<PAGE>
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DIRECTORS OFFICERS
Barton M. Biggs Stefanie V. Chang
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Asset Management Harold J. Schaaff, Jr.
Inc. and Morgan Stanley VICE PRESIDENT
Asset Management Limited; Managing Joseph P. Stadler
Director, Morgan Stanley & Co. Incorporated VICE PRESIDENT
Michael F. Klein Valerie Y. Lewis
DIRECTOR AND PRESIDENT SECRETARY
Principal, Morgan Stanley Asset Management Inc. and Karl O. Hartmann
Morgan Stanley & Co. Incorporated ASSISTANT SECRETARY
John D. Barrett II Joanna M. Haigney
Chairman and Director, TREASURER
Barrett Associates, Inc. Belinda A. Brady
Gerard E. Jones ASSISTANT TREASURER
Partner, Richards & O'Neil LLP
Andrew McNally IV
River Road Partners
Samuel T. Reeves
Chairman of the Board and Chief
Executive Officer,
Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer, LumeLite
Plastics Corporation
Frederick O. Robertshaw
Of Counsel, Copple, Chamberlin &
Boehm, P.C.
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INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, New York 10020
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CUSTODIANS
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
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LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
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INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
- ---------------------------------------------------------
For current performance, current net asset value, or for assistance with your
account, please contact the Fund at (800) 548-7786. This report is authorized
for distribution only when preceded or accompanied by prospectuses of the Morgan
Stanley Institutional Fund, Inc.
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. Box 2798
Boston, MA 02208-2798
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
AGGRESSIVE EQUITY PORTFOLIO
THIRD QUARTER REPORT
SEPTEMBER 30, 1998
<PAGE>
LETTER TO SHAREHOLDERS
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PERFORMANCE COMPARED TO THE LIPPER CAPITAL APPRECIATION INDEX AND THE S&P 500
INDEX(1)
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<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
--------- --------- -----------------
<S> <C> <C> <C>
PORTFOLIO--CLASS A........... -8.57% -3.23% 28.20%
PORTFOLIO--CLASS B........... -8.67 -3.48 21.22
LIPPER CAP. APPRECIATION
INDEX--CLASS A.............. -1.77 -4.10 16.35
S&P 500 INDEX--CLASS A....... 6.00 9.05 25.74
LIPPER CAP. APPRECIATION
INDEX--CLASS B.............. -1.77 -4.10 11.57
S&P 500 INDEX--CLASS B....... 6.00 9.05 21.98
</TABLE>
1. The Lipper Capital Appreciation Index is a composite of mutual funds managed
for maximum capital gains. The S&P 500 Index is an unmanaged index of common
stocks.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED. THE PORTFOLIO'S CONCENTRATION OF ITS
ASSETS IN A SMALL 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.
The Aggressive Equity Portfolio seeks capital appreciation through a
concentrated, non-diversified portfolio of corporate equity and equity-linked
securities. Short sales and options can be used to enhance performance
For the nine months ended September 30, 1998, the Portfolio had a total return
of -8.57% for the Class A shares and -8.67% for the Class B shares compared to a
total return of -1.77% for the Lipper Capital Appreciation Index and 6.00% for
the S&P 500 Index. For the one year ended September 30, 1998, the Portfolio had
a total return of -3.23% for the Class A shares and -3.48% for the Class B
shares compared to -4.10% for the Lipper Capital Appreciation Index and 9.05%
for the S&P 500 Index. From inception on March 8, 1995 through September 30,
1998, the average annual total return of Class A was 28.20% compared to 16.35%
for the Lipper Capital Appreciation Index and 25.74% for the S&P 500 Index. From
inception on January 2, 1996 through September 30, 1998, the average annual
total return of Class B was 21.22% compared to 11.57% for the Lipper Capital
Appreciation Index and 21.98% for the S&P 500 Index.
For the three months ended September 30, 1998 the Portfolio had a total return
of -19.27% for the Class A shares and -19.34% for the Class B shares compared to
- -14.35% for the Lipper Capital Appreciation Index and -9.95% for the S&P 500
Index. This was clearly disappointing. While some of our large positions
performed well in the third quarter (notably Loews Corp, and Litton Industries
Inc. which added approximately 0.93% and 0.57% to total return, respectively)
these gains were not enough to offset the cyclical pressures experienced by
Continental Airlines, detracting 6.59% from performance of the Portfolio for the
third quarter.
Our top ten holdings at September 30 were as follows:
<TABLE>
<S> <C>
Continental Airlines............................ 11%
Loews Corp...................................... 9
United Technologies............................. 8
Clear Channel Communications.................... 6
Litton.......................................... 5
General Re Corp................................. 5
Cordant......................................... 4
Tele Communications Inc......................... 4
American Express................................ 4
Coca-Cola Enterprises........................... 3
--
59%
--
--
</TABLE>
2
<PAGE>
The 59% weighting in our top ten positions is much more concentrated than most
U.S. Equity portfolios, but is fairly typical for this Portfolio. Since
inception in March 1995, the top ten holdings have tended to account for between
50-75% of net assets. Our belief is that heavy concentration may lead to greater
than average volatility but not necessarily greater than average risk. To us,
risk is synonymous with lack of knowledge, which our strategy of "seeking the
information edge" seeks to avoid. Timing of a stock's rebound may impact a
quarter negatively as with Continental this quarter, but we believe that over
the longer term, the ability to concentrate in issues where we have extremely
high conviction should lead to strong performance. We believe this ability to
concentrate has been one of the primary contributors to our strong performance
over the past several years as shown on the preceding page.
Concern regarding emerging markets, specifically Asia, Russia and the pending
Brazilian devaluation continues. Increased financial risk related to hedge fund
issues has contributed to market volatility. Despite these macro issues we
remain optimistic about companies with strong balance sheets and solid
management that are well positioned to take advantage of acquisition
opportunities. Two such companies include Clear Channel Communications and
United Technologies. Clear Channel recently announced the acquisition of Jacor,
making CCU the second-largest radio broadcaster in the nation. United
Technologies continues to take advantage of acquisition opportunities recently,
purchasing stakes in two key air conditioning distributors as well as
establishing two initial Asian joint ventures. We continue to seek out
opportunities in this challenging environment and identify Loews as a perfect
stock for this type of environment.
Loews, the Tisch family holding company, is clearly one of our "less
traditional" growth stock holdings. It is well positioned with significant cash
reserves, a large bond holding and an investment in puts on the S&P 500 Index.
The company has a strong track record of investments and is a book value growth
machine. Over the past 12 years, Loews book value per share has compounded at a
15% annual rate. Its stock price though, has grown at less than half that rate.
Even assuming a slowdown to 10% annual growth, the book value will exceed $100
by the end of next year. Loews is also compelling based on a sum of the parts
valuation. The company owns large stakes in two publicly traded stocks-- CNA
Financial and Diamond Offshore. Adding the value of these positions to
conservative estimates of the company's 100%-owned assets, Loews stock is the
cheapest it has been in years. The company has begun to repurchase stock, which
is additive to book value per share and earnings per share. We believe this is a
perfect stock for the current economic/market environment.
In the third quarter, we reduced our position in Continental Airlines. While the
company continues to beat earnings per share expectations and is aggressively
repurchasing its shares, we are taking steps to reduce the economic sensitivity
in the Portfolio. To that end, you will note that we have also reduced our
positions in GM, Case, some of the financials and have also eliminated our
holding in ITT Industries.
We see a similar opportunity in United Technologies that we had in the fourth
quarter of last year. This stock tends to underperform when fears of economic
crisis in Asia exist. In the fourth quarter of 1997 we saw the stock dip from
$79 to $68. We capitalized on the opportunity by increasing our holding to 10%
and were rewarded when the stock rebounded to $95 by the end of the first
quarter of 1998. We see similar behavior again this year with the stock falling
from the high 90's in May and August to the low $70's. We believe that the
underlying business fundamentals are strong and we expect the stock to exhibit
growth as the market bounces back. United Technologies is taking the opportunity
to become very entrenched in the elevator and air conditioning markets in the
emerging markets, well positioned to take advantage of the recurring business
opportunity in stronger economic times.
We increased our position in Litton Industries as we see the rising percentage
of sales and profits generated by growth in Electronic Materials and Information
Systems continue to drive its strong cash flows. In addition, we see the
opportunity for Litton to increase Advanced Electronics margins from 7% to
10-12% over the next 2-3
3
<PAGE>
years. We anticipate the ultimate resolution of the Honeywell lawsuit will also
be additive to the company. New management has begun to divest non-core assets
and repurchase stock.
Philip W. Friedman
PORTFOLIO MANAGER
William S. Auslander
PORTFOLIO MANAGER
Kenneth Rader
PORTFOLIO MANAGER
October 1998
4
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------- --------
<C> <S> <C>
COMMON STOCKS (95.7%)
BASIC MATERIALS (1.5%)
CHEMICALS (DIVERSIFIED) (1.5%)
36,400 Monsanto Co. $ 2,052
--------
CAPITAL GOODS (22.1%)
AEROSPACE/DEFENSE (7.2%)
136,700 Cordant Technologies, Inc. 5,784
109,900 Gulfstream Aerospace Corp. 4,423
--------
10,207
--------
MANUFACTURING (DIVERSIFIED) (10.3%)
49,300 Tyco International Ltd. 2,724
155,800 United Technologies Corp. 11,909
--------
14,633
--------
OFFICE EQUIPMENT & SUPPLIES (4.6%)
165,600 Knoll, Inc. 3,623
55,100 Pitney Bowes, Inc. 3,006
--------
6,629
--------
TOTAL CAPITAL GOODS 31,469
--------
COMMUNICATION SERVICES (1.7%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS) (1.7%)
27,200 Associated Group, Inc., Class A 898
5,600 Cellular Communications International, Inc. 304
29,400 NTL, Inc. 1,264
--------
2,466
--------
CONSUMER CYCLICALS (9.8%)
GAMING, LOTTERY & PARIMUTUEL
COMPANIES (0.5%)
39,700 International Game Technology 737
--------
PHOTOGRAPHY/IMAGING (0.8%)
15,000 Eastman Kodak Co. 1,160
--------
PUBLISHING (NEWSPAPERS) (2.1%)
36,500 News Corp., Ltd. ADR 817
27,200 Pulitzer Publishing Co. 2,152
--------
2,969
--------
RETAIL (SPECIALTY) (0.9%)
22,500 Gap, Inc. 1,187
--------
<CAPTION>
VALUE
SHARES (000)
- ------- --------
<C> <S> <C>
SERVICES (ADVERTISING/MARKETING) (2.0%)
11,500 Lamar Advertising Co. $ 322
205,920 R.H. Donnelley Corp. 2,548
--------
2,870
--------
SERVICES (COMMERCIAL & CONSUMER) (3.5%)
85,562 Cendant Corp. 994
387,596 Nielsen Media Research 3,973
--------
4,967
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TOTAL CONSUMER CYCLICALS 13,890
--------
CONSUMER STAPLES (14.6%)
BEVERAGES (NON-ALCOHOLIC) (3.1%)
176,000 Coca Cola Enterprises, Inc. 4,444
--------
BROADCASTING (TV, RADIO, CABLE) (9.4%)
170,800 Clear Channel Communications, Inc. 8,113
145,700 Tele-Communications, Inc., Class A 5,345
--------
13,458
--------
FOODS (1.1%)
36,700 U.S. Foodservice, Inc. 1,528
--------
ENTERTAINMENT (1.0%)
23,900 Viacom, Inc., Class B 1,386
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TOTAL CONSUMER STAPLES 20,816
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FINANCIAL (25.2%)
BANKS (MAJOR REGIONAL) (1.2%)
5,000 Wells Fargo & Co. 1,775
--------
BANKS (MONEY CENTER) (1.1%)
25,200 BankAmerica Corp. 1,515
--------
FINANCIAL (DIVERSIFIED) (3.5%)
65,100 American Express Co. 5,053
--------
INSURANCE (LIFE & HEALTH) (1.8%)
48,800 Reinsurance Group of America, Inc. (Non-Voting) 2,526
--------
INSURANCE (MULTI-LINE) (9.2%)
154,900 Loews Corp. 13,070
--------
INSURANCE (PROPERTY-CASUALTY) (7.9%)
97,100 Allstate Corp. 4,048
35,300 General Re Corp. 7,166
--------
11,214
--------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------- --------
<C> <S> <C>
INVESTMENT MANAGEMENT (0.5%)
23,700 PIMCO Advisors Holdings L.P. $ 696
--------
TOTAL FINANCIAL 35,849
--------
HEALTH CARE (2.0%)
HEALTH CARE (DRUGS-GENERIC & OTHERS) (2.0%)
37,700 Amgen, Inc. 2,849
--------
TECHNOLOGY (5.1%)
ELECTRONICS (DEFENSE) (5.1%)
12,200 Litton Industries, Inc. 7,320
--------
TRANSPORTATION (11.1%)
AIRLINES (11.1%)
418,900 Continental Airlines, Inc., Class B 15,813
--------
UTILITIES (2.6%)
ELECTRIC COMPANIES (2.6%)
84,100 Montana Power Co. 3,758
--------
TOTAL COMMON STOCKS (Cost $152,423) 136,282
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
CONTRACTS
- ---------
<C> <S> <C>
PURCHASED OPTIONS (0.2%)
FOODS (0.2%)
296 Whole Foods, Inc., expiring 2/20/99,
strike price $50 (Cost $330) 289
-----------
<CAPTION>
VALUE
(000)
-----------
<C> <S> <C>
TOTAL INVESTMENTS (95.9%) (Cost $152,753) $ 136,571
-----------
</TABLE>
<TABLE>
<S> <C>
OTHER ASSETS AND LIABILITIES (4.1%)
Other Assets 15,730
Liabilities (9,902)
--------
5,828
--------
NET ASSETS (100%) $142,399
--------
--------
CLASS A:
- --------
NET ASSETS $124,854
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 9,003,049 outstanding $0.001 par value shares
(authorized 500,000,000 shares) $ 13.87
--------
--------
CLASS B:
- --------
NET ASSETS $ 17,545
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE]
Applicable to 1,271,357 outstanding $0.001 par value shares
(authorized 500,000,000 shares) $ 13.80
--------
--------
</TABLE>
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ADR -- American Depositary Receipt
6
