sub. Series D-1, 6.20%,
5/15/17........................................ 1,639
1,000 Delaware Transportation Authority, Transportation
System Revenue Bonds, 6.50%, 7/01/11,
Prerefunded 7/01/01 at 102..................... 1,095
500 Fairfax County, Virginia, Water Authority Revenue
Bonds, 6.00%, 4/01/22.......................... 544
500 Fairfax County, Virginia, Water Authority Revenue
Bonds, 6.00%, 4/01/22, Prerefunded 4/01/07 at
102............................................ 565
1,500 Florida State Board of Education, Capital Outlay,
Public Education, General Obligation Bonds,
6.40%, 6/01/19................................. 1,631
1,325 Fort Worth, Texas, Water & Sewer Revenue Bonds,
Series B, 5.875%, 2/15/00...................... 1,377
1,000 Georgia State, General Obligation Bonds, Series
A, 5.80%, 3/01/02.............................. 1,066
500 Georgia State, General Obligation Bonds, Series
F, 6.50%, 12/01/06............................. 581
1,000 Gwinnett County, Georgia, General Obligation
Bonds, 6.00%, 1/01/11.......................... 1,085
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ---------------------------------------------------------------------
$ 1,000 Hawaii State, General Obligation Bonds, Series
CJ, 6.20%, 1/01/12, Prerefunded 1/01/05 at
100............................................ $ 1,111
450 Houston, Texas, Water & Sewer Systems, Revenue
Bonds, Series B, 6.25%, 12/01/05............... 506
1,000 Kentucky State Housing Corp., Revenue Bonds,
Series A, 6.00%, 7/01/10....................... 1,052
1,000 Maryland State Department of Transportation,
Construction Revenue Bonds, Second Issue,
6.60%, 11/01/00................................ 1,054
1,155 Maryland State Department of Transportation,
Construction Revenue Bonds, Second Issue,
6.80%, 11/01/05, Prerefunded 11/01/99 at 102... 1,235
1,000 Massachusetts State Consolidated Loan, Series A,
7.50%, 3/01/03, Prerefunded 3/01/00 at 102..... 1,090
500 Massachusetts State General Obligation Bonds,
Series A, 7.625%, 6/01/08, Prerefunded 6/01/01
at 102......................................... 564
1,625 Michigan State Housing Development Authority,
Revenue Bonds, Series A, 6.75%, 12/01/14....... 1,745
1,590 Minnesota State Infrastructure Development,
General Obligation Bonds, 6.80%, 8/01/03,
Prerefunded 8/01/00 at 100..................... 1,698
1,400 Mississippi State, General Obligation Bonds,
6.00%, 2/01/09, Prerefunded 2/01/05 at 100..... 1,537
1,475 Montana State, General Obligation Bonds, Long
Range Building Program, Series C, 6.00%,
8/01/13........................................ 1,585
2,000 Municipal Assistance Corp. for City of New York,
NY, Revenue Bonds, 6.00%, 7/01/04.............. 2,196
1,000 New Castle County, Delaware, General Obligation
Bonds, 6.25%, 10/15/01......................... 1,079
1,000 New Jersey State, General Obligation Bonds,
Series E, 5.50%, 7/15/02....................... 1,057
1,475 Ohio State, General Obligation Bonds, 6.65%,
8/01/05........................................ 1,699
1,000 Ohio State, Housing Finance Agency, Residential
Mortgage Revenue Bonds, Series A-1, 6.20%,
9/01/14........................................ 1,068
1,000 Orlando, Florida, Utilities Commission Water &
Electric, Revenue Bonds, Series D, 6.75%,
10/01/17....................................... 1,224
500 Palm Beach County, Florida, General Obligation
Bonds, Series B, 6.75%, 7/01/11................ 605
300 Puerto Rico Commonwealth Highway & Transportation
Authority, Revenue Bonds, Series T, 6.50%,
7/01/22, Prerefunded 7/01/02 at 101.50......... 333
1,000 Reedy Creek Improvement District, Florida,
Utility, Revenue Bonds, Series 91-1, 6.50%,
10/01/16, Prerefunded 10/01/01 at 101.......... 1,093
600 Salt Lake City, Utah, General Obligation Bonds,
6.375%, 6/15/11................................ 637
1,350 San Antonio, Texas, General Obligation Bonds,
6.50%, 8/01/14, Prerefunded 8/01/04 at 100..... 1,516
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
148
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FIXED RATE INSTRUMENTS (CONT.)
<TABLE>
<C> <S> <C>
$ 1,000 Shelby County, Tennessee, General Obligation
Bonds, Series A, 5.50%, 3/01/08................ $ 1,088
1,385 Shelby County, Tennessee, General Obligation
Bonds, Series B, 5.50%, 8/01/10................ 1,503
1,250 Texas A & M University, Revenue Bonds, Series B,
6.00%, 7/01/11................................. 1,327
1,500 Texas State, Public Finance Authority, Series A,
5.95%, 10/01/15................................ 1,611
1,500 Triborough Bridge & Tunnel Authority, New York,
Revenue Bonds, Series Y, 6.00%, 1/01/12........ 1,690
1,000 Utah State, Housing Financing Agency, Single
Family Mortgage Revenue Bonds, Series G-1,
Class I, 5.50%, 7/01/16........................ 1,020
1,000 Virginia Beach, Virginia, General Obligation
Bonds, 6.00%, 9/01/10.......................... 1,099
500 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.60%, 1/01/12................................. 546
1,000 Virginia State Housing Development Authority,
Commonwealth Mortgage Revenue Bonds, Series B,
6.65%, 1/01/13................................. 1,094
1,000 Washington State, General Obligation Bonds,
Series B, 6.40%, 6/01/17....................... 1,170
500 Washington Suburban Sanitary District, General
Obligation Revenue Bonds, 6.50%, 11/01/05,
Prerefunded 11/01/01 at 102.................... 551
1,440 Wisconsin State, Clean Water Revenue Bond, Series
1, 6.875%, 6/01/11............................. 1,746
1,115 Wisconsin State, General Obligation Bonds, Series
2, 5.125%, 11/01/11............................ 1,162
-------
TOTAL FIXED RATE INSTRUMENTS (Cost $56,725)............... 59,148
-------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $57,625)................. 60,048
-------
TOTAL INVESTMENTS (99.2%) (Cost $57,625).................... 60,048
-------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (1.9%)
Cash....................................... $ 91
Interest Receivable........................ 1,057
Other...................................... 1 1,149
----------
LIABILITIES (-1.1%)
Payable for Investments Purchased.......... (599)
Investment Advisory Fees Payable........... (14)
Adminstrative Fees Payable................. (8)
Director's Fees & Expenses Payable......... (3)
Custodian Fees Payable..................... (2)
Other...................................... (30) (656)
---------- --------
NET ASSETS (100%)........................................ $ 60,541
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 58,120
Distributions in Excess of Net Investment Income.............. (1)
Accumulated Net Realized Loss................................. (1)
Unrealized Appreciation on Investments........................ 2,423
--------
NET ASSETS.................................................... $ 60,541
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CLASS A:
- --------------------------------------------------------------
NET ASSETS.................................................... $ 60,541
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 5,761,908 outstanding $0.001 par value
shares (authorized 500,000,000 shares)...................... $10.51
----------
----------
</TABLE>
- ------------------------------------------------------------
Variable/Floating Rate Instruments. The interest rate changes on these
instruments are based upon a designated base rate. These instruments are payable
on demand and are secured by a letter of credit or other support agreement.
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
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
California............................. $ 1,140 1.9%
Connecticut............................ 4,179 6.9
Delaware............................... 2,174 3.6
Florida................................ 4,553 7.5
Georgia................................ 2,732 4.5
Hawaii................................. 1,111 1.8
Kentucky............................... 1,052 1.7
Maryland............................... 3,917 6.5
Massachusetts.......................... 1,654 2.7
Michigan............................... 1,745 2.9
Minnesota.............................. 1,698 2.8
Mississippi............................ 1,537 2.5
Montana................................ 1,585 2.6
New Jersey............................. 1,057 1.8
New Mexico............................. 829 1.4
New York............................... 4,186 6.9
Ohio................................... 2,967 4.9
Puerto Rico............................ 333 0.6
Tennessee.............................. 2,591 4.3
Texas.................................. 8,473 14.0
Utah................................... 1,657 2.7
Virginia............................... 3,849 6.4
Washington............................. 1,722 2.8
Wisconsin.............................. 2,907 4.8
Wyoming................................ 400 0.7
-------- -----
$ 60,048 99.2%
-------- -----
-------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Bond Portfolio
149
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Certificates of Deposit 19.4%
Commercial Paper 66.0%
Corporate Floating Rate Notes 7.2%
U.S. Government Agency Discount Notes 1.0%
U.S. Government Agency Floating Rate
Notes 0.8%
Other 5.6%
</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>
Jan. 4.96% 4.84%
Feb. 4.94% 4.82%
Mar. 4.96% 4.84%
Apr. 4.99% 4.94%
May 5.06% 4.98%
Jun. 5.11% 5.02%
Jul. 5.12% 5.32%
Aug. 5.17% 5.32%
Sep. 5.17% 5.31%
Oct. 5.16% 5.30%
Nov. 5.17% 5.33%
Dec. 5.19% 5.40%
</TABLE>
- ------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 December 31, 1997 were 5.25% and 5.39%, respectively. As with
all money market portfolios, the seven day yields are not necessarily indicative
of future performance.
After 14 months of steady policy, the Federal Reserve increased the target for
the federal funds rate the last week of the first quarter 1997. The increase of
25 basis points to a 5.50% fed funds target was expected and in fact was priced
into the market. Federal Reserve Chairman Alan Greenspan presented his view on
the economy during scheduled testimony to Congress earlier in the month of
March. Clearly at that time, he felt that the economy was continuing to
accelerate at a rapid pace and that a pre-emptive increase in the funds rate was
necessary to stave off inflation.
In the second quarter interest rates reversed the trend of the first quarter by
declining 25 to 40 basis points across the yield curve. Following the March
increase in the funds rate, the market began to adjust to expectations of a
slower rate of growth in the economy. When the May FOMC meeting passed with no
change in rates, the market took it as a sign that further rate increases would
not be necessary, and the economy seemed to be slowing on its own.
During the second half of 1997, the market obsessed about the relative strength
of the economy and speculated about how long the U.S. could continue functioning
at full employment and at what point inflation would begin to creep into the
equation. Market participants examined all of these factors within the framework
of the Federal Reserve and at what point they would find it necessary to
increase
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
150
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO (CONT.)
interest rates. One year Treasury bills declined as much as 20 basis points
(0.20%) in the third quarter, and the money market curve flattened quite
dramatically with the spread between three month and one year T-bills
compressing by 14 basis points to only 34 basis points by the end of the third
quarter.
The market was beginning to follow a pattern moving in one direction and then
another as data were released or a Federal Open Market Committee meeting
approached and then passed without any action on the part of the Fed. This
relative "calm" in the market halted abruptly on October 27th as currency and
market crises in Asia suddenly rattled the U.S. stock markets. Foreign stock
markets tumbled, particularly Hong Kong, and the U.S. market
followed suit. As these markets plummeted, U.S. investors concluded that the
Federal Reserve would shift their focus away from the U.S. economic fundamentals
and turn their attention toward world markets. In the face of these new
developments, the U.S. bond market rallied experiencing a flight to quality.
The November employment data was released in early December indicating that
employment remained very strong. The inflation statistics that followed were
very positive indicating that inflation still was not an issue. The market began
to discuss the Federal Reserve's need to act. If the Asian crisis had not
happened, the market's general sentiment was that the December FOMC meeting
would have resulted in a 25 basis point tightening. Instead the Fed made no
change. Through this period, market levels remained strong, and the yield curve
flattened even more than it already had in September. At the end of December the
spread between three month and one year Treasury bills was approximately 15
basis points.
With no protection against possible Federal Reserve tightening built into the
front end of the yield curve, we found little value in the market particularly
in the one year area of the money market curve. Finally, anchored by a 5.5%
funds rate, the entire yield curve has flattened, offering less opportunity to
enhance returns by rolling down the curve.
We increased the weighted average maturity of the Portfolio in April when rates
were higher. We then took the opportunity to reduce the overall maturity later
in the second quarter when rates fell. The Portfolio was positioned defensively,
slightly short of neutral for the balance of the second quarter and throughout
the third quarter. In October prior to the Asian crisis, there was a brief
period during which one year spread paper offered attractive value at 6.0%. At
this time we extended the Portfolio to 55 days. For the balance of the year we
maintain a similar weighted average maturity ultimately finishing the year at 57
days.
We are pleased to report that the Portfolio continues to meet its goal of
providing as high a level of interest income as is consistent with maintaining
liquidity and stability of principal, and that the Portfolio still holds only
high quality securities with 100% of the assets invested in securities rated
A1/P1 or better.
Abigail Jones Feder
PORTFOLIO MANAGER
Daniel M. Niland
PORTFOLIO MANAGER
Ellen D. Harvey
PORTFOLIO MANAGER
Scott F. Richard
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
Money Market Portfolio
151
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (94.4%)
U.S. GOVERNMENT & AGENCY OBLIGATIONS (1.8%)
AGENCY DISCOUNT NOTES (1.0%)
$15,000 Federal Home Loan Mortgage Corporation 6.00%,
4/08/98........................................ $ 14,991
-----------
AGENCY FLOATING RATE NOTES (0.8%)
13,000 Federal National Mortgage Association 5.62%,
7/26/99........................................ 12,978
-----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost
$27,969).................................................. 27,969
-----------
ASSET BACKED COMMERCIAL PAPER (7.9%)
SINGLE PURPOSE CORPORATION (7.9%)
10,000 Asset Securitization Corp. 5.62%, 2/20/98........ 9,922
13,000 Asset Securitization Corp. 5.79%, 3/24/98........ 12,831
10,000 Delaware Funding 5.75%, 1/16/98.................. 9,976
25,000 Delaware Funding 5.82%, 2/12/98.................. 24,831
30,000 Eiger Capital Corp. 5.81%, 2/13/98............... 29,793
31,500 Greenwich Funding 5.93%, 1/09/98................. 31,458
-----------
TOTAL ASSET BACKED COMMERCIAL PAPER
(Cost $118,811)........................................... 118,811
-----------
COMMERCIAL PAPER (58.1%)
AUTOMOTIVE (6.7%)
20,000 Associates Corp. 5.78%, 2/06/98.................. 19,885
15,000 Associates Corp. 5.80%, 2/13/98.................. 14,897
15,850 Daimler Benz North America Corp. 5.79%,
2/18/98........................................ 15,728
17,000 Daimler Benz North America Corp. 5.60%,
3/02/98........................................ 16,843
20,000 Toyota Motor Credit Corp. 5.68%, 1/30/98......... 19,909
13,000 Toyota Motor Credit Corp. 5.82%, 3/06/98......... 12,867
-----------
100,129
-----------
BANKS (23.5%)
13,700 ABN-AMRO North American Finance, Inc. 5.61%,
2/23/98........................................ 13,588
4,000 Bank of America 5.72%, 1/20/98................... 3,988
19,700 Bank of America 5.59%, 1/29/98................... 19,615
30,000 Barclays Bank U.S. Funding Corp. 5.77%,
2/02/98........................................ 29,847
39,700 Bayerishe Landesbank 5.75%, 3/11/98.............. 39,267
15,000 Credit Suisse 5.64%, 2/10/98..................... 14,907
30,000 Dresdner U.S. Finance 5.78%, 2/03/98............. 29,842
8,000 First Chicago Finance Corp. 5.81%, 2/09/98....... 7,950
20,000 First Chicago Finance Corp. 5.75%, 2/26/98....... 19,823
6,000 First Chicago Finance Corp. 5.67%, 5/06/98....... 5,884
41,700 Internationale Nederlanden Finance 5.78%,
3/05/98........................................ 41,282
20,000 J.P. Morgan & Co. 5.79%, 6/18/98................. 19,474
38,700 Rabobank U.S. Finance Corp. 5.65%, 4/29/98....... 37,996
10,700 Royal Bank of Scotland 5.61%, 1/27/98............ 10,657
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
$20,000 UBS Finance, Inc. 5.96%, 1/12/98................. $ 19,964
40,000 Westdeutche Landesbank 5.55%, 1/26/98............ 39,846
-----------
353,930
-----------
CONSUMER GOODS (4.4%)
15,000 General Electric Capital Corp. 5.58%, 2/26/98.... 14,871
37,300 H.J. Heinz Co. 5.79%, 2/11/98.................... 37,056
15,000 Warner Lambert Co. 5.56%, 3/17/98................ 14,828
-----------
66,755
-----------
ELECTRONICS (5.3%)
28,700 Electronic Data Systems 5.79%, 2/13/98........... 28,503
10,000 Panasonic Finance 5.58%, 3/02/98................. 9,908
15,700 Panasonic Finance 5.61%, 3/04/98................. 15,550
26,700 Siemens Capital Corp. 5.61%, 2/19/98............. 26,497
-----------
80,458
-----------
FINANCE (6.9%)
30,000 American Express Credit Corp. 5.52%, 2/05/98..... 29,840
20,000 CIT Group Holdings 6.02%, 1/20/98................ 19,937
15,000 Commercial Credit Corp. 5.58%, 2/09/98........... 14,910
15,000 Commercial Credit Corp. 5.69%, 2/20/98........... 14,882
24,700 Transamerica Financial Corp. 5.67%, 1/23/98...... 24,615
-----------
104,184
-----------
INSURANCE (4.1%)
10,000 General Reinsurance Corp. 5.82%, 4/23/98......... 9,822
5,086 MetLife Funding Inc. 5.78%, 3/23/98.............. 5,021
10,000 Prudential Funding 5.80%, 4/02/98................ 9,855
14,000 USAA Capital Corp. 5.68%, 1/21/98................ 13,956
23,300 USAA Capital Corp. 5.60%, 2/06/98................ 23,170
-----------
61,824
-----------
INVESTMENT BANKING (2.6%)
40,000 Merrill Lynch 5.79%, 2/13/98..................... 39,725
-----------
TELECOMMUNICATIONS (3.0%)
20,000 AT&T Capital Corp. 5.79%, 3/09/98................ 19,787
14,700 Bell South Telecommunications 5.74%, 2/11/98..... 14,605
10,000 Southern New England Telephone 5.92%, 1/20/98.... 9,969
-----------
44,361
-----------
UTILITIES (1.6%)
10,000 National Rural Utilities 5.55%, 1/27/98.......... 9,960
13,700 National Rural Utilities 5.79%, 4/28/98.......... 13,447
-----------
23,407
-----------
TOTAL COMMERCIAL PAPER (Cost $874,773).................... 874,773
-----------
CORPORATE FLOATING RATE NOTES (7.2%)
BANKS (5.2%)
20,000 Bank One, Columbus 5.61%, 9/16/98................ 20,007
8,500 Bank One, Dayton 6.22%, 8/21/98.................. 8,502
20,000 Morgan Guaranty Trust New York 5.63%, 3/25/98.... 20,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Money Market Portfolio
152
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
- -------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
CORPORATE FLOATING RATE NOTES (CONT.)
BANKS (CONT.)
<TABLE>
<C> <S> <C>
$ 9,000 Societe Generale Bank (Yankee) 6.16%, 1/15/98.... $ 9,000
20,000 Societe Generale Bank 6.14%, 8/28/98............. 19,994
-----------
77,503
-----------
ELECTRONICS (2.0%)
30,000 IBM Credit Corp. 5.66%, 11/20/98................. 30,000
-----------
TOTAL CORPORATE FLOATING RATE NOTES
(Cost $107,503)........................................... 107,503
-----------
CERTIFICATES OF DEPOSIT (19.4%)
BANKS (19.4%)
20,000 Australia & New Zealand Bank, New York 5.68%,
2/27/98........................................ 20,000
23,000 Bank of Montreal, Chicago (Yankee) 5.80%,
11/06/98....................................... 22,990
6,000 Barclays Bank 5.94%, 6/19/98..................... 6,003
28,000 Canadian Imperial Bank, New York 5.82%,
2/09/98........................................ 28,000
12,000 Canadian Imperial Bank (Yankee) 5.94%,
10/23/98....................................... 12,007
3,000 Chase Manhattan 5.75%, 2/11/98................... 3,000
15,000 Credit Agricole (Yankee) 5.75%, 3/19/98.......... 15,000
18,000 Credit Suisse, First Boston 6.25%, 4/08/98....... 18,000
27,000 Deutsche Bank, New York 5.64%, 1/29/98........... 27,000
12,500 Deutsche Bank, New York 5.94%, 10/23/98.......... 12,494
20,000 Deutsche Bank (Yankee) 5.85%, 3/13/98............ 19,999
14,000 Landesbank Hessen Thueringen 5.94%, 10/23/98..... 13,993
20,000 National Westminster Bank 5.66%, 3/05/98......... 19,993
15,000 Societe Generale Bank, New York 6.35%, 4/15/98... 15,020
49,000 Swiss Bank, New York 5.62%, 1/21/98.............. 49,000
10,000 Westdeutsche Landesbank 5.66%, 3/02/98........... 10,000
-----------
TOTAL CERTIFICATES OF DEPOSIT (Cost $292,499)............... 292,499
-----------
TOTAL MONEY MARKET INSTRUMENTS (Cost $1,421,555)............ 1,421,555
-----------
SHORT TERM INVESTMENTS (5.5%)
REPURCHASE AGREEMENTS (5.5%)
49,817 Deutsche Bank 6.40%, dated 12/31/97, due 1/02/98,
to be repurchased at $49,835, collateralized by
U.S. Treasury Notes, 6.125%, due 8/31/98,
valued at $51,204.............................. 49,817
32,888 J.P. Morgan & Co. 6.20%, dated 12/31/97, due
1/02/98, to be repurchased at $32,899,
collateralized by U.S. Treasury Bonds, 6.25%,
due 8/15/23, valued at $33,761................. 32,888
-----------
TOTAL REPURCHASE AGREEMENTS (Cost $82,705)................ 82,705
-----------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED
COST
(000)
<S> <C> <C>
- -------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%) (Cost $1,504,260).............. $1,504,260
--------
OTHER ASSETS (0.4%)
Interest Receivable........................ $ 6,945
Other...................................... 96 7,041
----------
LIABILITIES (-0.3%)
Dividends Payable.......................... (3,503)
Investment Advisory Fees Payable........... (1,106)
Administrative Fees Payable................ (197)
Bank Overdraft............................. (61)
Directors' Fees & Expenses Payable......... (57)
Custodian Fees Payable..................... (44)
Other Liabilities.......................... (123) (5,091)
---------- --------
NET ASSETS (100%)........................................ $1,506,210
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS CONSIST OF:
Paid in Capital........................ $1,506,621
Accumulated Net Realized Loss.......... (411)
----------
NET ASSETS (100%)...................... $1,506,210
----------
----------
NET ASSET VALUE, OFFERING AND
REDEMPTION
PRICE PER SHARE
Applicable to 1,506,624,942
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 December 31, 1997.
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 December 31, 1997.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Money Market Portfolio
153
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1997)
- --------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Fixed Rate Instruments 47.4%
Variable/Floating Rate
Instruments 52.3%
Other 0.3%
</TABLE>
COMPARATIVE MONTHLY AVERAGE YIELDS
- --------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MUNICIPAL MONEY
<S> <C> <C>
Market Portfolio IBC Municipal
30-Day Yields Money Fund Comparable Yields
Jan. 3.03% 2.90%
Feb. 2.91% 2.67%
Mar. 2.70% 2.76%
Apr. 2.89% 3.17%
May 3.31% 3.37%
Jun. 3.28% 3.28%
Jul. 3.30% 3.31%
Aug. 3.15% 3.19%
Sep. 3.14% 3.30%
Oct. 3.25% 3.34%
Nov. 3.20% 3.46%
Dec. 3.19% 3.44%
</TABLE>
- ------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. 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 December 31, 1997 were 3.40% and 3.46%, respectively. The seven
day taxable equivalent yield and the seven day taxable equivalent effective
yield for the Portfolio at December 31, 1997, assuming Federal income tax rate
of 39.6% (maximum rate) were 5.60% and 5.68%, respectively. The seven day yields
are not necessarily indicative of future performance.
The municipal money market curve was flat throughout much of 1997. In general,
rates were much less volatile than is normally the case. The municipal money
market curve did not experience the curve steeping and subsequent flattening
that characterized the taxable money market sector. Even in October in the face
of the Asian currency and market crises, the municipal money market did not
react. In fact, except for a couple of dips and spikes in March and April and
then again in August and September, rates fluctuated very little. The market's
stability has been due to "crossover" buyers which are primarily corporations
that move their investments between the taxable and tax-exempt sectors depending
on relative value. Each time rates declined due to decreased supply, the
crossover buyers moved out of the tax-exempt sector. This created a dramatic
increase in
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
154
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
supply forcing dealers to increase rates which in turn brought the crossover
buyers back into the tax-exempt sector.
The asset size of the Portfolio remained stable in 1997 with a modest increase
in assets in the fourth quarter; the Portfolio finished the year with net assets
of $805 million. Overall the asset allocation throughout the year remained
consistent. Commercial paper ranged from 30-45%, tax-exempt notes ranged from
3-7% (except for a brief period in August when the allocation dropped to 1%),
and daily and weekly variable rate puttable issues fluctuated between 50% and
60% of the Portfolio. Because of the relatively flat shape of the curve, the
Portfolio maintained a relatively short weighted average maturity throughout the
year ranging from 15 to 45 days. December ended with a weighted average maturity
of 32 days.
Abigail Jones Feder
PORTFOLIO MANAGER
January 1998
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
155
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
TAX-EXEMPT INSTRUMENTS (99.7%)
FIXED RATE INSTRUMENTS (47.4%)
NOTES (6.7%)
$10,000 California State, RANS, 4.50%, 6/30/98........... $ 10,032
1,300 Delaware, TRANS, 7.75%, 7/01/98.................. 1,343
2,000 Indianapolis, Indiana, Local Public Improvements
Board, Series E,
4.25%, 7/09/98................................. 2,005
3,000 Montana State, TRANS, 4.25%, 6/30/98............. 3,006
1,000 New Mexico State, General Obligation, Series B,
3.70%, 9/01/98................................. 999
3,000 New Mexico State, Severance Tax Revenue Bonds,
Series B, 4.80%, 7/01/98....................... 3,014
5,000 New Mexico State, TRANS, 4.50%, 6/30/98.......... 5,015
3,560 Tennessee State, General Obligation Bonds, Series
A, 5.00%, 5/01/98.............................. 3,574
25,200 Texas State, TRANS, Series A, 4.75%, 8/31/98..... 25,348
----------
54,336
----------
COMMERCIAL PAPER (40.7%)
Allegheny County, Pennsylvania, Industrial
Development Authority,
3,000 3.85%, 1/12/98, Series 85........................ 3,000
2,000 3.80%, 1/15/98, Series 95........................ 2,000
10,000 Baltimore County, Maryland, Series 95, BANS,
3.75%, 1/14/98................................. 10,000
4,900 Becker, Minnesota, Pollution Control Revenue
Bonds, Series 98A,
3.75%, 2/12/98................................. 4,900
2,000 Bexar, Texas, Metropolitan Water District, 3.80%,
1/21/98........................................ 2,000
2,500 City of Burlington, Kansas, Series 87A, 3.80%,
1/15/98........................................ 2,500
6,000 City of Honolulu, Hawaii, 3.80%, 2/04/98......... 6,000
2,500 City of Lincoln, Nebraska, Electric Systems
Revenue Notes, Series 95,
3.70%, 1/15/98................................. 2,500
7,200 City of San Antonio, Texas, Series A, 3.75%,
3/11/98........................................ 7,200
6,000 Commonwealth of Virginia, 3.75%, 3/10/98......... 6,000
Connecticut State, Health & Education,
1,600 3.70%, 1/15/98................................... 1,600
10,000 3.70%, 2/10/98................................... 10,000
2,400 Delta County, Michigan, Series A,
3.75%, 3/10/98................................. 2,400
2,525 Gainsville, Florida, Series C, 3.75%, 2/25/98.... 2,525
4,100 Gillette Campbell, Wyoming, 3.70%, 1/15/98....... 4,100
2,148 Harris County, Texas, Series A, 3.75%, 2/19/98... 2,148
2,500 Health & Educational Facilities, Vanderbilt
University, Tennessee, Series 89A, 3.75%,
2/18/98........................................ 2,500
Houston, Texas,
8,000 3.70%, 1/27/98, Series A......................... 8,000
10,100 3.80%, 2/24/98, Series A......................... 10,100
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 5,500 3.75%, 1/29/98, Series B......................... $ 5,500
4,000 3.80%, 2/24/98, Series B......................... 4,000
2,400 3.75%, 3/12/98, Series B......................... 2,400
6,000 3.75%, 3/12/98, Series C......................... 6,000
Illinois Educational Facility Authority,
9,600 3.70%, 1/22/98................................... 9,600
9,000 3.75%, 2/13/98................................... 9,000
2,100 Illinois Health & Educational Facilities, 3.75%,
2/11/98........................................ 2,100
4,750 Independence, Missouri, Water Utility Revenue,
Series 86, 3.80%, 1/28/98...................... 4,750
Jacksonville, Florida, Electric Authority,
1,750 3.80%, 2/09/98................................... 1,750
9,000 3.75%, 3/05/98................................... 9,000
10,000 King County, Washington, Sewer Revenue, Series A,
BANS, 3.70%, 2/11/98........................... 10,000
Louisiana, Public Facilities Authority,
5,500 3.65%, 1/13/98................................... 5,500
3,000 3.70%, 1/29/98................................... 3,000
6,050 Louisiana State, General Obligation Bonds, Series
91A, 3.80%, 2/19/98............................ 6,050
1,300 Maricopa County, Arizona, Pollution Control,
3.75%, 3/10/98................................. 1,300
6,600 Massachusetts Health & Education Facilities
Authority, Harvard University, Series L, 3.75%,
2/12/98........................................ 6,600
3,000 Massachusetts State Water Resource Authority,
3.75%, 1/16/98................................. 3,000
5,900 Michigan State Underground Storage Facility,
Series 1, 3.75%, 2/05/98....................... 5,900
2,000 Montgomery County, Alabama, Industrial
Development Board, General Electric Series,
3.70%, 1/21/98................................. 2,000
2,500 Montgomery County, Alabama, Industrial
Development Bond, 3.70%, 1/16/98............... 2,500
Montgomery County, Maryland, BANS,
4,000 3.70%, 1/13/98................................... 4,000
5,000 3.85%, 2/09/98................................... 5,000
5,700 3.75%, 3/11/98................................... 5,700
15,000 New Jersey State Transportation Authority, 3.75%,
1/13/98........................................ 15,000
New York City, New York, Water Finance Authority,
3,000 3.80%, 1/21/98................................... 3,000
4,600 3.75%, 3/09/98, Series A......................... 4,600
2,990 Omaha Nebraska, Public Power District, 3.75%,
3/09/98........................................ 2,990
4,000 Petersburg, Indiana, Indiana Power & Light,
Series 91, 3.75%, 2/11/98...................... 4,000
7,700 Platte River Authority, Colorado,
3.75%, 1/20/98................................. 7,700
5,000 Puerto Rico, General Development Bond, 3.70%,
1/12/98........................................ 5,000
</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
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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,
$ 1,000 3.80%, 1/12/98................................... $ 1,000
1,500 3.80%, 1/12/98................................... 1,500
1,565 3.75%, 2/17/98, Series E......................... 1,565
1,500 3.75%, 2/17/98, Series 92A....................... 1,500
6,000 3.75%, 2/17/98, Series 92C....................... 6,000
Salt River, Arizona,
6,600 3.70%, 1/14/98................................... 6,600
2,800 3.80%, 1/22/98................................... 2,800
11,006 Salt River, Arizona, Agricultural & Power
District Revenue Bonds, 3.80%, 1/08/98......... 11,006
1,500 San Antonio, Texas, 3.80%, 1/09/98............... 1,500
3,600 San Antonio, Texas, Electric & Gas Revenue Bond,
3.80%, 2/09/98................................. 3,600
5,000 Shelby County, Tennessee, TANS,
3.75%, 2/18/98................................. 5,000
Sunshine State, Florida, Government Finance
Authority,
4,470 3.80%, 2/19/98................................... 4,470
3,750 3.75%, 2/20/98................................... 3,750
2,000 3.75%, 2/23/98................................... 2,000
5,000 Sweetwater County, Wyoming, 3.75%, 2/04/98....... 5,000
5,000 Texas State, Series 1997-B, 3.75%, 2/10/98....... 5,000
1,000 Texas State, Public Finance Authority, Series B,
3.75%, 1/28/98................................. 1,000
2,500 University of Michigan, 3.75%, 1/15/98........... 2,500
5,055 Wisconsin State, General Obligation, 3.70%,
1/09/98........................................ 5,055
10,000 Wisconsin State Transportation Authority, Series
A, TRANS, 3.75%, 3/09/98....................... 10,000
----------
327,259
----------
TOTAL FIXED RATE INSTRUMENTS.............................. 381,595
----------
VARIABLE/FLOATING RATE INSTRUMENTS (52.3%)
DAILY VARIABLE RATE BONDS (25.8%)
1,500 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Shell Oil, 4.80%, 9/01/23....... 1,500
3,385 Burke County, Georgia, Pollution Control Revenue
Bonds, Georgia Power Co., Series 3, 4.80%,
9/01/25........................................ 3,385
1,000 Burke County, Georgia, Pollution Control, Revenue
Bonds, 4.80%, 7/01/24.......................... 1,000
4,000 Chattanooga-Hamilton County, Tennessee, Hospital
Authority Revenue Bonds, Erlanger Medical
Center,
4.90%, 10/01/17................................ 4,000
Chicago, Illinois, O'Hare International Airport
Special Facilities Revenue Bonds, American
Airlines, Inc.,
4,200 4.90%, 12/01/17, Series A........................ 4,200
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 3,500 4.90%, 12/01/17, Series B........................ $ 3,500
4,200 4.90%, 12/01/17, Series C........................ 4,200
3,750 4.90%, 12/01/17, Series D........................ 3,750
1,400 City of Forsyth, Montana, Pollution Control
Revenue Bonds, 3.75%, 1/01/18.................. 1,400
2,800 Delaware County, Pennsylvania, Industrial
Development Authority, Series 95, 4.90%,
12/01/09....................................... 2,800
1,700 Delta County, Michigan, Environmental Improvement
Revenue Bonds, Mead Corp., 5.10%, 12/01/23..... 1,700
3,850 East Baton Rouge Parish, Louisiana, Pollution
Control Revenue Bonds, Exxon Project, 4.80%,
3/01/22........................................ 3,850
4,200 Farmington, New Mexico, Pollution Control Revenue
Bonds, Series A, 4.80%, 5/01/24................ 4,200
4,200 Gulf Coast Waste Disposal Authority, Texas,
Pollution Control Revenue Bonds, Exxon Project,
4.95%, 6/01/20................................. 4,200
1,200 Hamond, Indiana, Pollution Control Revenue Bonds,
Amoco Oil Company Project, 4.95%, 2/01/22...... 1,200
5,000 Hapeville, Georgia, Industrial Development
Authority, Series 85, 5.10%, 11/01/15.......... 5,000
Harris County, Texas, Health Facilities
Development Corp., Methodist Hospital,
5,500 4.90%, 12/01/25.................................. 5,500
2,700 4.90%, 12/01/26.................................. 2,700
Harris County, Texas, Industrial Development,
Pollution Control Revenue Bonds, Exxon Project,
1,300 4.80%, 3/01/24, Series 84A....................... 1,300
2,600 4.80%, 3/01/24, Series 84B....................... 2,600
5,700 Hurley, New Mexico, Pollution Control Revenue
Bonds, Series 85,
5.00%, 12/01/15................................ 5,700
1,300 Jackson County, Mississippi, Port Facility,
Chevron Project, Series 93,
4.95%, 6/01/23................................. 1,300
900 Kansas City, Kansas, Industrial Development
Authority, Revenue Bonds, PQ Corp., 5.20%,
8/01/15........................................ 900
2,000 Lake Charles, Louisiana, Harbor & Terminal
District Port Facilities, Series 84, 5.00%,
11/01/11....................................... 2,000
Lincoln County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project,
2,200 5.10%, 11/01/14, Series 84A...................... 2,200
1,700 5.10%, 11/01/14, Series 84B...................... 1,700
2,500 5.10%, 11/01/14, Series 84C...................... 2,500
2,500 5.10%, 11/01/14, Series 84D...................... 2,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
157
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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>
$ 3,120 Louisiana Public Facilities Authority, Industrial
Development, Kenner Hotel, Series 85, 5.10%,
12/01/15....................................... $ 3,120
Maricopa County, Arizona, Pollution Control
Revenue Bonds, Arizona Public Service Co.,
5,700 4.80%, 5/01/29, Series C......................... 5,700
1,700 4.95%, 5/01/29, Series E......................... 1,700
3,600 4.90%, 5/01/29, Series F......................... 3,600
8,400 Massachusetts, State Health & Educational
Facilities Authority, Revenue Bonds, Capital
Assets Project, Series D,
5.00%, 1/01/35................................. 8,400
2,700 Metropolitan Nashville, Airport Authority,
Special Facility Revenue Bonds, American
Airlines Project, Series A, 5.00%, 10/01/12.... 2,700
Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University,
2,400 5.00%, 9/01/30, Series A......................... 2,400
3,500 5.00%, 9/01/30, Series B......................... 3,500
New York City, New York, General Obligation
Bonds,
700 4.15%, 10/01/23, Series C........................ 700
400 5.00%, 8/01/98, Series C, Sub-Series C4.......... 400
3,400 5.00%, 8/01/22, Sub-Series A4.................... 3,400
3,650 5.00%, 8/01/23, Sub-Series A4.................... 3,650
1,500 5.10%, 8/01/15, Sub-Series A5.................... 1,500
New York City, New York, Municipal Water Finance
Authority, Water & Sewer System Revenue Bonds,
4,965 5.10%, 6/15/22, Series 92C....................... 4,965
8,800 5.10%, 6/15/23, Series 93C....................... 8,800
1,400 New York State Energy Research & Development
Authority, Pollution Control Revenue Bonds,
Niagara,
4.50%, 7/01/15................................. 1,400
1,100 New York State, Dormitory Authority Revenue
Bonds, Cornell University, Series B, 4.75%,
7/01/25........................................ 1,100
700 New York State, Electric & Gas Revenue Bonds,
Series 94D, 5.00%, 10/01/29.................... 700
2,700 Nueces River Authority, Texas, Pollution Control
Revenue Bonds, Series 85, 5.20%, 12/01/99...... 2,700
4,100 Ohio State Air Quality Development Authority
Revenue Bonds, Cincinnati Gas & Electric,
Series 95B,
4.95%, 9/01/30................................. 4,100
2,400 Peninsula Port Authority, Virginia, Coal Revenue
Bonds, 5.00%, 7/01/16.......................... 2,400
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
Pennsylvania Higher Education Authority Revenue
Bonds, Carnegie Mellon University,
$ 5,000 4.85%, 11/01/25, Series 95A...................... $ 5,000
4,500 4.85%, 11/01/29, Series 95C...................... 4,500
2,600 4.85%, 11/01/30, Series 95D...................... 2,600
3,300 Pennsylvania State Higher Educational Facilities
Authority, Colleges & Universities Revenue
Bonds,
4.95%, 10/01/09................................ 3,300
Philadelphia, Pennsylvania, Hospitals & Higher
Educational Facilities Authority, Childrens
Hospital Project,
8,100 4.85%, 3/01/27, Series 92B....................... 8,100
2,500 4.85%, 3/01/27, Series 96A....................... 2,500
Platte County, Wyoming, Pollution Control Revenue
Bonds,
3,500 4.50%, 7/01/14, Series A......................... 3,500
600 4.50%, 7/01/14, Series B......................... 600
Port of Saint Helens, Oregon, Pollution Control
Revenue Bonds, Portland General Electric Co.,
2,000 5.00%, 4/01/10, Series A......................... 2,000
1,600 4.95%, 6/01/10, Series B......................... 1,600
Raleigh-Durham, North Carolina, Airport
Authority,
4,000 5.00%, 11/01/15, Series A........................ 4,000
600 5.00%, 11/01/15, Series B........................ 600
1,400 Saint Charles Parish, Louisiana, Pollution
Control Revenue Bonds, Shell Oil, Series 92B,
4.90%, 10/01/22................................ 1,400
5,600 Salt Lake County, Utah, Pollution Control
Revenue, SVC Station Holdings,
4.90%, 8/01/07................................. 5,600
3,600 Southwest, Texas, Higher Education Authority
Revenue Bonds, Southern Methodist University,
5.00%, 7/01/15................................. 3,600
2,950 Sublette County, Wyoming, Pollution Control
Revenue Bonds, Exxon Project, 4.95%,
11/01/14....................................... 2,950
700 Sweetwater County, Wyoming, Pacificorp, Series
88B, 4.50%, 1/01/14............................ 700
4,300 Texas State, Water Development Board Revenue
Bonds, Series A, 4.90%, 3/01/15................ 4,300
3,000 West Side Calhoun County, Texas, Pollution
Control Revenue Bonds, 4.90%, 12/01/15......... 3,000
----------
207,570
----------
WEEKLY VARIABLE RATE BONDS (25.8%)
1,900 Alaska State, Housing Finance Corp., Revenue
Bonds, Series C, 3.70%, 6/01/26................ 1,900
2,100 Albuquerque, New Mexico, Revenue Bonds, Series
91A, 3.70%, 7/01/22............................ 2,100
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
158
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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>
$ 2,700 Allegheny County, Pennsylvania, Hospital
Development Authority, Series 95B, 3.65%,
9/01/20........................................ $ 2,700
300 Arkansas State, Development Finance Authority
Bond, Series B, 4.13%, 6/01/12................. 300
2,300 Ascension Parish, Louisiana, Pollution Control
Revenue Bonds, Borden, Inc., 3.70%, 12/01/09... 2,300
Beaver County, Pennsylvania, Industrial
Development Authority, Duquesne Light,
1,000 3.65%, 8/01/20, Series A......................... 1,000
1,000 3.65%, 8/01/09, Series B......................... 1,000
9,200 Burke County, Georgia, Development Authority,
Oglethorpe, Series 93A, 3.65%, 1/01/16......... 9,200
2,700 California Statewide Communities, Revenue Bonds,
Series A1,
3.45%, 5/15/25................................. 2,700
5,600 Charlotte, North Carolina, Airport, Series 93A,
3.65%, 7/01/16................................. 5,600
1,000 City of Baltimore, Maryland, Pollution Control
Revenue Bonds, General Motors Corp., 3.65%,
2/01/00........................................ 1,000
2,500 City of Columbia, Missouri, Special Revenue
Bonds, Series 88A,
3.70%, 6/01/08................................. 2,500
1,500 City of Columbia, Missouri, Water & Electric
Revenue Bonds, Series 85B, 3.70%, 12/01/15..... 1,500
City of Forsyth, Montana, Pollution Control
Revenue Bonds,
300 3.75%, 6/01/13, Series B......................... 300
700 3.70%, 6/01/13, Series D......................... 700
2,600 City of Midlothian, Texas, Industrial Development
Corp., Pollution Control Revenue Bonds,
Box-Crow Cement Co., 3.70%, 12/01/09........... 2,600
1,000 City of Minnetonka, Minnesota, Multifamily,
Cliffs Ridgedale,
3.85%, 9/15/25................................. 1,000
1,500 City of San Antonio, Texas, Higher Education
Authority, Trinity University, 3.70%,
4/01/04........................................ 1,500
1,900 City of Seattle, Washington, Municipal Light &
Power, Revenue Bonds,
3.65%, 6/01/21................................. 1,900
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
Clark County, Nevada, Airport Revenue Bonds,
$12,700 3.65%, 7/01/12, Series 93A....................... $ 12,700
2,600 3.65%, 7/01/25, Series 95-A1..................... 2,600
4,000 Clark County, Nevada, Industrial Development
Revenue Bonds, Nevada Power Co., Series C,
3.85%, 10/01/30................................ 4,000
3,000 Clarksville, Tennessee, Public Building
Authority, Revenue Bonds,
3.65%, 12/01/00................................ 3,000
55 Clear Creek County, Colorado, Revenue Bonds,
Colorado Finance Pool Program, Series 88,
3.65%, 6/01/98................................. 55
600 Colorado Student Obligation Bond Authority,
Student Loan Revenue Bonds, Series 91-C1,
3.65%, 8/01/00................................. 600
5,000 Connecticut State, Revenue Bonds, Series B,
3.85%, 5/15/14................................. 5,000
5,300 Connecticut State, Special Tax Obligation Revenue
Bonds, Series 1,
3.65%, 12/01/10................................ 5,300
4,600 Cook County, Illinois, General Obligation Bonds,
3.65%, 12/01/01................................ 4,600
5,000 Cuyahoga County, Ohio, Hospital Revenue Bonds,
The Cleveland Clinic, Series C, 3.65%,
1/01/16........................................ 5,000
1,800 Dade County, Florida, Health Facilities Authority
Revenue Bonds, Miami Childrens Hospital, 3.65%,
9/01/25........................................ 1,800
10,000 Dade County, Florida, Water & Sewer Revenue
Bonds, Series 94,
3.65%, 10/05/22................................ 10,000
700 First Florida Government Finance Committee,
Revenue Bonds,
3.65%, 12/01/00................................ 700
3,000 Foothill/Eastern California Toll Road, Series
95C, TRANS, 3.35%, 1/02/35..................... 3,000
2,000 Franklin County, Ohio, Series 95,
3.65%, 6/01/16................................. 2,000
Georgia, Municipal Gas Authority, Gas Revenue
Bonds,
8,000 4.00%, 9/01/07, Series B......................... 8,000
8,000 3.65%, 1/01/08, Series C......................... 8,000
2,500 Glynn, Georgia, Brunswick Memorial Hospital,
Series 96, 3.65%, 8/01/16...................... 2,500
Harris County, Texas, Toll Road Revenue Bonds,
900 3.80%, 8/01/15, Series 94D....................... 900
5,000 3.65%, 8/01/20, Series 94G....................... 5,000
5,000 3.65%, 8/01/20, Series 94H....................... 5,000
2,200 Huntsville, Alabama, Healthcare Facilities
Authority, Series B, 3.60%, 6/01/24............ 2,200
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
159
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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>
Illinois Development Finance Authority, Revenue
Bonds,
$ 5,000 3.80%, 2/01/29................................... $ 5,000
3,500 3.80%, 6/01/31................................... 3,500
300 Illinois Development Finance Authority, A.E.
Staley Manufacturing, Series 85, 3.65%,
12/01/05....................................... 300
5,000 Illinois Development Finance Authority, Series
93A, 3.70%, 3/01/09............................ 5,000
3,000 Illinois State, Toll Highway Authority, Series B,
3.65%, 1/01/10................................. 3,000
4,000 Jefferson Parish, Louisiana, Hospital Service
District No. 001 Revenue Bonds, West Jefferson
Medical Center,
3.80%, 1/01/26................................. 4,000
900 Lehigh County, Pennsylvania, Allegheny Electric
Cooperative, 3.80%, 12/01/15................... 900
1,000 Louisiana Public Facilities Authority, Hospital
Revenue Bonds, Series 85, 3.80%, 12/01/00...... 1,000
2,000 Maryland Health & Higher Education Facilities,
Series A, 3.70%, 7/01/27....................... 2,000
1,000 Massachusetts Health & Education Facilities
Authority, Series G-1,
3.45%, 1/01/19................................. 1,000
2,000 Massachusetts Health & Education Facilities
Authority, Revenue Bonds, 3.80%, 2/01/16....... 2,000
2,400 Missouri State Health & Educational Facilities
Authority, Revenue Bonds, Washington
University, 3.70%, 9/01/09..................... 2,400
3,000 Municipal Electric Authority, Georgia, Revenue
Bonds, Series 85C,
3.65%, 3/01/20................................. 3,000
2,900 New York State Local Government Assistance Corp.,
Series D,
3.55%, 4/01/25................................. 2,900
3,900 Nueces County, Texas, Health Facilities, Driscoll
Childrens' Foundation,
3.85%, 7/01/15................................. 3,900
1,500 Person County, North Carolina, Carolina Power &
Light, 3.90%, 11/01/19......................... 1,500
Pinellas County, Flordia, Health Facilities,
Bayfront Medical Center,
235 3.65%, 6/01/98................................... 235
1,000 3.65%, 6/01/09................................... 1,000
250 Polk County, Iowa, Hospital Equipment &
Improvement Authority, 3.80%, 12/01/05......... 250
2,400 Port of Corpus Christi, Texas, Industrial
Development, Revenue Bonds,
3.85%, 6/01/27................................. 2,400
1,500 Port of Corpus Christi, Texas, Marine Terminal,
R.J. Reynolds Metals Series, 3.80%, 9/01/14.... 1,500
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
$ 600 Putnam County, Florida, Development Authority,
Seminole Electric, Series 84-H1, 3.85%,
3/15/14........................................ $ 600
1,000 Rapides Parish, Louisiana, Industrial Development
Revenue Bonds, Central Louisiana Electric Co.,
3.60%, 7/01/18................................. 1,000
700 Sheboygan, Wisconsin, Wisconsin Power & Light
Co., 3.80%, 8/01/14............................ 700
8,100 Texas State, General Obligation Bonds, Veterans
Housing Assistance-Fund I, 3.60%, 12/01/16..... 8,100
University of Alabama,
1,500 3.80%, 10/01/07, Series A........................ 1,500
2,000 3.95%, 10/01/07, Series B........................ 2,000
1,100 University of North Carolina, Chapel Hill Fund
Inc., Certificates of Participation, 3.75%,
10/01/09....................................... 1,100
2,200 University of Wisconsin, Hospitals & Clinics
Authority, Revenue Bonds, 3.70%, 4/01/26....... 2,200
5,000 Washington State, General Obligation Bonds,
Series VR 96B, 3.60%, 6/01/20.................. 5,000
Washington State, Public Power Supply Revenue
Bonds,
1,900 3.60%, 7/01/17, Series 93-1A3.................... 1,900
3,300 3.75%, 7/01/17, Series 1A-2...................... 3,300
----------
207,940
----------
SEMI-ANNUAL VARIABLE RATE BONDS (0.7%)
York County, South Carolina, Pollution Control
Revenue Bonds, Carolina Electric Project,
2,500 3.70%, 9/15/14................................... 2,500
2,500 3.70%, 9/15/14................................... 2,500
----------
5,000
----------
TOTAL VARIABLE/FLOATING RATE INSTRUMENTS.................. 420,510
----------
TOTAL TAX-EXEMPT INSTRUMENTS (Cost $802,105)................ 802,105
----------
TOTAL INVESTMENTS (99.7%) (Cost $802,105)................... 802,105
----------
</TABLE>
<TABLE>
<S> <C> <C>
OTHER ASSETS (0.6%)
Interest Receivable........................ $ 4,609
Other...................................... 70 4,679
----------
LIABILITIES (-0.3%)
Dividends Payable.......................... (1,214)
Investment Advisory Fees Payable........... (611)
Administrative Fees Payable................ (114)
Bank Overdraft............................. (75)
Director's Fees & Expenses Payable......... (33)
Custodian Fees Payable..................... (31)
Other Liabilities.......................... (99) (2,177)
---------- --------
NET ASSETS (100%)........................................ $804,607
--------
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
160
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO (CONT.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C> <C>
- -------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital.............................. $804,629
Accumulated Net Realized Loss................ (22)
--------
NET ASSETS............................................... $804,607
--------
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 804,603,794 outstanding $0.001 par value
shares (authorized 4,000,000,000 shares).................... $1.00
--------
--------
</TABLE>
- ------------------------------------------------------------
BANS -- Bond Anticipation Notes
RANS -- Revenue Anticipation Notes
TANS -- Tax 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
(UNAUDITED)
<TABLE>
<CAPTION>
AMORTIZED COST PERCENT OF
STATE (000) NET ASSETS
<S> <C> <C>
- -------------------------------------------------------------------------
Alabama................................ $ 10,200 1.3%
Alaska................................. 1,900 0.2
Arizona................................ 32,706 4.1
Arkansas............................... 300 --
California............................. 15,731 2.0
Colorado............................... 8,355 1.0
Connecticut............................ 21,900 2.7
Delaware............................... 1,344 0.2
Florida................................ 37,830 4.7
Georgia................................ 40,085 5.0
Hawaii................................. 6,000 0.7
Illinois............................... 57,750 7.2
Indiana................................ 7,205 0.9
Iowa................................... 250 --
Kansas................................. 3,400 0.4
Louisiana.............................. 34,720 4.3
Maryland............................... 27,700 3.4
Massachusetts.......................... 21,000 2.6
Michigan............................... 12,500 1.6
Minnesota.............................. 17,465 2.2
Mississippi............................ 1,300 0.2
Missouri............................... 17,050 2.1
Montana................................ 5,406 0.7
Nebraska............................... 5,490 0.7
Nevada................................. 19,300 2.4
New Jersey............................. 15,000 1.9
New Mexico............................. 21,028 2.6
New York............................... 37,115 4.6
North Carolina......................... 12,800 1.6
Ohio................................... 11,100 1.4
Oregon................................. 3,600 0.5
Pennsylvania........................... 39,400 4.9
Puerto Rico............................ 5,000 0.6
South Carolina......................... 5,000 0.6
Tennessee.............................. 20,774 2.6
Texas.................................. 144,596 18.0
Utah................................... 5,600 0.7
Virginia............................... 8,400 1.0
Washington............................. 22,100 2.7
Wisconsin.............................. 17,955 2.2
Wyoming................................ 25,750 3.2
--------------- ---
$ 802,105 99.7%
--------------- ---
--------------- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
Municipal Money Market Portfolio
161
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACTIVE
COUNTRY ASIAN ASIAN EMERGING EUROPEAN EUROPEAN GLOBAL
ALLOCATION EQUITY REAL ESTATE MARKETS EQUITY REAL ESTATE EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO
(000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 3,483 $ 4,133 $ 35 $ 33,374 $ 7,658 $ 72 $ 2,077
Interest 664 635 7 4,944 426 58 143
Less: Foreign Taxes Withheld (438) (421) (2) (1,827) (998) (9) (181)
---------- --------- ----- -------- -------- ----------- ---------
Total Income 3,709 4,347 40 36,491 7,086 121 2,039
---------- --------- ----- -------- -------- ----------- ---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,059 2,184 5 21,203 1,915 31 784
Less: Fees Waived (471) (510) (5) -- (219) (31) (111)
---------- --------- ----- -------- -------- ----------- ---------
Investment Advisory Fees -- Net 588 1,674 -- 21,203 1,696 -- 673
Administrative Fees 294 436 2 2,638 383 7 159
Sub-Administrative Fees -- -- -- 205 -- -- --
Custodian Fees 275 437 12 4,234 138 13 46
Directors' Fees and Expenses 9 17 -- 74 10 -- 5
Filing and Registration Fees 31 54 22 207 85 26 33
Foreign Tax Expense 7 141 -- 581 -- -- --
Insurance 5 13 -- 52 6 -- 3
Interest Expense -- -- -- 45 -- -- --
Professional Fees 49 68 40 240 48 40 45
Shareholder Reports 44 18 1 101 18 2 11
Distribution Fees on Class B Shares -- 12 -- 32 10 -- 11
Other Expenses 13 199 1 149 12 1 9
Expenses Reimbursed by Adviser -- -- (71) -- -- (49) --
---------- --------- ----- -------- -------- ----------- ---------
Total Expenses 1,315 3,069 7 29,761 2,406 40 995
---------- --------- ----- -------- -------- ----------- ---------
NET INVESTMENT INCOME 2,394 1,278 33 6,730 4,680 81 1,044
---------- --------- ----- -------- -------- ----------- ---------
NET REALIZED GAIN (LOSS):
Investments Sold 6,964 (69,033) (211) 85,665 24,802 (375) 8,035
Foreign Currency Transactions 7,208 (120) (33) 4,791 (192) (60) 1,280
Futures Contracts 21 -- -- -- -- -- --
---------- --------- ----- -------- -------- ----------- ---------
Total Net Realized Gain (Loss) 14,193 (69,153) (244) 90,456 24,610 (435) 9,315
---------- --------- ----- -------- -------- ----------- ---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 1,232 (46,290)* (412) (156,039)** 9,517 (623) 10,185
Foreign Currency Translations 229 301 23 812 (152) (9) (283)
Futures Contracts 426 -- -- -- -- -- --
Swaps -- -- -- (5,232) -- -- --
---------- --------- ----- -------- -------- ----------- ---------
Total Net Change in Unrealized
Appreciation (Depreciation) 1,887 (45,989) (389) (160,459) 9,365 (632) 9,902
---------- --------- ----- -------- -------- ----------- ---------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 16,080 (115,142) (633) (70,003) 33,975 (1,067) 19,217
---------- --------- ----- -------- -------- ----------- ---------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 18,474 $(113,864) $ (600) $(63,273) $ 38,655 $ (986) $ 20,261
---------- --------- ----- -------- -------- ----------- ---------
---------- --------- ----- -------- -------- ----------- ---------
- ---------------
</TABLE>
+ The Asian Real Estate and European Real Estate Portfolios commenced
operations on October 1, 1997.
* Net of foreign taxes of $28,000 on unrealized appreciation.
** Net of foreign taxes of $2,255,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
162
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL INTERNATIONAL JAPANESE LATIN
GOLD EQUITY MAGNUM SMALL CAP EQUITY AMERICAN
PORFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 380 $ 67,558 $ 3,441 $ 6,676 $ 1,301 $ 1,099
Interest 132 7,512 876 590 223 119
Less: Foreign Taxes Withheld (12) (7,941) (417) (802) (195) --
-------- ------------- ------ ------------- -------- --------
Total Income 500 67,129 3,900 6,464 1,329 1,218
-------- ------------- ------ ------------- -------- --------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 159 21,589 1,282 2,438 1,247 766
Basic Fees -- Sub Adviser 106 -- -- -- -- --
Less: Fees Waived -- Adviser (69) (430) (298) (170) (108) (48)
Less: Fees Waived-- Sub Adviser (46) -- -- -- -- --
-------- ------------- ------ ------------- -------- --------
Investment Advisory Fees -- Net 150 21,159 984 2,268 1,139 718
Administrative Fees 45 4,187 265 407 252 113
Sub-Administrative Fees -- -- -- -- -- 31
Custodian Fees 15 841 155 142 36 196
Filing and Registration Fees 40 211 94 23 55 50
Insurance 1 79 4 8 7 1
Directors' Fees and Expenses 3 105 7 12 9 11
Foreign Tax Expense -- -- -- -- -- 115
Professional Fees 35 195 40 59 43 47
Shareholder Reports 35 156 44 19 11 9
Distribution Fees on Class B Shares 3 8 70 -- 6 7
Other Expenses 10 71 8 13 113 23
-------- ------------- ------ ------------- -------- --------
Total Expenses 337 27,012 1,671 2,951 1,671 1,321
-------- ------------- ------ ------------- -------- --------
NET INVESTMENT INCOME (LOSS) 163 40,117 2,229 3,513 (342) (103)
-------- ------------- ------ ------------- -------- --------
NET REALIZED GAIN (LOSS):
Investments Sold (24,384) 272,106 16 10,943 (24,759) 17,417
Foreign Currency Transactions (88) 14,113 4,414 636 23,453 (132)
-------- ------------- ------ ------------- -------- --------
Total Net Realized Gain (Loss) (24,472) 286,219 4,430 11,579 (1,306) 17,285
-------- ------------- ------ ------------- -------- --------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments 4,877 662 (1,419) (20,232) 3 892*
Foreign Currency Translations (16) 7,577 742 1,144 (9,225) (7)
-------- ------------- ------ ------------- -------- --------
Total Net Change in Unrealized
Appreciation (Depreciation) 4,861 8,239 (677) (19,088) (9,222) 885
-------- ------------- ------ ------------- -------- --------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) (19,611) 294,458 3,753 (7,509) (10,528) 18,170
-------- ------------- ------ ------------- -------- --------
Net Increase (Decrease) in Net Assets
Resulting from Operations $(19,448) $ 334,575 $ 5,982 $ (3,996) $(10,870) $ 18,067
-------- ------------- ------ ------------- -------- --------
-------- ------------- ------ ------------- -------- --------
</TABLE>
- ---------------
* Net of foreign tax of $4,000 on unrealized appreciation.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
163
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGRESSIVE EMERGING EQUITY SMALL CAP U.S. EQUITY U.S. REAL
EQUITY GROWTH GROWTH VALUE EQUITY TECHNOLOGY PLUS ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO
(000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 1,259 $ 129 $ 4,906 $ 473 $ 7 $ 169 $ 10,611
Interest 325 105 1,002 53 25 8 1,014
Less: Foreign Taxes Withheld -- -- -- -- -- -- (24)
---------- -------- --------- ------ ---------- ----- ---------
Total Income 1,584 234 5,908 526 32 177 11,601
---------- -------- --------- ------ ---------- ----- ---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 1,154 605 3,079 295 189 37 2,428
Less: Fees Waived (87) (47) (118) (108) (189) (37) (115)
---------- -------- --------- ------ ---------- ----- ---------
Investment Advisory Fees -- Net 1,067 558 2,961 187 -- -- 2,313
Administrative Fees 225 99 796 60 33 15 471
Custodian Fees 38 21 67 12 78 4 64
Filing and Registration Fees 48 32 139 32 72 52 77
Insurance 3 3 11 1 -- -- 7
Directors' Fees and Expenses 6 4 18 2 5 1 9
Professional Fees 31 27 53 24 30 34 38
Shareholder Reports 17 8 49 22 50 49 45
Distribution Fees on Class B Shares 33 3 28 10 4 -- 33
Other Expenses 37 14 12 11 8 5 9
Expenses Reimbursed by Adviser -- -- -- -- (41) (93) --
---------- -------- --------- ------ ---------- ----- ---------
Total Expenses 1,505 769 4,134 361 239 67 3,066
---------- -------- --------- ------ ---------- ----- ---------
NET INVESTMENT INCOME (LOSS) 79 (535) 1,774 165 (207) 110 8,535
---------- -------- --------- ------ ---------- ----- ---------
NET REALIZED GAIN (LOSS):
Investments Sold 33,983 21,271 86,366 9,674 3,408 66 51,774
Securities Sold Short (806) -- -- -- (12) -- --
---------- -------- --------- ------ ---------- ----- ---------
Total Net Realized Gain 33,177 21,271 86,366 9,674 3,396 66 51,774
---------- -------- --------- ------ ---------- ----- ---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investments 6,699 (14,435) 49,579 125 (434) 599 15,493
Short Sales 197 -- -- -- 147 -- (2)
---------- -------- --------- ------ ---------- ----- ---------
Total Net Change in Unrealized
Appreciation (Depreciation) 6,896 (14,435) 49,579 125 (287) 599 15,491
---------- -------- --------- ------ ---------- ----- ---------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 40,073 6,836 135,945 9,799 3,109 665 67,265
---------- -------- --------- ------ ---------- ----- ---------
Net Increase in Net Assets Resulting from
Operations $ 40,152 $ 6,301 $ 137,719 $ 9,964 $ 2,902 $ 775 $ 75,800
---------- -------- --------- ------ ---------- ----- ---------
---------- -------- --------- ------ ---------- ----- ---------
<CAPTION>
VALUE
EQUITY
PORTFOLIO
(000)
<S> <C>
- ---------------------------------------------
INVESTMENT INCOME:
Dividends $ 2,833
Interest 92
Less: Foreign Taxes Withheld --
---------
Total Income 2,925
---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 512
Less: Fees Waived (97)
---------
Investment Advisory Fees -- Net 415
Administrative Fees 162
Custodian Fees 23
Filing and Registration Fees 27
Insurance 4
Directors' Fees and Expenses 5
Professional Fees 29
Shareholder Reports 43
Distribution Fees on Class B Shares 5
Other Expenses 13
Expenses Reimbursed by Adviser --
---------
Total Expenses 726
---------
NET INVESTMENT INCOME (LOSS) 2,199
---------
NET REALIZED GAIN (LOSS):
Investments Sold 20,470
Securities Sold Short --
---------
Total Net Realized Gain 20,470
---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investments 3,672
Short Sales --
---------
Total Net Change in Unrealized
Appreciation (Depreciation) 3,672
---------
TOTAL NET REALIZED GAIN AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 24,142
---------
Net Increase in Net Assets Resulting from
Operations $ 26,341
---------
---------
</TABLE>
- ---------------
+ The U.S. Equity Plus Portfolio commenced operations on July 31, 1997.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
164
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING GLOBAL MUNICIPAL
MARKETS FIXED FIXED HIGH MUNICIPAL MONEY MONEY
BALANCED DEBT INCOME INCOME YIELD BOND MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 90 $ 16 $ 52 $ -- $ 505 $ -- $ -- $ --
Interest 199 15,745 9,412 5,184 10,565 2,644 76,049 26,841
Less: Foreign Taxes Withheld -- (12) -- (25) -- -- -- --
-------- -------- --------- --------- --------- --------- --------- ---------
Total Income 289 15,749 9,464 5,159 11,070 2,644 76,049 26,841
-------- -------- --------- --------- --------- --------- --------- ---------
EXPENSES:
Investment Advisory Fees:
Basic Fees -- Adviser 32 1,623 504 372 489 185 4,066 2,213
Less: Fees Waived (32) -- (210) (190) -- (118) -- --
-------- -------- --------- --------- --------- --------- --------- ---------
Investment Advisory Fees -- Net -- 1,623 294 182 489 67 4,066 2,213
Administrative Fees 14 256 229 150 186 88 2,098 1,184
Custodian Fees 11 114 18 37 17 7 136 87
Filing and Registration Fees 21 41 41 30 43 32 73 80
Insurance -- 6 5 3 3 1 40 2
Interest Expense -- 386 -- -- -- -- -- --
Directors' Fees and Expenses 2 16 7 6 13 3 47 25
Professional Fees 22 62 30 39 34 25 80 57
Shareholder Reports 8 13 13 9 11 7 34 21
Distribution Fees on Class B shares 3 8 4 1 14 -- -- --
Other Expenses 7 94 11 12 15 8 8 5
Expenses Reimbursed by Adviser (39) -- -- -- -- -- -- --
-------- -------- --------- --------- --------- --------- --------- ---------
Total Expenses 49 2,619 652 469 825 238 6,582 3,674
-------- -------- --------- --------- --------- --------- --------- ---------
NET INVESTMENT INCOME 240 13,130 8,812 4,690 10,245 2,406 69,467 23,167
-------- -------- --------- --------- --------- --------- --------- ---------
NET REALIZED GAIN (LOSS):
Investments Sold 855 24,856 2,733 (2,147) 4,846 27 71 9
Foreign Currency Transactions -- (12) 384 268 -- -- -- --
Securities Sold Short -- (394) -- -- -- -- -- --
Written Options -- 489 -- -- -- -- -- --
-------- -------- --------- --------- --------- --------- --------- ---------
Total Net Realized Gain (Loss) 855 24,939 3,117 (1,879) 4,846 27 71 9
-------- -------- --------- --------- --------- --------- --------- ---------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION):
Investments (66) (13,108) 1,775 (3,162) 1,740 1,474 -- --
Foreign Currency Translations -- (7) (103) 374 -- -- -- --
Short Sales -- 355 -- -- -- -- -- --
-------- -------- --------- --------- --------- --------- --------- ---------
Total Net Change in Unrealized
Appreciation (Depreciation) (66) (12,760) 1,672 (2,788) 1,740 1,474 -- --
-------- -------- --------- --------- --------- --------- --------- ---------
TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN
UNREALIZED APPRECIATION (DEPRECIATION) 789 12,179 4,789 (4,667) 6,586 1,501 71 9
-------- -------- --------- --------- --------- --------- --------- ---------
Net Increase in Net Assets Resulting from
Operations $ 1,029 $ 25,309 $ 13,601 $ 23 $ 16,831 $ 3,907 $ 69,538 $ 23,176
-------- -------- --------- --------- --------- --------- --------- ---------
-------- -------- --------- --------- --------- --------- --------- ---------
</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>
ACTIVE COUNTRY ALLOCATION
PORTFOLIO ASIAN EQUITY PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------- --------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET
ASSETS
OPERATIONS:
Net Investment Income $ 2,394 $ 2,195 $ 1,278 $ 3,107
Net Realized Gain (Loss) 14,193 26,210 (69,153) 27,596
Change in Unrealized
Appreciation
(Depreciation) 1,887 (11,503) (45,989) (23,998)
- --------------------------------------------------------------------------------------
Net Increase (Decrease) in
Net Assets Resulting from
Operations 18,474 16,902 (113,864) 6,705
- --------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (9,445) (11,942) (42) (2,757)
In Excess of Net Investment
Income (220) (307) -- (5)
Net Realized Gain (13,378) (6,994) -- (23,408)
In Excess of Net Realized
Gain -- -- (8,471) --
CLASS B+:
Net Investment Income (1) (46) (1) (59)
In Excess of Net Investment
Income -- (1) -- --
Net Realized Gain (2) (28) -- (735)
In Excess of Net Realized
Gain -- -- (130) --
- --------------------------------------------------------------------------------------
Total Distributions (23,046) (19,318) (8,644) (26,964)
- --------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1)
CLASS A:
Subscribed 44,577 63,687 191,230 319,487
Distributions Reinvested 20,551 15,163 7,923 22,963
Redeemed (105,088) (63,918) (356,756) (274,658)
CLASS B+:
Subscribed 53 1,042 2,594 19,937
Distributions Reinvested 3 76 122 728
Redeemed (669) (471) (10,134) (8,582)
- --------------------------------------------------------------------------------------
Net Increase (Decrease) in
Capital Share Transactions (40,573) 15,579 (165,021) 79,875
- --------------------------------------------------------------------------------------
Total Increase (Decrease) in
Net Assets (45,145) 13,163 (287,529) 59,616
NET ASSETS:
Beginning of Period 183,826 170,663 374,500 314,884
- --------------------------------------------------------------------------------------
End of Period $ 138,681 $ 183,826 $ 86,971 $ 374,500
- --------------------------------------------------------------------------------------
Undistributed (distribution
in excess of) net
investment income included
in end of period net
assets $ (220) $ (308) $ 2,300 $ (4)
- --------------------------------------------------------------------------------------
(1) CAPITAL SHARE
TRANSACTIONS:
CLASS A:
Shares Subscribed 3,824 5,277 12,051 15,774
Shares Issued on
Distributions Reinvested 1,945 1,321 420 1,221
Shares Redeemed (8,432) (5,262) (22,811) (13,753)
- --------------------------------------------------------------------------------------
Net Increase (Decrease) in
Class A Shares
Outstanding (2,663) 1,336 (10,340) 3,242
- --------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 5 87 178 979
Shares Issued on
Distributions Reinvested -- 7 6 39
Shares Redeemed (59) (39) (615) (431)
- --------------------------------------------------------------------------------------
Net Increase (Decrease) in
Class B Shares
Outstanding (54) 55 (431) 587
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
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>
ASIAN REAL ESTATE
PORTFOLIO EMERGING MARKETS PORTFOLIO
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31,
OCTOBER 1, 1997* TO -------------------------------------
DECEMBER 31, 1997 1997 1996
(000) (000) (000)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 33 $ 6,730 $ 8,495
Net Realized Gain (Loss) (244) 90,456 19,598
Change in Unrealized Appreciation
(Depreciation) (389) (160,459) 80,354
- ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (600) (63,273) 108,447
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (20) (7,299) (7,165)
In Excess of Net Investment Income -- (7,147) (197)
Net Realized Gain -- (70,779) --
In Excess of Net Realized Gain -- (66,329) --
CLASS B+:
Net Investment Income -- (33) (51)
In Excess of Net Investment Income -- (32) (1)
Net Realized Gain -- (462) --
In Excess of Net Realized Gain -- (433) --
- ----------------------------------------------------------------------------------------------------------
Total Distributions (20) (152,514) (7,414)
- ----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 3,005 651,308 550,412
Distributions Reinvested -- 141,670 5,513
Redeemed -- (380,590) (229,242)
CLASS B+:
Subscribed -- 8,135 18,152
Distributions Reinvested -- 900 43
Redeemed -- (12,803) (4,283)
- ----------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 3,005 408,620 340,595
- ----------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 2,385 192,833 441,628
NET ASSETS:
Beginning of Period -- 1,318,219 876,591
- ----------------------------------------------------------------------------------------------------------
End of Period $ 2,385 $ 1,511,052 $ 1,318,219
- ----------------------------------------------------------------------------------------------------------
Distribution in excess of net investment
income included in end of period net
assets $ (20) $ (2,735) $ (198)
- ----------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 301 38,730 37,330
Shares Issued on Distributions Reinvested -- 11,430 367
Shares Redeemed -- (23,303) (15,483)
- ----------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 301 26,857 22,214
- ----------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed -- 488 1,254
Shares Issued on Distributions Reinvested -- 72 3
Shares Redeemed -- (784) (288)
- ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding -- (224) 969
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
+ The Emerging Markets Portfolio began offering Class B shares on
January 2, 1996.
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>
EUROPEAN REAL
EUROPEAN EQUITY PORTFOLIO ESTATE PORTFOLIO
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------------- OCTOBER 1, 1997* TO
1997 1996 DECEMBER 31, 1997
(000) (000) (000)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 4,680 $ 2,360 $ 81
Net Realized Gain (Loss) 24,610 1,760 (435)
Change in Unrealized Appreciation
(Depreciation) 9,365 22,277 (632)
- ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 38,655 26,397 (986)
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (4,297) (2,463) (12)
In Excess of Net Investment Income -- (220) --
Net Realized Gain (15,891) (364) --
CLASS B+:
Net Investment Income (78) (36) --
In Excess of Net Investment Income -- (3) --
Net Realized Gain (319) (6) --
- ----------------------------------------------------------------------------------------------------------
Total Distributions (20,585) (3,092) (12)
- ----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 146,810 128,948 25,148
Distributions Reinvested 19,418 2,886 11
Redeemed (119,644) (46,075) (9,021)
CLASS B+:
Subscribed 4,098 3,819 826
Distributions Reinvested 374 39 --
Redeemed (2,614) (1,495) --
- ----------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 48,442 88,122 16,964
- ----------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 66,512 111,427 15,966
NET ASSETS:
Beginning of Period 181,010 69,583 --
- ----------------------------------------------------------------------------------------------------------
End of Period $ 247,522 $ 181,010 $ 15,966
- ----------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ (74) $ (223) $ 9
- ----------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 8,152 8,473 2,513
Shares Issued on Distributions Reinvested 1,086 177 1
Shares Redeemed (6,397) (2,969) (919)
- ----------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 2,841 5,681 1,595
- ----------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 222 254 83
Shares Issued on Distributions Reinvested 21 2 --
Shares Redeemed (143) (97) --
- ----------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 100 159 83
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
+ The European Equity Portfolio began offering Class B shares on January
2, 1996.
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>
GLOBAL EQUITY PORTFOLIO GOLD PORTFOLIO
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------------- -------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,044 $ 1,086 $ 163 $ 153
Net Realized Gain (Loss) 9,315 7,313 (24,472) 493
Change in Unrealized Appreciation
(Depreciation) 9,902 7,828 4,861 (4,498)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 20,261 16,227 (19,448) (3,852)
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (2,113) (1,075) (96) (135)
In Excess of Net Investment Income -- -- -- (29)
Net Realized Gain (5,966) (5,024) -- --
In Excess of Net Realized Gain -- -- (38) (1,681)
CLASS B+:
Net Investment Income (105) (45) (4) (4)
In Excess of Net Investment Income -- -- -- (1)
Net Realized Gain (328) (223) -- --
In Excess of Net Realized Gain -- -- (2) (89)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (8,512) (6,367) (140) (1,939)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 28,012 15,476 22,066 52,836
Distributions Reinvested 7,897 5,960 114 1,522
Redeemed (19,393) (42,500) (30,936) (28,491)
CLASS B+:
Subscribed 5,204 3,900 1,815 2,457
Distributions Reinvested 424 268 4 38
Redeemed (4,134) (414) (1,529) (800)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 18,010 (17,310) (8,466) 27,562
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 29,759 (7,450) (28,054) 21,771
NET ASSETS:
Beginning of Period 84,225 91,675 29,180 7,409
- ----------------------------------------------------------------------------------------------------------------------------
End of Period $ 113,984 $ 84,225 $ 1,126 $ 29,180
- ----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ 125 $ 19 $ (26) $ (30)
- ----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,503 974 3,071 4,551
Shares Issued on Distributions Reinvested 436 370 17 162
Shares Redeemed (1,047) (2,808) (5,970) (2,591)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 892 (1,464) (2,882) 2,122
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 286 252 304 216
Shares Issued on Distributions Reinvested 24 17 1 4
Shares Redeemed (232) (27) (285) (72)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 78 242 20 148
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
169
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY PORTFOLIO INTERNATIONAL MAGNUM PORTFOLIO
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD FROM
------------------------------------- YEAR ENDED MARCH 15, 1996* TO
1997 1996 DECEMBER 31, 1997 DECEMBER 31, 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 40,117 $ 32,405 $ 2,229 $ 455
Net Realized Gain 286,219 123,116 4,430 1,365
Change in Unrealized Appreciation
(Depreciation) 8,239 200,317 (677) 3,643
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 334,575 355,838 5,982 5,463
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (69,608) (45,368) (5,428) (1,037)
In Excess of Net Investment Income -- -- -- (169)
Net Realized Gain (234,828) (101,435) (1,101) (87)
CLASS B+:
Net Investment Income (70) (97) (938) (273)
In Excess of Net Investment Income -- -- -- (44)
Net Realized Gain (262) (239) (212) (23)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (304,768) (147,139) (7,679) (1,633)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 593,523 508,163 108,822 82,326
Distributions Reinvested 274,428 131,405 5,026 1,117
Redeemed (339,313) (181,971) (38,220) (1,247)
CLASS B+:
Subscribed 1,717 5,025 16,947 22,789
Distributions Reinvested 297 305 1,146 311
Redeemed (4,302) (339) (13,200) (637)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 526,350 462,588 80,521 104,659
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 556,157 671,287 78,824 108,489
NET ASSETS:
Beginning of Period 2,269,817 1,598,530 108,489 --
- -----------------------------------------------------------------------------------------------------------------------------
End of Period $ 2,825,974 $ 2,269,817 $ 187,313 $ 108,489
- -----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ (3,083) $ (273) $ 63 $ (213)
- -----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 32,518 31,209 9,451 8,015
Shares Issued on Distributions Reinvested 16,345 7,837 462 106
Shares Redeemed (17,950) (10,975) (3,275) (117)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 30,913 28,071 6,638 8,004
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 92 321 1,466 2,211
Shares Issued on Distributions Reinvested 18 18 105 29
Shares Redeemed (249) (20) (1,149) (60)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding (139) 319 422 2,180
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
+ The International Equity Portfolio began offering Class B shares on
January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
170
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL SMALL CAP PORTFOLIO JAPANESE EQUITY PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------- ---------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 3,513 $ 2,830 $ (342) $ (98)
Net Realized Gain (Loss) 11,579 6,819 (1,306) 11,861
Change in Unrealized Appreciation
(Depreciation) (19,088) 23,041 (9,222) (17,205)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (3,996) 32,690 (10,870) (5,442)
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (4,472) (3,001) (11,702) (11,178)
In Excess of Net Investment Income (676) -- -- (8,826)
Net Realized Gain (10,992) (5,327) -- --
CLASS B+:
Net Investment Income -- -- (257) (277)
In Excess of Net Investment Income -- -- -- (218)
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions (16,140) (8,328) (11,959) (20,499)
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 64,122 40,108 126,168 154,108
Distributions Reinvested 14,482 7,416 11,173 16,337
Redeemed (64,267) (35,812) (190,192) (112,210)
Transaction Fees 1,151 -- -- --
CLASS B+:
Subscribed -- -- 2,478 7,701
Distributions Reinvested -- -- 256 435
Redeemed -- -- (3,925) (4,048)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 15,488 11,712 (54,042) 62,323
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (4,648) 36,074 (76,871) 36,382
NET ASSETS:
Beginning of Period 234,743 198,669 155,660 119,278
- --------------------------------------------------------------------------------------------------------------------------------
End of Period $ 230,095 $ 234,743 $ 78,789 $ 155,660
- --------------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ (676) $ 323 $ 2,109 $ (9,043)
- --------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,683 2,406 15,980 16,432
Shares Issued on Distributions Reinvested 911 444 1,916 2,042
Shares Redeemed (3,803) (2,199) (23,936) (12,218)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 791 651 (6,040) 6,256
- --------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed -- -- 311 812
Shares Issued on Distributions Reinvested -- -- 44 55
Shares Redeemed -- -- (497) (435)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding -- -- (142) 432
</TABLE>
- --------------------------------------------------------------------------------
+ The Japanese Equity Portfolio began offering Class B shares on January
2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
171
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN AMERICAN PORTFOLIO AGGRESSIVE EQUITY PORTFOLIO
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- -------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (103) $ 313 $ 79 $ 614
Net Realized Gain 17,285 6,257 33,177 15,730
Change in Unrealized Appreciation
(Depreciation) 885 2,592 6,896 4
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 18,067 9,162 40,152 16,348
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- (273) (107) (549)
In Excess of Net Investment Income -- (5) (3) --
Net Realized Gain (17,224) (4,475) (26,339) (9,877)
In Excess of Net Realized Gain (2,901) -- -- --
CLASS B+:
Net Investment Income -- (8) (4) (62)
Net Realized Gain (1,101) (164) (3,057) (1,265)
In Excess of Net Realized Gain (185) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (21,411) (4,925) (29,510) (11,753)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 82,256 18,267 109,256 40,946
Distributions Reinvested 19,134 4,324 24,425 9,531
Redeemed (55,658) (11,766) (57,002) (14,822)
CLASS B+:
Subscribed 11,696 1,308 14,928 9,581
Distributions Reinvested 1,249 147 3,039 1,315
Redeemed (7,170) (151) (9,209) (2,409)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 51,507 12,129 85,437 44,142
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 48,163 16,366 96,079 48,737
NET ASSETS:
Beginning of Period 31,742 15,376 77,285 28,548
- ----------------------------------------------------------------------------------------------------------------------------
End of Period $ 79,905 $ 31,742 $ 173,364 $ 77,285
- ----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income/ accumulated net
investment loss included in end of period
net assets $ (34) $ (5) $ (3) $ 32
- ----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 5,947 1,557 6,957 2,748
Shares Issued on Distributions Reinvested 1,858 384 1,596 665
Shares Redeemed (3,779) (953) (3,470) (1,012)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 4,026 988 5,083 2,401
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 875 118 939 672
Shares Issued on Distributions Reinvested 124 13 200 92
Shares Redeemed (496) (13) (587) (153)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 503 118 552 611
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
172
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING GROWTH PORTFOLIO EQUITY GROWTH PORTFOLIO
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- -------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (535) $ (904) $ 1,774 $ 2,212
Net Realized Gain 21,271 36,369 86,366 40,528
Change in Unrealized Appreciation
(Depreciation) (14,435) (31,141) 49,579 10,734
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 6,301 4,324 137,719 53,474
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income -- -- (1,761) (2,164)
In Excess of Net Investment Income -- -- (8) --
Net Realized Gain (30,771) (24,810) (76,181) (42,560)
CLASS B+:
Net Investment Income -- -- (15) (46)
Net Realized Gain (667) (1,588) (3,225) (1,031)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (31,438) (26,398) (81,190) (45,801)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 37,367 26,575 246,368 223,237
Distributions Reinvested 30,552 24,750 74,499 41,770
Redeemed (48,345) (87,418) (138,539) (78,208)
CLASS B+:
Subscribed 599 5,462 26,409 6,515
Distributions Reinvested 651 1,540 2,614 993
Redeemed (3,387) (1,423) (6,413) (1,891)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 17,437 (30,514) 204,938 192,416
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (7,700) (52,588) 261,467 200,089
NET ASSETS:
Beginning of Period 66,790 119,378 358,201 158,112
- ----------------------------------------------------------------------------------------------------------------------------
End of Period $ 59,090 $ 66,790 $ 619,668 $ 358,201
- ----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income/ accumulated net
investment loss included in end of period
net assets $ (4) $ (3) $ (8) $ 2
- ----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 3,007 1,202 14,949 14,718
Shares Issued on Distributions Reinvested 3,708 1,845 4,569 2,776
Shares Redeemed (3,885) (3,952) (8,169) (5,067)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 2,830 (905) 11,349 12,427
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 46 246 1,507 418
Shares Issued on Distributions Reinvested 81 115 161 66
Shares Redeemed (252) (64) (387) (116)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding (125) 297 1,281 368
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
173
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP VALUE EQUITY PORTFOLIO TECHNOLOGY PORTFOLIO
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD FROM
------------------------------------- YEAR ENDED SEPTEMBER 16, 1996* TO
1997 1996 DECEMBER 31, 1997 DECEMBER 31, 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ 165 $ 888 $ (207) $ (11)
Net Realized Gain (Loss) 9,674 6,620 3,396 (11)
Change in Unrealized Appreciation
(Depreciation) 125 (902) (287) 296
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 9,964 6,606 2,902 274
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (176) (851) (525) --
In Excess of Net Investment Income (5) -- -- --
Net Realized Gain (7,678) (5,696) (2,563) --
In Excess of Net Realized Gain -- -- (1,988) --
Return of Capital -- -- (524) --
CLASS B+:
Net Investment Income (11) (34) (34) --
In Excess of Net Investment Income (1) -- -- --
Net Realized Gain (1,619) (413) (176) --
In Excess of Net Realized Gain -- -- (137) --
Return of Capital -- -- (34) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (9,490) (6,994) (5,981) --
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 27,220 14,319 42,885 3,375
Distributions Reinvested 7,254 5,982 4,506 --
Redeemed (23,846) (48,028) (16,063) --
CLASS B+:
Subscribed 7,628 1,899 1,986 1,485
Distributions Reinvested 1,508 376 364 --
Redeemed (2,762) (420) (1,499) (52)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 17,002 (25,872) 32,179 4,808
- ---------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 17,476 (26,260) 29,100 5,082
NET ASSETS:
Beginning of Period 25,659 51,919 5,082 --
- ---------------------------------------------------------------------------------------------------------------------------------
End of Period $ 43,135 $ 25,659 $ 34,182 $ 5,082
- ---------------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ (6) $ 3 $ (121) $ --
- ---------------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,198 1,157 3,154 336
Shares Issued on Distributions Reinvested 664 537 407 --
Shares Redeemed (1,895) (3,850) (1,187) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 967 (2,156) 2,374 336
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 586 153 139 144
Shares Issued on Distributions Reinvested 139 34 33 --
Shares Redeemed (209) (32) (107) (5)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 516 155 65 139
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
+ The Small Cap Value Equity Portfolio began offering Class B shares on
January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
174
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. EQUITY PLUS
PORTFOLIO U.S. REAL ESTATE PORTFOLIO
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED
PERIOD FROM DECEMBER 31,
JULY 31, 1997* TO -------------------------------------
DECEMBER 31, 1997 1997 1996
(000) (000) (000)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 110 $ 8,535 $ 3,916
Net Realized Gain 66 51,774 17,097
Change in Unrealized Appreciation
(Depreciation) 599 15,491 28,458
- -----------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 775 75,800 49,471
- -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (106) (8,137) (3,888)
In Excess of Net Investment Income -- -- (2)
Net Realized Gain (55) (43,130) (12,504)
In Excess of Net Realized Gain -- (5,201) --
CLASS B+:
Net Investment Income (1) (358) (148)
Net Realized Gain -- (2,418) (559)
In Excess of Net Realized Gain -- (292) --
- -----------------------------------------------------------------------------------------------------------
Total Distributions (162) (59,536) (17,101)
- -----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 20,231 202,155 119,585
Distributions Reinvested 71 51,583 14,340
Redeemed -- (118,383) (24,190)
CLASS B+:
Subscribed 100 18,735 8,149
Distributions Reinvested 1 2,799 514
Redeemed -- (9,475) (1,175)
- -----------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 20,403 147,414 117,223
- -----------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 21,016 163,678 149,593
NET ASSETS:
Beginning of Period -- 219,102 69,509
- -----------------------------------------------------------------------------------------------------------
End of Period $ 21,016 $ 382,780 $ 219,102
- -----------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ 3 $ 38 $ (2)
- -----------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 2,022 13,083 9,313
Shares Issued on Distributions Reinvested 7 3,430 1,047
Shares Redeemed -- (7,604) (1,849)
- -----------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 2,029 8,909 8,511
- -----------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 10 1,205 662
Shares Issued on Distributions Reinvested -- 187 37
Shares Redeemed -- (614) (92)
- -----------------------------------------------------------------------------------------------------------
Net Increase in Class B Shares Outstanding 10 778 607
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
+ The U.S. Real Estate Portfolio began offering Class B Shares on
January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
175
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE EQUITY PORTFOLIO BALANCED PORTFOLIO
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- -------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,199 $ 3,431 $ 240 $ 584
Net Realized Gain 20,470 15,759 855 1,846
Change in Unrealized Appreciation
(Depreciation) 3,672 2,404 (66) (1,083)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 26,341 21,594 1,029 1,347
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (2,134) (3,374) (205) (477)
In Excess of Net Investment Income -- -- (1) (1)
Net Realized Gain (19,817) (17,256) (876) (1,690)
CLASS B+:
Net Investment Income (40) (58) (37) (108)
Net Realized Gain (509) (357) (138) (548)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (22,500) (21,045) (1,257) (2,824)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 26,077 38,132 1,474 1,205
Distributions Reinvested 19,651 19,004 1,007 1,898
Redeemed (69,683) (99,013) (3,632) (18,709)
CLASS B+:
Subscribed 1,386 2,992 -- 3,269
Distributions Reinvested 480 401 173 607
Redeemed (2,135) (747) (1,756) (1,246)
- ----------------------------------------------------------------------------------------------------------------------------
Net Decrease in Capital Share Transactions (24,224) (39,231) (2,734) (12,976)
- ----------------------------------------------------------------------------------------------------------------------------
Total Decrease in Net Assets (20,383) (38,682) (2,962) (14,453)
NET ASSETS:
Beginning of Period 108,683 147,365 8,189 22,642
- ----------------------------------------------------------------------------------------------------------------------------
End of Period $ 88,300 $ 108,683 $ 5,227 $ 8,189
- ----------------------------------------------------------------------------------------------------------------------------
Undistributed (distribution in excess of)
net investment income included in end of
period net assets $ 32 $ 7 $ (1) $ (1)
- ----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 1,781 2,649 175 121
Shares Issued on Distributions Reinvested 1,430 1,340 130 215
Shares Redeemed (4,530) (6,919) (427) (1,872)
- ----------------------------------------------------------------------------------------------------------------------------
Net Decrease in Class A Shares Outstanding (1,319) (2,930) (122) (1,536)
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 92 207 -- 327
Shares Issued on Distributions Reinvested 35 28 22 71
Shares Redeemed (146) (51) (208) (129)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding (19) 184 (186) 269
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
176
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING MARKETS DEBT PORTFOLIO FIXED INCOME PORTFOLIO
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- -------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 13,130 $ 21,910 $ 8,812 $ 10,061
Net Realized Gain 24,939 57,165 3,117 3,047
Change in Unrealized Appreciation
(Depreciation) (12,760) 309 1,672 (6,343)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 25,309 79,384 13,601 6,765
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (12,240) (14,104) (9,164) (10,366)
In Excess of Net Investment Income -- (74) (6) (14)
Net Realized Gain (37,926) (51,244) -- --
In Excess of Net Realized Gain (1,389) -- -- --
Return of Capital (1,701) -- -- --
CLASS B+:
Net Investment Income (183) (381) (176) (73)
In Excess of Net Investment Income -- (2) -- --
Net Realized Gain (611) (1,391) -- --
In Excess of Net Realized Gain (22) -- -- --
Return of Capital (27) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (54,099) (67,196) (9,346) (10,453)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
CLASS A:
Subscribed 94,373 79,712 92,474 43,737
Distributions Reinvested 45,771 51,784 7,836 8,559
Redeemed (121,535) (173,915) (52,011) (83,396)
CLASS B+:
Subscribed 2,314 4,437 5,117 2,038
Distributions Reinvested 789 1,522 100 64
Redeemed (4,654) (1,211) (1,940) (646)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Capital Share
Transactions 17,058 (37,671) 51,576 (29,644)
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (11,732) (25,483) 55,831 (33,332)
NET ASSETS:
Beginning of Period 156,395 181,878 132,195 165,527
- ----------------------------------------------------------------------------------------------------------------------------
End of Period $ 144,663 $ 156,395 $ 188,026 $ 132,195
- ----------------------------------------------------------------------------------------------------------------------------
Distribution in excess of net investment
income included in end of period net
assets $ (8) $ (76) $ (6) $ (14)
- ----------------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 11,924 8,356 8,608 4,156
Shares Issued on Distributions Reinvested 7,578 6,805 733 812
Shares Redeemed (14,998) (16,141) (4,871) (7,913)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class A Shares
Outstanding 4,504 (980) 4,470 (2,945)
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 288 467 478 194
Shares Issued on Distributions Reinvested 131 201 9 6
Shares Redeemed (588) (103) (182) (62)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Class B Shares
Outstanding (169) 565 305 138
</TABLE>
- --------------------------------------------------------------------------------
+ Each Portfolio began offering Class B shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
177
<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>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------- -------------------------- --------------------------
1997 1996 1997 1996 1997 1996
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET
ASSETS
OPERATIONS:
Net Investment Income $ 4,690 $ 6,007 $ 10,245 $ 8,522 $ 2,406 $ 1,840
Net Realized Gain (Loss) (1,879) 2,742 4,846 687 27 (6)
Change in Unrealized
Appreciation
(Depreciation) (2,788) (1,546) 1,740 3,436 1,474 (686)
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 23 7,203 16,831 12,645 3,907 1,148
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
CLASS A:
Net Investment Income (2,512) (5,986) (9,705) (8,340) (2,404) (1,821)
In Excess of Net Investment
Income -- -- -- (4) (1) (16)
Net Realized Gain -- -- -- -- (21) --
In Excess of Net Realized
Gain -- -- -- -- (1) --
CLASS B+:
Net Investment Income (14) (88) (466) (333) -- (4)
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (2,526) (6,074) (10,171) (8,677) (2,427) (1,841)
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1)
CLASS A:
Subscribed 18,508 53,391 93,559 48,672 32,474 18,758
Distributions Reinvested 2,096 5,288 7,844 6,490 2,356 1,724
Redeemed (46,384) (49,742) (90,405) (25,529) (15,996) (25,432)
CLASS B+:
Subscribed 257 2,353 7,925 6,981 4 171
Distributions Reinvested 13 78 369 244 -- 4
Redeemed (1,433) (902) (7,061) (1,743) (73) (105)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Capital Share Transactions (26,943) 10,466 12,231 35,115 18,765 (4,880)
- ------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in
Net Assets (29,446) 11,595 18,891 39,083 20,245 (5,573)
NET ASSETS:
Beginning of Period 114,447 102,852 101,328 62,245 40,296 45,869
- ------------------------------------------------------------------------------------------------------------------
End of Period $ 85,001 $ 114,447 $ 120,219 $ 101,328 $ 60,541 $ 40,296
- ------------------------------------------------------------------------------------------------------------------
Undistributed (distribution
in excess of) net
investment income included
in end of period net
assets $ 323 $ 612 $ 90 $ (4) $ (1) $ (16)
- ------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE
TRANSACTIONS:
CLASS A:
Shares Subscribed 1,676 4,846 8,260 4,604 3,162 1,830
Shares Issued on
Distributions Reinvested 192 480 693 610 228 169
Shares Redeemed (4,264) (4,503) (7,958) (2,400) (1,554) (2,496)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Class A Shares
Outstanding (2,396) 823 995 2,814 1,836 (497)
- ------------------------------------------------------------------------------------------------------------------
CLASS B+:
Shares Subscribed 24 213 697 662 -- 17
Shares Issued on
Distributions Reinvested 1 7 32 23 -- --
Shares Redeemed (130) (82) (625) (165) (7) (10)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Class B Shares
Outstanding (105) 138 104 520 (7) 7
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Each Portfolio began offering Class B Shares on January 2, 1996.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
178
<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>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------- --------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 69,467 $ 54,883 $ 23,167 $ 19,261
Net Realized Gain (Loss) 71 (469) 9 (22)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 69,538 54,414 23,176 19,239
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income (69,467) (54,883) (23,167) (19,261)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Subscribed 13,470,057 13,167,615 6,575,839 5,869,663
Distributions Reinvested 63,629 51,181 22,255 18,242
Redeemed (13,312,180) (12,770,387) (6,514,906) (5,617,992)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Capital Share Transactions 221,506 448,409 83,188 269,913
- --------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 221,577 447,940 83,197 269,891
NET ASSETS:
Beginning of Period 1,284,633 836,693 721,410 451,519
- --------------------------------------------------------------------------------------------------------------------
End of Period $ 1,506,210 $ 1,284,633 $ 804,607 $ 721,410
- --------------------------------------------------------------------------------------------------------------------
(1) CAPITAL SHARE TRANSACTIONS:
CLASS A:
Shares Subscribed 13,470,057 13,167,615 6,575,839 5,869,663
Shares Issued on Distributions Reinvested 63,629 51,181 22,255 18,242
Shares Redeemed (13,312,180) (12,770,387) (6,514,906) (5,617,992)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Class A Shares Outstanding 221,506 448,409 83,188 269,913
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
179
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
(000)
<S> <C>
- --------------------------------------------------------------
CASH FLOWS FROM INVESTING AND OPERATING
ACTIVITIES:
Proceeds from Sales of Investments $ 756,562
Purchases of Investments (741,898)
Net Decrease in Short Term
Investments 14,767
Net Realized Loss on Foreign Currency
Transactions (12)
Interest Income 13,096
Interest Expense Paid (684)
Operating Expenses Paid (2,478)
- --------------------------------------------------------------
Net Cash Provided by Investing and
Operating Activities 39,353
- --------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Paid for Reverse Repurchase
Agreements (4,680)
Net Portfolio Share Transactions (27,662)
Cash Distributions Paid (net of
reinvestments of $46,560) (7,539)
- --------------------------------------------------------------
Net Cash Used for Financing
Activities (39,881)
- --------------------------------------------------------------
Net Decrease in Cash (528)
CASH AT BEGINNING OF YEAR 374
- --------------------------------------------------------------
BANK OVERDRAFT AT END OF YEAR $ (154)
- --------------------------------------------------------------
- --------------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME
TO NET CASH
PROVIDED BY INVESTING AND OPERATING
ACTIVITIES:
Net Investment Income $ 13,130
Proceeds from Sale of Investments 756,562
Purchase of Investments (741,898)
Net Decrease in Short Term
Investments 14,767
Net Realized Loss on Foreign Currency
Transactions (12)
Net Increase in Receivables
Pertaining to Investing and
Operating Activities (222)
Net Decrease in Payables Pertaining
to Investing and Operating
Activities (521)
(Accretion)/Amortization of
Premium/Discount (2,453)
- --------------------------------------------------------------
Net Cash Provided by Investing and
Operating Activities $ 39,353
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
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:
- --------------------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997++ 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.44 $ 11.63 $ 11.65 $ 12.21 $ 9.59
------------- ------------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.18 0.24 0.17 0.19 0.13
Net Realized and Unrealized Gain
(Loss) on Investments 0.80 0.88 1.00 (0.25) 2.75
------------- ------------- --------- --------- ---------
Total from Investment Operations 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 $10.39 $11.44 $11.63 $11.65 $12.21
------------- ------------- --------- --------- ---------
------------- ------------- --------- --------- ---------
TOTAL RETURN 8.61% 9.71% 10.57% (0.52)% 30.72%
------------- ------------- --------- --------- ---------
------------- ------------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $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%
Ratio of Net Investment Income to
Average Net Assets (1) 1.47% 1.22% 1.26% 1.43% 1.29%
Portfolio Turnover Rate 49% 65% 72% 51% 53%
Average Commission Rate Per Share# $0.0019 $0.0028 N/A N/A N/A
- ---------------
Average Commission Rate as a Percentage
of Trade Amount# 0.11% 0.11% N/A N/A N/A
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.03 $0.03 $0.05 $0.03 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.10% 1.09% 1.18% 1.00% 1.33%
Net Investment Income to Average
Net Assets 1.18% 0.94% 0.88% 1.23% 0.76%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997++ 1996
<S> <C> <C>
- ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.44 $11.66
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.08 0.06
Net Realized and Unrealized Gain on
Investments 0.87 1.00
------ ------
Total from Investment Operations 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 $10.48 $11.44
------ ------
------ ------
TOTAL RETURN 8.35% 9.22%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 14 $ 633
Ratio of Expenses to Average Net Assets
(2) 1.05% 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.71% 1.09%**
Portfolio Turnover Rate 49% 65%
Average Commission Rate Per Share $0.0019 $0.0028
- ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.11% 0.11%
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.03 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.32% 1.33%**
Net Investment Income to Average
Net Assets 0.45% 0.82%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
++ Per share amounts for the year ended December 31, 1997 are based on
average shares outstanding.
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:
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.73 $ 19.48 $ 21.54 $ 26.20 $ 13.11
------------- ------------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income(1) 0.14 0.17 0.18 0.11 0.10
Net Realized and Unrealized Gain
(Loss) on Investments (8.93) 0.50 1.11 (4.15) 13.38
------------- ------------- --------- --------- ---------
Total from Investment Operations (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 $ 9.43 $18.73 $19.48 $21.54 $26.20
------------- ------------- --------- --------- ---------
------------- ------------- --------- --------- ---------
TOTAL RETURN (48.29)% 3.49% 6.87% (15.81)% 105.71%
------------- ------------- --------- --------- ---------
------------- ------------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $85,503 $363,498 $314,884 $276,906 $287,136
Ratio of Expenses to Average Net Assets
(1) 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% 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 0.47% 0.74% 0.97% 0.52% 0.83%
Portfolio Turnover Rate 107% 69% 42% 47% 18%
Average Commission Rate Per Share# $0.0102 $0.0111 N/A N/A N/A
- ---------------
Average Commission Rate as a Percentage
of Trade Amount# 0.46% 0.52% N/A N/A N/A
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.05 $0.05 $0.03 $0.04 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.31% 1.25% 1.18% 1.20% 1.38%
Net Investment Income to Average
Net Assets 0.29% 0.54% 0.79% 0.32% 0.45%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $18.74 $19.55
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.03 0.11
Net Realized and Unrealized Gain
(Loss) on Investments (8.86) 0.46
------ ------
Total from Investment Operations (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 $ 9.40 $18.74
------ ------
------ ------
TOTAL RETURN (48.48)% 2.92%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,468 $11,002
Ratio of Expenses to Average Net Assets
(2) 1.37% 1.25%**
Ratio of Expenses to Average Net Assets
Excluding Country Tax Expense and
Interest Expense 1.25% 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.18% 0.58%**
Portfolio Turnover Rate 107% 69%
Average Commission Rate Per Share $0.0102 $0.0111
- ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.46% 0.52%
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.04 $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 1.56% 1.52%**
Net Investment Income (Loss) to
Average Net Assets (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.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
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:
- --------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------
PERIOD FROM
OCTOBER 1, 1997*
TO DECEMBER 31,
1997
<S> <C>
- -----------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.11
Net Realized and Unrealized Loss on
Investments (2.10)
------
Total from Investment Operations (1.99)
------
DISTRIBUTIONS
Net Investment Income (0.07)
------
Total Distributions (0.07)
------
NET ASSET VALUE, END OF PERIOD $ 7.94
------
------
TOTAL RETURN (19.92)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $2,385
Ratio of Expenses to Average Net Assets
(1) 1.08%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 5.21%**
Portfolio Turnover Rate 38%
Average Commission Rate Per Share $0.0061
- ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.43%
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.25
Ratios before expense limitation:
Expenses to Average Net Assets 12.95%**
Net Investment Loss to Average Net
Assets (6.66)%**
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------
PERIOD FROM
OCTOBER 1, 1997*
TO
DECEMBER 31,
1997
<S> <C>
- -----------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income --
Net Realized and Unrealized Loss on
Investments (1.97)
-------
Total from Investment Operations (1.97)
-------
NET ASSET VALUE, END OF PERIOD $ 8.03
-------
-------
TOTAL RETURN (19.70)%
-------
-------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $ 0+
Ratio of Expenses to Average Net Assets 1.18%**
Ratio of Net Investment Income to
Average Net Assets 4.24%**
Portfolio Turnover Rate 38%
Average Commission Rate Per Share $0.0061
- ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.43%
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ Amount is less than $500.
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 RATIOS:
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.66 $ 13.14 $ 16.30 $ 19.00 $ 10.22
---------- ---------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.07 0.09 0.08 (0.04) (0.01)
Net Realized and Unrealized Gain
(Loss) on Investments (0.29) 1.51 (2.05) (1.69) 8.79
---------- ---------- -------- -------- --------
Total from Investment Operations (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 $ 12.97 $ 14.66 $ 13.14 $ 16.30 $ 19.00
---------- ---------- -------- -------- --------
---------- ---------- -------- -------- --------
TOTAL RETURN (1.03)% 12.19% (12.77)% (9.63)% 85.91%
---------- ---------- -------- -------- --------
---------- ---------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,501,386 $1,304,006 $876,591 $929,638 $735,352
Ratio of Expenses to Average Net Assets
(1) 1.75% 1.74% 1.72% 1.75% 1.75%
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) 0.40% 0.69% 0.60% (0.26)% (0.06)%
Portfolio Turnover Rate 90% 55% 54% 32% 52%
Average Commision Rate Per Share# $0.0016 $0.0006 N/A N/A N/A
- ---------------
Average Commission Rate as a Percentage
of Trade Amount# 0.38% 0.42% N/A N/A N/A
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment
loss 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 1.79%
Net Investment Loss to Average Net
Assets N/A N/A N/A N/A (0.10)%
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.66 $ 13.25
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.04
Net Realized and Unrealized Gain
(Loss) on Investments (0.28) 1.42
------ ------
Total from Investment Operations (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 $ 12.98 $ 14.66
------ ------
------ ------
TOTAL RETURN (1.31)% 11.04%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $9,666 $14,213
Ratio of Expenses to Average Net Assets 2.00% 1.99%**
Ratio of Net Investment Income to
Average Net Assets 0.11% 0.33%**
Portfolio Turnover Rate 90% 55%
Average Commision Rate Per Share $0.0016 $0.0006
- ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.38% 0.42%
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
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:
- --------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------
PERIOD FROM
YEAR ENDED DECEMBER 31, APRIL 2, 1993*
------------------------------------------------------- TO DECEMBER 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $16.70 $13.92 $13.94 $12.91 $10.00
----------- ----------- ----------- ----------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.39 0.24 0.14 0.08 0.08
Net Realized and Unrealized
Gain on Investments 2.58 2.85 1.37 1.29 2.83
----------- ----------- ----------- ----------- ------
Total from Investment
Operations 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 $ 17.96 $ 16.70 $ 13.92 $ 13.94 $ 12.91
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
TOTAL RETURN 17.88% 22.29% 11.85% 10.88% 29.10%
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $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%**
Ratio of Net Investment Income
to Average Net Assets (1) 1.96% 1.83% 1.37% 0.87% 1.23%**
Portfolio Turnover Rate 43% 24% 13% 79% 15%
Average Commission Rate Per
Share# $0.0207 $0.0212 N/A N/A N/A
- ---------------
Average Commission Rate as a
Percentage of Trade Amount# 0.20% 0.23% N/A N/A N/A
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.02 $0.02 $0.03 $0.06 $0.09
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.09% 1.16% 1.25% 1.62% 2.43%**
Net Investment Income
(Loss) to Average Net
Assets 1.87% 1.67% 1.12% 0.25% (0.21)%**
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
---------------------------
PERIOD FROM
JANUARY 2,
1996***
YEAR ENDED TO DECEMBER
DECEMBER 31,
31, 1997 1996
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $16.67 $14.05
----------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.28 0.18
Net Realized and Unrealized
Gain on Investments 2.66 2.73
----------- ------
Total from Investment
Operations 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 $17.94 $16.67
----------- ------
----------- ------
TOTAL RETURN 17.73% 20.76%
----------- ------
----------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $4,654 $2,654
Ratio of Expenses to Average
Net Assets (2) 1.25% 1.25%**
Ratio of Net Investment Income
to Average Net Assets (2) 1.55% 1.67%**
Portfolio Turnover Rate 43% 24%
Average Commission Rate Per
Share $0.0207 $0.0212
- ---------------
Average Commission Rate as a
Percentage of Trade Amount 0.20% 0.23%
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.02 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.34% 1.40%**
Net Investment Income to
Average Net Assets 1.46% 1.52%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
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:
- --------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------
PERIOD FROM
OCTOBER 1, 1997* TO
DECEMBER 31,
1997
<S> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.05
Net Realized and Unrealized Loss on
Investments (0.52)
------
Total from Investment Operations (0.47)
------
DISTRIBUTIONS
Net Investment Income (0.01)
------
Total Distributions (0.01)
------
NET ASSET VALUE, END OF PERIOD $ 9.52
------
------
TOTAL RETURN (4.72)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $15,177
Ratio of Expenses to Average Net Assets
(1) 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.08%**
Portfolio Turnover Rate 47%
Average Commission Rate Per Share $0.0155
- ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.23%
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 3.05%**
Net Investment Income to Average
Net Assets 0.03%**
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------
PERIOD FROM
OCTOBER 1, 1997* TO
DECEMBER 31,
1997
<S> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.02
Net Realized and Unrealized Loss on
Investments (0.50)
------
Total from Investment Operations (0.48)
------
NET ASSET VALUE, END OF PERIOD $ 9.52
------
------
TOTAL RETURN (4.76)%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $789
Ratio of Expenses to Average Net Assets
(2) 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.51%**
Portfolio Turnover Rate 47%
Average Commission Rate Per Share $0.0155
- ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.23%
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 3.12%**
Net Investment Loss to Average Net
Assets (0.36)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
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:
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.24 $ 14.31 $ 13.40 $ 13.87 $ 9.75
------ ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.21 0.23 0.18 0.08 0.08
Net Realized and Unrealized
Gain on Investments 3.61 3.02 2.26 0.79 4.18
------ ----------- ----------- ----------- -----------
Total from Investment
Operations 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 $18.52 $16.24 $14.31 $13.40 $13.87
------ ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- -----------
TOTAL RETURN 23.75% 22.83% 18.66% 6.95% 44.24%
------ ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $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%
Ratio of Net Investment Income
to Average Net Assets (1) 1.07% 1.38% 1.17% 0.87% 0.84%
Portfolio Turnover Rate 30% 26% 28% 12% 42%
Average Commission Rate Per
Share# $0.0312 $0.0299 N/A N/A N/A
- ---------------
Average Commission Rate as a
Percentage of Trade Amount# 0.26% 0.25% N/A N/A N/A
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.02 $0.03 $0.02 $0.02 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.11% 1.15% 1.13% 1.24% 1.66%
Net Investment Income to
Average Net Assets 0.96% 1.23% 1.04% 0.63% 0.18%
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.21 $ 14.36
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.16 0.13
Net Realized and Unrealized
Gain on Investments 3.60 3.02
------ ------
Total from Investment
Operations 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 $ 18.46 $ 16.21
------ ------
------ ------
TOTAL RETURN 23.37% 22.04%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $5,910 $3,928
Ratio of Expenses to Average
Net Assets (2) 1.25% 1.25%**
Ratio of Net Investment Income
to Average Net Assets (2) 0.80% 1.29%**
Portfolio Turnover Rate 30% 26%
Average Commission Rate Per
Share $0.0312 $0.0299
- ---------------
Average Commission Rate as a
Percentage of Trade Amount 0.26% 0.25%
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.02 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.36% 1.39%**
Net Investment Income to
Average Net Assets 0.69% 1.15%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
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:
- --------------------------------------------------------------------------------
GOLD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------
PERIOD FROM
FEBRUARY 1,
1994* TO
YEAR ENDED DECEMBER 31, DECEMBER
--------------------------------------- 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.30 $ 8.55 $ 9.13 $ 10.00
----------- ----- ----- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss)
(1) 0.35 0.05 (0.07) 0.03
Net Realized and Unrealized
Gain (Loss) on
Investments++ (5.51) 1.41 1.22 (0.88)
----------- ----- ----- -----------
Total from Investment
Operations (5.16) 1.46 1.15 (0.85)
----------- ----- ----- -----------
DISTRIBUTIONS
Net Investment Income (0.03) (0.05) (0.01) (0.02)
In Excess of Net Investment
Income -- (0.01) -- --
Net Realized Gain -- -- (1.72) --
In Excess of Net Realized
Gain (0.01) (0.65) -- --
----------- ----- ----- -----------
Total Distributions (0.04) (0.71) (1.73) (0.02)
----------- ----- ----- -----------
NET ASSET VALUE, END OF PERIOD $ 4.10 $ 9.30 $ 8.55 $ 9.13
----------- ----- ----- -----------
----------- ----- ----- -----------
TOTAL RETURN (55.64)% 16.94% 13.21% (8.49)%
----------- ----- ----- -----------
----------- ----- ----- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $436 $27,810 $7,409 $30,243
Ratio of Expenses to Average
Net Assets (1) 1.27% 1.25% 1.25% 1.25%**
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense 1.25% 1.25% 1.25% 1.25%**
Ratio of Net Investment Income
(Loss) to Average Net Assets
(1) 0.64% 0.57% (0.31)% 0.41%**
Portfolio Turnover Rate 71% 94% 47% 56%
Average Commission Rate Per
Share# $0.0108 $0.0246 N/A N/A
- ---------------
Average Commission Rate as a
Percentage of Trade Amount# 0.55% 0.47% N/A N/A
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income (loss) $0.24 $0.04 $0.11 $0.04
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.70% 1.73% 1.76% 1.72%**
Net Investment Income
(Loss) to Average Net
Assets 0.20% 0.10% (0.82)% (0.06)%**
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- ---------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $9.28 $8.81
------ -----
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.03 0.03
Net Realized and Unrealized
Gain (Loss) on
Investments++ (5.14) 1.14
------ -----
Total from Investment
Operations (5.11) 1.17
------ -----
DISTRIBUTIONS
Net Investment Income (0.02) (0.04)
In Excess of Net Investment
Income -- (0.01)
In Excess of Net Realized
Gain (0.01) (0.65)
------ -----
Total Distributions (0.03) (0.70)
------ -----
NET ASSET VALUE, END OF PERIOD $4.14 $9.28
------ -----
------ -----
TOTAL RETURN (55.17)% 13.21%
------ -----
------ -----
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $690 $1,370
Ratio of Expenses to Average
Net Assets (2) 1.52% 1.50%**
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense 1.50% 1.50%**
Ratio of Net Investment Income
to Average Net Assets (2) 0.29% 0.30%**
Portfolio Turnover Rate 71% 94%
Average Commission Rate Per
Share $0.0108 $0.0246
- ---------------
Average Commission Rate as a
Percentage of Trade Amount 0.55% 0.47%
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $ 0.05 $ 0.04
Ratios before expense
limitation:
Expenses to Average Net
Assets 2.07% 1.94%**
Net Investment Loss to
Average Net Assets (0.25)% (0.13)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
*** The Portfolio began offering Class B shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
++ The amounts shown for the year ended December 31, 1996 for a share
outstanding throughout the year does not accord with aggregate net
losses 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.
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:
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $16.95 $15.15 $15.34 $14.09 $9.98
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.30 0.25 0.16 0.16 0.15
Net Realized and Unrealized Gain on
Investments 2.01 2.71 1.55 1.54 4.36
---------- ---------- ---------- ---------- ----------
Total from Investment Operations 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 $17.16 $16.95 $15.15 $15.34 $14.09
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN 13.91% 19.64% 11.77% 12.39% 46.50%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $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%
Ratio of Net Investment Income to
Average Net Assets (1) 1.49% 1.64% 1.38% 1.12% 1.25%
Portfolio Turnover Rate 33% 18% 27% 16% 23%
Average Commission Rate Per Share# $0.0201 $0.0238 N/A N/A N/A
- ---------------
Average Commission Rate as a Percentage
of Trade Amount# 0.21% 0.26% N/A N/A N/A
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.00+ $0.00 $0.003 $0.004 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.02% 1.02% 1.03% 1.03% 1.06%
Net Investment Income to Average
Net Assets 1.47% 1.61% 1.35% 1.09% 1.19%
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.93 $ 15.24
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.23 0.23
Net Realized and Unrealized
Gain on Investments 2.02 2.59
------ ------
Total from Investment
Operations 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 $17.13 $16.93
------ ------
------ ------
TOTAL RETURN 13.57% 18.58%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $3,074 $5,393
Ratio of Expenses to Average
Net Assets (2) 1.25% 1.25%**
Ratio of Net Investment Income
to Average Net Assets (2) 1.21% 1.68%**
Portfolio Turnover Rate 33% 18%
Average Commission Rate Per
Share $0.0201 $0.0238
- ---------------
Average Commission Rate as a
Percentage of Trade Amount 0.21% 0.26%
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.00+ $0.00
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.27% 1.27%**
Net Investment Income to
Average Net Assets 1.19% 1.66%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
+ 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:
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------
PERIOD FROM
MARCH 15,
YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.66 $10.00
------------ -------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.17 0.06
Net Realized and Unrealized
Gain on Investments 0.54 0.76
------------ -------------
Total from Investment
Operations 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 $10.87 $10.66
------------ -------------
------------ -------------
TOTAL RETURN 6.58% 8.25%
------------ -------------
------------ -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $159,096 $85,316
Ratio of Expenses to Average
Net Assets (1) 1.00% 1.00%**
Ratio of Net Investment Income
to Average Net Assets (1) 1.44% 0.99%**
Portfolio Turnover Rate 41% 18%
Average Commission Rate Per
Share $ 0.0198 $ 0.0211
- ---------------
Average Commission Rate as a
Percentage of Trade Amount 0.27% 0.25%
(1) 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 1.19% 1.54%**
Net Investment Income to
Average Net Assets 1.25% 0.44%**
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
PERIOD FROM
MARCH 15,
YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.63 $10.00
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.16 0.01
Net Realized and Unrealized
Gain on Investments 0.52 0.78
------ ------
Total from Investment
Operations 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 $10.84 $10.63
------ ------
------ ------
TOTAL RETURN 6.33% 7.90%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $28,217 $23,173
Ratio of Expenses to Average
Net Assets (2) 1.25% 1.25%**
Ratio of Net Investment Income
to Average Net Assets (2) 1.19% 0.60%**
Portfolio Turnover Rate 41% 18%
Average Commission Rate Per
Share $0.0198 $0.0211
- ---------------
Average Commission Rate as a
Percentage of Trade Amount 0.27% 0.25%
(2) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $ 0.02 $ 0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.44% 1.69%**
Net Investment Income to
Average Net Assets 1.00% 0.15%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
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:
- --------------------------------------------------------------------------------
INTERNATIONAL SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993++
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.83 $ 14.94 $ 15.15 $ 14.64 $ 10.09
----------- ----------- ----------- ----------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1) 0.25 0.21 0.24 0.14 0.09
Net Realized and Unrealized
Gain (Loss) on Investments (0.42) 2.29* 0.15* 0.62* 4.48*
----------- ----------- ----------- ----------- ------
Total from Investment
Operations (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)
----------- ----------- ----------- ----------- ------
TRANSACTIONS FEES 0.08 -- -- -- --
----------- ----------- ----------- ----------- ------
NET ASSET VALUE, END OF PERIOD $15.61 $16.83 $14.94 $15.15 $14.64
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
TOTAL RETURN (0.55)% 16.82% 2.60% 5.25% 45.34%
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $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%
Ratio of Net Investment Income
to Average Net Assets (1) 1.37% 1.29% 1.72% 1.18% 0.66%
Portfolio Turnover Rate 39% 35% 24% 8% %14
Average Commission Rate Per
Share# $0.0134 $0.0159 N/A N/A N/A
- ---------------
Average Commission Rate as a
Percentage of Trade Amount# 0.31% 0.30% N/A N/A N/A
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income $0.01 $0.01 $0.01 $0.02 $0.10
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.22% 1.23% 1.24% 1.29% 1.86%
Net Investment Income
(Loss) to Average Net
Assets 1.30% 1.20% 1.63% 1.04% (0.05)%
</TABLE>
- --------------------------------------------------------------------------------
* Reflects a 1% transaction fee on purchases and redemptions of capital
shares.
++ Per share amounts for the year ended December 31, 1993 are based on
average shares outstanding.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
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:
- --------------------------------------------------------------------------------
JAPANESE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------
PERIOD FROM
APRIL 25,
1994* TO
YEAR ENDED DECEMBER 31, DECEMBER
------------------------------------------- 31,
1997 1996++ 1995 1994
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.96 $ 9.27 $ 9.83 $ 10.00
----- ----- ----- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss)
(1) 0.17 -- 0.04 (0.01)
Net Realized and Unrealized
Loss on Investments+ (0.94) (0.13) (0.40) (0.16)
----- ----- ----- -----------
Total from Investment
Operations (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 $ 5.89 $ 7.96 $ 9.27 $ 9.83
----- ----- ----- -----------
----- ----- ----- -----------
TOTAL RETURN (9.23)% (1.40)% (3.64)% (1.70)%
----- ----- ----- -----------
----- ----- ----- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $77,086 $152,229 $119,278 $50,332
Ratio of Expenses to Average
Net Assets (1) 1.06% 1.00% 1.00% 1.00%**
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense 1.00% 1.00% 1.00% 1.00%**
Ratio of Net Investment Income
(Loss) to Average Net Assets
(1) (0.21)% (0.04)% 0.15% (0.10)%**
Portfolio Turnover Rate 40% %38 52% 1%
Average Commission Rate Per
Share# $0.0425 $0.0561 N/A N/A
- ---------------
Average Commission Rate as a
Percentage of Trade Amount# 0.41% 0.43% N/A N/A
(1) Effect of voluntary
expense limitation during
the period:
Per share benefit to net
investment income (loss) $0.01 $0.01 $0.06 $0.02
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.14% 1.07% 1.20% 1.27%**
Net Investment Loss to
Average Net Assets (0.28)% (0.11)% (0.05)% (0.37)%**
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
PERIOD FROM
YEAR JANUARY 2,
ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996++
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.94 $ 9.25
----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss)
(2) 0.09 (0.02)
Net Realized and Unrealized
Loss on Investments (0.89) (0.14)
----- -----
Total from Investment
Operations (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 $ 5.87 $ 7.94
----- -----
----- -----
TOTAL RETURN (9.64)% (1.67)%
----- -----
----- -----
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $1,703 $3,431
Ratio of Expenses to Average
Net Assets (2) 1.31% 1.25%**
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense 1.25% 1.25%**
Ratio of Net Investment Loss
to Average Net Assets (2) (0.53)% (0.26)%**
Portfolio Turnover Rate 40% 38%
Average Commission Rate Per
Share $0.0425 $0.0561
- ---------------
Average Commission Rate as a
Percentage of Trade Amount 0.41% 0.43%
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income (loss) $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 1.38% 1.31%**
Net Investment Loss to
Average Net Assets (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.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
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:
- --------------------------------------------------------------------------------
LATIN AMERICAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------
YEAR ENDED
DECEMBER 31, PERIOD FROM
---------------- JANUARY 18, 1995* TO
1997 1996 DECEMBER 31, 1995
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.32 $ 9.06 $ 10.00
------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) (0.01) 0.14 0.05
Net Realized and Unrealized Gain
(Loss) on Investments 4.32 4.27 (0.92)
------- ------- ------
Total from Investment Operations 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 $ 10.91 $ 11.32 $ 9.06
------- ------- ------
------- ------- ------
TOTAL RETURN 41.28% 48.77% (8.68)%
------- ------- ------
------- ------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $73,196 $30,409 $15,376
Ratio of Expenses to Average Net Assets
(1) 1.89% 1.70% 1.70%**
Ratio of Expenses to Average Net Assets
Excluding Country Tax Expense and
Interest Expense 1.70% 1.70% 1.70%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) (0.14)% 1.21% 1.62%**
Portfolio Turnover Rate 286% 192% 137%
Average Commission Rate Per Share# $0.0007 $0.0004 N/A
- ---------------
Average Commission Rate as a Percentage
of Trade Amount# 0.27% 0.30% N/A
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.01 $0.05 $0.09
Ratios before expense limitation:
Expenses to Average Net Assets 1.96% 2.18% 3.13%**
Net Investment Income (Loss) to
Average Net Assets (0.21)% 0.75% (0.48)%**
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------
PERIOD FROM
YEAR ENDED JANUARY 2, 1996***
DECEMBER 31, TO
1997 DECEMBER 31, 1996
<S> <C> <C>
- ---------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.31 $9.44
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) -- 0.09
Net Realized and Unrealized Gain on
Investments 4.21 3.90
------ ------
Total from Investment Operations 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 $ 10.80 $ 11.31
------ ------
------ ------
TOTAL RETURN 40.37% 42.44%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $6,709 $1,333
Ratio of Expenses to Average Net Assets
(2) 2.14% 1.95%**
Ratio of Expenses to Average Net Assets
Excluding Country Tax Expense and
Interest Expense 1.95% 1.95%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (0.34)% 0.89%**
Portfolio Turnover Rate 286% 192%
Average Commission Rate Per Share $0.0007 $0.0004
- ---------------
Average Commission Rate as a Percentage
of Trade Amount 0.27% 0.30%
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.00+ $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 2.21% 2.43%**
Net Investment Income (Loss) to
Average Net Assets (0.41)% 0.42%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
+ Amount is less than $0.01 per share.
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:
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------
PERIOD FROM
YEAR ENDED MARCH 8,
DECEMBER 31, 1995* TO
----------------- DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.43 $ 12.17 $ 10.00
-------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.01 0.18 0.15
Net Realized and Unrealized Gain on
Investments 4.58 4.73 3.95
-------- ------- ------
Total from Investment Operations 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 $15.78 $14.43 $12.17
-------- ------- ------
-------- ------- ------
TOTAL RETURN 33.31% 40.90% 41.25%
-------- ------- ------
-------- ------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $155,087 $68,480 $28,548
Ratio of Expenses to Average Net Assets
(1) 1.02% 1.00% 1.00%**
Ratio of Expenses to Average Net Assets
Excluding Dividend Expense on
Securities Sold Short and Interest
Expense 1.00% 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 0.08% 1.26% 1.64%**
Portfolio Turnover Rate 302% 380% 309%
Average Commission Rate Per Share# $0.0575 $0.0484 N/A
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.01 $0.03 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.08% 1.24% 1.59%**
Net Investment Income to Average
Net Assets 0.02% 1.02% 1.05%**
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------
PERIOD FROM
YEAR ENDED JANUARY 2, 1996***
DECEMBER 31, TO
1997 DECEMBER 31, 1996
<S> <C> <C>
- ---------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $14.42 $12.25
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (2) (0.01) 0.13
Net Realized and Unrealized Gain on
Investments 4.55 4.67
------ ------
Total from Investment Operations 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 $ 15.72 $ 14.42
------ ------
------ ------
TOTAL RETURN 32.90% 39.72%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $18,277 $8,805
Ratio of Expenses to Average Net Assets
(2) 1.27% 1.25%**
Ratio of Expenses to Average Net Assets
Excluding Dividend Expense on
Securities Sold Short and Interest
Expense 1.25% 1.25%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (0.18)% 0.95%**
Portfolio Turnover Rate 302% 380%
Average Commission Rate Per Share $0.0575 $0.0484
- ---------------
(2) Effect of voluntary expense
limitation during the period
Per share benefit to net
investment income (loss) $0.00+ $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 1.33% 1.47%**
Net Investment Income (Loss) to
Average Net Assets (0.24)% 0.73%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
+ Amount is less than $0.01 per share.
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:
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.50 $ 21.49 $ 16.12 $ 16.22 $ 16.22
------- ------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (1) (0.07) (0.19) (0.18) (0.09) (0.11)
Net Realized and Unrealized Gain
(Loss) on Investments 1.09 0.89 5.55 (0.01) 0.11
------- ------- -------- -------- --------
Total from Investment Operations 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 $ 7.72 $ 13.50 $ 21.49 $ 16.12 $ 16.22
------- ------- -------- -------- --------
------- ------- -------- -------- --------
TOTAL RETURN 11.36% 3.72% 33.31% (0.62)% 0.00%
------- ------- -------- -------- --------
------- ------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $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%
Ratio of Net Investment Loss to Average
Net Assets (1) (0.87)% (0.88)% (0.76)% (0.61)% (0.77)%
Portfolio Turnover Rate 228% 33% 25% 24% 25%
Average Commission Rate Per Share# $0.0513 $0.0507 N/A N/A N/A
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment loss $ 0.01 $ 0.01 $ 0.003 $ 0.002 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.34% 1.30% 1.26% 1.26% 1.31%
Net Investment Loss to Average Net
Assets (0.95)% (0.92)% (0.77)% (0.62)% (0.83)%
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $13.45 $21.47
----- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (2) (0.06) (0.15)
Net Realized and Unrealized Gain on
Investments 1.04 0.82
----- ------
Total From Operations 0.98 0.67
----- ------
DISTRIBUTIONS
Net Realized Gain (6.80) (8.69)
----- ------
Total Distributions (6.80) (8.69)
----- ------
NET ASSET VALUE, END OF PERIOD $ 7.63 $ 13.45
----- ------
----- ------
TOTAL RETURN 11.13% 3.58%
----- ------
----- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,313 $3,997
Ratio of Expenses to Average Net Assets
(2) 1.50% 1.50%**
Ratio of Net Investment Loss to Average
Net Assets (2) (1.12)% (1.09)%**
Portfolio Turnover Rate 228% 33%
Average Commission Rate Per Share $0.0513 $0.0507
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment loss $ 0.00+ $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.58% 1.54%**
Net Investment Loss to Average Net
Assets (1.21)% (1.14)%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
+ 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:
- --------------------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.94 $ 14.14 $ 12.02 $ 12.14 $ 11.88
-------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.06 0.17 0.22 0.17 0.22
Net Realized and Unrealized Gain on
Investments 4.48 4.07 4.93 0.21 0.28
-------- -------- -------- ------- -------
Total from Investment Operations 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 $ 16.93 $ 14.94 $ 14.14 $ 12.02 $ 12.14
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
TOTAL RETURN 31.32% 30.97% 45.02% 3.26% 4.33%
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $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%
Ratio of Net Investment Income to
Average Net Assets (1) 0.35% 1.12% 1.57% 1.44% 1.59%
Portfolio Turnover Rate 177% 186% 186% 146% 172%
Average Commission Rate Per Share# $0.0562 $0.0535 N/A N/A N/A
- ---------------
(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
Ratios before expense limitation:
Expenses to Average Net Assets 0.82% 0.88% 0.88% 0.89% 0.93%
Net Investment Income to Average
Net Assets 0.33% 1.04% 1.49% 1.35% 1.46%
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.92 $ 14.22
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.04 0.13
Net Realized and Unrealized Gain on
Investments 4.46 3.99
------ ------
Total from Investment Operations 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 $ 16.91 $ 14.92
------ ------
------ ------
TOTAL RETURN 31.05% 29.92%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $27,879 $5,498
Ratio of Expenses to Average Net Assets
(2) 1.05% 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.10% 0.91%**
Portfolio Turnover Rate 177% 186%
Average Commission Rate Per Share $0.0562 $0.0535
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $ 0.01 $ 0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.07% 1.12%**
Net Investment Income to Average
Net Assets 0.08% 0.84%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
+ Amount is less than $0.01 per share.
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:
- --------------------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.89 $ 11.91 $ 10.80 $ 11.10 $ 10.14
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.07 0.32 0.30 0.28 0.24
Net Realized and Unrealized Gain
(Loss) on Investments 3.72 2.36 1.82 (0.01) 0.90
-------- -------- -------- -------- --------
Total from Investment Operations 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 $ 11.24 $ 10.89 $ 11.91 $ 10.80 $ 11.10
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN 36.80% 22.99% 20.63% 2.53% 11.33%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $35,612 $23,970 $51,919 $40,033 $26,775
Ratio of Expenses to Average Net Assets
(1) 1.01% 1.00% 1.00% 1.00% 1.00%
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets (1) 0.55% 2.20% 2.60% 2.67% 2.56%
Portfolio Turnover Rate 178% 32% 36% 22% 29%
Average Commission Rate Per Share# $0.0500 $0.0402 N/A N/A N/A
- ---------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment
income $0.04 $0.04 $0.02 $0.03 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets 1.32% 1.32% 1.21% 1.26% 1.68%
Net Investment Income to Average
Net Assets 0.24% 1.89% 2.39% 2.41% 1.88%
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- ----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.88 $ 11.95
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.10 0.23
Net Realized and Unrealized Gain on
Investments 3.65 2.38
------ ------
Total from Investment Operations 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 $ 11.21 $ 10.88
------ ------
------ ------
TOTAL RETURN 36.51% 22.33%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $7,523 $1,689
Ratio of Expenses to Average Net Assets
(2) 1.26% 1.24%**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 1.25% 1.24%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (0.06)% 1.93%**
Portfolio Turnover Rate 178% 32%
Average Commission Rate Per Share $0.0500 $0.0402
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment
income (loss) $0.02 $0.05
Ratios before expense limitation:
Expenses to Average Net Assets 1.56% 1.69%**
Net Investment Income (Loss) to
Average Net Assets (0.36)% 1.50%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996,the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
+ Amount is less than $0.01 per share.
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:
- --------------------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------
PERIOD FROM
SEPTEMBER 16,
YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- -----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.71 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1) 0.07 (0.02)
Net Realized and Unrealized Gain on
Investments 3.75 0.73
------ ------
Total from Investment Operations 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 $ 11.73 $ 10.71
------ ------
------ ------
TOTAL RETURN 37.27% 7.10%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $31,788 $3,595
Ratio of Expenses to Average Net Assets
(1) 1.25% 1.25%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1) (1.07)% (0.70)%**
Portfolio Turnover Rate 622% 77%
Average Commission Rate Per Share $0.0370 $0.0374
- ---------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment
loss $0.08 $0.22
Ratios before expense limitation:
Expenses to Average Net Assets 2.47% 8.51%**
Net Investment Loss to Average Net
Assets (2.30)% (7.96)%**
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------
PERIOD FROM
SEPTEMBER 16,
YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- -----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.71 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (2) 0.04 (0.02)
Net Realized and Unrealized Gain on
Investments 3.74 0.73
------ ------
Total from Investment Operations 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 $ 11.72 $ 10.71
------ ------
------ ------
TOTAL RETURN 36.90% 7.10%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $2,394 $1,487
Ratio of Expenses to Average Net Assets
(2) 1.50% 1.50%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (2) (1.41)% (1.00)%**
Portfolio Turnover Rate 622% 77%
Average Commission Rate Per Share $0.0370 $0.0374
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment
loss $0.04 $0.19
Ratios before expense limitation:
Expenses to Average Net Assets 2.72% 9.14%**
Net Investment Loss to Average Net
Assets (2.63)% (8.65)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
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:
- --------------------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------
PERIOD FROM
JULY 31,
1997* TO
DECEMBER 31,
1997++
<S> <C>
- ------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.06
Net Realized and Unrealized Gain on
Investments 0.33
------
Total from Investment Operations 0.39
------
DISTRIBUTIONS
Net Investment Income (0.05)
Net Realized Gain (0.03)
------
Total Distributions (0.08)
------
NET ASSET VALUE, END OF PERIOD $ 10.31
------
------
TOTAL RETURN 3.94%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $20,914
Ratio of Expenses to Average Net Assets
(1) 0.80%**
Ratio of Net Investment Income to
Average Net Assets (1) 1.32%**
Portfolio Turnover Rate 15%
Average Commission Rate Per Share $0.0300
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.07
Ratios before expense limitation:
Expenses to Average Net Assets 2.37%**
Net Investment Loss to Average Net
Assets (0.25)%**
- ------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------
PERIOD FROM
JULY 31,
1997* TO
DECEMBER 31,
1997++
<S> <C>
- ------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.02
Net Realized and Unrealized Gain on
Investments 0.37
------
Total from Investment Operations 0.39
------
DISTRIBUTIONS
Net Investment Income (0.05)
Net Realized Gain (0.03)
------
Total Distributions (0.08)
------
NET ASSET VALUE, END OF PERIOD $ 10.31
------
------
TOTAL RETURN 3.93%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $102
Ratio of Expenses to Average Net Assets
(2) 1.05%**
Ratio of Net Investment Income to
Average Net Assets (2) 0.48%**
Portfolio Turnover Rate 15%
Average Commission Rate Per Share $0.0300
- ---------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $ 0.00+
Ratios before expense limitation:
Expenses to Average Net Assets 2.63%**
Net Investment Loss to Average Net
Assets (0.32)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ Amount is less than $0.01 per share.
++ 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.
- --------------------------------------------------------------------------------
199
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
U.S. REAL ESTATE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------
PERIOD FROM
YEAR ENDED FEBRUARY 24,
DECEMBER 31, 1995* TO
------------------ DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
- -------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.41 $ 11.42 $ 10.00
-------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.42 0.37 0.26
Net Realized and Unrealized Gain on
Investments 3.40 4.02 1.84
-------- -------- ------
Total from Investment Operations 3.82 4.39 2.10
-------- -------- ------
DISTRIBUTIONS
Net Investment Income (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 (2.85) (1.40) (0.68)
-------- -------- ------
NET ASSET VALUE, END OF PERIOD $ 15.38 $ 14.41 $ 11.42
-------- -------- ------
-------- -------- ------
TOTAL RETURN 27.62% 39.56% 21.07%
-------- -------- ------
-------- -------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $361,549 $210,368 $69,509
Ratio of Expenses to Average Net Assets
(1) 1.00% 1.00% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (1) 2.72% 3.08% 4.04%**
Portfolio Turnover Rate 135% 171% 158%
Average Commission Rate Per Share# $0.0593 $0.0568 N/A
- ---------------
(1) 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 1.04% 1.14% 1.33%**
Net Investment Income to Average
Net Assets 2.68% 2.93% 3.71%**
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- -------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.39 $ 11.50
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.47 0.35
Net Realized and Unrealized Gain on
Investments 3.29 3.92
------ ------
Total from Investment Operations 3.76 4.27
------ ------
DISTRIBUTIONS
Net Investment Income (0.39) (0.37)
Net Realized Gain (2.16) (1.01)
In Excess of Net Realized Gain (0.26) --
------ ------
Total DIstributions (2.81) (1.38)
------ ------
NET ASSET VALUE, END OF PERIOD $ 15.34 $ 14.39
------ ------
------ ------
TOTAL RETURN 27.21% 38.23%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $21,231 $8,734
Ratio of Expenses to Average Net Assets
(2) 1.25% 1.25%**
Ratio of Net Investment Income to
Average Net Assets (2) 3.49% 2.91%**
Portfolio Turnover Rate 135% 171%
Average Commission Rate Per Share $0.0593 $0.0568
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.00+ $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 1.28% 1.37%**
Net Investment Income to Average
Net Assets 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.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commisions were charged, during the period.
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:
- --------------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.89 $ 13.94 $ 11.50 $ 12.63 $ 11.31
------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.35 0.41 0.38 0.40 0.37
Net Realized and Unrealized Gain
(Loss) on Investments 3.51 2.27 3.30 (0.55) 1.31
------- -------- -------- ------- -------
Total from Investment Operations 3.86 2.68 3.68 (0.15) 1.68
------- -------- -------- ------- -------
DISTRIBUTIONS
Net Investment Income (0.35) (0.41) (0.47) (0.40) (0.36)
Net Realized Gain (3.78) (2.32) (0.77) (0.58) -
------- -------- -------- ------- -------
Total Distributions (4.13) (2.73) (1.24) (0.98) (0.36)
------- -------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 13.62 $ 13.89 $ 13.94 $ 11.50 $ 12.63
------- -------- -------- ------- -------
------- -------- -------- ------- -------
TOTAL RETURN 29.20% 19.73% 33.69% (1.29)% 15.14%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $86,054 $106,128 $147,365 $73,406 $54,598
Ratio of Expenses to Average Net Assets
(1) 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment Income to
Average Net Assets (1) 2.15% 2.62% 3.01% 3.37% 3.23%
Portfolio Turnover Rate 36% 42% 43% 33% 51%
Average Commission Rate Per Share# $0.0411 $0.0434 N/A N/A N/A
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.02 $0.01 $0.01 $0.01 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.80% 0.78% 0.77% 0.80% 0.95%
Net Investment Income to Average
Net Assets 2.06% 2.55% 2.94% 3.27% 2.98%
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------
PERIOD FROM
YEAR ENDED JANUARY 2,
DECEMBER 1996*** TO
31, DECEMBER 31,
1997 1996
<S> <C> <C>
- ------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.89 $ 14.06
----------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.28 0.29
Net Realized and Unrealized Gain on
Investments 3.51 2.25
----------- ------
Total from Investment Operations 3.79 2.54
----------- ------
DISTRIBUTIONS
Net Investment Income (0.31) (0.39)
Net Realized Gain (3.78) (2.32)
----------- ------
Total Distributions (4.09) (2.71)
----------- ------
NET ASSET VALUE, END OF PERIOD $ 13.59 $ 13.89
----------- ------
----------- ------
TOTAL RETURN 28.70% 18.57%
----------- ------
----------- ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $2,246 $2,555
Ratio of Expenses to Average Net Assets
(2) 0.95% 0.95%**
Ratio of Net Investment Income to
Average Net Assets (2) 1.86% 2.33%**
Portfolio Turnover Rate 36% 42%
Average Commission Rate Per Share $0.0411 $0.0434
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.01 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets 1.04% 1.03%**
Net Investment Income to Average
Net Assets 1.77% 2.26%**
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
*** The Portfolio began offering Class B Shares on January 2, 1996.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
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:
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.19 $ 9.98 $ 8.96 $ 11.13 $ 11.31
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.36 0.52 0.39 0.42 0.44
Net Realized and Unrealized Gain
(Loss) on Investments 0.99 0.54 1.62 (0.64) 0.79
--------- --------- --------- --------- ---------
Total from Investment Operations 1.35 1.06 2.01 (0.22) 1.23
--------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income (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 (1.99) (2.85) (0.99) (1.95) (1.41)
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 7.55 $ 8.19 $ 9.98 $ 8.96 $ 11.13
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 17.30% 10.93% 23.63% (2.32)% 12.09%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $4,606 $5,992 $22,642 $18,492 $29,684
Ratio of Expenses to Average Net Assets
(1) 0.71% 0.70% 0.70% 0.70% 0.70%
Ratio of Expenses to Average Net Assets
Excluding Interest Expense 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Net Investment Income to
Average Net Assets (1) 3.82% 3.93% 4.10% 4.13% 3.88%
Portfolio Turnover Rate 25% 22% 26% 44% 136%
Average Commission Rate Per Share# $0.0426 $0.0397 N/A N/A N/A
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.11 $0.08 $0.03 $0.03 $0.04
Ratios before expense limitation:
Expenses to Average Net Assets 1.83% 1.32% 1.02% 0.95% 1.02%
Net Investment Income to Average
Net Assets 2.71% 3.31% 3.78% 3.88% 3.56%
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- --------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 8.18 $ 10.02
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.08 0.34
Net Realized and Unrealized
Gain on Investments 1.24 0.65
------ ------
Total from Investment
Operations 1.32 0.99
------ ------
DISTRIBUTIONS
Net Investment Income (0.34) (0.46)
Net Realized Gain (1.63) (2.37)
------ ------
Total Distributions (1.97) (2.83)
------ ------
NET ASSET VALUE, END OF PERIOD $ 7.53 $ 8.18
------ ------
------ ------
TOTAL RETURN 16.94% 10.24%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $621 $2,197
Ratio of Expenses to Average
Net Assets (2) 0.96% 0.95%**
Ratio of Expenses to Average
Net Assets Excluding
Interest Expense 0.95% 0.95%**
Ratio of Net Investment Income
to Average Net Assets (2) 3.60% 3.73%**
Portfolio Turnover Rate 25% 22%
Average Commission Rate Per
Share $0.0426 $0.0397
- ---------------
(2) Effect of voluntary expense limitation during the period:
Per share benefit to net
investment income $0.14 $0.07
Ratios before expense
limitation:
Expenses to Average Net
Assets 2.05% 1.68%**
Net Investment Income to
Average Net Assets 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.
# Beginning with fiscal year 1996, the Portfolio is required to disclose
the average commission rate per share it paid for portfolio trades, on
which commissions were charged, during the period.
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:
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------
PERIOD
FROM
FEBRUARY
1,
1994* TO
YEAR ENDED DECEMBER 31, DECEMBER
------------------------------- 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.54 $ 8.59 $ 8.59 $ 10.00
--------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.74 1.54 1.36 0.50
Net Realized and Unrealized Gain
(Loss) on Investments 0.55 2.79 0.91 (1.91)
--------- --------- --------- --------
Total from Investment Operations 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 $ 5.77 $ 7.54 $ 8.59 $ 8.59
--------- --------- --------- --------
--------- --------- --------- --------
TOTAL RETURN 18.29% 50.52% 28.23% (14.10)%
--------- --------- --------- --------
--------- --------- --------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $142,382 $152,142 $181,878 $144,949
Ratio of Expenses to Average Net Assets 1.60% 2.70% 1.75% 1.49%**
Ratio of Net Investment Income to
Average Net Assets 8.06% 11.66% 14.70% 9.97%**
Portfolio Turnover Rate 417% 560% 406% 273%
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- -------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.53 $ 8.68
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.69 1.01
Net Realized and Unrealized
Gain on Investments 0.59 3.20
------ ------
Total from Investment
Operations 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 $ 5.77 $ 7.53
------ ------
------ ------
TOTAL RETURN 18.05% 48.52%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $2,281 $4,253
Ratio of Expenses to Average
Net Assets 1.91% 2.81%**
Ratio of Net Investment Income
to Average Net Assets 7.87% 11.09%**
Portfolio Turnover Rate 417% 560%
</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.
- --------------------------------------------------------------------------------
203
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.58 $ 10.81 $ 9.82 $ 11.05 $ 10.93
------- ------- ------- ------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.65 0.67 0.72 0.59 0.54
Net Realized and Unrealized Gain
(Loss) on Investments 0.33 (0.20) 1.06 (0.92) 0.41
------- ------- ------- ------- --------
Total from Investment Operations 0.98 0.47 1.78 (0.33) 0.95
------- ------- ------- ------- --------
DISTRIBUTIONS
Net Investment Income (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 (0.68) (0.70) (0.79) (0.90) (0.83)
------- ------- ------- ------- --------
NET ASSET VALUE, END OF PERIOD $ 10.88 $ 10.58 $ 10.81 $ 9.82 $ 11.05
------- ------- ------- ------- --------
------- ------- ------- ------- --------
TOTAL RETURN 9.54% 4.61% 18.76% (3.10)% 9.07%
------- ------- ------- ------- --------
------- ------- ------- ------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $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%
Ratio of Net Investment Income to
Average Net Assets (1) 6.11% 6.30% 6.85% 5.73% 4.97%
Portfolio Turnover Rate 163% 183% 172% 388% 240%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.02 $0.02 $0.01 $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.60% 0.60% 0.59% 0.58% 0.60%
Net Investment Income to Average
Net Assets 5.97% 6.15% 6.71% 5.60% 4.82%
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.58 $10.81
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (2) 0.64 0.64
Net Realized and Unrealized
Gain (Loss) on Investments 0.33 (0.19)
------ ------
Total from Investment
Operations 0.97 0.45
------ ------
DISTRIBUTIONS
Net Investment Income (0.66) (0.68)
------ ------
Total Distributions (0.66) (0.68)
------ ------
NET ASSET VALUE, END OF PERIOD $10.89 $10.58
------ ------
------ ------
TOTAL RETURN 9.48% 4.35%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands) $4,834 $1,462
Ratio of Expenses to Average
Net Assets (2) 0.60% 0.60%**
Ratio of Net Investment Income
to Average Net Assets (2) 5.93% 6.15%**
Portfolio Turnover Rate 163% 183%
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.02 $0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets 0.74% 0.74%**
Net Investment Income to
Average Net Assets 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.
- --------------------------------------------------------------------------------
204
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997++ 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.30 $ 11.22 $ 10.29 $ 11.68 $ 11.26
------ --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.56 0.61 0.76 0.70 0.69
Net Realized and Unrealized Gain
(Loss) on Investments (0.40) 0.08 1.15 (1.38) 0.90
------ --------- --------- --------- --------
Total from Investment Operations 0.16 0.69 1.91 (0.68) 1.59
------ --------- --------- --------- --------
DISTRIBUTIONS
Net Investment Income (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 (0.31) (0.61) (0.98) (0.71) (1.17)
------ --------- --------- --------- --------
NET ASSET VALUE, END OF PERIOD $11.15 $ 11.30 $ 11.22 $ 10.29 $ 11.68
------ --------- --------- --------- --------
------ --------- --------- --------- --------
TOTAL RETURN 1.50% 6.44% 19.32% (6.08)% 15.34%
------ --------- --------- --------- --------
------ --------- --------- --------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $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%
Ratio of Net Investment Income to
Average Net Assets (1) 5.05% 5.50% 6.79% 6.34% 5.99%
Portfolio Turnover Rate 116% 258% 207% 171% 108%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.02 $0.02 $0.02 $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.71% 0.72% 0.71% 0.66% 0.70%
Net Investment Income to Average
Net Assets 4.84% 5.29% 6.58% 6.18% 5.79%
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997++ 1996
<S> <C> <C>
- -----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.29 $11.23
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.54 0.48
Net Realized and Unrealized Gain
(Loss) on Investments (0.40) 0.18
------ ------
Total from Investment Operations 0.14 0.66
------ ------
DISTRIBUTIONS
Net Investment Income (0.30) (0.60)
------ ------
Total Distributions (0.30) (0.60)
------ ------
NET ASSET VALUE, END OF PERIOD $11.13 $11.29
------ ------
------ ------
TOTAL RETURN 1.29% 6.12%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $366 $1,559
Ratio of Expenses to Average Net Assets
(2) 0.65% 0.65%**
Ratio of Net Investment Income to
Average Net Assets (2) 4.88% 5.28%**
Portfolio Turnover Rate 116% 258%
- ---------------
(2) Effect of voluntary expense limitation during the
period:
Per share benefit to net
investment income $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets 0.86% 0.86%**
Net Investment Income to Average
Net Assets 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.
- --------------------------------------------------------------------------------
205
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[LOGO] Morgan Stanley
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- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.91 $ 10.46 $9.55 $ 11.16 $9.95
--------- --------- --------- ------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 1.00 1.03 1.14 0.97 0.90
Net Realized and Unrealized Gain
(Loss) on Investments 0.67 0.47 0.97 (1.40) 1.21
--------- --------- --------- ------- ---------
Total from Investment Operations 1.67 1.50 2.11 (0.43) 2.11
--------- --------- --------- ------- ---------
DISTRIBUTIONS
Net Investment Income (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 (1.00) (1.05) (1.20) (1.18) (0.90)
--------- --------- --------- ------- ---------
NET ASSET VALUE, END OF PERIOD $ 11.58 $ 10.91 $ 10.46 $9.55 $ 11.16
--------- --------- --------- ------- ---------
--------- --------- --------- ------- ---------
TOTAL RETURN 15.87% 15.01% 23.35% (4.18)% 22.11%
--------- --------- --------- ------- ---------
--------- --------- --------- ------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $113,006 $95,663 $62,245 $97,223 $74,500
Ratio of Expenses to Average Net Assets
(1) 0.69% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to
Average Net Assets (1) 8.70% 9.78% 11.09% 9.42% 8.70%
Portfolio Turnover Rate 111% 117% 90% 74% 104%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income N/A $0.01 $0.01 $ 0.001 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets N/A 0.82% 0.83% 0.76% 0.96%
Net Investment Income to Average
Net Assets N/A 9.71% 11.01% 9.41% 8.49%
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
- ------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.90 $ 10.49
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (2) 0.97 0.98
Net Realized and Unrealized Gain
(Loss) on Investments 0.65 0.45
------ ------
Total from Investment Operations 1.62 1.43
------ ------
DISTRIBUTIONS
Net Investment Income (0.96) (1.02)
------ ------
Total Distributions (0.96) (1.02)
------ ------
NET ASSET VALUE, END OF PERIOD $ 11.56 $ 10.90
------ ------
------ ------
TOTAL RETURN 15.48% 14.37%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $7,213 $5,665
Ratio of Expenses to Average Net
Assets (2) 0.93% 1.00%**
Ratio of Net Investment Income to
Average Net Assets (2) 8.48% 9.49%**
Portfolio Turnover Rate 111% 117%
-----------------
(2) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income N/A $0.01
Ratios before expense limitation:
Expenses to Average Net Assets N/A 1.05%**
Net Investment Income to Average
Net Assets 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.
- --------------------------------------------------------------------------------
206
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 18,
1995* TO
---------------------------- DECEMBER 31,
1997++ 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.25 $ 10.37 $ 10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.47 0.49 0.44
Net Realized and Unrealized Gain
(Loss) on Investments 0.25 (0.12) 0.42
------ ------ ------
Total from Investment Operations 0.72 0.37 0.86
------ ------ ------
DISTRIBUTIONS
Net Investment Income (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 (0.46) (0.49) (0.49)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.51 $ 10.25 $ 10.37
------ ------ ------
------ ------ ------
TOTAL RETURN 7.25% 3.67% 8.80%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $60,541 $40,227 $45,869
Ratio of Expenses to Average Net Assets
(1) 0.45% 0.45% 0.45%**
Ratio of Net Investment Income to
Average Net Assets (1) 4.55% 4.77% 4.61%**
Portfolio Turnover Rate 80% 45% 180%
- ---------------
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income $0.02 $0.03 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets 0.68% 0.73% 0.73%**
Net Investment Income to Average
Net Assets 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 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.
- --------------------------------------------------------------------------------
207
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[LOGO] Morgan Stanley
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- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS:
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- ---------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.051 0.049 0.054 0.040 0.027
---------- ---------- -------- -------- --------
DISTRIBUTIONS
Net Investment Income (0.051) (0.049) (0.054) (0.040) (0.027)
In Excess of Net Investment Income -- -- -- -- 0.000+
---------- ---------- -------- -------- --------
Total Distributions (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
---------- ---------- -------- -------- --------
---------- ---------- -------- -------- --------
TOTAL RETURN 5.20% 5.03% 5.51% 3.84% 2.76%
---------- ---------- -------- -------- --------
---------- ---------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $1,506,210 $1,284,633 $836,693 $690,503 $657,163
Ratio of Expenses to Average Net Assets
(1) 0.49% 0.52% 0.51% 0.49% 0.53%
Ratio of Net Investment Income to
Average Net Assets (1) 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 $ 0.000+
Ratios before expense limitation:
Expenses to Average Net Assets 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 2.70%
</TABLE>
- --------------------------------------------------------------------------------
+ Amount is less than $0.001 per share.
- --------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1) 0.031 0.030 0.034 0.020 0.019
-------- -------- -------- -------- --------
DISTRIBUTIONS
Net Investment Income (0.031) (0.030) (0.034) (0.020) (0.019)
In Excess of Net Investment Income -- -- -- -- (0.000)+
-------- -------- -------- -------- --------
Total Distributions (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
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN 3.17% 3.02% 3.44% 2.44% 1.91%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands) $804,607 $721,410 $451,519 $359,444 $266,524
Ratio of Expenses to Average Net Assets
(1) 0.50% 0.53% 0.52% 0.51% 0.54%
Ratio of Net Investment Income to
Average Net Assets (1) 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 $ 0.000+
Ratios before expense limitation:
Expenses to Average Net Assets 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 1.87%
</TABLE>
- --------------------------------------------------------------------------------
+ Amount is less than $0.001 per share.
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
208
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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 December 31, 1997, the Fund was comprised of 29 separate active,
diversified and non-diversified portfolios (individually referred to as a
"Portfolio", collectively as the "Portfolios"). At December 31, 1997, each
Portfolio (with the exception of the International Small Cap, Money Market 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. The U.S. Equity Plus Portfolio commenced operations on July 31, 1997 and
the Asian Real Estate and European Real Estate Portfolios commenced operations
on October 1, 1997. Effective February 1998, the Money Market Portfolio began
offering Class B shares. Please refer to the manager's reports included
elsewhere in this report for a description of each Portfolio's investment
objectives.
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
- --------------------------------------------------------------------------------
209
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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 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 December 31, 1997, the Emerging Markets Debt Portfolio had reverse repurchase
agreements outstanding as follows:
<TABLE>
<CAPTION>
MATURITY IN
30 TO 90
DAYS
------------
<S> <C>
Value of securities subject to repurchase..... $32,182,906
------------
Liability for Reverse Repurchase Agreement.... 29,740,000
Weighted Average Interest Rate................ 6.50%
------------
</TABLE>
For the Emerging Markets Debt Portfolio, the average weekly balance of reverse
repurchase agreements outstanding during the year ended December 31, 1997 was
approximately $9,397,000, at a weighted average interest rate of 5.357%.
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 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.
- --------------------------------------------------------------------------------
210
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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 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 custodians 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 with 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 custodians 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
- --------------------------------------------------------------------------------
211
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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, 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 Portfolio 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 December 31, 1997 are as follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- -------------------------------- --------------- -----------
<S> <C> <C>
Active Country Allocation....... $ 19,321 $ 20,612
Asian Equity.................... 6,157 7,197
International Equity............ 297,284 313,615
</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 $100,000, $243,000 and $828,000 for the Active Country
Allocation, Asian Equity and International Equity Portfolios, respectively, for
the year ended December 31, 1997.
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.
- --------------------------------------------------------------------------------
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[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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 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
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<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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 risks not normally 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 registrars 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, Discover & 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 Country 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
Gold........................... 1.00 1.25 1.50
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>
Sun Valley Gold Company is the sub-adviser ("Sub-Adviser") of the Gold
Portfolio. The Sub-Adviser is entitled to receive an annual sub-advisory fee in
an amount equal to 0.40% of the average daily net assets of the Gold Portfolio.
The Sub-Adviser has agreed to a proportionate reduction in its fees if the
Adviser is required to waive its fees or to reimburse the Gold Portfolio.
C. ADMINISTRATOR: MSAM also provides the Fund with administrative services
pursuant to an administrative agreement for a monthly fee which on an annual
- --------------------------------------------------------------------------------
214
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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"), through its affiliate Chase Global Funds
Services Company ("CGFSC"), Chase 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 with
certain emerging market countries.
D. DISTRIBUTOR: Morgan Stanley & Co., Incorporated (the "Distributor"), a
wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & 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, Discover & 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.
For the year ended December 31, 1997, the following Portfolios incurred custody
fees and had amounts payable to MSTC at December 31, 1997:
<TABLE>
<CAPTION>
MSTC CUSTODY
CUSTODY FEES FEES PAYABLE TO
INCURRED MSTC
(000) (000)
--------------- -----------------
<S> <C> <C>
Active Country Allocation.... $ 269 $ 40
Asian Equity................. 434 69
Asian Real Estate............ 12 4
Emerging Markets............. 4,223 701
European Equity.............. 132 23
European Real Estate......... 13 4
Global Equity................ 41 7
Gold......................... 8 1
International Equity......... 829 126
International Magnum......... 147 25
International Small Cap...... 136 24
Japanese Equity.............. 33 6
Latin American............... 190 38
Emerging Markets Debt........ 108 77
Global Fixed................. 28 7
</TABLE>
In addition, for the year ended December 31, 1997, 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>
Active Country............ $ 2 $ 3
Asian Equity.............. 6 49
Asian Real Estate......... -- 1
Emerging Markets.......... 12 100
European Equity........... 1 3
Global Equity............. -- 1
Gold...................... 1 --
International Equity...... 1 23
International Small Cap... -- 2
Japanese Equity........... -- 3
Latin American............ 2 15
Emerging Markets Debt..... 28 45
Global Fixed Income....... 1 1
</TABLE>
F. DIRECTOR'S 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 payment of a percentage of their total fees earned as
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215
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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
deferred fees payable, under the Compensation Plan, at December 31, 1997 totaled
$341,000 and are included in Directors' Fees and Expenses Payable on the
Statement of Net Assets.
G. PURCHASES AND SALES: During the year ended December 31, 1997, 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 Country Allocation........... $ 72,434 $ 130,797
Asian Equity........................ 282,494 456,231
Asian Real Estate................... 3,600 654
Emerging Markets.................... 1,596,417 1,416,459
European Equity..................... 129,494 96,835
European Real Estate................ 21,435 5,289
Global Equity....................... 38,473 28,024
Gold................................ 16,142 22,267
International Equity................ 1,128,971 797,313
International Magnum................ 124,939 56,934
International Small Cap............. 101,765 93,605
Japanese Equity..................... 56,342 110,909
Latin American...................... 213,690 186,620
Aggressive Equity................... 464,678 415,008
Emerging Growth..................... 134,961 148,821
Equity Growth....................... 1,018,180 869,269
Small Cap Value Equity.............. 66,767 59,716
Technology.......................... 136,400 110,293
U.S. Equity Plus.................... 22,231 2,427
U.S. Real Estate.................... 489,771 388,571
Value Equity........................ 36,138 80,487
Balanced............................ 1,024 3,089
Emerging Markets Debt............... 706,169 745,241
Fixed Income........................ 59,314 65,934
Global Fixed Income................. 59,600 80,289
High Yield.......................... 120,565 117,084
Municipal Bond...................... 61,248 41,429
</TABLE>
Purchases and sales during the year ended December 31, 1997 of long-term U.S.
Government securities occurred in the Balanced, Emerging Markets Debt, Fixed
Income and Global Fixed Income Portfolios only and totaled:
<TABLE>
<CAPTION>
PURCHASES SALES
PORTFOLIO (000) (000)
- -------------------------------------- ----------- ---------
<S> <C> <C>
Balanced.............................. $ 482 $ 1,874
Emerging Markets Debt................. 9,900 9,944
Fixed Income.......................... 193,292 149,475
Global Fixed Income................... 35,903 33,317
</TABLE>
During the year ended December 31, 1997, the following Portfolios paid brokerage
commissions to Morgan Stanley & Co., Incorporated and Dean Witter Reynolds,
Inc., affiliated broker/dealers, of approximately:
<TABLE>
<CAPTION>
BROKERAGE COMMISSION
(000)
------------------------------------------
MORGAN STANLEY DEAN WITTER
PORTFOLIO & CO. REYNOLDS, INC.
- ---------------------- ----------------------- -----------------
<S> <C> <C>
Asian Equity.......... $ 269 $ --
Asian Real Estate..... 2 --
Emerging Markets...... 514 --
European Equity....... 1 --
European Real
Estate............... 1 --
Global Equity......... 8 --
International
Equity............... 34 --
International
Magnum............... 4 --
International Small
Cap.................. 4 --
Japanese Equity....... 134 --
Latin American........ 49 --
Equity Growth......... -- 2
U.S. Real Estate...... 47 5
</TABLE>
H. OTHER: At December 31, 1997, 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 Country
Allocation............... $ 128,229 $ 20,499 $ (13,581) $ 6,918
Asian Equity.............. 108,383 3,096 (31,831) (28,735)
Asian Real Estate......... 2,822 18 (516) (498)
Emerging Markets.......... 1,629,382 235,979 (385,186) (149,207)
European Equity........... 200,392 40,359 (5,744) 34,615
European Real Estate...... 15,839 107 (798) (691)
Global Equity............. 85,991 31,806 (5,267) 26,539
International Equity...... 2,303,262 604,313 (129,807) 474,506
International Magnum...... 184,421 16,920 (15,591) 1,329
International Small Cap... 233,446 30,130 (36,066) (5,936)
Japanese Equity........... 99,820 3,131 (25,012) (21,881)
Latin American............ 82,649 6,117 (5,757) 360
Aggressive Equity......... 165,630 11,002 (3,292) 7,710
Emerging Growth........... 52,560 9,234 (2,329) 6,905
Equity Growth............. 536,135 80,445 (4,713) 75,732
Small Cap Value Equity.... 39,185 5,904 (1,756) 4,148
Technology................ 32,583 1,400 (2,064) (664)
U.S. Equity Plus.......... 19,912 1,393 (837) 556
U.S. Real Estate.......... 336,371 49,516 (1,727) 47,789
Value Equity.............. 67,910 21,412 (1,072) 20,340
Balanced.................. 4,475 789 (29) 760
Emerging Markets Debt..... 175,333 1,553 (9,023) (7,470)
Fixed Income.............. 180,962 3,744 (180) 3,564
Global Fixed Income....... 83,863 1,696 (2,808) (1,112)
High Yield................ 120,550 5,505 (1,146) 4,359
Municipal Bond............ 57,625 2,423 -- 2,423
Money Market.............. 1,504,260 -- -- --
Municipal Money Market.... 802,105 -- -- --
</TABLE>
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216
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
During the year ended December 31, 1997, the Emerging Markets Portfolio owned
shares of affiliated funds for which the Portfolio earned dividend income of
approximately $790,000.
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
Gold..................... -- -- -- 8,248 8,248
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>
During the year ended December 31, 1997, the Emerging Markets, Technology, Fixed
Income, Global Fixed Income, High Yield, Municipal Bond, Money Market and
Municipal Money Market Portfolios utilized capital loss carryforwards for U.S.
Federal income tax purposes of approximately $11,112,000, $4,000, $2,586,000,
$510,000, $3,604,000, $6,000, $71,000 and $9,000, respectively.
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 Country 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 --
Gold..................................... 18,195 24
International Magnum..................... 211 --
Japanese Equity.......................... 16,223 --
Latin American........................... -- 31
Technology............................... 1,716 --
Emerging Markets Debt.................... 2,193 --
Municipal Bond........................... 1 --
</TABLE>
During the year ended December 31, 1997, the following Portfolio wrote covered
call options as follows:
COVERED CALL OPTIONS:
<TABLE>
<CAPTION>
FACE AMOUNT PREMIUM
EMERGING MARKETS DEBT PORTFOLIO (000) (000)
- -------------------------------------- ------------- -----------
<S> <C> <C>
Options outstanding at December 31,
1996................................. $ -- $ --
Options written during the period..... 424 1,037
Options closed during the period...... (353) (909)
Options exercised during the period... (71) (128)
------ -----------
Options outstanding at December 31,
1997................................. $ -- $ --
------ -----------
------ -----------
</TABLE>
At December 31, 1997, 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.
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217
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Assets and liabilities, including Portfolio securities and foreign currency
holdings were translated at the following exchange rates as of December 31,
1997:
<TABLE>
<S> <C> <C> <C>
Argentine Peso...................... 0.99981 = $1.00
Australian Dollar................... 1.53504 = $1.00
Austrian Shilling................... 12.63150 = $1.00
Belgian Franc....................... 37.05100 = $1.00
Brazilian Real...................... 1.11605 = $1.00
British Pound....................... 0.60853 = $1.00
Canadian Dollar..................... 1.42945 = $1.00
Colombian Peso...................... 1,296.65000 = $1.00
Danish Krone........................ 6.85190 = $1.00
Egyptian Pound...................... 3.40250 = $1.00
Finnish Markka...................... 5.45095 = $1.00
French Franc........................ 6.01850 = $1.00
German Mark......................... 1.79895 = $1.00
Hong Kong Dollar.................... 7.74900 = $1.00
Hungarian Forint.................... 203.95500 = $1.00
Indian Rupee........................ 39.20000 = $1.00
Indonesian Rupiah................... 5,500.00000 = $1.00
Irish Punt.......................... 0.70284 = $1.00
Israeli Shekels..................... 3.53715 = $1.00
Italian Lira........................ 1,769.00000 = $1.00
Japanese Yen........................ 130.47500 = $1.00
Malaysian Ringgit................... 3.88950 = $1.00
Mexican Peso........................ 8.06000 = $1.00
Morrocan Dhiram..................... 9.74750 = $1.00
Netherlands Guilder................. 2.02765 = $1.00
New Zealand Dollar.................. 1.72221 = $1.00
Norwegian Krone..................... 7.38580 = $1.00
Pakistani Rupees.................... 44.00600 = $1.00
Peruvian New Sole................... 2.72550 = $1.00
Philippine Peso..................... 40.50000 = $1.00
Poland Zloty........................ 3.52500 = $1.00
Portuguese Escudo................... 184.05000 = $1.00
Singapore Dollar.................... 1.68150 = $1.00
South African Rand.................. 4.86650 = $1.00
South Korean Won.................... 1,695.00000 = $1.00
Spanish Peseta...................... 152.35000 = $1.00
Sri Lankan Rupee.................... 61.75000 = $1.00
Swedish Krona....................... 7.93990 = $1.00
Swiss Franc......................... 1.46050 = $1.00
Taiwan Dollar....................... 32.62500 = $1.00
Thai Baht........................... 48.15000 = $1.00
Turkish Lira........................ 207,250.00000 = $1.00
Venezuelan Bolivar.................. 504.30000 = $1.00
Zimbabwe Dollar..................... 18.37500 = $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.
I. SUBSEQUENT EVENT: On January 9, 1998, the Fund filed a Proxy
Statement/Prospectus with the Securities and Exchange Commission for the purpose
of presenting proposals to the respective shareholders of the Balanced Portfolio
and the Small Cap Value Portfolio seeking their approval to liquidate those
Portfolios and transfer the net assets of those Portfolios to the MAS Funds
Balanced Portfolio and MAS Funds MidCap Value Portfolio, respectively. A Special
Meeting of the shareholders of those Portfolios is expected to be held during
the second quarter of 1998 to vote on the proposals.
During December 1997, the Gold Portfolio had significant shareholder redemption
activity. As a result, at December 31, 1997, all of the Portfolio's investments
have been sold. Management is in the process of winding down the Portfolio and,
accordingly, shares of the Portfolio are not available for subscription.
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218
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Morgan Stanley Institutional Fund, Inc.
In our opinion, the accompanying statements of net assets and the related
statements of operations, of changes in net assets and of cash flows (the
Emerging Markets Debt Portfolio only) and the financial highlights present
fairly, in all material respects, the financial position of each of the
portfolios constituting Morgan Stanley Institutional Fund, Inc. (the "Fund") at
December 31, 1997, the results of each of their operations, the changes in each
of their net assets, the Emerging Markets Debt Portfolio's cash flows and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1997 by
correspondence with the custodians, brokers and counterparties and the
application of alternative auditing procedures where confirmations from brokers
and counterparties were not received, provide a reasonable basis for the opinion
expressed above.
As explained in Note I to the financial statements, the Fund filed a proxy
statement/prospectus with the Securities and Exchange Commission for the purpose
of merging the Balanced and Small Cap Value Portfolios into Portfolios of the
MAS Funds. Subsequent to the merger, these Portfolios would cease to exist. In
addition, the Gold Portfolio is being wound down by management, and shares of
this Portfolio are no longer available for subscription.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 11, 1998
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219
<PAGE>
[LOGO] Morgan Stanley
Institutional Fund, Inc.
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED):
- --------------------------------------------------------------------------------
For the year ended December 31, 1997, the percentage of dividends paid that
qualify for the 70% dividend received deduction for corporate shareholders for
the Global Equity, Aggressive Equity, Emerging Growth, Equity Growth, Small Cap
Value, U.S. Equity Plus, Value Equity, Balanced and High Yield Portfolios are
10.6%, 4.0%, 1.3%, 7.0%, 14.4%, 76.1%, 55.6%, 24.4% and 4.9%, respectively.
For the year ended December 31, 1997, the percentage of exempt interest
dividends paid by the Municipal Bond and Municipal Money Market Portfolios are
100% and 97%, respectively.
For the year ended December 31, 1997, the following Portfolios intend to pass
through foreign tax credits and have derived gross income from sources within
foreign countries amounting to:
<TABLE>
<CAPTION>
FOREIGN TAX
CREDIT FOREIGN SOURCE
PASS-THROUGH INCOME
PORTFOLIO (000)** (000)
- ----------------------------------------------------------------------- ----------------- --------------
<S> <C> <C>
Active Country Allocation.............................................. $ 438 $ 3,490
Asian Equity........................................................... 562 4,288
Emerging Markets....................................................... 1,827 34,575
European Equity........................................................ 998 7,678
Global Equity.......................................................... 181 1,558
International Equity*.................................................. 7,978 70,776
International Magnum................................................... 416 3,469
International Small Cap................................................ 802 6,769
Japanese Equity........................................................ 195 1,301
</TABLE>
For the year ended December 31, 1997, the following Portfolios has designated
long-term capital gains totaling:
<TABLE>
<CAPTION>
LONG-TERM LONG-TERM
CAPITAL GAINS -- 20% CAPITAL GAINS -- 28%
PORTFOLIO (000) (000)
- -------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Active Country Allocation..................................... $ 6,607 $ 4,174
Asian Equity.................................................. -- 8,601
Emerging Markets.............................................. 31,834 39,218
European Equity............................................... 6,629 4,554
Global Equity................................................. 3,393 564
Gold.......................................................... -- 40
International Equity*......................................... -- 92,930
International Magnum.......................................... 192 649
International Small Cap....................................... 131 9,365
Latin American................................................ 957 1,737
Aggressive Equity............................................. 50 306
Emerging Growth............................................... 3,741 22,389
Equity Growth................................................. 7,304 12,940
Small Cap Value Equity........................................ 3,168 2,750
U.S. Real Estate.............................................. 5,891 5,318
Value Equity.................................................. 7,542 9,730
Balanced...................................................... 328 577
Municipal Bond................................................ 22 --
</TABLE>
- ------------
* Amounts based on October 31 tax year end.
** Amounts presented are 100% allowable as a foreign tax credit.
- --------------------------------------------------------------------------------
220
<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
Price Waterhouse 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.
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221
