<PAGE>
File No. 33-23166
811-05624
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-1A
REGISTRATION STATEMENT (NO. 33-23166)
UNDER
THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 38
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 39
--------------
MORGAN STANLEY INSTITUTIONAL FUND, INC.
(Exact Name of Registrant as Specified in Charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of Principal Executive Office)
Registrant's Telephone Number (800) 548-7786
Harold J. Schaaff, Jr., Esquire
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas, New York, New York 10020
(Name and Address of Agent for Service)
--------------
COPIES TO:
Michael F. Klein, Esquire Richard W. Grant, Esquire
Morgan Stanley Asset Management Inc. Morgan, Lewis & Bockius LLP
1221 Avenue of the Americas 2000 One Logan Square
New York, NY 10020 Philadelphia, PA 19103
--------------
Title of Securities Being Registered
--------------
Common Stock, par value $.001 per share
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX)
/ / IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (b) OF RULE 485
/ / ON ________________ PURSUANT TO PARAGRAPH (b) OF RULE 485
/X/ 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a) OF RULE 485
/ / 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a) OF RULE 485
/ / ON _______________ PURSUANT TO PARAGRAPH (a) OF RULE 485
------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
CROSS REFERENCE SHEET
PART A -INFORMATION REQUIRED IN A PROSPECTUS
Form N-1A
Item Number Location in Prospectus for the Fixed Income, Municipal Bond,
- ----------- Mortgage-Backed Securities, Money Market and Municipal Money
Market Portfolios
-------------------------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis-- Fund Expenses (Estimated for Mortgage-Backed Securities
Portfolio)
Item 3. Condensed Financial Information -- Financial Highlights (for the Fixed
Income, Global Fixed Income, Municipal Bond, High Yield, Money Market
and Municipal Money Market Portfolios only); Performance Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
Form N-1A
Item Number Location in Prospectus for the Small Cap Value Equity, Value
- ----------- Equity, Balanced, Global Fixed Income and High Yield Portfolios
-------------------------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
_______________________
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1997 Annual Report
to Shareholders, except for the following portfolios which were not in
operation at December 31, 1997: Mortgage-Backed Securities, China
Growth and MicroCap Portfolios. Information required by Item 5A for the
aforementioned portfolios will be contained in the next
Report to Shareholders following commencement of operations.
<PAGE>
Form N-1A
Item Number Location in Prospectus for the Active Country Allocation
- ----------- Portfolio
---------------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
Form N-1A
Item Number Location in Prospectus for Gold Portfolio
- ----------- -----------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
_______________________
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1997 Annual Report
to Shareholders, except for the following portfolios which were not in
operation at December 31, 1997: Mortgage-Backed Securities, China
Growth and MicroCap Portfolios. Information required by Item 5A for the
aforementioned portfolios will be contained in the next Report to
Shareholders following commencement of operations.
<PAGE>
Form N-1A Location in Prospectus for the Global Equity, International Equity,
Item Number International Small Cap and European Equity Portfolios
- ----------- -------------------------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
Form N-1A
Item Number Location in Prospectus for the Emerging Markets, Emerging
- ---------- Markets Debt and Latin American Portfolios
------------------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
_______________________
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1997 Annual Report
to Shareholders, except for the following portfolios which were not in
operation at December 31, 1997: Mortgage-Backed Securities, China
Growth and MicroCap Portfolios. Information required by Item 5A for the
aforementioned portfolios will be contained in the next Report to
Shareholders following commencement of operations.
<PAGE>
Form N-1A
Item Number Location in Prospectus for the China Growth Portfolio
- ----------- -----------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses (Estimated)
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
Form N-1A
Item Number Location in Prospectus for the Equity Growth, Emerging Growth
- ----------- and Aggressive Equity Portfolios
--------------------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses (Estimated for the MicroCap Portfolio)
Item 3. Condensed Financial Information -- Financial Highlights (for the
Equity Growth, Emerging Growth and Aggressive Equity Portfolios only);
Performance Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
_______________________
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1997 Annual Report
to Shareholders, except for the following portfolios which were not in
operation at December 31, 1997: Mortgage-Backed Securities, China
Growth and MicroCap Portfolios. Information required by Item 5A for the
aforementioned portfolios will be contained in the next Report to
Shareholders following commencement of operations.
<PAGE>
Form N-1A
Item number Location in Prospectus for the European Real Estate, Asian
- ----------- Real Estate and U.S. Real Estate Portfolios
----------------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
Form N-1A
Item Number Location in Prospectus for the International Magnum Portfolio
- ----------- -------------------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights; Performance
Information
Item 4. General Description of Registrant -- Prospectus Summary; Investment
Objective and Policies; Additional Investment Information; Investment
Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund;
Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption
of Shares; Shareholder Services; Valuation of Shares; Dividends and
Capital Gains Distributions; Taxes; General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover
Page; Purchase of Shares; Shareholder Services; Valuation of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares;
Shareholder Services
Item 9. Pending Legal Proceedings -- *
_______________________
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1997 Annual Report
to Shareholders, except for the following portfolios which were not in
operation at December 31, 1997: Mortgage-Backed Securities, China
Growth and MicroCap Portfolios. Information required by Item 5A for the
aforementioned portfolios will be contained in the next Report to
Shareholders following commencement of operations.
<PAGE>
Form N-1A
Item Number Location in Prospectus for the Technology Portfolio
- ----------- ---------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights;
Performance Information
Item 4. General Description of Registrant -- Prospectus Summary;
Investment Objective and Policies; Additional Investment
Information; Investment Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of
the Fund; Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance**
Item 6. Capital Stock and Other Securities -- Purchase of Shares;
Redemption of Shares; Shareholder Services; Valuation of
Shares; Dividends and Capital Gains Distributions; Taxes;
General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary;
Cover Page; Purchase of Shares; Shareholder Services; Valuation
of Shares
Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of
Shares; Shareholder Services
Item 9. Pending Legal Proceedings -- *
_______________________
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1997 Annual Report
to Shareholders, except for the following portfolios which were not in
operation at December 31, 1997: Mortgage-Backed Securities, China
Growth and MicroCap Portfolios. Information required by Item 5A for the
aforementioned portfolios will be contained in the next Report to
Shareholders following commencement of operations.
<PAGE>
Form N-1A Location in Prospectus for the Asian Equity and Japanese
Item Number Equity Portfolios
- ----------- --------------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights;
Performance Information
Item 4. General Description of Registrant -- Prospectus Summary;
Investment Objectives and Policies; Additional Investment
Information; Investment Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of
the Fund; Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance -- **
Item 6. Capital Stock and Other Securities -- Purchase of Shares;
Redemption of Shares; Shareholder Services; Valuation of
Shares; Dividends and Capital Gains Distributions; Taxes;
General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary;
Cover Page; Purchase of Shares; Shareholder Services;
Valuation of Shares
Item 8. Redemption or Purchase -- Prospectus Summary; Redemption of
Shares; Shareholder Services
Item 9. Pending Legal Proceedings -- *
________________________
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1997 Annual Report
to Shareholders, except for the following portfolios which were not in
operation at December 31, 1997: Mortgage-Backed Securities, China
Growth and MicroCap Portfolios. Information required by Item 5A for
the aforementioned portfolios will be contained in the next Report of
Shareholders following commencement of operations.
<PAGE>
Form N-1A
Item Number Location in Prospectus for the U.S. Equity Plus Portfolio
- ----------- ---------------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses
Item 3. Condensed Financial Information -- Financial Highlights;
Performance Information
Item 4. General Description of Registrant -- Prospectus Summary;
Investment Objectives and Policies; Additional Investment
Information; Investment Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of
the Fund; Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance -- **
Item 6. Capital Stock and Other Securities -- Purchase of Shares;
Redemption of Shares; Shareholder Services; Valuation of
Shares; Dividends and Capital Gains Distributions; Taxes;
General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary;
Cover Page; Purchase of Shares; Shareholder Services;
Valuation of Shares
Item 8. Redemption or Purchase -- Prospectus Summary; Redemption of
Shares; Shareholder Services
Item 9. Pending Legal Proceedings -- *
________________________
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1997 Annual Report
to Shareholders, except for the following portfolios which were not in
operation at December 31, 1997: Mortgage-Backed Securities, China
Growth and MicroCap Portfolios. Information required by Item 5A for
the aforementioned portfolios will be contained in the next Report of
Shareholders following commencement of operations.
<PAGE>
Form N-1A
Item Number Location in Prospectus for the MicroCap Portfolio
- ----------- -------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Fund Expenses (Estimated)
Item 3. Condensed Financial Information -- *
Item 4. General Description of Registrant -- Prospectus Summary;
Investment Objectives and Policies; Additional Investment
Information; Investment Limitations; General Information
Item 5. Management of the Fund -- Prospectus Summary; Management of
the Fund; Portfolio Transactions
Item 5A. Management's Discussion of Fund Performance -- **
Item 6. Capital Stock and Other Securities -- Purchase of Shares;
Redemption of Shares; Shareholder Services; Valuation of
Shares; Dividends and Capital Gains Distributions; Taxes;
General Information
Item 7. Purchase of Securities Being Offered -- Prospectus Summary;
Cover Page; Purchase of Shares; Shareholder Services;
Valuation of Shares
Item 8. Redemption or Purchase -- Prospectus Summary; Redemption of
Shares; Shareholder Services
Item 9. Pending Legal Proceedings -- *
________________________
* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is contained in the 1997 Annual Report
to Shareholders, except for the following portfolios which were not in
operation at December 31, 1997: Mortgage-Backed Securities, China
Growth and MicroCap Portfolios. Information required by Item 5A for
the aforementioned portfolios will be contained in the next Report of
Shareholders following commencement of operations.
<PAGE>
PART B - INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Form N-1A
Item Number Location in Statement of Additional Information for the Fixed
- ----------- Income, Global Fixed Income, Municipal Bond, Mortgage-Backed
Securities, High Yield, Money Market, Municipal Money Market,
Small Cap Value Equity, Value Equity, Balanced, Active Country
Allocation, Gold, Global Equity, International Equity,
International Magnum, International Small Cap, Asian Equity,
European Equity, Japanese Equity, Latin American, Emerging
Markets, Emerging Markets Debt, China Growth, Equity Growth,
Emerging Growth, MicroCap, Aggressive Equity, U.S. Real Estate,
European Real Estate, Asian Real Estate, Technology and U.S.
Equity Plus Portfolios
----------------------------------------------------------------
Item 10. Cover Page -- Cover Page
Item 11. Table of Contents -- Cover Page
Item 12. General Information and History -- *
Item 13. Investment Objective and Policies -- Investment Objectives and
Policies; Investment Limitations
Item 14. Management of the Fund -- Management of the Fund
Item 15. Control Persons and Principal Holders of Securities -- Management of
the Fund; General Information
Item 16. Investment Advisory and Other Services -- Management of the Fund
Item 17. Brokerage Allocation -- *
Item 18. Capital Stock and Other Securities -- General Information
Item 19. Purchase, Redemption and Pricing of Securities Being Offered --
Purchase of Shares; Redemption of Shares; Net Asset Value; General
Information
Item 20. Tax Status -- Federal Tax Treatment of Forward Currency and Futures
Contracts
Item 21. Underwriters -- *
Item 22. Calculation of Performance Data -- Performance Information
Item 23. Financial Statements -- Financial Statements
_______________
* Omitted since the answer is negative or the Item is not applicable.
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
-----------------------------------------------------------------------------
FIXED INCOME PORTFOLIO
MUNICIPAL BOND PORTFOLIO
MORTGAGE-BACKED SECURITIES PORTFOLIO
MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
thirty-two portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Fixed Income, Municipal Bond and Mortgage-Backed Securities Portfolios (the
"Non-Money Portfolios") and to the Class A and Class B shares of the Money
Market Portfolio and Class A shares of the Municipal Money Market Portfolio (the
"Money Portfolios") (each, a "Portfolio" and collectively, the "Portfolios").
The Class A and Class B shares currently offered by the Non-Money Portfolios and
the Money Market Portfolio have different minimum investment requirements and
fund expenses. Shares of the Portfolios are offered with no sales charge,
exchange fee or redemption fee. The Mortgage-Backed Securities Portfolio
currently is not being offered.
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.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator") and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Asian Real Estate, Emerging Markets,
European Equity, European Real Estate, Global Equity, Gold, International
Equity, International Magnum, International Small Cap, Japanese Equity and Latin
American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth,
Equity Growth, Small Cap Value Equity, Technology, U.S. Equity Plus, U.S. Real
Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced
Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global
Fixed Income, High Yield and Municipal Bond Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information about
the Fund is contained in a "Statement of Additional Information" dated May 1,
1998, which is incorporated herein by reference. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the Fund
are available upon request and without charge by writing or calling the Fund at
the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolios indicated below will incur:
<TABLE>
<CAPTION>
MORTGAGE- MUNICIPAL
FIXED MUNICIPAL BACKED MONEY MONEY
INCOME BOND SECURITIES MARKET MARKET
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A........................................................... None None None None None
Class B........................................................... None None None None N/A
Maximum Sales Load Imposed on Reinvested Dividends
Class A........................................................... None None None None None
Class B........................................................... None None None None N/A
Deferred Sales Load
Class A........................................................... None None None None None
Class B........................................................... None None None None N/A
Redemption Fees
Class A........................................................... None None None None None
Class B........................................................... None None None None N/A
Exchange Fees
Class A........................................................... None None None None None
Class B........................................................... None None None None N/A
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE- MUNICIPAL
FIXED MUNICIPAL BACKED MONEY MONEY
INCOME BOND SECURITIES MARKET MARKET
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO PORTFOLIO
- -------------------------------------------------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)*
Class A......................................... % % %+ %** %**
Class B......................................... % % %+ N/A
12b-1 Fees
Class A......................................... None None None+ None None
Class B......................................... 0.15%*** 0.25% 0.25%+ 0.25% N/A
Other Expenses
Class A......................................... % % %+ % %
Class B......................................... % % %+ N/A
-------- -------- -------- -------- --------
Total Operating Expenses (Net of Fee Waivers)*
Class A......................................... % % %+ %** %**
Class B......................................... % % %+ N/A
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- ------------------------------
+Estimated.
*The Adviser has agreed to waive its management fees and/or reimburse the
Portfolios, if necessary, if such fees would cause the total annual operating
expenses of each of the Portfolios to exceed a specified percentage of its
respective average daily net assets. As a result of these reductions, the
Management Fees stated above are lower than the contractual fees stated under
"Management of the Fund." The Adviser reserves the right to terminate any of
its fee waivers and/or expense reimbursements at any time in its sole
discretion. For further information on Fund expenses see "Management of the
Fund." Set forth below, for each Portfolio as applicable, are the management
fees and total operating expenses absent such fee waivers and/or expense
reimbursements as a percent of average daily net assets of the Class A shares
of the Portfolios and Class B shares of the Non-Money Portfolios and Money
Market Portfolio, respectively.
2
<PAGE>
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEES ----------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- ------------------------------------------------------ ----------------------- ------------- -------------
<S> <C> <C> <C>
Fixed Income.......................................... 0.35% % %
Municipal Bond........................................ 0.35% % %
Mortgage-Backed Securities............................ 0.35% % %
Money Market.......................................... 0.30% % %
Municipal Money Market................................ 0.30% % N/A
</TABLE>
- ------------------------
**No fee waiver or expense reimbursement is in effect for this Portfolio.
***The Distributor has agreed to waive 0.10% of the 0.25% distribution fee it is
entitled to receive from this Portfolio.
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1997 except that (i) expenses for the Mortgage-Backed
Securities Portfolio are based on estimates and assume that the average daily
net assets of the Mortgage-Backed Securities Portfolio will be $50,000,000 and
(ii) expenses for Class B shares of the Money Market Portfolio assume that
expenses for Class A and Class B shares will differ only by the distribution
expense charged to Class B shares. Due to the continuous nature of Rule 12b-1
fees, long-term Class B shareholders may pay more than the equivalent of the
maximum front-end sales charges otherwise permitted by the National Association
of Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (i) a 5% annual rate of return and (ii) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
----- ----- ----- -----
<S> <C> <C> <C> <C>
Fixed Income Portfolio
Class A............................. $ $ $ $
Class B.............................
Municipal Bond Portfolio
Class A.............................
Class B.............................
Mortgage-Backed Securities Portfolio*
Class A............................. * *
Class B............................. * *
Money Market Portfolio
Class A.............................
Class B*............................
Municipal Money Market Portfolio
Class A.............................
</TABLE>
- ------------------------------
* Because this Class or Portfolio was not operational as of the Fund's fiscal
year end, the Fund has not projected expenses beyond the three-year period
shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A and Class
B shares of the Fixed Income and Municipal Bond Portfolios and the Class A
shares of the Money Market and Municipal Money Market Portfolio for each of the
periods presented. The audited financial highlights for each Portfolio's shares
for each of the periods presented are part of the Fund's financial statements
which appear in the Fund's December 31, 1997 Annual Report to Shareholders and
which are incorporated by reference into the Fund's Statement of Additional
Information. Each Portfolio's financial highlights for each of the periods
presented have been audited by Price Waterhouse LLP, whose unqualified report
thereon is also incorporated by reference into the Statement of Additional
Information. Additional performance information is included in the Annual
Report. The Annual Report and the financial statements therein, along with the
Statement of Additional Information, are available at no cost from the Fund at
the address and telephone number noted on the cover page of this Prospectus. No
financial highlights appear for Class A and Class B shares of the
Mortgage-Backed Securities Portfolio and Class B shares of the Money Market
Portfolio because the Fund had not offered those classes of shares as of
December 31, 1997. After October 31, 1992, the Fund changed its fiscal year end
to December 31. The following information should be read in conjunction with the
financial statements and notes thereto.
4
<PAGE>
FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
---------------------
PERIOD
FROM
CLASS A JANUARY
--------------------------------------------------------------------------------- 2,
TWO 1996***
YEAR YEAR YEAR YEAR YEAR MONTHS YEAR YEAR TO
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED DECEMBER
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER OCTOBER DECEMBER 31,
31, 1997 31, 1996 31, 1995 31, 1994 31, 1993 31, 1992 31, 1992 31, 1997 1996
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............. $ 10.81 $ 9.82 $ 11.05 $ 10.93 $ 10.92 $ 10.55 $ 10.81
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (1)....... 0.67 0.72 0.59 0.54 0.10 0.69 0.64
Net Realized and
Unrealized Gain
(Loss) on
Investments...... (0.20) 1.06 (0.92) 0.41 0.01 0.39 (0.19)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from
Investment
Operations..... 0.47 1.78 (0.33) 0.95 0.11 1.08 0.45
--------- --------- --------- --------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment
Income........... (0.70) (0.79) (0.53) (0.56) (0.10) (0.69) (0.68)
In Excess of Net
Investment
Income........... (0.00)+ -- -- (0.01) -- -- --
Net Realized
Gain............. -- -- (0.37) (0.26) -- (0.02) --
In Excess of Net
Realized Gain.... -- -- (0.00)+ -- -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total
Distributions.. (0.70) (0.79) (0.90) (0.83) (0.10) (0.71) (0.68)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END
OF PERIOD.......... $ 10.58 $ 10.81 $ 9.82 $ 11.05 $ 10.93 $ 10.92 $ 10.58
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN........ 4.61% 18.76% (3.10)% 9.07% 1.02% 10.61% 4.35%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period
(Thousands)...... $130,733 $165,527 $209,331 $240,668 $154,210 $146,546 $ 1,462
Ratio of Expenses
to Average Net
Assets (1)....... 0.45% 0.45% 0.45% 0.45% 0.45%** 0.45% 0.60%**
Ratio of Net
Investment Income
to Average Net
Assets (1)....... 6.30% 6.85% 5.73% 4.97% 5.56%** 6.59% 6.15%**
Portfolio Turnover
Rate............. 183% 172% 388% 240% 15% 105% 183%
- ----------------------------------------
(1) Effect of
voluntary
expense
limitation
during the
period:
Per share
benefit to net
investment
income........ $0.02 $0.01 $0.01 $0.02 $0.01 $0.02 $0.01
Ratios before
expense
limitation:
Expenses to
Average Net
Assets........ 0.60% 0.59% 0.58% 0.60% 0.75%** 0.59% 0.74%**
Net Investment
Income to
Average Net
Assets........ 6.15% 6.71% 5.60% 4.82% 5.26%** 6.45% 6.01%**
</TABLE>
** ANNUALIZED.
*** THE PORTFOLIO BEGAN OFFERING CLASS B SHARES ON JANUARY 2, 1996.
+ AMOUNT IS LESS THAN $0.01 PER SHARE.
5
<PAGE>
MUNICIPAL BOND PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------- --------------------------
PERIOD FROM PERIOD FROM
JANUARY 18, JANUARY 2,
YEAR ENDED YEAR ENDED 1995* TO YEAR ENDED 1996*** TO
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 31, 31, 31, 31,
1997 1996 1995 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 10.37 $ 10.00 $ 10.37
----- ----------- ----------- ----- -----------
----- ----------- ----------- ----- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.49 0.44 0.44
Net Realized and Unrealized Gain (Loss) on
Investments............................... (0.12) 0.42 (0.08)
----- ----------- ----------- ----- -----------
Total from Investment Operations......... 0.37 0.86 0.36
----- ----------- ----------- ----- -----------
DISTRIBUTIONS
Net Investment Income...................... (0.49) (0.45) (0.49)
In Excess of Net Investment Income......... -- (0.00)+ --
Net Realized Gain.......................... -- (0.04) --
----- ----------- ----------- ----- -----------
Total Distributions...................... (0.49) (0.49) (0.49)
----- ----------- ----------- ----- -----------
NET ASSET VALUE, END OF PERIOD............... $ 10.25 $ 10.37 $ 10.24
----- ----------- ----------- ----- -----------
----- ----------- ----------- ----- -----------
TOTAL RETURN................................. 3.67% 8.80% 3.55%
----- ----------- ----------- ----- -----------
----- ----------- ----------- ----- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $40,227 $45,869 $ 69
Ratio of Expenses to Average Net Assets
(1)....................................... 0.45% 0.45%** 0.70%**
Ratio of Net Investment Income to Average
Net Assets (1)............................ 4.77% 4.61%** 4.56%**
Portfolio Turnover Rate.................... 45% 180% 45%
</TABLE>
- ------------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income............................... $0.03 $0.03 $0.03
Ratios before expense limitation:
Expenses to Average Net Assets........ 0.73 % 0.73 %** 0.98 %**
Net Investment Income to Average Net
Assets............................... 4.50 % 4.33 %** 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.
6
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------
TWO YEAR
YEAR MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED OCTOBER
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER 31,
31, 1997 31, 1996 31, 1995 31, 1994 31, 1993 31, 1992 1992
----------- ----------- ----------- ----------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000
----------- ----------- ----------- ----------- --------- --------- ------
----------- ----------- ----------- ----------- --------- --------- ------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (1)....... 0.049 0.054 0.040 0.027 0.005 0.039
----------- ----------- ----------- ----------- --------- --------- ------
DISTRIBUTIONS
Net Investment
Income........... (0.049) (0.054) (0.040) (0.027) (0.005) (0.039)
In Excess of Net
Investment
Income........... -- -- -- 0.000+ -- --
----------- ----------- ----------- ----------- --------- --------- ------
Total
Distributions... (0.049) (0.054) (0.040) (0.027) (0.005) (0.039)
----------- ----------- ----------- ----------- --------- --------- ------
NET ASSET VALUE, END
OF PERIOD.......... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000
----------- ----------- ----------- ----------- --------- --------- ------
----------- ----------- ----------- ----------- --------- --------- ------
TOTAL RETURN........ 5.03% 5.51% 3.84% 2.76% 0.50% 3.77%
----------- ----------- ----------- ----------- --------- --------- ------
----------- ----------- ----------- ----------- --------- --------- ------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period
(Thousands)...... $1,284,633 $836,693 $690,503 $657,163 $599,172 $612,968
Ratio of Expenses
to Average Net
Assets (1)....... 0.52% 0.51% 0.49% 0.53% 0.55%** 0.52%
Ratio of Net
Investment Income
to Average Net
Assets (1)....... 4.92% 5.37% 3.77% 2.71% 3.11%** 3.74%
- ------------------------------
(1) Effect of
voluntary
expense
limitation
during the
period:
Per share
benefit to net
investment
income........ N/A N/A N/A $0.000+ $0.000+ N/A
Ratios before
expense
limitation:
Expenses to
Average Net
Assets........ N/A N/A N/A 0.54% 0.59%** N/A
Net Investment
Income to
Average Net
Assets........ N/A N/A N/A 2.70% 3.07%** N/A
</TABLE>
** Annualized.
+ Amount if less than $0.001 per share.
7
<PAGE>
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
TWO
MONTHS YEAR
YEAR YEAR ENDED
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED OCTOBER
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER 31,
31, 1997 31, 1996 31, 1995 31, 1994 31, 1993 31, 1992 1992
----------- ----------- ----------- ----------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000
----- ----------- ----------- ----------- --------- --------- ------
----- ----------- ----------- ----------- --------- --------- ------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (1)....... 0.030 0.034 0.020 0.019 0.004 0.026
----- ----------- ----------- ----------- --------- --------- ------
DISTRIBUTIONS
Net Investment
Income........... (0.030) (0.034) (0.020) (0.019) (0.004) (0.026)
In Excess of Net
Investment
Income........... -- -- -- (0.000)+ -- --
----- ----------- ----------- ----------- --------- --------- ------
Total
Distributions... (0.030) (0.034) (0.020) (0.019) (0.004) (0.026)
----- ----------- ----------- ----------- --------- --------- ------
NET ASSET VALUE, END
OF PERIOD.......... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000
----- ----------- ----------- ----------- --------- --------- ------
----- ----------- ----------- ----------- --------- --------- ------
TOTAL RETURN........ 3.02% 3.44% 2.44% 1.91% 0.37% 2.74%
----- ----------- ----------- ----------- --------- --------- ------
----- ----------- ----------- ----------- --------- --------- ------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period
(Thousands)...... $721,410 $451,519 $359,444 $266,524 $208,866 $206,691
Ratio of Expenses
to Average Net
Assets (1)....... 0.53% 0.52% 0.51% 0.54% 0.57%** 0.55%
Ratio of Net
Investment Income
to Average Net
Assets (1)....... 2.98% 3.38% 2.42% 1.89% 2.31%** 2.66%
- ------------------------------
(1) Effect of
voluntary
expense
limitation
during the
period:
Per share
benefit to net
investment
income........ N/A N/A N/A $0.000+ $0.000+ N/A
Ratios before
expense
limitation:
Expenses to
Average Net
Assets........ N/A N/A N/A 0.56% 0.67%** N/A
Net Investment
Income to
Average Net
Assets........ N/A N/A N/A 1.87% 2.21%** N/A
</TABLE>
** Annualized.
+ Amount is less than $0.001 per share.
8
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of thirty-two portfolios, offering institutional and high
net worth individual investors a broad range of investment choices coupled with
the advantages of a no-load mutual fund with Morgan Stanley and its affiliates
providing customized services as Adviser, Administrator and Distributor. Each
portfolio offers Class A shares and Class B shares, except the International
Small Cap and Municipal Money Market Portfolios which offer only Class A shares.
Each portfolio has its own investment objective and policies designed to meet
its specific goals. The investment objective of each Portfolio described in this
Prospectus is as follows:
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing in municipal
obligations, the interest on which is exempt from federal income tax.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment grade mortgage-backed
securities.
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and telephone number noted on the
cover page of this Prospectus. The investment objectives of these other
portfolios are listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of companies in
the Asian real estate industry.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
9
<PAGE>
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
- The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and
long-term capital appreciation by investing primarily in equity securities
of companies in the European real estate industry.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in equity securities of small- to medium-sized companies which
the Adviser believes to be undervalued.
- The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Adviser, are expected to be benefit from their involvement in technology
and technology-related industries.
- The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers included in the S&P
500 Index ("S&P 500").
- 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
substantial investment in real estate investment trusts.
10
<PAGE>
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of equity securities which the Adviser believe
to be undervalued and fixed income securities.
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
- 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 of the recognized rating services.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund and
each of its portfolios. As of , 1998, Morgan Stanley Asset Management
Inc. and its affiliated institutional asset management companies (exclusive of
Miller Anderson & Sherrerd, LLP) managed assets of approximately $ billion.
See "Management of the Fund -- Investment Adviser" and "Management of the Fund
- -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Non-Money Portfolio are offered at net asset value with no sales commission, but
with a 12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of
the Class B shares average daily net assets on an annualized basis. The
Distributor has agreed to waive 0.10% of the 0.25% 12b-1 fee with respect to the
Fixed Income Portfolio. The minimum initial investment, generally, is $500,000
for Class A shares of each Portfolio and $100,000 for Class B shares of each
Non-Money Portfolio. There is no minimum investment for Class B shares of the
Money Market Portfolio. The minimum initial investment amount is reduced for
certain categories of investors. For additional information on how to purchase
shares and minimum initial investments, see "Purchase of Shares."
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of the applicable class
next determined after receipt of the redemption request. The redemption price
may be more or less than the purchase price. Certain redemptions that cause the
value of an account to remain for a continuous 60-day period below the minimum
investment amount for Class A shares or Class B shares may result in involuntary
redemption or automatic conversion. For additional information on how to redeem
shares and involuntary redemption or conversion, see "Purchase of Shares" and
"Redemption of Shares."
11
<PAGE>
RISK FACTORS
Investing in each of the Portfolios entails certain risks and considerations
of which an investor should be aware. The Portfolios' share prices and
investment returns fluctuate and, when redeemed, an investment in the Portfolios
may be worth more or less than its original cost. The investment policies of the
Portfolios may entail the following risk factors:
- FIXED INCOME SECURITIES. Each Portfolio will be subject to credit risk and
market risk associated with investment in fixed income securities. Credit
risk is the possibility that an issuer may be unable to meet scheduled
principal and interest payments. Market risk is the possibility that a
change in interest rates or the market's perception of the issuer's
prospects may adversely affect the value of a fixed income security.
- MORTGAGE-BACKED SECURITIES. The Fixed Income, Mortgage-Backed Securities
and Money Market Portfolios may invest in mortgage-backed securities.
Mortgage-backed securities represent an interest in a pool of underlying
mortgage loans. They are sensitive to changes in interest rates, but may
respond to these changes in a manner different from other fixed income
securities due to the possibility of prepayment of the underlying mortgage
loans. As a result, it is not possible to determine in advance the actual
maturity date or average life of a mortgage-backed security. Rising
interest rates tend to discourage refinancings, with the result that the
average life and volatility of the security will increase and its market
price will decrease. When interest rates fall, mortgage-backed securities
may not gain as much in market value because additional mortgage
prepayments must be reinvested at lower interest rates.
- FOREIGN INVESTMENT. The Fixed Income Portfolio may invest in the
securities of foreign issuers. The risks of foreign investment include
fluctuations in foreign currency values, political events affecting the
country of issuance and potentially greater market volatility and lower
liquidity.
- DERIVATIVES. Each Non-Money Portfolio may invest in instruments that
derive their values from those of specified securities, indices,
currencies or other points of reference. These derivatives, including
those used to manage risk, are themselves subject to the risks of the
different markets in which they are traded and, therefore, may or may not
serve their intended purposes.
For additional information about risk factors, see also "Investment Objectives
and Policies" and "Additional Investment Information."
12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies each Portfolio will employ in its efforts to achieve its objective.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. In addition to the investments and strategies described below, the
Portfolios may invest in certain securities and obligations as set forth in
"Additional Investment Information" and as described under "Investment
Objectives and Policies" in the Statement of Additional Information. The
investment policies described below are not fundamental policies unless
otherwise noted and may be changed without shareholder approval.
THE FIXED INCOME PORTFOLIO
The Fixed Income Portfolio seeks to produce a high total return consistent
with the preservation of capital by investing 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, such as certificates of deposit and short-term money
market instruments. Short- and intermediate-term bonds form the core of the
Portfolio, and long-term bonds (i.e., those with maturities over ten years) are
purchased on a short-term opportunistic basis when the Adviser believes they
will enhance return without significantly increasing risk. The Adviser sets an
annual target rate of return for the Portfolio based on current and projected
market and economic conditions and manages the Portfolio conservatively --
primarily through gradual shifts in maturities in attempting to achieve this
target rate.
The Portfolio will typically invest between 50% and 75% of its total assets
in U.S. Government and mortgage-backed securities. The Portfolio will purchase
corporate bonds that generally are rated in the two highest rating categories by
Moody's Investors Service, Inc. ("Moody's") (Aaa or Aa) or Standard & Poor's
Ratings Group ("S&P") (AAA or AA). The Portfolio will not invest in a corporate
bond if it is not rated at least investment grade by either rating agency at the
time of investment. The Portfolio may invest up to 15% of its assets in fixed
income instruments denominated in foreign currencies and issued by corporate or
governmental issuers when the Adviser feels that the currency component and
underlying market characteristics of such obligations will add value to the
Portfolio.
THE MUNICIPAL BOND PORTFOLIO
The Municipal Bond Portfolio seeks to produce a high level of current income
consistent with preservation of principal by investing in a portfolio consisting
primarily of intermediate- and long-term investment grade municipal obligations
("Municipal Obligations"), the interest on which is exempt from federal income
tax. Municipal Obligations include notes, bonds and other securities issued by
or on behalf of states, territories and possessions of the United States and the
District of Columbia, and their political subdivisions, agencies and
instrumentalities, on which the interest paid is, in the opinion of counsel for
the issuer or the Portfolio, exempt from federal income tax.
The Portfolio will invest only in Municipal Obligations if they are
investment grade securities. Investment grade securities are (i) bonds rated
within one of the four highest rating categories of Moody's (Aaa, Aa, A or Baa)
or S&P (AAA, AA, A or BBB); (ii) notes rated within one of the two highest
rating categories of Moody's (MIG1 or MIG2) or one of the two highest rating
categories of S&P (SP-1 or SP-2); (iii) commercial paper rated P-1 or P-2 by
Moody's or A-1 or A-2 by S&P; (iv) variable rate securities rated VMIG1 or VMIG2
by Moody's; and
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(v) unrated Municipal Obligations that the Adviser believes are of comparable
quality to securities in the foregoing rating categories. Bonds rated Baa by
Moody's or BBB by S&P have speculative characteristics. Under normal
circumstances, the Portfolio will invest at least 80% of its net assets in
Municipal Obligations (or futures contracts or options on futures relating
thereto), that are rated investment grade at the time of investment. This policy
is fundamental and may not be changed without the approval of a majority of the
Portfolio's outstanding voting securities.
Although there are no maturity restrictions on the Municipal Obligations in
which the Portfolio invests, it is currently anticipated that the average
maturity will range between 7 and 20 years. Under normal circumstances, at least
65% of the Portfolio's net assets will be invested in Municipal Obligations
having an initial maturity of more than one year. The Adviser will actively
manage the Portfolio, and adjust its average maturity (including by the use of
futures contracts and options on futures), depending on its assessment of the
relative yields available on securities of different maturities and its
expectations of future changes in interest rates. During periods of rising
interest rates and declining prices, the average maturity of the Portfolio may
be shorter, while during periods of declining interest rates and rising prices,
the Portfolio may have a longer average maturity. The Portfolio will not invest
more than 20% of its net assets in Municipal Obligations the interest on which
is subject to alternative minimum tax.
The Portfolio may also invest up to 20% of its net assets in cash, cash
equivalents, U.S. Government Securities and taxable corporate investment grade
securities. U.S. Government Securities consist of direct obligations of the U.S.
Treasury and securities issued or guaranteed by agencies or instrumentalities of
the U.S. Government. Securities issued or guaranteed by agencies or
instrumentalities may be backed by the full faith and credit of the United
States (such as securities issued by the Government National Mortgage
Association ("GNMA")), or supported by the issuing agency's right to borrow from
the U.S. Treasury (such as securities issued by the Federal Home Loan Banks), or
backed only by the credit of the issuing instrumentality such as securities
issued by Fannie Mae).
THE MORTGAGE-BACKED SECURITIES PORTFOLIO
The Mortgage-Backed Securities Portfolio seeks to produce as high a level of
current income as is consistent with the preservation of capital by investing
primarily in mortgage-backed securities either (i) issued or guaranteed by the
U.S. Government or (ii) rated A or higher by Moody's or S&P or, if unrated,
determined by the Adviser to be of comparable quality.
The Portfolio will invest in mortgage-backed securities that are either (i)
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities or (ii) at the time of investment rated within one of the
three highest rating categories of Moody's (Aaa, Aa or A) or S&P (AAA, AA or A),
or if unrated, determined by the Adviser to be of comparable quality. Under
normal circumstances, the Adviser expects that at least 75% of the Portfolio's
net assets will be invested in mortgage-backed securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities or rated Aaa by
Moody's or AAA by S&P. Up to 15% of the Portfolio's net assets may be invested
in mortgage-backed securities rated A by Moody's or S&P.
The Adviser expects that short- and intermediate-term mortgage-backed
securities will form the core of the Portfolio, with long-term securities (i.e.,
with maturities over ten years) being purchased when the Adviser believes that
they will enhance return without significantly increasing risk. The Adviser sets
an annual target
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rate of return for the Portfolio based on current and projected market and
economic conditions and manages the Portfolio conservatively -- primarily
through gradual shifts in maturities -- in attempting to achieve this target
rate.
THE MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to maximize current income and preserve
capital while maintaining high levels of liquidity by investing in the following
high quality money market instruments which have remaining maturities of one
year or less. The Portfolio's average maturity (on a dollar-weighted basis) will
not exceed 90 days. The Portfolio expects 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.
U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in obligations issued
or guaranteed by the U.S. Government, such as U.S. Treasury securities and those
backed by the full faith and credit of the United States, such as obligations of
GNMA, the Farmers Home Administration and the Export-Import Bank. The Portfolio
may also invest in obligations issued or guaranteed by U.S. Government agencies
or instrumentalities where the Portfolio must look principally to the issuing or
guaranteeing agency for ultimate repayment; some examples of agencies or
instrumentalities issuing these obligations are the Federal Farm Credit System
and the Federal Home Loan Banks.
MORTGAGE-BACKED SECURITIES. The Portfolio may invest in certain high
quality mortgage-backed securities.
BANK OBLIGATIONS. The Portfolio may invest in high quality U.S.
dollar-denominated negotiable certificates of deposit, time deposits, deposit
notes and bankers' acceptances of (i) banks, savings and loan associations and
savings banks which have more than $2 billion in total assets and are organized
under federal or state law, (ii) foreign branches of these banks ("Euros") and
(iii) U.S. branches of foreign banks of equivalent size ("Yankees"). The
Portfolio may also invest in U.S. dollar-denominated obligations of the
International Bank for Reconstruction and Development ("World Bank"). These
obligations are supported by appropriated but unpaid commitments of the World
Bank's member countries, and there is no assurance these commitments will be
undertaken or met in the future.
COMMERCIAL PAPER; CORPORATE BONDS. The Portfolio may invest in high quality
commercial paper and corporate bonds issued by U.S. corporations. The Portfolio
may also invest in commercial paper issued by foreign corporations if the issuer
is a direct subsidiary of a U.S. corporation, the obligation is U.S. dollar-
denominated and is not subject to foreign withholding tax, and the aggregate of
these foreign investments does not exceed 10% of the Portfolio's net assets.
QUALITY INFORMATION. The Portfolio will limit its portfolio investments to
those instruments that present minimal credit risks and are of "eligible
quality" as determined by the Adviser under the supervision of the Board of
Directors in accordance with regulations of the Commission, as they may from
time to time be amended. For this purpose, "eligible quality" means a security
rated (i) in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations assigning a rating to the security
or issuer, or (ii) if only one rating organization assigned a rating, by that
rating organization or (iii) if unrated, of
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comparable quality as determined by the Board of Directors. The Money Market
Portfolio will not purchase any bank or corporate obligation unless it is rated
at least Aa or Prime-1 by Moody's or AA or A-1 by S&P, or is deemed to be of
comparable quality.
These standards must be satisfied at the time an investment is made. In the
event that an investment held by the Portfolio is assigned a lower rating or
ceases to be rated, the Adviser under the supervision of the Board of Directors,
will promptly reassess whether such security presents minimal credit risk and
whether the Portfolio should continue to hold the security. If a portfolio
security no longer presents minimal credit risk or is in default, the Portfolio
will dispose of the security as soon as reasonably practicable unless the Board
of Directors determines that it is not in the best interests of the Portfolio to
do so.
THE MUNICIPAL MONEY MARKET PORTFOLIO
The Municipal Money Market Portfolio seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity by
investing in the following high quality municipal money market instruments
which, in the opinion of bond counsel for the issuer, earn interest exempt from
federal income tax. 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
that pay interest subject to the 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 expects 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.
MUNICIPAL BONDS. The Portfolio may invest in bonds issued by or on behalf
of states, territories and possessions of the United States and its political
subdivisions, agencies, authorities and instrumentalities. These obligations may
be general obligation bonds secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest, or they may
be revenue bonds payable from specific revenue sources, but not generally backed
by the issuer's taxing power. These obligations include private activity bonds
where payment is the responsibility of the private industrial user of the
facility financed by the bonds. The Portfolio may invest more than 25% of its
total assets in private activity bonds (provided that the interest on such bonds
is not subject to the alternative minimum tax), but may not invest more than 25%
of its total assets in these bonds related to projects of similar type or in the
same state.
MUNICIPAL NOTES. The Portfolio may also invest in municipal notes of
various types, including notes issued in anticipation of receipt of taxes, the
proceeds of the sale of bonds, other revenues or grant proceeds and project
notes, as well as municipal commercial paper and municipal demand obligations.
There may be no secondary market for project notes, and the Portfolio intends to
hold such notes until maturity. There is no specific percentage limitation on
these investments.
QUALITY INFORMATION. The Portfolio will limit its portfolio investments to
those instruments which present minimal credit risk and which are of "eligible
quality" as determined by the Adviser under the supervision of the Board of
Directors in accordance with regulations of the Commission, as they may from
time to time be amended. For this purpose, "eligible quality" means a security
rated (i) in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations assigning a rating to the security
or issuer or, (ii) if only one rating organization assigned a rating, by that
rating organization or (iii) if unrated, of
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comparable quality as determined by the Board of Directors. The Municipal Money
Market Portfolio will not purchase any municipal obligation unless it is rated
at least Aa, MIG-1 (or MIG-2 in the case of New York State municipal notes), or
Prime-1 by Moody's, or AA, SP-1 or A-1 by S&P, or is deemed to be of comparable
quality.
These standards must be satisfied at the time an investment is made. In the
event that an investment held by the Portfolio is assigned a lower rating or
ceases to be rated, the Adviser under the supervision of the Board of Directors
will promptly reassess whether such security presents minimal credit risk and
whether the Portfolio should continue to hold the security. If a portfolio
security no longer presents minimal credit risk or is in default, the Portfolio
will dispose of the security as soon as reasonably practicable unless the Board
of Directors determines that it is not in the best interests of the Portfolio to
do so. The credit quality of municipal obligations is frequently enhanced by
various arrangements with domestic or foreign financial institutions, such as
letters of credit, guarantees and insurance, and these arrangements are
considered when investment quality is evaluated.
PUTS FOR THE MUNICIPAL MONEY MARKET PORTFOLIO. The Portfolio may to the
extent consistent with the Portfolio's investment policies, purchase without
limit municipal bonds or notes together with the right to resell them at an
agreed price or yield within a specified period prior to maturity. This right to
resell is known as a "put." The aggregate price paid for securities with puts
may be higher than the price which otherwise would be paid. The purpose of this
practice is to permit the Portfolio to be fully invested in tax-exempt
securities while maintaining the necessary liquidity to purchase securities on a
when-issued basis, to meet unusually large redemptions, to purchase at a later
date securities other than those subject to the put and to facilitate the
Adviser's ability to manage the Portfolio actively. The principal risk of puts
is that the put writer may default on its obligation to repurchase. The Adviser
will monitor each put writer's ability to meet its obligations. No value is
assigned to any puts. The cost of any such put is carried as an unrealized loss
from the time of purchase until it is exercised or expires.
ADDITIONAL INVESTMENT INFORMATION
FIXED INCOME SECURITIES. Each Portfolio will invest in fixed income (debt)
securities. The market value of the fixed income securities in which a Portfolio
invest will be affected by changes in the creditworthiness of issuers and will
change in response to interest rate changes and other factors. Generally, the
values of fixed income securities vary inversely with changes in interest rates,
so that during periods of falling interest rates, the values of outstanding
fixed income securities generally rise and during periods of rising interest
rates, the values of such securities generally decline. While securities with
longer maturities tend to produce higher yields, the prices of longer maturity
securities are subject to greater market fluctuations as a result of changes in
interest rates.
FOREIGN INVESTMENT. The Fixed Income Portfolio may invest in the securities
of foreign issuers. Investment in securities of foreign issuers involves
investment risks somewhat different from those affecting securities of U.S.
issuers. The Portfolio's investments will be subject to political and economic
events that affect the countries in which it invests. Foreign issuers may be
subject to different accounting, auditing and financial standards and
requirements. There also may be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the United
States. Many foreign securities markets have substantially less trading volume
than U.S. national securities exchanges and, therefore, securities of some
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foreign issuers are less liquid and more volatile than securities of comparable
U.S. issuers. Brokerage commissions and other transaction costs on foreign
securities exchanges are generally higher than in the United States. Dividends
and interest paid by foreign issuers may be subject to withholding and other
foreign taxes, which may decrease the net return on foreign investments as
compared to dividends and interest paid to the Portfolio by domestic companies.
Investments in securities of foreign issuers are generally denominated in
foreign currencies and, since the Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of the Portfolio's
assets as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency exchange rates and exchange control regulations, and the
Portfolio may incur costs in connection with conversions between various
currencies.
FOREIGN CURRENCY FORWARD CONTRACTS.
Each Non-Money Portfolio may enter into foreign currency forward contracts
("forward contracts") that provide for the purchase or sale of an amount of a
specified currency at a future date. The Portfolio may use such contracts to
protect against a decline in a foreign currency against the U.S. dollar between
the trade date and settlement date when the Portfolio purchases or sells
securities, lock in the U.S. dollar value of dividends and interest on
securities held by the Portfolio, and generally to protect the U.S. dollar value
of securities held by the Portfolio against exchange rate fluctuation. While
forward contracts may limit losses as a result of exchange rate fluctuations,
they will also limit any gains that might otherwise have been realized. The
Portfolio's Custodian may be required to place cash or liquid securities in a
segregated account in an amount equal to the value of the Portfolio's total
assets committed to the consummation of forward contracts. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will be at least equal to the amount of the Portfolio's commitments
with respect to such contracts.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets.
MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money
market instruments, although each Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
Consistent with their investment policies, the Portfolios may make money market
investments pending other investment or settlement for liquidity. In addition,
the Portfolios may invest in money market instruments for temporary defensive
purposes during adverse market conditions. The money market investments
permitted for the Portfolios include obligations of the U.S. Government and its
agencies and instrumentalities, obligations of foreign sovereignties, commercial
paper, bank obligations (including certificates of deposit), other debt
securities and repurchase agreements.
MORTGAGE-BACKED SECURITIES. The Fixed Income, Mortgage-Backed Securities
and Money Market Portfolios may invest in mortgage-backed securities.
Mortgage-backed securities, directly or indirectly, represent an interest in a
pool of mortgage loans on real property. The Portfolios generally will invest in
two types of
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mortgage-backed securities. Mortgage pass-through securities represent a direct
interest in a group of loans that has been pooled and the loan payments passed
through to security holders. Collateralized mortgage obligations ("CMOs") are
fixed income securities that, rather than representing a direct interest in a
pool of underlying mortgage loans, are collateralized by the underlying loans.
The indirect ownership structure enables issuers to offer CMOs with a number of
different classes, or tranches, having particular risk/return characteristics.
The loans may be pooled by a government agency or instrumentality, such as
the Government National Mortgage Association, which packages the loans and
guarantees repayment of principal and/or interest on the underlying loans. The
agencies or instrumentalities pooling and guaranteeing such loans may or may not
be backed by full faith and credit of the U.S. Government. Mortgage-backed
securities also may be issued by private originators of or investors in mortgage
loans and structured similarly to governmental pass-through securities. Because
privately issued securities typically lack a guarantee by an entity having the
credit status of a governmental agency or instrumentality, they often are
structured with one or more types of credit enhancement.
Investment in mortgage-backed securities entails certain risks. Like other
debt securities, the value of mortgage-backed securities generally varies
inversely with changes in interest rates. However, mortgage-backed securities
may respond to these changes in a manner different from other fixed income
securities because the possibility of prepayment of the underlying mortgage
loans makes it difficult to determine in advance the actual maturity date or
average life of a mortgage-backed security. Rising interest rates tend to
discourage refinancings, with the result that the average life and volatility of
the security will increase and its market price will decrease. When interest
rates fall, however, mortgage-backed securities may not gain as much in value
because increased mortgage prepayments must be reinvested at lower interest
rates.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines of the Fund's
Board of Directors. In a repurchase agreement, a Portfolio buys a security from
a seller that has agreed to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement. The
term of these agreements is usually from overnight to one week and never exceeds
one year. A repurchase agreement may be viewed as a fully collateralized loan of
money by the Portfolio to the seller. The Portfolio always receives securities
with a market value at least equal to the purchase price (including accrued
interest) as collateral, and this value is maintained during the term of the
agreement. If the seller defaults and the collateral value declines, the
Portfolio might incur a loss. If bankruptcy proceedings are commenced with
respect to the seller, the Portfolio's realization upon the collateral may be
delayed or limited. The Portfolio may not enter into repurchase agreements with
more than seven days to maturity if, as a result, more than 15% of the market
value of the Portfolio's net assets are invested in these agreements and other
investments for which market quotations are not readily available or which are
otherwise illiquid.
REVERSE REPURCHASE AGREEMENTS. The Money Market Portfolio may enter into
reverse repurchase agreements with brokers, dealers, domestic and foreign banks
or other financial institutions. In a reverse repurchase agreement, the
Portfolio sells a security and agrees to repurchase it at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. Reverse Repurchase Agreements may also be viewed as the borrowing of
money by the Portfolio and are, therefore, subject to the Portfolio's overall
borrowing limitations. The Portfolio's investment of the proceeds of a reverse
repurchase agreement is the speculative factor known as leverage. The Portfolio
may enter into a reverse repurchase agreement only if
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the interest income from investment of the proceeds is greater than the interest
expense of the transaction and the proceeds are invested for a period no longer
than the term of the agreement. The Portfolio will maintain with the Custodian a
segregated account of securities at least equal to its purchase obligations
under these agreements. If interest rates rise during a reverse repurchase
agreement, it may adversely affect the Portfolio's ability to maintain a stable
net asset value.
TAXABLE INVESTMENTS. The Municipal Bond and Municipal Money Market
Portfolios attempt to invest 80% and 100%, respectively, of their assets in
tax-exempt municipal securities. However, the Portfolios are permitted to invest
up to 20% of the value of their total assets in securities, the interest income
of which is subject to federal income tax. Either Portfolio may make taxable
investments pending investment of proceeds from sales of its shares or portfolio
securities or pending settlement of purchases of portfolio securities in order
to maintain liquidity to meet redemptions or when it is advisable in the
Adviser's opinion because of adverse market conditions. The taxable investments
permitted for either Portfolio include obligations of the U.S. Government and
its agencies and instrumentalities, bank obligations, commercial paper and
repurchase agreements. Fees from loans of tax-exempt securities will also be
taxable income of the Portfolio.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, each Portfolio
may, for temporary defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and medium-term debt obligations in which a Portfolio may invest consist of (i)
obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. Each Portfolio will
maintain with the Custodian a segregated account of cash or liquid securities in
an amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time a Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if the general level of
interest rates has changed. It is a fundamental policy of the Money Market
Portfolio and a current policy of the Municipal Money Market Portfolio not to
enter into when-issued commitments exceeding, in the aggregate, 15% of the
market value of the Portfolio's total assets less liabilities other than the
obligations created by these commitments.
DERIVATIVE PRODUCTS (DERIVATIVES)
The Non-Money Portfolios are permitted to utilize various exchange-traded
and over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. The Money Portfolios do not utilize derivative
products. Permitted derivative products include, but are not limited to: futures
contracts ("futures"); forward contracts ("forwards"); options; swaps, caps,
collars and floors; structured notes; and other derivative products yet to be
developed, so long as these new products are used in a manner consistent with
the objectives of the Portfolios. These derivative products may be based upon a
wide variety of underlying rates,
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indices, instruments, securities and other products, such as interest rates,
foreign currencies, foreign and domestic fixed income and equity securities,
groups or "baskets" of securities and securities indices (for each derivative
product, the "underlying"). Exclusive of forward foreign currency contracts and
any derivative products used for hedging purposes, each Portfolio will limit its
use of derivative products to 33 1/3% of its total assets, measured by the
aggregate notional amount of outstanding derivative products.
The Portfolios may use derivative products under a number of different
circumstances to further their investment objectives. For example, a Portfolio
may purchase derivatives to gain exposure to a market quickly in response to
changes in the Portfolio's investment strategy, upon the inflow of investable
cash or when the derivative provides greater liquidity than the underlying
market. A Portfolio may also use derivatives when it is restricted from directly
owning the "underlying" or when derivatives provide a pricing advantage or lower
transaction costs. The Portfolios also may purchase combinations of derivatives
in order to gain exposure to an investment in lieu of actually purchasing such
investment. Derivatives may also be used by a Portfolio for hedging or risk
management purposes and in other circumstances when the Adviser believes it
advantageous to do so consistent with the Portfolio's investment objectives and
policies. The Portfolios will not use derivatives in a manner that creates
leverage, except to the extent that the use of leverage is expressly permitted
by a particular Portfolio's investment policies, and then only in a manner
consistent with such policies.
The use of derivative products is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Portfolios will be less favorable than it would
have been if these investment techniques had not been used.
Some of the derivative products in which the Portfolios may invest and some
of the risks related thereto are described in more detail below.
FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)
The Non-Money Portfolios may purchase and sell futures contracts, such as
futures on securities indices, baskets of securities, foreign currencies and
interest rates of the type generally known as financial futures. These are
standardized contracts that are bought and sold on organized exchanges. A
futures contract obligates a party to buy or sell a specific amount of the
"underlying," such as for example, a particular foreign currency, on a specified
future date at a specified price or to settle the value in cash.
The Portfolios may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolios may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Forward Contracts" above. These
forward contracts are privately negotiated and are bought and sold in the
over-the-counter market. Like a future, a forward contract obligates a party to
buy or sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.
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In some cases, the Portfolios may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolios will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolios may utilize futures contracts, forward contracts and related options
are as follows:
The Portfolios may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market exposure.
There currently are limited securities index futures and options on such futures
in many countries, particularly emerging countries. The nature of the strategies
adopted by the Adviser, and the extent to which those strategies are used, may
depend on the development of such markets. The Portfolios may also purchase and
sell foreign currency futures to hedge their respective holdings and commitments
against changes in the level of future currency rates or to adjust their
exposure to a particular currency.
The Portfolios may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely with
changes in interest rates. The Portfolios may engage in such transactions to
hedge their holdings of debt instruments against future changes in interest
rates or for other purposes.
The Portfolios may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these contracts also rises and falls inversely with
changes in interest rates. The Portfolios may engage in financial futures and
forward contracts for both hedging and non-hedging purposes.
Gains and losses on futures contracts, forward contracts and related options
depend on the Adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors. Other risks associated with
the use of these instruments include (i) imperfect correlation between the
change in market value of investments held by a Portfolio and the prices of
derivative products relating to investments purchased or sold by the Portfolio,
and (ii) possible lack of a liquid secondary market for a derivative product and
the resulting inability to close out a position. The risk that a Portfolio will
be unable to close out a position will be minimized by only entering into
transactions for which there appears to be a liquid exchange or secondary
market. In some strategies, the risk of loss in trading on futures and related
transactions can be substantial, due both to the low margin deposits required
and the extremely high degree of leverage involved in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the
"CFTC"), each Portfolio may, without registering with the CFTC as a Commodity
Pool Operator, enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-bona
fide hedging activities.
OPTION TRANSACTIONS
The Non-Money Portfolios may seek to increase their returns or may hedge
their portfolio investments through options transactions with respect to
individual securities, indices or baskets in which such Portfolios may invest;
other financial instruments; and foreign currency. Various options may be
purchased and sold on either the exchange-traded or over-the-counter markets.
22
<PAGE>
Each Portfolio may purchase put and call options. Purchasing a put option
gives a Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period.
Purchasing a call option gives a Portfolio a similar right, but not the
obligation, to purchase the underlying. The purchaser pays a premium to the
seller (also known as the writer) of the option.
Each Portfolio also may write put and call options on investments held in
its portfolio, as well as foreign currency options. A Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, a Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, a Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.
By writing an option, a Portfolio incurs an obligation either to buy (in the
case of a put option) or sell (in the case of a call option) the underlying from
the purchaser of the option at the option's exercise price, upon exercise by the
purchaser. Pursuant to guidelines established by the Board of Directors, the
Portfolios may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will continue to own (i) the underlying; (ii) securities or instruments
convertible or exchangeable without the payment of any consideration into the
underlying; or (iii) a call option on the same underlying with a strike price no
higher than the price at which the underlying was sold pursuant to a short
option position. In the case of a put option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will own another put option on the same underlying with an equal or higher
strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolios' use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by a
Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.
INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS
Swaps are privately negotiated over-the-counter derivative products in which
two parties agree to exchange payment streams calculated in relation to a rate,
index, instrument or certain securities and a particular "notional amount." As
with many of the other derivative products available to the Non-Money
Portfolios, the underlying may include an interest rate (fixed or floating), a
currency exchange rate, a commodity price index, and a security, securities
index or a combination thereof. A great deal of flexibility is possible in the
way the products may be structured, with the effect being that the parties may
have exchanged amounts equal to the return on one rate, index or group of
securities for another. For example, in a simple fixed-to-floating interest rate
swap, one party makes payments equivalent to a fixed interest rate, and the
other makes payments equivalent to a specified interest rate index. A Portfolio
may engage in simple or more complex swap transactions involving a wide variety
of underlyings. The currency swaps that the Portfolios may enter will generally
involve an
23
<PAGE>
agreement to pay interest streams in one currency based on a specified index in
exchange for receiving interest streams denominated in another currency. Such
swaps may involve initial and final exchanges that correspond to the agreed upon
notional amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. A Portfolio may use one or more of these products in addition to or in
lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar is a combination product in which the same party, such as the Portfolio,
buys a cap from and sells a floor to the other party. As with put and call
options, the amount at risk is limited for the buyer, but, if the cap or floor
is not hedged or covered, may be unlimited for the seller. Under current market
practice, caps, collars and floors between the same two parties are generally
documented under the same "master agreement." In some cases, options and forward
agreements may also be governed by the same master agreement. In the event of a
default, amounts owed under all transactions entered into under, or covered by,
the same master agreement would be netted and only a single payment would be
made.
Swaps, caps, collars and floors are credit-intensive products. A Portfolio
that enters into a swap transaction bears the risk of default, i.e. nonpayment,
by the other party. The guidelines under which each Portfolio enters derivative
transactions, along with some features of the transactions themselves, are
intended to reduce these risks to the extent reasonably practicable, although
they cannot eliminate the risks entirely. Under guidelines established by the
Board of Directors, a Portfolio may enter into swaps only with parties that meet
certain credit rating guidelines. Consistent with current market practices, a
Portfolio will generally enter into swap transactions on a net basis, and all
swap transactions with the same party will be documented under a single master
agreement to provide for net payment upon default. In addition, a Portfolio's
obligations under an agreement will be accrued daily (offset against any amounts
owing to the Portfolio) and any accrued, but unpaid, net amounts owed to the
other party to a master agreement will be covered by the maintenance of a
segregated account consisting of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, a Portfolio's risk of loss will consist of the payments
that a Portfolio is contractually entitled to receive from the other party. This
may not be true for currency swaps that require the delivery of the entire
notional amount of one designated currency in exchange for the other. If there
is a default by the other party, a Portfolio may have contractual remedies
pursuant to the agreements related to the transaction.
STRUCTURED NOTES
Structured notes are derivative securities for which the amount of principal
repayment and/or interest payments is based upon the movement of one or more
factors. These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices,
such as the S&P 500 Index. In some cases, the impact of the movements of these
factors may increase or decrease
24
<PAGE>
through the use of multipliers or deflators. The Non-Money Portfolios may use
structured notes to tailor their investments to the specific risks and returns
the Adviser wishes to accept while avoiding or reducing certain other risks.
INVESTMENT LIMITATIONS
Each Portfolio is a diversified investment company under the Investment
Company Act of 1940, as amended (the "1940 Act") and is subject to the following
limitations: (i) as to 75% of its total assets, a Portfolio may not invest more
than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government and its agencies and instrumentalities; and
(ii) a Portfolio may not own more than 10% of the outstanding voting securities
of any one issuer.
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes the portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. Set forth below as an annual percentage of daily net assets are the
management fees payable to the Adviser quarterly by each Portfolio pursuant to
the terms of the Investment Advisory Agreement. The Adviser has voluntarily
agreed to a reduction in the fees payable to it and to reimburse the Non-Money
Portfolios, if necessary, if such fees would cause the total annual operating
expenses of any Portfolio to exceed the maximum set forth in the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING EXPENSES
AFTER FEE WAIVERS
MANAGEMENT FEE ----------------------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- -------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Fixed Income 0.35% 0.45% 0.60%
Municipal Bond 0.35% 0.45% 0.70%
Mortgage-Backed Securities 0.35% 0.45% 0.70%
Money Market 0.30% 0.55% 0.80%
Municipal Money Market 0.30% 0.57% N/A
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD")
is the direct parent of the Adviser and Morgan Stanley. MSDWD is a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses -- securities, asset management and
25
<PAGE>
credit services. At , 1998, the Adviser, together with its affiliated
institutional asset management companies (exclusive of Miller Anderson &
Sherrerd, LLP), managed assets of approximately $ billion. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. The following individuals have primary portfolio
management responsibility for the Portfolios noted below:
FIXED INCOME PORTFOLIO -- WARREN ACKERMAN, III. Warren Ackerman is a
Principal of the Adviser and Morgan Stanley and a Senior Fixed Income Portfolio
Manager. Mr. Ackerman joined the Advisor in December 1993. Prior to joining the
Advisor, Mr. Ackerman spent over 14 years with Bankers Trust Company as a
Managing Director responsible for institutional active fixed income management.
Prior to Bankers, he spent almost seven years as a Vice President with Irving
Trust Company in the Trust Investment Division. Mr. Ackerman is a graduate of
Monmouth College with a B.S. in Economics. Mr. Ackerman has had primary
responsibility for managing the Portfolio's assets since March 1994.
MUNICIPAL BOND PORTFOLIO -- LORI A. COHANE. Lori A. Cohane joined the
Adviser in 1994 as a Vice President and Municipal Bond Portfolio Manager. Prior
to joining the Adviser, Ms. Cohane spent eight years with Salomon Brothers Asset
Management as a Vice President, Portfolio Manager and Senior Credit Analyst of
municipal bond accounts managing portfolios for high net worth individuals,
open- and closed-end bond funds and institutional accounts. Ms. Cohane is a
magna cum laude graduate of the State University of New York at Albany with a
B.S. degree in Finance and Economics. Ms. Cohane has had primary responsibility
for managing the Portfolio's assets since its inception.
MORTGAGE-BACKED SECURITIES PORTFOLIO -- WARREN ACKERMAN, III. Information
about Mr. Ackerman is included under Fixed Income Portfolio above. Mr. Ackerman
has had primary responsibility for managing the Portfolio's assets since its
inception.
MONEY MARKET PORTFOLIO -- ABIGAIL JONES FEDER, DANIEL M. NILAND, ELLEN D.
HARVEY AND SCOTT F. RICHARD. Abigail Jones Feder is a Principal of the Adviser
and Morgan Stanley and shares responsibility for managing short-term taxable and
tax-exempt portfolios. Ms. Feder joined Morgan Stanley's Corporate Finance
Department in 1985. In 1987 she joined the Adviser as a Marketing Analyst and
was promoted to a Marketing Director in 1988. She joined the Fixed Income Group
as a Portfolio Manager in 1989 and she became a Vice President in 1992. Ms.
Feder holds a B.A. from Vassar College. Ms. Feder has had primary responsibility
for managing the portfolio's assets since its inception. Daniel M. Niland joined
the Adviser in July 1997 as a Vice President and shares responsibility for
managing short-term taxable portfolios. Prior to joining the Adviser, Mr. Niland
managed liquidity and short duration fixed income portfolios for institutional
and private accounts at Citibank Global Asset Management. Before joining
Citibank, Mr. Niland worked at J.P. Morgan as a portfolio manager investing $20
billion in short-term securities for that firm's securities lending program. Mr.
Niland holds a B.A. from Iona College and an M.B.A. from Fordham University. Mr.
Niland has shared primary responsibility for managing the Portfolio's assets
since July 1997. Ellen D. Harvey joined the Adviser in 1996 and has been a
portfolio manager with Miller Anderson & Sherrerd, LLP ("MAS"), an affiliate of
the Adviser, since 1984. She assumed responsibility for the MAS-advised Cash
Reserves Portfolio in 1990, the Limited Duration Portfolio in 1992 and the
Intermediate Duration Portfolio in 1994. Ms. Harvey holds an A.B. in economics
from Princeton University and an M.A. in economics from George Washington
University. Scott F. Richard joined the Adviser in 1996 and has been a portfolio
manager with MAS since 1992. He served as Vice
26
<PAGE>
President, Head of Fixed Income Research & Model Development for Goldman, Sachs
& Co. from 1987 to 1991 and as Head of Mortgage Research in 1992. He assumed
responsibility for the MAS-advised Mortgage-Backed Securities Portfolio in 1992
and the Limited Duration, Intermediate Duration, Municipal and PA Municipal
Portfolios in 1994. Mr. Richard holds a B.S. from Massachusetts Institute of
Technology and a D.B.A. from Harvard Graduate School of Business Administration.
Ms. Harvey and Mr. Richard have shared primary responsibility for managing the
Portfolio's assets since January 1996.
MUNICIPAL MONEY MARKET PORTFOLIO -- ABIGAIL JONES FEDER. Information about
Ms. Feder is included under the Money Market Portfolio above. Ms. Feder has had
primary responsibility for managing the Portfolio's assets since inception.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and the
Board of Directors of the Fund, and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator through its agents will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each of the Non-Money Portfolios and the Money Market Portfolio
pursuant to Rule 12b-1 under the 1940 Act (each, a "Plan"). Under each Plan, the
Distributor is entitled to receive from each of the Non-Money Portfolios and the
Money Market Portfolio a distribution fee, which is accrued daily and paid
quarterly, of 0.25% of the Class B shares' average daily net assets on an
annualized basis. Each Plan is designed to compensate the Distributor for its
services in connection with distribution assistance. The Distributor may retain
any portion of the fee that it does not expend
27
<PAGE>
in meeting its obligations to the Fund. The Distributor may compensate financial
intermediaries, plan fiduciaries and administrators for providing
distribution-related services, including account maintenance services, to
shareholders (including, where applicable, underlying beneficial owners) of
Class B shares.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees and
printing and mailing costs) as specified in its agreements with the Adviser and
Morgan Stanley.
PURCHASE OF SHARES
Class A shares of each Portfolio and Class B shares of each Portfolio except
the Municipal Money Market Portfolio may be purchased at the net asset value per
share next determined after receipt by the Fund of a purchase order. CLASS B
SHARES OF THE MONEY MARKET PORTFOLIO ARE AVAILABLE FOR PURCHASE ONLY THROUGH
FINANCIAL INTERMEDIARIES (AS DISCUSSED BELOW) THAT HAVE MADE ARRANGEMENTS WITH
THE FUND. The net asset value per share of each Portfolio is calculated on days
that the New York Stock Exchange ("NYSE") and Chase (the "Custodian Bank") are
open for business. Net asset value per share is determined (i) for each
Non-Money Portfolio, as of the close of trading of the NYSE (normally 4:00 p.m.
Eastern Time); (ii) for the Money Market Portfolio, as of 12:00 noon Eastern
Time; and (iii) for the Municipal Money Market Portfolio, as of 11:00 a.m.
Eastern Time (for each Portfolio, the "Pricing Time").
MINIMUM INVESTMENT
The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares of each Non-Money Portfolio. The minimum initial investment
is $100,000 for Class A shares of each Money Portfolio. There is no minimum
initial investment for Class B shares of the Money Market Portfolio. These
minimums may be waived at the discretion of the Adviser for certain types of
investors, including trust departments, brokers, dealers, agents, financial
planners, financial services firms, investment advisers or various retirement
and deferred compensation plans ("Financial Intermediaries"); certain accounts
managed by the Adviser and its affiliates ("Managed Accounts"); and certain
employees and customers of Morgan Stanley and its affiliates. The Fund's
determination of an investor's eligibility to purchase shares of a given class
will take precedence over the investor's selection of a class.
METHODS OF PURCHASE
Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolios by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Class B shares of the Money Market Portfolio may be purchased only
through Financial Intermediaries. Some Financial Intermediaries may charge an
additional service or transaction fee. If a purchase is canceled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
28
<PAGE>
FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian Bank are open for business.
Your bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:
1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide you
with a confirmation number.
2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
3. Complete and sign the Account Registration Form and mail it to the
address shown thereon.
When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the regular close of the Federal Funds Wire Control
Center ("FFWCC") (normally 6:00 p.m. Eastern Time) the purchase will be executed
at the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the regular close of the FFWCC will be executed at the net asset value
next determined. Certain institutional investors and financial institutions have
entered into an agreement with Morgan Stanley pursuant to which they may place
orders prior to the Pricing Time, but make payment in Federal Funds for those
shares the following business day.
BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and the bank handling the wire, money transferred by bank wire
may or may not be converted into Federal Funds prior to the close of the FFWCC.
Prior to conversion to Federal Funds and receipt by the Fund, an investor's
money will not be invested.
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share of each of the
Portfolios determined on the next business day after receipt. An investor's
money will not be invested prior to crediting of Federal Funds.
29
<PAGE>
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. Each business evening, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day, and places a net purchase
and/or redemption order(s) by the morning of the next business day. These orders
normally are executed at the net asset value that was computed for each
Portfolio as of the close of the previous business day.
ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 per
Portfolio, except that there is no minimum for Class B shares of the Money
Market Portfolio. The minimum additional investment may be lower for certain
accounts described above under "Minimum Investment". For purchases directly from
the Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.
INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES
Class A and Class B shares of each Non-Money Portfolio may be subject to the
involuntary conversion and redemption features described below. Shares of the
Money Portfolios are not subject to involuntary conversion or redemption. The
conversion and redemption features may be waived at the discretion of the
Adviser for shares held in a Managed Account and shares purchased through a
Financial Intermediary. Accounts that were open prior to January 2, 1996 are not
subject to involuntary conversion or redemption. The Fund reserves the right to
modify or terminate the conversion or redemption features of the shares at any
time upon 60 days notice to shareholders.
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account
containing Class A shares of a Non-Money Portfolio falls below $500,000 (but
remains at or above $100,000) because of shareholder redemption(s), the Fund
will notify the shareholder, and if the account value remains below $500,000
(but remains at or above $100,000) for a continuous 60-day period, the Class A
shares in such account will convert to Class B shares and will be subject to the
distribution fee and other features applicable to Class B shares. The Fund will
not convert Class A shares of a Non-Money Portfolio to Class B shares based
solely upon changes in the market that reduce the net asset value of shares.
Under current tax law, conversion between share classes is not a taxable event
to the shareholder.
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares of a Non-Money Portfolio increases to $500,000 or
more, whether due to shareholder purchases or market activity, the Class B
shares will convert to Class A shares. Class B shares purchased through a
Financial Intermediary that has entered into an arrangement with the Fund for
the purchase of such shares may not be converted. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements as
are applicable to accounts containing Class A shares described above.
INVOLUNTARY REDEMPTION OF SHARES. If the value of an account falls below
$100,000 because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $100,000 for
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<PAGE>
a continuous 60-day period, the shares in such account will be subject to
redemption by the Fund. The Fund will not redeem shares based solely upon
changes in the market that reduce the net asset value of shares. If redeemed,
redemption proceeds will be promptly paid to the shareholder.
REDEMPTION OF SHARES
Class A shares of each Portfolio and Class B shares of each Portfolio except
the Municipal Money Market Portfolio may be redeemed at any time and without
charge at the net asset value per share next determined after receipt by the
Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds may be more or less than the purchase price of your shares
depending on, among other factors, the market value of the investment securities
held by a Portfolio.
METHODS OF REDEMPTION
Shares may be redeemed directly from the Fund by mail or by telephone.
HOWEVER, SHARES PURCHASED THROUGH A FINANCIAL INTERMEDIARY MUST BE REDEEMED
THROUGH A FINANCIAL INTERMEDIARY. Certain Financial Intermediaries may charge an
additional service or transaction fee.
BY MAIL. Each Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, to Morgan Stanley Institutional Fund, Inc.,
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following:
1. A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
2. Any required signature guarantees; and
3. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.
BY TELEPHONE. If you have previously elected the Telephone Redemption
Option on the Account Registration Form, you can redeem Portfolio shares by
calling the Fund and requesting that the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to receive
redemption proceeds, send a written request to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.
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The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include requiring the investor to provide certain personal identification
information at the time an account is opened and prior to effecting each
telephone transaction. In addition, all telephone transaction requests will be
recorded and investors may be required to provide additional telecopied written
instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to accept redemption
requests from underlying beneficial owners. These redemptions may be processed
in the same way as purchases made through such Financial Intermediaries, as
described above.
FURTHER REDEMPTION INFORMATION
The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event more than seven days after
receipt of a redemption request in good order. However, payments to investors
redeeming shares which were purchased by check will not be made until payment
for the purchase has been collected, which may take up to eight days after the
date of purchase. The Fund may suspend the right of redemption or postpone the
date upon which redemptions are effected at times when the NYSE is closed, or
under any emergency conditions as determined by the Securities and Exchange
Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required to verify the identity of the person who has authorized
certain redemptions. Please contact the Fund for further information. See
"Redemption of Shares" in the Statement of Additional Information.
ACCOUNT POLICIES AND SERVICES
EXCHANGE FEATURES
You may exchange shares of each Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced and Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchases of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption
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followed by a purchase. Therefore, an exchange will be considered a taxable
event for shareholders subject to tax. Exchange transactions will be processed
at the net asset value per share next determined after receipt of the request.
Shares of the portfolios may be exchanged by mail or telephone. The telephone
exchange privilege is automatic and made available without shareholder election.
The exchange privilege may be modified or terminated by the Fund at any time
upon 60-days notice to shareholders.
BY MAIL. To exchange shares by mail, send a written exchange request to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798. Your written exchange request should include (i) the name, class of
shares and account number of your current Portfolio; (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to exchange
shares; and (iii) the signatures of all registered account holders.
BY TELEPHONE. To exchange shares by telephone, call the Fund at the phone
number provided on the cover of this Prospectus. A Fund representative will
request (i) the name, class of shares and account number of your current
Portfolio and (ii) the name(s) and class(es) of shares of the portfolio(s) into
which you intend to exchange shares. For additional information regarding
responsibility for the authenticity of telephoned instructions, see "Redemption
of Shares" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by sending a written request to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. It may not be possible to
transfer the registration of certain shares purchased through a Financial
Intermediary. As with redemptions, the written request must be received in "good
order" before any transfer can be made. Transferring the registration of shares
may affect the eligibility of your account for a given class of shares and may
result in involuntary conversion or redemption of your shares.
OTHER ACCOUNT INFORMATION
The Fund does not issue share certificates for the Portfolios. All shares
purchased are confirmed to you and credited to your account on the Fund's books
maintained by the Adviser or its agents. You will have the same rights and
ownership with respect to such shares as if certificates had been issued.
EXCESSIVE TRADING
Frequent trades in your account(s) can disrupt management of a Portfolio and
raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of each Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a portfolio of the Fund within any 120-day
period. For example, the following series of transactions would amount to
excessive trading: exchanging shares of Portfolio A for shares of Portfolio B,
then exchanging shares of Portfolio B for shares of Portfolio C and then
exchanging shares of Portfolio C for shares of Portfolio A within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios; and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.
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INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS
Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the portfolios used for investment by these accounts may
experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the portfolio.
VALUATION OF SHARES
The net asset value per share of a class of shares of each Non-Money
Portfolio is determined by dividing the total market value of the Non-Money
Portfolio's investments and other assets attributable to such class, less all
liabilities attributable to such class, by the number of total outstanding
shares of such a class of the Non-Money Portfolio. Net asset value is calculated
separately for each class of the Portfolio. Net asset value per share of the
Non-Money Portfolios is determined as of the close of the NYSE (normally 4:00
p.m. Eastern Time) on each day that the NYSE is open for business. Price
information on listed securities is taken from the exchange where the security
is primarily traded. Securities listed on a U.S. securities exchange for which
market quotations are available are valued at the last quoted sale price on the
day the valuation is made. Securities listed on a foreign exchange are valued at
their closing price. Unlisted securities and listed securities not traded on the
valuation date and for which market quotations are not readily available are
valued at a price within a range not exceeding the current asked price nor less
than the current bid price. The current bid and asked prices are determined
based on the average of the bid and asked prices quoted on such valuation date
by two reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily unless collection is in doubt. In addition, bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair market value of such
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. Securities not priced in this manner are valued at the most
recently quoted bid price or, when securities exchange valuations are used, at
the latest quoted sale price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine prices in
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accordance with the above-stated procedures are determined in good faith at fair
value using methods determined by the Board of Directors. For purposes of
calculating net asset value per share, all assets and liabilities initially
expressed in foreign currencies will be converted into U.S. dollars at the mean
of the bid and asked price for such currencies against the U.S. dollar last
quoted by any major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of Class A shares as a result of the distribution expenses charged to
Class B shares.
The net asset value per share of each of the Money Market and Municipal
Money Market Portfolios is determined by subtracting the Portfolio's liabilities
(including accrued expenses and dividends payable) from the total value of the
Portfolio's investments and other assets and dividing the result by the total
number of outstanding shares of the Portfolio. The net asset values per share of
the Municipal Money Market Portfolio and the Money Market Portfolio are
determined as of 11:00 a.m. and 12:00 noon (Eastern Time), respectively, on the
days on which the NYSE is open. For the purpose of calculating each Money
Portfolio's net asset value per share, securities are valued by the "amortized
cost" method of valuation, which does not take into account unrealized gains or
losses. This involves valuing an instrument at its cost and thereafter assuming
a constant amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which the value, as determined by amortized cost, is higher or lower than
the price the Portfolio would receive if it sold the instrument.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Fixed Income, Municipal Bond and Mortgage-Backed Securities Portfolios. In
addition, from time to time the Fund may advertise "yield" for the Municipal
Bond, Money Market and Municipal Money Market Portfolios and "effective yield"
for the Money Market and Municipal Money Market Portfolios. In addition to these
yield figures, the Municipal Bond and Municipal Money Market Portfolio may
advertise a tax equivalent yield. THESE FIGURES ARE BASED ON HISTORICAL
PERFORMANCE AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
Each of the Non-Money Portfolios may advertise "total return" which shows
what an investment in a class of the Portfolio would have earned over a
specified period of time (such as one, five or ten years) assuming that all
distributions and dividends by the Portfolio were reinvested in the same class
on the reinvestment dates during the period. Total return does not take into
account any federal or state income taxes that may be payable on dividends and
distributions or upon redemption. The "yield" of the Municipal Bond Portfolio
refers to the income generated by an investment in the Portfolio over a
one-month or 30-day period, while the "yield" of the Money Market and Municipal
Money Market Portfolios refers to the income generated by an investment in the
Portfolio over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of income
generated by the investment during that 30- or seven-day period is assumed to be
generated each 30-day period for twelve periods or each week over a 52-week
period, and is shown as a percentage of the investment. The "effective yield" is
calculated similarly but, when annualized, the income earned on an investment in
the Portfolio is assumed to be reinvested. The "effective yield" will be
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slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment. A "tax equivalent yield" is the "yield" of the Portfolio
increased by an amount based on an assumed rate of tax for a shareholder. For
further information concerning these figures, see "Calculation of Yield and
Total Return" in the Statement of Additional Information. The Fund may also use
comparative performance information in marketing the Portfolios' shares,
including data from Lipper Analytical Services, Inc., Donoghue's Money Fund
Report, other industry publications, business periodicals, rating services and
market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
FIXED INCOME, MUNICIPAL BOND AND MORTGAGE-BACKED SECURITIES PORTFOLIOS
All income dividends and capital gains distributions for a class of shares
of each Non-Money Portfolio will be automatically reinvested in additional
shares of such class at net asset value, except that, upon written notice to the
Fund or by checking off the appropriate box in the Distribution Option Section
on the Account Registration Form, a shareholder may elect to receive income
dividends and capital gains distributions in cash.
Each Non-Money Portfolio expects to distribute substantially all of its
taxable net investment income in the form of monthly dividends. Net realized
capital gains of each Non-Money Portfolio, if any, after reduction for any tax
loss carryforwards will also be distributed annually.
Undistributed net investment income is included in each Non-Money
Portfolio's net assets for the purpose of calculating net asset value per share.
Therefore, on the "ex-dividend" date, the net asset value per share excludes the
dividend (I.E., is reduced by the per share amount of the dividend). Dividends
paid shortly after the purchase of shares by an investor, although in effect a
return of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of each Non-Money Portfolio will differ
at times. Expenses of each Non-Money Portfolio allocated to a particular class
of shares will be borne on a pro rata basis by each outstanding share of that
class.
MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS
Net investment income is computed and dividends declared as of 1:00 p.m.
(Eastern time), on each day. Such dividends are payable to Municipal Money
Market Portfolio shareholders of record as of 11:00 a.m. (Eastern time) on that
day and to Money Market Portfolio shareholders of record as of 12:00 noon
(Eastern time) on that day, if the Fund and Custodian Bank are open for
business. This means that shareholders whose purchase orders become effective as
of 12:00 noon (for the Money Market Portfolio) or 11:00 a.m. (for the Municipal
Money Market Portfolio) receive the dividend for that day. Dividends declared
for Saturdays, Sundays and holidays are payable to shareholders of record as of
4:00 p.m. on the last preceding day the Fund and its Custodian Bank were open
for business.
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For the purpose of calculating dividends, net income of each Money Portfolio
shall consist of interest earned, including any discount or premium ratably
amortized to the date of maturity, minus estimated expenses of the Money
Portfolio. Each Money Portfolio's daily dividends are accrued throughout the
month and are distributed on the fifteenth calendar day of each month (or next
business day if the fifteenth calendar day falls on a holiday or weekend).
Because of the distribution fee and other expenses that may be attributable to
Class B shares of the Money Market Portfolio, the net income attributable to and
the dividends payable on Class B shares will be lower than for Class A shares.
Dividends of each Money Portfolio are payable in additional shares, except that,
upon written notice to the Fund or by checking off the appropriate box in the
Distribution Option Section on the Account Registration Form, a shareholder may
elect to receive income dividends and any capital gains distributions in cash.
Each shareholder receives a monthly statement summarizing activity in the
account. If at any time a shareholder wishes to withdraw all of the funds in an
account, the proceeds will be sent to the shareholder by wire or check,
according to the shareholder's instructions. If the withdrawal is by wire, a
check in the amount of the income to the shareholder's account through the day
of withdrawal will be mailed to the shareholder on the next business day.
Withdrawals by check will include accrued income through the date of withdrawal.
Net realized short-term capital gains, if any, of each Money Portfolio are
to be distributed whenever the Board of Directors determine that such
distributions would be in the best interest of shareholders, but in any event,
at least once a year. The Money Portfolios do not expect to realize any
long-term capital gains. Should any such gains be realized, they will be
distributed annually.
It is an objective of management to maintain the price per share of each
Money Portfolio as computed for the purpose of sales and redemptions at exactly
$1.00. In the event the Board of Directors determines that a deviation from the
$1.00 per share price may exist which may result in a material dilution or other
unfair results to investors or existing shareholders, they will take corrective
action they regard as necessary and appropriate, including the sale of
instruments from a Money Portfolio prior to maturity to realize capital gains or
losses; shortening average portfolio maturity; withholding dividends; making a
special capital distribution; or redemptions of shares in kind.
TAXES
GENERAL
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other Portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
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Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income (other than
"exempt-interest dividends," described below) are taxable to shareholders as
ordinary income, whether received in cash or in additional shares. Distributions
of net capital gain are taxable to shareholders as a 20% rate gain distribution
(taxed at a rate of 20%) or a 28% rate gain distribution (taxed at a rate of
28%), depending upon the designation by the Portfolio (such designation being
dependent upon the holding period of the Portfolio in the underlying asset
generating the net capital gain), regardless of how long shareholders have held
their shares. Distributions of net investment income and net capital gain are
not eligible for the corporate dividends-received deduction. Each Portfolio will
send reports annually to its shareholders of the federal income tax status of
all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss, including any available capital loss carryforwards) prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (i) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) who has not certified to the Fund that such
shareholder is not subject to backup withholding. This backup withholding is not
an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceed or are less than the
shareholder's adjusted basis in the sold, exchanged or redeemed shares. If
capital gains distributions have been made with respect to shares that are sold
at a loss after being held for six months or less, then the loss is treated as a
long-term capital loss to the extent of the capital gains distributions.
Conversions of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
THE MUNICIPAL BOND AND MUNICIPAL MONEY MARKET PORTFOLIOS
The dividends payable by the Municipal Bond and the Municipal Money Market
Portfolios from net tax-exempt interest from municipal bonds and notes will
qualify as "exempt-interest dividends" if, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities the interest on
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which is excludable from gross income. Each of the Municipal Bond and Municipal
Money Market Portfolios intends to invest a sufficient portion of its assets in
municipal bonds and notes to qualify to pay "exempt-interest dividends."
Exempt-interest dividends are excludable from a shareholder's gross income
for regular income tax purposes. However, the receipt of such dividends may have
collateral federal income tax consequences, including alternative minimum tax
consequences. In addition, the receipt of exempt-interest dividends may cause
persons receiving Social Security or Railroad Retirement benefits to be taxable
on a portion of such benefits. See the Statement of Additional Information.
Current federal tax law limits the types of volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Portfolios to purchase sufficient amounts of tax-exempt
securities to satisfy the Code's requirement for the payment of exempt-interest
dividends.
All or a portion of the interest on indebtedness incurred or continued by an
investor to purchase or carry shares is not deductible for federal income tax
purposes. Furthermore, entities or persons who are "substantial users" (or
persons related to "substantial users") of facilities financed by "private
activity bonds" or "industrial development bonds" should consult their tax
advisors before purchasing shares of the Portfolios. See the Statement of
Additional Information.
The Portfolios will report annually to their shareholders the portion of
dividends that is taxable and the portion that is tax-exempt based on income
received by the Portfolios during the year to which the dividends relate.
The exemption of dividends paid by the Municipal Bond and Municipal Money
Market Portfolio for Federal income tax purposes may not result in similar
exemptions under the laws of a particular state or local taxing authority. Each
of the Municipal Bond and Municipal Money Market Portfolio will report annually
to its shareholders the percentage and source, on a state-by-state basis, of
interest income earned on municipal bonds and municipal notes held by the
Portfolio during the preceding year.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
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Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolios will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with their
respective objectives and policies. For the fiscal year ended December 31, 1997,
the Fixed Income Portfolio had a portfolio turnover rate of [183%]. As portfolio
turnover increases, the Portfolios may expect to pay correspondingly increased
brokerage and trading costs. In addition to transaction costs, higher portfolio
turnover may result in the realization of capital gains. As discussed under
"Taxes," to the extent net short-term capital gains are realized, any
distributions resulting from such gains are considered ordinary income for
federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 40 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
portfolio are currently classified into two classes, the Class A shares and
Class B shares, except for the International Small Cap and Municipal Money
Market Portfolios, which offer only Class A shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as that
term is defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is
not required to hold an annual meeting of its shareholders unless required to do
so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports.
Financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
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In addition, the Adviser, or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Commission for the purpose of providing
custodial services for such assets. MSTC may also hold certain domestic assets
for the Fund. For more information on the custodians, see "General Information
- -- Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
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MORGAN STANLEY INSTITUTIONAL FUND, INC.
FIXED INCOME, MUNICIPAL BOND, MORTGAGE-BACKED SECURITIES,
MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, Inc., please contact your Morgan Stanley
representative or call us toll free 1-800-548-7786. Please print all
items except signature, and mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely,
including telephone number(s).
<CAPTION>
B)
<CAPTION>
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor.
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY
NUMBER ("TIN") NUMBER ("SSN")
OR
2. TIN
SSN
OR
TIN
SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct TIN(s) or SSN(s). Accounts that have a missing or incorrect
TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on
dividends, distributions and other payments. If you have not provided us
with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of
persons subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
You may be notified that you are subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code because you have
underreported interest or dividends or you were required to, but failed
to, file a return which would have included a reportable interest or
dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SELECTION Portfolio(s): / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 Fixed Income Portfolio / / Class A Shares $ / / Class B Shares $
and Class B shares minimum $100,000 Municipal Bond Portfolio / / Class A Shares $
for each of the Fixed Income, Mortgage-Backed Securities / / Class A Shares $
Municipal Bond and Mortgage-Backed Portfolio
Securities Portfolios. Minimum Money Market Portfolio
$50,000 for Class A shares of each Municipal Money Market
of the Money Market and Municipal Portfolio
Money Market Portfolios). Please
indicate Portfolio, class and
amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio
and manner of payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the account
statement sent to my/our registered
address, I/we hereby authorize the Address
Fund to mail duplicate statements
to the name and address provided at City State Zip Code
right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative No. Branch
No.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE
SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE
APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL SECURITY
ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF
I/ WE DO NOT PROVIDE EITHER NUMBER TO CHASE GLOBAL FUNDS
SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS
APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR CORRECT SSN(S)
OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP
WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE
PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 9
Investment Objectives and Policies................ 13
Additional Investment Information................. 17
Investment Limitations............................ 25
Management of the Fund............................ 25
Purchase of Shares................................ 28
Redemption of Shares.............................. 31
Account Policies and Services..................... 32
Valuation of Shares............................... 34
Performance Information........................... 35
Dividends and Capital Gains Distributions......... 36
Taxes............................................. 37
Portfolio Transactions............................ 39
General Information............................... 40
Account Registration Form
</TABLE>
FIXED INCOME PORTFOLIO
MUNICIPAL BOND PORTFOLIO
MORTGAGE-BACKED SECURITIES PORTFOLIO
MONEY MARKET PORTFOLIO
MUNICIPAL MONEY MARKET PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. Box 2798, Boston, MA 02208-2798
- ---------------------------------
- ---------------------------------
- ---------------------------------
- ---------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
SMALL CAP VALUE EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
BALANCED PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
HIGH YIELD PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
thirty-two portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Small Cap Value Equity, Value Equity, Balanced, Global Fixed Income and High
Yield Portfolios (each, a "Portfolio," and collectively, the "Portfolios"). The
Class A and Class B shares currently offered by the Portfolios have different
minimum investment requirements and fund expenses. Shares of the Portfolios are
offered with no sales charge, exchange fee or redemption fee. The Small Cap
Value Equity and Balanced Portfolios are currently closed to new investors with
the exception of certain tax-qualified retirement plans, other investment
companies advised by Morgan Stanley Asset Management Inc. and its affiliates and
certain employees of the Adviser and its affiliates.
THE HIGH YIELD PORTFOLIO INVESTS PREDOMINANTLY IN LOWER RATED BONDS,
COMMONLY REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE
SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL.
INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS PORTFOLIO. SEE "RISK FACTORS RELATING TO INVESTING IN HIGH YIELD
SECURITIES."
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Asian Real Estate, Emerging Markets,
European Equity, European Real Estate, Global Equity, Gold, International
Equity, International Magnum, International Small Cap, Japanese Equity and Latin
American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth,
Equity Growth, Small Cap Value Equity, Technology, U.S. Equity Plus, U.S. Real
Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced
Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global
Fixed Income, High Yield and Municipal Bond Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information about
the Fund is contained in a "Statement of Additional Information", dated May 1,
1998, which is incorporated herein by reference. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the Fund
are available upon request and without charge by writing or calling the Fund at
the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
each Portfolio will incur:
<TABLE>
<CAPTION>
GLOBAL
FIXED HIGH
SMALL CAP VALUE VALUE EQUITY BALANCED INCOME YIELD
SHAREHOLDER TRANSACTION EXPENSES EQUITY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------ ----------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A................................. None None None None None
Class B................................. None None None None None
Maximum Sales Load Imposed on Reinvested
Dividends
Class A................................. None None None None None
Class B................................. None None None None None
Deferred Sales Load
Class A................................. None None None None None
Class B................................. None None None None None
Redemption Fees
Class A................................. None None None None None
Class B................................. None None None None None
Exchange Fees
Class A................................. None None None None None
Class B................................. None None None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C> <C> <C> <C> <C>
- ------------------------------------------
<CAPTION>
GLOBAL
FIXED HIGH
SMALL CAP VALUE VALUE EQUITY BALANCED INCOME YIELD
(AS A PERCENTAGE OF AVERAGE NET ASSETS) EQUITY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------------- ------------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)*
Class A................................. % % % % %
Class B................................. % % % % %
12b-1 Fees
Class A................................. None None None None None
Class B................................. 0.25% 0.25% 0.25% 0.15%** 0.25%
Other Expenses
Class A................................. % % % % %
Class B................................. % % % % %
------ ------ ----------- -------- --------
Total Operating Expenses (Net of Fee
Waivers)*
Class A................................. % % % % %
Class B................................. % % % % %
------ ------ ----------- -------- --------
------ ------ ----------- -------- --------
</TABLE>
- --------------------------
*The Adviser has agreed to waive its management fee and/or reimburse the
Portfolios, if necessary, if such fees would cause the total annual operating
expenses of each of the Portfolios to exceed a specified percentage of its
respective average daily net assets. As a result of these reductions, the
Management Fees stated above are lower than the contractual fees stated under
"Management of the Fund." The Adviser reserves the right to terminate any of
its fee waivers and/or expense reimbursements at any time in its sole
discretion. For further information on Fund expenses, see "Management of the
Fund." Set forth below, for each Portfolio, are the management fees and total
operating expenses absent such fee waivers and/or expense reimbursements as a
percentage of the average daily net assets of the Class A shares and Class B
shares, respectively.
**The Distributor has agreed to waive 0.10% of the 0.25% distribution fee it is
entitled to receive from this Portfolio.
2
<PAGE>
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEE ------------------------
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- ------------------------------------------------------------ ------------------- ---------- ------------
<S> <C> <C> <C>
Small Cap Value Equity...................................... 0.85% % %
Value Equity................................................ 0.50% % %
Balanced.................................................... 0.50% % %
Global Fixed Income......................................... 0.40% % %
High Yield.................................................. 0.375% % %
</TABLE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees for each Portfolio are based on actual figures for
the fiscal year ended December 31, 1997. Due to the continuous nature of Rule
12b-1 fees, long-term Class B shareholders may pay more than the equivalent of
the maximum front-end sales charges otherwise permitted by the National
Association of Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (i) a 5% annual rate of return and (ii) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Small Cap Value Equity Portfolio
Class A.......................................................... $ $ $ $
Class B..........................................................
Value Equity Portfolio
Class A..........................................................
Class B..........................................................
Balanced Portfolio
Class A..........................................................
Class B..........................................................
Global Fixed Income
Class A..........................................................
Class B..........................................................
High Yield Portfolio
Class A..........................................................
Class B..........................................................
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A and Class
B shares for each of the Portfolios for the periods presented. The audited
financial highlights for each of the Portfolio's shares for each of the periods
presented are part of the Fund's financial statements which appear in the Fund's
December 31, 1997 Annual Report to Shareholders and which are incorporated by
reference into the Fund's Statement of Additional Information. Each Portfolio's
financial highlights for each of the periods presented have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also incorporated by
reference into the Statement of Additional Information. Additional performance
information is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. After October 31, 1992, the
Fund changed its fiscal year end to December 31. The following information
should be read in conjunction with the financial statements and notes thereto.
4
<PAGE>
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------
PERIOD FROM
DECEMBER 17,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ $ 11.91 $ 10.80 $ 11.10 $ 10.14 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)... 0.32 0.30 0.28 0.24 0.01
Net Realized and Unrealized
Gain (Loss) on
Investments................ 2.36 1.82 (0.01) 0.90 0.13
Total from Investment
Operations............... 2.68 2.12 0.27 1.14 0.14
DISTRIBUTIONS
Net Investment Income....... (0.32) (0.38) (0.27) (0.18) --
Net Realized Gain........... (3.38) (0.63) (0.30) -- --
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions....... (3.70) (1.01) (0.57) (0.18) --
------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD....................... $ $ 10.89 $ 11.91 $ 10.80 $ 11.10 $ 10.14
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN.................. % 22.99% 20.63% 2.53% 11.33% 1.40%
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)................ $ $23,970 $51,919 $40,033 $26,775 $ 5,974
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)................. % 2.20% 2.60% 2.67% 2.56% 1.64%**
Portfolio Turnover Rate..... % 32% 36% 22% 29% 0%
Average Commission Rate#.... $0.0402 N/A N/A N/A N/A
<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....................... $ $ 11.95
------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)... 0.23
Net Realized and Unrealized
Gain (Loss) on
Investments................ 2.38
Total from Investment
Operations............... 2.61
DISTRIBUTIONS
Net Investment Income....... (0.30)
Net Realized Gain........... (3.38)
------------ ------------
Total Distributions....... (3.68)
------------ ------------
NET ASSET VALUE, END OF
PERIOD....................... $ $ 10.88
------------ ------------
------------ ------------
TOTAL RETURN.................. % 22.33%
------------ ------------
------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)................ $ $ 1,689
Ratio of Expenses to Average
Net Assets (1)............. % 1.24%**
Ratio of Net Investment
Income to Average Net
Assets (1)................. % 1.93%**
Portfolio Turnover Rate..... % 32%
Average Commission Rate#.... $0.0402
</TABLE>
- ----------------------
<TABLE>
<C><S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income.......... $ $0.04 $0.02 $0.03 $0.06 $0.13
Ratios before expense
limitation:
Expenses to Average Net
Assets..................... % 1.32 % 1.21 % 1.26 % 1.68 % 23.14 %**
Net Investment Income (Loss)
to Average Net Assets...... % 1.89 % 2.39 % 2.41 % 1.88 % (20.50 )%**
<CAPTION>
(1)
<C> <C>
$ $0.05
% 1.69 %**
% 1.50 %**
<CAPTION>
</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.
5
<PAGE>
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1997 1996 1995 1994 1993 1992 1992
------------- ------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ $ 13.94 $ 11.50 $ 12.63 $ 11.31 $ 10.71 $ 10.24
------------- ------------- ------------- ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)..................... 0.41 0.38 0.40 0.37 0.08 0.38
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 2.27 3.30 (0.55) 1.31 0.52 0.48
------------- ------------- ------------- ------------ ------------ ------------ ------------
Total from Investment
Operations.......... 2.68 3.68 (0.15) 1.68 0.60 0.86
------------- ------------- ------------- ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income.. (0.41) (0.47) (0.40) (0.36) -- (0.39)
Net Realized Gain...... (2.32) (0.77) (0.58) -- -- --
------------- ------------- ------------- ------------ ------------ ------------ ------------
Total
Distributions....... (2.73) (1.24) (0.98) (0.36) -- (0.39)
------------- ------------- ------------- ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD.................. $ $ 13.89 $ 13.94 $ 11.50 $ 12.63 $ 11.31 $ 10.71
------------- ------------- ------------- ------------ ------------ ------------ ------------
------------- ------------- ------------- ------------ ------------ ------------ ------------
TOTAL RETURN............. % 19.73% 33.69% (1.29)% 15.14% 5.60% 8.51%
------------- ------------- ------------- ------------ ------------ ------------ ------------
------------- ------------- ------------- ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $ $106,128 $147,365 $73,406 $54,598 $27,541 $25,013
Ratio of Expenses to
Average Net Assets
(1)................... % 0.70% 0.70% 0.70% 0.70% 0.70%** 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1)............ % 2.62% 3.01% 3.37% 3.23% 4.41%** 3.72%
Portfolio Turnover
Rate.................. % 42% 43% 33% 51% 9% 56%
Average Commission
Rate#................. $ $0.0434 N/A N/A N/A N/A N/A
<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..... $ $ 14.06
------------- ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)..................... 0.29
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 2.25
------------- ------------
Total from Investment
Operations.......... 2.54
------------- ------------
DISTRIBUTIONS
Net Investment Income.. (0.39)
Net Realized Gain...... (2.32)
------------- ------------
Total
Distributions....... (2.71)
------------- ------------
NET ASSET VALUE, END OF
PERIOD.................. $ $ 13.89
------------- ------------
------------- ------------
TOTAL RETURN............. % 18.57%
------------- ------------
------------- ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $ $ 2,555
Ratio of Expenses to
Average Net Assets
(1)................... % 0.95%**
Ratio of Net Investment
Income to Average Net
Assets (1)............ % 2.33%**
Portfolio Turnover
Rate.................. % 42%
Average Commission
Rate#................. $ $0.0434
</TABLE>
- -------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit
to net investment
income............ $ $0.01 $0.01 $0.01 $0.03 $0.01 $0.01
Ratios before expense
limitation:
Expenses to Average
Net Assets........ % 0.78 % 0.77 % 0.80 % 0.95 % 1.20 %** 0.84%
Net Investment
Income to
Average Net
Assets............ % 2.55 % 2.94 % 3.27 % 2.98 % 3.91 %** 3.58%
<CAPTION>
(1)
<C> <C>
$ $0.01
% 1.03 %**
% 2.26 %**
<CAPTION>
</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 paid, during the period.
6
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER OCTOBER
31, 1997 31, 1996 31, 1995 31, 1994 31, 1993 31, 1992 31, 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ $ 9.98 $ 8.96 $ 11.13 $ 11.31 $ 11.00 $ 10.61
---------- ---------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)................... 0.52 0.39 0.42 0.44 0.10 0.58
Net Realized and
Unrealized Gain (Loss)
on Investments........ 0.54 1.62 (0.64) 0.79 0.21 0.42
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from Investment
Operations.......... 1.06 2.01 (0.22) 1.23 0.31 1.00
---------- ---------- ---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment
Income................ (0.48) (0.50) (0.49) (0.41) -- (0.58)
In Excess of Net
Investment Income..... 0.00+ -- -- (0.08) -- --
Net Realized Gain...... (2.37) (0.49) (1.46) (0.06) -- (0.03)
In Excess of Net
Realized Gain......... -- -- -- (0.86) -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total
Distributions....... (2.85) (0.99) (1.95) (1.41) -- (0.61)
---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF
PERIOD.................. $ $ 8.19 $ 9.98 $ 8.96 $ 11.13 $ 11.31 $
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL RETURN............. % 10.93% 23.63% (2.32)% 12.09% 2.82% 9.57%
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of
Period (Thousands).... $ $ 5,992 $22,642 $18,492 $29,684 $39,984 $40,332
Ratio of Expenses to
Average Net Assets
(1)................... % 0.70% 0.70% 0.70% 0.70% 0.70%** 0.70%
Ratio of Net Investment
Income to Average Net
Assets (1)............ % 3.93% 4.10% 4.13% 3.88% 5.29%** 5.21%
Portfolio Turnover
Rate.................. % 22% 26% 44% 136% 4% 40%
Average Commission
Rate#................. $ $0.0397 N/A N/A N/A N/A N/A
<CAPTION>
CLASS B
------------------------
PERIOD
FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER DECEMBER
31, 1997 31, 1996
---------- ----------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ $ 10.02
---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)................... 0.34
Net Realized and
Unrealized Gain (Loss)
on Investments........ 0.65
---------- ----------
Total from Investment
Operations.......... 0.99
---------- ----------
DISTRIBUTIONS
Net Investment
Income................ (0.46)
In Excess of Net
Investment Income..... (2.37)
Net Realized Gain...... (2.83)
In Excess of Net
Realized Gain......... $ 8.18
---------- ----------
Total
Distributions....... 10.24%
---------- ----------
NET ASSET VALUE, END OF
PERIOD.................. $ $ 11.00
---------- ----------
---------- ----------
TOTAL RETURN............. % 10.24%
---------- ----------
---------- ----------
RATIOS AND SUPPLEMENTAL D
Net Assets, End of
Period (Thousands).... $ $ 2,197
Ratio of Expenses to
Average Net Assets
(1)................... % 0.95%**
Ratio of Net Investment
Income to Average Net
Assets (1)............ % 3.73%**
Portfolio Turnover
Rate.................. % 22%
Average Commission
Rate#................. $ $0.0397
</TABLE>
- ----------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit
to net investment
income........... $ $0.08 $0.03 $0.03 $0.04 $0.01 $0.01
Ratios before
expense limitation:
Expenses to
Average Net
Assets........... % 1.32 % 1.02 % 0.95 % 1.02 % 1.00 %** 0.79%
Net Investment
Income to Average
Net Assets....... % 3.31 % 3.78 % 3.88 % 3.56 % 4.99 %** 5.12%
<CAPTION>
(1)
<C> <C>
$ $0.07
% 1.68% **
% 3.00% **
<CAPTION>
</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.
7
<PAGE>
GLOBAL FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
----------
CLASS A
----------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER OCTOBER DECEMBER
31, 31, 31, 31, 31, 31, 31, 31,
1997 1996 1995 1994 1993 1992 1992 1997
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41 $ 10.61 $
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)..................... 0.61 0.76 0.70 0.69 0.14 0.53
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 0.08 1.15 (1.38) 0.90 (0.29) 0.55
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from Investment
Operations.......... 0.69 1.91 (0.68) 1.59 (0.15) 1.08
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income.. (0.61) (0.98) (0.40) (0.79) -- (0.27)
In Excess of Net
Investment Income..... -- -- -- (0.22) -- --
Net Realized Gain...... -- -- (0.31) (0.16) -- (0.01)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total
Distributions....... (0.61) (0.98) (0.71) (1.17) -- (0.28)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF
PERIOD.................. $ $ 11.30 $ 11.22 $ 10.29 $ 11.68 $ 11.26 $ 11.41 $
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL RETURN............. % 6.44% 19.32% (6.08)% 15.34% (1.31)% 10.29% %
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $ $112,888 $102,852 $130,675 $172,468 $ 92,897 $ 94,847 $
Ratio of Expenses to
Average Net Assets
(1)................... % 0.50% 0.50% 0.50% 0.50% 0.50%** 0.50% %
Ratio of Net Investment
Income to Average Net
Assets (1)............ % 5.50% 6.79% 6.34% 5.99% 6.99%** 6.92% %
Portfolio Turnover
Rate.................. % 258% 207% 171% 108% 9% 144% %
<CAPTION>
PERIOD
FROM
JANUARY
2,
1996***
TO
DECEMBER
31,
1996
-------
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $11.23
-------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)..................... 0.48
Net Realized and
Unrealized Gain (Loss)
on Investments.......... 0.18
-------
Total from Investment
Operations.......... 0.66
-------
DISTRIBUTIONS
Net Investment Income.. (0.60)
In Excess of Net
Investment Income..... --
Net Realized Gain...... --
-------
Total
Distributions....... (0.60)
-------
NET ASSET VALUE, END OF
PERIOD.................. $11.29
-------
-------
TOTAL RETURN............. 6.12%
-------
-------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $1,559
Ratio of Expenses to
Average Net Assets
(1)................... 0.65%**
Ratio of Net Investment
Income to Average Net
Assets (1)............ 5.28%**
Portfolio Turnover
Rate.................. 258%
</TABLE>
- ----------------------
<TABLE>
<C><S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income................ $ $0.02 $0.02 $0.02 $0.02 $0.01 $0.03 $
Ratios before expense
limitation:
Expenses to Average Net
Assets................ % 0.72 % 0.71 % 0.66 % 0.70 % 0.90 %** 0.86 % %
Net Investment Income
to Average Net
Assets................ % 5.29 % 6.58 % 6.18 % 5.79 % 6.59 %** 6.56 % %
<CAPTION>
(1)
$0.02
0.86 %**
5.08 %**
<CAPTION>
</TABLE>
** Annualized
*** The Portfolio began offering Class B shares on January 2, 1996.
8
<PAGE>
HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS SEPTEMBER
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 28, 1992*
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER TO
31, 31, 31, 31, 31, 31, OCTOBER 31,
1997 1996 1995 1994 1993 1992 1992
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77 $ 10.00
----------- ----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)..... 1.03 1.14 0.97 0.90 0.14 0.08
Net Realized and Unrealized
Gain (Loss) on
Investments................ 0.47 0.97 (1.40) 1.21 0.19 (0.31)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total from Investment
Operations............... 1.50 2.11 (0.43) 2.11 0.33 (0.23)
----------- ----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income....... (1.05) (1.20) (0.97) (0.90) (0.15) --
In Excess of Net Investment
Income..................... (0.00)+ -- -- -- -- --
Net Realized Gain........... -- -- (0.21) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Distributions....... (1.05) (1.20) (1.18) (0.90) (0.15) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD....................... $ $ 10.91 $ 10.46 $ 9.55 $ 11.16 $ 9.95 $ 9.77
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL RETURN.................. % 15.01% 23.35% (4.18)% 22.11% 3.41% (2.30)%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)................ % $ 95,663 $ 62,245 $ 97,223 $ 74,500 $ 20,194 $ 16,950
Ratio of Expenses to Average
Net Assets (1)............. % 0.75% 0.75% 0.75% 0.75% 0.75%** 0.75%**
Ratio of Net Investment
Income to Average Net
Assets (1)................. % 9.78% 11.09% 9.42% 8.70% 8.96%** 9.89%**
Portfolio Turnover Rate..... % 117% 90% 74% 104% 24% 9%
<CAPTION>
CLASS B
-------------------------
PERIOD FROM
JANUARY 2,
YEAR ENDED 1996*** TO
DECEMBER DECEMBER
31, 31,
1997 1996
----------- -----------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ $ 10.49
----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)..... 0.98
Net Realized and Unrealized
Gain (Loss) on
Investments................ 0.45
----------- -----------
Total from Investment
Operations............... 1.43
----------- -----------
DISTRIBUTIONS
Net Investment Income....... (1.02)
In Excess of Net Investment
Income..................... --
Net Realized Gain........... --
----------- -----------
Total Distributions....... (1.02)
----------- -----------
NET ASSET VALUE, END OF
PERIOD....................... $ $ 10.90
----------- -----------
----------- -----------
TOTAL RETURN.................. % 14.37%
----------- -----------
----------- -----------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)................ % $ 5,665
Ratio of Expenses to Average
Net Assets (1)............. % 1.00%**
Ratio of Net Investment
Income to Average Net
Assets (1)................. % 9.49%**
Portfolio Turnover Rate..... % 117%
</TABLE>
- -------------------------
<TABLE>
<C><S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income.......... $ $ 0.01 $ 0.01 $ 0.001 $ 0.02 $ 0.01 $ 0.01
Ratios before expense
limitation:
Expenses to Average Net
Assets..................... % 0.82% 0.83% 0.76% 0.96% 1.62%** 1.23%**
Net Investment Income to
Average Net Assets......... % 9.71% 11.01% 9.41% 8.49% 8.09%** 9.41%**
<CAPTION>
(1)
$ $ 0.01
% 1.05%**
% 9.44%**
<CAPTION>
</TABLE>
* Commencement of Operations.
** Annualized
*** The Portfolio began offering Class B shares on January 2, 1996.
+ Amount is less than $0.01 per share.
9
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of thirty-two portfolios, offering institutional investors
and high net worth individual investors a broad range of investment choices
coupled with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and Class B shares, except for
the International Small Cap and Municipal Money Market Portfolios which offer
only Class A shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of each
Portfolio described in this Prospectus is as follows:
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in equity securities of small- to medium-sized companies which
the Adviser believes to be undervalued.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of equity securities which the Adviser believes
to be undervalued and fixed income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
- 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 of the recognized rating services.
The other portfolios of the Fund are described in other Prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of companies in
the Asian real estate industry.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
10
<PAGE>
- The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and
long-term capital appreciation by investing primarily in equity securities
in the European real estate industry.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Adviser, are expected to benefit from their involvement in technology and
technology-related industries.
- The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers included in the
Standard & Poor's 500 Index ("S&P 500").
- 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
substantial investment in real estate investment trusts.
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
11
<PAGE>
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment grade mortgage-backed
securities.
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing in municipal
obligations, the interest on which is exempt from federal income tax.
MONEY MARKET:
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund and
each of its portfolios. As of , 1998, Morgan Stanley Asset
Management Inc. and its affiliated institutional asset management companies
(exclusive of Miller Anderson & Sherrerd, LLP) managed assets of approximately
$ billion. See "Management of the Fund -- Investment Adviser" and "Management
of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. The Distributor
has agreed to waive 0.10% of the 0.25% 12b-1 fee with respect to the Global
Fixed Income Portfolio. The minimum initial investment, generally, is $500,000
for Class A shares of each Portfolio and $100,000 for Class B shares of each
Portfolio. The minimum initial investment amount is reduced for certain
categories of investors. For additional information on how to purchase shares
and minimum initial investments, see "Purchase of Shares."
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of the applicable class
next determined after receipt of the redemption request. The redemption price
may be more or less than the purchase price. Certain redemptions that cause the
value of an account to remain for a continuous 60-day period below the minimum
investment amount for Class A shares or
12
<PAGE>
for Class B shares may result in involuntary redemption or automatic conversion.
For additional information on how to redeem shares and involuntary redemption or
conversion, see "Purchase of Shares" and "Redemption of Shares."
RISK FACTORS
Investing in each of the Portfolios entails certain risks and considerations
of which an investor should be aware. The Portfolios' share prices and
investment returns fluctuate and, when redeemed, an investment in the Portfolios
may be worth more or less than its original cost. The investment policies of the
Portfolios may entail the following risk factors:
- EQUITY SECURITIES. The Small Cap Value Equity, Value Equity and Balanced
Portfolios may invest primarily in equity securities. Prices of equity
securities fluctuate in response to many factors, including the financial
health of the issuers and changes in economic and market conditions.
- FIXED INCOME SECURITIES. The Balanced, Global Fixed Income and High Yield
Portfolios will be subject to credit risk and market risk associated with
investment in fixed income securities. Credit risk is the possibility that
an issuer may be unable to meet scheduled principal and interest payments.
Market risk is the possibility that a change in interest rates or the
market's perception of the issuer's prospects may adversely affect the
value of a fixed income security.
- HIGH YIELD SECURITIES. The High Yield Portfolio may invest in lower rated
and unrated fixed income securities (i.e., high yield or high risk
securities), which are often issued by smaller or less creditworthy
companies. High yield securities generally are subject to greater market
risk and credit risk than other fixed income securities.
- MORTGAGE-BACKED SECURITIES. The Balanced and High Yield Portfolios may
invest in mortgage-backed securities. Mortgage-backed securities represent
an interest in a pool of underlying mortgage loans. They are sensitive to
changes in interest rates, but may respond to these changes in a manner
different from other fixed income securities due to the possiblity of
prepayment of the underlying mortgage loans. As a result, it is not
possible to determine in advance the actual maturity date or average life
of a mortgage-backed security. Rising interest rates tend to discourage
refinancings, with the result that the average life and volatility of the
security will increase and its market price will decrease. When interest
rates fall, mortgage-backed securities may not gain as much in market
value because additional mortgage prepayments must be reinvested at lower
interest rates.
- FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. The risks of foreign investment include fluctuations in foreign
currency values, political events affecting the country of issuance and
potentially greater market volatility and lower liquidity.
- EMERGING MARKET COUNTRY SECURITIES. The High Yield Portfolio may invest in
emerging market country securities which entail risks typically associated
with investment in more established foreign markets. However, these risks
may be intensified due to higher volatility and less liquidity of emerging
markets, possible political risks associated with the country of issuance
and generally weaker financial condition of issuers in these markets.
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<PAGE>
- DERIVATIVES. Each Portfolio may invest in instruments that derive their
values from those of specified securities, indices, currencies or other
points of reference. These derivatives, including those used to manage
risk, are themselves subject to the risks of the different markets in
which they are traded and, therefore, may or may not serve their intended
purposes.
For additional information about risk factors, see also "Investment
Objectives and Policies" and "Additional Investment Information."
14
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies each Portfolio employs in its efforts to achieve its objective.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that a Portfolio will attain its objective. In
addition to the investments and strategies described below, the Portfolios may
invest in certain securities and obligations as set forth in "Additional
Investment Information" and as described under "Investment Objectives and
Policies" in the Statement of Additional Information. The investment policies
described below are not fundamental policies unless otherwise noted and may be
changed without shareholder approval.
THE SMALL CAP VALUE EQUITY PORTFOLIO
The investment objective of the Small Cap Value Equity Portfolio is to
provide high long-term total return by investing in equity securities of small-
to medium-sized corporations that the Adviser believes to be undervalued
relative to the stock market in general at the time of purchase. The Portfolio
invests primarily in corporations domiciled in the United States with equity
market capitalizations in the range of the companies represented in the Russell
2500 Small Company Index, and may also invest in similar sized foreign
companies. Such range is approximately $70 million to $1.3 billion, but the
range fluctuates over time with the equity market. Under normal circumstances,
the Fund will invest at least 65% of the value of its total assets in equity
securities of issuers whose market capitalizations are within the range
represented in the Index. With respect to the Portfolio, equity securities
include common and preferred stocks, convertible securities, rights and warrants
to purchase common stocks, and similar equity interests, such as trusts or
partnership interests. These investments may or may not carry voting rights. The
portfolio may invest in equity securities of foreign issuers that trade on a
U.S. exchange, over-the-counter or in the form of Depositary Receipts.
Companies considered attractive will have the following characteristics; (i)
the market prices of the stocks will be undervalued relative to the normal
earning power of the companies; (ii) stock prices will be low relative to the
intrinsic value of the companies' assets; (iii) stocks will most often have
yields distinctly above the average of companies with similar capitalizations;
and (iv) stocks will be of high quality, in the Adviser's judgment, as evaluated
by the companies' balance sheets, income statements, franchises and product
competitiveness. The thrust of this approach is to seek investments in stocks
for which investor enthusiasm is currently low, as reflected in their valuation,
but which have the financial and fundamental features, which, in the Adviser's
opinion, will allow the stocks to achieve a higher valuation. Value is achieved
and the Portfolio reduces its holdings in a security when the investment
community's perception of the issuer improves and the price approaches what the
Adviser believes is a fair valuation.
THE VALUE EQUITY PORTFOLIO
The investment objective of the Value Equity Portfolio is to achieve high
total return (i.e., long-term growth of capital and high current income) by
investing in equity securities that the Adviser believes to be undervalued
relative to the stock market in general at the time of purchase. The Portfolio
invests primarily in equity securities of large capitalization companies, mainly
those domiciled in the United States. With respect to the Portfolio, equity
securities include common and preferred stocks, convertible securities, and
rights and warrants to
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<PAGE>
purchase common stocks. Under normal circumstances, the Portfolio will invest at
least 65% of the value of its total assets in equity securities. The Portfolio
may invest up to 25% of its total assets in the equity securities of foreign
issuers, and in Depositary Receipts for such securities.
The Adviser invests with the philosophy that a diversified portfolio of
undervalued equity securities will outperform the market over the long term, as
well as preserve principal in difficult market environments. Companies
considered attractive will have the following characteristics: (i) stocks most
often will have distinctly above-average dividend yields; (ii) the market prices
of the stocks will be undervalued relative to the normal earning power of the
company; (iii) many stocks will sell at close to or below the replacement value
of their assets; and (iv) most stocks' market prices will have underperformed
the general market due to a lower level of investor expectations regarding the
company outlook. The thrust of this approach is to seek investments where
current investor enthusiasm is low, as reflected in their valuations. Value is
achieved and the Portfolio reduces its holdings in a security when the
investment community's perception of the issuer improves and the price
approaches what the Adviser believes is a fair valuation.
THE BALANCED PORTFOLIO
The investment objective of the Balanced Portfolio is to achieve high total
return while preserving capital by investing in a combination of undervalued
equity securities and fixed income securities. The Portfolio seeks strong total
return in all market conditions, with a special emphasis on minimizing interim
declines during falling equity markets. It primarily invests in large
capitalization equity securities, intermediate-maturity bonds and cash
equivalents.
The Adviser uses a value-driven balanced portfolio philosophy which combines
separate equity, fixed income and asset allocation strategies. The equity
investment approach is the same as that used for the Value Equity Portfolio.
This produces a portfolio of stocks with low price-to-earnings and price-to-book
ratios and high dividend yields. The fixed income strategy values bonds using
historical yield differentials. Fixed income securities in which the Portfolio
may invest include U.S. Governmental securities, mortgage-backed securities,
corporate bonds, bank obligations and short-term money market instruments. The
asset allocation strategy shifts the stock/fixed income/cash equivalent mix
relative to calculated risk and return levels. All three strategies use
historical capital market behavior to reach conclusions.
The Portfolio will typically maintain between 35% and 65% of its total
assets invested in equity securities, depending upon the Adviser's assessment of
market conditions. In overvalued equity markets, the common stock exposure will
be at the low end of this range. It is expected that equity exposure will
average approximately 55% over time. With respect to the Portfolio, equity
securities include common and preferred stocks, convertible securities, and
rights and warrants to purchase common stocks. The average maturity of the fixed
income securities held by the Portfolio will, under normal circumstances, be
approximately five years, although this will vary with changing market
conditions. Up to 25% of the Portfolio's total assets may be invested in the
securities of foreign issuers.
THE GLOBAL FIXED INCOME PORTFOLIO
The Global Fixed Income Portfolio seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities of
U.S. and foreign issuers denominated in U.S. dollars and in other currencies.
The Portfolio seeks to achieve its objective by investing in U.S. Government
securities, foreign government securities, securities of supranational entities,
Eurobonds, and corporate bonds with varying
16
<PAGE>
maturities. In selecting portfolio securities, the Adviser evaluates the
currency, market, and individual features of the securities being considered for
investment. Under normal circumstances, at least 65% of the total assets of the
Portfolio will be invested in fixed income securities.
The Adviser seeks to minimize investment risk by investing only in
investment grade debt securities. U.S. Government securities that the Portfolio
may invest in include obligations issued by the U.S. Government, such as U.S.
Treasury securities, as well as those guaranteed or backed by the full faith and
credit of the United States, such as obligations of the Government National
Mortgage Association and The Export-Import Bank. The Portfolio may also invest
in obligations issued or guaranteed by U.S. Government agencies or
instrumentalities where the Portfolio must look principally to the issuing or
guaranteeing agency for ultimate repayment. The Portfolio may invest in
obligations issued or guaranteed by foreign governments and their political
subdivisions, authorities, agencies or instrumentalities, and by supranational
entities (such as the World Bank, The European Economic Community, The Asian
Development Bank and the European Coal and Steel Community). Investment in
foreign government securities will be limited to those of developed nations
which the Adviser believes pose limited credit risk. These countries currently
include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Ireland,
Italy, Japan, Luxembourg, The Netherlands, New Zealand, Norway, Spain, Sweden,
Switzerland, The United Kingdom and Germany. Corporate and supranational
obligations which the Portfolio will invest in will be limited to those rated A
or better by Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P") or IBCA Ltd. or, if unrated, to those that are of
comparable quality in the determination of the Board of Directors and the
Adviser.
The Adviser's approach to multicurrency fixed income management is strategic
and value-based and designed to produce an attractive real rate of return. The
Adviser's assessment of bond markets and currencies is based on an analysis of
real interest rates. Current nominal yields of securities are adjusted for
inflation prevailing in each currency sector using an analysis of past and
projected inflation rates. The Portfolio's aim is to invest in bond markets
which offer the most attractive real returns.
The Portfolio will have a neutral investment position in medium-term
securities (I.E., those with a remaining maturity of between three and seven
years) and will respond to changing interest rate levels by shortening or
lengthening portfolio maturity through investment in longer- or shorter-term
instruments. For example, the Portfolio will respond to high levels of real
interest rates through a lengthening in portfolio maturity. Current and
historical yield spreads among the three main market segments -- the Government,
Foreign and Euro markets -- guide the Adviser's selection of markets and
particular securities within those markets. The analysis of currencies is made
independent of the analysis of markets. Value in foreign exchange is determined
by relative purchasing power parity of a given currency. The Portfolio seeks to
invest in currencies currently undervalued based on purchasing power parity. The
Adviser analyzes current account and capital account performance and real
interest rates to adjust for shorter-term currency flows.
THE HIGH YIELD PORTFOLIO
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 of the recognized rating services. The Portfolio normally invests
between 80% and 100% of its
17
<PAGE>
total assets in these higher yielding securities, which generally entails
increased credit and market risk. To mitigate these risks the Portfolio will
diversify its holdings by issuer, industry and credit quality, but investors
should carefully review the section below entitled "Risk Factors Relating to
Investing in High Yield Securities."
Appendix A to this Prospectus sets forth a description of the corporate bond
rating categories of Moody's and S&P. Corporate bonds rated below Baa by Moody's
or BBB by S&P are considered speculative. Securities in the lowest rating
categories may have predominantly speculative characteristics or may be in
default. Ratings of S&P and Moody's represent their opinions of the quality of
bonds and other debt securities they undertake to rate at the time of issuance.
However, ratings are not absolute standards of quality and may not reflect
changes in an issuer's creditworthiness. Accordingly, although the Adviser will
consider ratings, it will perform its own analysis of credit risk and market
risk and will not rely principally on ratings. In its selection of securities
for the Portfolio, the Adviser will consider, among other things, the price of
the security and the issuer's financial history and condition as well as the
prospects and the management of the issuer. The Portfolio may buy unrated high
yield securities consistent with the Portfolio's objective and policies. The
Adviser may vary the average maturity of the securities in the Portfolio without
limit and there is no restriction on the maturity of any individual security.
The Portfolio may acquire fixed income securities of both U.S. and foreign
issuers, including debt obligations (e.g., bonds, debentures, notes, equipment
lease certificates, equipment trust certificates, conditional sales contracts,
commercial paper and obligations issued or guaranteed by the U.S. Government,
any foreign government with which the United States maintains relations or any
of their respective political subdivisions, agencies or instrumentalities) and
preferred stock. The Portfolio's fixed income securities may have equity
features such as conversion rights or warrants, and the Portfolio may invest in
equity securities other than preferred stock (e.g., common stocks, warrants and
rights and limited partnership interests). The Portfolio may not invest more
than 5% of its total assets at time of acquisition in limited partnership
interests. The Portfolio may invest in fixed income securities that are
investment grade (i.e., rated in one of the top four categories or comparable)
and have maturities of one year or less. The Portfolio may invest in or own
securities of companies in various stages of financial restructuring, bankruptcy
or reorganization which are not currently paying interest or dividends; the
total value, at time of purchase, of the sum of all such securities will not
exceed 10% of the value of the Portfolio's total assets.
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The table below provides a summary of ratings assigned by S&P to debt
obligations in the High Yield Portfolio. These figures are dollar-weighted
averages of month-end portfolio holdings during the fiscal year ended December
31, 1997, presented as a percentage of total investments. These percentages are
historical and are not necessarily indicative of the quality of current or
future portfolio holdings, which may vary.
<TABLE>
<CAPTION>
S&P
- ----------------
AVERAGE
PERCENT
OF
PORTFOLIO
RATING HOLDINGS
- ------- -------
<S> <C>
AAA %
AA %
A %
BBB %
BB %
B %
CCC %
CC %
Unrated %
</TABLE>
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. Lower rated or
unrated (i.e., high yield) securities are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
primarily react inversely to movements in the general level of interest rates.
Yields and market values of high yield securities, however, reflect not only
changing interest rates, but the market's perception of credit quality and the
outlook for economic growth. When economic conditions appear to be
deteriorating, medium to lower rated securities may decline in value due to
heightened concern over credit quality, regardless of prevailing interest rates.
Investors should carefully consider the relative risks of investing in high
yield securities and understand that such securities are not generally meant for
short-term investing.
The high yield market is still relatively new and its recent growth
parallels a long period of economic expansion and an increase in merger,
acquisition and leveraged buyout activity. Adverse economic developments may
disrupt the market for high yield securities, and severely affect the ability of
issuers, especially highly leveraged issuers, to service their debt obligations
or to repay their obligations upon maturity. In addition, the secondary market
for high yield securities, which is concentrated in relatively few market
makers, may not be as liquid as the secondary market for more highly rated
securities. As a result, the Adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Under these circumstances, prices realized
upon the sale of lower rated or unrated securities may be less than the prices
used in calculating the Portfolio's net asset value. Prices for high yield
securities may be affected by legislative and regulatory developments. These
developments could adversely affect the Portfolio's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Portfolio
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Portfolio's investment portfolio
and increasing the exposure of the Portfolio to the risks of high yield
securities.
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ADDITIONAL INVESTMENT INFORMATION
DEPOSITARY RECEIPTS. Each Portfolio, except the Global Fixed Income and
High Yield Portfolios, is permitted to invest in Depositary Receipts, including
American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"),
European Depositary Receipts ("EDRs") and other Depositary Receipts (which,
together with ADRs, GDRs and EDRs, are hereinafter collectively referred to as
"Depositary Receipts"), to the extent that such Depositary Receipts are or
become available. ADRs are securities, typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer (the "underlying issuer") and
deposited with the depositary. ADRs may be "sponsored" or "unsponsored."
Sponsored ADRs are established jointly by a depositary and the underlying
issuer, whereas unsponsored ADRs may be established by a depositary without
participation by the underlying issuer. The issuers of the stock of unsponsored
ADRs are not obligated to disclose material information in the United States and
therefore, there may not be a correlation between such information and the
market value of the ADR. GDRs, EDRs and other types of Depositary Receipts are
typically issued by foreign depositaries, although they may also be issued by
U.S. depositaries, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. The Portfolios may invest in
sponsored and unsponsored Depositary Receipts. For purposes of the Portfolios'
investment policies, the Portfolios' investments in Depositary Receipts will be
deemed to be investments in the underlying securities.
FIXED INCOME SECURITIES. Each Portfolio, except the Small Cap Value Equity
and Value Equity Portfolios, will invest in fixed income (debt) securities. The
market value of the fixed income securities in which a Portfolio invests will be
affected by changes in the creditworthiness of issuers and will change in
response to interest rate changes and other factors. Generally, the values of
fixed income securities vary inversely with changes in interest rates, so that
during periods of falling interest rates, the values of outstanding fixed income
securities generally rise and during periods of rising interest rates, the
values of such securities generally decline. While securities with longer
maturities tend to produce higher yields, the prices of longer maturity
securities are subject to greater market fluctuations as a result of changes in
interest rates.
FOREIGN CURRENCY FORWARD CONTRACTS. Each Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolios
may use such contracts to protect against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, lock in the U.S. dollar value of
dividends and interest on securities held by the Portfolio, and generally to
protect the U.S. dollar value of securities held by the Portfolio against
exchange rate fluctuation. Forward contracts may also be used as a protective
measure against the effects of fluctuating rates of currency exchange and
exchange control regulations. While forward contracts may limit losses as a
result of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will be at least equal to the amount of
the Portfolio's commitments with respect to such contracts.
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<PAGE>
FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. Investment in securities of foreign issuers involves investment risks
somewhat different from those affecting securities of U.S. issuers. The
Portfolio's investments will be subject to political and economic events that
affect the countries in which it invests. Foreign issuers may be subject to
different accounting, auditing and financial standards and requirements. There
also may be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the United States. Many foreign
securities markets have substantially less trading volume than U.S. national
securities exchanges and, therefore, securities of some foreign issuers are less
liquid and more volatile than securities of comparable U.S. issuers. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the United States. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes, which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Portfolios by domestic companies. Investments in securities
of foreign issuers are generally denominated in foreign currencies and, since a
Portfolio may temporarily hold uninvested reserves in bank deposits in foreign
currencies, the value of a Portfolio's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations, and a Portfolio may incur costs in connection with
conversions between various currencies.
The High Yield Portfolio may also invest in emerging market country
securities. Investing in emerging markets entails the risks associated with
foreign investment described above, however, these risks may be intensified in
emerging markets. Emerging markets can include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe. Certain emerging market countries have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, large amounts of external debt,
trade difficulties and unemployment. Further, the economies of developing
countries generally are heavily dependent upon international trade and,
accordingly, have been, and may continue to be, adversely affected by trade
barriers, exchange controls and other protectionist measures imposed or
negotiated by the countries in which they trade. There also are risks associated
with the possibility of nationalization, expropriation or confiscatory taxation,
political changes, government regulation, social instability or diplomatic
developments (including war) that could adversely affect the economies of such
countries or the value of a Portfolio's investments in those countries.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. Each Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets. Securities lending entails certain risks of delay in recovery or
loss of rights in collateral in the event of the insolvency of the borrower.
MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although the Portfolios intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. Consistent with their investment policies, the Portfolios may make
money market investments pending other investment or settlement for liquidity.
In addition, the Portfolios may invest in money market
21
<PAGE>
instruments for temporary defensive purposes during adverse market conditions.
The money market investments permitted for the Portfolios include: obligations
of the U.S. Government and its agencies and instrumentalities, commercial paper,
bank obligations (including certificates of deposit), other debt securities and
repurchase agreements.
MORTGAGE-BACKED SECURITIES. The Balanced and High Yield Portfolios may
invest in mortgage-backed securities. Mortgage-backed securities, directly or
indirectly, represent an interest in a pool of mortgage loans on real property.
The Portfolios generally will invest in two types of mortgage-backed securities.
Mortgage pass-through securities represent a direct interest in a group of loans
that has been pooled and the loan payments passed through to security holders.
Collateralized mortgage obligations ("CMOs") are fixed income securities that,
rather than representing a direct interest in a pool of underlying mortgage
loans, are collateralized by the underlying loans. The indirect ownership
structure enables issuers to offer CMOs with a number of different classes, or
tranches, having particular risk/return characteristics.
The loans may be pooled by a government agency or instrumentality, such as
the Government National Mortgage Association, which packages the loans and
guarantees repayment of principal and/or interest on the underlying loans. The
agencies or instrumentalities pooling and guaranteeing such loans may or may not
be backed by the full faith and credit of the U.S. Government. Mortgage-backed
securities also may be issued by privare originators of or investors in mortgage
loans and structured similarly to governmental pass-through securities. Because
privately issued securities typically lack a guarantee by an entity having the
credit status of a governmental agency or instrumentality, they often are
structured with one or more types of credit enhancement.
Investment in mortgage-backed securities entails certain risks. Like other
debt securities, the value of mortgage-backed securities generally varies
inversely with changes in interest rates. However, mortgage-backed securities
may respond to these changes in a manner different from other fixed income
securities because the possibility of prepayment of the underlying mortgage
loans makes it difficult to determine in advance the actual maturity date or
average life of a mortgage-backed security. Rising interest rates tend to
discourage refinancings, with the result that the average life and volatility of
the security will increase and its market price will decrease. When interest
rates fall, however, mortgage-backed securities may not gain as much in value
because increased mortgage prepayments must be reinvested at lower interest
rates.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolios may invest in securities that are neither listed on
a stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted equity securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Portfolio or less than what may be
considered the fair value of such securities. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.
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<PAGE>
As a general matter, a Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Also, as a general matter, the Portfolio may
not invest more than 10% of its total assets in securities that are restricted
from sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). However, the Portfolio may
invest without limit in liquid Restricted Securities that can be offered and
sold to qualified institutional buyers under Rule 144A under the 1933 Act ("Rule
144A Securities"). The Board of Directors has adopted guidelines and delegated
to the Adviser, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of Rule 144A Securities.
Rule 144A Securities may become illiquid if qualified institutional buyers are
not interested in acquiring the securities.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. Each Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolios may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 15% of the market value of the Portfolio's net assets are invested in
these agreements and other investments for which market quotations are not
readily available or which are otherwise illiquid.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, each Portfolio
may, for temporary defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and medium-term debt obligations in which a Portfolio may invest consist of (i)
obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment, but will
take place no more than 120 days after the trade date. Each Portfolio will
maintain with the Custodian a segregated account of cash or liquid securities in
an amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time a Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if the general level of
interest rates has changed. It is a current policy of each Portfolio not to
enter into when-issued commitments and delayed delivery commitments exceeding in
the aggregate 15% of the market value of the Portfolio's total assets less
liabilities other than the obligations created by these commitments.
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ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES. The High Yield
Portfolio may invest in zero coupon, pay-in-kind or deferred payment securities.
Zero coupon securities are securities that are sold at a discount to par value
and securities on which interest payments are not made during the life of the
security. Upon maturity, the holder is entitled to receive the par value of the
security. While interest payments are not made on such securities, holders of
such securities are deemed to have received "phantom income" annually. Because
the Portfolio will distribute its "phantom income" to shareholders, to the
extent that shareholders elect to receive dividends in cash rather than
reinvesting such dividends in additional shares of the Portfolio, it will have
fewer assets with which to purchase income producing securities. The Portfolio
accrues income with respect to these securities prior to the receipt of cash
payments. Pay-in-kind securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred payment securities
are securities that remain zero coupon securities until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods.
DERIVATIVE PRODUCTS (DERIVATIVES)
The Portfolios are permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but are
not limited to: futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other derivative
products yet to be developed, so long as these new products are used in a manner
consistent with the objectives of the Portfolios. These derivative products may
be based upon a wide variety of underlying rates, indices, instruments,
securities and other products, such as interest rates, foreign currencies,
foreign and domestic fixed income and equity securities, groups or "baskets" of
securities and securities indices (for each derivative product, the
"underlying"). Exclusive of forward foreign currency contracts and any
derivative products used for hedging purposes, each Portfolio will limit its use
of derivative products to 33 1/3% of its total assets, measured by the aggregate
notional amount of outstanding derivative products.
The Portfolios may use derivative products under a number of different
circumstances to further their investment objectives. For example, a Portfolio
may purchase derivatives to gain exposure to a market quickly in response to
changes in the Portfolio's investment strategy, upon the inflow of investable
cash or when the derivative provides greater liquidity than the underlying
market. A Portfolio may also use derivatives when it is restricted from directly
owning the "underlying" or when derivatives provide a pricing advantage or lower
transaction costs. The Portfolios also may purchase combinations of derivatives
in order to gain exposure to an investment in lieu of actually purchasing such
investment. Derivatives may also be used by a Portfolio for hedging or risk
management purposes and in other circumstances when the Adviser believes it
advantageous to do so consistent with the Portfolio's investment objectives and
policies. The Portfolios will not use derivatives in a manner that creates
leverage, except to the extent that the use of leverage is expressly permitted
by a particular Portfolio's investment policies, and then only in a manner
consistent with such policies.
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The use of derivative products is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Portfolios will be less favorable than it would
have been if these investment techniques had not been used.
Some of the derivative products in which the Portfolios may invest and some
of the risks related thereto are described in more detail below.
FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)
The Portfolios may purchase and sell futures contracts of the type generally
known as financial futures, such as futures on securities indices, baskets of
securities, foreign currencies and interest rates. These are standardized
contracts that are bought and sold on organized exchanges. A futures contract
obligates a party to buy or sell a specific amount of the "underlying," such as
for example, a particular foreign currency, on a specified future date at a
specified price or to settle the value in cash.
The Portfolios may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolios may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Forward Contracts" above. These
forward contracts are privately negotiated and are bought and sold in the
over-the-counter market. Like a future, a forward contract obligates a party to
buy or sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.
In some cases, the Portfolios may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolios will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolios may utilize futures contracts, forward contracts and related options
are as follows:
The Portfolios may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market exposure.
There currently are limited securities index futures and options on such futures
in many countries, particularly emerging countries. The nature of the strategies
adopted by the Adviser, and the extent to which those strategies are used, may
depend on the development of such markets. The Portfolios may also purchase and
sell foreign currency futures to hedge their respective holdings and commitments
against changes in the level of future currency rates or to adjust their
exposure to a particular currency.
The Portfolios may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely with
changes in interest rates. The Portfolios may engage in such transactions to
hedge their holdings of debt instruments against future changes in interest
rates or for other purposes.
The Portfolios may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these contracts also rises and falls inversely with
changes in interest rates. The Portfolios may engage in financial futures and
forward contracts for both hedging and non-hedging purposes.
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Gains and losses on futures contracts, forward contracts and related options
depend on the Adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors. Other risks associated with
the use of these instruments include (i) imperfect correlation between the
change in market value of investments held by a Portfolio and the prices of
derivative products relating to investments purchased or sold by the Portfolio,
and (ii) possible lack of a liquid secondary market for a derivative product and
the resulting inability to close out a position. The risk that a Portfolio will
be unable to close out a position will be minimized by only entering into
transactions for which there appears to be a liquid exchange or secondary
market. In some strategies, the risk of loss in trading on futures and related
transactions can be substantial, due both to the low margin deposits required
and the extremely high degree of leverage involved in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the
"CFTC"), each Portfolio may, without registering with the CFTC as a Commodity
Pool Operator, enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-bona
fide hedging activities.
OPTION TRANSACTIONS
The Portfolios may seek to increase their returns or may hedge their
portfolio investments through options transactions with respect to individual
securities, indices or baskets in which such Portfolios may invest; other
financial instruments; and foreign currency. Various options may be purchased
and sold on either the exchange-traded or over-the-counter markets.
Each Portfolio may purchase put and call options. Purchasing a put option
gives a Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period.
Purchasing a call option gives a Portfolio a similar right, but not the
obligation, to purchase the underlying. The purchaser pays a premium to the
seller (also known as the writer) of the option.
Each Portfolio also may write put and call options on investments held in
its portfolio, as well as foreign currency options. A Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, a Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, a Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.
By writing an option, a Portfolio incurs an obligation either to buy (in the
case of a put option) or sell (in the case of a call option) the underlying from
the purchaser of the option at the option's exercise price, upon exercise by the
purchaser. Pursuant to guidelines established by the Board of Directors, the
Portfolios may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will continue to own (i) the underlying; (ii) securities or instruments
convertible or exchangeable without the payment of any consideration into the
underlying; or (iii) a call option on the same underlying with a strike price no
higher than the price at which the underlying was sold pursuant to a short
option position. In the case of a put option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will own another put option on the same underlying with an equal or higher
strike price.
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There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolios' use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by a
Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.
INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS
Swaps are privately negotiated over-the-counter derivative products in which
two parties agree to exchange payment streams calculated in relation to a rate,
index, instrument or certain securities and a particular "notional amount." As
with many of the other derivative products available to the Portfolios, the
underlying may include an interest rate (fixed or floating), a currency exchange
rate, a commodity price index, and a security, securities index or a combination
thereof. A great deal of flexibility is possible in the way the products may be
structured, with the effect being that the parties may have exchanged amounts
equal to the return on one rate, index or group of securities for another. For
example, in a simple fixed-to-floating interest rate swap, one party makes
payments equivalent to a fixed interest rate, and the other makes payments
equivalent to a specified interest rate index. A Portfolio may engage in simple
or more complex swap transactions involving a wide variety of underlyings. The
currency swaps that the Portfolios may enter will generally involve an agreement
to pay interest streams in one currency based on a specified index in exchange
for receiving interest streams denominated in another currency. Such swaps may
involve initial and final exchanges that correspond to the agreed upon notional
amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. A Portfolio may use one or more of these products in addition to or in
lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar is a combination product in which the same party, such as the Portfolio,
buys a cap from and sells a floor to the other party. As with put and call
options, the amount at risk is limited for the buyer, but, if the cap or floor
is not hedged or covered, may be unlimited for the seller. Under current market
practice, caps, collars and floors between the same two parties are generally
documented under the same "master agreement." In some cases, options and forward
agreements may also be governed by the same master agreement. In the event of a
default, amounts owed under all transactions entered into under, or covered by,
the same master agreement would be netted and only a single payment would be
made.
Swaps, caps, collars and floors are credit-intensive products. A Portfolio
that enters into a swap transaction bears the risk of default, i.e. nonpayment,
by the other party. The guidelines under which each Portfolio enters derivative
transactions, along with some features of the transactions themselves, are
intended to reduce these risks to the extent reasonably practicable, although
they cannot eliminate the risks entirely. Under guidelines established by the
Board of Directors, a Portfolio may enter into swaps only with parties that meet
certain credit rating guidelines. Consistent with current market practices, a
Portfolio will generally enter into swap transactions on a net basis, and all
swap transactions with the same party will be documented under a single master
27
<PAGE>
agreement to provide for net payment upon default. In addition, a Portfolio's
obligations under an agreement will be accrued daily (offset against any amounts
owing to the Portfolio) and any accrued, but unpaid, net amounts owed to the
other party to a master agreement will be covered by the maintenance of a
segregated account consisting of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, a Portfolio's risk of loss will consist of the payments
that a Portfolio is contractually entitled to receive from the other party. This
may not be true for currency swaps that require the delivery of the entire
notional amount of one designated currency in exchange for the other. If there
is a default by the other party, a Portfolio may have contractual remedies
pursuant to the agreements related to the transaction.
STRUCTURED NOTES
Structured notes are derivative securities for which the amount of principal
repayment and/or interest payments is based upon the movement of one or more
factors. These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices,
such as the S&P 500 Index. In some cases, the impact of the movements of these
factors may increase or decrease through the use of multipliers or deflators.
The Portfolios may use structured notes to tailor their investments to the
specific risks and returns the Adviser wishes to accept while avoiding or
reducing certain other risks.
INVESTMENT LIMITATIONS
As a diversified investment company, each Portfolio, except the Global Fixed
Income Portfolio, is subject to the following limitations: (i) as to 75% of its
total assets, a Portfolio may not invest more than 5% of its total assets in the
securities of any one issuer, except obligations of the U.S. Government and its
agencies and instrumentalities, and (ii) a Portfolio may not own more than 10%
of the outstanding voting securities of any one issuer.
The Global Fixed Income Portfolio is a non-diversified investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), which
means the Global Fixed Income Portfolio is not limited by the 1940 Act in the
proportion of its total assets that may be invested in the obligations of a
single issuer. Thus, the Global Fixed Income Portfolio may invest a greater
proportion of its total assets in the securities of a smaller number of issuers
and, as a result, will be subject to greater risk with respect to its portfolio
securities. Nevertheless, the Global Fixed Income Portfolio intends to comply
with the more limited diversification requirements imposed by the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company.
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
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MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each Portfolio's
investments. Set forth below as an annual percentage of average daily net assets
are the management fees payable to the Adviser quarterly by each Portfolio
pursuant to the terms of the Investment Advisory Agreement. The Adviser has
voluntarily agreed to a reduction in the fees payable to it and to reimburse the
Portfolios, if necessary, if such fees would cause total annual operating
expenses of the Portfolios to exceed the maximums set forth in the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING
EXPENSES
AFTER FEE WAIVERS
MANAGEMENT ----------------------------
PORTFOLIO FEE CLASS A CLASS B
- ------------------------------------ ------------ ------------- -------------
<S> <C> <C> <C>
Small Cap Value Equity Portfolio 0.85% 1.00% 1.25%
Value Equity Portfolio 0.50% 0.70% 0.95%
Balanced Portfolio 0.50% 0.70% 0.95%
Global Fixed Income 0.40% 0.50% 0.65%
High Yield 0.375% 0.75% 1.00%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD")
is the direct parent of the Adviser and Morgan Stanley. MSDWD is a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses -- securities, asset management and credit
services. At , 1998, the Adviser, together with its affiliated
institutional asset management companies (exclusive of Miller Anderson &
Sherrerd, LLP) managed assets of approximately $ billion. See "Management of
the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. The following individuals have primary portfolio
management responsibility for the Portfolios noted below:
SMALL CAP VALUE EQUITY PORTFOLIO -- WILLIAM B. GERLACH AND GARY G.
SCHLARBAUM. Mr. Gerlach joined the Adviser in July 1996 and has worked with the
Adviser's affiliate, Miller Anderson & Sherrerd, LLP ("MAS") since 1991.
Previously, he was with Alphametrics Corporation and Wharton Econometric
Forecasting Associates. Mr. Gerlach received a B.A. in Economics from Haverford
College. Gary G. Schlarbaum, a Managing Director of Morgan Stanley, joined MAS
in 1987. He assumed responsibility for the MAS Funds Equity and Small Cap Value
Portfolios in 1987, the MAS Funds Balanced Portfolio in 1992 and the MAS Funds
Multi-Asset-Class and Mid Cap Value Portfolios in 1994. Mr. Schlarbaum also is a
Director of MAS Fund Distribution, Inc. Previously, he was with First Chicago
Investment Advisers and was a Professor at the Krannert Graduate School at
Purdue University. Mr. Schlarbaum holds a B.A. in Economics from Coe College and
a Ph.D. in Applied Economics from University of Pennsylvania. Mr. Gerlach and
Mr. Schlarbaum have had primary responsibility for managing the Small Cap Value
Equity Portfolio since June 1997.
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VALUE EQUITY AND BALANCED PORTFOLIOS -- STEPHEN C. SEXAUER AND PHILIP W.
FRIEDMAN. Stephen C. Sexauer is a Principal of Morgan Stanley and the Adviser
and is a member of the investment management team of the Adviser. In addition to
portfolio management, his equity research responsibilities include financials,
energy, utilities and technology. Mr. Sexauer joined the firm in July 1989 after
three years as a Vice President at Salomon Brothers. Previously, he was with
Merrill Lynch Economics and Wharton Econometrics. Mr. Sexauer received a B.S. in
Economics from the University of Illinois and an M.B.A. in Economics and
Statistics from the University of Chicago. Philip W. Friedman is a Managing
Director of Morgan Stanley and the Adviser and is a member of the investment
management team of the Adviser. In addition to portfolio management, his equity
research responsibilities include business equipment and services, capital
goods, consumer durables, multi-industry and transportation. Prior to joining
the Adviser in 1997, he was the North American Director of Equity Research at
Morgan Stanley. From 1990 to 1995, he was a member of Morgan Stanley's Equity
Research team. Mr. Friedman graduated from Rutgers University with a B.A. (PHI
BETA KAPPA AND SUMMA CUM LAUDE) in Economics. He also holds an M.B.A. from J.L.
Kellogg School of Management at Northwestern University. Mr. Sexauer and Mr.
Friedman have had primary responsibility for managing the Value Equity Portfolio
since January 1992 and July 1997, respectively. Mr. Sexauer and Mr. Friedman
have had primary responsibility for managing the Balanced Portfolio since
February 1990 and July 1997, respectively.
GLOBAL FIXED INCOME PORTFOLIO -- J. DAVID GERMANY, MICHAEL B. KUSHMA, PAUL
F. O'BRIEN, ROBERT M. SMITH AND RICHARD B. WORLEY. J. David Germany joined the
Adviser in 1996 and has been a portfolio manager with MAS since 1991. He was
Vice President & Senior Economist for Morgan Stanley from 1989 to 1991. He
assumed responsibility for the Global Fixed Income and International Fixed
Income Portfolios of the MAS-advised MAS Funds in 1993 and the MAS Funds
Multi-Asset-Class Portfolio in 1994. Mr. Germany was Senior Staff Economist
(International Finance and Macroeconomics) to the Council of Economic Advisers
- -- Executive Office of the President from 1986 through 1987 and an Economist
with the Board of Governors of the Federal Reserve System -- Division of
International Finance from 1983 through 1987. He holds an A.B. degree
(Valedictorian) from Princeton University and a Ph.D. in Economics from the
Massachusetts Institute of Technology. Michael B. Kushma, a Principal at Morgan
Stanley, joined the firm in 1987. He was a member of Morgan Stanley's global
fixed income strategy group in the fixed income division from 1987 to 1995,
where he became the division's senior government bond strategist. He joined the
Adviser in 1995, where he took responsibility for global fixed income bond
strategy. Mr. Kushma received an A.B. in economics from Princeton University in
1979, and an M.Sc. in economics from Columbia University in 1983. Paul F.
O'Brien joined the Adviser and MAS in 1996. He was head of European Economics
from 1993 through 1995 for JP Morgan and a Principal Administrator from 1991
through 1992 for the Organization for Economic Cooperation and Development. He
assumed responsibility for the MAS-advised MAS Funds Global Fixed Income and
International Fixed Income Portfolios in 1996. Mr. O'Brien holds a B.S. degree
from the Massachusetts Institute of Technology and a Ph.D. in Economics from the
University of Minnesota. Robert Smith, a Principal of Morgan Stanley, joined the
Adviser in June 1994. Prior to joining the Adviser, he spent eight years as
Senior Portfolio Manager -- Fixed Income at the State of Florida Pension Fund.
Mr. Smith's responsibilities included active total rate of return management of
long-term portfolios and supervision of other fixed income managers. A graduate
of Florida State University with a B.S. in Business, Mr. Smith also received an
M.B.A. -- Finance from Florida State and holds a Chartered Financial Analyst
(CFA) designation. Richard B. Worley, a Managing Director of Morgan Stanley,
joined MAS in 1978. He assumed responsibility for the MAS Funds Fixed Income
Portfolio in 1984, the MAS Funds Domestic Fixed Income Portfolio in 1987, the
MAS Funds Fixed Income Portfolio II in
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<PAGE>
1990, the MAS Funds Balanced and Special Purpose Fixed Income Portfolios in
1992, the MAS Funds Global Fixed Income and International Fixed Income
Portfolios in 1993 and the MAS Funds Multi-Asset-Class Portfolio in 1994. Mr.
Worley received a B.A. in Economics from University of Tennessee and attended
the Graduate School of Economics at University of Texas. J. David Germany,
Michael B. Kushma, Paul F. O'Brien, Robert M. Smith and Richard B. Worley have
had primary responsibility for managing the Global Fixed Income Portfolio since
September 1997.
HIGH YIELD PORTFOLIO -- ROBERT ANGEVINE, THOMAS L. BENNETT AND STEPHEN F.
ESSER. Robert Angevine is a Principal of the Adviser and the Portfolio Manager
for high yield investments. Prior to joining the Adviser in October 1988, he
spent over eight years at Prudential Insurance where he was responsible for one
of the largest open-end high yield mutual fund in the country. Mr. Angevine also
manages high yield assets for one of the largest corporate pension funds in the
country. His other experience includes international treasury operations at a
major pharmaceutical company and commercial banking. Mr. Angevine received an
M.B.A from Fairleigh Dickinson University and a B.A. in Economics from Lafayette
College. He served two years as a Lieutenant in the U.S. Army. Thomas L. Bennett
joined the Adviser in 1996 and has been a portfolio manager with MAS since 1984.
Mr. Bennett assumed responsibility for the MAS-advised MAS Funds' Fixed Income
Portfolio in 1984, the Domestic Fixed Income Portfolio in 1987, the High Yield
Portfolio in 1985, the Fixed Income Portfolio II in 1990, the Special Purpose
Fixed Income and Balanced Portfolios in 1992 and the Multi-Asset-Class Portfolio
in 1994. Mr. Bennett also is the Chairman of the MAS Funds and has a B.S degree
(Chemistry) and an M.B.A. from the University of Cincinnati. Stephen F. Esser
joined the Adviser in 1996 and has been a portfolio manager with MAS since 1988.
He assumed responsibility for the MAS-advised MAS Funds' High Yield Portfolio in
1989. Mr. Esser is a member of the New York Society of Security Analysts and has
a B.S. degree (SUMMA CUM LAUDE; PHI BETA KAPPA) from the University of Delaware.
Robert Angevine, Thomas L. Bennett and Stephen F. Esser have had primary
responsibility for managing the Portfolio's assets since .
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The officers of the Fund conduct and supervise its daily business
operations.
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<PAGE>
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a
"Plan"). Under each Plan, the Distributor is entitled to receive compensation
from each Portfolio, which is accrued daily and paid quarterly, equal to 0.25%
of the Class B shares' average daily net assets on an annualized basis. Each
Plan is designed to compensate the Distributor for its services in connection
with distribution assistance. The Distributor may retain any portion of the fee
that it does not expend in meeting its obligations to the Fund. The Distributor
may compensate financial intermediaries, plan fiduciaries and adminsitrators for
providing distribution-related services, including account maintenance services,
to shareholders (including, where applicable, underlying beneficial owners) of
Class B shares. [The Distributor has agreed to waive 0.10% of the 0.25%
distribution fee it is entitled to receive from the Global Fixed Income
Portfolio.]
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees and
printing and mailing costs) as specified in its agreements with the Adviser and
Morgan Stanley.
PURCHASE OF SHARES
Class A shares of each Portfolio and Class B shares of each Portfolio may be
purchased at the net asset value per share next determined after receipt by the
Fund of a purchase order. The net asset value per share of each Portfolio is
calculated on days that the New York Stock Exchange ("NYSE") and Chase (the
"Custodian") are open for business as of the close of trading of the NYSE,
normally 4:00 p.m. Eastern Time (the "Pricing Time").
MINIMUM INVESTMENT
The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares of each Portfolio. These minimums may be waived at the
discretion of the Adviser for certain types of investors, including trust
departments, brokers, dealers, agents, financial planners, financial services
firms, investment advisers or various retirement and deferred compensation plans
("Financial Intermediaries"), certain accounts managed by the Adviser and its
affiliates ("Managed Accounts"), and certain employees and customers of Morgan
Stanley and its affiliates. The Fund's determination of an investor's
eligibility to purchase shares of a given class will take precedence over the
investor's selection of a class.
METHODS OF PURCHASE
Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolios by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or because your
check does not clear, you will be
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responsible for any loss the Fund or its agents incur. If you are already a
shareholder, the Fund may redeem shares from your account(s) to reimburse the
Fund or its agents for any loss. In addition, you may be prohibited or
restricted from making future investments in the Fund.
FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian are open for business. Your
bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:
1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide you
with a confirmation number.
2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring the funds.
3. Complete and sign the Account Registration Form and mail it to the
address shown thereon.
When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the close of the Federal Funds Wire Control Center
("FFWCC") (normally 6:00 p.m. Eastern Time), the purchase will be executed at
the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the close of the FFWCC, will be executed at the net asset value next
determined. Certain institutional investors and financial institutions have
entered into an arrangement with Morgan Stanley, pursuant to which they may
place orders prior to the Pricing Time, but make payment in Federal Funds for
those shares on the following business day.
BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and which bank is handling the wire, money transferred by bank
wire may or may not be converted into Federal Funds prior to the close of the
FFWCC. Prior to conversion to Federal Funds and receipt by the Fund, an
investor's money will not be invested.
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
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The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share of each of the
Portfolios determined on the next business day after receipt. An investor's
money will not be invested prior to crediting of Federal Funds.
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. After the Pricing Time, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day and places a net purchase
and/or redemption order(s) by the morning of the next business day. These orders
normally are executed at the net asset value that was computed for each
Portfolio as of the close of the previous business day.
ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 per
Portfolio. The minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases directly from the
Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.
INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES
Class A and Class B shares of each Portfolio may be subject to the
involuntary conversion and redemption features described below. The conversion
and redemption features may be waived at the discretion of the Adviser for
shares held in a Managed Account and shares purchased through a Financial
Intermediary. Accounts that were open prior to January 2, 1996 are not subject
to involuntary conversion or redemption. The Fund reserves the right to modify
or terminate the conversion or redemption features of the shares at any time
upon 60 days notice to shareholders.
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account
containing Class A shares falls below $500,000 (but remains at or above
$100,000) because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $500,000 (but remains at or
above $100,000) for a continuous 60-day period, the Class A shares in such
account will convert to Class B shares and will be subject to the distribution
fee and other features applicable to Class B shares. The Fund will not convert
Class A shares to Class B shares based solely upon changes in the market that
reduce the net asset value of shares. Under current tax law, conversion between
share classes is not a taxable event to the shareholder.
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares increases to $500,000 or more, whether due to
shareholder purchases or market activity, the Class B shares will convert to
Class A shares. Under current tax law, such conversion is not a taxable event to
the shareholder. Class B shares purchased through a Financial Intermediary that
has entered into an arrangement with the Fund for the purchase of such shares
may not be converted. Class A shares converted from Class B shares are subject
to the same minimum account size requirements as are applicable to New Accounts
containing Class A shares described above.
INVOLUNTARY REDEMPTION OF SHARES. If the value of an account falls below
$100,000 because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $100,000 for
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a continuous 60-day period, the shares in such account will be subject to
redemption by the Fund. The Fund will not redeem shares based solely upon
changes in the market that reduce the net asset value of shares. If redeemed,
redemption proceeds will be promptly paid to the shareholder.
REDEMPTION OF SHARES
Class A and Class B shares of each Portfolio may be redeemed at any time and
without charge at the net asset value per share next determined after receipt by
the Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds may be more or less than the purchase price of your shares
depending on, among other factors, the market value of the investment securities
held by a Portfolio.
METHODS OF REDEMPTION
Shares may be redeemed directly from the Fund by mail or by telephone.
However, shares purchased through a Financial Intermediary must be redeemed
through a Financial Intermediary. Certain Financial Intermediaries may charge an
additional service or transaction fee.
BY MAIL. Each Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, to Morgan Stanley Institutional Fund, Inc.,
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following:
1. A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which they are registered;
2. Any required signature guarantees; and
3. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit-sharing
plans and other organizations.
Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.
BY TELEPHONE. If you have previously elected the Telephone Redemption
Option on the Account Registration Form, you can redeem Portfolio shares by
calling the Fund and requesting that the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to receive
redemption proceeds, send a written request to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. An investor may be
required to provide personal identification information at
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the time an account is opened and prior to effecting each telephone transaction.
In addition, all telephone transaction requests will be recorded and investors
may be required to provide additional telecopied written instructions regarding
transaction requests. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to accept redemption
requests from underlying beneficial owners. These redemptions may be processed
in the same way as purchases made through such Financial Intermediaries, as
described above.
FURTHER REDEMPTION INFORMATION
The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event more than seven days after
receipt of a redemption request in good order. However, payments to investors
redeeming shares which were purchased by check will not be made until payment
for the purchase has been collected, which may take up to eight days after the
date of purchase. The Fund may suspend the right of redemption or postpone the
date upon which redemptions are effected at times when the NYSE is closed, or
under any emergency conditions as determined by the Securities and Exchange
Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required to verify the identity of the person who has authorized
certain redemptions. Please contact the Fund or see the Statement of Additional
Information for further information.
ACCOUNT POLICIES AND SERVICES
EXCHANGE FEATURES
You may exchange shares of each Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced or Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase. Therefore, an
exchange will be considered a taxable event for shareholders subject to tax.
Exchange transactions will be processed at the net asset value per share next
determined after receipt of the
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request. Shares of the portfolios may be exchanged by mail or telephone. The
telephone exchange privilege is automatic and made available without shareholder
election. The exchange privilege may be modified or terminated by the Fund at
any time upon 60-days notice to shareholders.
BY MAIL. To exchange shares by mail, send a written exchange request to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798. Your written exchange request should include (i) the name, class of
shares and account number of your current Portfolio; (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to exchange
shares; and (iii) the signatures of all registered account holders.
BY TELEPHONE. To exchange shares by telephone, call the Fund at the phone
number provided on the cover of this Prospectus. A Fund representative will
request (i) the name, class of shares and account number of your current
Portfolio, and (ii) the name(s) and class(es) of shares of the portfolio(s) into
which you intend to exchange shares. For additional information regarding
responsibility for the authenticity of telephoned instructions, see "Redemption
of Shares" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by sending a written request to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. It may not be possible to
transfer the registration of certain shares purchased through a Financial
Intermediary. As with redemptions, the written request must be received in "good
order" before any transfer can be made. Transferring the registration of shares
may affect the eligibility of your account for a given class of shares and may
result in involuntary conversion or redemption of your shares.
OTHER ACCOUNT INFORMATION
The Fund does not issue share certificates for the Portfolios. All shares
purchased are confirmed to you and credited to your account on the Fund's books
maintained by the Adviser or its agents. You will have the same rights and
ownership with respect to such shares as if certificates had been issued.
EXCESSIVE TRADING
Frequent trades in your account(s) can disrupt management of a Portfolio and
raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of each Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a portfolio of the Fund within any 120-day
period. For example, the following series of transactions would amount to
excessive trading: exchanging shares of Portfolio A for shares of Portfolio B,
then exchanging shares of Portfolio B for shares of Portfolio C and then
exchanging shares of Portfolio C for shares of Portfolio A within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios; and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.
INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS
Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the Portfolios used for investment by these accounts may
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<PAGE>
experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the Portfolios.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such a class, less any liabilities attributable
to such a class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolios. Net asset value per share is determined as of the close of the NYSE
(normally 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business. Price information on listed securities is taken from the exchange
where the security is primarily traded. Securities listed on a U.S. securities
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date and for which market quotations are
not readily available are valued at a price within a range not exceeding the
current asked price nor less than the current bid price. The current bid and
asked prices are determined based on the average of the bid and asked prices
quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such 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. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted securities and unlisted foreign
securities) and those securities for which it is inappropriate to determine the
prices in accordance with the above-stated procedures are determined in good
faith at fair value using methods determined by the Board of Directors. For
purposes of calculating net asset value per share, all assets and liabilities
initially expressed in foreign currencies will be translated into U.S. dollars
at the mean of the bid and asked price of such currencies against the U.S.
dollar last quoted by a major bank.
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Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise "total return" for each class of
the Small Cap Value Equity, Value Equity and Balanced Portfolios. In addition,
from time to time the Fund may advertise "yield" for the Global Fixed Income and
High Yield Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE
NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
Each Portfolio may advertise "total return" which shows what an investment
in a class of a Portfolio would have earned over a specified period of time
(such as one, five or ten years) assuming that all distributions and dividends
by the Portfolio were reinvested in the same class on the reinvestment dates
during the period. Total return does not take into account any federal or state
income taxes that may be payable on dividends and distributions or on
redemption. The "yield" of the Global Fixed Income and High Yield Portfolios
refers to the income generated by an investment in the Portfolio over a month or
30-day period. This income is then annualized. That is, the amount of income
generated by the investment during that 30-day period is assumed income
generated each 30-day period for twelve periods, and is shown as a percentage of
the investment. The Fund may also include comparative performance information in
advertising or marketing the Portfolios' shares, including data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating service and market indices. For further information concerning these
figures, see "Calculation of Yield and Total Return"in the Statement of
Additional Information.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
when, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
elects to receive income dividends and capital gains distributions in cash.
Each Portfolio expects to distribute substantially all of its taxable net
investment income in the form of quarterly dividends. Net realized capital
gains, if any, after reduction for any available tax loss carryforwards will
also be distributed annually.
Undistributed net investment income is included in a Portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to tax.
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Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends paid by a Portfolio, except the High Yield and Global
Equity Portfolios, will generally qualify for the dividends-received deduction
for corporate shareholders to the extent of the aggregate qualifying dividend
income received by the Portfolio from U.S. corporations. Dividends paid by the
High Yield and Global Equity Portfolios will generally not qualify for the
dividends-received deduction for corporate shareholders.
Distributions of net capital gain are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio (such
designation being dependent upon the holding period of the Portfolio in the
underlying asset generating the net capital gain), regardless of how long
shareholders have held their shares. Each Portfolio will send reports annually
to shareholders of the federal income tax status of all distributions made
during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
loss, including any available capital loss carry-forwards), prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (i) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number
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or non-individual's employer identification number) on the Account Registration
Form; (ii) who is subject to backup withholding by the Internal Revenue Service;
or (iii) who has not certified to the Fund that such shareholder is not subject
to backup withholding. This backup withholding is not an additional tax, and any
amounts withheld may be credited against the shareholder's ultimate U.S. tax
liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceed or are
less than the shareholder's adjusted tax basis in the sold, exchanged or
redeemed shares. If capital gains distributions have been made with respect to
shares that are sold at a loss after being held for six months or less, then the
loss is treated as a long-term capital loss to the extent of the capital gains
distributions.
Conversions of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolios will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent
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with their respective objectives and policies. For the fiscal year ended
December 31, 1997, the Global Fixed Income and High Yield Portfolios had
portfolio turnover rates of [258%] and [117%], respectively. As portfolio
turnover increases, the Portfolios may expect to pay correspondingly increased
brokerage and trading costs. In addition to transaction costs, higher portfolio
turnover may result in the realization of capital gains. As discussed under
"Taxes," to the extent net short-term capital gains are realized, any
distributions resulting from such gains are considered ordinary income for
federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 40 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as that
term is defined in the 1940 Act) such Portfolio. Under Maryland law, the Fund is
not required to hold an annual meeting of its shareholders unless required to do
so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports. The
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data are also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Commission for the purpose of providing
custodial services for such assets. MSTC may also hold certain domestic assets
for the Fund. For more information on the custodians, see "General Information
- -- Custody Arrangements" in the Statement of Additional Information.
42
<PAGE>
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
43
<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE CORPORATE BOND RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks at a higher end of the rating category, modifier 2 indicates a mid-range
rating and the modifier 3 indicates that the issue ranks at the lower end of the
rating category.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
44
<PAGE>
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS:
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay principal
and interest.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only to a small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC and C -- Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D -- Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
45
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
SMALL CAP VALUE EQUITY, VALUE EQUITY, BALANCED, GLOBAL FIXED INCOME
AND HIGH YIELD PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, Inc., please contact your Morgan Stanley
representative or call us toll free 1-800-548-7786. Please print all
items except signature, and mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely,
including telephone number(s).
<CAPTION>
B)
<CAPTION>
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor.
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY
NUMBER ("TIN") NUMBER ("SSN")
OR
2. TIN
SSN
OR
TIN
SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct TIN(s) or SSN(s). Accounts that have a missing or incorrect
TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on
dividends, distributions and other payments. If you have not provided us
with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of
persons subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
You may be notified that you are subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code because you have
underreported interest or dividends or you were required to, but failed
to, file a return which would have included a reportable interest or
dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SELECTION Portfolio(s): / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 Small Cap Value Equity / / Class A Shares $ / / Class B Shares $
for each Portfolio and Class B Portfolio / / Class A Shares $ / / Class B Shares $
shares minimum $100,000 for each Value Equity Portfolio / / Class A Shares $ / / Class B Shares $
Portfolio. Please indicate Balanced Portfolio
Portfolio, class and amount. Global Fixed Income Portfolio
High Yield Portfolio
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio
and manner of payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the account
statement sent to my/our registered
address, I/we hereby authorize the Address
Fund to mail duplicate statements
to the name and address provided at City State Zip Code
right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative No. Branch
No.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE
SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE
APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL SECURITY
ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF
I/ WE DO NOT PROVIDE EITHER NUMBER TO CHASE GLOBAL FUNDS
SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS
APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR CORRECT SSN(S)
OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP
WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE
PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 10
Investment Objectives and Policies................ 15
Additional Investment Information................. 20
Investment Limitations............................ 28
Management of the Fund............................ 29
Purchase of Shares................................ 32
Redemption of Shares.............................. 35
Account Policies and Services..................... 36
Valuation of Shares............................... 38
Performance Information........................... 39
Dividends and Capital Gains Distributions......... 39
Taxes............................................. 40
Portfolio Transactions............................ 41
General Information............................... 42
Appendix A -- Description of Corporate Bond
Ratings.......................................... 44
Account Registration Form
</TABLE>
SMALL CAP VALUE EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
BALANCED PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
HIGH YIELD PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
ACTIVE COUNTRY ALLOCATION PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
thirty-two portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Active Country Allocation Portfolio (the "Portfolio"). The Class A and Class
B shares currently offered by the Portfolio have different minimum investment
requirements and fund expenses. Shares of the Portfolio are offered with no
sales charge, exchange fee or redemption fee.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Asian Real Estate, Emerging Markets,
European Equity, European Real Estate, Global Equity, Gold, International
Equity, International Magnum, International Small Cap, Japanese Equity and Latin
American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth,
Equity Growth, Small Cap Value Equity, Technology, U.S. Equity Plus, U.S. Real
Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced
Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global
Fixed Income, High Yield, and Municipal Bond Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information about
the Fund is contained in a "Statement of Additional Information," dated May 1,
1998, which is incorporated herein by reference. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the Fund
are available upon request and without charge by writing or calling the Fund at
the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Active Country Allocation Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................. None
Class B................................................................................. None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................. None
Class B................................................................................. None
Deferred Sales Load
Class A................................................................................. None
Class B................................................................................. None
Redemption Fees
Class A................................................................................. None
Class B................................................................................. None
Exchange Fees
Class A................................................................................. None
Class B................................................................................. None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (Net of Fee Waiver)*
Class A................................................................................. %
Class B................................................................................. %
12b-1 Fees
Class A................................................................................. None
Class B................................................................................. 0.25%
Other Expenses
Class A................................................................................. %
Class B................................................................................. %
-----------
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................................................. %
Class B................................................................................. %
-----------
-----------
</TABLE>
- ------------------------
*The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed a specified percentage of its average daily
net assets. Absent the fee waiver, the management fee would be 0.65%. Absent
the fee waiver and/or expense reimbursement, the Portfolio's total operating
expenses would be % of the average daily net assets of the Class A shares
and % of the average daily net assets of the Class B shares. As a result of
this reduction, the Management Fee stated above is lower than the contractual
fee stated under "Management of the Fund." The Adviser reserves the right to
terminate any of its fee waivers and/or expense reimbursements at any time in
its sole discretion. For further information on Fund expenses, see "Management
of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1997. Due to the continuous nature of Rule 12b-1 fees,
long-term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the National Association of
Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (i) a 5% annual rate of return and (ii) redemption at
the end of each time period. As noted in the table above, the Fund charges no
redemption fees of any kind. The following example is based on the total
operating expenses of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Active Country Allocation Portfolio
Class A.......................................................... $ $ $ $
Class B..........................................................
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A and Class
B shares of the Portfolio for each of the periods presented. The audited
financial highlights for the Portfolio's shares for each of the periods
presented are part of the Fund's financial statements which appear in the Fund's
December 31, 1997 Annual Report to Shareholders and which are incorporated by
reference into the Fund's Statement of Additional Information. The Portfolio's
financial highlights for each of the periods presented have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also incorporated by
reference into the Statement of Additional Information. Additional performance
information is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. After October 31, 1992 (the
Fund's prior fiscal year end), the Fund changed its fiscal year end to December
31. The following information should be read in conjunction with the financial
statements and notes thereto.
4
<PAGE>
ACTIVE COUNTRY ALLOCATION PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS JANUARY 17,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1997 1996 1995 1994 1993 1992 1992
------------ ------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING
OF
PERIOD... $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------ -----------
INCOME
FROM
INVESTMENT
OPERATIONS
Net
Investment
Income (1)... 0.24 0.17 0.19 0.13 0.02 0.11
Net
Realized
and
Unrealized
Gain
(Loss)
on
Investments... 0.88 1.00 (0.25) 2.75 0.20 (0.74)
------------ ------------ ------------ ------------ ------------ ------------ -----------
Total
from
Investment
Operations... 1.12 1.17 (0.06) 2.88 0.22 (0.63)
------------ ------------ ------------ ------------ ------------ ------------ -----------
DISTRIBUTIONS
Net
Investment
Income... (0.81) (0.25) (0.14) (0.09) -- --
In
Excess
of Net
Investment
Income.. (0.02) (0.10) -- (0.08) -- --
Net
Realized
Gain... (0.48) (0.84) (0.36) -- -- --
In
Excess
of Net
Realized
Gain... -- -- -- (0.09) -- --
------------ ------------ ------------ ------------ ------------ ------------ -----------
Total
Distributions... (1.31) (1.19) (0.50) (0.26) -- --
------------ ------------ ------------ ------------ ------------ ------------ -----------
NET ASSET
VALUE,
END OF
PERIOD... $ 11.44 $ 11.63 $ 11.65 $ 12.21 $ 9.59 $ 9.37
------------ ------------ ------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ ------------ ------------ -----------
TOTAL
RETURN... 9.71% 10.57% (0.52)% 30.72% 2.35% (6.30)%
------------ ------------ ------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ ------------ ------------ -----------
RATIOS AND
SUPPLEMENTAL
DATA:
Net
Assets,
End of
Period
(Thousands).. $183,193 $170,663 $182,977 $150,854 $50,234 $47,534
Ratio of
Expenses
to
Average
Net
Assets
(1).... 0.80% 0.80% 0.80% 0.80% 0.80%** 0.88%**
Ratio of
Net
Investment
Income
to
Average
Net
Assets (1)... 1.22% 1.26% 1.43% 1.29% 1.22%** 2.32%**
Portfolio
Turnover
Rate... 65% 72% 51% 53% 2% 62%
Average
Commission
Rate #... $ 0.0028 N/A N/A N/A N/A N/A
- ----------------------------------
(1) Effect
of
voluntary
expense
limitation
during
the
period:
Per
share
benefit
to
net
investment
income... $0.03 $0.05 $0.03 $0.05 $0.01 $0.03
Ratios
before
expense
limitation:
Expenses
to
Average
Net
Assets... 1.09% 1.18% 1.00% 1.33% 1.70%** 1.58%**
Net
Investment
Income
to
Average
Net
Assets... 0.94% 0.88% 1.23% 0.76% 0.32%** 1.62%**
<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... $ 11.66
------------ ------------
INCOME
FROM
INVESTMENT
OPERATIONS
Net
Investment
Income (1) 0.06
Net
Realized
and
Unrealized
Gain
(Loss)
on
Investm 1.00
------------ ------------
Total
from
Investment
Operations 1.06
------------ ------------
DISTRIBUTI
Net
Investment
Income... (0.78)
In
Excess
of Net
Investment
Income.. (0.02)
Net
Realized
Gain... (0.48)
In
Excess
of Net
Realized
Gain... --
------------ ------------
Total
Distri (1.28)
------------ ------------
NET ASSET
VALUE,
END OF
PERIOD... $ 11.44
------------ ------------
------------ ------------
TOTAL
RETURN... 9.22%
------------ ------------
------------ ------------
RATIOS AND
SUPPLEMENT
DATA:
Net
Assets,
End of
Period
(Thousa $633
Ratio of
Expenses
to
Average
Net
Assets
(1).... 1.05%**
Ratio of
Net
Investment
Income
to
Average
Net
Assets 1.09%**
Portfolio
Turnover
Rate... 65%
Average
Commission
Rate #... $0.0028
- ----------
(1) Effect
of
voluntary
expense
limitation
during
the
period:
Per
share
benefit
to
net
investment
income... $0.02
Ratios
before
expense
limitat
Expenses
to
Average
Net
Assets... 1.33%**
Net
Investment
Income
to
Average
Net
Assets... 0.82%**
</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. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.11% of the trade amount.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of thirty-two portfolios, offering institutional investors
and high net worth individual investors a broad range of investment choices
coupled with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and Class B shares, except the
International Small Cap and Municipal Money Market Portfolios, which offer only
Class A shares. Each portfolio has its own investment objective and policies
designed to meet its specific goals. The investment objective of the Portfolio
described in this Prospectus is as follows:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of companies in
the Asian real estate industry.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and
long-term capital appreciation by investing primarily in equity securities
of companies in the European real estate industry.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in the equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
6
<PAGE>
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in equity securities of small- to medium-sized companies which
the Adviser believes to be undervalued.
-The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Adviser, are expected to benefit from their involvement in technology and
technology-related industries.
-The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers included in the
Standard & Poor's 500 Index ("S&P 500").
-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
substantial investment in real estate investment trusts.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of equity securities which the Adviser believes
to be undervalued and fixed income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-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 of the recognized rating services.
7
<PAGE>
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing in municipal
obligations, the interest on which is exempt from federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund and
each of its portfolios. As of , 1998, Morgan Stanley Asset Management
Inc. and its affiliated institutional asset management companies (exclusive of
Miller Anderson & Sherrerd, LLP) managed assets of approximately $ billion.
See "Management of the Fund -- Investment Adviser" and "Management of the Fund
- -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. The minimum
initial investment, generally, is $500,000 for Class A shares of the Portfolio
and $100,000 for Class B shares of the Portfolio. The minimum initial investment
amount is reduced for certain categories of investors. For additional
information on how to purchase shares and minimum initial investments, see
"Purchase of Shares".
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of the applicable class
next determined after receipt of the redemption request. The redemption price
may be more or less than the purchase price. Certain redemptions that cause the
value of an account to remain for a continuous 60-day period below the minimum
investment amount for Class A shares or for Class B shares may result in
involuntary redemption or automatic conversion. For additional information on
how to redeem shares and involuntary redemption or conversion, see "Purchase of
Shares" and "Redemption of Shares."
8
<PAGE>
RISK FACTORS
Investing in the Portfolio entails certain risks and considerations of which
an investor should be aware. The Portfolio's share price and investment returns
fluctuate and, when redeemed, an investment in the Portfolio may be worth more
or less than its original cost. The investment policies of the Portfolio may
entail the following risk factors:
-EQUITY SECURITIES. The Portfolio may invest in equity securities. Prices of
equity securities fluctuate in response to many factors, including the
financial health of the issuers and changes in economic and market
conditions.
-FOREIGN INVESTMENT. The Portfolio may invest in the securities of foreign
issuers. The risks of foreign investment include fluctuations in foreign
currency values, political events affecting the country of issuance and
potentially greater market volatility and lower liquidity.
-EMERGING MARKET COUNTRY SECURITIES. The Portfolio may invest in emerging
market country securities which entail risks typically associated with
investment in more established foreign markets. However, these risks may be
intensified due to higher volatility and less liquidity of emerging
markets, possible political risks associated with the country of issuance
and generally weaker financial condition of issuers in these markets.
-DERIVATIVES. The Portfolio may invest in instruments that derive their
values from those of specified securities, indices, currencies or other
points of reference. These derivatives, including those used to manage
risk, are themselves subject to the risks of the different markets in which
they are traded and, therefore, may or may not serve their intended
purposes.
For additional information about risk factors, see also "Investment Objectives
and Policies" and "Additional Investment Information."
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is to provide long-term capital
appreciation by investing in accordance with country weightings determined by
the Adviser in equity securities of non-U.S. issuers which, in the aggregate,
replicate broad country indices. The Adviser utilizes a top-down approach in
selecting investments for the Portfolio that emphasizes country selection and
weighting rather than individual stock selection. This approach reflects the
Adviser's philosophy that a diversified selection of securities representing
exposure to world markets, based upon the economic outlook and current valuation
levels for each country, is an effective way to maximize the return and minimize
the risk associated with international investment. The Portfolio's investment
objective is a fundamental policy which may not be changed without the approval
of a majority of the Portfolio's outstanding voting securities. There is no
assurance that the Portfolio will attain its objective. The investment policies
described below are not fundamental policies unless otherwise noted and may be
changed without shareholder approval.
The Adviser determines country allocations for the Portfolio on an ongoing
basis within policy ranges dictated by each country's market capitalization and
liquidity. The Portfolio will invest in the industrialized countries throughout
the world that comprise the Morgan Stanley Capital International EAFE (Europe,
Australia and the Far East) Index. The Portfolio will not invest in the stocks
of U.S. issuers. The Portfolio will also invest in securities of issuers located
in emerging countries. With respect to the Portfolio, the term "emerging
country" applies to any country which, in the opinion of the Adviser, is
generally considered to be an emerging country by the international financial
community, including the International Bank for Reconstruction and Development
(more commonly known as the World Bank) and the International Finance
Corporation. There are currently over 130 countries which, in the opinion of the
Adviser, are generally considered to be emerging countries by the international
financial community, approximately 40 of which currently have stock markets.
These countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe. The Portfolio will focus its investments on those emerging
market countries in which it believes the economies are developing strongly and
in which the markets are becoming more sophisticated. [With respect to the
portion of the Portfolio that is invested in emerging country equity securities,
the Portfolio currently intends to invest primarily in some or all of the
following countries:
<TABLE>
<S> <C>
Argentina Portugal
Brazil Philippines
India South Africa
Indonesia South Korea
Malaysia Thailand
Mexico Turkey
</TABLE>
As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging countries in which it invests. The Portfolio does
not intend to invest in any security in a country where the currency is not
freely convertible to U.S. dollars, unless the Portfolio has obtained the
necessary governmental licensing to convert such currency or other appropriately
licensed or sanctioned contractual guarantee to protect such investment against
loss of that currency's external value, or the Portfolio has a reasonable
10
<PAGE>
expectation at the time the investment is made that such governmental licensing
or other appropriately licensed or sanctioned guarantee would be obtained or
that the currency in which the security is quoted would be freely convertible at
the time of any proposed sale of the security by the Portfolio.
By analyzing a variety of macroeconomic and political factors, the Adviser
develops fundamental projections on interest rates, currencies, corporate
profits and economic growth for each country. These country projections are used
then to determine what the Adviser believes to be a fair value for the stock
market of each country. Discrepancies between actual value and fair value as
determined by the Adviser provide an expected return for each stock market. The
expected return is adjusted by currency return expectations derived from the
Adviser's purchasing-power parity exchange rate model to arrive at an expected
total return in U.S. dollars. The final country allocation decision is then
arrived at by considering the expected total return in light of various country
specific considerations such as market size, volatility, liquidity and country
risk.
Within a particular country, investments are made through the purchase of
equity securities which, in aggregate, replicate a broad market index, which in
most cases will be the Morgan Stanley Capital International index for the given
country. The Portfolio invests primarily in equity securities, which include
common and preferred stock, convertible securities and rights and warrants to
purchase common stocks. The Adviser may overweight or underweight an industry
segment of a particular index if it concludes this would be advantageous to the
Portfolio. [An issuer may be considered to be from a particular country if, in
the opinion of the Adviser, it has one or more of the following characteristics:
(i) its principal securities trading market is in that country, (ii) alone or on
a consolidated basis it derives 50% or more of its annual revenue from either
goods produced, sales made or services performed in that country; or (iii) it is
organized under the laws of, and has a principal office in, that country. The
Adviser will base determinations as to eligibility on publicly available
information and inquiries made to the companies.] Indexation of the Portfolio's
stock selection reduces stock-specific risk through diversification and
minimizes transaction costs, which can be substantial in foreign markets. In
addition to the investments and strategies described below, the Portfolio may
invest in certain securities and obligations as set forth in "Additional
Investment Information" below.
ADDITIONAL INVESTMENT INFORMATION
FIXED INCOME SECURITIES. The Portfolio will invest in fixed income (debt)
securities. The market value of the fixed income securities in which the
Portfolio invests will be affected by changes in the creditworthiness of issuers
and will change in response to interest rate changes and other factors.
Generally, the values of fixed income securities vary inversely with changes in
interest rates, so that during periods of falling interest rates, the values of
outstanding fixed income securities generally rise and during periods of rising
interest rates, the values of such securities generally decline. While
securities with longer maturities tend to produce higher yields, the prices of
longer maturity securities are subject to greater market fluctuations as a
result of changes in interest rates.
FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolio may
use such contracts to protect against a decline in a foreign currency against
the U.S. dollar between the trade date and settlement date when the Portfolio
purchases or sells securities, lock in the U.S.
11
<PAGE>
dollar value of dividends and interest on securities held by the Portfolio, and
generally to protect the U.S. dollar value of securities held by the Portfolio
against exchange rate fluctuation. While forward contracts may limit losses as a
result of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will be at least equal to the amount of
the Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. The Portfolio may invest in the securities of foreign
issuers. Investment in securities of foreign issuers involves investment risks
somewhat different from those affecting securities of U.S. issuers. The
Portfolio's investments will be subject to political and economic events that
affect the countries in which it invests. Foreign issuers may be subject to
different accounting, auditing and financial standards and requirements. There
also may be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the United States. Many foreign
securities markets have substantially less trading volume than U.S. national
securities exchanges and, therefore, securities of some foreign issuers are less
liquid and more volatile than securities of comparable U.S. issuers. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the United States. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes, which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Portfolio by domestic companies. Investments in securities
of foreign issuers are generally denominated in foreign currencies and, since
the Portfolio may temporarily hold uninvested reserves in bank deposits in
foreign currencies, the value of the Portfolio's assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency exchange
rates and exchange control regulations, and the Portfolio may incur costs in
connection with conversions between various currencies.
The Portfolio may also invest in emerging market country securities.
Investing in emerging markets entails the risks associated with foreign
investment described above, however, these risks may be intensified in emerging
markets. Emerging markets can include every nation in the world except the
United States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe. Certain emerging market countries have historically experienced,
and may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, large amounts of external debt, trade difficulties
and unemployment. Further, the economies of developing countries generally are
heavily dependent upon international trade and, accordingly, have been, and may
continue to be, adversely affected by trade barriers, exchange controls and
other protectionist measures imposed or negotiated by the countries in which
they trade. There also are risks associated with the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could adversely affect the economies of such countries or the value of
the Portfolio's investments in those countries.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the
12
<PAGE>
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. The Portfolio will not enter into securities loan
transactions exceeding in the aggregate 33 1/3% of the market value of the
Portfolio's total assets.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
Consistent with its investment policies, the Portfolio may make money market
investments pending other investment or settlement for liquidity. In addition,
the Portfolio may invest in money market instruments for temporary defensive
purposes during adverse market conditions. The money market investments
permitted for the Portfolio include: obligations of the U.S. Government and its
agencies and instrumentalities, obligations of foreign sovereignties, commercial
paper, bank obligations (including certificates of deposit), other debt
securities and repurchase agreements.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines adopted by the
Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week
and never exceeds one year. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolio may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 10% of the market value of the Portfolio's net assets would be
invested in such repurchase agreements and other investments for which market
quotations are not readily available or which are otherwise illiquid.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, the Portfolio
may, for temporary defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and medium-term debt obligations in which the Portfolio may invest consist of
(i) obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the Custodian a segregated account of cash or liquid securities in
an amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time the Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if the general
13
<PAGE>
level of interest rates has changed. It is a current policy of the Portfolio not
to enter into when-issued commitments exceeding, in the aggregate, 15% of the
market value of the Portfolio's total assets less liabilities other than the
obligations created by these commitments.
DERIVATIVE PRODUCTS (DERIVATIVES)
The Portfolio is permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but are
not limited to: futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other derivative
products yet to be developed, so long as these new products are used in a manner
consistent with the objective of the Portfolio. These derivative products may be
based upon a wide variety of underlying rates, indices, instruments, securities
and other products, such as interest rates, foreign currencies, foreign and
domestic fixed income and equity securities, groups or "baskets" of securities
and securities indices (for each derivative product, the "underlying").
Exclusive of forward foreign currency contracts and any derivative products used
for hedging purposes, the Portfolio will limit its use of derivative products to
33 1/3% of its total assets, measured by the aggregate notional amount of
outstanding derivative products.
The Portfolio may use derivative products under a number of different
circumstances to further its investment objective. For example, the Portfolio
may purchase derivatives to gain exposure to a market quickly in response to
changes in the Portfolio's investment strategy, upon the inflow of investable
cash or when the derivative provides greater liquidity than the underlying
market. The Portfolio may also use derivatives when it is restricted from
directly owning the "underlying" or when derivatives provide a pricing advantage
or lower transaction costs. The Portfolio also may purchase combinations of
derivatives in order to gain exposure to an investment in lieu of actually
purchasing such investment. Derivatives may also be used by the Portfolio for
hedging or risk management purposes and in other circumstances when the Adviser
believes it advantageous to do so consistent with the Portfolio's investment
objective and policies. The Portfolio will not use derivatives in a manner that
creates leverage, except to the extent that the use of leverage is expressly
permitted by the Portfolio's investment policies, and then only in a manner
consistent with such policies.
The use of derivative products is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Portfolio will be less favorable than it would
have been if these investment techniques had not been used.
Some of the derivative products in which the Portfolio may invest and some
of the risks related thereto are described in more detail below.
FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)
The Portfolio may purchase and sell futures contracts, such as futures on
securities indices, baskets of securities, foreign currencies and interest rates
of the type generally known as financial futures. These are standardized
contracts that are bought and sold on organized exchanges. A futures contract
obligates a party to buy or sell a specific amount of the "underlying," such as
for example, a particular foreign currency, on a specified future date at a
specified price or to settle the value in cash.
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The Portfolio may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolio may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Forward Contracts" above. These
forward contracts are privately negotiated and are bought and sold in the
over-the-counter market. Like a future, a forward contract obligates a party to
buy or sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.
In some cases, the Portfolio may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolio will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolio may utilize futures contracts, forward contracts and related options
are as follows:
The Portfolio may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market exposure.
There currently are limited securities index futures and options on such futures
in many countries, particularly emerging countries. The nature of the strategies
adopted by the Adviser, and the extent to which those strategies are used, may
depend on the development of such markets. The Portfolio may also purchase and
sell foreign currency futures to hedge its respective holdings and commitments
against changes in the level of future currency rates or to adjust its exposure
to a particular currency.
The Portfolio may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely with
changes in interest rates. The Portfolio may engage in such transactions to
hedge its holdings of debt instruments against future changes in interest rates
or for other purposes.
The Portfolio may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these contracts also rises and falls inversely with
changes in interest rates. The Portfolio may engage in financial futures and
forward contracts for both hedging and non-hedging purposes.
Gains and losses on futures contracts, forward contracts and related options
depend on the Adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors. Other risks associated with
the use of these instruments include (i) imperfect correlation between the
change in market value of investments held by the Portfolio and the prices of
derivative products relating to investments purchased or sold by the Portfolio,
and (ii) possible lack of a liquid secondary market for a derivative product and
the resulting inability to close out a position. The risk that the Portfolio
will be unable to close out a position will be minimized by only entering into
transactions for which there appears to be a liquid exchange or secondary
market. In some strategies, the risk of loss in trading on futures and related
transactions can be substantial, due both to the low margin deposits required
and the extremely high degree of leverage involved in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the
"CFTC"), the Portfolio may, without registering with the CFTC as a Commodity
Pool Operator, enter into futures contracts and options
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thereon for both hedging and non-hedging purposes, provided that not more than
5% of the Portfolio's total assets at the time of entering the transaction are
required as margin and option premiums to secure obligations under such
contracts relating to non-bona fide hedging activities.
OPTION TRANSACTIONS
The Portfolio may seek to increase its returns or may hedge its portfolio
investments through options transactions with respect to individual securities,
indices or baskets in which the Portfolio may invest; other financial
instruments; and foreign currency. Various options may be purchased and sold on
either the exchange-traded or over-the-counter markets.
The Portfolio may purchase put and call options. Purchasing a put option
gives the Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period.
Purchasing a call option gives the Portfolio a similar right, but not the
obligation, to purchase the underlying. The purchaser pays a premium to the
seller (also known as the writer) of the option.
The Portfolio also may write put and call options on investments held in its
portfolio, as well as foreign currency options. The Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, the Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, the Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.
By writing an option, the Portfolio incurs an obligation either to buy (in
the case of a put option) or sell (in the case of a call option) the underlying
from the purchaser of the option at the option's exercise price, upon exercise
by the purchaser. Pursuant to guidelines established by the Board of Directors,
the Portfolio may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will continue to own (i) the underlying; (ii) securities or instruments
convertible or exchangeable without the payment of any consideration into the
underlying; or (iii) a call option on the same underlying with a strike price no
higher than the price at which the underlying was sold pursuant to a short
option position. In the case of a put option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will own another put option on the same underlying with an equal or higher
strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolio's use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by the
Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.
INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS
Swaps are privately negotiated over-the-counter derivative products in which
two parties agree to exchange payment streams calculated in relation to a rate,
index, instrument or certain securities and a particular
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"notional amount." As with many of the other derivative products available to
the Portfolio, the underlying may include an interest rate (fixed or floating),
a currency exchange rate, a commodity price index, and a security, securities
index or a combination thereof. A great deal of flexibility is possible in the
way the products may be structured, with the effect being that the parties may
have exchanged amounts equal to the return on one rate, index or group of
securities for another. For example, in a simple fixed-to-floating interest rate
swap, one party makes payments equivalent to a fixed interest rate, and the
other makes payments equivalent to a specified interest rate index. The
Portfolio may engage in simple or more complex swap transactions involving a
wide variety of underlyings. The currency swaps that the Portfolio may enter
will generally involve an agreement to pay interest streams in one currency
based on a specified index in exchange for receiving interest streams
denominated in another currency. Such swaps may involve initial and final
exchanges that correspond to the agreed upon notional amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. The Portfolio may use one or more of these products in addition to or
in lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar is a combination product in which the same party, such as the Portfolio,
buys a cap from and sells a floor to the other party. As with put and call
options, the amount at risk is limited for the buyer, but, if the cap or floor
is not hedged or covered, may be unlimited for the seller. Under current market
practice, caps, collars and floors between the same two parties are generally
documented under the same "master agreement." In some cases, options and forward
agreements may also be governed by the same master agreement. In the event of a
default, amounts owed under all transactions entered into under, or covered by,
the same master agreement would be netted and only a single payment would be
made.
Swaps, caps, collars and floors are credit-intensive products. When the
Portfolio enters into a swap transaction it bears the risk of default, i.e.
nonpayment, by the other party. The guidelines under which the Portfolio enters
derivative transactions, along with some features of the transactions
themselves, are intended to reduce these risks to the extent reasonably
practicable, although they cannot eliminate the risks entirely. Under guidelines
established by the Board of Directors, the Portfolio may enter into swaps only
with parties that meet certain credit rating guidelines. Consistent with current
market practices, the Portfolio will generally enter into swap transactions on a
net basis, and all swap transactions with the same party will be documented
under a single master agreement to provide for net payment upon default. In
addition, the Portfolio's obligations under an agreement will be accrued daily
(offset against any amounts owing to the Portfolio) and any accrued, but unpaid,
net amounts owed to the other party to a master agreement will be covered by the
maintenance of a segregated account consisting of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, the Portfolio's risk of loss will consist of the payments
that the Portfolio is contractually
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entitled to receive from the other party. This may not be true for currency
swaps that require the delivery of the entire notional amount of one designated
currency in exchange for the other. If there is a default by the other party,
the Portfolio may have contractual remedies pursuant to the agreements related
to the transaction.
STRUCTURED NOTES
Structured notes are derivative securities for which the amount of principal
repayment and/or interest payments is based upon the movement of one or more
factors. These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices,
such as the S&P 500 Index. In some cases, the impact of the movements of these
factors may increase or decrease through the use of multipliers or deflators.
The Portfolio may use structured notes to tailor its investments to the specific
risks and returns the Adviser wishes to accept while avoiding or reducing
certain other risks.
INVESTMENT LIMITATIONS
As a diversified investment company, the Portfolio is subject to the
following limitations: (i) as to 75% of its total assets, the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government and its agencies and
instrumentalities, and (ii) the Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in Statement of Additional
Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and the Portfolio. The Adviser provides investment
advice and portfolio management services pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the Portfolio's
investments. The Adviser is entitled to receive from the Active Country
Allocation Portfolio an annual management fee, payable quarterly, equal to 0.65%
of the average daily net assets of the Portfolio.
The fees of the Portfolio are higher than those of most investment
companies' because the Portfolio invests internationally. The Adviser believes
that the fees are comparable to those of other investment companies that invest
internationally. The Adviser has voluntarily agreed to a reduction in the fees
payable to it and to reimburse the Portfolio, if necessary, if such fees would
cause total annual operating expenses of the Portfolio to exceed 0.80% of the
average daily net assets of the Class A shares of the Portfolio and 1.05% of the
average daily net assets of the Class B shares of the Portfolio.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to
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customers in the United States and abroad. Morgan Stanley, Dean Witter, Discover
& Co. ("MSDWD") is the direct parent of the Adviser and Morgan Stanley. MSDWD is
a preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses -- securities, asset
management and credit services. At , 1998, the Adviser, together with
its affiliated institutional asset management companies (exclusive of Miller
Anderson & Sherrerd, LLP), managed assets of approximately $ billion. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. ANN D. THIVIERGE AND BARTON M. BIGGS. Ann D. Thivierge
is a Principal of the Adviser. She is a member of the Adviser's asset allocation
committee, primarily representing the Total Fund Management team since its
inception in 1991. Prior to joining the Adviser in 1986, she spent two years at
Edgewood Management Company, a privately held investment management firm. Ms.
Thivierge holds a B.A. in International Relations from James Madison College,
Michigan State University, and an M.B.A. in Finance from New York University.
Barton M. Biggs has been Chairman and a director of the Adviser since 1980 and a
Managing Director of Morgan Stanley since 1975. He is also a director and
chairman of various registered investment companies to which the Adviser and
certain of its affiliates provide investment advisory services. Mr. Biggs holds
a B.A. from Yale University and an M.B.A. from New York University. Ms.
Thivierge and Mr. Biggs have shared primary responsibility for managing the
Portfolio since June, 1995.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
LOCAL ADMINISTRATOR FOR THE PORTFOLIO. The Portfolio has, as required by
local law, entered into an administration agreement with a local administrator
in Brazil. A local administrator provides certain services for the Portfolio
with respect to the Portfolio's investments in that country, including services
relating to foreign exchange, local taxes, remittance of income and capital
gains, and repatriation of investments. The Portfolio's local adminstrator in
Brazil, Unibanco-Uniao, a Brazilian corporation, is paid by the Fund an annual
fee of 0.125% of the Portfolio's average weekly net assets invested in Brazil.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The officers of the Fund conduct and supervise its daily business
operations.
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DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Fund upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Portfolio.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") (the "Plan"). Under the Plan, the Distributor is
entitled to receive from the Portfolio a distribution fee, which is accrued
daily and paid quarterly, of 0.25% of the Class B shares' average daily net
assets on an annualized basis. Each Plan is designed to compensate the
Distributor for its services in connection with distribution assistance. The
Distributor may retain any portion of the fee that it does not expend in meeting
its obligations to the Fund. The Distributor may compensate financial
intermediaries, plan fiduciaries and administrators for providing
distribution-related services, including account maintenance services, to
shareholders (including, where applicable, underlying beneficial owners) of
Class B shares.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) as specified in its agreements with the Adviser and
Morgan Stanley.
PURCHASE OF SHARES
Class A shares and Class B shares of the Portfolio may be purchased at the
net asset value per share next determined after receipt by the Fund of a
purchase order. The net asset value per share of the Portfolio is calculated on
days that the New York Stock Exchange ("NYSE") and Chase (the "Custodian Bank")
are open for business as of the close of trading of the NYSE, normally 4:00 p.m.
Eastern Time (the "Pricing Time").
MINIMUM INVESTMENT
The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares of the Portfolio. These minimums may be waived at the
discretion of the Adviser for certain types of investors, including trust
departments, brokers, dealers, agents, financial planners, financial services
firms, investment advisers or various retirement and deferred compensation plans
("Financial Intermediaries"), certain accounts managed by the Adviser and its
affiliates ("Managed Accounts"), and certain employees and customers of Morgan
Stanley and its affiliates. The Fund's determination of an investor's
eligibility to purchase shares of a given class will take precedence over the
investor's selection of a class.
METHODS OF PURCHASE
Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolio by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or because your
check does not clear, you will be
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responsible for any loss the Fund or its agents incur. If you are already a
shareholder, the Fund may redeem shares from your account(s) to reimburse the
Fund or its agents for any loss. In addition, you may be prohibited or
restricted from making future investments in the Fund.
FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian Bank are open for business.
Your bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:
1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide you
with a confirmation number.
2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring the funds.
3. Complete and sign the Account Registration Form and mail it to the
address shown thereon.
When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the close of the Federal Funds Wire Control Center
("FFWCC") (normally 6:00 p.m. Eastern Time), the purchase will be executed at
the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the close of the FFWCC, will be executed at the net asset value next
determined. Certain institutional investors and financial institutions have
entered into an arrangement with Morgan Stanley, pursuant to which they may
place orders prior to the Pricing Time, but make payment in Federal Funds for
those shares on the following business day.
BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and which bank is handling the wire, money transferred by bank
wire may or may not be converted into Federal Funds prior to the close of the
FFWCC. Prior to conversion to Federal Funds and receipt by the Fund, an
investor's money will not be invested.
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
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<PAGE>
The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share determined on the next
business day after receipt. An investor's money will not be invested prior to
crediting of Federal Funds.
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. Each business evening, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day and places a net purchase
and/or redemption order(s) by the morning of the next business day. These orders
normally are executed at the net asset value that was computed for the Portfolio
as of the close of the previous business day.
ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 for the
Portfolio. The minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases directly from the
Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.
INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES
Class A and Class B shares of the Portfolio may be subject to the
involuntary conversion and redemption features described below. The conversion
and redemption features may be waived at the discretion of the Adviser for
shares held in a Managed Account and shares purchased through a Financial
Intermediary. Accounts that were open prior to January 2, 1996 are not subject
to involuntary conversion or redemption. The Fund reserves the right to modify
or terminate the conversion or redemption features of the shares at any time
upon 60 days notice to shareholders.
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account
containing Class A shares falls below $500,000 (but remains at or above
$100,000) because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $500,000 (but remains at or
above $100,000) for a continuous 60-day period, the Class A shares in such
account will convert to Class B shares and will be subject to the distribution
fee and other features applicable to Class B shares. The Fund will not convert
Class A shares to Class B shares based solely upon changes in the market that
reduce the net asset value of shares. Under current tax law, conversion between
share classes is not a taxable event to the shareholder.
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares increases to $500,000 or more, whether due to
shareholder purchases or market activity, the Class B shares will convert to
Class A shares. Class B shares purchased through a Financial Intermediary that
has entered into an arrangement with the Fund for the purchase of such shares
may not be converted. Under current tax law, such conversion is not a taxable
event to the shareholder. Class A shares converted from Class B shares are
subject to the same minimum account size requirements as are applicable to New
Accounts containing Class A shares described above.
INVOLUNTARY REDEMPTION OF SHARES. If the value of an account falls below
$100,000 because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $100,000 for
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<PAGE>
a continuous 60-day period, the shares in such account will be subject to
redemption by the Fund. The Fund will not redeem shares based solely upon
changes in the market that reduce the net asset value of shares. If redeemed,
redemption proceeds will be promptly paid to the shareholder.
REDEMPTION OF SHARES
Class A and Class B shares of the Portfolio may be redeemed at any time and
without charge at the net asset value per share next determined after receipt by
the Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds may be more or less than the purchase price of your shares
depending on, among other factors, the market value of the investment securities
held by the Portfolio.
METHODS OF REDEMPTION
Shares may be redeemed directly from the Fund by mail or by telephone.
However, shares purchased through a Financial Intermediary must be redeemed
through a Financial Intermediary. Certain Financial Intermediaries may charge an
additional service or transaction fee.
BY MAIL. The Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, to Morgan Stanley Institutional Fund, Inc.,
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following:
1. A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
2. Any required signature guarantees; and
3. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.
BY TELEPHONE. If you have previously elected the Telephone Redemption
Option on the Account Registration Form, you can redeem Portfolio shares by
calling the Fund and requesting that the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to receive
redemption proceeds, send a written request to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.
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The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. An investor may be
required to provide personal identification information at the time an account
is opened and prior to effecting each telephone transaction. In addition, all
telephone transaction requests will be recorded and investors may be required to
provide additional telecopied written instructions regarding transaction
requests. Neither the Fund nor the Transfer Agent will be responsible for any
loss, liability, cost or expense for following instructions received by
telephone that either of them reasonably believes to be genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to accept redemption
requests from underlying beneficial owners. These redemptions may be processed
in the same way as purchases made through such Financial Intermediaries, as
described above.
FURTHER REDEMPTION INFORMATION
The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event more than seven days after
receipt of a redemption request in good order. However, payments to investors
redeeming shares which were purchased by check will not be made until payment
for the purchase has been collected, which may take up to eight days after the
date of purchase. The Fund may suspend the right of redemption or postpone the
date upon which redemptions are effected at times when the NYSE is closed, or
under any emergency conditions as determined by the Securities and Exchange
Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required to verify the identity of the person who has authorized
certain redemptions. Please contact the Fund or see the Statement of Additional
Information for further information.
ACCOUNT POLICIES AND SERVICES
EXCHANGE FEATURES
You may exchange shares of the Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced or Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption
24
<PAGE>
followed by a purchase. Therefore, an exchange will be considered a taxable
event for shareholders subject to tax. Exchange transactions will be processed
at the net asset value per share next determined after receipt of the request.
Shares of the portfolios may be exchanged by mail or telephone. The telephone
exchange privilege is automatic and made available without shareholder election.
The exchange privilege may be modified or terminated by the Fund at any time
upon 60-days notice to shareholders.
BY MAIL. To exchange shares by mail, send a written exchange request to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798. Your written exchange request should include (i) the name, class of
shares and account number of your current Portfolio; (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to exchange
shares; and (iii) the signatures of all registered account holders.
BY TELEPHONE. To exchange shares by telephone, call the Fund at the phone
number provided on the cover of this Prospectus. A Fund representative will
request (i) the name, class of shares and account number of your current
Portfolio and (ii) the name(s) and class(es) of shares of the portfolio(s) into
which you intend to exchange shares. For additional information regarding
responsibility for the authenticity of telephoned instructions, see "Redemption
of Shares" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by sending a written request to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. It may not be possible to
transfer the registration of certain shares purchased through a Financial
Intermediary. As with redemptions, the written request must be received in "good
order" before any transfer can be made. Transferring the registration of shares
may affect the eligibility of your account for a given class of shares and may
result in involuntary conversion or redemption of your shares.
OTHER ACCOUNT INFORMATION
The Fund does not issue share certificates for the Portfolio. All shares
purchased are confirmed to you and credited to your account on the Fund's books
maintained by the Adviser or its agents. You will have the same rights and
ownership with respect to such shares as if certificates had been issued.
EXCESSIVE TRADING
Frequent trades in your account(s) can disrupt management of the Portfolio
and raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of the Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a portfolio of the Fund within any 120-day
period. For example, the following series of transactions would amount to
excessive trading: exchanging shares of Portfolio A for shares of Portfolio B,
then exchanging shares of Portfolio B for shares of Portfolio C and then
exchanging shares of Portfolio C for shares of Portfolio A within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios, and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.
25
<PAGE>
INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS
Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the portfolios used for investment by these accounts may
experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the portfolio.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the close of the NYSE
(normally 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business. Price information on listed securities is taken from the exchange
where the security is primarily traded. Securities listed on a U.S. securities
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date and for which market quotations are
not readily available are valued at a price that is considered to best represent
fair value within a range not exceeding the current asked price nor less than
the current bid price. The current average bid and asked prices are determined
based on the bid and asked prices quoted on such valuation date by reputable
brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such 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. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine prices in accordance
with the above-stated procedure are determined in good faith at fair value using
methods
26
<PAGE>
determined by the Board of Directors. For purposes of calculating net asset
value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid and asked
price of such currencies against the U.S. dollar last quoted by a major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.
The Portfolio may advertise "total return" which shows what an investment in
a class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividends and distributions or on redemption. The
Fund may also include comparative performance information in advertising or
marketing the Portfolio's shares, including data from Lipper Analytical
Services, Inc., other industry publications, business periodicals, rating
services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares of such class at net asset
value, except when, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder elects to receive income dividends and capital gains
distributions in cash.
The Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual dividends. Net realized capital gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
27
<PAGE>
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
The Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from the Portfolio's net investment income are taxable
to shareholders as ordinary income, whether received in cash or reinvested in
additional shares. Such dividends paid by the Portfolio will generally not
qualify for the dividends-received deduction for corporate shareholders. The
Portfolio will report annually to its shareholders the amount of dividend income
qualifying for such treatment.
Distributions of net capital gain are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio (such
designation being dependent upon the holding period of the Portfolio in the
underlying asset generating the net capital gain), regardless of how long the
shareholder has held the Portfolio's shares. The Portfolio will send reports
annually to shareholders of the federal income tax status of all distributions
made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss, including any available capital loss carryforwards) prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any taxable dividends, capital gains distributions and redemption proceeds paid
to any individual or certain other non-corporate shareholder (i) who has failed
to provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) who has not certified to the Fund that such
shareholder is not subject to backup withholding. This backup withholding is not
an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
28
<PAGE>
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceed or are
less than the shareholder's tax adjusted basis in the sold, exchanged or
redeemed shares. If capital gains distributions have been made with respect to
shares that are sold at a loss after being held for six months or less, then the
loss is treated as a long-term capital loss to the extent of the capital gains
distributions.
Conversions of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolio generally does not invest for short-term trading purposes,
however, when circumstances warrant, the Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the
29
<PAGE>
Portfolio will not consider portfolio turnover rate a limiting factor in making
investment decisions consistent with their respective objective and policies. As
portfolio turnover increases, the Portfolio necessarily will experience
increased transaction costs and additional realization of capital gains.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 40 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of the
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no pre-emptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a portfolio may be presumed to "control" (as that term is
defined in the 1940 Act) that portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports. The
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Commission for the purpose of providing
custodial services for such assets. MSTC may also hold certain domestic assets
for the Fund. For more information on the custodians, see "General Information
- -- Custody Arrangements" in the Statement of Additional Information.
30
<PAGE>
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
31
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
ACTIVE COUNTRY ALLOCATION PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
If you need assistance in filling out this form for the
ACCOUNT INFORMATION Morgan Stanley Institutional Fund, Inc., please contact your
Fill in where applicable Morgan Stanley representative or call us toll free
1-800-548-7786. Please print all items except signature, and
mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor.
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY NUMBER
NUMBER ("TIN") ("SSN")
OR
2. TIN SSN
OR
TIN SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct TIN(s) or SSN(s). Accounts that have a missing or incorrect
TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on
dividends, distributions and other payments. If you have not provided us
with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of
persons subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
You may be notified that you are subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code because you have
underreported interest or dividends or you were required to, but failed
to, file a return which would have included a reportable interest or
dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following
CLASS SECTION Portfolio: / / Class A Shares $ / / Class B Shares $
(Class A shares minimum Active Country Allocation
$500,000 for the Portfolio
Portfolio and Class B
shares minimum $100,000
for the Portfolio).
Please indicate class and
amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio
and manner of payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the
account statement sent to
my/our registered Address
address, I/we hereby
authorize the Fund to City State Zip Code
mail duplicate statements
to the name and address
provided at right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative
No. Branch
No.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE
ARE SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE
HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL
SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE
UNDERSTAND THAT IF I/WE DO NOT PROVIDE EITHER NUMBER TO CHASE
GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE
DATE OF THIS APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR
CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY
AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION
PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU
MAY REQUEST SUCH FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S. CITIZENS
OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY THE
INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 11
Investment Limitations............................ 18
Management of the Fund............................ 18
Purchase of Shares................................ 20
Redemption of Shares.............................. 23
Account Policies and Services..................... 24
Valuation of Shares............................... 26
Performance Information........................... 27
Dividends and Capital Gains Distributions......... 27
Taxes............................................. 28
Portfolio Transactions............................ 29
General Information............................... 30
Account Registration Form
</TABLE>
ACTIVE COUNTRY ALLOCATION PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
GOLD PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
thirty-two portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Gold Portfolio (the "Portfolio"). The Class A and Class B shares currently
offered by the Portfolio have different minimum investment requirements and fund
expenses. Shares of the Portfolio are offered with no sales charge, exchange fee
or redemption fee. The Gold Portfolio is currently closed to new investors with
the exception of certain Morgan Stanley & Co. Incorporated ("Morgan Stanley")
customers, employees of Morgan Stanley, certain tax-qualified retirement plans
and other investment companies advised by Morgan Stanley Asset Management Inc.
and its affiliates.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley as Distributor, the Fund makes
available to institutional and high net worth individual investors a series of
portfolios which benefit from the investment expertise and commitment to
excellence associated with Morgan Stanley and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Asian Real Estate, Emerging Markets,
European Equity, European Real Estate, Global Equity, Gold, International
Equity, International Magnum, International Small Cap, Japanese Equity and Latin
American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth,
Equity Growth, Small Cap Value Equity, Technology, U.S. Equity Plus, U.S. Real
Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced
Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global
Fixed Income, High Yield and Municipal Bond Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information about
the Fund is contained in a "Statement of Additional Information," dated May 1,
1998, which is incorporated herein by reference. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the Fund
are available upon request and without charge by writing or calling the Fund at
the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Gold Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................... None
Class B................................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................... None
Class B................................................................................... None
Deferred Sales Load
Class A................................................................................... None
Class B................................................................................... None
Redemption Fees
Class A................................................................................... None
Class B................................................................................... None
Exchange Fees
Class A................................................................................... None
Class B................................................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------------------------------------------------------------
<S> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (Net of Fee Waiver)*
Class A................................................................................... %
Class B................................................................................... %
12b-1 Fees
Class A................................................................................... None
Class B................................................................................... 0.25%
Other Expenses
Class A................................................................................... %
Class B................................................................................... %
---------
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................................................... %
Class B................................................................................... %
---------
---------
</TABLE>
- ------------------------------
*The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed a specified percentage of its average daily
net assets. Absent the fee waiver, the management fee would be 1.00%. Absent
the fee waiver and/or expense reimbursement, the Portfolio's total operating
expenses would be 1.73% of the average daily net assets of the Class A shares
and 1.94% of the average daily net assets of the Class B shares. As a result of
this reduction, the Management Fee stated above is lower than the contractual
fee stated under "Management of the Fund." The Adviser reserves the right to
terminate any of its fee waivers and/or expense reimbursements at any time in
its sole discretion. For further information on Fund expenses, see "Management
of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1997. Due to the continuous nature of Rule 12b-1 fees,
long-term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the National Association of
Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (i) a 5% annual rate of return and (ii) redemption at
the end of each time period. As noted above, the Portfolio charges no redemption
fees of any kind. The example is based on total operating expenses of the
Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gold Portfolio
Class A.......................................................... $ $ $ $
Class B..........................................................
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A and Class
B shares of the Portfolio for each of the periods presented. The audited
financial highlights for the Portfolio's shares for each of the periods
presented are part of the Fund's financial statements which appear in the Fund's
December 31, 1997 Annual Report to Shareholders and which are incorporated by
reference into the Fund's Statement of Additional Information. The Portfolio's
financial highlights for each of the periods presented have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also incorporated by
reference into the Statement of Additional Information. Additional performance
information is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. The following information
should be read in conjunction with the financial statements and notes thereto.
4
<PAGE>
GOLD PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
YEAR ENDED DECEMBER YEAR ENDED DECEMBER YEAR ENDED
31, 1997 31, 1996 DECEMBER 31, 1995
--------------------- --------------------- -----------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 8.55 $ 9.13
------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1)................ 0.05 (0.07)
Net Realized and Unrealized Gain (Loss) on
Investments++.................................. 1.41 1.22
------- ------- ------
Total from Investment Operations.............. 1.46 1.15
------- ------- ------
DISTRIBUTIONS
Net Investment Income........................... (0.05) (0.01)
In Excess of Net Investment Income.............. (0.01) --
Net Realized Gain............................... -- --
In Excess of Net Realized Gain.................. (0.65) --
------- ------- ------
Total Distributions........................... (0.71) (1.73)
------- ------- ------
NET ASSET VALUE, END OF PERIOD.................... $ 9.30 $ 8.55
------- ------- ------
------- ------- ------
TOTAL RETURN...................................... 16.94% 13.21%
------- ------- ------
------- ------- ------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........... $27,810 $7,409
Ratio of Expenses to Average Net Assets (1)..... 1.25%** 1.25%
Ratio of Net Investment Income (Loss) to Average
Net Assets (1)................................. 0.57% (0.31)%
Portfolio Turnover Rate......................... 94% 47%
Average Commission Rate#........................ $0.0246 N/A
<CAPTION>
CLASS B
PERIOD FROM -----------------------------------------
FEBRUARY 1, 1994* PERIOD FROM JANUARY
TO DECEMBER 31, YEAR ENDED DECEMBER 2, 1996*** TO
1994 31, 1997 DECEMBER 31, 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 10.00 $ 8.81
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1)................ 0.03 0.03
Net Realized and Unrealized Gain (Loss) on
Investments++.................................. (0.88) 1.14
------- ------- -------
Total from Investment Operations.............. (0.85) 1.17
------- ------- -------
DISTRIBUTIONS
Net Investment Income........................... (0.02) (0.04)
In Excess of Net Investment Income.............. -- (0.01)
Net Realized Gain............................... (1.72) --
In Excess of Net Realized Gain.................. -- (0.65)
------- ------- -------
Total Distributions........................... (0.02) (0.70)
------- ------- -------
NET ASSET VALUE, END OF PERIOD.................... $ 9.13 $ 9.28
------- ------- -------
------- ------- -------
TOTAL RETURN...................................... (8.49)% 13.21%
------- ------- -------
------- ------- -------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........... $ 30,243 $ 1,370
Ratio of Expenses to Average Net Assets (1)..... 1.25% 1.50%**
Ratio of Net Investment Income (Loss) to Average
Net Assets (1)................................. 0.41%** 0.30%**
Portfolio Turnover Rate......................... 56% 94%
Average Commission Rate#........................ N/A $0.0246
</TABLE>
- ------------------------------
<TABLE>
<S> <C> <C> <C>
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net
investment income............................ $ 0.04 $ 0.11
Ratios before expense limitation:
Expenses to Average Net
Assets....................................... 1.73% 1.76%
Net Investment Loss to
Average Net Assets........................... 0.10% (0.82)%
<CAPTION>
(1) Effect of voluntary expense limitation during
Per share benefit to net
investment income............................ $ 0.04 $ 0.04
Ratios before expense limitation:
Expenses to Average Net
Assets....................................... 1.72%** 1.94%**
Net Investment Loss to
Average Net Assets........................... (0.06)%** (0.13)%**
<CAPTION>
the period:
</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. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.47% of the trade amount.
++ 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.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of thirty-two portfolios, offering institutional investors
and high net worth individual investors a broad range of investment choices
coupled with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and Class B shares, except the
International Small Cap and Municipal Money Market Portfolios, which offer only
Class A shares. Each portfolio has its own investment objective and policies
designed to meet its specific goals. The investment objective of the Gold
Portfolio is as follows:
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in the equity securities of foreign and domestic issuers engaged
in gold-related activities.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and telephone number noted on the
cover page of this Prospectus. The investment objectives of these other
portfolios are listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of companies in
the Asian real estate industry.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
- The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and
long-term capital appreciation by investing primarily in equity securities
of companies in the European real estate industry.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
6
<PAGE>
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of
small-to-medium-sized corporations.
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in equity securities of small-to-medium-sized companies which
the Adviser believes to be undervalued.
- The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Adviser, are expected to benefit from their involvement in technology and
technology-related industries.
- The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers included in the S&P
500 Index ("S&P 500").
- 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.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of equity securities which the Adviser believes
to be undervalued and fixed income securities.
7
<PAGE>
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers in emerging countries.
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
- 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 of the recognized rating services.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment grade mortgage-backed
securities.
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing in municipal
obligations, the interest on which is exempt from federal income tax.
MONEY MARKET:
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund and
each of its portfolios. As of , 1998, Morgan Stanley Asset Management
Inc. and its affiliated institutional asset management companies (exclusive of
Miller Anderson & Sherrerd, LLP) managed assets of approximately $ billion. Sun
Valley Gold Company (the "Sub-Adviser"), which at , 1998, had in
excess of $ million in assets under management, acts as sub-adviser to the
Portfolio. See "Management of the Fund -- Investment Adviser and Sub-Adviser"
and "Management of the Fund -- Administrator."
8
<PAGE>
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. The minimum
initial investment, generally, is $500,000 for Class A shares of the Portfolio
and $100,000 for Class B shares of the Portfolio. The minimum initial investment
amount is reduced for certain categories of investors. For additional
information on how to purchase shares and minimum initial investments, see
"Purchase of Shares."
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions that
cause the value of an account to remain for a continuous 60-day period below the
minimum investment amount for the Class A shares or for Class B shares may
result in involuntary redemption or automatic conversion. For additional
information on how to redeem shares and involuntary redemption or conversion,
see "Purchase of Shares" and "Redemption of Shares."
RISK FACTORS
Investing in the Portfolio entails certain risks and considerations of which
an investor should be aware. The Portfolio's share price and investment returns
fluctuate and, when redeemed, an investment in the Portfolio may be worth more
or less than its original cost. The investment policies of the Portfolio may
entail the following risk factors:
- EQUITY SECURITIES. The Portfolio may invest in equity securities. Prices
of equity securities fluctuate in response to many factors, including the
financial health of the issuers and changes in economic and market
conditions.
- PRECIOUS METALS. The Portfolio invests in a portfolio of securities of
issuers in precious metals related industries with limited diversification.
Historically, stock prices of companies involved in precious metals-related
industries have been volatile. In addition, prices of gold and other
precious metals and minerals may fluctuate sharply over short periods of
time due in various world-wide economic, financial and political factors.
- FOREIGN INVESTMENT. The Portfolio may invest in the securities of foreign
issuers. The risks of foreign investment include fluctuations in foreign
currency values, political events affecting the country of issuance and
potentially greater market volatility and lower liquidity.
- EMERGING MARKET COUNTRY SECURITIES. The Portfolio may invest in emerging
market country securities which entail risks typically associated with
investment in more established foreign markets. However, these risks may be
intensified due to higher volatility and less liquidity of emerging
markets, possible political risks associated with the country of issuance
and generally weaker financial condition of issuers in these markets.
9
<PAGE>
- DERIVATIVES. The Portfolio may invest in instruments that derive their
values from those of specified securities, indices, currencies or other
points of reference. These derivatives, including those used to manage
risk, are themselves subject to the risks of the different markets in which
they are traded and, therefore, may or may not serve their intended
purposes.
For additional information about risk factors, see also "Investment Objectives
and Policies" and "Additional Investment Information."
10
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Gold Portfolio is long-term capital
appreciation. The production of any current income is incidental to this
objective. The Portfolio seeks to achieve its objective by investing primarily
in the equity securities of foreign and domestic issuers engaged in gold-related
activities. There can be no assurance that the Portfolio's investment objective
will be achieved. The Portfolio's investment objective is a fundamental policy
which may be changed only with shareholder approval. In addition to the
investments and strategies described below, the Portfolio may invest in certain
securities and obligations as set forth in "Additional Investment Information".
The investment policies described below are not fundamental policies unless
otherwise noted and may be changed without shareholder approval. Because the
securities in which the Portfolio invests may involve risks not associated with
more traditional investments, an investment in the Portfolio, by itself, should
not be considered a balanced investment program.
Under normal circumstances, the Portfolio will invest at least 70% of its
total assets in equity securities of companies principally engaged in the
exploration, mining, fabrication, processing, distribution or trading of gold
(or, to a lesser degree, silver, platinum or other precious metals or minerals)
or the financing, managing, controlling or operating of companies engaged in
such activities ("gold-related" or "precious-metals-related" activities). For
these purposes, a company will be considered to be principally engaged in such
activities if it derives more than 50% of its income, or devotes 50% or more of
its assets, to such activities. With respect to the Portfolio, equity securities
include common and preferred stocks, convertible securities, and rights and
warrants to purchase common stocks. [The Portfolio will invest more than 25% of
its total assets in securities of companies in the group of industries involved
in gold-related or precious-metals-related activities, as described above, and
may invest more than 25% of its total assets in one or more of the industries,
such as mining, that are a part of such group of industries, as described
above.] Potential investors in the Portfolio should consider the possibly
greater risk arising from the concentration of the Portfolio's investments in
one industry or group of industries.
Because most of the world's gold production is outside of the United States,
the Portfolio expects that a significant portion of its assets may be invested
in securities of foreign issuers. The percentage of assets invested in
particular countries or regions will change from time to time in accordance with
the judgment of Morgan Stanley Asset Management Inc. (the "Adviser") and Sun
Valley Gold Company (the "Sub-Adviser", and collectively with the Adviser, the
"Advisers"), which may be based on, among other things, consideration of the
political stability and economic outlook of these countries or regions. It is
currently anticipated that the Portfolio's assets will be principally invested
in the equity securities of companies located in the United States, Canada and
Australia. The Portfolio's assets also may be invested in equity securities of
companies located in South Africa.
The Portfolio expects to invest directly in foreign securities, but the
Portfolio may also invest in Depositary Receipts, or similar securities that are
convertible into securities of foreign issuers and that evidence ownership of
the underlying foreign security. Under normal circumstances, the Portfolio may
also invest up to 30% of its assets in money market instruments, although the
Portfolio intends to stay invested in securities satisfying its primary
investment objective to the extent practicable.
11
<PAGE>
The Portfolio may also invest up to 10% of its total assets in gold bullion.
Bullion will only be bought from and sold to U.S. and foreign banks, regulated
U.S. commodities exchanges, exchanges affiliated with a regulated U.S. stock
exchange, and dealers who are members of, or affiliated with, a regulated U.S.
commodities exchange, in accordance with applicable investment laws. Investors
should note that bullion offers the potential for capital appreciation or
depreciation, but does not generate income. In bullion transactions, the
Portfolio may encounter higher custody costs and other costs (including shipping
and insurance) than those normally associated with ownership of securities. The
Portfolio may attempt to minimize these costs by the use of receipts or
certificates representing ownership interests in bullion. The Advisers currently
intend to use the Portfolio's investments in gold bullion as a short-term
investment for portfolio management purposes.
ADDITIONAL INVESTMENT INFORMATION
DEPOSITARY RECEIPTS. The Portfolio is permitted to invest indirectly in
securities of foreign companies through sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") and other types of Depositary Receipts (which,
together with ADRs, EDRs and GDRs, are hereinafter collectively referred to as
"Depositary Receipts"), to the extent such Depositary Receipts are or become
available. Depositary Receipts are not necessarily denominated in the same
currency as the underlying securities. In addition, the issuers of the
securities underlying unsponsored Depositary Receipts are not obligated to
disclose material information in the United States and, therefore, there may be
less information available regarding such issuers and there may not be a
correlation between such information and the market value of the Depositary
Receipts. ADRs are securities typically issued by a U.S. financial institution
(a "depositary"), that evidence ownership interests in a security or pool or
securities issued by a foreign issuer (the "underlying issuer") and deposited
with the depositary. GDRs and other types of Depositary Receipts are typically
issued by foreign depositaries, although they also may be issued by U.S.
financial institutions, and evidence ownership interests in a security or pool
of securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. For purposes of the Portfolio's
investment policies, the Portfolio's investments in Depositary Receipts will be
deemed to be investments in the underlying securities. The issuers of the stock
of unsponsored ADRs are not obligated to disclose material information in the
United States and therefore, there may not be a correlation between such
information and the market value of the ADR. In the event that ADRs or EDRs are
not available for a particular security, the Portfolio may invest in that
security, which may or may not be listed on a foreign securities exchange.
FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolio may
use such contracts to protect against a decline in a foreign currency against
the U.S. dollar between the trade date and settlement date when the Portfolio
purchases or sells securities, lock in the U.S. dollar value of dividends and
interest on securities held by the Portfolio, and generally to protect the U.S.
dollar value of securities held by the Portfolio against exchange rate
fluctuation. While forward contracts may limit losses as a result of exchange
rate fluctuations, they will also limit any gains that might otherwise have been
realized. The Portfolio's Custodian may be required to place cash or liquid
securities in a segregated account in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward contracts.
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If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will be at least equal to the amount of the
Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. The Portfolio may invest in the securities of foreign
issuers. Investment in securities of foreign issuers involves investment risks
somewhat different from those affecting securities of U.S. issuers. The
Portfolio's investments will be subject to political and economic events that
affect the countries in which it invests. Foreign issuers may be subject to
different accounting, auditing and financial standards and requirements. There
also may be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the United States. Many foreign
securities markets have substantially less trading volume than U.S. national
securities exchanges and, therefore, securities of some foreign issuers are less
liquid and more volatile than securities of comparable U.S. issuers. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the United States. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes, which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Portfolio by domestic companies. Investments in securities
of foreign issuers are generally denominated in foreign currencies and, since
the Portfolio may temporarily hold uninvested reserves in bank deposits in
foreign currencies, the value of the Portfolio's assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency exchange
rates and exchange control regulations, and the Portfolio may incur costs in
connection with conversions between various currencies.
The Portfolio may also invest in emerging market country securities.
Investing in emerging markets entails the risks associated with foreign
investment described above, however, these risks may be intensified in emerging
markets. Emerging markets can include every nation in the world except the
United States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe. Certain emerging market countries have historically experienced,
and may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, large amounts of external debt, trade difficulties
and unemployment. Further, the economies of developing countries generally are
heavily dependent upon international trade and, accordingly, have been, and may
continue to be, adversely affected by trade barriers, exchange controls and
other protectionist measures imposed or negotiated by the countries in which
they trade. There also are risks associated with the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could adversely affect the economies of such countries or the value of
the Portfolio's investments in those countries.
GOLD-RELATED INVESTMENTS. The Portfolio intends to invest at least 70% of
its total assets in securities of companies engaged in gold-related activities.
As a result of this policy, which is a fundamental policy of the Portfolio, the
Portfolio's investments may be subject to greater risk and market fluctuation
than a fund that invests in securities representing a broader range of
investment alternatives. Historically, stock prices of companies involved in
precious-metals-related industries have been volatile. Investments related to
gold and other precious metals and minerals are considered speculative and are
impacted by a variety of world-wide economic, financial and political factors.
Prices of gold and other precious metals may fluctuate sharply over short
periods of time due to changes in inflation or expectations regarding inflation
in various countries, supplies
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of precious metals, changes in industrial and commercial demand, metal sales by
governments, central banks or international agencies, investment speculation,
monetary and other economic policies of various governments and government
restrictions on private ownership of certain precious metals and minerals.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of its total assets.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
Consistent with its investment policies, the Portfolio may make money market
investments pending other investments or settlement for liquidity. In addition,
the Portfolio may invest in money market instruments for temporary defensive
purposes. The money market investments permitted for the Portfolio include:
obligations of the U.S. Government and its agencies and instrumentalities,
obligations of foreign sovereignties, commercial paper, bank obligations
(including certificates of deposit), other debt securities and repurchase
agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted equity securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Portfolio or less than what may be
considered the fair value of such securities. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.
As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Also, as a general matter, the Portfolio may
not invest more than 10% of its total assets in securities that are restricted
from sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). However, each Portfolio may
invest up to 20% of its total assets in liquid Restricted Securities that can be
offered and sold to qualified institutional buyers under Rule 144A under the
1933 Act ("Rule 144A Securities"). The Board of Directors has adopted guidelines
and delegated to the Adviser, subject to the supervision of the Board of
Directors, the daily function of determining and monitoring the liquidity of
Rule 144A Securities. Rule 144A Securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
PRECIOUS METALS FORWARD AND FUTURES CONTRACTS. The Portfolio may enter into
futures contracts on precious metals as a hedge against changes in the prices of
precious metals held or intended to be acquired by the Portfolio, but not for
speculation or for achieving leverage. The Portfolio's hedging activities may
include
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purchases of futures contracts as an offset against the effect of anticipated
increases in the price of a precious metal which the Portfolio intends to
acquire or sales of futures contracts as an offset against the effect of
anticipated declines in the price of precious metal which the Portfolio owns.
The Portfolio may enter into precious metals forward contracts, which are
similar to precious metals futures contracts in that they both provide for the
purchase or sale of precious metals at an agreed price with delivery to take
place at an agreed future time. However, unlike futures contracts, forward
contracts are negotiated contracts which are primarily used in the dealer
market. The Portfolio will use forward contracts for the same hedging purposes
as those applicable to futures contracts, as described above. Precious metals
futures and forward contract prices can be volatile and are influenced
principally by changes in spot market prices, which in turn are affected by a
variety of political and economic factors. While the correlation between changes
in prices of futures and forward contracts and prices of the precious metals
being hedged by such contracts has historically been very strong, the
correlation may be imperfect at times, and even a well conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected precious
metals price trends.
The Portfolio may also purchase and write covered call or put options on
precious metals futures contracts. Such options would be purchased solely for
hedging purposes. Call options might be purchased to hedge against an increase
in the price of precious metals the Portfolio intends to acquire, and put
options may be purchased to hedge against a decline in the price of precious
metals owned by the Portfolio. As is the case with futures contracts, options on
precious metals futures may facilitate the Portfolio's acquisition of precious
metals or permit the Portfolio to defer disposition of precious metals for tax
or other purposes.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines of the Fund's
Board of Directors. In a repurchase agreement, the Portfolio buys a security
from a seller that has agreed to repurchase it at a mutually agreed upon date
and price, reflecting the interest rate effective for the term of the agreement.
The term of these agreements is usually from overnight to one week and never
exceeds one year. A repurchase agreement may be viewed as a fully collateralized
loan of money by the Portfolio to the seller. The Portfolio always receives
securities with a market value at least equal to the purchase price (including
accrued interest) as collateral, and this value is maintained during the term of
the agreement. If the seller defaults and the collateral value declines, the
Portfolio might incur a loss. If bankruptcy proceedings are commenced with
respect to the seller, the Portfolio's realization upon the collateral may be
delayed or limited. The Portfolio may not enter into repurchase agreements with
more than seven days to maturity if, as a result, more than 15% of the market
value of the Portfolio's net assets are invested in these agreements and other
investments for which market quotations are not readily available or which are
otherwise illiquid.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, each Portfolio
may, for temporary defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and medium-term debt obligations in which a Portfolio may invest consist of (i)
obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the
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transaction. Delivery of and payment for these securities may take as long as a
month or more after the date of the purchase commitment but will take place no
more than 120 days after the trade date. The Portfolio will maintain with the
Custodian a segregated account of cash or liquid securities in an amount at
least equal to these commitments. The payment obligation and the interest rates
that will be received are each fixed at the time the Portfolio enters into the
commitment and no interest accrues to the Portfolio until settlement. Thus, it
is possible that the market value at the time of settlement could be higher or
lower than the purchase price if, among other factors, the general level of
interest rates has changed. It is a current policy of the Portfolio not to enter
into when-issued commitments exceeding in the aggregate 15% of the market value
of the Portfolio's total assets less liabilities, other than the obligations
created by these commitments.
DERIVATIVE PRODUCTS (DERIVATIVES)
The Portfolio is permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but are
not limited to: futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other derivative
products yet to be developed, so long as these new products are used in a manner
consistent with the objective of the Portfolio. These derivative products may be
based upon a wide variety of underlying rates, indices, instruments, securities
and other products, such as interest rates, foreign currencies, foreign and
domestic fixed income and equity securities, groups or "baskets" of securities
and securities indices (for each derivative product, the "underlying").
Exclusive of forward foreign currency contracts and any derivative products used
for hedging purposes, the Portfolio will limit its use of derivative products to
33 1/3 % of its total assets, measured by the aggregate notional amount of
outstanding derivative products.
The Portfolio may use derivative products under a number of different
circumstances to further its investment objective. For example, the Portfolio
may purchase derivatives to gain exposure to a market quickly in response to
changes in the Portfolio's investment strategy, upon the inflow of investable
cash or when the derivative provides greater liquidity than the underlying
market. The Portfolio may also use derivatives when it is restricted from
directly owning the "underlying" or when derivatives provide a pricing advantage
or lower transaction costs. The Portfolio also may purchase combinations of
derivatives in order to gain exposure to an investment in lieu of actually
purchasing such investment. Derivatives may also be used by the Portfolio for
hedging or risk management purposes and in other circumstances when the Adviser
believes it advantageous to do so consistent with the Portfolio's investment
objective and policies. The Portfolio will not use derivatives in a manner that
creates leverage, except to the extent that the use of leverage is expressly
permitted by the Portfolio's investment policies, and then only in a manner
consistent with such policies.
The use of derivative products is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Portfolio will be less favorable than it would
have been if these investment techniques had not been used.
Some of the derivative products in which the Portfolio may invest and some
of the risks related thereto are described in more detail below.
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FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)
The Portfolio may purchase and sell futures contracts, such as futures on
securities indices, baskets of securities, foreign currencies and interest rates
of the type generally known as financial futures. These are standardized
contracts that are bought and sold on organized exchanges. A futures contract
obligates a party to buy or sell a specific amount of the "underlying," such as
for example, a particular foreign currency, on a specified future date at a
specified price or to settle the value in cash.
The Portfolio may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolio may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Forward Contracts" above. These
forward contracts are privately negotiated and are bought and sold in the
over-the-counter market. Like a future, a forward contract obligates a party to
buy or sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.
In some cases, the Portfolio may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolio will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolio may utilize futures contracts, forward contracts and related options
are as follows:
The Portfolio may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market exposure.
There currently are limited securities index futures and options on such futures
in many countries, particularly emerging countries. The nature of the strategies
adopted by the Adviser, and the extent to which those strategies are used, may
depend on the development of such markets. The Portfolio may also purchase and
sell foreign currency futures to hedge its respective holdings and commitments
against changes in the level of future currency rates or to adjust its exposure
to a particular currency.
The Portfolio may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely with
changes in interest rates. The Portfolio may engage in such transactions to
hedge its holdings of debt instruments against future changes in interest rates
or for other purposes.
The Portfolio may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these contracts also rises and falls inversely with
changes in interest rates. The Portfolio may engage in financial futures and
forward contracts for both hedging and non-hedging purposes.
Gains and losses on futures contracts, forward contracts and related options
depend on the Adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors. Other risks associated with
the use of these instruments include (i) imperfect correlation between the
change in market value of investments held by the Portfolio and the prices of
derivative products relating to investments purchased or sold by the Portfolio,
and (ii) possible lack of a liquid secondary market for a derivative product and
the resulting inability to close out a position. The risk that the Portfolio
will be unable to close out a position will
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be minimized by only entering into transactions for which there appears to be a
liquid exchange or secondary market. In some strategies, the risk of loss in
trading on futures and related transactions can be substantial, due both to the
low margin deposits required and the extremely high degree of leverage involved
in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the
"CFTC"), the Portfolio may, without registering with the CFTC as a Commodity
Pool Operator, enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of the Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-bona
fide hedging activities.
OPTION TRANSACTIONS
The Portfolio may seek to increase its returns or may hedge its portfolio
investments through options transactions with respect to individual securities,
indices or baskets in which the Portfolio may invest; other financial
instruments; and foreign currency. Various options may be purchased and sold on
either the exchange-traded or over-the-counter markets.
The Portfolio may purchase put and call options. Purchasing a put option
gives the Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period.
Purchasing a call option gives the Portfolio a similar right, but not the
obligation, to purchase the underlying. The purchaser pays a premium to the
seller (also known as the writer) of the option.
The Portfolio also may write put and call options on investments held in its
portfolio, as well as foreign currency options. The Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, the Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, the Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.
By writing an option, the Portfolio incurs an obligation either to buy (in
the case of a put option) or sell (in the case of a call option) the underlying
from the purchaser of the option at the option's exercise price, upon exercise
by the purchaser. Pursuant to guidelines established by the Board of Directors,
the Portfolio may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will continue to own (i) the underlying; (ii) securities or instruments
convertible or exchangeable without the payment of any consideration into the
underlying; or (iii) a call option on the same underlying with a strike price no
higher than the price at which the underlying was sold pursuant to a short
option position. In the case of a put option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will own another put option on the same underlying with an equal or higher
strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolio's use of options as
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described include (i) imperfect correlation between the change in market value
of investments held, purchased or sold by the Portfolio and the prices of
options relating to such investments, and (ii) possible lack of a liquid
secondary market for an option.
INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS
Swaps are privately negotiated over-the-counter derivative products in which
two parties agree to exchange payment streams calculated in relation to a rate,
index, instrument or certain securities and a particular "notional amount." As
with many of the other derivative products available to the Portfolio, the
underlying may include an interest rate (fixed or floating), a currency exchange
rate, a commodity price index, and a security, securities index or a combination
thereof. A great deal of flexibility is possible in the way the products may be
structured, with the effect being that the parties may have exchanged amounts
equal to the return on one rate, index or group of securities for another. For
example, in a simple fixed-to-floating interest rate swap, one party makes
payments equivalent to a fixed interest rate, and the other makes payments
equivalent to a specified interest rate index. The Portfolio may engage in
simple or more complex swap transactions involving a wide variety of
underlyings. The currency swaps that the Portfolio may enter will generally
involve an agreement to pay interest streams in one currency based on a
specified index in exchange for receiving interest streams denominated in
another currency. Such swaps may involve initial and final exchanges that
correspond to the agreed upon notional amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. The Portfolio may use one or more of these products in addition to or
in lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar is a combination product in which the same party, such as the Portfolio,
buys a cap from and sells a floor to the other party. As with put and call
options, the amount at risk is limited for the buyer, but, if the cap or floor
is not hedged or covered, may be unlimited for the seller. Under current market
practice, caps, collars and floors between the same two parties are generally
documented under the same "master agreement." In some cases, options and forward
agreements may also be governed by the same master agreement. In the event of a
default, amounts owed under all transactions entered into under, or covered by,
the same master agreement would be netted and only a single payment would be
made.
Swaps, caps, collars and floors are credit-intensive products. When the
Portfolio enters into a swap transaction it bears the risk of default, i.e.
nonpayment, by the other party. The guidelines under which the Portfolio enters
derivative transactions, along with some features of the transactions
themselves, are intended to reduce these risks to the extent reasonably
practicable, although they cannot eliminate the risks entirely. Under guidelines
established by the Board of Directors, the Portfolio may enter into swaps only
with parties that meet certain credit rating guidelines. Consistent with current
market practices, the Portfolio will generally enter into swap transactions on a
net basis, and all swap transactions with the same party will be documented
under a single master agreement to provide for net payment upon default. In
addition, the Portfolio's obligations under
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an agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued, but unpaid, net amounts owed to the other party to a
master agreement will be covered by the maintenance of a segregated account
consisting of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, the Portfolio's risk of loss will consist of the payments
that the Portfolio is contractually entitled to receive from the other party.
This may not be true for currency swaps that require the delivery of the entire
notional amount of one designated currency in exchange for the other. If there
is a default by the other party, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction.
STRUCTURED NOTES
Structured notes are derivative securities for which the amount of principal
repayment and/or interest payments is based upon the movement of one or more
factors. These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices,
such as the S&P 500 Index. In some cases, the impact of the movements of these
factors may increase or decrease through the use of multipliers or deflators.
The Portfolio may use structured notes to tailor its investments to the specific
risks and returns the Adviser wishes to accept while avoiding or reducing
certain other risks.
INVESTMENT LIMITATIONS
As a diversified investment company, the Gold Portfolio is subject to the
following limitations: (i) as to 75% of its total assets, the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government and its agencies and
instrumentalities, and (ii) the Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares and under certain
non-fundamental investment limitation that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER AND SUB-ADVISER. Morgan Stanley Asset Management Inc. is
the Adviser and Administrator of the Fund and the Portfolio. The Adviser
provides investment advice and portfolio management services, pursuant to an
Investment Advisory Agreement and, subject to the supervision of the Fund's
Board of Directors, makes each of the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages each of the Portfolio's investments. With respect to the Portfolio, the
Adviser has delegated these responsibilities, subject to its supervision, to the
Sub-Adviser. The Adviser is entitled to receive from the Portfolio an annual
investment advisory fee, payable quarterly, in an amount equal to 1.00% of the
average daily net assets of the Portfolio.
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Sun Valley Gold Company is sub-adviser of the Portfolio. Pursuant to a
Sub-Advisory Agreement, and subject at all times to the supervision of the
Adviser and the Board of Directors of the Fund, the Sub-Adviser provides
investment advice and portfolio management services, makes the Portfolio's
day-to-day investment decisions, arranges for the execution of portfolio
transactions and generally manages the Portfolio's investments. The Sub-Adviser
is entitled to receive from the Adviser an annual sub-advisory fee, payable
quarterly, in an amount equal to 0.40% of the average daily net assets of the
Portfolio.
The Adviser has agreed to a reduction in the fees payable to it and to
reimburse the Portfolio, if necessary, if such fees would cause the total annual
operating expenses for Class A and Class B shares to exceed 1.25% and 1.50%,
respectively, of its average daily net assets. The Sub-Adviser has voluntarily
agreed to a proportionate reduction in its fees from the Adviser if the Adviser
is required to waive its fees or to reimburse the Portfolio so that the
Portfolio's total operating expenses for Class A and Class B shares do not
exceed 1.25% and 1.50%, respectively, of its average daily net assets.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD")
is the direct parent of the Adviser and Morgan Stanley. MSDWD is a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses -- securities, asset management and credit
services. At , 1998, the Adviser, together with its affiliated
institutional asset management companies (exclusive of Miller Anderson &
Sherrerd, LLP), managed assets of approximately $ billion. See "Management of
the Fund" in the Statement of Additional Information.
The Sub-Adviser, with principal offices at 620 Sun Valley Road, Sun Valley,
Idaho 83340, specializes in the management of gold-related investments. At
, 1998, the Sub-Adviser managed investments totaling in excess of $
million.
PORTFOLIO MANAGER. Peter F. Palmedo, the President of the Sub-Adviser since
its inception in January, 1992, has had primary portfolio management
responsibility for the Portfolio since its inception. He has also served as
President of Sun Valley Gold Trading, Inc., a registered broker-dealer, since
its inception in January, 1992, and of Mad River Management since September,
1989. Prior thereto, Mr. Palmedo worked at Morgan Stanley in the institutional
equity department and specialized in portfolio risk management, derivatives and
the development and analysis of long-dated options, synthetic options and
options embedded in securities. He received a B.A. in Business and Finance from
Hampshire College in 1979.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of report, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of the Portfolio.
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Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Portfolio.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of the Portfolio pursuant to Rule 12b-1 under the 1940 Act (the "Plan").
Under the Plan, the Distributor is entitled to receive from the Portfolio a
distribution fee, which is accrued daily and paid quarterly, of 0.25% of the
Class B shares' average daily net assets on an annualized basis. Each Plan is
designed to compensate the Distributor for its services in connection with
distribution assistance. The Distributor may retain any portion of the fee that
it does not expend in meeting its obligations to the Fund. The Distributor may
compensate financial intermediaries, plan fiduciaries and administrators for
providing distribution-related services, including account maintenance services,
to shareholders (including, where applicable, underlying beneficial owners) of
Class B shares.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees, and
printing and mailing costs) as specified in its agreements with the Adviser and
Morgan Stanley.
PURCHASE OF SHARES
Class A shares and Class B shares of the Portfolio may be purchased at the
net asset value per share next determined after receipt by the Fund of a
purchase order. The net asset value per share of the Portfolio is calculated on
days that the New York Stock Exchange ("NYSE") and Chase (the "Custodian Bank")
are open for business as of the close of trading of the NYSE, normally 4:00 p.m.
Eastern Time (the "Pricing Time").
MINIMUM INVESTMENT
The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares of the Portfolio. These minimums may be waived at the
discretion of the Adviser for certain types of investors, including trust
departments, brokers, dealers, agents, financial planners, financial services
firms, investment advisers or various retirement and deferred compensation plans
("Financial Intermediaries"), certain accounts
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managed by the Adviser and its affiliates ("Managed Accounts"), and certain
employees and customers of Morgan Stanley and its affiliates. The Fund's
determination of an investor's eligibility to purchase shares of a given class
will take precedence over the investor's selection of a class.
METHODS OF PURCHASE
Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolio by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or because your
check does not clear, you will be responsible for any loss the Fund or its
agents incur. If you are already a shareholder, the Fund may redeem shares from
your account(s) to reimburse the Fund or its agents for any loss. In addition,
you may be prohibited or restricted from making future investments in the Fund.
FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian Bank are open for business.
Your bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:
1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide you
with a confirmation number.
2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring the funds.
3. Complete and sign the Account Registration Form and mail it to the
address shown thereon.
When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the close of the Federal Funds Wire Control Center
("FFWCC") (normally 6:00 p.m. Eastern Time), the purchase will be executed at
the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the close of the FFWCC, will be executed at the net asset value next
determined. Certain institutional investors and financial institutions have
entered into an arrangement with Morgan Stanley, pursuant to which they may
place orders prior to the Pricing Time, but make payment in Federal Funds for
those shares on the following business day.
BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and which bank is handling the
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wire, money transferred by bank wire may or may not be converted into Federal
Funds prior to the close of the FFWCC. Prior to conversion to Federal Funds and
receipt by the Fund, an investor's money will not be invested.
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share determined on the next
business day after receipt. An investor's money will not be invested prior to
crediting of Federal Funds.
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. Each business evening, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day and places a net purchase
and/or redemption order(s) by the morning of the next business day. These orders
normally are executed at the net asset value that was computed for the Portfolio
as of the close of the previous business day.
ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 for the
Portfolio. The minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases directly from the
Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.
INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES
Class A and Class B shares of the Portfolio may be subject to the
involuntary conversion and redemption features described below. The conversion
and redemption features may be waived at the discretion of the Adviser for
shares held in a Managed Account and shares purchased through a Financial
Intermediary. Accounts that were open prior to January 2, 1996 are not subject
to involuntary conversion or redemption. The Fund reserves the right to modify
or terminate the conversion or redemption features of the shares at any time
upon 60 days notice to shareholders.
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account
containing Class A shares falls below $500,000 (but remains at or above
$100,000) because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $500,000 (but remains at or
above $100,000) for a continuous 60-day period, the Class A shares in such
account will convert to Class B shares and will be subject to the distribution
fee and other features applicable to Class B shares. The Fund will not convert
Class A shares to Class B shares based solely upon changes in the market that
reduce the net asset value of shares. Under current tax law, conversion between
share classes is not a taxable event to the shareholder.
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<PAGE>
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares increases to $500,000 or more, whether due to
shareholder purchases or market activity, the Class B shares will convert to
Class A shares. Class B shares purchased through a Financial Intermediary that
has entered into an arrangement with the Fund for the purchase of such shares
may not be converted. Under current tax law, such conversion is not a taxable
event to the shareholder. Class A shares converted from Class B shares are
subject to the same minimum account size requirements as are applicable to New
Accounts containing Class A shares described above.
INVOLUNTARY REDEMPTION OF SHARES. If the value of an account falls below
$100,000 because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $100,000 for a continuous
60-day period, the shares in such account will be subject to redemption by the
Fund. The Fund will not redeem shares based solely upon changes in the market
that reduce the net asset value of shares. If redeemed, redemption proceeds will
be promptly paid to the shareholder.
REDEMPTION OF SHARES
Class A and Class B shares of the Portfolio may be redeemed at any time and
without charge at the net asset value per share next determined after receipt by
the Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds may be more or less than the purchase price of your shares
depending on, among other factors, the market value of the investment securities
held by the Portfolio.
METHODS OF REDEMPTION
Shares may be redeemed directly from the Fund by mail or by telephone.
However, shares purchased through a Financial Intermediary must be redeemed
through a Financial Intermediary. Certain Financial Intermediaries may charge an
additional service or transaction fee.
BY MAIL. The Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, to Morgan Stanley Institutional Fund, Inc.,
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following:
1. A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
2. Any required signature guarantees; and
3. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.
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<PAGE>
BY TELEPHONE. If you have previously elected the Telephone Redemption
Option on the Account Registration Form, you can redeem Portfolio shares by
calling the Fund and requesting that the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to receive
redemption proceeds, send a written request to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. An investor may be
required to provide personal identification information at the time an account
is opened and prior to effecting each telephone transaction. In addition, all
telephone transaction requests will be recorded and investors may be required to
provide additional telecopied written instructions regarding transaction
requests. Neither the Fund nor the Transfer Agent will be responsible for any
loss, liability, cost or expense for following instructions received by
telephone that either of them reasonably believes to be genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to accept redemption
requests from underlying beneficial owners. These redemptions may be processed
in the same way as purchases made through such Financial Intermediaries, as
described above.
FURTHER REDEMPTION INFORMATION
The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event more than seven days after
receipt of a redemption request in good order. However, payments to investors
redeeming shares which were purchased by check will not be made until payment
for the purchase has been collected, which may take up to eight days after the
date of purchase. The Fund may suspend the right of redemption or postpone the
date upon which redemptions are effected at times when the NYSE is closed, or
under any emergency conditions as determined by the Securities and Exchange
Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required to verify the identity of the person who has authorized
certain redemptions. Please contact the Fund or see the Statement of Additional
Information for further information.
ACCOUNT POLICIES AND SERVICES
EXCHANGE FEATURES
You may exchange shares of the Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging
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<PAGE>
Markets, Small Cap Value Equity, Balanced or Gold Portfolios because they are
currently closed to new investors. In addition, certain portfolios may be
unavailable to shareholders who purchased portfolio shares through a Financial
Intermediary. Contact your Financial Intermediary to determine which portfolios
are available for exchange.
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase. Therefore, an
exchange will be considered a taxable event for shareholders subject to tax.
Exchange transactions will be processed at the net asset value per share next
determined after receipt of the request. Shares of the portfolios may be
exchanged by mail or telephone. The telephone exchange privilege is automatic
and made available without shareholder election. The exchange privilege may be
modified or terminated by the Fund at any time upon 60-days notice to
shareholders.
BY MAIL. To exchange shares by mail, send a written exchange request to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798. Your written exchange request should include (i) the name, class of
shares and account number of your current Portfolio; (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to exchange
shares; and (iii) the signatures of all registered account holders.
BY TELEPHONE. To exchange shares by telephone, call the Fund at the phone
number provided on the cover of this Prospectus. A Fund representative will
request (i) the name, class of shares and account number of your current
Portfolio, and (ii) the name(s) and class(es) of shares of the portfolio(s) into
which you intend to exchange shares. For additional information regarding
responsibility for the authenticity of telephoned instructions, see "Redemption
of Shares" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by sending a written request to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. It may not be possible to
transfer the registration of certain shares purchased through a Financial
Intermediary. As with redemptions, the written request must be received in "good
order" before any transfer can be made. Transferring the registration of shares
may affect the eligibility of your account for a given class of shares and may
result in involuntary conversion or redemption of your shares.
OTHER ACCOUNT INFORMATION
The Fund does not issue share certificates for the Portfolio. All shares
purchased are confirmed to you and credited to your account on the Fund's books
maintained by the Adviser or its agents. You will have the same rights and
ownership with respect to such shares as if certificates had been issued.
EXCESSIVE TRADING
Frequent trades in your account(s) can disrupt management of the Portfolio
and raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of the Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a
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portfolio of the Fund within any 120-day period. For example, the following
series of transactions would amount to excessive trading: exchanging shares of
Portfolio A for shares of Portfolio B, then exchanging shares of Portfolio B for
shares of Portfolio C and then exchanging shares of Portfolio C for shares of
Portfolio A within a 120-day period. Two types of transactions are exempt from
these excessive trading restrictions: (i) trades exclusively between money
market portfolios, and (ii) trades made in connection with an asset allocation
service managed or advised by the Adviser and/or any of its affiliates.
INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS
Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the portfolios used for investment by these accounts may
experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the portfolio.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the close of the NYSE
(normally 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business. Price information on listed securities is taken from the exchange
where the security is primarily traded. Securities listed on a U.S. securities
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date and for which market quotations are
not readily available are valued at a price within a range not exceeding the
current asked price nor less than the current bid price. The current bid and
asked prices are determined based on the average of the bid and asked prices
quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such 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. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such
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reported sale, the latest quoted bid price will be used. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine prices in accordance
with the above-stated procedures are determined in good faith at fair value
using methods determined by the Board of Directors. For purposes of calculating
net asset value per share, all assets and liabilities initially expressed in
foreign currencies will be translated into U.S. dollars at the mean of the bid
and asked price of such currencies against the U.S. dollar last quoted by a
major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise "total return" for each class of
the Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE.
The Portfolio may advertise "total return" which shows what an investment in
a class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years) assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividend and distributions or upon redemption. The
Fund may also include comparative performance information in advertising or
marketing the Portfolio's shares. Such performance information may include data
from Lipper Analytical Services, Inc., other industry publications, business
periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares of such class at net asset
value, except when, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder elects to receive income dividends and capital gains
distributions in cash.
The Portfolio expects to distribute substantially all of its taxable net
investment income in the form of quarterly dividends. Net realized capital
gains, if any, after reduction for any available tax loss carryforwards will
also be distributed annually.
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Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gains that is distributed to shareholders.
The Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from the Portfolio's net investment income are taxable
to shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends will generally qualify for the dividends-received
deduction for corporate shareholders only to the extent of the aggregate
qualifying dividend income received by the Portfolio from U.S. corporations. The
Portfolio will report annually to its shareholders the amount of dividend income
qualifying for such treatment.
Distributions of net capital gain are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio (such
designation being dependent upon the holding period of the Portfolio in the
underlying asset generating the net capital gain), regardless of how long
shareholders have held their shares. The Portfolio will send reports annually to
shareholders of the federal income tax status of all distributions made during
the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
losses, including any available capital loss carryforwards) prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
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The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (i) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) who has not certified to the Fund that such
shareholder is not subject to backup withholding. This backup withholding is not
an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceed or are less than the
shareholder's adjusted tax basis in the sold, exchanged or redeemed shares. If
capital gains distributions have been made with respect to shares that are sold
at a loss after being held for six months or less, then the loss is treated as a
long-term capital loss to the extent of the capital gains distributions.
Conversions of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other
31
<PAGE>
remuneration paid to Morgan Stanley or other affiliates must be fair and
reasonable in comparison to those of other broker-dealers for comparable
transactions involving similar securities being purchased or sold during a
comparable time period.
PORTFOLIO TURNOVER
The Portfolio generally does not invest for short-term trading purposes,
however, when circumstances warrant, the Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolio will not consider portfolio turnover rate a
limiting factor in making investment decisions consistent with its respective
objective and policies. As portfolio turnover increases, the Portfolio
necessarily will experience increased transaction costs and additional
realization of capital gains.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 40 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of the
Portfolio are currently classified into two classes, Class A shares and Class B
shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no pre-emptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a portfolio may be presumed to "control" (as that term is
defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports. The
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York, ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs
32
<PAGE>
subcustodians approved by the Board of Directors of the Fund in accordance with
regulations of the Commission for the purpose of providing custodial services
for such assets. MSTC may also hold certain domestic assets for the Fund. For
more information on the custodians, see "General Information -- Custody
Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
33
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
GOLD PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
If you need assistance in filling out this form for the
ACCOUNT INFORMATION Morgan Stanley Institutional Fund, Inc., please contact your
Fill in where applicable Morgan Stanley representative or call us toll free
1-800-548-7786. Please print all items except signature, and
mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF
SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First
Name Initial Last Name
2.
First
Name Initial Last Name
First
Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund
for additional documents
that may be required to
set up account and to
authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<S> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF
SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
<PAGE>
<TABLE>
<S> <S> <C> <C>
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor.
OR
1. TAXPAYER SOCIAL SECURITY NUMBER
IDENTIFICATION NUMBER ("SSN")
("TIN")
OR
2. TIN SSN
OR
TIN SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer)
with your correct TIN(s) or SSN(s). Accounts that have a
missing or incorrect TIN(s) or SSN(s) will be subject to
backup withholding at a 31% rate on dividends, distributions
and other payments. If you have not provided us with your
correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability
of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding
under Section 3406(a)(1)(C) of the Internal Revenue Code
because you have underreported interest or dividends or you
were required to, but failed to, file a return which would
have included a reportable interest or dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SECTION Portfolio:
(Class A shares minimum Gold Portfolio
$500,000 for the
Portfolio and Class B
shares minimum $100,000
for the Portfolio).
Please indicate class and
amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio
and manner of payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the
account statement sent to
my/our registered Address
address, I/we hereby
authorize the Fund to City State Z
mail duplicate statements Code
to the name and address
provided at right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative
No. Branch
No.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE
ARE SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE
HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL
SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE
UNDERSTAND THAT IF I/WE DO NOT PROVIDE EITHER NUMBER TO CHASE
GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE
DATE OF THIS APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR
CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY
AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION
PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU
MAY REQUEST SUCH FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S):
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 11
Additional Investment Information................. 12
Investment Limitations............................ 20
Management of the Fund............................ 20
Purchase of Shares................................ 22
Redemption of Shares.............................. 25
Account Policies and Services..................... 26
Valuation of Shares............................... 28
Performance Information........................... 29
Dividends and Capital Gains Distributions......... 29
Taxes............................................. 30
Portfolio Transactions............................ 31
General Information............................... 32
Account Registration Form
</TABLE>
GOLD PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Sub-Adviser
Sun Valley Gold Company
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
- --------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL SMALL CAP PORTFOLIO
EUROPEAN EQUITY PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
thirty-two portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Global Equity, International Equity, and European Equity Portfolios (each a
"Multiclass Portfolio" and collectively, the "Multiclass Portfolios") and to the
Class A Shares of the International Small Cap Portfolio (each, a "Portfolio" and
collectively, the "Portfolios"). The Class A and Class B shares currently
offered by the Portfolios have different minimum investment requirements and
fund expenses. Shares of the Portfolios are offered with no sales charge,
exchange fee or redemption fee, (except that the International Small Cap
Portfolio may impose a transaction fee). The International Equity Portfolio is
currently closed to new investors with the exception of certain Morgan Stanley &
Co. Incorporated ("Morgan Stanley") customers, employees of Morgan Stanley,
certain tax-qualified retirement plans and other investment companies advised by
Morgan Stanley Asset Management Inc. and its affiliates.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley as Distributor, the Fund makes
available to institutional and high net worth individual investors a series of
portfolios which benefit from the investment expertise and commitment to
excellence associated with Morgan Stanley and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Asian Real Estate, Emerging Markets,
European Equity, European Real Estate, Global Equity, Gold, International
Equity, International Magnum, International Small Cap, Japanese Equity and Latin
American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth,
Equity Growth, Small Cap Value Equity, Technology, U.S. Equity Plus, U.S. Real
Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced
Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global
Fixed Income, High Yield and Municipal Bond Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information about
the Fund is contained in a "Statement of Additional Information," dated May 1,
1998, as supplemented through September 26, 1997, which is incorporated herein
by reference. The Statement of Additional Information and the prospectuses
pertaining to the other portfolios of the Fund are available upon request and
without charge by writing or calling the Fund at the address and telephone
number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
each Portfolio listed below will incur.
<TABLE>
<CAPTION>
GLOBAL EQUITY INTERNATIONAL EQUITY INTERNATIONAL SMALL EUROPEAN EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO CAP PORTFOLIO PORTFOLIO
- ---------------------------------- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases
Class A......................... None None None* None
Class B......................... None None N/A None
Maximum Sales Load Imposed on
Reinvested Dividends
Class A......................... None None None None
Class B......................... None None N/A None
Deferred Sales Load
Class A......................... None None None None
Class B......................... None None N/A None
Redemption Fees
Class A......................... None None 1.00%* None
Class B......................... None None N/A None
Exchange Fees
Class A......................... None None None None
Class B......................... None None N/A None
</TABLE>
- --------------------------
* Shareholders of the International Small Cap Portfolio may be charged a 1.00%
transaction fee, which is payable directly to the International Small Cap
Portfolio, in connection with each purchase and redemption of shares of the
Portfolio. The transaction fee is intended to allocate transaction costs
associated with purchases and redemptions of shares of the Portfolio to
investors actually making such purchases and redemptions rather than to the
Portfolio's other shareholders. The 1.00% fee represents the Adviser's
estimate of such transaction costs, which include the costs of acquiring and
disposing of Portfolio securities. The transaction fee is not a sales charge
or load, and is retained by the Portfolio. The fee does not apply to
portfolios of the Fund other than the International Small Cap Portfolio and is
not charged in connection with the reinvestment of dividends or capital gain
distributions. The fee will not be charged with respect to purchases and
redemptions that do not result in actual transaction costs to the Portfolio.
Examples of such transactions include offsetting purchases and redemptions by
different shareholders occurring at the same time and in-kind purchases and
redemptions.
2
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL
GLOBAL EQUITY EQUITY INTERNATIONAL SMALL EUROPEAN EQUITY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO CAP PORTFOLIO PORTFOLIO
- ------------------------------------------------ ------------------- ------------------- ------------------- ------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C> <C>
Management Fee (Net of Fee Waivers)**
Class A....................................... % % % %
Class B....................................... % % N/A %
12b-1 Fees
Class A....................................... None None None None
Class B....................................... 0.25% 0.25% N/A 0.25%
Other Expenses
Class A....................................... % % % %
Class B....................................... % % N/A %
------- ------- ------- ----------
Total Operating Expenses (Net of Fee Waivers)**
Class A....................................... % % % %
Class B....................................... % % N/A %
------- ------- ------- ----------
------- ------- ------- ----------
</TABLE>
- --------------------------
** The Adviser has agreed to waive its management fees and/or reimburse the
Portfolios, if necessary, if such fees would cause the total annual
operating expenses of each of the Portfolios to exceed a specified
percentage of its respective average daily net assets. As a result of these
reductions, the Management Fees stated above are lower than the contractual
fees stated under "Management of the Fund." The Adviser reserves the right
to terminate any of its fee waivers and/or expense reimbursements at any
time in its sole discretion. For further information on Fund expenses, see
"Management of the Fund." Set forth below, for each Portfolio as applicable,
are the management fees and total operating expenses absent such fee waivers
and/or expense reimbursements as a percentage of average daily net assets of
the Class A shares of the Portfolios and Class B Shares of the Multiclass
Portfolios, respectively.
<TABLE>
<CAPTION>
TOTAL
OPERATING EXPENSES
ABSENT
MANAGEMENT FEE WAIVERS
FEES ABSENT FEE --------------------------
PORTFOLIO WAIVERS CLASS A CLASS B
- ---------------------------------------------------------------- --------------- ------------ ------------
<S> <C> <C> <C>
Global Equity................................................... 0.80% % %
International Equity............................................ 0.80% % %
International Small Cap......................................... 0.95% % N/A
European Equity................................................. 0.80% % %
</TABLE>
The purpose of the table is to assist the investor in understanding the
various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1997. Due to the continuous nature of Rule 12b-1 fees,
long-term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the National Association of
Securities Dealers, Inc. ("NASD") Conduct Rules.
3
<PAGE>
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (i) a 5% annual rate of return and (ii) redemption at
the end of each time period. As noted in the table above, the only fee charged
by the Fund upon purchase or redemption of Fund shares is the 1% transaction fee
that may be assessed on purchases and redemptions of shares of the International
Small Cap Portfolio, which charges are reflected in this example. The following
example is based on total operating expenses of the Portfolios after fee
waivers.
<TABLE>
<CAPTION>
3 5 10
1 YEAR YEARS YEARS YEARS
------ ------ ------ -------
<S> <C> <C> <C> <C>
Global Equity Portfolio
Class A.......................... $ $ $ $
Class B..........................
International Equity Portfolio
Class A..........................
Class B..........................
International Small Cap Portfolio
Class A..........................
European Equity Portfolio
Class A..........................
Class B..........................
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A and Class
B shares of the Multiclass Portfolios and the Class A shares of the
International Small Cap Portfolio for each of the periods presented. The audited
financial highlights for each Portfolio's shares for each of the periods
presented are part of the Fund's financial statements which appear in the Fund's
December 31, 1997 Annual Report to Shareholders and which are incorporated by
reference into the Fund's Statement of Additional Information. Each Portfolio's
financial highlights for each of the periods presented have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also incorporated by
reference into the Statement of Additional Information. Additional performance
information is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. After October 31, 1992, the
Fund changed its fiscal year end to December 31. The following information
should be read in conjunction with financial statements and notes thereto.
5
<PAGE>
GLOBAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------------------
PERIOD FROM
TWO MONTHS JULY 15,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 1992* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1997 1996 1995 1994 1993 1992 1992
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD.................. $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)...................... 0.23 0.18 0.08 0.08 0.01 0.02
Net Realized and
Unrealized Gain (Loss) on
Investments.............. 3.02 2.26 0.79 4.18 0.39 (0.67)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total from Investment
Operations............. 3.25 2.44 0.87 4.26 0.40 (0.65)
------------ ------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income..... (0.23) (0.22) (0.12) (0.02) -- --
In Excess of Net
Investment Income........ -- -- -- (0.03) -- --
Net Realized Gain......... (1.09) (1.31) (1.22) (0.09) -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total Distributions..... (1.32) (1.53) (1.34) (0.14) -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD..................... $ 16.24 $ 14.31 $ 13.40 $ 13.87 $ 9.75 $ 9.35
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN................ 22.83% 18.66% 6.95% 44.24% 4.28% (6.50)%
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands).............. $80,297 $91,675 $78,935 $19,918 $11,739 $11,257
Ratio of Expenses to
Average Net Assets (1)... 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00%**
Ratio of Net Investment
Income to Average Net
Assets (1)............... 1.38% 1.17% 0.87% 0.84% 0.69%** 1.00%**
Portfolio Turnover Rate... 26% 28% 12% 42% 5% 10%
Average Commission Rate
#........................ $0.0299 N/A N/A N/A N/A N/A
<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.................. $14.36
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)...................... 0.13
Net Realized and
Unrealized Gain (Loss) on
Investments.............. 3.02
------ ------
Total from Investment
Operations............. 3.15
------ ------
DISTRIBUTIONS
Net Investment Income..... (0.21)
In Excess of Net
Investment Income........ --
Net Realized Gain......... (1.09)
------ ------
Total Distributions..... (1.30)
------ ------
NET ASSET VALUE, END OF
PERIOD..................... $16.21
------ ------
------ ------
TOTAL RETURN................ 22.04%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands).............. $3,928
Ratio of Expenses to
Average Net Assets (1)... 1.25%**
Ratio of Net Investment
Income to Average Net
Assets (1)............... 1.29%**
Portfolio Turnover Rate... 26%
Average Commission Rate
#........................ $0.0299
</TABLE>
- ----------------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income............... $0.03 $0.02 $0.02 $0.01 $0.02 $0.08
Ratios before expense
limitation:
Expenses to Average
Net Assets........... 1.15% 1.13% 1.24% 1.66% 2.49%** 5.22%**
Net Investment Income
(Loss) to Average Net
Assets............... 1.23% 1.04% 0.63% 0.18% (0.80)%** (3.22)%**
<CAPTION>
(1)
$0.01
1.39%**
1.15%**
<CAPTION>
</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. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.25% of the trade amount.
6
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1997 1996 1995 1994 1993 1992 1992
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD.................. $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83 $ 10.52
------------ ------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)...................... 0.25 0.16 0.16 0.15 0.01 0.12
Net Realized and
Unrealized Gain (Loss) on
Investments.............. 2.71 1.55 1.54 4.36 0.14 (0.59)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total from Investment
Operations............. 2.96 1.71 1.70 4.51 0.15 (0.47)
------------ ------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income..... (0.36) (0.06) (0.18) (0.01) -- (0.17)
In Excess of Net
Investment Income........ -- -- -- (0.13) -- --
Net Realized Gain......... (0.80) (1.84) (0.27) (0.26) -- (0.05)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total Distributions..... (1.16) (1.90) (0.45) (0.40) -- (0.22)
------------ ------------ ------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF
PERIOD..................... $ 16.95 $ 15.15 $ 15.34 $ 14.09 $ 9.98 $ 9.83
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
TOTAL RETURN................ 19.64% 11.77% 12.39% 46.50% 1.53% (4.56)%
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands).............. $2,264,424 $1,598,530 $1,304,770 $947,045 $510,727 $486,836
Ratio of Expenses to
Average Net Assets (1)... 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00%
Ratio of Net Investment
Income to Average Net
Assets (1)............... 1.64% 1.38% 1.12% 1.25% 0.68%** 1.46%
Portfolio Turnover Rate... 18% 27% 16% 23% 5% 12%
Average Commission Rate#.. $0.0238 N/A N/A N/A N/A N/A
<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.................. $15.24
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)...................... 0.23
Net Realized and
Unrealized Gain (Loss) on
Investments.............. 2.59
------ ------
Total from Investment
Operations............. 2.82
------ ------
DISTRIBUTIONS
Net Investment Income..... (0.33)
In Excess of Net
Investment Income........ --
Net Realized Gain......... (0.80)
------ ------
Total Distributions..... (1.13)
------ ------
NET ASSET VALUE, END OF
PERIOD..................... $16.93
------ ------
------ ------
TOTAL RETURN................ 18.58%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(Thousands).............. $5,393
Ratio of Expenses to
Average Net Assets (1)... 1.25%**
Ratio of Net Investment
Income to Average Net
Assets (1)............... 1.68%**
Portfolio Turnover Rate... 18%
Average Commission Rate#.. $0.0238
</TABLE>
- ------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit to
net investment
income............... $0.00 $0.003 $0.004 $0.01 $0.00 $0.00
Ratios before expense
limitation:
Expenses to Average
Net Assets........... 1.02% 1.03% 1.03% 1.06% 1.14%** 1.02%
Net Investment Income
to Average Net
Assets............... 1.61% 1.35% 1.09% 1.19% 0.54%** 1.44%
<CAPTION>
(1)
$0.00
1.27%**
1.66%**
<CAPTION>
</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. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.26% of the trade amount.
7
<PAGE>
INTERNATIONAL SMALL CAP PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993++
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........ $ 14.94 $ 15.15 $ 14.64 $ 10.09
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)................. 0.21 0.24 0.14 0.09
Net Realized and Unrealized Gain on
Investments (2).......................... 2.29 0.15 0.62 4.48
------------- ------------- ------------- ------------- -------------
Total from Investment Operations........ 2.50 0.39 0.76 4.57
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income..................... (0.22) (0.23) (0.03) 0.00
In Excess of Net Investment Income........ -- -- -- (0.02)
Net Realized Gain......................... (0.39) (0.37) (0.22) --
------------- ------------- ------------- ------------- -------------
Total Distributions..................... (0.61) (0.60) (0.25) (0.02)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 16.83 $ 14.94 $ 15.15 $ 14.64
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
TOTAL RETURN................................ 16.82% 2.60% 5.25% 45.34%
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)..... $ 234,743 $ 198,669 $ 160,101 $ 52,834
Ratio of Expenses to Average Net Assets
(1)...................................... 1.15% 1.15% 1.15% 1.15%
Ratio of Net Investment Income to
Average Net Assets (1)................... 1.29% 1.72% 1.18% 0.66%
Portfolio Turnover Rate................... 35% 24% 8% 14%
Average Commission Rate#.................. $0.0159 N/A N/A N/A
<CAPTION>
PERIOD FROM
DECEMBER 15,
1992* TO
DECEMBER 31,
1992
-------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........ $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)................. 0.01
Net Realized and Unrealized Gain on
Investments (2).......................... 0.08
------
Total from Investment Operations........ 0.09
------
DISTRIBUTIONS
Net Investment Income..................... --
In Excess of Net Investment Income........ --
Net Realized Gain......................... --
------
Total Distributions..................... --
------
NET ASSET VALUE, END OF PERIOD $ 10.09
------
------
TOTAL RETURN................................ 0.90%
------
------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)..... $ 3,824
Ratio of Expenses to Average Net Assets
(1)...................................... 1.15%**
Ratio of Net Investment Income to
Average Net Assets (1)................... 1.37%**
Portfolio Turnover Rate................... 0%
Average Commission Rate#.................. N/A
</TABLE>
- ----------------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income............................... $0.01 $0.01 $0.02 $0.10 $0.16
Ratios before expense limitation:
Expenses to Average Net Assets........ 1.23% 1.24% 1.29% 1.86% 21.67%**
Net Investment Income/(Loss) to
Average Net Assets................... 1.20% 1.63% 1.04% (0.05)% (19.15)%**
(2) Reflects a 1% transaction fee on
purchases and redemptions of capital
shares.
</TABLE>
* Commencement of operations.
** Annualized
++ Per share amounts for the year ended December 31, 1993 are based on average
outstanding shares.
# 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. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.30% of the trade amount.
8
<PAGE>
EUROPEAN EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
PERIOD FROM
APRIL 2,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1993* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 13.92 $ 13.94 $ 12.91 $ 10.00
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.24 0.14 0.08 0.08
Net Realized and Unrealized Gain on
Investments............................... 2.85 1.37 1.29 2.83
------------- ------------- ------------- ------------- -------------
Total from Investment Operations......... 3.09 1.51 1.37 2.91
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income...................... (0.25) (0.15) (0.09) --
In Excess of Net Investment Income......... (0.02) -- -- --
Net Realized Gain.......................... (0.04) (1.38) (0.25) --
------------- ------------- ------------- ------------- -------------
Total Distributions...................... (0.31) (1.53) (0.34) --
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD............... $ 16.70 $ 13.92 $ 13.94 $ 12.91
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
TOTAL RETURN................................. 22.29% 11.85% 10.88% 29.10%
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $ 178,356 $ 69,583 $ 27,634 $ 12,681
Ratio of Expenses to Average Net Assets
(1)....................................... 1.00% 1.00% 1.00% 1.00%**
Ratio of Net Investment Income to Average
Net Assets (1)............................ 1.83% 1.37% 0.87% 1.23%**
Portfolio Turnover Rate.................... 24% 13% 79% 15%
Average Commission Rate#................... $0.0212 N/A N/A N/A
<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......... $ 14.05
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.18
Net Realized and Unrealized Gain on
Investments............................... 2.73
------ ------
Total from Investment Operations......... 2.91
------ ------
DISTRIBUTIONS
Net Investment Income...................... (0.23)
In Excess of Net Investment Income......... (0.02)
Net Realized Gain.......................... (0.04)
------ ------
Total Distributions...................... (0.29)
------ ------
NET ASSET VALUE, END OF PERIOD............... $ 16.67
------ ------
------ ------
TOTAL RETURN................................. 20.76%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $2,654
Ratio of Expenses to Average Net Assets
(1)....................................... 1.25%**
Ratio of Net Investment Income to Average
Net Assets (1)............................ 1.67%**
Portfolio Turnover Rate.................... 24%
Average Commission Rate#................... $0.0212
</TABLE>
- ----------------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income................................ $0.02 $0.03 $0.06 $0.09
Ratios before expense limitation:
Expenses to Average Net Assets......... 1.16% 1.25% 1.62% 2.43%**
Net Investment Income (Loss) to Average
Net Assets............................ 1.67% 1.12% 0.25% (0.21)%**
<CAPTION>
(1)
$0.02
1.40%**
1.52%**
<CAPTION>
</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. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.23% of the trade amount.
9
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of thirty-two portfolios, offering institutional investors
and high net worth individual investors a broad range of investment choices
coupled with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and Class B shares except the
International Small Cap and Municipal Money Market Portfolios which offer only
Class A shares. Each portfolio has its own investment objective and policies
designed to meet its specific goals. The investment objective of each Portfolio
described in this Prospectus is as follows:
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of companies in
the Asian real estate industry.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and
long-term capital appreciation by investing primarily in equity securities
of companies in the European real estate industry.
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
10
<PAGE>
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in equity securities of small- to medium-sized companies which
the Adviser believes to be undervalued.
- The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Adviser, are expected to benefit from their involvement in technology and
technology-related industries.
- The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers included in the S&P
500 Index ("S&P 500").
- 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
substantial investment in real estate investment trusts.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of equity securities which the Adviser believes
to be undervalued and fixed income securities.
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
11
<PAGE>
- 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 of the recognized rating services.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment grade mortgage-backed
securities.
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing in municipal
obligations, the interest on which is exempt from federal income tax.
MONEY MARKET:
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high-quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high-quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund and
each of its portfolios. As of , 1998, Morgan Stanley Asset
Management Inc. and its affiliated institutional asset management companies
(exclusive of Miller Anderson & Sherrerd, LLP) managed assets of approximately
$ billion. See "Management of the Fund--Investment Adviser" and "Management of
the Fund--Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Multiclass Portfolio are offered at net asset value with no sales commission,
but with a 12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25%
of the Class B shares' average daily net assets on an annualized basis.
Shareholders of the International Small Cap Portfolio may be charged a 1.00%
transaction fee, which is payable directly to the International Small Cap
Portfolio, in connection with each purchase and redemption of shares of the
Portfolio. The minimum initial investment, generally, is $500,000 for Class A
shares of each Portfolio and $100,000 for Class B shares of each Multiclass
Portfolio. The minimum initial investment amount is reduced for certain
categories of investors. For additional information on how to purchase shares
and minimum initial investments, see "Purchase of Shares."
12
<PAGE>
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of the applicable class
next determined after receipt of the redemption request, (except that
shareholders of the International Small Cap Portfolio may be charged a 1.00%
transaction fee, which is payable directly to the International Small Cap
Portfolio, in connection with each purchase and redemption of shares of the
Portfolio). The redemption price may be more or less than the purchase price.
Certain redemptions that cause the value of an account to remain for a
continuous 60-day period below the minimum investment amount for Class A shares
or for Class B shares may result in involuntary redemption or automatic
conversion. For additional information on how to redeem shares and involuntary
redemption or conversion, see "Purchase of Shares" and "Redemption of Shares."
RISK FACTORS
Investing in each of the Portfolios entails certain risks and considerations
of which an investor should be aware. The Portfolios' share prices and
investment returns fluctuate and, when redeemed, an investment in the Portfolios
may be worth more or less than its original cost. The investment policies of the
Portfolios may entail the following risk factors:
- EQUITY SECURITIES. Each Portfolio may invest in equity securities. Prices
of equity securities fluctuate in response to many factors, including the
financial health of the issuers and changes in economic and market
conditions.
- FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. The risks of foreign investment include fluctuations in foreign
currency values, political events affecting the country of issuance and
potentially greater market volatility and lower liquidity.
- EMERGING MARKET COUNTRY SECURITIES. Each Portfolio may invest in emerging
market country securities which entail risks typically associated with
investment in more established foreign markets. However, these risks may be
intensified due to higher volatility and less liquidity of emerging
markets, possible political risks associated with the country of issuance
and generally weaker financial condition of issuers in these markets.
- DERIVATIVES. Each Portfolio may invest in instruments that derive their
values from those of specified securities, indices, currencies or other
points of reference. These derivatives, including those used to manage
risk, are themselves subject to the risks of the different markets in which
they are traded and, therefore, may or may not serve their intended
purposes.
For additional information about risk factors, see also "Investment Objectives
and Policies" and "Additional Investment Information."
13
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies each Portfolio will employ in its efforts to achieve its objective.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. Each of the Portfolios invests in equity securities, which include
common and preferred stocks, convertible securities and rights and warrants to
purchase common stocks. In addition to the investments and strategies described
below, the Portfolios may invest in certain securities and obligations as set
forth in "Additional Investment Information". The investment policies described
below are not fundamental policies unless otherwise noted and may be changed
without shareholder approval.
THE GLOBAL EQUITY PORTFOLIO
The Global Equity Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers. At least 65% of the total assets of the Portfolio will
be invested in equity securities under normal circumstances. Under normal
circumstances, the Adviser expects that at least 20% of the Portfolio's total
assets will be invested in the common stocks of U.S. issuers. The remainder of
the Portfolio will be invested in issuers located throughout the world,
including those located in emerging markets. Although the Portfolio intends to
invest primarily in securities listed on stock exchanges, it will also invest in
securities traded in over-the-counter markets and may invest in equity
securities in the form of Depositary Receipts.
The Adviser's approach in selecting investments for the Portfolio is
oriented to individual stock selection, and is value driven. In selecting stocks
for the Portfolio, the Adviser initially identifies those stocks which it
believes to be undervalued in relation to the issuer's assets, cash flow,
earnings and revenues, and then evaluates the future value of such stocks by
running the results of an in-depth study of the issuer through a dividend
discount model. The Adviser utilizes the research of a number of sources,
including Morgan Stanley Capital International, an affiliate of the Adviser
located in Geneva, Switzerland, in identifying attractive securities, and
applies a number of proprietary screening criteria to identify those securities
it believes to be undervalued. Portfolio holdings are regularly reviewed and
subjected to fundamental analysis to determine whether they continue to conform
to the Adviser's value criteria. Securities which no longer conform to such
value criteria are sold.
THE INTERNATIONAL EQUITY PORTFOLIO
The investment objective of the International Equity Portfolio is to provide
long-term capital appreciation. The production of any current income is
incidental to this objective. The Portfolio seeks to achieve its objective by
investing primarily in equity securities of non-U.S. issuers. At least 65% of
the total assets of the Portfolio will be invested in such equity securities
under normal circumstances.
The Adviser's orientation to individual stock selection and value driven
approach in selecting investments for the Portfolio are the same as those
described for the Global Equity Portfolio discussed above. While the Portfolio
is not subject to any specific geographic diversification requirements, it
currently intends to diversify investments among countries to reduce risk,
including currency risk. Investments will be made primarily in equity securities
of companies domiciled in developed countries, but may also be made in equity
securities of
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<PAGE>
issuers domiciled in emerging markets. Under normal circumstances, the Portfolio
will not invest in equity securities of U.S. issuers. Although the Portfolio
intends to invest primarily in equity securities listed on stock exchanges, it
will also invest in equity securities traded in over-the-counter markets.
THE INTERNATIONAL SMALL CAP PORTFOLIO
The investment objective of the International Small Cap Portfolio is to
provide long-term capital appreciation. The production of any current income is
incidental to this objective. The Portfolio seeks to achieve its objective by
investing primarily in equity securities of non-U.S. issuers with equity market
capitalizations of less than $1 billion. The Portfolio will not, under normal
circumstances, invest in equity securities of U.S. issuers. At least 65% of the
total assets of the Portfolio will be invested in such equity securities under
normal circumstances. The Portfolio will invest a minimum of 80% of its total
assets in companies with market capitalizations of less than $1 billion. The
Adviser's orientation to individual stock selection and value driven approach in
selecting investments for the Portfolio are the same as those described for the
Global Equity Portfolio discussed above.
While the Portfolio is not subject to any specific geographic
diversification requirements, it currently intends to diversify investments
among countries to reduce risk, including currency risk. Investments will be
made primarily in equity securities of companies domiciled in developed
countries. Limited investments may also be made in the securities of companies
domiciled in emerging countries, but will not normally exceed 5% of the total
assets of the Portfolio. Although the Portfolio intends to invest primarily in
equity securities listed on stock exchanges, it may also invest in equity
securities traded in over-the-counter markets and in privately placed
securities. Small capitalization securities involve greater issuer risk and the
markets for such securities may be more volatile and less liquid.
THE EUROPEAN EQUITY PORTFOLIO
The investment objective of the European Equity Portfolio is to provide
long-term capital appreciation. The Portfolio seeks to achieve this objective by
investing primarily in equity securities of European issuers, including those
located in Germany, France, Switzerland, Belgium, Italy, Finland, Sweden,
Denmark, Norway and the United Kingdom. Investments may also be made in equity
securities of issuers located in the smaller and emerging markets of Europe.
While the Portfolio is not subject to any specific geographic
diversification requirements, it currently intends to diversify investments
among countries to reduce currency risk. At least 65% of the total assets of the
Portfolio will be invested in equity securities of European issuers under normal
circumstances. The Portfolio will not, under normal circumstances, invest in
equity securities of U.S. issuers. The Adviser's orientation to individual stock
selection and value-driven approach in selecting investments for the Portfolio
are the same as those described for the Global Equity Portfolio discussed above.
Although the Portfolio intends to invest primarily in equity securities listed
on stock exchanges, it will also invest in equity securities traded in over-the-
counter markets.
ADDITIONAL INVESTMENT INFORMATION
DEPOSITARY RECEIPTS. The Global Equity Portfolio may invest in Depositary
Receipts, including American Depositary Receipts ("ADRs"), Global Depositary
Receipts ("GDRs"), European Depositary Receipts ("EDRs") and other Depositary
Receipts (which, together with ADRs, GDRs and EDRs, are hereinafter
15
<PAGE>
collectively referred to as "Depositary Receipts"), to the extent that such
Depositary Receipts are or become available. ADRs are securities, typically
issued by a U.S. financial institution (a "depositary"), that evidence ownership
interests in a security or a pool of securities issued by a foreign issuer (the
"underlying issuer") and deposited with the depositary. ADRs may be "sponsored"
or "unsponsored." Sponsored ADRs are established jointly by a depositary and the
underlying issuer, whereas unsponsored ADRs may be established by a depositary
without participation by the underlying issuer. The issuers of the stock of
unsponsored ADRs are not obligated to disclose material information in the
United States and therefore, there may not be a correlation between such
information and the market value of the ADR. GDRs, EDRs and other types of
Depositary Receipts are typically issued by foreign depositaries, although they
may also be issued by U.S. depositaries, and evidence ownership interests in a
security or pool of securities issued by either a foreign or a U.S. corporation.
Generally, Depositary Receipts in registered form are designed for use in the
U.S. securities market and Depositary Receipts in bearer form are designed for
use in securities markets outside the United States. The Portfolio may invest in
sponsored and unsponsored Depositary Receipts. For purposes of the Portfolio's
investment policies, the Portfolio's investments in Depositary Receipts will be
deemed to be investments in the underlying securities.
FOREIGN CURRENCY FORWARD CONTRACTS. Each Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolios
may use such contracts to protect against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, lock in the U.S. dollar value of
dividends and interest on securities held by the Portfolio, and generally to
protect the U.S. dollar value of securities held by the Portfolio against
exchange rate fluctuation. While forward contracts may limit losses as a result
of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will be at least equal to the amount of
the Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. Investment in securities of foreign issuers involves investment risks
somewhat different from those affecting securities of U.S. issuers. The
Portfolio's investments will be subject to political and economic events that
affect the countries in which it invests. Foreign issuers may be subject to
different accounting, auditing and financial standards and requirements. There
also may be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the United States. Many foreign
securities markets have substantially less trading volume than U.S. national
securities exchanges and, therefore, securities of some foreign issuers are less
liquid and more volatile than securities of comparable U.S. issuers. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the United States. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes, which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Portfolios by domestic companies. Investments in securities
of foreign issuers are generally denominated in foreign currencies and, since a
Portfolio may temporarily hold uninvested reserves in bank deposits in foreign
currencies, the value of a
16
<PAGE>
Portfolio's assets as measured in U.S. dollars may be affected favorably or
unfavorably by changes in currency exchange rates and exchange control
regulations, and a Portfolio may incur costs in connection with conversions
between various currencies.
The Portfolios may also invest in emerging market country securities.
Investing in emerging markets entails the risks associated with foreign
investment described above, however, these risks may be intensified in emerging
markets. Emerging markets can include every nation in the world except the
United States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe. Certain emerging market countries have historically experienced,
and may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, large amounts of external debt, trade difficulties
and unemployment. Further, the economies of developing countries generally are
heavily dependent upon international trade and, accordingly, have been, and may
continue to be, adversely affected by trade barriers, exchange controls and
other protectionist measures imposed or negotiated by the countries in which
they trade. There also are risks associated with the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could adversely affect the economies of such countries or the value of
a Portfolio's investments in those countries.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding in the aggregate 33 1/3% of the market value of the Portfolio's total
assets.
MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money
market instruments, although each Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
Consistent with their investment policies, each Portfolio may make money market
investments pending other investment or settlement for liquidity. In addition,
the Portfolios may invest in money market instruments for temporary defensive
purposes during adverse market conditions. The money market investments
permitted for the Portfolios include: obligations of the U.S. Government and its
agencies and instrumentalities, obligations of foreign sovereignties, commercial
paper, bank obligations (including certificates of deposit), other debt
securities and repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The International Small Cap Portfolio may invest in securities that
are neither listed on a stock exchange nor traded over-the-counter, including
privately placed securities. Such unlisted equity securities may involve a
higher degree of business and financial risk that can result in substantial
losses. As a result of the absence of a public trading market for these
securities, they may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the
Portfolio or less than what may be considered the fair value of such securities.
Further, companies whose securities are not publicly traded may not be subject
to the disclosure and other investor protection requirements which might be
applicable if their securities were publicly traded. If such securities are
required to be registered under the securities laws of one or more jurisdictions
before being resold, the Portfolio may be required to bear the expenses of
registration.
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<PAGE>
As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Also as a general matter, the Portfolio may
not invest more than 10% of its total assets in securities that are restricted
from sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). However, the Portfolio may
invest up to 25% of its total assets in liquid Restricted Securities that can be
offered and sold to qualified institutional buyers under Rule 144A under the
1933 Act ("Rule 144A Securities"). The Board of Directors has adopted guidelines
and delegated to the Adviser, subject to the supervision of the Board of
Directors, the daily function of determining and monitoring the liquidity of
Rule 144A Securities. Rule 144A Securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week
and never exceeds one year. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolio may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 15% of the market value of the Portfolio's net assets are invested in
these agreements and other investments for which market quotations are not
readily available or which are otherwise illiquid.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, each Portfolio
may, for temporary, defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and medium-term debt obligations in which a Portfolio may invest consist of (i)
obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. Each Portfolio will
maintain with the Custodian a segregated account of cash or liquid securities in
an amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time a Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if, among other factors, the
general level of interest rates has changed. It is a current policy of each
Portfolio not to enter into when-issued commitments or delayed delivery
securities exceeding in the aggregate 15% of the market value of the Portfolio's
total assets less liabilities, other than the obligations created by these
commitments.
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<PAGE>
INVESTMENT LIMITATIONS
Each Portfolio is a diversified investment company under the Investment
Company Act of 1940, as amended (the"1940 Act") and is therefore subject to the
following limitations: (i) as to 75% of its total assets, a Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government and its agencies and
instrumentalities; and (ii) a Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each of the
Portfolio's investments. Set forth below as an annual percentage of average
daily net assets are the management fees payable to the Adviser quarterly by
each Portfolio pursuant to the terms of the Investment Advisory Agreement. The
Adviser has voluntarily agreed to a reduction in the fees payable to it and to
reimburse the Portfolios, if necessary, if such fees would cause total annual
operating expenses of the Portfolios to exceed the maximums set forth in the
table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL ANNUAL
OPERATING
EXPENSES AFTER FEE WAIVERS
--------------------------
MANAGEMENT FEES
PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B
- ------------------------------------------ ------------------- ------------ ------------
<S> <C> <C> <C>
Global Equity 0.80% 1.00% 1.25%
International Equity 0.80% 1.00% 1.25%
International Small Cap 0.95% 1.15% N/A
European Equity 0.80% 1.00% 1.25%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD")
is the direct parent of the Adviser and Morgan Stanley. MSDWD is a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses -- securities, asset management and credit
services. At , the Adviser, together with its affiliated
institutional asset management companies (exclusive of Miller Anderson &
Sherrerd, LLP), managed assets of approximately $ billion. See "Management of
the Fund" in the Statement of Additional Information.
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<PAGE>
PORTFOLIO MANAGERS. The following individuals have primary portfolio
management responsibility for the Portfolios noted below:
GLOBAL EQUITY PORTFOLIO -- FRANCES CAMPION. Frances Campion joined the
Adviser in January 1990 as a Global Equity Fund Manager and is now a Principal
of the Adviser and Morgan Stanley. Her responsibilities include day to day
management of the Global Equity product. Prior to joining the Adviser, Ms.
Campion was a U.S. equity analyst with Lombard Odier Limited where she had
responsibility for the management of global portfolios. Ms. Campion has ten
years global investment experience. She is a graduate of University College,
Dublin.
INTERNATIONAL EQUITY PORTFOLIO -- DOMINIC CALDECOTT. Dominic Caldecott is a
Managing Director of the Adviser and Morgan Stanley and is responsible for
research and stock selection in the Pacific Basin and has been primarily
responsible for managing the Portfolio's assets since its inception. He has ten
years professional experience, primarily in Tokyo, Hong Kong, and Seoul. Prior
to joining Morgan Stanley, he worked with GT Management Group in Tokyo and Hong
Kong, specializing in Pacific Basin investment management. He became a Vice
President of Morgan Stanley in 1987, a Principal in 1989, and a Managing
Director in 1991. He is responsible for a number of Pacific Basin investment
programs for clients of Morgan Stanley. Mr. Caldecott is a graduate of New
College, Oxford, England.
INTERNATIONAL SMALL CAP PORTFOLIO -- MARGARET NAYLOR. Margaret Naylor is a
Principal of the Adviser and Morgan Stanley and works with Dominic Caldecott on
Pacific Basin research and stock selection. She joined the Adviser in March 1987
and has been primarily responsible for managing the Portfolio's assets since
December 1992. Prior to joining the Adviser she spent three years at the Trade
Policy Research Centre, an independent research unit. Ms. Naylor is a graduate
of the University of York.
EUROPEAN EQUITY PORTFOLIO -- ROBERT SARGENT. Robert Sargent joined Morgan
Stanley International in May, 1986, and transferred to the Adviser in June,
1987. Mr. Sargent is now a Managing Director of the Adviser and Morgan Stanley
and has been primarily responsible for managing the Portfolio's assets since its
inception. As the fund manager with primary responsibility for continental
European stock selection and portfolio management, Mr. Sargent is closely
involved with the Adviser's fundamental research effort and company visiting
program. He is a graduate of York University, Toronto, Canada.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of each Portfolio.
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<PAGE>
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Multiclass Portfolio pursuant to Rule 12b-1 under the 1940 Act
(each, a "Plan"). Under each Plan, the Distributor is entitled to receive from
each Multiclass Portfolio a distribution fee, which is accrued daily and paid
quarterly, of 0.25% of the Class B shares' average daily net assets on an
annualized basis. Each Plan is designed to compensate the Distributor for its
services in connection with distribution assistance. The Distributor may retain
any portion of the fee that it does not expend in meeting its obligations to the
Fund. The Distributor may compensate financial intermediaries, plan fiduciaries
and administrators for providing distribution-related services, including
account maintenance services, to shareholders (including, where applicable,
underlying beneficial owners) of Class B shares.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees and
printing and mailing costs) as specified in its agreements with the Adviser and
Morgan Stanley.
PURCHASE OF SHARES
Class A shares of each Portfolio and Class B shares of each Multiclass
Portfolio may be purchased at the net asset value per share next determined
after receipt by the Fund of a purchase order. The net asset value per share of
each Portfolio is calculated on days that the New York Stock Exchange ("NYSE")
and Chase (the "Custodian Bank") are open for business as of the close of
trading of the NYSE, normally 4:00 p.m. Eastern Time (the "Pricing Time").
MINIMUM INVESTMENT
The minimum initial investment is $500,000 for Class A shares for each
Portfolio and $100,000 for Class B shares of each Multiclass Portfolio. These
minimums may be waived at the discretion of the Adviser for certain types of
investors, including trust departments, brokers, dealers, agents, financial
planners, financial services firms, investment advisers or various retirement
and deferred compensation plans ("Financial Intermediaries"),
21
<PAGE>
certain accounts managed by the Adviser and its affiliates ("Managed Accounts"),
and certain employees and customers of Morgan Stanley and its affiliates. The
Fund's determination of an investor's eligibility to purchase shares of a given
class will take precedence over the investor's selection of a class.
METHODS OF PURCHASE
Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolios by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or because your
check does not clear, you will be responsible for any loss the Fund or its
agents incur. If you are already a shareholder, the Fund may redeem shares from
your account(s) to reimburse the Fund or its agents for any loss. In addition,
you may be prohibited or restricted from making future investments in the Fund.
FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian Bank are open for business.
Your bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:
1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide
you with a confirmation number.
2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring the funds.
3. Complete and sign the Account Registration Form and mail it to the
address shown thereon.
When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the close of the Federal Funds Wire Control Center
("FFWCC") (normally 6:00 p.m. Eastern Time), the purchase will be executed at
the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the close of the FFWCC, will be executed at the net asset value next
determined. Certain institutional investors and financial institutions have
entered into an arrangement with Morgan Stanley, pursuant to which they may
place orders prior to the Pricing Time, but make payment in Federal Funds for
those shares on the following business day.
BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and which bank is handling the
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<PAGE>
wire, money transferred by bank wire may or may not be converted into Federal
Funds prior to the close of the FFWCC. Prior to conversion to Federal Funds and
receipt by the Fund, an investor's money will not be invested.
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share of each of the
Portfolios determined on the next business day after receipt. An investor's
money will not be invested prior to crediting of Federal Funds.
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. Each business evening, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day and places a net purchase
and/or redemption order(s) by the morning of the next business day. These orders
normally are executed at the net asset value that was computed for each
Portfolio as of the close of the previous business day.
ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 per
Portfolio. The minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases directly from the
Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.
INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES
Class A shares of each Portfolio and Class B shares of each Multiclass
Portfolio may be subject to the involuntary conversion and redemption features
described below. The conversion and redemption features may be waived at the
discretion of the Adviser for shares held in a Managed Account and shares
purchased through a Financial Intermediary. Accounts that were open prior to
January 2, 1996 are not subject to involuntary conversion or redemption. The
Fund reserves the right to modify or terminate the conversion or redemption
features of the shares at any time upon 60 days notice to shareholders.
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account
containing Class A shares, except an account for the International Small Cap
Portfolio, falls below $500,000 (but remains at or above $100,000) because of
shareholder redemption(s), the Fund will notify the shareholder, and if the
account value remains below $500,000 (but remains at or above $100,000) for a
continuous 60-day period, the Class A shares in such account will convert to
Class B shares and will be subject to the distribution fee and other features
applicable to
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<PAGE>
Class B shares. The Fund will not convert Class A shares to Class B shares based
solely upon changes in the market that reduce the net asset value of shares.
Under current tax law, conversion between share classes is not a taxable event
to the shareholder.
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares increases to $500,000 or more, whether due to
shareholder purchases or market activity, the Class B shares will convert to
Class A shares. Class B shares purchased through a Financial Intermediary that
has entered into an arrangement with the Fund for the purchase of such shares
may not be converted. Under current tax law, such conversion is not a taxable
event to the shareholder. Class A shares converted from Class B shares are
subject to the same minimum account size requirements as are applicable to New
Accounts containing Class A shares described above.
INVOLUNTARY REDEMPTION OF SHARES. If the value of an account falls below
$100,000 because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $100,000 for a continuous
60-day period, the shares in such account will be subject to redemption by the
Fund. If the value of an account for the International Small Cap Portfolio falls
below $500,000 because of shareholder redemptions, the Fund will notify the
shareholder, and if the account value remains below $500,000 for a continuous
60-day period, the shares in such account will be subject to redemption by the
Fund. The Fund will not redeem shares based solely upon changes in the market
that reduce the net asset value of shares. If redeemed, redemption proceeds will
be promptly paid to the shareholder.
REDEMPTION OF SHARES
Class A shares of each Portfolio and Class B shares of each Multiclass
Portfolio may be redeemed at any time and without charge at the net asset value
per share next determined after receipt by the Fund of a redemption order as
described under "Methods of Redemption." Redemption proceeds may be more or less
than the purchase price of your shares depending on, among other factors, the
market value of the investment securities held by a Portfolio.
METHODS OF REDEMPTION
Shares may be redeemed directly from the Fund by mail or by telephone.
However, shares purchased through a Financial Intermediary must be redeemed
through a Financial Intermediary. Certain Financial Intermediaries may charge an
additional service or transaction fee.
BY MAIL. Each Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, to Morgan Stanley Institutional Fund, Inc.,
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following:
1. A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which they are registered;
2. Any required signature guarantees; and
24
<PAGE>
3. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit-sharing
plans and other organizations.
Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.
BY TELEPHONE. If you have previously elected the Telephone Redemption
Option on the Account Registration Form, you can redeem Portfolio shares by
calling the Fund and requesting that the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to receive
redemption proceeds, send a written request to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. An investor may be
required to provide personal identification information at the time an account
is opened and prior to effecting each telephone transaction. In addition, all
telephone transaction requests will be recorded and investors may be required to
provide additional telecopied written instructions regarding transaction
requests. Neither the Fund nor the Transfer Agent will be responsible for any
loss, liability, cost or expense for following instructions received by
telephone that either of them reasonably believes to be genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to accept redemption
requests from underlying beneficial owners. These redemptions may be processed
in the same way as purchases made through such Financial Intermediaries, as
described above.
FURTHER REDEMPTION INFORMATION
The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event more than seven days after
receipt of a redemption request in good order. However, payments to investors
redeeming shares which were purchased by check will not be made until payment
for the purchase has been collected, which may take up to eight days after the
date of purchase. The Fund may suspend the right of redemption or postpone the
date upon which redemptions are effected at times when the NYSE is closed, or
under any emergency conditions as determined by the Securities and Exchange
Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.
25
<PAGE>
To protect your account, the Fund and its agents from fraud, signature
guarantees are required to verify the identity of the person who has authorized
certain redemptions. Please contact the Fund or see the Statement of Additional
Information for further information.
ACCOUNT POLICIES AND SERVICES
EXCHANGE FEATURES
You may exchange shares of each Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced or Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase. Therefore, an
exchange will be considered a taxable event for shareholders subject to tax.
Exchange transactions will be processed at the net asset value per share next
determined after receipt of the request. Shares of the portfolios may be
exchanged by mail or telephone. The telephone exchange privilege is automatic
and made available without shareholder election. The exchange privilege may be
modified or terminated by the Fund at any time upon 60-days notice to
shareholders.
BY MAIL. To exchange shares by mail, send a written exchange request to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798. Your written exchange request should include (i) the name, class of
shares and account number of your current Portfolio; (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to exchange
shares; and (iii) the signatures of all registered account holders.
BY TELEPHONE. To exchange shares by telephone, call the Fund at the phone
number provided on the cover of this Prospectus. A Fund representative will
request (i) the name, class of shares and account number of your current
Portfolio, and (ii) the name(s) and class(es) of shares of the portfolio(s) into
which you intend to exchange shares. For additional information regarding
responsibility for the authenticity of telephoned instructions, see "Redemption
of Shares" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by sending a written request to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. It may not be possible to
transfer the registration of certain shares purchased through a Financial
Intermediary. As with redemptions, the written request must be received in "good
order" before any transfer can be made. Transferring the registration of shares
may affect the eligibility of your account for a given class of shares and may
result in involuntary conversion or redemption of your shares.
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<PAGE>
OTHER ACCOUNT INFORMATION
The Fund does not issue share certificates for the Portfolios. All shares
purchased are confirmed to you and credited to your account on the Fund's books
maintained by the Adviser or its agents. You will have the same rights and
ownership with respect to such shares as if certificates had been issued.
EXCESSIVE TRADING
Frequent trades in your account(s) can disrupt management of a Portfolio and
raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of each Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a portfolio of the Fund within any 120-day
period. For example, the following series of transactions would amount to
excessive trading: exchanging shares of Portfolio A for shares of Portfolio B,
then exchanging shares of Portfolio B for shares of Portfolio C and then
exchanging shares of Portfolio C for shares of Portfolio A within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios, and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.
INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS
Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the Portfolios used for investment by these accounts may
experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the Portfolios.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such class, less any liabilities attributable
to such class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolios. Net asset value per share is determined as of the close of the NYSE
(normally 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business. Price information on listed securities is taken from the exchange
where the security is primarily traded. Securities listed on a U.S. securities
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date and for which market quotations are
not readily
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<PAGE>
available are valued at a price within a range not exceeding the current asked
price nor less than the current bid price. The current bid and asked prices are
determined based on the average of the bid and asked prices quoted on such
valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such 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. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine the prices in
accordance with the above-stated procedures are determined in good faith at fair
value using methods determined by the Board of Directors. For purposes of
calculating net asset value per share, all assets and liabilities initially
expressed in foreign currencies will be translated into U.S. dollars at the mean
of the bid and asked price for such currencies against the U.S. dollar last
quoted by a major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expenses charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise the "total return" for each class
of a Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE.
Each of the Portfolios may advertise "total return" which shows what an
investment in a class of a Portfolio would have earned over a specified period
of time (such as one, five or ten years) assuming that all distributions and
dividends by the Portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividends and distributions or on
redemption. The Fund may also include comparative performance information in
advertising or marketing the Portfolios' shares, including data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
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<PAGE>
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
when, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
elects to receive income dividends and capital gains distributions in cash.
Each Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual dividends. Net realized capital gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually.
Undistributed net investment income is included in a Portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolios or their shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends paid by a Portfolio will generally qualify for the
dividends-received deduction for corporate shareholders only to the extent of
the aggregate qualifying dividend income received by the Portfolio from U.S.
corporations. Each Portfolio will report annually to its shareholders the amount
of dividend income qualifying for such treatment.
Distributions of net capital gain are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio
29
<PAGE>
(such designation being dependent upon the holding period of the Portfolio in
the underlying asset generating the net capital gain), regardless of how long
shareholders have held their shares. Each Portfolio will send reports annually
to its shareholders of the federal income tax status of all distributions made
during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss, including any available capital loss carryforwards) prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (i) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) who has not certified to the Fund that such
shareholder is not subject to backup withholding. This backup withholding is not
an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceed or are
less than the shareholder's tax adjusted basis in the sold, exchanged or
redeemed shares. If capital gains distributions have been made with respect to
shares that are sold at a loss after being held for six months or less, then the
loss is treated as a long-term capital loss to the extent of the capital gains
distributions.
Conversions of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, each
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although each
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that each Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
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<PAGE>
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolios will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with their
respective objectives and policies. As portfolio turnover increases, the
Portfolios may expect to pay correspondingly increased brokerage and trading
costs. In addition to transaction costs, higher portfolio turnover may result in
the realization of capital gains. As discussed under "Taxes," to the extent net
short-term capital gains are realized, any distributions resulting from such
gains are considered ordinary income for federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 40 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares, except for the International Small Cap and Municipal Money
Market Portfolios, which offer only Class A shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
31
<PAGE>
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as
defined in the 1940 Act) such Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports. The
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs sub-custodians approved by the Board of Directors of the Fund
in accordance with regulations of the Securities and Exchange Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
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MORGAN STANLEY INSTITUTIONAL FUND, INC.
GLOBAL EQUITY, INTERNATIONAL EQUITY, INTERNATIONAL SMALL CAP AND
EUROPEAN EQUITY PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, Inc., please contact your Morgan Stanley
representative or call us toll free 1-800-548-7786. Please print all
items except signature, and mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor.
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY
NUMBER ("TIN") NUMBER ("SSN")
OR
2. TIN
SSN
OR
TIN
SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct TIN(s) or SSN(s). Accounts that have a missing or incorrect
TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on
dividends, distributions and other payments. If you have not provided us
with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of
persons subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
You may be notified that you are subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code because you have
underreported interest or dividends or you were required to, but failed
to, file a return which would have included a reportable interest or
dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SECTION Portfolio(s): / / Class A Shares $
(Class A shares minimum $500,000 Global Equity Portfolio / / Class A Shares $ / / Class B Shares $
for each Portfolio and Class B International Equity Portfolio / / Class A Shares $ / / Class B Shares $
shares minimum $100,000 for the International Small Cap
Global Equity, International Portfolio
Equity, and European Equity European Equity Portfolio
Portfolios). Please indicate
Portfolio, class and amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio
and manner of payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the account
statement sent to my/our registered
address, I/we hereby authorize the Address
Fund to mail duplicate statements
to the name and address provided at City State Zip Code
right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative No. Branch
No.
</TABLE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE
SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE
APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL SECURITY
ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF
I/ WE DO NOT PROVIDE EITHER NUMBER TO CHASE GLOBAL FUNDS
SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS
APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR CORRECT SSN(S)
OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP
WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE
PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses..................................... 2
Financial Highlights.............................. 5
Prospectus Summary................................ 10
Investment Objectives and Policies................ 14
Additional Investment Information................. 15
Investment Limitations............................ 19
Management of the Fund............................ 19
Purchase of Shares................................ 21
Redemption of Shares.............................. 24
Account Policies and Services..................... 26
Valuation of Shares............................... 27
Performance Information........................... 28
Dividends and Capital Gains Distributions......... 29
Taxes............................................. 29
Portfolio Transactions............................ 31
General Information............................... 31
Account Registration Form
</TABLE>
GLOBAL EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
INTERNATIONAL SMALL CAP PORTFOLIO
EUROPEAN EQUITY PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
- --------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
EMERGING MARKETS DEBT PORTFOLIO
LATIN AMERICAN PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
thirty-two portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Emerging Markets, Emerging Markets Debt and Latin American Portfolios (each,
a "Portfolio" and collectively, the "Portfolios"). The Emerging Markets
Portfolio is currently closed to new investors with the exception of certain
Morgan Stanley & Co. Incorporated ("Morgan Stanley") customers, employees of
Morgan Stanley, certain tax-qualified retirement plans and other investment
companies advised by Morgan Stanley Asset Management Inc. and its affiliates.
The Class A and Class B shares currently offered by the Portfolios have
different minimum investment requirements and fund expenses. Shares of the
Portfolios are offered with no sales charge, exchange fee.
THE EMERGING MARKETS PORTFOLIO MAY INVEST IN EQUITY SECURITIES OF RUSSIAN
COMPANIES. RUSSIA'S SYSTEM OF SHARE REGISTRATION AND CUSTODY INVOLVES CERTAIN
RISKS OF LOSS THAT ARE NOT NORMALLY ASSOCIATED WITH INVESTMENTS IN OTHER
SECURITIES MARKETS. SEE "ADDITIONAL INVESTMENT INFORMATION -- RUSSIAN SECURITIES
TRANSACTIONS."
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator") and with Morgan Stanley as Distributor, the Fund makes
available to institutional and high net worth individual investors a series of
portfolios which benefit from the investment expertise and commitment to
excellence associated with Morgan Stanley and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under the "Prospectus Summary" below. The
Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL
EQUITY -- Active Country Allocation, Asian Equity, Asian Real Estate, Emerging
Markets, European Equity, European Real Estate, Global Equity, Gold,
International Equity, International Magnum, International Small Cap, Japanese
Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity,
Emerging Growth, Equity Growth, Small Cap Value Equity, Technology, U.S. Equity
Plus, U.S. Real Estate and Value Equity Portfolios; (iii) BALANCED -- Balanced
Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global
Fixed Income, High Yield and Municipal Bond Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information about
the Fund is contained in a "Statement of Additional Information," dated May 1,
1998, which is incorporated herein by reference. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the Fund
are available upon request and without charge by writing or calling the Fund at
the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolios indicated below will incur:
<TABLE>
<CAPTION>
EMERGING
EMERGING MARKETS LATIN
MARKETS DEBT AMERICAN
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A.......................................................... None None None
Class B.......................................................... None None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A.......................................................... None None None
Class B.......................................................... None None None
Deferred Sales Load
Class A.......................................................... None None None
Class B.......................................................... None None None
Redemption Fees
Class A.......................................................... None None None
Class B.......................................................... None None None
Exchange Fees
Class A.......................................................... None None None
Class B.......................................................... None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- -------------------------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C>
Management Fee (Net of Fee Waivers)*
Class A.......................................................... % % %
Class B.......................................................... % % %
12b-1 Fees
Class A.......................................................... None None None
Class B.......................................................... 0.25% 0.25% 0.25%
Other Expenses
Class A.......................................................... % % %
Class B.......................................................... % % %
----------- ----------- -----------
Total Operating Expenses (Net of Fee Waivers)*
Class A.......................................................... % % %
Class B.......................................................... % % %
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------------
*The Adviser has agreed to waive its management fees and/or reimburse the
Portfolios, if necessary, if such fees would cause total annual operating
expenses, as a percentage of average daily net assets, to exceed 1.75% for the
Class A shares and 2.00% for the Class B shares of the Emerging Markets and
Emerging Markets Debt Portfolios or to exceed 1.70% for the Class A shares and
1.95% for the Class B shares of the Latin American Portfolio. The management
fees are 1.25% for the Emerging Markets Portfolio and 1.00% for the Emerging
Markets Debt Portfolio. Absent the fee waiver and/or expense reimbursement, the
Latin American Portfolio's management fee would be 1.10% and total operating
expenses would be 2.18% of the average daily net assets of the Class A shares
and 2.43% of the average daily net assets of the Class B shares. As a result of
these reductions, the Management Fee for the Latin American Portfolio stated
above is lower than the contractual fee stated under "Management of the Fund."
The Adviser reserves the right to terminate any of its fee waivers and/or
expense reimbursements at any time in its sole discretion. For further
information on Fund expenses, see "Management of the Fund."
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees for each Portfolio are based on actual
2
<PAGE>
figures for the fiscal year ended December 31, 1997. Due to the continuous
nature of Rule 12b-1 fees, long-term Class B shareholders may pay more than the
equivalent of the maximum front-end sales charges otherwise permitted by the
National Association of Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (i) a 5% annual rate of return and (ii) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Emerging Markets Portfolio
Class A.......................................................... $ $ $ $
Class B..........................................................
Emerging Markets Debt Portfolio
Class A..........................................................
Class B..........................................................
Latin American Portfolio
Class A..........................................................
Class B..........................................................
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A and Class
B shares for the Emerging Markets, Emerging Markets Debt and Latin American
Portfolios for each of the periods presented. The audited financial highlights
for each of the Portfolio's shares for each of the periods presented are part of
the Fund's financial statements which appear in the Fund's December 31, 1997
Annual Report to Shareholders and which are incorporated by reference into the
Fund's Statement of Additional Information. Each Portfolio's financial
highlights for each of the periods presented have been audited by Price
Waterhouse LLP, whose unqualified report thereon is also incorporated by
reference into the Statement of Additional Information. Additional performance
information is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. After October 31, 1992, the
Fund changed its fiscal year end to December 31. The following information
should be read in conjunction with the financial statements and notes thereto.
4
<PAGE>
EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
CLASS B
CLASS A -------------------
--------------------------------------------------------------------------------- PERIOD
PERIOD FROM
TWO FROM JANUARY
YEAR YEAR YEAR YEAR MONTHS SEPTEMBER YEAR 2,
ENDED YEAR ENDED ENDED ENDED ENDED ENDED 25, ENDED 1996***
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER 1992* TO DECEMBER TO
31, 31, 31, 31, 31, 31, OCTOBER 31, DECEMBER
1997 1996 1995 1994 1993 1992 31, 1992 1997 31, 1996
--------- ----------- --------- --------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............. $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11 $ 10.00 $ 13.25
- -
- -
----------- --------- --------- --------- -------- -------- --------
----------- --------- --------- --------- -------- -------- --------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income (Loss)
(1).............. 0.09 0.08 (0.04) (0.01) -- -- 0.04
Net Realized and
Unrealized Gain
(Loss) on
Investments...... 1.51 (2.05) (1.69) 8.79 0.11 0.11 1.42
- -
----------- --------- --------- --------- -------- -------- --------
Total from
Investment
Operations..... 1.60 (1.97) (1.73) 8.78 0.11 0.11 1.46
- -
----------- --------- --------- --------- -------- -------- --------
DISTRIBUTIONS
Net Investment
Income........... (0.08) (0.06) -- -- -- -- (0.05)
Net Realized
Gain............. -- (1.13) (0.97) -- -- -- --
- -
----------- --------- --------- --------- -------- -------- --------
Total
Distributions... (0.08) (1.19) (0.97) -- -- -- (0.05)
- -
----------- --------- --------- --------- -------- -------- --------
NET ASSET VALUE, END
OF PERIOD.......... $ 14.66 $ 13.14 $ 16.30 $ 19.00 $ 10.22 $ 10.11 $ 14.66
- -
----------- --------- --------- --------- -------- -------- --------
TOTAL RETURN........ 12.19% (12.77)% (9.63)% 85.91% 1.09% 1.10% 11.04%
- -
- -
----------- --------- --------- --------- -------- -------- --------
----------- --------- --------- --------- -------- -------- --------
RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period
(Thousands)...... $1,304,006 $876,591 $929,638 $735,352 $74,219 $28,806 $14,213
Ratio of Expenses
to Average Net
Assets (1)....... 1.74% 1.72% 1.75% 1.75% 1.75%** 1.75%** 1.99%**
Ratio of Net
Investment Income
(Loss) to Average
Net Assets (1)... 0.69% 0.60% (0.26)% (0.06)% (0.33)%** (0.53)%** 0.33%**
Portfolio Turnover
Rate............. 55% 54% 32% 52% 2% 0% 55%
Average Commission
Rate#............ $0.0006 N/A N/A N/A N/A N/A $0.0006
</TABLE>
- --------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of
voluntary
expense
limitation
during the
period:
Per share
benefit to net
investment
income........ N/A N/A N/A $0.01 $0.00 $0.02 N/A
Ratios before
expense
limitation:
Expenses to
Average Net
Assets........ N/A N/A N/A 1.79 % 2.48 %** 4.82 %** N/A
Net Investment
Loss to
Average Net
Assets........ N/A N/A N/A (0.10 )% (1.06 )%** (3.60 )%** N/A
</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. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.42% of the trade amount.
5
<PAGE>
EMERGING MARKETS DEBT PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------- -------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED YEAR ENDED YEAR ENDED FEBRUARY 1, YEAR ENDED JANUARY 2,
DECEMBER DECEMBER DECEMBER 1994* TO DECEMBER 1996*** TO
31, 31, 31, DECEMBER 31, DECEMBER
1997 1996 1995 31, 1994 1997 31, 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 8.59 $ 8.59 $ 10.00 $ 8.68
- -
- -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income....... 1.54 1.36 0.50 1.01
Net Realized and Unrealized
Gain (Loss) on
Investments................ 2.79 0.91 (1.91) 3.20
- -
----------- ----------- ----------- -----------
Total from Investment
Operations............... 4.33 2.27 (1.41) 4.21
- -
----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income....... (1.17) (1.86) -- (1.15)
In Excess of Net Investment
Income..................... (0.01) -- -- (0.01)
Net Realized Gain........... (4.20) (0.41) -- (4.20)
- -
----------- ----------- ----------- -----------
Total Distributions....... (5.38) (2.27) -- (5.36)
- -
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD....................... $ 7.54 $ 8.59 $ 8.59 $ 7.53
- -
- -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
TOTAL RETURN.................. 50.52% 28.23% (14.10)% 48.52%
- -
- -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(Thousands)................ $152,142 $181,878 $144,949 $4,253
Ratio of Expenses to Average
Net Assets................. 2.70% 1.75% 1.49%** 2.81%**
Ratio of Expenses to Average
Net Assets (Excluding
Dividend and Interest
Expense)................... 1.42% N/A N/A 1.65%**
Ratio of Net Investment
Income to Average Net
Assets..................... 11.66% 14.70% 9.97%** 11.09%**
Portfolio Turnover Rate..... 560% 406% 273% 560%
</TABLE>
- --------------
* Commencement of operations.
** Annualized
*** The Portfolio began offering Class B shares on January 2, 1996.
6
<PAGE>
LATIN AMERICAN PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
--------------------------------------- CLASS B
PERIOD FROM -------------------------
JANUARY 18, PERIOD FROM
YEAR ENDED YEAR ENDED 1995* TO YEAR ENDED JANUARY 2,
DECEMBER DECEMBER DECEMBER DECEMBER 1996*** TO
31, 31, 31, 31, DECEMBER
1997 1996 1995 1997 31, 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 9.06 $ 10.00 $ 9.44
- -
----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (1)... 0.14 0.05 0.09
Net Realized and Unrealized
Gain (Loss) on
Investments................ 4.27 (0.92) 3.90
- -
----------- ----------- -----------
Total from Investment
Operations............... 4.41 (0.87) 3.99
- -
----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income....... (0.13) (0.04) (0.10)
Net Realized Gain........... (2.02) -- (2.02)
Return of Capital........... -- (0.03) --
- -
----------- ----------- -----------
Total Distributions....... (2.15) (0.07) (2.12)
- -
----------- ----------- -----------
Net Asset Value, End of
Period....................... $ 11.32 $ 9.06 $ 11.31
- -
- -
----------- ----------- -----------
----------- ----------- -----------
Total Return.................. 48.77% (8.68)% 42.44%
- -
- -
----------- ----------- -----------
----------- ----------- -----------
Ratios and Supplemental Data:
Net Assets, End of Period
(Thousands)................ $ 30,409 $ 15,376 $1,333
Ratio of Expenses to Average
Net Assets (1)............. 1.70% 1.70%** 1.95%**
Ratio of Net Investment
Income to Average Net
Assets (1)................. 1.21% 0.62%** 0.89%**
Portfolio Turnover Rate..... 192% 137% 192%
Average Commission Rate#.... $0.0004 N/A $0.0004
</TABLE>
- --------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense
limitation during the period:
Per share benefit to net
investment income.......... $0.05 $0.09 $0.05
Ratios before expense
limitation:
Expenses to Average Net
Assets..................... 2.18 % 3.13 %** 2.43 %**
Net Investment Loss to
Average Net Assets......... 0.75 % (0.48 )%** 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. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.30% of the trade amount.
7
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of thirty-two portfolios, offering institutional investors
and high net worth individual investors a broad range of investment choices
coupled with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and Class B shares, except for
the International Small Cap and Municipal Money Market Portfolios which offer
only Class A shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of each
Portfolio described in this Prospectus is as follows:
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and telephone number noted on the
cover page of this Prospectus. The investment objectives of these other
portfolios are listed below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of companies in
the Asian real estate industry.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and
long-term capital appreciation by investing primarily in equity securities
of companies in the European real estate industry.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
8
<PAGE>
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in equity securities of small- to medium-sized companies which
the Adviser believes to be undervalued.
-The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Adviser, are expected to benefit from their involvement in technology and
technology-related industries.
-The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers included in the S&P 500
Index ("S&P 500").
-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
substantial investment in real estate investment trusts.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
BALANCED:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of equity securities which the Adviser believes
to be undervalued and fixed income securities.
9
<PAGE>
FIXED INCOME:
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-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 of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing in municipal
obligations, the interest on which is exempt from federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund and
each of its portfolios. As of , 1998, Morgan Stanley Asset Management
Inc. and its affiliated institutional asset management companies (exclusive of
Miller Anderson & Sherrerd, LLP) managed assets of approximately $ billion. See
"Management of the Fund -- Investment Adviser" and "Management of the Fund --
Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. The minimum
initial investment, generally, is $500,000 for Class A shares of each Portfolio
and $100,000 for Class B shares of each Portfolio. The minimum initial
investment amount is reduced for certain categories of investors. For additional
information on how to purchase shares and minimum initial investments, see
"Purchase of Shares."
10
<PAGE>
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of the applicable class
next determined after receipt of the redemption request. The redemption price
may be more or less than the purchase price. Certain redemptions that cause the
value of an account to remain for a continuous 60-day period below the minimum
investment amount for Class A shares or for Class B shares may result in
involuntary redemption or conversion. For additional information on how to
redeem shares and involuntary redemption or conversion, see "Purchase of Shares"
and "Redemption of
Shares."
RISK FACTORS
Investing in each of the Portfolios entails certain risks and considerations
of which an investor should be aware. The Portfolios' share prices and
investment returns fluctuate and, when redeemed, an investment in the Portfolios
may be worth more or less than its original cost. The investment policies of the
Portfolios may entail the following risk factors:
-EQUITY SECURITIES. The Emerging Markets and Latin American Portfolios may
invest in equity securities. Prices of equity securities fluctuate in
response to many factors, including the financial health of the issuers and
changes in economic and market conditions.
-FIXED INCOME SECURITIES. Each Portfolio will be subject to credit risk and
market risk associated with investment in fixed income securities. Credit
risk is the possibility that an issuer may be unable to meet scheduled
principal and interest payments. Market risk is the possibility that a
change in interest rates or the market's perception of the issuer's
prospects may adversely affect the value of a fixed income security.
-HIGH YIELD SECURITIES. Each Portfolio may invest in lower rated and unrated
fixed income securities (i.e., high yield or high risk securities), which
are often issued by smaller or less creditworthy companies. High yield
securities generally are subject to greater market risk and credit risk
than other fixed income securities.
-FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. The risks of foreign investment include fluctuations in foreign
currency values, political events affecting the country of issuance and
potentially greater market volatility and lower liquidity.
-EMERGING MARKET COUNTRY SECURITIES. Each Portfolio may invest in emerging
market country securities which entail risks typically associated with
investment in more established foreign markets. However, these risks may be
intensified due to higher volatility and less liquidity of emerging
markets, possible political risks associated with the country of issuance
and generally weaker financial condition of issuers in these markets.
-DERIVATIVES. Each Portfolio may invest in instruments that derive their
values from those of specified securities, indices, currencies or other
points of reference. These derivatives, including those used to manage
risk, are themselves subject to the risks of the different markets in which
they are traded and, therefore, may or may not serve their intended
purposes.
For additional information about risk factors, see also "Investment Objectives
and Policies" and "Additional Investment Information."
11
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies each Portfolio will employ in its efforts to achieve its objective.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. In addition to the investments and strategies described below, the
Portfolios may invest in certain securities and obligations as set forth in
"Additional Investment Information" and as described under "Investment
Objectives and Policies" in the Statement of Additional Information. The
investment policies described below are not fundamental policies unless
otherwise noted and may be changed without shareholder approval.
THE EMERGING MARKETS PORTFOLIO
The investment objective of the Portfolio is to provide long-term capital
appreciation by investing primarily in equity securities of emerging country
issuers. With respect to the Portfolio, equity securities include common and
preferred stocks, convertible securities and rights and warrants to purchase
common stocks. The Portfolio may also invest indirectly in equity securities of
emerging country issuers through depositary receipts. Under normal
circumstances, at least 65% of the Portfolio's total assets will be invested in
emerging country equity securities. An emerging country security is one issued
by a company that, in the opinion of the Adviser, has one or more of the
following characteristics: (i) its principal securities trading market is in an
emerging country, (ii) alone, or on a consolidated basis, the company derives
50% or more of its annual revenue from either goods produced, sales made or
services performed in emerging countries; or (iii) the company is organized
under the laws of, and has a principal office in, an emerging country. The
Adviser will base determinations as to eligibility on publicly available
information and inquiries made to the companies. Currently, investing in many
emerging countries is not feasible or may involve unacceptable political risks.
The Portfolio will focus its investments on those emerging market countries in
which it believes the economies are developing strongly and in which the markets
are becoming more sophisticated. The Portfolio intends to invest primarily in
some or all of the following countries:
<TABLE>
<S> <C> <C> <C>
Argentina Ghana Malaysia Singapore
Botswana Greece Mexico South Africa
Brazil Hong Kong Morocco South Korea
Bulgaria Hungary Nigeria Sri Lanka
Chile India Pakistan Taiwan
China Indonesia Peru Thailand
(mainland and Hong Israel Philippines Turkey
Kong) Jamaica Poland Venezuela
Colombia Jordan Portugal Zimbabwe
Egypt Kenya Russia
</TABLE>
As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging countries in which it invests. [The Portfolio
does not intend to invest in any security in a country where the currency is not
freely convertible to U.S. dollars, unless the Portfolio has obtained the
necessary governmental licensing to convert such currency or other appropriately
licensed or sanctioned contractual guarantees to
12
<PAGE>
protect such investment against loss of that currency's external value, or the
Portfolio has a reasonable expectation at the time the investment is made that
such governmental licensing or other appropriately licensed or sanctioned
guarantees would be obtained or that the currency in which the security is
quoted would be freely convertible at the time of any proposed sale of the
security by the Portfolio.]
To the extent that the Portfolio's assets are not invested in emerging
country equity securities, the remainder of the assets may be invested in (i)
debt securities denominated in the currency of an emerging country or issued or
guaranteed by an emerging country company or the government of an emerging
country; (ii) equity or debt securities of corporate or governmental issuers
located in industrialized countries; and (iii) short- and medium-term debt
securities. The Portfolio's assets may be invested in debt securities when the
Portfolio believes that, based upon factors such as relative interest rate
levels and foreign exchange rates, such debt securities offer opportunities for
long-term capital appreciation. It is likely that many of the debt securities in
which the Portfolio will invest will be unrated and, whether or not rated, such
securities may have speculative characteristics. When deemed appropriate by the
Adviser, the Portfolio may invest up to 20% of its total assets (measured at the
time of the investment) in high yield securities. [As of the date of this
prospectus, less than 5% of the Portfolio's total assets were invested in junk
bonds].
THE EMERGING MARKETS DEBT PORTFOLIO
The investment objective of the Portfolio is to seek high total return. In
seeking to achieve this objective, the Portfolio will seek to invest at least
65% of its total assets in debt securities of government and government-related
issuers located in emerging countries (including participations in loans between
governments and financial institutions), and of entities organized to
restructure outstanding debt of such issuers. In addition, the Portfolio may
invest up to 35% of its total assets in debt securities of corporate issuers
located in or organized under the laws of emerging countries.
The Adviser intends to invest the Portfolio's assets in emerging country
debt securities that provide a high level of current income, while at the same
time holding the potential for capital appreciation if the perceived
creditworthiness of the issuer improves due to improving economic, financial,
political, social or other conditions in the country in which the issuer is
located. Emerging country debt securities that the Portfolio may invest in
include bonds, notes, bills, debentures, convertible securities, warrants, bank
debt obligations, short-term paper, mortgage and other asset-backed securities,
loan participations, loan assignments and interests issued by entities organized
and operated for the purpose of restructuring the investment characteristics of
instruments
13
<PAGE>
issued by emerging country issuers. Currently, investing in many emerging
country securities is not feasible or may involve unacceptable political risks.
Initially, the Portfolio expects that its investments in emerging country debt
securities will be made primarily in some or all of the following emerging
countries:
<TABLE>
<S> <C> <C>
Algeria Hungary Peru
Argentina India Philippine
Brazil Indonesia Poland
Bulgaria Ivory Coast Portugal
Chile Jamaica Russia
China Jordan Slovakia
Colombia Malaysia South Africa
Costa Rica Mexico Thailand
Czech Republic Morocco Trinidad & Tobago
Democratic Republic of
Congo Nicaragua Tunisia
Dominican Republic Nigeria Turkey
Ecuador Pakistan Uruguay
Egypt Panama Venezuela
Greece Paraguay
</TABLE>
As opportunities to invest in debt securities in other countries develop, the
Portfolio expects to expand and further diversify the emerging countries in
which it invests. While the Portfolio generally is not restricted in the portion
of its assets which may be invested in a single country or region, it is
anticipated that, under normal conditions, the Portfolio's assets will be
invested in issuers in at least three countries.
U.S. dollar-denominated emerging country debt securities held by the
Portfolio will generally be listed but not traded on a securities exchange, and
non-U.S. dollar-denominated securities held by the Portfolio may or may not be
listed or traded on a securities exchange. The Portfolio is not restricted in
the portion of its assets which may be invested in securities denominated in a
particular currency and a substantial portion of the Portfolio's assets may be
invested in non-U.S. dollar-denominated securities. The portion of the
Portfolio's assets invested in securities denominated in currencies other than
the U.S. dollar will vary depending on market conditions. The Portfolio will be
subject to no restrictions on the maturities of the emerging country debt
securities it holds; those maturities may range from overnight to 30 years. The
Portfolio may also invest up to 5% of its total assets in mortgage-backed
securities and in other asset-backed securities issued by non-governmental
entities, such as banks and other financial institutions.
In selecting particular emerging country debt securities for investment by
the Portfolio, the Adviser will apply a market risk analysis contemplating
factors such as liquidity, volatility, tax consequences, interest rate
sensitivity, counterparty risks and technical market considerations. Emerging
country debt securities in which the Portfolio may invest will not be required
to meet a minimum rating standard and may not be rated for creditworthiness by
any internationally recognized credit rating organization. The Portfolio's
investments are expected to be rated in the lower and lowest rating categories
of internationally recognized credit rating organizations or, if unrated, of
comparable quality. These types of debt obligations are predominantly
speculative with respect to the capacity to pay interest and repay principal in
accordance with their terms and generally
14
<PAGE>
involve a greater risk of default and of volatility in price than securities in
higher rating categories. Ratings of non-U.S. debt instruments, to the extent
undertaken, are related to evaluations of the country in which the issuer of the
instrument is located and generally take into account the currency in which a
non-U.S. debt instrument is denominated. Instruments issued by a foreign
government in other than the local currency, typically have a lower rating than
local currency instruments due to the risk that the government will be unable to
obtain the required foreign currency to service its foreign currency-denominated
debt. In general, the ratings of debt securities or obligations issued by a
non-U.S. public or private entity will not be higher than the rating of the
currency or the foreign currency debt of the central government of the country
in which the issuer is located, regardless of the intrinsic creditworthiness of
the issuer.
The Portfolio's investments in government, government-related and
restructured debt securities will consist of (i) debt securities or obligations
issued or guaranteed by governments, governmental agencies or instrumentalities
and political subdivisions located in emerging countries including
participations in loans between governments and financial institutions; (ii)
debt securities or obligations issued by government owned, controlled or
sponsored entities located in emerging countries; (iii) fixed income securities
known as "Brady Bonds"; and (iv) issuers of structured securities. Certain
issuers of such structured securities may be deemed to be "investment companies"
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
As a result, the Portfolio's investment in such securities may be limited by
certain investment restrictions contained in the 1940 Act. The Portfolio's
investments in government, government-related and restructured debt instruments
are subject to special risks, including the inability or unwillingness to repay
principal and interest, requests to reschedule or restructure outstanding debt
and requests to extend additional loan amounts. The Portfolio may have limited
recourse in the event of default on such debt instruments. The Portfolio's
investments in debt securities of corporate issuers in emerging countries may
include debt securities or obligations issued (i) by banks located in emerging
countries or by branches of emerging country banks located outside the country;
or (ii) by companies organized under the laws of an emerging country.
Determinations as to eligibility will be made by the Adviser based on publicly
available information and inquiries made to the issuer.
15
<PAGE>
The table below provides a summary of ratings assigned by S&P to debt
obligations in the Emerging Markets Debt Portfolio. These figures are
dollar-weighted averages of month-end portfolio holdings during the fiscal year
ended December 31, 1997, presented as a percentage of total investments. These
percentages are historical and are not necessarily indicative of the quality of
current or future portfolio holdings, which may vary.
<TABLE>
<CAPTION>
S&P
- ----------------
AVERAGE
PERCENT
OF
PORTFOLIO
RATING HOLDINGS
- ------- -------
<S> <C>
AAA %
AA %
A %
BBB %
BB %
B %
CCC %
CC %
Unrated %
</TABLE>
THE LATIN AMERICAN PORTFOLIO
The investment objective of the Latin American Portfolio is long-term
capital appreciation. The Portfolio seeks to achieve this objective by investing
primarily in equity securities (i) of companies organized in or for which the
principal securities trading market is in Latin America; (ii) denominated in a
Latin American currency and issued by companies to finance operations in Latin
America; or (iii) of companies that alone or on a consolidated basis derive 50%
or more of their annual revenues from either goods produced, sales made or
services performed in Latin America (collectively, "Latin American issuers") and
by investing, from time to time, in debt securities issued or guaranteed by a
Latin American government or governmental entity. Under normal circumstances,
substantially all, but not less than 80%, of the Portfolio's total assets are
invested in equity securities of Latin American issuers and in debt securities
issued or guaranteed by a Latin American government or governmental entity. For
purposes of this Prospectus, unless otherwise indicated, Latin America consists
of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, the Dominican
Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama,
Paraguay, Peru, Uruguay and Venezuela.
The Portfolio focuses its investments in listed equity securities in
Argentina, Brazil, Chile and Mexico, the most developed capital markets in Latin
America. The Portfolio expects, under normal circumstances, to have at least 55%
of its total assets invested in listed equity securities of issuers in these
four countries. The Portfolio is not limited in the extent to which it may
invest in any Latin American country and intends to invest opportunistically as
markets develop. [The portion of the Portfolio's holdings in any Latin American
country will vary from time to time, although the portion of the Portfolio's
assets invested in Chile may tend to vary less than the portions invested in
other Latin American countries because, with limited exceptions, capital
invested in Chile currently cannot be repatriated for one year.] Equity
securities in which the Portfolio may invest include those that are neither
listed on a stock exchange nor traded over-the-counter. As a result of the
absence of a public trading market for these securities, they may be less liquid
than publicly traded securities.
16
<PAGE>
The governments of some Latin American countries have been engaged in
programs of selling part or all of their stakes in government owned or
controlled enterprises ("privatizations"). The Adviser believes that
privatizations may offer investors opportunities for significant capital
appreciation and intends to invest assets of the Portfolio in privatizations in
appropriate circumstances. In certain Latin American countries, the ability of
foreign entities, such as the Portfolio, to participate in privatizations may be
limited by local law, or the terms on which the Portfolio may be permitted to
participate may be less advantageous than those for local investors. There can
be no assurance that Latin American governments will continue to sell companies
currently owned or controlled by them or that any privatization programs in
which the Portfolio participates will be successful.
The Portfolio also may participate in debt to equity conversion programs
adopted by several Latin American countries, pursuant to which investors may use
government issued or guaranteed debt securities, directly or indirectly, to make
investments in local companies. The terms of the various programs vary from
country to country although each program includes significant restrictions on
the application of the proceeds received in the conversion and on the remittance
of profits on the investment and of the invested capital. The Adviser will
evaluate opportunities to enter into debt to equity conversion transactions as
they arise.
To the extent that the Portfolio's assets are not invested in equity
securities of Latin American issuers or in government issued or guaranteed debt
securities, the remainder of its assets may be invested in (i) debt securities
of other Latin American issuers; (ii) equity or debt securities of corporate or
governmental issuers located in countries outside Latin America; and (iii)
short-term and medium-term debt securities. The Portfolio's assets may be
invested in debt securities when the Portfolio believes that, based upon factors
such as relative interest rate levels and foreign exchange rates, debt
securities offer opportunities for long-term capital appreciation. It is likely
that many of the debt securities in which the Portfolio will invest will be
unrated. The Portfolio may invest up to 20% of its total assets in lower-quality
debt securities that are determined by the Adviser to be comparable to
securities rated below investment grade by S&P or Moody's ("junk bonds").
Investment in such debt securities involves a high degree of risk and is
generally considered to be speculative in nature.
The Portfolio will not invest more than 25% of its total assets in one
industry, except to the extent and only for such period of time as the Board of
Directors determines that it is appropriate and in the best interests of the
Portfolio and its shareholders to invest more than 25% of the Portfolio's total
assets in companies involved in each of the telecommunications or financial
services industries. Concentration in these two industries may be beneficial to
the Portfolio because the securities markets of Latin American countries are
emerging markets characterized by a relatively small number of issuers and it is
possible that one or more markets may be dominated by issues of companies in
these industries. Also, it is possible that privatizations in certain Latin
American countries, which currently represent a primary source of new issues in
many Latin American markets and which are often attractive investment
opportunities, will occur in these two industries.
The Board of Directors has determined that, in light of the increased
presence of telecommunications companies in the Latin American markets, the
Portfolio's ability to achieve its investment objective would be materially
adversely affected if it were not permitted to invest more than 25% of its
assets in securities of companies in the telecommunications industries of the
Latin American countries in which the Portfolio invests. In accordance with the
Portfolio's investment restrictions and as a result of the Board's action, the
Portfolio is required to invest at least 25% of its total assets in securities
of Latin American issuers engaged in the
17
<PAGE>
telecommunications industry. The Portfolio will remain so invested until the
Board determines that the Portfolio should invest less than 25% of its assets in
that industry. Because the Portfolio will have a more concentrated position in
the securities of a single sector within the Latin American securities markets,
the Portfolio will be subject to certain risks with respect to these portfolio
securities. Market price movements affecting telecommunications companies and
their securities will have a greater impact on the Portfolio's performance
because of the more concentrated position in such securities. Telecommunications
may be subject to greater government regulation than many other industries.
Changes in government policies and the need to obtain regulatory approvals may
have a material effect on products and services offered by telecommunications
companies. Technological and structural developments may adversely affect the
profitability of telecommunications companies. To better control the Portfolio's
exposure to such risks, the Board has limited investments in telecommunications
securities to not more than 40% of the Portfolio's assets.
The Board of Directors has not currently authorized the Portfolio to invest
more than 25% of its total assets in the financial services industry. The
Portfolio will notify shareholders of any decision by the Board of Directors to
permit investments of more than 25% in the financial services industry
including, if applicable, a discussion of any increased investment risks
particular to this industry to which the Portfolio may be exposed.
ADDITIONAL INVESTMENT INFORMATION
BORROWING AND OTHER FORMS OF LEVERAGE. The Emerging Markets Debt and Latin
American Portfolios are authorized to borrow money from banks and other entities
in an amount up to 33 1/3% of the Portfolios' total assets (including the amount
borrowed) less all liabilities and indebtedness other than the borrowing, and
may use the proceeds of the borrowing for investment purposes or to pay
dividends. Borrowing for investment purposes creates leverage which is a
speculative characteristic. Borrowing by the Portfolios will create the
opportunity for increased net income but, at the same time, will involve special
risk considerations. Leverage that results from borrowing will magnify declines
as well as increases in the Portfolios' net asset value per share and net yield.
Although the Portfolios are authorized to borrow, they will do so only when the
Adviser believes that borrowing will benefit the Portfolios after taking into
account considerations such as the costs of the borrowing and the likely
investment returns on securities purchased with borrowed funds.
The Portfolios expect that all of their borrowing will be made on a secured
basis. The Portfolios' Custodian will either segregate the assets securing the
borrowing for the benefit of the lenders or arrangements will be made with a
suitable sub-custodian. If assets used to secure the borrowing decrease in
value, the Portfolios may be required to pledge additional collateral to the
lender in the form of cash or securities to avoid liquidation of those assets.
BRADY BONDS. Brady Bonds are fixed income securities that are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring. Brady Bonds have been
issued only in recent years and, accordingly, do not have a long payment
history. They may be collateralized or uncollateralized and issued in various
currencies (although most are U.S. dollar-denominated) and they are actively
traded in the over-the-counter secondary market. Investment in Brady Bonds
should be viewed as speculative in light of the history of defaults with respect
to commercial bank loans by public and private entities of countries issuing
Brady Bonds.
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DEPOSITARY RECEIPTS. The Portfolios may invest in Depositary Receipts,
including American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") and other Depositary Receipts
(which, together with ADRs, GDRs and EDRs, are hereinafter collectively referred
to as "Depositary Receipts"), to the extent that such Depositary Receipts are or
become available. ADRs are securities, typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer (the "underlying issuer") and
deposited with the depositary. ADRs may be "sponsored" or "unsponsored."
Sponsored ADRs are established jointly by a depositary and the underlying
issuer, whereas unsponsored ADRs may be established by a depositary without
participation by the underlying issuer. The issuers of the stock of unsponsored
ADRs are not obligated to disclose material information in the United States and
therefore, there may not be a correlation between such information and the
market value of the ADR. GDRs, EDRs and other types of Depositary Receipts are
typically issued by foreign depositaries, although they may also be issued by
U.S. depositaries, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. The Portfolios may invest in
sponsored and unsponsored Depositary Receipts. For purposes of the Portfolios'
investment policies, the Portfolios' investments in Depositary Receipts will be
deemed to be investments in the underlying securities.
FIXED INCOME SECURITIES. Each Portfolio will invest in fixed income (debt)
securities. The market value of the fixed income securities in which a Portfolio
invests will be affected by changes in the creditworthiness of issuers and will
change in response to interest rate changes and other factors. Generally, the
values of fixed income securities vary inversely with changes in interest rates,
so that during periods of falling interest rates, the values of outstanding
fixed income securities generally rise and during periods of rising interest
rates, the values of such securities generally decline. While securities with
longer maturities tend to produce higher yields, the prices of longer maturity
securities are subject to greater market fluctuations as a result of changes in
interest rates.
FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolios may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolios
may use such contracts to protect against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, lock in the U.S. dollar value of
dividends and interest on securities held by the Portfolio, and generally to
protect the U.S. dollar value of securities held by the Portfolio against
exchange rate fluctuation. While forward contracts may limit losses as a result
of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will be at least equal to the amount of
the Portfolio's commitments with respect to such contracts.
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FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. Investment in securities of foreign issuers involves investment risks
somewhat different from those affecting securities of U.S. issuers. The
Portfolio's investments will be subject to political and economic events that
affect the countries in which it invests. Foreign issuers may be subject to
different accounting, auditing and financial standards and requirements. There
also may be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the United States. Many foreign
securities markets have substantially less trading volume than U.S. national
securities exchanges and, therefore, securities of some foreign issuers are less
liquid and more volatile than securities of comparable U.S. issuers. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the United States. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes, which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Portfolios by domestic companies. Investments in securities
of foreign issuers are generally denominated in foreign currencies and, since a
Portfolio may temporarily hold uninvested reserves in bank deposits in foreign
currencies, the value of a Portfolio's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations, and a Portfolio may incur costs in connection with
conversions between various currencies.
The Portfolios may also invest in emerging market country securities.
Investing in emerging markets entails the risks associated with foreign
investment described above, however, these risks may be intensified in emerging
markets. Emerging markets can include every nation in the world except the
United States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe. Certain emerging market countries have historically experienced,
and may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, large amounts of external debt, trade difficulties
and unemployment. Further, the economies of developing countries generally are
heavily dependent upon international trade and, accordingly, have been, and may
continue to be, adversely affected by trade barriers, exchange controls and
other protectionist measures imposed or negotiated by the countries in which
they trade. There also are risks associated with the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could adversely affect the economies of such countries or the value of
a Portfolio's investments in those countries.
HIGH YIELD SECURITIES. Each Portfolio may invest in lower rated or unrated
debt securities, commonly referred to as high yield, high risk securities or
"junk bonds". High yield securities are debt securities rated below the four
highest rating categories (i.e., Ba through C by Moody's Investors Service, Inc.
or BB through D by Standard & Poor's Rating Group ("S&P")), and unrated
securities considered to be of equivalent quality by the Adviser. Such
securities carry a high degree of risk and are considered speculative by the
major credit rating agencies.
While such securities offer high yields, they also normally carry with them
a greater degree of risk than securities with higher ratings. The values of high
yield securities are more volatile and may react with greater sensitivity to
market changes. Also, high yield securities are often issued by smaller, less
creditworthy companies, or by highly leveraged (indebted) companies, which are
generally less able than more established or less leveraged companies to make
scheduled payments of interest and principal. The price movement of these
securities is influenced less by changes in interest rates and more by the
financial position of the issuing corporation.
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INVESTMENT FUNDS. Some emerging countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain emerging countries through investment funds which have been specifically
authorized. The Portfolios may invest in these investment funds subject to the
provisions of the 1940 Act and other applicable laws as discussed below under
"Investment Restrictions." If a Portfolio invests in such investment funds, the
Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
Adviser), but also will indirectly bear similar expenses of the underlying
investment funds.
Certain of the investment funds referred to in the preceding paragraph are
advised by the Adviser. These Portfolios may, to the extent permitted under the
1940 Act and other applicable law, invest in these investment funds. If a
Portfolio does elect to make an investment in such an investment fund, it will
only purchase the securities of such investment fund in the secondary market.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Portfolios may invest in fixed
rate and floating rate loans ("Loans") arranged through private negotiations
between an issuer of sovereign debt obligations and one or more financial
institutions ("Lenders"). The Portfolios' investments in Loans are expected in
most instances to be in the form of participation in Loans ("Participations")
and assignments of all or a portion of Loans ("Assignments") from third parties.
The Portfolios will have the right to receive payments of principal, interest
and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. In the event of the insolvency of the Lender selling a Participation,
the Portfolios may be treated as a general creditor of the Lender and may not
benefit from any set-off between the Lender and the borrower. Certain
Participations may be structured in a manner designed to avoid purchasers of
Participations being subject to the credit risk of the Lender with respect to
the Participation. Even under such a structure, in the event of the Lender's
insolvency, the Lender's servicing of the Participation may be delayed and the
assignability of the Participation may be impaired. The Portfolios will acquire
Participations only if the Lender interpositioned between the Portfolios and the
borrower is determined by the Adviser to be creditworthy.
When the Portfolios purchase Assignments from Lenders they will acquire
direct rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by the Portfolios as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender. Because there is no liquid market for such securities,
the Portfolios anticipate that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and the Portfolios'
ability to dispose of particular Assignments or Participations when
necessary to meet the Portfolios' liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the borrower.
The lack of a liquid secondary market for Assignments and Participations also
may make it more difficult for the Portfolios to assign a value to these
securities for purposes of valuing the Portfolios' portfolio and calculating
their net asset value.
LOANS OF PORTFOLIO SECURITIES. The Portfolios may lend securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the
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securities or even loss of rights in the collateral should the borrower of the
securities fail financially. Each Portfolio will not enter into securities loan
transactions exceeding in the aggregate 33 1/3% of the market value of its total
assets.
MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although each Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
Consistent with their investment policies, the Portfolios may make money market
investments pending other investment or settlement for liquidity. In addition,
the Portfolios may invest in money market instruments for temporary, defensive
purposes during adverse market conditions. The money market investments
permitted for the Portfolios include: obligations of the U.S. government and its
agencies and instrumentalities, obligations of foreign sovereignties, commercial
paper, bank obligations (including certificates of deposit), other debt
securities and repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolios may invest in securities that are neither listed on
a stock exchange nor traded over-the-counter, including privately placed
securities. Investing in such unlisted securities, including investments in new
and early stage companies, may involve a high degree of business and financial
risk that can result in substantial losses. As a result of the absence of a
public trading market for these securities, they may be less liquid than
publicly traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized from these sales could be less than
those originally paid by the Portfolios or less than what may be considered the
fair value of such securities. Further, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements which might be applicable if their securities were
publicly traded. If such securities are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Portfolios
may be required to bear the expenses of registration.
As a general matter, each Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Also, as a general matter, each Portfolio
may not invest more than 10% of its total assets in securities that are
restricted from sale to the public without registration ("Restricted
Securities") under the Securities Act of 1933 (the "1933 Act"). However, each
Portfolio may invest up to 25% of its total assets in liquid Restricted
Securities that can be offered and sold to qualified institutional buyers under
Rule 144A under the 1933 Act ("Rule 144A Securities"). The Board of Directors
has adopted guidelines and delegated to the Adviser, subject to the supervision
of the Board of Directors, the daily function of determining and monitoring the
liquidity of Rule 144A Securities. Rule 144A securities may become illiquid if
qualified institutional buyers are not interested in acquiring the securities.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolios may not enter into
repurchase agreements with more
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than seven days to maturity if, as a result, more than 15% of the market value
of the Portfolio's net assets would be invested in such repurchase agreements
and in other investments for which market quotations are not readily available
or which are otherwise illiquid.
REVERSE REPURCHASE AGREEMENTS. The [Emerging Markets Debt and Latin
American Portfolios] may enter into reverse repurchase agreements with brokers,
dealers, domestic and foreign banks or other financial institutions. In a
reverse repurchase agreement, the Portfolio sells a security and agrees to
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. It may also be viewed as the
borrowing of money by the Portfolio. The Portfolio's investment of the proceeds
of a reverse repurchase agreement is the speculative factor known as leverage.
The Portfolio may enter into a reverse repurchase agreement only if the interest
income from investment of the proceeds is greater than the interest expense of
the transaction and the proceeds are invested for a period no longer than the
term of the agreement. The Portfolio will maintain with the Custodian a separate
account with a segregated portfolio of cash or other liquid securities in an
amount at least equal to its purchase obligations under these agreements.
Reverse repurchase agreements are considered to be borrowings and are subject to
the percentage limitations on borrowings set forth in "Borrowing and Other Forms
of Leverage."
RUSSIAN SECURITIES TRANSACTIONS. The Emerging Markets Portfolio may invest
in equity securities of Russian issuers. The registration, clearing and
settlement of securities transactions in Russia are subject to significant risks
not normally associated with securities transactions in the United States and
other more developed markets. Ownership of shares in Russian companies is
evidenced by entries in a company's share register (except where shares are held
through depositories that meet the requirements of the 1940 Act) and the
issuance of extracts from the register or, in certain limited cases, by formal
share certificates. However, Russian share registers are frequently unreliable
and the Portfolio could possibly lose its registration through oversight,
negligence or fraud. Moreover, Russia lacks a centralized registry to record
securities transactions and registrars located throughout Russia or the
companies themselves maintain share registers. Registrars are under no
obligation to provide extracts to potential purchasers in a timely manner or at
all and are not necessarily subject to effective state supervision. In addition,
while registrars are liable under law for losses resulting from their errors, it
may be difficult for the Portfolio to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss of share
registration. Although Russian companies with more than 1,000 shareholders are
required by law to employ an independent company to maintain share registers, in
practice, such companies have not always followed this law. Because of this lack
of independence of registrars, management of a Russian company may be able to
exert considerable influence over who can purchase and sell the company's shares
by illegally instructing the registrar to refuse to record transactions on the
share register. Furthermore, these practices may prevent the Portfolio from
investing in the securities of certain Russian companies deemed suitable by the
Adviser and could cause a delay in the sale of Russian securities by the
Portfolio if the company deems a purchaser unsuitable, which may expose the
Portfolio to potential loss on its investment.
In light of the risks described above, the Board of Directors of the
Portfolio has approved certain procedures concerning the Portfolio's investments
in Russian securities. Among these procedures is a requirement that the
Portfolio will not invest in the securities of Russian issuers unless that
issuer's registrar has entered into a contract with the Portfolio's
sub-custodian containing certain protective conditions including, among
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other things, the sub-custodian's right to conduct regular share confirmations
on behalf of the Portfolio. This requirement will likely have the effect of
precluding investments in certain Russian companies that the Portfolio would
otherwise make.
SHORT SALES. The Emerging Markets Debt and Latin American Portfolios may
from time to time sell securities short without limitation, but consistent with
applicable legal requirements. A short sale is a transaction in which the
Portfolio sells securities it owns or has the right to acquire at no added cost
(i.e., "against the box") or does not own (but has borrowed) in anticipation of
a decline in the market price of the securities. To deliver the securities to
the buyer, the Portfolio arranges through a broker to borrow the securities and,
in so doing, the Portfolio becomes obligated to replace the securities borrowed
at their market price at the time of replacement. When the Portfolio makes a
short sale, the proceeds it receives from the sale will be held on behalf of a
broker until the Portfolio replaces the borrowed securities. The Portfolio may
have to pay a premium to borrow the securities and must pay any dividends or
interest payable on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or other liquid securities. In addition, the Portfolio will
place in a segregated account with its Custodian an amount of cash or other
liquid securities equal to the difference, if any, between (i) the market value
of the securities sold at the time they were sold short; and (ii) any cash or
other liquid securities deposited as collateral with the broker in connection
with the short sale. Short sales by the Portfolio 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 can equal only the total amount
invested.
STRUCTURED SECURITIES. The Emerging Markets Debt Portfolio may invest a
portion of its assets 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,
such as a corporation or trust, of specified instruments (such as commercial
bank loans or Brady Bonds) and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Securities to
create securities with different investment characteristics, such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to Structured Securities is dependent on the
extent of the cash flow on the underlying instruments. Because the type of
Structured Securities in which the Portfolio anticipates it will invest
typically involve no credit enhancement, their credit risk generally will be
equivalent to that of the underlying instruments. The Portfolio is permitted to
invest in a class of Structured Securities that is either subordinated or
unsubordinated to the right of payment of another class. Subordinated Structured
Securities typically have higher yields and present greater risks than
unsubordinated Structured Securities. Certain issuers of Structured Securities
may be deemed to be "investment companies" as defined in the 1940 Act and, as a
result, the Portfolio's investment in Structured Securities may be limited by
the 1940 Act. Structured Securities are typically sold in private placement
transactions, and there currently is no active trading market for Structured
Securities.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, each Portfolio
may, for temporary defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and
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medium-term debt obligations in which a Portfolio may invest consist of (i)
obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Each Portfolio will maintain with the Custodian a
segregated account of cash or other liquid securities in an amount at least
equal to these commitments. The payment obligation and the interest rates that
will be received are each fixed at the time the Portfolio enters into the
commitment and no interest accrues to the Portfolio until settlement. Thus, it
is possible that the market value at the time of settlement could be higher or
lower than the purchase price if, among other factors, the general level of
interest rates has changed. It is a current policy of each Portfolio not to
enter into when-issued commitments or delayed delivery securities exceeding in
the aggregate 15% of the market value of the Portfolio's total assets less
liabilities, other than the obligations created by these commitments.
ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES. The Emerging
Markets Debt Portfolio may invest in zero coupon, pay-in-kind or deferred
payment securities. Zero coupon securities are securities that are sold at a
discount to par value and securities on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. While interest payments are not made on
such securities, holders of such securities are deemed to have received "phantom
income" annually. Because the Portfolio will distribute its "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares of the Portfolio, it
will have fewer assets with which to purchase income producing securities. The
Portfolio accrues income with respect to these securities prior to the receipt
of cash payments. Pay-in-kind securities are securities that have interest
payable by delivery of additional securities. Upon maturity, the holder is
entitled to receive the aggregate par value of the securities. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. Zero coupon, pay-in-kind and
deferred payment securities may be subject to greater fluctuation in value and
lesser liquidity in the event of adverse market conditions than comparably rated
securities paying cash interest at regular interest payment periods.
DERIVATIVE PRODUCTS (DERIVATIVES)
The Portfolios are permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but are
not limited to: futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other derivative
products yet to be developed, so long as these new products are used in a manner
consistent with the objectives of the Portfolios. These derivative products may
be based upon a wide variety of underlying rates, indices, instruments,
securities and other products, such as interest rates, foreign currencies,
foreign and domestic fixed income and equity securities, groups or "baskets" of
securities and securities indices (for each derivative product, the
"underlying"). Exclusive of forward foreign currency contracts and any
derivative products used for hedging purposes, each Portfolio will limit its use
of derivative products to 33 1/3% of its total assets, measured by the aggregate
notional amount of outstanding derivative products.
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The Portfolios may use derivative products under a number of different
circumstances to further their investment objectives. For example, a Portfolio
may purchase derivatives to gain exposure to a market quickly in response to
changes in the Portfolio's investment strategy, upon the inflow of investable
cash or when the derivative provides greater liquidity than the underlying
market. A Portfolio may also use derivatives when it is restricted from directly
owning the "underlying" or when derivatives provide a pricing advantage or lower
transaction costs. The Portfolios also may purchase combinations of derivatives
in order to gain exposure to an investment in lieu of actually purchasing such
investment. Derivatives may also be used by a Portfolio for hedging or risk
management purposes and in other circumstances when the Adviser believes it
advantageous to do so consistent with the Portfolio's investment objectives and
policies. The Portfolios will not use derivatives in a manner that creates
leverage, except to the extent that the use of leverage is expressly permitted
by a particular Portfolio's investment policies, and then only in a manner
consistent with such policies.
The use of derivative products is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Portfolios will be less favorable than it would
have been if these investment techniques had not been used.
Some of the derivative products in which the Portfolios may invest and some
of the risks related thereto are described in more detail below.
FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)
The Portfolios may purchase and sell futures contracts, such as futures on
securities indices, baskets of securities, foreign currencies and interest rates
of the type generally known as financial futures. These are standardized
contracts that are bought and sold on organized exchanges. A futures contract
obligates a party to buy or sell a specific amount of the "underlying," such as
for example, a particular foreign currency, on a specified future date at a
specified price or to settle the value in cash.
The Portfolios may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolios may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Forward Contracts" above. These
forward contracts are privately negotiated and are bought and sold in the
over-the-counter market. Like a future, a forward contract obligates a party to
buy or sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.
In some cases, the Portfolios may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolios will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolios may utilize futures contracts, forward contracts and related options
are as follows:
The Portfolios may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market exposure.
There currently are limited securities index futures and options on such futures
in many countries, particularly emerging countries. The
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nature of the strategies adopted by the Adviser, and the extent to which those
strategies are used, may depend on the development of such markets. The
Portfolios may also purchase and sell foreign currency futures to hedge their
respective holdings and commitments against changes in the level of future
currency rates or to adjust their exposure to a particular currency.
The Portfolios may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely with
changes in interest rates. The Portfolios may engage in such transactions to
hedge their holdings of debt instruments against future changes in interest
rates or for other purposes.
The Portfolios may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these contracts also rises and falls inversely with
changes in interest rates. The Portfolios may engage in financial futures and
forward contracts for both hedging and non-hedging purposes.
Gains and losses on futures contracts, forward contracts and related options
depend on the Adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors. Other risks associated with
the use of these instruments include (i) imperfect correlation between the
change in market value of investments held by a Portfolio and the prices of
derivative products relating to investments purchased or sold by the Portfolio,
and (ii) possible lack of a liquid secondary market for a derivative product and
the resulting inability to close out a position. The risk that a Portfolio will
be unable to close out a position will be minimized by only entering into
transactions for which there appears to be a liquid exchange or secondary
market. In some strategies, the risk of loss in trading on futures and related
transactions can be substantial, due both to the low margin deposits required
and the extremely high degree of leverage involved in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the
"CFTC"), each Portfolio may, without registering with the CFTC as a Commodity
Pool Operator, enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-bona
fide hedging activities.
OPTION TRANSACTIONS
The Portfolios may seek to increase their returns or may hedge their
portfolio investments through options transactions with respect to individual
securities, indices or baskets in which such Portfolios may invest; other
financial instruments; and foreign currency. Various options may be purchased
and sold on either the exchange-traded or over-the-counter markets.
Each Portfolio may purchase put and call options. Purchasing a put option
gives a Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period.
Purchasing a call option gives a Portfolio a similar right, but not the
obligation, to purchase the underlying. The purchaser pays a premium to the
seller (also known as the writer) of the option.
Each Portfolio also may write put and call options on investments held in
its portfolio, as well as foreign currency options. A Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a
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<PAGE>
call option, a Portfolio will limit its opportunity to profit from an increase
in the market value of the underlying above the exercise price of the option. By
writing a put option, a Portfolio will be exposed to the amount by which the
price of the underlying is less than the strike price.
By writing an option, a Portfolio incurs an obligation either to buy (in the
case of a put option) or sell (in the case of a call option) the underlying from
the purchaser of the option at the option's exercise price, upon exercise by the
purchaser. Pursuant to guidelines established by the Board of Directors, the
Portfolios may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will continue to own (i) the underlying; (ii) securities or instruments
convertible or exchangeable without the payment of any consideration into the
underlying; or (iii) a call option on the same underlying with a strike price no
higher than the price at which the underlying was sold pursuant to a short
option position. In the case of a put option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will own another put option on the same underlying with an equal or higher
strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolios' use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by a
Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.
INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS
Swaps are privately negotiated over-the-counter derivative products in which
two parties agree to exchange payment streams calculated in relation to a rate,
index, instrument or certain securities and a particular "notional amount." As
with many of the other derivative products available to the Portfolios, the
underlying may include an interest rate (fixed or floating), a currency exchange
rate, a commodity price index, and a security, securities index or a combination
thereof. A great deal of flexibility is possible in the way the products may be
structured, with the effect being that the parties may have exchanged amounts
equal to the return on one rate, index or group of securities for another. For
example, in a simple fixed-to-floating interest rate swap, one party makes
payments equivalent to a fixed interest rate, and the other makes payments
equivalent to a specified interest rate index. A Portfolio may engage in simple
or more complex swap transactions involving a wide variety of underlyings. The
currency swaps that the Portfolios may enter will generally involve an agreement
to pay interest streams in one currency based on a specified index in exchange
for receiving interest streams denominated in another currency. Such swaps may
involve initial and final exchanges that correspond to the agreed upon notional
amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. A Portfolio may use one or more of these products in addition to or in
lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar
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<PAGE>
is a combination product in which the same party, such as the Portfolio, buys a
cap from and sells a floor to the other party. As with put and call options, the
amount at risk is limited for the buyer, but, if the cap or floor is not hedged
or covered, may be unlimited for the seller. Under current market practice,
caps, collars and floors between the same two parties are generally documented
under the same "master agreement." In some cases, options and forward agreements
may also be governed by the same master agreement. In the event of a default,
amounts owed under all transactions entered into under, or covered by, the same
master agreement would be netted and only a single payment would be made.
Swaps, caps, collars and floors are credit-intensive products. A Portfolio
that enters into a swap transaction bears the risk of default, i.e. nonpayment,
by the other party. The guidelines under which each Portfolio enters derivative
transactions, along with some features of the transactions themselves, are
intended to reduce these risks to the extent reasonably practicable, although
they cannot eliminate the risks entirely. Under guidelines established by the
Board of Directors, a Portfolio may enter into swaps only with parties that meet
certain credit rating guidelines. Consistent with current market practices, a
Portfolio will generally enter into swap transactions on a net basis, and all
swap transactions with the same party will be documented under a single master
agreement to provide for net payment upon default. In addition, a Portfolio's
obligations under an agreement will be accrued daily (offset against any amounts
owing to the Portfolio) and any accrued, but unpaid, net amounts owed to the
other party to a master agreement will be covered by the maintenance of a
segregated account consisting of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, a Portfolio's risk of loss will consist of the payments
that a Portfolio is contractually entitled to receive from the other party. This
may not be true for currency swaps that require the delivery of the entire
notional amount of one designated currency in exchange for the other. If there
is a default by the other party, a Portfolio may have contractual remedies
pursuant to the agreements related to the transaction.
STRUCTURED NOTES
Structured notes are derivative securities for which the amount of principal
repayment and/or interest payments is based upon the movement of one or more
factors. These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices,
such as the S&P 500 Index. In some cases, the impact of the movements of these
factors may increase or decrease through the use of multipliers or deflators.
The Portfolios may use structured notes to tailor their investments to the
specific risks and returns the Adviser wishes to accept while avoiding or
reducing certain other risks.
INVESTMENT LIMITATIONS
Each Portfolio is a non-diversified portfolio under the 1940 Act, which
means that the Portfolio is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. Thus, each
Portfolio may invest a greater proportion of its total assets in the securities
of a smaller number of issuers and, as a result, will be subject to greater risk
with respect to its portfolio securities. Nevertheless, each Portfolio intends
to comply with the more limited diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
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<PAGE>
Each Portfolio operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each of the
Portfolio's investments. The Adviser is entitled to receive from each Portfolio
an annual management fee, payable quarterly, equal to the percentage of average
daily net assets set forth in the table below. However, the Adviser has
voluntarily agreed to a reduction in the fees payable to it and to reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of either Portfolio to exceed the respective percentages of average
daily net assets set forth in the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL ANNUAL
OPERATING
EXPENSES AFTER FEE
WAIVERS
MANAGEMENT -------------------------
PORTFOLIO FEE CLASS A CLASS B
- ------------------------------ ----------- --------- ---------
<S> <C> <C> <C>
Emerging Markets Portfolio 1.25% 1.75% 2.00%
Emerging Markets Debt
Portfolio 1.00% 1.75% 2.00%
Latin American Portfolio 1.10% 1.70% 1.95%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD")
is the direct parent of the Adviser and Morgan Stanley. MSDWD is a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses -- securities, asset management and credit
services. At , 1998, the Adviser, together with its affiliated
institutional asset management companies (exclusive of Miller Anderson &
Sherrerd, LLP), managed assets of approximately $ billion. See "Management of
the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. The following individuals have primary portfolio
management responsibility for the Portfolios noted below:
EMERGING MARKETS PORTFOLIO -- MADHAV DHAR AND ROBERT L. MEYER. Madhav Dhar
joined the Adviser in 1984. He is a Managing Director of the Adviser and of
Morgan Stanley. He is a member of the Adviser's executive committee, head of the
Adviser's emerging markets group and chief investment officer of the Adviser's
global emerging market equity portfolios. He holds a B.S. (honors) from St.
Stephen's College, Delhi University India and an M.B.A. from Carnegie-Mellon
University. Mr. Dhar has been primarily responsible for managing the Portfolio's
assets since it commenced operations. Robert L. Meyer joined the Adviser in
1989. He is a Managing Director of the Adviser and of Morgan Stanley and
co-manager of the Adviser's emerging markets group and head of the Adviser's
Latin American team. He was born in Argentina and graduated from Yale
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<PAGE>
University with a B.A. in Economics and Political Science. He received a J.D.
from Harvard Law School. In addition, he is also a Chartered Financial Analyst.
Mr. Meyer has worked with Mr. Dhar in managing the Portfolio's assets since its
inception.
EMERGING MARKETS DEBT PORTFOLIO -- PAUL GHAFFARI. Paul Ghaffari is a
Managing Director of the Adviser and of Morgan Stanley. He joined the Adviser in
June 1993 as a Vice President and Portfolio Manager for the Morgan Stanley
Emerging Markets Debt Fund (a closed-end investment company). Prior to joining
the Adviser, Mr. Ghaffari was a Vice President in the Fixed Income Division of
the Emerging Markets Sales and Trading Department at Morgan Stanley. From 1983
to 1992, he worked in LDC Sales and Trading Department and the Mortgage-Backed
Securities Department at J.P. Morgan & Co. Inc. and worked in the Treasury
Department at the Morgan Guaranty Trust Co. He holds a B.A. in International
Relations from Pamona College and an M.S. in Foreign Service from Georgetown
University. Mr. Ghaffari has had primary responsibility for managing the
Portfolio's assets since inception.
LATIN AMERICAN PORTFOLIO -- ROBERT L. MEYER AND ANDY SKOV. Robert Meyer and
Andy Skov share primary responsibility for managing the Portfolio's assets.
Information about Mr. Meyer is included under the Emerging Markets Portfolio
above. Andy Skov joined the Adviser in 1994 as a Portfolio Manager. Currently,
he is a Vice President of the Adviser and of Morgan Stanley. Prior to joining
the Adviser, he worked in the Latin America group at Bankers Trust in corporate
finance, research and sales; two of those years he spent in Argentina. He
graduated from the University of California at Berkeley with a B.A. (Phi Beta
Kappa) in Political Science and Economics Development.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors administrative services provided by CGFSC. Their
services are also subject to the supervision of the Board of Directors of the
Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
LOCAL ADMINISTRATORS FOR THE EMERGING MARKETS PORTFOLIO. The Portfolio has,
as required by local law, entered into administration agreements with local
administrators in Brazil and Colombia. A local administrator provides certain
services for the Portfolio with respect to the Portfolio's investments in that
country, including services relating to foreign exchange, local taxes,
remittance of income and capital gains, and repatriation of investments. The
Portfolio's local administrator in Brazil, Unibanco-Uniao, a Brazilian
corporation, is paid by an
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<PAGE>
annual fee of 0.125% of the Portfolio's average weekly net assets invested in
Brazil. The Portfolio's local administrator in Colombia, CitiTrust S.A., a
Colombian trust company, is paid by the Fund an annual fee of $1,000 plus 0.20%
per transaction in Colombia.
LOCAL ADMINISTRATORS FOR THE LATIN AMERICAN PORTFOLIO. The Portfolio has,
as required by local law, entered into administration agreements with local
administrators in Brazil, Chile, and Colombia. A local administrator provides
certain services for the Portfolio with respect to the Portfolio's investments
in that country, including services relating to foreign exchange, local taxes,
remittance of income and capital gains, and repatriation of investments. The
Portfolio's local administrator in Brazil, Unibanco-Uniao, a Brazilian
corporation, is paid by the Fund an annual fee of 0.125% of the Portfolio's
average weekly net assets invested in Brazil. The Portfolio's local
administrator in Chile, Bice Chileconsult Agente de Valores S.A., a Chilean
corporation, is paid by the Fund an annual fee of 0.125% of the Portfolio's
average weekly net assets invested in Chile. The Portfolio's local administrator
in Colombia, CitiTrust S.A., a Colombian trust company, is paid by the Fund an
annual fee of $1,000 plus 0.20% per transaction in Colombia.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares for each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a
"Plan"). Under each Plan, the Distributor is entitled to receive from the
Portfolios a distribution fee, which is accrued daily and paid quarterly, of
0.25% of the Class B shares' average daily net assets on an annualized basis.
Each Plan is designed to compensate the Distributor for its services in
connection with distribution assistance. The Distributor may retain any portion
of the fee that it does not expend in meeting its obligations to the Fund. The
Distributor may compensate financial intermediaries, plan fiduciaries and
administrators for providing distribution-related services, including account
maintenance services, to shareholders (including, where applicable, underlying
beneficial owners) of Class B shares.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including organizational costs, legal fees, accountant's fees,
custodial fees, and printing and mailing costs) as specified in its agreements
with the Adviser and Morgan Stanley.
PURCHASE OF SHARES
Class A shares of each Portfolio and Class B shares of each Portfolio may be
purchased at the net asset value per share next determined after receipt by the
Fund of a purchase order. The net asset value per share of each
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<PAGE>
Portfolio is calculated on days that the New York Stock Exchange ("NYSE") and
Chase (the "Custodian Bank") are open for business as of the close of trading of
the NYSE, normally 4:00 p.m. Eastern Time (the "Pricing Time").
MINIMUM INVESTMENT
The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares of each Portfolio. These minimums may be waived at the
discretion of the Adviser for certain types of investors, including trust
departments, brokers, dealers, agents, financial planners, financial services
firms, investment advisers or various retirement and deferred compensation plans
("Financial Intermediaries"), certain accounts managed by the Adviser and its
affiliates ("Managed Accounts"), and certain employees and customers of Morgan
Stanley and its affiliates. The Fund's determination of an investor's
eligibility to purchase shares of a given class will take precedence over the
investor's selection of a class.
METHODS OF PURCHASE
Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolios by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or because your
check does not clear, you will be responsible for any loss the Fund or its
agents incur. If you are already a shareholder, the Fund may redeem shares from
your account(s) to reimburse the Fund or its agents for any loss. In addition,
you may be prohibited or restricted from making future investments in the Fund.
FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian Bank are open for business.
Your bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:
1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide you
with a confirmation number.
2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring the funds.
3. Complete and sign the Account Registration Form and mail it to the
address shown thereon.
When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the close of the Federal Funds Wire Control Center
("FFWCC") (normally 6:00 p.m. Eastern Time), the purchase
33
<PAGE>
will be executed at the net asset value computed on the date of receipt.
Purchases for which an order is received after the Pricing Time or for which
Federal Funds are received after the close of the FFWCC, will be executed at the
net asset value next determined. Certain institutional investors and financial
institutions have entered into an arrangement with Morgan Stanley, pursuant to
which they may place orders prior to the Pricing Time, but make payment in
Federal Funds for those shares on the following business day.
BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and which bank is handling the wire, money transferred by bank
wire may or may not be converted into Federal Funds prior to the close of the
FFWCC. Prior to conversion to Federal Funds and receipt by the Fund, an
investor's money will not be invested.
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share of each of the
Portfolios determined on the next business day after receipt. An investor's
money will not be invested prior to crediting of Federal Funds.
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. Each business evening, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day and places a net purchase
and/or redemption order(s) by the morning of the next business day. These orders
normally are executed at the net asset value that was computed for each
Portfolio as of the close of the previous business day.
ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 per
Portfolio. The minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases directly from the
Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.
INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES
Class A and Class B shares of each Portfolio may be subject to the
involuntary conversion and redemption features described below. The conversion
and redemption features may be waived at the discretion of the Adviser for
shares held in a Managed Account and shares purchased through a Financial
Intermediary. Accounts that were open prior to January 2, 1996 are not subject
to involuntary conversion or redemption. The Fund reserves the right to modify
or terminate the conversion or redemption features of the shares at any time
upon 60 days notice to shareholders.
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<PAGE>
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account
containing Class A shares falls below $500,000 (but remains at or above
$100,000) because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $500,000 (but remains at or
above $100,000) for a continuous 60-day period, the Class A shares in such
account will convert to Class B shares and will be subject to the distribution
fee and other features applicable to Class B shares. The Fund will not convert
Class A shares to Class B shares based solely upon changes in the market that
reduce the net asset value of shares. Under current tax law, conversion between
share classes is not a taxable event to the shareholder.
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares increases to $500,000 or more, whether due to
shareholder purchases or market activity, the Class B shares will convert to
Class A shares. Class B shares purchased through a Financial Intermediary that
has entered into an arrangement with the Fund for the purchase of such shares
may not be converted. Under current tax law, such conversion is not a taxable
event to the shareholder. Class A shares converted from Class B shares are
subject to the same minimum account size requirements as are applicable to New
Accounts containing Class A shares described above.
INVOLUNTARY REDEMPTION OF SHARES. If the value of an account falls below
$100,000 because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $100,000 for a continuous
60-day period, the shares in such account will be subject to redemption by the
Fund. The Fund will not redeem shares based solely upon changes in the market
that reduce the net asset value of shares. If redeemed, redemption proceeds will
be promptly paid to the shareholder.
REDEMPTION OF SHARES
Class A and Class B shares of each Portfolio may be redeemed at any time and
without charge at the net asset value per share next determined after receipt by
the Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds may be more or less than the purchase price of your shares
depending on, among other factors, the market value of the investment securities
held by a Portfolio.
METHODS OF REDEMPTION
Shares may be redeemed directly from the Fund by mail or by telephone.
However, shares purchased through a Financial Intermediary must be redeemed
through a Financial Intermediary. Certain Financial Intermediaries may charge an
additional service or transaction fee.
BY MAIL. Each Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, to Morgan Stanley Institutional Fund, Inc.,
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following:
1. A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
2. Any required signature guarantees; and
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<PAGE>
3. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.
BY TELEPHONE. If you have previously elected the Telephone Redemption
Option on the Account Registration Form, you can redeem Portfolio shares by
calling the Fund and requesting that the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to receive
redemption proceeds, send a written request to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. An investor may be
required to provide personal identification information at the time an account
is opened and prior to effecting each telephone transaction. In addition, all
telephone transaction requests will be recorded and investors may be required to
provide additional telecopied written instructions regarding transaction
requests. Neither the Fund nor the Transfer Agent will be responsible for any
loss, liability, cost or expense for following instructions received by
telephone that either of them reasonably believes to be genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to accept redemption
requests from underlying beneficial owners. These redemptions may be processed
in the same way as purchases made through such Financial Intermediaries, as
described above.
FURTHER REDEMPTION INFORMATION
The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event more than seven days after
receipt of a redemption request in good order. However, payments to investors
redeeming shares which were purchased by check will not be made until payment
for the purchase has been collected, which may take up to eight days after the
date of purchase. The Fund may suspend the right of redemption or postpone the
date upon which redemptions are effected at times when the NYSE is closed, or
under any emergency conditions as determined by the Securities and Exchange
Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.
36
<PAGE>
To protect your account, the Fund and its agents from fraud, signature
guarantees are required to verify the identity of the person who has authorized
certain redemptions. Please contact the Fund or see the Statement of Additional
Information for further information.
ACCOUNT POLICIES AND SERVICES
EXCHANGE FEATURES
You may exchange shares of each Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced or Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase. Therefore, an
exchange will be considered a taxable event for shareholders subject to tax.
Exchange transactions will be processed at the net asset value per share next
determined after receipt of the request. Shares of the portfolios may be
exchanged by mail or telephone. The telephone exchange privilege is automatic
and made available without shareholder election. The exchange privilege may be
modified or terminated by the Fund at any time upon 60-days notice to
shareholders.
BY MAIL. To exchange shares by mail, send a written exchange request to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798. Your written exchange request should include (i) the name, class of
shares and account number of your current Portfolio; (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to exchange
shares; and (iii) the signatures of all registered account holders.
BY TELEPHONE. To exchange shares by telephone, call the Fund at the phone
number provided on the cover of this Prospectus. A Fund representative will
request (i) the name, class of shares and account number of your current
Portfolio, and (ii) the name(s) and class(es) of shares of the portfolio(s) into
which you intend to exchange shares. For additional information regarding
responsibility for the authenticity of telephoned instructions, see "Redemption
of Shares" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by sending a written request to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. It may not be possible to
transfer the registration of certain shares purchased through a Financial
Intermediary. As with redemptions, the written request must be received in "good
order" before any transfer can be made. Transferring the registration of shares
may affect the eligibility of your account for a given class of shares and may
result in involuntary conversion or redemption of your shares.
37
<PAGE>
OTHER ACCOUNT INFORMATION
The Fund does not issue share certificates for the Portfolios. All shares
purchased are confirmed to you and credited to your account on the Fund's books
maintained by the Adviser or its agents. You will have the same rights and
ownership with respect to such shares as if certificates had been issued.
EXCESSIVE TRADING
Frequent trades in your account(s) can disrupt management of a Portfolio and
raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of each Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a portfolio of the Fund within any 120-day
period. For example, the following series of transactions would amount to
excessive trading: exchanging shares of Portfolio A for shares of Portfolio B,
then exchanging shares of Portfolio B for shares of Portfolio C and then
exchanging shares of Portfolio C for shares of Portfolio A within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios, and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.
INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS
Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the Portfolios used for investment by these accounts may
experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the Portfolios.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolios is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the close of the NYSE
(normally 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business. Price information on listed securities is taken from the exchange
where the security is primarily traded. Securities listed on a U.S. securities
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date and for which market quotations are
not readily available
38
<PAGE>
are valued at a price within a range not exceeding the current asked price nor
less than the current bid price. The current bid and asked prices are determined
based on the average of the bid and asked prices quoted on such valuation date
by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such 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. Securities
not priced in this manner are valued at the most recently quoted bid price, or
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determined prices in
accordance with the above-stated procedures are determined in good faith at fair
value using methods determined by the Board of Directors. For purposes of
calculating net asset value per share, all assets and liabilities initially
expressed in foreign currencies will be translated into U.S. dollars at the mean
of the bid and asked price of such currencies against the U.S. dollar last
quoted by a major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distributions expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise the total return for each class of
the Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE.
"Total return" shows what an investment in a class of the Portfolio would
have earned over a specified period of time (such as one, five or ten years),
assuming that all distributions and dividends by the Portfolio were reinvested
in the same class on the reinvestment dates during the period. Total return does
not take into account any federal or state income taxes that may be payable on
dividends and distributions or upon redemption. The Fund may also include
comparative performance information in advertising or marketing the Portfolios'
shares, including data from Lipper Analytical Services, Inc., other industry
publications, business periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
39
<PAGE>
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
when, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
elects to receive income dividends and capital gains distributions in cash.
Each Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual dividends. Net realized capital gains of
each Portfolio, if any, after reduction for any tax loss carryforwards will also
be distributed annually.
Undistributed net investment income is included in each Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(I.E., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of each Portfolio will differ at times.
Expenses of each Portfolio allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends paid by a Portfolio generally will not qualify for the
dividends-received deduction for corporate shareholders. Each Portfolio will
report annually to its shareholders the amount of dividend income qualifying for
such treatment.
Distributions of net capital gain are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio
40
<PAGE>
(such designation being dependent upon the holding period of the Portfolio in
the underlying asset generating the net capital gain), regardless of how long
shareholders have held their shares. Each Portfolio will send reports annually
to shareholders of the federal income tax status of all distributions made
during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
losses, including any available capital loss carryforwards), prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (i) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) who has not certified to the Fund that such
shareholder is not subject to backup withholding. This backup withholding is not
an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceed or are
less than the shareholder's tax adjusted basis in the sold, exchanged or
redeemed shares. If capital gains distributions have been made with respect to
shares that are sold at a loss after being held for six months or less, then the
loss is treated as a long-term capital loss to the extent of the capital gains
distributions.
Conversions of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, each
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although each
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that each Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
41
<PAGE>
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolios will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with their
respective objectives and policies. For the fiscal year ended December 31, 1997,
the Emerging Markets Debt and Latin American Portfolios had portfolio turnover
rates of [560]% and [192]%, respectively. As portfolio turnover increases, the
Portfolios may expect to pay correspondingly increased brokerage and trading
costs. In addition to transaction costs, higher portfolio turnover may result in
the realization of capital gains. As discussed under "Taxes," to the extent net
short-term capital gains are realized, any distributions resulting from such
gains are considered ordinary income for federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 40 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares.
The shares of the Portfolios, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
42
<PAGE>
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as that
term is defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is
not required to hold an annual meeting of its shareholders unless required to do
so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports. The
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser, or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs sub-custodians approved by the Board of Directors of the Fund
in accordance with regulations of the Commission for the purpose of providing
custodial services for such assets. MSTC may also hold certain domestic assets
for the Fund. For more information on the custodians, see "General Information
- -- Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
43
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
EMERGING MARKETS, EMERGING MARKETS DEBT AND LATIN AMERICAN PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, Inc., please contact your Morgan Stanley
representative or call us toll free 1-800-548-7786. Please print all
items except signature, and mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED).
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor.
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY
NUMBER ("TIN") NUMBER ("SSN")
OR
2. TIN
SSN
OR
TIN
SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct TIN(s) or SSN(s). Accounts that have a missing or incorrect
TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on
dividends, distributions and other payments. If you have not provided us
with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of
persons subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
You may be notified that you are subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code because you have
underreported interest or dividends or you were required to, but failed
to, file a return which would have included a reportable interest or
dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SECTION Portfolio(s): / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 Emerging Markets Portfolio / / Class A Shares $ / / Class B Shares $
for each Portfolio and Class B Emerging Markets Debt
shares minimum $100,000 for each Portfolio
Portfolio.) Please indicate Latin American Portfolio
Portfolio, class and amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio
and manner of payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on - - - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of Commercial Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the account
statement sent to my/our registered
address, I/we hereby authorize the Address
Fund to mail duplicate statements
to the name and address provided at City State Zip Code
right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative No. Branch
No.
</TABLE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE
SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE
APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL SECURITY
ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF
I/ WE DO NOT PROVIDE EITHER NUMBER TO CHASE GLOBAL FUNDS
SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS
APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR CORRECT SSN(S)
OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP
WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE
PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 8
Investment Objectives and Policies................ 12
Additional Investment Information................. 18
Investment Limitations............................ 29
Management of the Fund............................ 30
Purchase of Shares................................ 32
Redemption of Shares.............................. 35
Account Policies and Services..................... 37
Valuation of Shares............................... 38
Performance Information........................... 39
Dividends and Capital Gains Distributions......... 40
Taxes............................................. 40
Portfolio Transactions............................ 42
General Information............................... 42
Account Registration Form
</TABLE>
EMERGING MARKETS PORTFOLIO
EMERGING MARKETS DEBT PORTFOLIO
LATIN AMERICAN PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
<PAGE>
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
CHINA GROWTH PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P. O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company with diversified and non-diversified series
("portfolios"). The Fund currently consists of twenty-seven portfolios offering
a broad range of investment choices. The Fund is designed to provide clients
with attractive alternatives for meeting their investment needs. Shares of the
portfolios are offered with no sales charge or exchange or redemption fee (with
the exception of one of the portfolios). This Prospectus sets forth information
pertaining to the China Growth Portfolio (the "Portfolio").
The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in the equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional investors and high net
worth individual investors a series of portfolios which benefit from the
investment expertise and commitment to excellence associated with Morgan Stanley
and its affiliates.
The Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses. The Fund currently offers the following
portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY -- Active Country Allocation,
Asian Equity, China Growth, Emerging Markets, European Equity, Global Equity,
Gold, International Equity, International Small Cap, Japanese Equity and Latin
American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth,
Equity Growth, Small Cap Value Equity, U.S. Real Estate and Value Equity
Portfolios; (iii) BALANCED -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging
Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed
Securities, Municipal Bond and Real Yield Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolio. Additional information about
the Fund is contained in a "Statement of Additional Information" dated May 1,
1998, which is incorporated herein by reference. The Statement of Additional
Information and the Prospectuses pertaining to the other portfolios of the Fund
are available upon request and without charge by writing or calling the Fund at
the address and telephone number set forth above.
INVESTORS SHOULD NOTE THAT THE PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL
ASSETS IN RESTRICTED SECURITIES, AND UP TO 25% OF ITS TOTAL ASSETS IN RESTRICTED
SECURITIES THAT ARE RULE 144A SECURITIES. SEE "ADDITIONAL INVESTMENT INFORMATION
- -- NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES." INVESTMENTS IN RESTRICTED SECURITIES IN EXCESS OF 5% OF THE
PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE
GREATER RISK AND MAY INCREASE THE PORTFOLIO'S EXPENSES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
the China Growth Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases..................... None
Maximum Sales Load Imposed on Reinvested Dividends.......... None
Deferred Sales Load......................................... None
Redemption Fees............................................. None
Exchange Fees............................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C>
Investment Advisory Fee (Net of Fee Waiver)................. 0.90%*
Administrative & Shareholder Account Costs.................. 0.15%
12b-1 Fees.................................................. None
Custody Fees................................................ 0.50%
Other Expenses.............................................. 0.20%
---------
Total Operating Expenses (Net of Fee Waiver)............ 1.75%*+
---------
---------
<FN>
- --------------
* The Adviser has agreed to a reduction in the fees payable to it as Adviser and
to reimburse the Portfolio, if necessary, if such fees would cause the total
annual operating expenses of the Portfolio to exceed 1.75% of its average
daily net assets. See "Management of the Fund - Investment Adviser." Absent
this fee waiver, the Portfolio's total operating expenses would be estimated
to be 2.10% of its average daily net assets. As a result of these reductions,
the Investment Advisory Fee stated above is lower than the contractual fee
stated under "Management of the Fund." For further information on Fund
expenses, see "Management of the Fund."
+ Estimated.
</TABLE>
The purpose of the foregoing table is to assist the investor in
understanding the various expenses that an investor in the Portfolio will bear
directly or indirectly. The expenses and fees for the Portfolio are based on
estimates. For purposes of calculating the estimated expenses and fees set forth
above, the table assumes that the average daily net assets of the Portfolio will
be $50,000,000. "Other Expenses" are based on estimated amounts for the current
fiscal year and include Board of Directors' fees and expenses, amortization of
organizational costs, filing fees, professional fees, and costs for reports to
shareholders.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at
the end of each time period. As noted in the table above, the Portfolio charges
no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolio after fee waivers:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
China Growth Portfolio............................ $ 18 $ 55
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
2
<PAGE>
The Fund intends to comply with all state laws that restrict investment
company expenses. Currently, the most restrictive state law requires that the
aggregate annual expenses of an investment company shall not exceed two and
one-half percent (2 1/2%) of the first $30 million of average net assets, two
percent (2%) of the next $70 million of average net assets, and one and one-half
percent (1 1/2%) of the remaining net assets of such investment company.
The Adviser has agreed to a reduction in the amounts payable to it, and to
reimburse the Portfolio, if necessary, if in any fiscal year the sum of the
Portfolio's expenses exceeds the limit set by applicable state law.
3
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of twenty-seven portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan Stanley
and its affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio has its own investment objectives and policies
designed to meet its specific goals. This Prospectus pertains to the China
Growth Portfolio.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in the equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and telephone number noted on the
cover page of this Prospectus. The objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in common stocks of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in common stocks of Asian issuers.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in common stocks of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in common stocks of European issuers.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in common stocks of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in the equity securities of foreign and domestic issuers engaged
in gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in common stocks of non-U.S. issuers.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in common stocks of non-U.S. issuers with equity
market capitalizations of less than $500 million.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in the equity securities of Japanese issuers.
-THE LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and debt
securities issued or guaranteed by Latin American governments or
governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
4
<PAGE>
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented common stocks of small-to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented common stocks of medium and large
capitalization companies.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued common stocks of small-to medium-sized companies.
-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.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in common
stocks which the Adviser believes to be undervalued relative to the stock
market in general at the time of purchase.
BALANCED:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued common stocks and fixed income
securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-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 three
highest rating categories of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment-grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal through investment
primarily in municipal obligations, the interest on which is exempt from
federal income tax.
-The REAL YIELD PORTFOLIO seeks to produce a high total return consistent
with preservation of capital by investing in fixed income securities of
issuers throughout the world, including U.S. issuers.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
5
<PAGE>
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley Group Inc., which, together with its affiliated asset management
companies, at December 31, 1994 had approximately $48.7 billion in assets under
management as an investment manager or as a fiduciary adviser, acts as
investment adviser to the Fund and each of its portfolios. See "Management of
the Fund -- Investment Adviser" and "Management of the Fund -- Administrator."
HOW TO INVEST
Shares of the Portfolio are offered directly to investors at net asset value
with no sales commission or 12b-1 charges. Share purchases may be made by
sending investments directly to the Fund. The minimum initial investment is
$500,000 for the Portfolio. The minimum for subsequent investments is $1,000
(except for automatic reinvestment of dividends and capital gains distributions
for which there are no minimums). The minimum investment levels may be waived
for certain Morgan Stanley employees and customers at the discretion of the
Adviser. See "Purchase of Shares."
HOW TO REDEEM
Shares of the Portfolio may be redeemed at any time, without cost, at the
net asset value per share of the Portfolio next determined after receipt of the
redemption request. The redemption price may be more or less than the purchase
price. If a shareholder reduces its total investment in shares of the Portfolio
to less than $500,000, the investment may be subject to redemption. See
"Redemption of Shares."
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations of which an investor should be aware. The Portfolio will invest
in securities of foreign issuers, including issuers located in The People's
Republic of China, Hong Kong and Taiwan, which are subject to certain risks not
typically associated with domestic securities. Governmental actions in China can
have a significant effect on the economic conditions in China and surrounding
countries. Although the Chinese Government has recently begun to institute
economic reform policies, there can be no assurances that it will continue to
pursue such policies or that such policies will succeed. See "Investment
Objectives and Policies" and "Additional Investment Information." In addition,
the Portfolio may invest in repurchase agreements, lend its portfolio
securities, purchase securities on a when-issued basis and purchase and sell
options and enter into futures transactions and options thereon for hedging
purposes. The Portfolio may also borrow money in an amount up to 33 1/3% of its
total assets, less liabilities and other borrowings. Borrowing money creates
leverage which is a speculative activity. See "Additional Investment Information
- -- Borrowing and Other Forms of Leverage." In addition, the Portfolio may enter
in forward foreign currency exchange contracts, currency swaps, currency futures
contracts and options on such futures contracts, as well as options on
currencies to hedge currency risk associated with investment in non-U.S. dollar
denominated securities. The Portfolio may also enter into currency swaps for
non-hedging purposes. Each of these investment strategies involves specific
risks which are described under "Investment Objectives and Policies" and
"Additional Investment Information" herein and under "Investment Objectives and
Policies" in the Statement of Additional Information.
6
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is described below, together with
the policies the Fund employs in its efforts to achieve this objective. The
Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Fund will attain its objectives. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval.
The investment objective of the Portfolio is long-term capital appreciation.
The production of any current income is incidental to this objective. The
Portfolio seeks to achieve its objective by investing primarily in the equity
securities of China growth companies. China growth companies consist of
companies that (i) are organized or have their principal place of business or
principal securities trading market in The People's Republic of China
(collectively "China"), Hong Kong or Taiwan (collectively, the "Chinese Economic
Area") or (ii) are engaged in business primarily within the Chinese Economic
Area. The Portfolio's Adviser may treat a company as engaged in business
primarily within the Chinese Economic Area if it reasonably believes that such
company meets the following criteria or, based on announced plans, is likely to
meet such criteria in the foreseeable future: the company derives at least 50%
of its revenue from goods or services sold or produced in, or has at least 50%
of its assets located in, the Chinese Economic Area. The Adviser expects that a
significant portion of the Portfolio's assets invested in China growth companies
located outside of the Chinese Economic Area will be located in Asian countries
such as Singapore, Malaysia, the Philippines, Indonesia, Korea, Vietnam and
Thailand.
Under normal circumstances, the Portfolio will invest at least 65% of its
total assets in equity securities of China growth companies. Equity securities
are defined as: common and preferred stocks; direct equity interests in trusts,
partnerships, joint ventures and other unincorporated entities or enterprises
("direct investments"); special classes of shares available only to foreign
persons in markets where the ownership of certain classes of equity is
restricted to nationals or residents of the country; American, Global or other
types of Depositary Receipts; investment grade debt securities convertible into
common stock ("convertible debentures"); and common stock purchase warrants.
Direct investments in China growth companies will not exceed 25% of the total
assets of the Portfolio. See "Risk Factors and Special Considerations" for a
discussion of the risks associated with direct investments. The Portfolio may
invest 25% or more of its total assets in the securities of issuers located in
any one country in the Chinese Economic Area.
The Portfolio may invest up to 35% of its total assets in equity securities
of companies other than China growth companies. The Portfolio may also enter
into options on securities and indices, options on currency, futures contracts
and options thereon, forward foreign currency exchange contracts and currency
swaps. See "Additional Investment Information."
The Portfolio may invest under normal circumstances up to 35% of its total
assets, and for temporary defensive purposes up to all of its assets, in high
quality debt securities of foreign and U.S. companies and foreign and U.S.
governments, their respective agencies, instrumentalities, political
subdivisions and authorities, as well as in money market instruments denominated
in U.S. dollars or foreign currency. See "Additional Investment Information."
The market value of the Portfolio's debt securities will change in response to
interest
7
<PAGE>
rate changes and other factors. During periods of falling interest rates, the
value of the debt securities held by the Portfolio generally rises, and
conversely, during periods of rising interest rates, the value of such
securities generally the Portfolio may invest in investment grade convertible
debentures as indicated above, declines.
As indicated above, the Portfolio may invest in investment-grade convertible
debentures. A debt security is investment grade if it is rated BBB or above by
Standard & Poor's Corporation ("S&P") or Baa or above by Moody's Investors
Service, Inc. ("Moody's") or determined to be of comparable quality by the
Adviser. Debt securities rated BBB by S&P or Baa by Moody's have speculative
characteristics. Economic changes and other circumstances are more likely to
lead to a weakened capacity to make principal and interest payments than is the
case with higher grade debt securities. The Portfolio will promptly dispose of
any convertible debenture which is down rated or determined by the Adviser to be
below investment grade subsequent to acquisition by the Portfolio.
ADDITIONAL INVESTMENT INFORMATION
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines adopted by the
Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. Repurchase agreements may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The aggregate value of repurchase
agreements and certain other investments of the Portfolio is limited as set
forth under "Investment Limitations."
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding, in the aggregate 33 1/3%, of the market value of its total assets.
For more detailed information about securities lending, see "Investment
Objectives and Policies" in the Statement of Additional Information.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. The Portfolio will maintain with the Custodian a
separate account with a segregated portfolio of high-grade equity or debt
securities or cash in an amount at least equal to these commitments. The payment
obligation and the interest rates that will be received are each fixed at the
time the Portfolio enters into the commitment and no interest accrues to the
Portfolio until settlement. Thus, it is possible that the market value at the
time of settlement could be higher or lower than the purchase price if, among
other factors, the general level
8
<PAGE>
of interest rates has changed. It is a current policy of the Portfolio not to
enter into when-issued commitments exceeding, in the aggregate, 15% of the
market value of the Portfolio's total assets less liabilities other than the
obligations created by these commitments.
DEPOSITARY RECEIPTS. The Portfolio is permitted to invest indirectly in
securities of China growth companies through sponsored or unsponsored American
Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other
types of Depositary Receipts (which, together with ADRs and GDRs, are
hereinafter collectively referred to as "Depositary Receipts"), to the extent
such Depositary Receipts are or become available. Depositary Receipts are not
necessarily denominated in the same currency as the underlying securities. In
addition, the issuers of the securities underlying unsponsored Depositary
Receipts are not obligated to disclose material information in the U.S. and,
therefore, there may be less information available regarding such issuers and
there may not be a correlation between such information and the market value of
the Depositary Receipts. ADRs are Depositary Receipts typically issued by a U.S.
financial institution which evidence ownership interests in a security or pool
of securities issued by a foreign issuer. GDRs and other types of Depositary
Receipts are typically issued by foreign banks or trust companies, although they
also may be issued by U.S. financial institutions, and evidence ownership
interests in a security or pool of securities issued by either a foreign or a
U.S. corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. For purposes
of the Portfolio's investment policies, the Portfolio's investments in
Depositary Receipts will be deemed to be investments in the underlying
securities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may enter
into futures contracts and options on futures contracts as a hedge against
fluctuations in price of a security it holds or intends to acquire, but not for
speculation or for achieving leverage. The Portfolio may also enter into futures
transactions to remain fully invested and to reduce transaction costs. The
futures contracts may be based on various securities and other securities
indices, foreign currencies and other financial instruments and indices. The
Portfolio may enter into futures contracts and options on futures contracts
provided that not more than 5% of the Portfolio's total assets at the time of
entering into any such contract or option is required as deposit to secure the
Portfolio's obligations under all such contracts and options, in the aggregate,
and provided that not more than 20% of the Portfolio's total assets in the
aggregate are invested in options, futures contracts and options on futures
contracts.
The Portfolio may purchase and write (i.e., sell) call and put options on
futures contracts that are traded on a recognized securities or futures
exchange, including non-U.S. exchanges, to the extent permitted by the U.S.
Commodity Futures Trading Commission ("CFTC"), and enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid) to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. The Portfolio will
purchase and write options on futures contracts for purposes identical to those
set forth above for the purchase of a futures contract (purchase of a call
option or sale of a put option) and the sale of a futures contract (purchase of
a put option or sale of a call option), or to close out a long or short position
in a futures contract.
RISKS ASSOCIATED WITH OPTIONS AND FUTURES. The primary risks associated
with the use of options, futures and options on futures are (i) an imperfect
correlation between the change in market value of the stocks held by the
Portfolio or value of the currencies in which the Portfolio's assets are
invested and the prices of futures and options relating to the stocks purchased
or sold by the Portfolio; and (ii) the possible lack of a liquid secondary
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market for a futures contract and the resulting inability to close a futures
position which could have an adverse impact on the Portfolio's ability to hedge.
In the opinion of the Board of Directors, the risk that the Portfolio will be
unable to close out a futures position or options contract will be minimized by
the Portfolio's only entering into futures contracts or options transactions for
which the Adviser believes there is a liquid secondary market.
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Portfolio may write
(i.e., sell) covered call options and covered put options and purchase call and
put options on securities and securities indices. The Portfolio may also write
combinations of put and call options on the same security, known as "straddles."
Such transactions can generate additional premium income, but also present
increased risk. The Portfolio may also purchase put and call options on
securities or securities indices in anticipation of changes in the value of its
existing portfolio securities or in the prices of securities that the Portfolio
expects to purchase at a later date. The Portfolio may purchase and sell options
that are traded on U.S. or foreign exchanges or that are traded
over-the-counter.
By selling a covered call option, the Portfolio would become obligated
during the term of the option to deliver the securities underlying the option
should the option holder choose to exercise the option before the option's
termination date. In return for the call it has written, the Portfolio will
receive from the purchaser (or option holder) a premium which is the price of
the option, less a commission charged by a broker. The Portfolio will keep the
premium regardless of whether the option is exercised. By selling a covered put
option, the Portfolio incurs an obligation to buy the security underlying the
option from the purchaser of the put at the option's exercise price at any time
during the option period, at the purchaser's election (certain options written
by the Portfolio will be exercisable by the purchaser only on a specific date).
A call option is "covered" if the Portfolio owns the security underlying the
option it has written or has an absolute or immediate right to acquire the
security by holding a call option on such security, or maintains a sufficient
amount of cash, cash equivalents or liquid securities to purchase the underlying
security. Generally, a put option is "covered" if the Portfolio maintains cash,
U.S. Government securities or other high grade debt obligations equal to the
exercise price of the option, or if the Portfolio holds a put option on the same
underlying security with a similar or higher exercise price.
When the Portfolio writes covered call options, it augments its income by
the premiums received and is thereby hedged to the extent of that amount against
a decline in the price of the underlying securities. The premiums received will
offset a portion of the potential loss incurred by the Portfolio if the
securities underlying the options are ultimately sold by the Portfolio at a
loss. However, during the option period, the Portfolio has, in return for the
premium on the option, given up the opportunity for capital appreciation above
the exercise price should the market price of the underlying security increase,
but has retained the risk of loss should the price of the underlying security
decline.
The Portfolio will write put options to receive the premiums paid by
purchasers (when the Adviser wishes to purchase the security underlying the
option at a price lower than its current market price, in which case the
Portfolio will write the covered put at an exercise price reflecting the lower
purchase price sought) and to close out a long put option position.
The Portfolio may also purchase put or call options on its portfolio
securities and securities indices. When the Portfolio purchases a call option it
acquires the right to buy a designated security at a designated price (the
"exercise price"), and when the Portfolio purchases a put option it acquires the
right to sell a designated security at the exercise price, in each case on or
before a specified date (the "termination date"), which is usually not
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<PAGE>
more than nine months from the date the option is issued. The Portfolio may
purchase call options to close out a covered call position or to protect against
an increase in the price of a security it anticipates purchasing. The Portfolio
may purchase put options on securities which it holds in its portfolio only to
protect itself against a decline in the value of the security. If the value of
the underlying security were to fall below the exercise price of the put
purchased in an amount greater than the premium paid for the option, the
Portfolio would incur no additional loss. The Portfolio may also purchase put
options to close out written put positions in a manner similar to call option
closing purchase transactions. The Portfolio may not enter into options
transactions if more than 20% of the Portfolio's total assets, in the aggregate,
are invested in options, futures contracts and options on futures contracts.
OPTIONS ON CURRENCIES. The Portfolio may purchase and write (i.e., sell)
put and call options on foreign currencies for the purposes of protecting
against declines in the U.S. dollar value of foreign portfolio securities and
anticipated dividends on such securities and against increases in the U.S.
dollar cost of foreign securities to be acquired. The Portfolio may use options
on currency to cross-hedge, which involves writing or purchasing options of one
currency to hedge against changes in exchange rates for a different currency, if
there is a pattern of correlation between the two currencies. As with other
kinds of options transactions, however, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received. The Portfolio could be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to
the Portfolio's position, the Portfolio may forfeit the entire amount of the
premium plus related transaction costs. In addition, the Portfolio may purchase
call or put options on currency for non-hedging purposes when the Adviser
anticipates that the currency will appreciate or depreciate in value, but the
securities denominated in that currency do not present attractive investment
opportunities. The Portfolio may not enter into options transactions if more
than 20% of the Portfolio's total assets in the aggregate are invested in
options, futures contracts and options on futures contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolio may enter into
forward foreign currency exchange contracts ("forward contracts") which provide
for the purchase or sale of an amount of a specified currency at a future date.
Purposes for which such contracts may be used include protecting against
fluctuations in the value of a foreign currency against the U.S. dollar between
the trade date and settlement date when the Portfolio purchases or sells
securities, locking in the U.S. dollar value of dividends declared on securities
held by the Portfolio and generally protecting the U.S. dollar value of
securities held by the Portfolio against exchange rate fluctuation. Such
contracts may also be used as a protective measure against the effects of
fluctuating rates of currency exchange and exchange control regulations. While
such forward contracts may limit losses to the Portfolio as a result of exchange
rate fluctuation, they will also limit any gains that may otherwise have been
realized. See "Investment Objectives and Policies -- Forward Currency Exchange
Contracts" in the Statement of Additional Information.
CURRENCY SWAPS. The Portfolio may enter into currency swaps for both
hedging and non-hedging purposes. Currency swaps involve the exchange of rights
to make or receive payments in specified currencies. Currency swaps usually
involve the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations. The use of currency swaps
is a
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highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
Because currency swaps are individually negotiated, the Portfolio expects to
achieve an acceptable degree of correlation between its portfolio investments
and its currency swap positions. If the Adviser is incorrect in its forecasts of
market values and currency exchange rates, the investment performance of the
Portfolio would be less favorable than it would have been if currency swaps were
not used.
FOREIGN CURRENCY CONSIDERATIONS. The Portfolio's assets will be invested
principally in securities of China growth companies and substantially all of the
income received by the Portfolio will be in foreign currencies including Chinese
renminbi and Hong Kong dollars. However, the Portfolio will compute and
distribute its income in U.S. dollars, and the computation of income will be
made on the date that the income is earned by the Portfolio at the foreign
exchange rate in effect on that date. Therefore, if the value of the relevant
foreign currency falls relative to the U.S. dollar between the earning of the
income and the time at which the Portfolio converts the foreign currency to U.S.
dollars, the Portfolio will be required to borrow money or liquidate securities
in order to make distributions if the Portfolio has insufficient cash in U.S.
dollars to meet distribution requirements. The liquidation of investments, if
required, may have an adverse impact on the Portfolio's performance. In
addition, changes in the exchange rates at which such foreign currencies may be
converted into U.S. dollars will affect the dollar value of securities owned by
the Portfolio and the unrealized appreciation or depreciation of investments.
The Portfolio will conduct its foreign currency exchange transactions either on
a cash basis at the cash rate prevailing in the foreign currency exchange
market, or through entering into forward, futures or options contracts to
purchase or sell foreign currencies.
The Portfolio may seek to protect the value of some portion or all of its
portfolio holdings against currency risks by engaging in hedging transactions.
Currently, there is no market in which the Portfolio may engage in many of these
hedging transactions, including with respect to the renminbi, and there can be
no guarantee that instruments suitable for hedging currency or market or
interest rate shifts will be available at the time when the Portfolio wishes to
use them. The Portfolio is authorized to enter into forward currency exchange
contracts and currency futures contracts and options on such futures contracts,
as well as to enter into currency swaps and to purchase put or call options on
foreign currencies, in U.S. or foreign markets, to the extent available.
DIRECT INVESTMENTS. The Portfolio may invest up to 25% of its total assets
in direct investments in China growth companies. Direct investments include (i)
the private purchase from trusts, partnerships, joint ventures and other
unincorporated entities or enterprises of an equity interest in the enterprise
in the form of shares of common stock or other equity interests; and (ii) the
purchase of such an equity interest in an enterprise from a principal investor
in the enterprise. Certain of the Portfolio's direct investments, particularly
in China, may include investments in smaller, less seasoned companies, or which
may be dependent on a limited management group. In some cases, the Portfolio's
direct investments will fund new operations for an enterprise which itself is
engaged in similar operations or is affiliated with an organization that is
engaged in similar operations. Such direct investments may be made in entities
that are reasonably expected in the foreseeable future to become China growth
companies, either by expanding current operations or establishing significant
operations in the Chinese Economic Area.
RISKS ASSOCIATED WITH DIRECT INVESTMENTS. Direct investments may involve a
higher degree of business and financial risk that can result in substantial
losses. Because of the absence of any public trading market for these
investments, the Portfolio may take longer to liquidate these positions than
would be the case for publicly traded securities. Although these securities may
be resold in privately negotiated transactions, the prices on
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these sales could be less than those originally paid by the Portfolio, or less
than what may be considered their fair value. Furthermore, issuers whose
securities are not publicly traded may not be subject to public disclosure and
other investor protection requirements applicable to publicly traded securities.
If such securities are required to be registered under the securities laws of
one or more jurisdictions before being resold, the Portfolio may be required to
bear the expenses of registration. In addition, in the event the Portfolio sells
unlisted securities, any capital gains realized on such transactions may be
subject to higher rates of taxation than taxes payable on the sale of listed
securities.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including direct investments
(discussed above). Investing in such unlisted equity securities may involve a
high degree of business and financial risk that can result in substantial
losses. As a result of the absence of a public trading market for these
securities, they may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the
Portfolio or less than what may be considered the fair value of such securities.
Further, companies whose securities are not publicly traded may not be subject
to the disclosure and other investor protection requirements which might be
applicable if their securities were publicly traded. If such securities are
required to be registered under the securities laws of one or more jurisdictions
before being resold, the Portfolio may be required to bear the expenses of
registration. As a general matter, the Portfolio may not invest more than 15% of
its total assets in illiquid securities, including securities for which there is
no readily available secondary market nor more than 10% of its total assets in
securities that are restricted from sale to the public without registration
("Restricted Securities") under the Securities Act of 1933 (the "1933 Act").
Nevertheless, subject to the foregoing limit on illiquid securities, the
Portfolio may invest up to 25% of its total assets in Restricted Securities that
can be offered and sold to qualified institutional buyers under Rule 144A under
that Act ("144A Securities"). The Board of Directors has adopted guidelines and
delegated to the Adviser, subject to the supervision of the Board of Directors,
the daily function of determining and monitoring the liquidity of Rule 144A
securities. Rule 144A securities may become illiquid if qualified institutional
buyers are not interested in acquiring the securities.
FOREIGN INVESTMENT RISK FACTORS. Investors should recognize that investing
in China growth companies and other foreign issuers involves certain risks and
special considerations, including those set forth below, which are not typically
associated with investing in securities of U.S. issuers. Investing in securities
issued by foreign companies and governments involves considerations and possible
risks not typically associated with investing in securities issued by the U.S.
Government and U.S. corporations. The values of foreign investments are affected
by changes in currency exchange rates or exchange control regulations,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in the U.S. or
abroad) or changed circumstances in dealings between nations and the Portfolio
may incur costs in connection with conversions between various currencies. In
addition, foreign brokerage commissions are generally higher than in the U.S.,
and foreign securities markets may be less liquid, more volatile and subject to
less governmental supervision than in the U.S. Investments in foreign issuers
could be affected by other factors not present in the U.S., including
expropriation, confiscatory taxation, lack of uniform accounting and auditing
standards and potential difficulties in enforcing contractual obligations.
Transactions in the securities of foreign issuers could be subject to settlement
delays.
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Because the Portfolio normally invests at least 65% of its total assets in
equity securities of China growth companies, its investment performance will be
especially affected by events affecting the Chinese Economic Area. The value and
liquidity of such investments may be affected favorably or unfavorably by
political, economic, fiscal, regulatory or other developments in the Chinese
Economic Area or neighboring regions. The extent of economic development,
political stability and market depth of different countries in the Chinese
Economic Area varies widely. Certain countries in the Chinese Economic Area are
either comparatively underdeveloped or are in the process of becoming developed.
Investments in China growth companies typically involve greater potential for
gain or loss than investments in securities of issuers in developed countries.
In comparison to the U.S. and other developed countries, developing countries
may have relatively unstable governments and economies based on only a few
industries. In light of the Portfolio's investment objective and policies, the
Portfolio will likely be particularly sensitive to changes in China's economy as
the result of a reversal of economic liberalization, political unrest or changes
in China's trading status.
MARKET CHARACTERISTICS. The securities markets in the Chinese Economic Area
and the surrounding region are substantially smaller, less liquid and more
volatile than the major securities markets in the United States. A high
proportion of the shares of many issuers may be held by a limited number of
persons and financial institutions, which may limit the number of shares
available for investment by the Portfolio. Similarly, volume and liquidity in
the equity markets in the Chinese Economic Area are less than in the United
States and, at times, price volatility can be greater than in the United States.
A limited number of issuers in the securities markets of the Chinese Economic
Area may represent a disproportionately large percentage of market
capitalization and trading value. The limited liquidity of securities markets in
the Chinese Economic Area may also affect the Portfolio's ability to acquire or
dispose of securities at the price and time it wishes to do so. In addition,
restrictions on foreign investment in equity securities listed on securities
exchanges in the Chinese Economic Area may impair the Portfolio's ability to
diversify its investments among certain industry sectors and may adversely
influence the prices paid by the Portfolio for such securities.
The Chinese Economic Area stock markets are undergoing a period of growth
and change which may result in trading volatility and difficulties in the
settlement and recording of transactions, and in interpreting and applying the
relevant law and regulations. In particular, the securities industry in China is
not well developed. China has no securities laws of nationwide applicability.
The prices at which the Portfolio may acquire investments may be affected by
trading by persons with material non-public information and by securities
transactions by brokers in anticipation of transactions by the Portfolio in
particular securities.
POLITICAL, ECONOMIC AND OTHER FACTORS. The Portfolio will invest in
countries with emerging economies or securities markets. Political and economic
structures in many of such countries may be undergoing significant evolution and
rapid development, and such countries may lack the social, political and
economic stability characteristic of the United States. Certain of such
countries have in the past failed to recognize private property rights and have
at times nationalized or expropriated the assets of private companies. As a
result, the risks described above, including the risks of nationalization or
expropriation of assets, may be heightened. In addition, unanticipated political
or social developments may affect the value of the Portfolio's investments in
those countries and the availability to the Portfolio of additional investments
in those countries.
Economies of the countries in the Chinese Economic Area may differ favorably
or unfavorably from the U.S. economy in such respect as rate of growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. As export-driven economies,
the economies of
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countries in the Chinese Economic Area are affected by developments in the
economies of their principal trading partners. Revocation by the United States
of China's "Most Favored Nation" trading status, which the U.S. President and
Congress reconsider annually, would adversely affect the trade and economic
development of China and Hong Kong. In addition, governmental actions in China
can have a significant effect on the economic conditions in the surrounding
countries, which could adversely affect the value and liquidity of the
Portfolio's investments. Although the Chinese Government has recently begun to
institute economic reform policies, there can be no assurances that it will
continue to pursue such policies or, if it does, that such polices will succeed.
INVESTMENT LIMITATIONS
As a non-diversified investment company, the Portfolio is not limited by the
1940 Act in the proportion of its total assets that may be invested in the
obligations of a single issuer. Thus, the Portfolio may invest a greater
proportion of its total assets in the securities of a smaller number of issuers
and, as a result, will be subject to greater risk with respect to its portfolio
securities. However, the Portfolio does intend to comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended, for qualification as a regulated investment company. See "Investment
Limitations" in the Statement of Additional Information.
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares. See "Investment
Limitations" in the Statement of Additional Information. In addition, the
Portfolio operates under certain non-fundamental investment limitations as
described below and in the Statement of Additional Information. The Portfolio
may not (i) enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 15% of the market value of the Portfolio's
total assets would be invested in such repurchase agreements and other
investments for which market quotations are not readily available, or which are
otherwise illiquid; (ii) borrow money, except from banks for extraordinary or
emergency purposes, and then only in amounts up to 10% of the Portfolio's total
assets, less all liabilities and indebtedness other than the borrowing, taken at
cost at the time of borrowing; or purchase securities while borrowings exceed 5%
of its total assets; or mortgage, pledge or hypothecate any assets except in
connection with any such borrowing in amounts up to 10% of the value of the
Portfolio's net assets at the time of borrowing; (iii) invest in fixed time
deposits with a duration of over seven calendar days; or (iv) invest in fixed
time deposits with a duration of seven or less calendar days if more than 10% of
the Portfolio's total assets would be invested in these deposits.
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MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. (the "Adviser") is
the Investment Adviser and Administrator of the Fund and each of its portfolios.
The Adviser provides investment advice and portfolio management services,
pursuant to an Investment Advisory Agreement and, subject to the supervision of
the Fund's Board of Directors, makes each of the Fund's portfolio's day-to-day
investment decisions, arranges for the execution of portfolio transactions and
generally manages each of the Fund's portfolio's investments. The Adviser is
entitled to receive from the Portfolio an annual investment advisory fee,
payable quarterly, equal to 1.25% of the average daily net assets of the
Portfolio.
The Adviser has agreed to a reduction in the fees payable to it as Adviser
and to reimburse the Portfolio, if necessary, if such fees would cause the total
annual operating expenses of the Portfolio to exceed 1.75% of its average daily
net assets.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At December 31, 1994, the Adviser, together with its
affiliated asset management companies, managed investments totaling
approximately $48.7 billion, including approximately $35.6 billion under active
management and $13.1 billion as Named Fiduciary or Fiduciary Adviser. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. EAN WAH CHIN AND JAMES CHENG. Ms. Chin is a Managing
Director of Morgan Stanley, and is responsible for the Adviser's regional Asia
ex-Japan operations based in Singapore. She has shared primary portfolio
management responsibility for the Portfolio since its inception. Prior to
joining Morgan Stanley in 1986, Ms. Chin spent eight years with the Monetary
Authority of Singapore and the Government of Singapore Investment Corporation,
where she was a portfolio manager for one of the largest portfolios in Asia. Ms.
Chin was an ASEAN scholar educated at the University of Singapore. Mr. Cheng is
a Principal of Morgan Stanley. Mr. Cheng has shared primary portfolio management
responsibility for the Portfolio since its inception. He joined the Adviser in
1988 as a Portfolio Manager for Asian markets and is currently responsible for
investments in Hong Kong, China, Taiwan, and South Korea. Prior to joining
Morgan Stanley, he was affiliated with American Express and with Arthur
Andersen, where he spent three years as an auditor/consultant. Mr. Cheng holds
an M.B.A. from the University of Michigan, Ann Arbor.
ADMINISTRATOR. The Adviser also provides the Fund with administrative
services pursuant to an Administration Agreement. The services provided under
the Administration Agreement are subject to the supervision of the officers and
the Board of Directors of the Fund and include day-to-day administration of
matters related to the corporate existence of the Fund, maintenance of its
records, preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal and state laws. The Administration Agreement also
provides that the Administrator, through its agents, will provide the Fund
dividend disbursing and transfer agent services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15% of the average daily net assets of the Portfolio.
Under the U.S. Trust Administration Agreement between the Adviser and United
States Trust Company of New York ("U.S. Trust"), U.S. Trust has agreed to
provide certain administrative services to the Fund. Pursuant to a delegation
clause in the U.S. Trust Administration Agreement, U.S. Trust delegates its
responsibilities to
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Mutual Funds Service Company ("MFSC"), a subsidiary of U.S. Trust, that provides
certain administrative services to the Fund. The Adviser supervises and monitors
such administrative services provided by MFSC. The services provided under the
Administration Agreement and the U.S. Trust Administration Agreement are also
subject to the supervision of the Board of Directors of the Fund. The Board of
Directors of the Fund has approved the provision of services described above
pursuant to the Administration Agreement and the U.S. Trust Administration
Agreement as being in the best interest of the Fund. MFSC's business address is
73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information
regarding the Administration Agreement or the U.S. Trust Administration
Agreement, see "Management of the Fund" in the Statement of Additional
Information.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator and Distributor. The officers of
the Fund conduct and supervise its daily business operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Portfolio and receives no compensation for its
distribution services.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees, and
printing and mailing costs) specified in the Administration and Distribution
Agreements.
PURCHASE OF SHARES
Shares of the Portfolio may be purchased, without sales commission, at the
net asset value per share next determined after receipt of the purchase order.
See "Valuation of Shares."
INITIAL INVESTMENTS
1) BY CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check ($500,000 minimum for
the Portfolio, with certain exceptions for Morgan Stanley employees and
select customers) payable to "Morgan Stanley Institutional Fund, Inc. --
China Growth Portfolio", to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
Payment will be accepted only in U.S. dollars, unless prior approval for
payment by other currencies is given by the Fund. The portfolio(s) to be
purchased should be designated on the Account Registration Form. For purchases
by check, the Fund is ordinarily credited with Federal Funds within one business
day. Thus your purchase of shares by check is ordinarily credited to your
account at the net asset value per share of the Portfolio determined on the next
business day after receipt.
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2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire
Federal Funds to the Fund's bank account. In order to ensure prompt receipt
of your Federal Funds Wire, it is important that you follow these steps:
A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your
name, address, telephone number, Social Security or Tax Identification
Number, the portfolio(s) selected, the amount being wired, and by which
bank. We will then provide you with a Fund account number. (Investors
with existing accounts should also notify the Fund prior to wiring
funds.)
B. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account (be sure to have your bank include the name of
the portfolio(s) selected and the account number assigned to you):
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
ABA #0210-0131-8
DDA #20-9310-3
Attn.: Morgan Stanley Institutional Fund, Inc.
Ref.: (portfolio name, your account number, your account name)
Please call before wiring funds: 1-800-548-7786
C. Complete and sign the Account Registration Form and mail it to the
address shown thereon.
Federal Funds purchase orders will be accepted only on a day on which the Fund
and United States Trust Company of New York (the "Custodian Bank") are open
for business. Your bank may charge a service fee for wiring funds.
3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire"
above must be followed in purchasing shares by bank wire. However, money
transferred by bank wire may or may not be converted into Federal Funds the
same day, depending on the time the money is received and the bank handling
the wire. Prior to such conversion an investor's money will not be invested.
Your bank may charge a service fee for wiring funds.
ADDITIONAL INVESTMENTS
You may add to your account at any time (minimum additional investment
$1,000, except for automatic reinvestment of dividends and capital gains
distributions for which there are no minimums) by purchasing shares at net asset
value by mailing a check to the Fund (payable to "Morgan Stanley Institutional
Fund, Inc. -- China Growth Portfolio") at the above address or by wiring monies
to the Custodian Bank as outlined above. It is very important that your account
name and the portfolio name be specified in the letter or wire to ensure proper
crediting to your account. In order to ensure that your wire orders are invested
promptly, you are requested to notify one of the Fund's representatives (toll
free: 1-800-548-7786) prior to the wire date.
OTHER PURCHASE INFORMATION
The purchase price of the shares of the Portfolio is the net asset value
next determined after the order is received. See "Valuation of Shares." An order
received prior to the regular close of the New York Stock
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Exchange ("NYSE"), which is currently 4:00 p.m. (Eastern Time), will be executed
at the price computed on the date of receipt; an order received after the
regular close of the NYSE will be executed at the price computed on the next day
the NYSE is open.
In the interest of economy and convenience and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
To ensure that checks are collected by the Fund, withdrawals of investments
made by check are not presently permitted until payment for the purchase has
been received, which may take up to eight business days after the date of
purchase. As a condition of this offering, if a purchase is canceled due to
nonpayment or because your check does not clear, you will be responsible for any
loss the Fund or its agents incur. If you are already a shareholder, the Fund
may redeem shares from your account(s) to reimburse the Fund or its agents for
any loss. In addition, you may be prohibited or restricted from making future
investments in the Fund.
Investors may also invest in the Fund by purchasing shares through
registered broker-dealers. Broker-dealers who make purchases for their customers
may charge a fee for such services.
EXCESSIVE TRADING
Frequent trades involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you can disrupt management of
a Portfolio and raise its expenses. Consequently, in the interest of all the
stockholders of the Portfolio and the Portfolio's performance, the Fund may in
its discretion bar a stockholder that engages in excessive trading of shares of
a Portfolio from further purchases of shares of the Fund for an indefinite
period. The Fund considers excessive trading to be more than one purchase and
sale involving shares of the same Portfolio of the Fund within any 120-day
period. For example, exchanging shares of Portfolios of the Fund as follows:
exchanging shares of Portfolio A for shares of Portfolio B, then exchanging
shares of Portfolio B for shares of Portfolio C and again exchanging shares of
Portfolio C for shares of Portfolio B within a 120-day period amounts to
excessive trading. Two types of transactions are exempt from these excessive
trading restrictions: (1) trades exclusively between money market portfolios;
and (2) trades done in connection with an asset allocation service managed or
advised by MSAM and/or any of its affiliates.
REDEMPTION OF SHARES
You may withdraw all or any portion of the amount in your account by
redeeming shares at any time. Please note that purchases made by check are not
permitted to be redeemed until payment of the purchase price has been collected,
which may take up to eight business days after purchase. The Fund will redeem
shares of the Portfolio at its next determined net asset value. On days that
both the NYSE and the Custodian Bank are open for business, the net asset value
per share of the Portfolio is determined at the regular close of trading of the
NYSE (currently 4:00 p.m. Eastern Time). Shares of the Portfolio may be redeemed
by mail or telephone. No charge is made for redemption. Any redemption proceeds
may be more or less than the purchase price of your shares depending on, among
other factors, the market value of the investment securities held by the
Portfolio.
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<PAGE>
BY MAIL
The Portfolio will redeem its shares at the net asset value determined on
the date the request is received if the request is received in "good order"
before the regular close of the NYSE. Your request should be addressed to Morgan
Stanley Institutional Fund, Inc. P.O. Box 2798, Boston, Massachusetts
02208-2798, except that deliveries by overnight courier should be addressed to
Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds Service Company, 73
Tremont Street, Boston, Massachusetts 02108.
"Good order" means that the request to redeem shares must include the
following documentation:
(a) A letter of instruction or a stock assignment specifying the number
of shares or dollar amount to be redeemed, signed by all registered owners
of the shares in the exact names in which they are registered;
(b) Any required signature guarantees (see "Further Redemption
Information" below); and
(c) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.
Shareholders who are uncertain of requirements for redemption should consult
with a Morgan Stanley Institutional Fund representative.
BY TELEPHONE
Provided you have previously elected the Telephone Redemption Option on the
Account Registration Form, you can request a redemption of your shares by
calling the Fund and requesting the redemption proceeds be mailed to you or
wired to your bank. Please contact one of Morgan Stanley Institutional Fund's
representatives for further details. In times of drastic market conditions, the
telephone redemption option may be difficult to implement. If you experience
difficulty in making a telephone redemption, your request may be made by mail or
overnight courier and will be implemented at the net asset value next determined
after it is received. Redemption requests sent to the Fund through overnight
courier must be sent to Morgan Stanley Insitutional Fund, Inc., c/o Mutual Funds
Service Company, 73 Tremont Street, Boston, Massachusetts 02108. The Fund and
the Fund's transfer agent (the "Transfer Agent") will employ reasonable
procedures to confirm that the instructions communicated by telephone are
genuine. These procedures include requiring the investor to provide certain
personal identification information at the time an account is opened and prior
to effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to provide
additional telecopied written instructions regarding transaction requests.
Neither the Fund nor the Transfer Agent will be responsible for any loss,
liability, cost or expense for following instructions received by telephone that
either of them reasonably believes to be genuine.
To change the commercial bank or account designated to receive redemption
proceeds, a written request must be sent to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed.
FURTHER REDEMPTION INFORMATION
Normally the Fund will make payment for all shares redeemed within one
business day of receipt of the request, but in no event will payment be made
more than seven days after receipt of a redemption request in good order.
However, payments to investors redeeming shares which were purchased by check
will not be made until payment for the purchase has been collected, which may
take up to eight days after the date of purchase.
20
<PAGE>
The Fund may suspend the right of redemption or postpone the date upon which
redemptions are effected at times when the NYSE is closed, or under any
emergency circumstances as determined by the Securities and Exchange Commission
(the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission.
Distributions-in-kind will be made in readily marketable securities. Investors
may incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves the right to redeem shares in any account in the Portfolio having a
value of less than $500,000 (the net asset value of which will be promptly paid
to the shareholder). The Fund, however, will not redeem shares based solely upon
market reductions in net asset value. If at any time your total investment does
not equal or exceed the stated minimum value, you may be notified of this fact
and you will be allowed at least 60 days to make an additional investment before
the redemption is processed.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. Please contact the
Fund for further information. See "Redemption of Shares" in the Statement of
Additional Information.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
You may exchange shares that you own in the Portfolio for shares of any
other available portfolio of the Fund (except for the International Equity
Portfolio). The privilege to exchange shares by telephone is automatic. Shares
of the Portfolio may be exchanged by mail or telephone. Before you make an
exchange, you should read the Prospectus of the portfolios in which you seek to
invest. Because an exchange transaction is treated as a redemption followed by a
purchase, an exchange would be considered a taxable event for shareholders
subject to tax. The exchange privilege is only available with respect to
portfolios that are registered for sale in a shareholder's state of residence.
BY MAIL
In order to exchange shares by mail, you should include in the exchange
request the name and account number of the Portfolio, the name of the portfolios
into which you intend to exchange shares, and the signatures of all registered
account holders. Send the exchange request to Morgan Stanley Institutional Fund,
Inc. P.O. Box 2798, Boston, Massachusetts 02208-2798.
BY TELEPHONE
When exchanging shares by telephone, have ready the name and account number
of the Portfolio, the name of the portfolios into which you intend to exchange
shares, your Social Security number or Tax I.D. number, and your account
address. Requests for telephone exchanges received prior to 4:00 p.m. (Eastern
Time) are processed at the close of business that same day based on the net
asset value of each of the portfolios at the close
21
<PAGE>
of business. Requests received after 4:00 p.m. (Eastern Time) are processed the
next business day based on the net asset value determined at the close of
business on such day. For additional information regarding responsibility for
the authenticity of telephoned instructions, see "Redemption of Shares -- By
Telephone" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Fund shares to another
person by writing to Morgan Stanley Institutional Fund, Inc. P.O. Box 2798,
Boston, Massachusetts 02208-2798. As in the case of redemptions, the written
request must be received in good order before any transfer can be made.
VALUATION OF SHARES
The net asset value per share of the Portfolio is determined by dividing the
total market value of the Portfolio's investments and other assets, less any
liabilities, by the total number of outstanding shares of the Portfolio. Net
asset value per share is determined as of the regular close of the NYSE on each
day that the NYSE is open for business. Price information on listed securities
is taken from the exchange where the security is primarily traded. Securities
listed on a U.S. securities exchange for which market quotations are available
are valued at the last quoted sale price on the day the valuation is made.
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 not readily available are valued at a price within a
range not exceeding the current asked price nor less than the current bid price.
The current bid and asked prices are determined based on the bid and asked
prices quoted on such valuation date by two reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such 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. Securities
not priced in this manner are valued at the most recently quoted bid price, or
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which no quotations are readily
available (including restricted and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above stated procedures are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid price and
asked price of such currencies against the U.S. dollar last quoted by any major
bank.
PERFORMANCE INFORMATION
The Fund may from time to time advertise the "total return" of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an
22
<PAGE>
investment in the Portfolio would have earned over a specified period of time
(such as one, five or ten years), assuming that all distributions and dividends
by the Portfolio were reinvested on the reinvestment dates during the period.
Total return does not take into account any federal or state income taxes that
may be payable on dividends and distributions or upon redemption. The Fund may
also include comparative performance information in advertising or marketing the
Portfolio's shares. Such performance information may include data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating services and market indices.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions will automatically be
reinvested in additional shares at net asset value, except that, upon written
notice to the Fund or by checking off the appropriate box in the Distribution
Option Section on the Account Registration Form, a shareholder may elect to
receive income dividends and capital gains distributions in cash. The Portfolio
expects to distribute substantially all of its net investment income in the form
of annual dividends. Net capital gains, if any, will also be distributed
annually. Confirmations of the purchase of shares of the Portfolio through the
automatic reinvestment of income dividends and capital gains distributions will
be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of
1934, as amended, on the next quarterly client statement following such purchase
of shares. Consequently, confirmations of such purchases will not be provided at
the time of completion of such purchases as might otherwise be required by Rule
10b-10.
Undistributed net investment income is included in a portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to income tax.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), so that the Portfolio will be relieved of federal income tax on
that part of its net investment income and net capital gain that is distributed
to shareholders.
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The Portfolio distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from the Portfolio's net investment income are taxable to shareholders
as ordinary income, whether received in cash or in additional shares. Such
dividends generally will not qualify for the dividends-received deduction for
corporations. The Portfolio will report annually to its shareholders the amount
of dividend income qualifying for such treatment.
Distributions of net capital gain are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio (such
designation being dependent upon the holding period of the Portfolio in the
underlying asset generating the net capital gain), regardless of how long
shareholders have held their shares. The Portfolio sends reports annually to
shareholders of the federal income tax status of all distributions made during
the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gains over short-term and long-term capital
losses), including any available capital loss carryforwards, prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders on December 31 of that year if the distributions are paid by
the Portfolio at any time during the following January.
The sale or redemption of shares may result in taxable gain or loss to the
redeeming shareholder, depending upon whether the fair market value of the
redemption proceeds exceeds or is less than the shareholder's adjusted basis in
the redeemed shares. If capital gain distributions have been made with respect
to shares that are sold at a loss after being held for six months or less, then
the loss is treated as a long-term capital loss to the extent of the capital
gain distributions.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolio and directs the Adviser to use its best
24
<PAGE>
efforts to obtain the best available price and most favorable execution with
respect to all transactions for the Portfolio. The Fund has authorized the
Adviser to pay higher commissions in recognition of brokerage services which, in
the opinion of the Adviser, are necessary for the achievement of better
execution, provided the Adviser believes this to be in the best interest of the
Fund.
Since shares of the Portfolio are not marketed through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
However, the Adviser may place portfolio orders with qualified broker-dealers
who recommend the Fund's portfolios or who act as agents in the purchase of
shares of the Fund's portfolios their clients.
In purchasing and selling securities for the Portfolio, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolio, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolio may also be appropriate
for other clients served by the Adviser. If purchase or sale of securities
consistent with the investment policies of the Portfolio and one or more of
these other clients served by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Portfolio and
such other clients in a manner deemed fair and reasonable by the Adviser,
subject to the supervision of the Adviser. Although there is no specified
formula for allocating such transactions, the various allocation methods used by
the Adviser, and the results of such allocations, are subject to periodic review
by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution
of orders, the Adviser may allocate a portion of the Portfolio's brokerage
transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order
for Morgan Stanley or its affiliates to effect any portfolio transactions for
the Fund, the commissions, fees or other remuneration received by Morgan Stanley
or such affiliates must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of the Directors who are not
"interested persons," as defined in the Investment Company Act of 1940, as
amended (the "1940 Act"), have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to Morgan
Stanley or such affiliates are consistent with the foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, the Adviser or Morgan Stanley or any "affiliated persons," as defined
in the 1940 Act, of Morgan Stanley when such entities are acting as principals,
except to the extent permitted by law.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the length
of time they have been held. The Portfolio anticipates that, under normal
circumstances, the annual portfolio turnover rate may exceed 100%. High
portfolio turnover involves correspondingly greater transaction costs which will
be borne directly by the respective Portfolio. In addition, high portfolio
turnover may result in more capital gains which would be taxable to the
shareholders of the respective Portfolio.
25
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation permit the Fund to issue up to 15,000,000,000 shares
of common stock, with $.001 par value per share. Pursuant to the Fund's Articles
of Incorporation, the Board of Directors may increase the number of shares the
Fund is authorized to issue without the approval of the shareholders of the
Fund. The Board of Directors has the power to designate one or more classes of
shares of common stock and to classify and reclassify any unissued shares with
respect to such classes.
The shares of the Portfolio, when issued, will be fully paid,
non-assessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of the Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as that
term is defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is
not required to hold an annual meeting of its shareholders unless required to do
so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports; the
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, Morgan Stanley Asset Management Inc. or its agent, as Transfer
Agent, will send to each shareholder having an account directly with the Fund a
monthly statement showing transactions in the account, the total number of
shares owned, and any dividends or distributions paid.
CUSTODIAN
Domestic securities and cash are held by United States Trust Company of New
York, New York, as the Fund's domestic custodian. Morgan Stanley Trust Company,
Brooklyn, New York, acts as the Fund's custodian for foreign assets held outside
the United States and employs subcustodians who were approved by the Board of
Directors of the Fund in accordance with regulations of the Securities and
Exchange Commission for the purpose of providing custodial services for such
assets. For more information on the custodians, see "General Information --
Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
The Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts
02108-3913, acts as Dividend Disbursing and Transfer Agent for the Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
26
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC. -- CHINA GROWTH PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
If you need assistance in filling out this form for
ACCOUNT INFORMATION the Morgan Stanley Institutional Fund, please
Fill in where applicable contact your Morgan Stanley representative or call
us toll free 1-(800)-548-7786. Please print all
items except signature, and mail to the Fund at the
address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS (RIGHTS OF SURVIVORSHIP PRESUMED UNLESS TENANCY IN COMMON IS
INDICATED)
1.
- --------------------------------------------------------------------------------
First Name Initial Last Name
2.
- --------------------------------------------------------------------------------
First Name Initial Last Name
- --------------------------------------------------------------------------------
First Name Initial Last Name
3. CORPORATIONS, TRUSTS AND OTHERS Please call the Fund for additional
documents that may be required to set up account and to authorize
transactions.
3.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR (ONLY ONE
ASSOCIATION CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
B) MAILING ADDRESS
Please fill in completely, including telephone number(s).
Street or P.O. Box ____________________________________________________________
City _____________________ State _____________________ Zip __________-__________
Home Telephone No. __________-__________-__________
Business Telephone No. __________-__________-__________
/ / United States Citizen / / Resident Alien / / Non-Resident Alien:
Indicate Country of Residence __________________________________________________
C) TAXPAYER IDENTIFICATION NUMBER
If the account is in more than one name, CIRCLE THE NAME OF THE PERSON WHOSE
TAXPAYER IDENTIFICATION NUMBER IS PROVIDED IN SECTION A) ABOVE. If no name
is circled, the number will be considered to be that of the last name
listed. For Custodian account of a minor (Uniform Gifts/Transfers to Minors
Acts), give the Social Security Number of the minor.
PART 1. Enter your Taxpayer Identification Number. For most individual
taxpayers, this is your Social Security Number.
TAXPAYER IDENTIFICATION NUMBER
------------------------------------------------------------------------
OR
SOCIAL SECURITY NUMBER
------------------------------------------------------------------------
PART 2. BACKUP WITHHOLDING
/ / Check this box if you are NOT subject to Backup Withholding under the
provisions of Section 3406(a)(1)(C) of the Internal Revenue Code.
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct taxpayer identification number. Accounts that have a missing or
incorrect taxpayer identification number will be subject to backup
withholding at a 31% rate on dividends, distributions and other payments. If
you have not provided us with your correct taxpayer identification number,
you may be subject to a $50 penalty imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of persons
subject to backup withholding will be reduced by the amount of tax withheld.
If withholding results in an overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding under Section
3406(a)(1)(C) of the Internal Revenue Code because you have underreported
interest or dividends or you were required to but failed to file a return
which would have included a reportable interest or dividend payment. IF YOU
HAVE NOT BEEN SO NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT.
D) PORTFOLIO SELECTION
Minimum $500,000 for the China Growth Portfolio. Please indicate amount.
FOR PURCHASE OF $ OF CHINA GROWTH PORTFOLIO
E) METHOD OF INVESTMENT
Please indicate manner of payment.
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.-CHINA
GROWTH PORTFOLIO)
/ / Exchange $ From --
Name of Portfolio Account No.
/ / Account previously established by:
/ / Phone exchange / / Wire on --
Date
Account No. (Check Digit)
(Previously assigned by the Fund)
<PAGE>
F) DISTRIBUTION OPTION
Income dividends and capital gains distributions (if any) will be reinvested
in additional shares unless either box below is checked.
/ / Income dividends to be paid in cash, capital gains distributions (if any)
in shares.
/ / Income dividends and capital gains distributions (if any) to be paid in
cash.
G) TELEPHONE REDEMPTION
Please select at time of initial application if you wish to redeem shares by
telephone. A SIGNATURE GUARANTEE IS REQUIRED IF BANK ACCOUNT IS NOT
REGISTERED IDENTICALLY TO YOUR FUND ACCOUNT. TELEPHONE REQUESTS FOR
REDEMPTIONS WILL NOT BE HONORED UNLESS THE BOX IS CHECKED.
/ / I/we hereby authorize the Fund and its agents to honor any telephone
requests to wire redemption proceeds to the commercial bank indicated at
right and/or mail redemption proceeds to the name and address in which
my/our fund account is registered if such requests are believed to be
authentic.
THE FUND AND THE FUND'S TRANSFER AGENT WILL EMPLOY REASONABLE PROCEDURES TO
CONFIRM THAT INSTRUCTIONS COMMUNICATED BY TELEPHONE ARE GENUINE. THESE
PROCEDURES INCLUDE REQUIRING THE INVESTOR TO PROVIDE CERTAIN PERSONAL
IDENTIFICATION INFORMATION AT THE TIME AN ACCOUNT IS OPENED AND PRIOR TO
EFFECTING EACH TRANSACTION REQUESTED BY TELEPHONE. IN ADDITION, ALL
TELEPHONE TRANSACTION REQUESTS WILL BE RECORDED AND INVESTORS MAY BE
REQUIRED TO PROVIDE ADDITIONAL TELECOPIED WRITTEN INSTRUCTIONS OF
TRANSACTION REQUESTS. NEITHER THE FUND NOR THE TRANSFER AGENT WILL BE
RESPONSIBLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR FOLLOWING
INSTRUCTIONS RECEIVED BY TELEPHONE THAT IT REASONABLY BELIEVES TO BE
GENUINE.
----------------------------------------------------------------------------
Name of COMMERCIAL Bank (Not Savings Bank) Bank Account No.
----------------------------------------------------------------------------
Bank ABA No.
----------------------------------------------------------------------------
Name(s) in which your Bank Account is Established
----------------------------------------------------------------------------
Bank's Street Address
----------------------------------------------------------------------------
City State Zip
H) INTERESTED PARTY OPTION
In addition to the account statement sent to my/our registered address, I/we
hereby authorize the Fund to mail duplicate statements to the name and
address provided at right.
-----------------------------------------------------------------------------
Name
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Address
-----------------------------------------------------------------------------
City State Zip Code
I) DEALER INFORMATION
-----------------------------------------------------------------------------
Representative Name
-----------------------------------------------------------------------------
Representative No.
-----------------------------------------------------------------------------
Branch No.
J) SIGNATURE OF ALL HOLDERS AND TAXPAYER CERTIFICATION
Sign Here
The undersigned certify(ies) that I/we have full authority and legal capacity to
purchase and redeem shares of the Fund and affirm that I/we have received a
current Prospectus of the China Growth Portfolio of the Morgan Stanley
Institutional Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES
OF PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS
TRUE, CORRECT AND COMPLETE.
(X) (X)
- --------------------------------------- --------------------------------------
Signature Date Signature Date
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVES OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses............................................................. 2
Prospectus Summary........................................................ 4
Investment Objective and Policies......................................... 7
Additional Investment Information......................................... 8
Investment Limitations.................................................... 15
Management of the Fund.................................................... 16
Purchase of Shares........................................................ 17
Redemption of Shares...................................................... 19
Shareholder Services...................................................... 21
Valuation of Shares....................................................... 22
Performance Information................................................... 22
Dividends and Capital Gains Distributions................................. 23
Taxes..................................................................... 23
Portfolio Transactions.................................................... 24
General Information....................................................... 26
Account Registration Form
</TABLE>
CHINA GROWTH PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
EQUITY GROWTH PORTFOLIO
EMERGING GROWTH PORTFOLIO
AGGRESSIVE EQUITY PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
thirty-two portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Equity Growth, Emerging Growth and Aggressive Equity Portfolios (each, a
"Portfolio" and collectively, the "Portfolios"). The Class A and Class B shares
currently offered by the Portfolios have different minimum investment
requirements and fund expenses. Shares of the Portfolios are offered with no
sales charge, exchange fee or redemption fee.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional investors and high net
worth individual investors a series of portfolios which benefit from the
investment expertise and commitment to excellence associated with Morgan Stanley
and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Asian Real Estate, Emerging Markets,
European Equity, European Real Estate, Global Equity, Gold, International
Equity, International Magnum, International Small Cap, Japanese Equity and Latin
American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth,
Equity Growth, Small Cap Value Equity, Technology, U.S. Equity Plus, U.S. Real
Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced
Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global
Fixed Income, High Yield and Municipal Bond Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information about
the Fund is contained in a "Statement of Additional Information" dated May 1,
1998, which is incorporated herein by reference. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the Fund
are available upon request and without charge by writing or calling the Fund at
the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolios indicated below will incur:
<TABLE>
<CAPTION>
EQUITY EMERGING AGGRESSIVE
GROWTH GROWTH EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A......................................................... None None None
Class B......................................................... None None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A......................................................... None None None
Class B......................................................... None None None
Deferred Sales Load
Class A......................................................... None None None
Class B......................................................... None None None
Redemption Fees
Class A......................................................... None None None
Class B......................................................... None None None
Exchange Fees
Class A......................................................... None None None
Class B......................................................... None None None
</TABLE>
<TABLE>
<CAPTION>
EQUITY EMERGING AGGRESSIVE
GROWTH GROWTH EQUITY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (Net of Fee Waivers)*
Class A......................................................... % % %
Class B......................................................... % % %
12b-1 Fees
Class A......................................................... None None None
Class B......................................................... 0.25% 0.25% 0.25%
Other Expenses
Class A......................................................... % % %
Class B......................................................... % % %
----------- ----------- -----------
Total Operating Expenses (Net of Fee Waivers)*
Class A......................................................... % % %
Class B......................................................... % % %
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
* The Adviser has agreed to waive its management fees and/or reimburse the
Portfolios, if necessary, if such fees would cause the total annual operating
expenses of each of the Portfolios to exceed a specified percentage of its
respective average daily net assets. As a result of these reductions, the
Management Fees stated above are lower than the contractual fees stated under
"Management of the Fund." The Adviser reserves the right to terminate any of
its fee waivers and/or expense reimbursements at any time in its sole
discretion. For further
2
<PAGE>
information on Fund expenses, see "Management of the Fund." Set forth below,
for each Portfolio, are the management fees and total operating expenses
absent such fee waivers and/or expense reimbursements as a percentage of
average daily net assets of the Class A shares and Class B shares,
respectively, of each Portfolio.
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEES ABSENT ------------------------
PORTFOLIO FEE WAIVERS CLASS A CLASS B
- ------------------------------------------------------------ ------------------------- ----------- -----------
<S> <C> <C> <C>
Equity Growth............................................... 0.60% % %
Emerging Growth............................................. 1.00% % %
Aggressive Equity........................................... 0.80% % %
</TABLE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees for each Portfolio are based on actual figures for
the fiscal year ended December 31, 1997. Due to the continuous nature of Rule
12b-1 fees, long-term Class B shareholders may pay more than the equivalent of
the maximum front-end charges otherwise permitted by the National Association of
Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (i) a 5% annual rate of return and (ii) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The example is based on total operating expenses
of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Equity Growth Portfolio
Class A.......................................................... $ $ $ $
Class B..........................................................
Emerging Growth Portfolio
Class A..........................................................
Class B..........................................................
Aggressive Equity Portfolio
Class A..........................................................
Class B..........................................................
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A and Class
B shares of the Equity Growth, Emerging Growth and Aggressive Equity Portfolios
for each of the periods presented. The audited financial highlights for each of
the Portfolio's shares for each of the periods presented are part of the Fund's
financial statements which appear in the Fund's December 31, 1997 Annual Report
to Shareholders and which are incorporated by reference into the Fund's
Statement of Additional Information. Each Portfolio's financial highlights for
each of the periods presented have been audited by Price Waterhouse LLP, whose
unqualified report thereon is also incorporated by reference into the Statement
of Additional Information. Additional performance information is included in the
Annual Report. The Annual Report and the financial statements therein, along
with the Statement of Additional Information, are available at no cost from the
Fund at the address and telephone number noted on the cover page of this
Prospectus. After October 31, 1992, the Fund changed its fiscal year end to
December 31. The following information should be read in conjunction with the
financial statements and notes thereto.
4
<PAGE>
EQUITY GROWTH PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------
YEAR ENDED TWO MONTHS
DECEMBER 31, ENDED YEAR ENDED
----------------------------------------------------- DECEMBER 31, OCTOBER 31,
1997 1996 1995 1994 1993 1992 1992
--------- --------- --------- --------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD...... $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44 $ 10.66
--------- --------- --------- --------- --------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............... 0.17 0.22 0.17 0.22 0.03 0.16
Net Realized and Unrealized Gain on
Investments............................ 4.07 4.93 0.21 0.28 0.41 0.82
--------- --------- --------- --------- --------- ------- -------
Total from Investment Operations...... 4.24 5.15 0.38 0.50 0.44 0.98
--------- --------- --------- --------- --------- ------- -------
DISTRIBUTIONS
Net Investment Income................... (0.17) (0.28) (0.13) (0.23) -- (0.20)
In Excess of Net Investment Income...... -- -- -- (0.01) -- --
Net Realized Gain....................... (3.27) (2.75) (0.37) -- -- --
--------- --------- --------- --------- --------- ------- -------
Total Distributions................... (3.44) (3.03) (0.50) (0.24) -- (0.20)
--------- --------- --------- --------- --------- ------- -------
NET ASSET VALUE, END OF PERIOD............ $ 14.94 $ 14.14 $ 12.02 $ 12.14 $ 11.88 $ 11.44
--------- --------- --------- --------- --------- ------- -------
--------- --------- --------- --------- --------- ------- -------
TOTAL RETURN.............................. 30.97% 45.02% 3.26% 4.33% 3.85% 9.26%
--------- --------- --------- --------- --------- ------- -------
--------- --------- --------- --------- --------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)... $ 352,703 $ 158,112 $ 97,259 $ 73,789 $ 45,985 $ 36,558
Ratio of Expenses to Average Net Assets
(1).................................... 0.80% 0.80% 0.80% 0.80% 0.80%** 0.80%
Ratio of Net Investment Income to
Average Net Assets (1)................. 1.12% 1.57% 1.44% 1.59% 1.93%** 1.73%
Portfolio Turnover Rate................. 186% 186% 146% 172% 1% 38%
Average Commission Rate#................ $0.0535 N/A N/A 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 $0.01 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets....... 0.88% 0.88% 0.89% 0.93% 1.11%** 1.01%
Net Investment Income to Average Net
Assets.............................. 1.04% 1.49% 1.35% 1.46% 1.62%** 1.52%
<CAPTION>
CLASS B
------------------------------
PERIOD FROM PERIOD FROM
APRIL 2, JANUARY 2,
1991* TO YEAR ENDED 1996*** TO
OCTOBER 31, DECEMBER 31, DECEMBER 31,
1991 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD...... $ 10.00 $ 14.22
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)............... 0.05 0.13
Net Realized and Unrealized Gain on
Investments............................ 0.61 3.99
------- ------- -------
Total from Investment Operations...... 0.66 4.12
------- ------- -------
DISTRIBUTIONS
Net Investment Income................... -- (0.15)
In Excess of Net Investment Income...... -- --
Net Realized Gain....................... -- (3.27)
------- ------- -------
Total Distributions................... -- (3.42)
------- ------- -------
NET ASSET VALUE, END OF PERIOD............ $ 10.66 $ 14.92
------- ------- -------
------- ------- -------
TOTAL RETURN.............................. 6.60% 29.92%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)... $ 18,139 $5,498
Ratio of Expenses to Average Net Assets
(1).................................... 0.80%** 1.05%**
Ratio of Net Investment Income to
Average Net Assets (1)................. 2.34%** 0.91%**
Portfolio Turnover Rate................. 3% 186%
Average Commission Rate#................ N/A $0.0535
- ----------------------------------
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income.............................. $0.03 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets....... 1.37%** 1.12%**
Net Investment Income to Average Net
Assets.............................. 1.77%** 0.84%**
</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.
5
<PAGE>
EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 21.49 $ 16.12 $ 16.22
------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income Loss (1)............................ (0.19) (0.18) (0.09)
Net Realized and Unrealized Gain (Loss) on Investments.... 0.89 5.55 (0.01)
------------- ------------- ------------- -------------
Total from Investment Operations........................ 0.70 5.37 (0.10)
------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Realized Gain......................................... (8.69) -- --
------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD.............................. $ 13.50 $ 21.49 $ 16.12
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
TOTAL RETURN................................................ 3.72% 33.31% (0.62)%
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)..................... $ 62,793 $ 119,378 $ 117,669
Ratio of Expenses to Average Net Assets (1)............... 1.25% 1.25% 1.25%
Ratio of Net Investment Income (Loss) to Average Net
Assets (1)............................................... (0.88)% (0.76)% (0.61)%
Portfolio Turnover Rate................................... 33% 25% 24%
Average Commission Rate .................................. $0.0507 N/A N/A
- ----------------------------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income............. $0.01 $0.003 $0.002
Ratios before expense limitation:
Expenses to Average Net Assets......................... 1.30% 1.26% 1.26%
Net Investment Income (Loss) to Average Net Assets..... (0.92)% (0.77)% (0.62)%
<CAPTION>
CLASS
B
-------------
TWO MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31,
1993 1992 1992 1997
------------- ------------- ------------- -------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 16.22 $ 14.97 $ 16.18
------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income Loss (1)............................ (0.11) (0.01) (0.09)
Net Realized and Unrealized Gain (Loss) on Investments.... 0.11 1.26 (1.12)
------------- ------------- ------------- -------------
Total from Investment Operations........................ 0.00 1.25 (1.21)
------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Realized Gain......................................... -- -- --
------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD.............................. $ 16.22 $ 16.22 $ 14.97
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
TOTAL RETURN................................................ 0.00% 8.35% (7.48)%
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)..................... $ 103,621 $ 94,161 $ 80,156
Ratio of Expenses to Average Net Assets (1)............... 1.25% 1.25%** 1.25%
Ratio of Net Investment Income (Loss) to Average Net
Assets (1)............................................... (0.77)% (0.68)%** (0.66)%
Portfolio Turnover Rate................................... 25% 1% 17%
Average Commission Rate .................................. N/A N/A N/A
- ----------------------------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income............. $0.01 $0.00 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets......................... 1.31% 1.36%** 1.29%
Net Investment Income (Loss) to Average Net Assets..... (0.83)% (0.79)%** (0.71)%
<CAPTION>
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996
-------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 21.47
-------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income Loss (1)............................ (0.15)
Net Realized and Unrealized Gain (Loss) on Investments.... 0.82
-------------
Total from Investment Operations........................ 0.67
-------------
DISTRIBUTIONS
Net Realized Gain......................................... (8.69)
-------------
NET ASSET VALUE, END OF PERIOD.............................. $ 13.45
-------------
-------------
TOTAL RETURN................................................ 3.58%
-------------
-------------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)..................... $3,997
Ratio of Expenses to Average Net Assets (1)............... 1.50%**
Ratio of Net Investment Income (Loss) to Average Net
Assets (1)............................................... (1.09)%**
Portfolio Turnover Rate................................... 33%
Average Commission Rate .................................. $0.0507
- ----------------------------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income............. $0.01
Ratios before expense limitation:
Expenses to Average Net Assets......................... 1.54%**
Net Investment Income (Loss) to Average Net Assets..... (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.
6
<PAGE>
AGGRESSIVE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------- --------------------------------
PERIOD FROM
YEAR ENDED DECEMBER PERIOD FROM JANUARY 2,
31, MARCH 8, 1995* YEAR ENDED 1996*** TO
-------------------- TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1997 1996
--------- --------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............. $ 12.17 $ 10.00 $ 12.25
--------- --------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)...................... 0.18 0.15 0.13
Net Realized and Unrealized Gain on
Investments................................... 4.73 3.95 4.67
--------- --------- ------- ------- -------
Total from Investment Operations............. 4.91 4.10 4.80
--------- --------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income.......................... (0.17) (0.15) (0.15)
Net Realized Gain.............................. (2.48) (1.78) (2.48)
--------- --------- ------- ------- -------
Total Distributions.......................... (2.65) (1.93) (2.63)
--------- --------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD................... $ 14.43 $ 12.17 $ 14.42
--------- --------- ------- ------- -------
--------- --------- ------- ------- -------
TOTAL RETURN..................................... 40.90% 41.25% 39.72%
--------- --------- ------- ------- -------
--------- --------- ------- ------- -------
RATIO AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands).......... $ 68,480 $ 28,548 $8,805
Ratio of Expenses to Average Net Assets (1).... 1.00% 1.00%** 1.25%**
Ratio of Net Investment Income to Average Net
Assets (1).................................... 1.26% 1.64%** 0.95%**
Portfolio Turnover Rate........................ 380% 309% 380%
Average Commission Rate#....................... $0.0484 N/A $0.0484
</TABLE>
- --------------------
<TABLE>
<C> <S> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income................ $0.03 $0.06
Ratios before expense limitation:
Expenses to Average Net Assets............................ 1.24% 1.59%**
Net Investment Income to Average Net Assets............... 1.02% 1.05%**
<CAPTION>
(1)
<C> <C>
$0.03
1.47%**
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.
7
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of thirty-two portfolios, offering institutional investors
and high net worth individual investors a broad range of investment choices
coupled with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and Class B shares, except the
International Small Cap and Municipal Money Market Portfolios which offers only
Class A shares. Each portfolio has its own investment objective and policies
designed to meet its specific goals. The investment objective of each Portfolio
described in this Prospectus is as follows:
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
The other portfolios of the Fund are described in other Prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of companies in
the Asian real estate industry.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
- The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and
long-term capital appreciation by investing primarily in equity securities
of companies in the European real estate industry.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
8
<PAGE>
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in equity securities of small- to medium-sized companies which
the Adviser believes to be undervalued.
- The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Adviser, are expected to benefit from their involvement in technology and
technology-related industries.
- The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers included in the
Standard & Poor's 500 Index ("S&P 500").
- 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
substantial investment in real estate investment trusts.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of equity securities which the Adviser believes
to be undervalued and fixed income securities.
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
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- 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 of the recognized rating services.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment grade mortgage-backed
securities.
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing in municipal
obligations, the interest on which is exempt from federal income tax.
MONEY MARKET:
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund and
each of its portfolios. As of , 1998, Morgan Stanley Asset
Management Inc. and its affiliated institutional asset management companies
(exclusive of Miller Anderson & Sherrerd, LLP) managed assets of approximately
$ billion. See "Management of the Fund -- Investment Adviser" and "Management
of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. The minimum
initial investment, generally, is $500,000 for Class A shares of each Portfolio
and $100,000 for Class B shares of each Portfolio. The minimum initial
investment amount is reduced for certain categories of investors. For additional
information on how to purchase shares and minimum initial investments, see
"Purchase of Shares."
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of the applicable class
next determined after receipt of the redemption request. The redemption price
may be more or less than the purchase price. Certain redemptions that cause the
value of an account to remain for a continuous 60-day period below the minimum
investment amount for Class A shares or
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for Class B shares may result in involuntary redemption or automatic conversion.
For additional information on how to redeem shares and involuntary redemption or
conversion, see "Purchase of Shares" and "Redemption of Shares."
RISK FACTORS
Investing in each of the Portfolios entails certain risks and considerations
of which an investor should be aware. The Portfolios' share prices and
investment returns fluctuate and, when redeemed, an investment in the Portfolios
may be worth more or less than its original cost. The investment policies of the
Portfolios may entail the following risk factors:
- EQUITY SECURITIES. Each Portfolio may invest in equity securities. Prices
of equity securities fluctuate in response to many factors, including the
financial health of the issuers and changes in economic and market
conditions.
- FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. The risks of foreign investment include fluctuations in foreign
currency values, political events affecting the country of issuance and
potentially greater market volatility and lower liquidity.
- DERIVATIVES. Each Portfolio may invest in instruments that derive their
values from those of specified securities, indices, currencies or other
points of reference. These derivatives, including those used to manage
risk, are themselves subject to the risks of the different markets in which
they are traded and, therefore, may or may not serve their intended
purposes.
For additional information about risk factors, see also "Investment Objectives
and Policies" and "Additional Investment Information."
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies each Portfolio will employ in its efforts to achieve its objective.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. In addition to the investments and strategies described below, the
Portfolios may invest in certain securities and obligations as set forth in
"Additional Investment Information" and as described under "Investment
Objectives and Policies" in the Statement of Additional Information. The
investment policies described below are not fundamental policies unless
otherwise noted and may be changed without shareholder approval.
THE EQUITY GROWTH PORTFOLIO
The Portfolio's investment objective is to provide long-term capital
appreciation by investing in growth-oriented equity securities of medium and
large capitalization U.S. corporations and, to a limited extent, foreign
corporations. With respect to the Portfolio, equity securities include common
and preferred stocks, convertible securities and rights and warrants to purchase
common stocks. Under normal circumstances, the Portfolio will invest at least
65% of the value of its total assets in equity securities.
The Adviser employs a flexible and eclectic investment process in pursuit of
the Portfolio's investment objective and may invest in any equity security that,
in the Adviser's judgment, provides above-average potential for capital
appreciation. In selecting stocks for the Portfolio, the Adviser concentrates on
a universe of rapidly growing, high quality companies and lower, but
accelerating, earnings growth situations. The Adviser's universe of potential
investments generally comprises companies with market capitalizations of $500
million or more. The Portfolio is not restricted to investments in specific
market sectors. In selecting investments for the Portfolio, the Adviser
emphasizes individual security selection. The Portfolio's investments will
generally be diversified by number of issues, but concentrated sector positions
may result from the investment process. Although the Portfolio has a long-term
investment perspective, the Adviser may take advantage of short-term
opportunities that are consistent with the Portfolio's objective by selling
recently purchased securities which have increased in value.
The Adviser uses its research capabilities, analytical resources and
judgment to assess economic, industry and market trends, as well as individual
company developments, to select promising growth investments for the Portfolio.
In addition, the Adviser rigorously assesses company developments, including
changes in strategic direction, management focus and current and likely future
earnings results. Valuation is important to the Adviser, but is viewed in the
context of prospects for sustainable earnings growth and the potential for
positive earnings surprises in relation to consensus expectations.
The Portfolio may invest up to 25% of its total assets at the time of
purchase in securities of foreign companies, either directly or in the form of
Depositary Receipts. The Portfolio also may invest in convertible securities of
domestic and, subject to the above restrictions, foreign issuers on occasions
when the Adviser believes it is more advantageous to purchase such securities
than to purchase common stock.
THE EMERGING GROWTH PORTFOLIO
The Portfolio's investment objective is to provide long-term capital
appreciation by investing primarily in growth-oriented equity securities of
small- to medium-sized domestic corporations and, to a limited extent,
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foreign corporations. Such companies generally have annual gross revenues
ranging from $10 million to $750 million. With respect to the Portfolio, equity
securities include common and preferred stocks, convertible securities, and
rights and warrants to purchase common stocks, and any similar equity interest,
such as trust or partnership interests. Such equity securities may not pay
dividends or distributions and may or may not carry voting rights. Although the
Portfolio has a long-term investment perspective, the Adviser may take advantage
of short-term opportunities that are consistent with its objective.
The Adviser employs a flexible investment program in pursuit of the
Portfolio's investment objective and may invest in any common stock which, in
the Adviser's judgment, provides above-average potential for capital
appreciation. The Portfolio is not restricted to investments in specific market
sectors. The Portfolio generally will invest in small- to medium-sized companies
that are early in their life cycle, but which, in the Adviser's judgment, have
the potential to become major enterprises. For example, the Adviser uses its
judgment and research capabilities to assess economic, industry, market and
company developments to select investments in promising emerging growth
companies that are expected to benefit from new technology or new products or
services. In addition, the Adviser looks for special developments, such as
research discoveries, changes in customer demand, rejuvenated management or
basic changes in the economic environment.
The Portfolio may invest up to 25% of its total assets at the time of
purchase in securities of foreign companies, either directly or in the form of
Depositary Receipts. The Portfolio may also invest in convertible securities of
domestic and, subject to the above restrictions, foreign issuers on occasions
when the Adviser believes it is more advantageous to purchase such securities
than to purchase common stock. The Portfolio will not invest in debt securities
that are not rated at least investment grade by either Standard & Poor's Ratings
Group ("S&P") or Moody's Investors Service, Inc. ("Moody's").
THE AGGRESSIVE EQUITY PORTFOLIO
The Portfolio's investment objective is to provide capital appreciation by
investing primarily in a non-diversified portfolio of corporate equity and
equity-linked securities. With respect to the Portfolio, equity and
equity-linked securities include common and preferred stocks, convertible
securities, rights and warrants to purchase common stocks, options, futures, and
specialty securities, such as ELKS, LYONs, PERCS of U.S., and to a limited
extent, foreign issuers. Under normal circumstances, the Portfolio will invest
at least 65% of the value of its total assets in equity and equity-linked
securities. The Portfolio has a long-term investment perspective; however, the
Adviser may take advantage of short-term opportunities that are consistent with
the Portfolio's objective by selling recently purchased securities which have
increased in value.
The Adviser employs a flexible and eclectic investment process in pursuit of
the Portfolio's investment objective and may invest in any equity or
equity-linked security that, in the Adviser's judgment, provides above-average
potential for capital appreciation. In selecting securities for the Portfolio,
the Adviser concentrates on a universe of rapidly growing, high quality
companies and lower, but accelerating, earnings growth situations. The Adviser's
universe of potential investments generally comprises companies with market
capitalizations of $500 million or more, but smaller market capitalization
securities may be purchased from time to time. The Portfolio is not restricted
to investments in specific market sectors. The Adviser uses its research
capabilities, analytical resources and judgment to assess economic, industry and
market trends, as well as individual company developments, to select promising
investments for the Portfolio. In addition, the Adviser rigorously
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assesses earnings results. Valuation is of secondary importance to the Adviser
and is viewed in the context of prospects for sustainable earnings growth and
the potential for positive earnings surprises in relation to consensus
expectations.
In selecting investments for the Portfolio, the Adviser emphasizes
individual security selection. Overweighted sector positions and issuer
positions may result from the investment process. The Portfolio does not expect
to invest more than 25% of its total assets at the time of purchase in
securities of foreign companies. The Portfolio may invest in securities of
foreign issuers directly or in the form of Depositary Receipts.
ADDITIONAL INVESTMENT INFORMATION
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES.
The Portfolios may invest in securities such as convertible securities,
preferred stock, warrants or other securities exchangeable under certain
circumstances for shares of common stock. Warrants are instruments giving
holders the right, but not the obligation, to buy shares of a company at a given
price during a specified period.
The Aggressive Equity Portfolio may invest in equity-linked securities,
including, among others, PERCS, ELKS or LYONs, which are securities that are
convertible into or the value of which is based upon the value of, equity
securities upon certain terms and conditions. The amount received by an investor
at maturity of such securities is not fixed but is based on the price of the
underlying common stock. It is impossible to predict whether the price of the
underlying common stock will rise or fall. Trading prices of the underlying
common stock will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial, or other factors affecting the
capital markets, the stock exchanges on which the underlying common stock is
traded and the market segment of which the issuer is a part. In addition, it is
not possible to predict how equity-linked securities will trade in the secondary
market, which is fairly developed and liquid. The market for such securities may
be shallow, however, and high volume trades may be possible only with
discounting. In addition to the foregoing risks, the return on such securities
depends on the creditworthiness of the issuer of the securities, which may be
the issuer of the underlying securities or a third party investment banker or
other lender. The creditworthiness of such third party issuer of equity-linked
securities may, and often does, exceed the creditworthiness of the issuer of the
underlying securities. The advantage of using equity-linked securities over
traditional equity and debt securities is that the former are income producing
vehicles that may provide a higher income than the dividend income on the
underlying equity securities while allowing some participation in the capital
appreciation of the underlying equity securities. Another advantage of using
equity-linked securities is that they may be used for hedging to reduce the risk
of investing in the generally more volatile underlying equity securities.
The following are three examples of equity-linked securities. The Portfolio
may invest in the securities described below or other similar equity-linked
securities.
PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS") technically
is preferred stock with some characteristics of common stock. PERCS are
mandatorily convertible into common stock after a period of time, usually three
years, during which the investors' capital gains are capped, usually at 30%.
Commonly, PERCS may be redeemed by the issuer at any time or if the issuer's
common stock is trading at a specified price level or better. The redemption
price starts at the beginning of the PERCS duration period at a price that is
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above the cap by the amount of the extra dividends the PERCS holder is entitled
to receive relative to the common stock over the duration of the PERCS and
declines to the cap price shortly before maturity of the PERCS. In exchange for
having the cap on capital gains and giving the issuer the option to redeem the
PERCS at any time or at the specified common stock price level, the Portfolio
may be compensated with a substantially higher dividend yield than that on the
underlying common stock. Investors, such as the Portfolio, that seek current
income find PERCS attractive because PERCS provide a higher dividend income than
that paid with respect to a company's common stock.
ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt
securities, in that the principal amount received at maturity is not fixed but
is based on the price of the issuer's common stock. ELKS are debt securities
commonly issued in fully registered form for a term of three years under an
indenture trust. At maturity, the holder of ELKS will be entitled to receive a
principal amount equal to the lesser of a cap amount, commonly in the range of
30% to 55% greater than the current price of the issuer's common stock, or the
average closing price per share of the issuer's common stock, subject to
adjustment as a result of certain dilution events, for the 10 trading days
immediately prior to maturity. Unlike PERCS, ELKS are commonly not subject to
redemption prior to maturity. ELKS usually bear interest during the three-year
term at a substantially higher rate than the dividend yield on the underlying
common stock. In exchange for having the cap on the return that might have been
received as capital gains on the underlying common stock, the Portfolio may be
compensated with the higher yield, contingent on how well the underlying common
stock does. Investors, such as the Portfolio, that seek current income, find
ELKS attractive because ELKS provide a higher dividend income than that paid
with respect to a company's common stock.
LYONS. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. For an investment in LYONs, the
Portfolio will not receive any interest payments until the notes mature,
typically in 15 to 20 years, when the notes are redeemed at face, or par, value.
The yield on LYONs, typically, is lower-than-market rate for debt securities of
the same maturity, due in part to the fact that the LYONs are convertible into
common stock of the issuer at any time at the option of the holder of the LYONs.
Commonly, the LYONs are redeemable by the issuer at any time after an initial
period or if the issuer's common stock is trading at a specified price level or
better or, at the option of the holder, upon certain fixed dates. The redemption
price typically is the purchase price of the LYONs plus accrued original issue
discount to the date of redemption, which amounts to the lower-than-market
yield. The Portfolio will receive only the lower-than-market yield unless the
underlying common stock increases in value at a substantial rate. LYONs are
attractive to investors like the Portfolio when it appears that they will
increase in value due to the rise in value of the underlying common stock.
DEPOSITARY RECEIPTS. The Portfolios may invest in Depositary Receipts,
including American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") and other Depositary Receipts
(which, together with ADRs, GDRs and EDRs, are hereinafter collectively referred
to as "Depositary Receipts"), to the extent that such Depositary Receipts are or
become available. ADRs are securities, typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer (the "underlying issuer") and
deposited with the depositary. ADRs may be "sponsored" or "unsponsored."
Sponsored ADRs are established jointly by a depositary and the underlying
issuer, whereas unsponsored ADRs may be established by a depositary without
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participation by the underlying issuer. The issuers of the stock of unsponsored
ADRs are not obligated to disclose material information in the United States and
therefore, there may not be a correlation between such information and the
market value of the ADR. GDRs, EDRs and other types of Depositary Receipts are
typically issued by foreign depositaries, although they may also be issued by
U.S. depositaries, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. The Portfolios may invest in
sponsored and unsponsored Depositary Receipts. For purposes of the Portfolios'
investment policies, the Portfolios' investments in Depositary Receipts will be
deemed to be investments in the underlying securities.
FIXED INCOME SECURITIES. The Emerging Growth Portfolio may invest in fixed
income (debt) securities. The market value of the fixed income securities in
which a Portfolio invests will be affected by changes in the creditworthiness of
issuers and will change in response to interest rate changes and other factors.
Generally, the values of fixed income securities vary inversely with changes in
interest rates, so that during periods of falling interest rates, the values of
outstanding fixed income securities generally rise and during periods of rising
interest rates, the values of such securities generally decline. While
securities with longer maturities tend to produce higher yields, the prices of
longer maturity securities are subject to greater market fluctuations as a
result of changes in interest rates.
FOREIGN CURRENCY FORWARD CONTRACTS. Each Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolios
may use such contracts to protect against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, lock in the U.S. dollar value of
dividends and interest on securities held by the Portfolio, and generally to
protect the U.S. dollar value of securities held by the Portfolio against
exchange rate fluctuation. While forward contracts may limit losses as a result
of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will be at least equal to the amount of
the Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. Investment in securities of foreign issuers involves investment risks
somewhat different from those affecting securities of U.S. issuers. The
Portfolio's investments will be subject to political and economic events that
affect the countries in which it invests. Foreign issuers may be subject to
different accounting, auditing and financial standards and requirements. There
also may be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the United States. Many foreign
securities markets have substantially less trading volume than U.S. national
securities exchanges and, therefore, securities of some foreign issuers are less
liquid and more volatile than securities of comparable U.S. issuers. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the United States. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes, which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Portfolios by domestic companies. Investments in securities
of foreign issuers are generally denominated in foreign currencies and, since a
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Portfolio may temporarily hold uninvested reserves in bank deposits in foreign
currencies, the value of a Portfolio's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations, and a Portfolio may incur costs in connection with
conversions between various currencies.
LOANS OF PORTFOLIO SECURITIES. The Portfolios may lend their securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of its total assets.
MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money
market instruments, although the Portfolios intend to stay invested in
securities satisfying their primary investment objective to the extent
practical. Consistent with their investment policies, the Portfolios may make
money market investments pending other investment or settlement for liquidity.
In addition, the Portfolios may invest in money market instruments for temporary
defensive purposes during adverse market conditions. The money market
investments permitted for the Portfolios include: obligations of the U.S.
Government and its agencies and instrumentalities, commercial paper, bank
obligations (including certificates of deposit), other debt securities and
repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Equity Growth and Aggressive Equity Portfolios may invest in
securities that are neither listed on a stock exchange nor traded
over-the-counter. Such unlisted equity securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Portfolios or less than what may be
considered the fair value of such securities. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.
As a general matter, a Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Securities that are not registered under the
Securities Act of 1933, as amended, but that can be offered and sold to
qualified institutional buyers under Rule 144A under that Act ("Rule 144A
Securities") will not be included within the foregoing 15% restriction if the
securities are determined to be liquid. The Board of Directors has adopted
guidelines and delegated to the Adviser, subject to the supervision of the Board
of Directors, the daily function of determining and monitoring the liquidity of
Rule 144A Securities. Rule 144A Securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
REPURCHASE AGREEMENTS. The Portfolios may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement,
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the Portfolio buys a security from a seller that has agreed to repurchase it at
a mutually agreed upon date and price, reflecting the interest rate effective
for the term of the agreement. The term of these agreements is usually from
overnight to one week, and never exceeds one year. A repurchase agreement may be
viewed as a fully collateralized loan of money by the Portfolio to the seller.
The Portfolio always receives securities, with a market value at least equal to
the purchase price (including accrued interest) as collateral and this value is
maintained during the term of the agreement. If the seller defaults and the
collateral value declines, the Portfolio might incur a loss. If bankruptcy
proceedings are commenced with respect to the seller, the Portfolio's
realization upon the collateral may be delayed or limited. The Portfolios may
not enter into repurchase agreements with more than seven days to maturity if,
as a result, more than 15% of the market value of the Portfolio's net assets are
invested in these agreements and other investments for which market quotations
are not readily available or which are otherwise illiquid.
SHORT SALES. The Aggressive Equity Portfolio may from time to time sell
securities short consistent with applicable legal requirements. A short sale is
a transaction in which the Portfolio sells securities it either owns or has the
right to acquire at no added cost (i.e., "against the box") or does not own (but
has borrowed) in anticipation of a decline in the market price of the
securities. To deliver the securities to the buyer, the Portfolio arranges
through a broker to borrow the securities and, in so doing, the Portfolio will
become obligated to replace the securities borrowed at their market price at the
time of the replacement, whatever that price may be. When the Portfolio makes a
short sale of borrowed securities, the proceeds it receives from the sale will
be held on behalf of a broker until the Portfolio replaces the borrowed
securities. The Portfolio may have to pay a premium to borrow the securities and
must pay any dividends or interest payable on the securities until they are
replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or other liquid securities. In addition, if the short sale is
not "against the box", the Portfolio will place in a segregated account with the
Custodian an amount of cash or other liquid securities equal to the difference,
if any, between (i) the market value of the securities sold at the time they
were sold short and (ii) any cash or other liquid securities deposited as
collateral with the broker in connection with the short sale. Short sales by the
Portfolio 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 can equal only the total amount invested.
SMALL- AND MEDIUM-SIZED COMPANIES. The Emerging Growth Portfolio seeks
long-term capital appreciation by investing primarily in small- to medium-sized
companies, which generally are more vulnerable to financial and other risks than
larger, more established companies. Accordingly, investments in this Portfolio
may involve a higher degree of risk and price volatility than the general equity
markets. The Aggressive Equity Portfolio may invest in small- to medium-sized
companies to a lesser extent.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, each Portfolio
may, for temporary defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and medium-term debt obligations in which a Portfolio may invest consist of (i)
obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.
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<PAGE>
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolios may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment, but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the Custodian a segregated account of cash or liquid securities in
an amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time a Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if the general level of
interest rates has changed. It is a current policy of the Portfolios not to
enter into when-issued commitments exceeding in the aggregate 15% of the
Portfolio's net assets other than the obligations created by these commitments.
DERIVATIVE PRODUCTS (DERIVATIVES)
The Portfolios are permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but are
not limited to: futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other derivative
products yet to be developed, so long as these new products are used in a manner
consistent with the objectives of the Portfolios. These derivative products may
be based upon a wide variety of underlying rates, indices, instruments,
securities and other products, such as interest rates, foreign currencies,
foreign and domestic fixed income and equity securities, groups or "baskets" of
securities and securities indices (for each derivative product, the
"underlying"). Exclusive of forward foreign currency contracts and any
derivative products used for hedging purposes, each Portfolio will limit its use
of derivative products to 33 1/3% of its total assets, measured by the aggregate
notional amount of outstanding derivative products.
The Portfolios may use derivative products under a number of different
circumstances to further their investment objectives. For example, a Portfolio
may purchase derivatives to gain exposure to a market quickly in response to
changes in the Portfolio's investment strategy, upon the inflow of investable
cash or when the derivative provides greater liquidity than the underlying
market. A Portfolio may also use derivatives when it is restricted from directly
owning the "underlying" or when derivatives provide a pricing advantage or lower
transaction costs. The Portfolios also may purchase combinations of derivatives
in order to gain exposure to an investment in lieu of actually purchasing such
investment. Derivatives may also be used by a Portfolio for hedging or risk
management purposes and in other circumstances when the Adviser believes it
advantageous to do so consistent with the Portfolio's investment objectives and
policies. The Portfolios will not use derivatives in a manner that creates
leverage, except to the extent that the use of leverage is expressly permitted
by a particular Portfolio's investment policies, and then only in a manner
consistent with such policies.
The use of derivative products is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Portfolios will be less favorable than it would
have been if these investment techniques had not been used.
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Some of the derivative products in which the Portfolios may invest and some
of the risks related thereto are described in more detail below.
FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)
The Portfolios may purchase and sell futures contracts, such as futures on
securities indices, baskets of securities, foreign currencies and interest rates
of the type generally known as financial futures. These are standardized
contracts that are bought and sold on organized exchanges. A futures contract
obligates a party to buy or sell a specific amount of the "underlying," such as
for example, a particular foreign currency, on a specified future date at a
specified price or to settle the value in cash.
The Portfolios may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolios may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Forward Contracts" above. These
forward contracts are privately negotiated and are bought and sold in the
over-the-counter market. Like a future, a forward contract obligates a party to
buy or sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.
In some cases, the Portfolios may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolios will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolios may utilize futures contracts, forward contracts and related options
are as follows:
The Portfolios may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market exposure.
There currently are limited securities index futures and options on such futures
in many countries, particularly emerging countries. The nature of the strategies
adopted by the Adviser, and the extent to which those strategies are used, may
depend on the development of such markets. The Portfolios may also purchase and
sell foreign currency futures to hedge their respective holdings and commitments
against changes in the level of future currency rates or to adjust their
exposure to a particular currency.
The Portfolios may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely with
changes in interest rates. The Portfolios may engage in such transactions to
hedge their holdings of debt instruments against future changes in interest
rates or for other purposes.
The Portfolios may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these contracts also rises and falls inversely with
changes in interest rates. The Portfolios may engage in financial futures and
forward contracts for both hedging and non-hedging purposes.
Gains and losses on futures contracts, forward contracts and related options
depend on the Adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors. Other risks associated with
the use of these instruments include (i) imperfect correlation between the
change in market value of investments held by a Portfolio and the prices of
derivative products relating to investments purchased
20
<PAGE>
or sold by the Portfolio, and (ii) possible lack of a liquid secondary market
for a derivative product and the resulting inability to close out a position.
The risk that a Portfolio will be unable to close out a position will be
minimized by only entering into transactions for which there appears to be a
liquid exchange or secondary market. In some strategies, the risk of loss in
trading on futures and related transactions can be substantial, due both to the
low margin deposits required and the extremely high degree of leverage involved
in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the
"CFTC"), each Portfolio may, without registering with the CFTC as a Commodity
Pool Operator, enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-bona
fide hedging activities.
OPTION TRANSACTIONS
The Portfolios may seek to increase their returns or may hedge their
portfolio investments through options transactions with respect to individual
securities, indices or baskets in which such Portfolios may invest; other
financial instruments; and foreign currency. Various options may be purchased
and sold on either the exchange-traded or over-the-counter markets.
Each Portfolio may purchase put and call options. Purchasing a put option
gives a Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period.
Purchasing a call option gives a Portfolio a similar right, but not the
obligation, to purchase the underlying. The purchaser pays a premium to the
seller (also known as the writer) of the option.
Each Portfolio also may write put and call options on investments held in
its portfolio, as well as foreign currency options. A Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, a Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, a Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.
By writing an option, a Portfolio incurs an obligation either to buy (in the
case of a put option) or sell (in the case of a call option) the underlying from
the purchaser of the option at the option's exercise price, upon exercise by the
purchaser. Pursuant to guidelines established by the Board of Directors, the
Portfolios may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will continue to own (i) the underlying; (ii) securities or instruments
convertible or exchangeable without the payment of any consideration into the
underlying; or (iii) a call option on the same underlying with a strike price no
higher than the price at which the underlying was sold pursuant to a short
option position. In the case of a put option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will own another put option on the same underlying with an equal or higher
strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolios' use of options as
21
<PAGE>
described include (i) imperfect correlation between the change in market value
of investments held, purchased or sold by a Portfolio and the prices of options
relating to such investments, and (ii) possible lack of a liquid secondary
market for an option.
INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS
Swaps are privately negotiated over-the-counter derivative products in which
two parties agree to exchange payment streams calculated in relation to a rate,
index, instrument or certain securities and a particular "notional amount." As
with many of the other derivative products available to the Portfolios, the
underlying may include an interest rate (fixed or floating), a currency exchange
rate, a commodity price index, and a security, securities index or a combination
thereof. A great deal of flexibility is possible in the way the products may be
structured, with the effect being that the parties may have exchanged amounts
equal to the return on one rate, index or group of securities for another. For
example, in a simple fixed-to-floating interest rate swap, one party makes
payments equivalent to a fixed interest rate, and the other makes payments
equivalent to a specified interest rate index. A Portfolio may engage in simple
or more complex swap transactions involving a wide variety of underlyings. The
currency swaps that the Portfolios may enter will generally involve an agreement
to pay interest streams in one currency based on a specified index in exchange
for receiving interest streams denominated in another currency. Such swaps may
involve initial and final exchanges that correspond to the agreed upon notional
amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. A Portfolio may use one or more of these products in addition to or in
lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar is a combination product in which the same party, such as the Portfolio,
buys a cap from and sells a floor to the other party. As with put and call
options, the amount at risk is limited for the buyer, but, if the cap or floor
is not hedged or covered, may be unlimited for the seller. Under current market
practice, caps, collars and floors between the same two parties are generally
documented under the same "master agreement." In some cases, options and forward
agreements may also be governed by the same master agreement. In the event of a
default, amounts owed under all transactions entered into under, or covered by,
the same master agreement would be netted and only a single payment would be
made.
Swaps, caps, collars and floors are credit-intensive products. A Portfolio
that enters into a swap transaction bears the risk of default, i.e. nonpayment,
by the other party. The guidelines under which each Portfolio enters derivative
transactions, along with some features of the transactions themselves, are
intended to reduce these risks to the extent reasonably practicable, although
they cannot eliminate the risks entirely. Under guidelines established by the
Board of Directors, a Portfolio may enter into swaps only with parties that meet
certain credit rating guidelines. Consistent with current market practices, a
Portfolio will generally enter into swap transactions on a net basis, and all
swap transactions with the same party will be documented under a single master
agreement to provide for net payment upon default. In addition, a Portfolio's
obligations under an agreement
22
<PAGE>
will be accrued daily (offset against any amounts owing to the Portfolio) and
any accrued, but unpaid, net amounts owed to the other party to a master
agreement will be covered by the maintenance of a segregated account consisting
of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, a Portfolio's risk of loss will consist of the payments
that a Portfolio is contractually entitled to receive from the other party. This
may not be true for currency swaps that require the delivery of the entire
notional amount of one designated currency in exchange for the other. If there
is a default by the other party, a Portfolio may have contractual remedies
pursuant to the agreements related to the transaction.
STRUCTURED NOTES
Structured notes are derivative securities for which the amount of principal
repayment and/or interest payments is based upon the movement of one or more
factors. These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices,
such as the S&P 500 Index. In some cases, the impact of the movements of these
factors may increase or decrease through the use of multipliers or deflators.
The Portfolios may use structured notes to tailor their investments to the
specific risks and returns the Adviser wishes to accept while avoiding or
reducing certain other risks.
INVESTMENT LIMITATIONS
Each of the Equity Growth and Emerging Growth Portfolios is a diversified
investment company and is therefore subject to the following fundamental
limitations: (i) as to 75% of its total assets, a Portfolio may not invest more
than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government and its agencies and instrumentalities, and
(ii) a Portfolio may not own more than 10% of the outstanding voting securities
of any one issuer.
The Aggressive Equity Portfolio is a non-diversified portfolio under the
1940 Act, which means that the Portfolio is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. Thus, the Portfolio may invest a greater proportion of its assets in the
securities of a small number of issuers and as a result will be subject to
greater risk with respect to its portfolio securities. Nevertheless, the
Portfolio intends to comply with more limited diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company.
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes
23
<PAGE>
each of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each of the
Portfolio's investments. Set forth below as an annual percentage of average
daily net assets are the management fees payable to the Adviser quarterly by
each Portfolio pursuant to the terms of the Investment Advisory Agreement. The
fees for the Emerging Growth and Aggressive Equity Portfolios are higher than
most investment companies because each of the Portfolios invests
internationally. The Adviser believes that the fees are comparable to those of
other investment companies that invest internationally. The Adviser has
voluntarily agreed to a reduction in the fees payable to it and to reimburse the
Portfolios, if necessary, if such fees would cause the total annual operating
expenses of the Portfolios to exceed the maximums set forth below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING
EXPENSES AFTER FEE
WAIVER
------------------------
PORTFOLIO MANAGEMENT FEE CLASS A CLASS B
- --------------------------------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Equity Growth Portfolio 0.60% 0.80% 1.05%
Emerging Growth Portfolio 1.00% 1.25% 1.50%
Aggressive Equity Portfolio 0.80% 1.00% 1.25%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD")
is the direct parent of the Adviser and Morgan Stanley. MSDWD is a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses -- securities, asset management and credit
services. At , 1998, the Adviser, together with its affiliated asset
management companies (exclusive of Miller Anderson & Sherrerd, LLP), managed
assets of approximately $ billion. See "Management of the Fund" in the
Statement of Additional Information.
PORTFOLIO MANAGERS. The following persons have primary responsibility for
managing the Portfolios indicated.
EQUITY GROWTH PORTFOLIO -- KURT FEUERMAN AND MARGARET K. JOHNSON. Kurt
Feuerman joined the Adviser in July 1993 as a Managing Director in the
Institutional Equity Group. Previously Mr. Feuerman was a Managing Director of
Morgan Stanley's Research Department, where he was responsible for emerging
growth stocks, gaming and restaurants. Before joining Morgan Stanley, Mr.
Feuerman was a Managing Director of Drexel Burnham Lambert, where he had been an
equity analyst since 1984. Over the years, he has been highly ranked in the
Institutional Investor All American Research Poll in four separate categories:
packaged food, tobacco, emerging growth and gaming. Mr. Feuerman earned an
M.B.A. from Columbia University in 1982, an M.A. from Syracuse University in
1980, and a B.A. from McGill University in 1977. Margaret Johnson is a Principal
of the Adviser and Morgan Stanley and a Portfolio Manager in the Institutional
Equity Group. She joined the Adviser in 1984 and worked as an Analyst in the
Marketing and Fiduciary Advisor areas. Ms. Johnson became an Equity Analyst in
1986 and a Portfolio Manager in 1989. Prior to joining Morgan Stanley, she
worked for the New York City PBS affiliate, WNET, Channel 13. She holds a B.A.
degree from Yale College and is a Chartered Financial Analyst. Mr. Feuerman and
Ms. Johnson have had primary responsibility for managing the Portfolio's assets
since July 1993 and April 1991, respectively.
24
<PAGE>
EMERGING GROWTH -- KURT A. FEUERMAN AND DANIEL R. LASCANO. Information
about Mr. Feuerman is included under the Equity Growth Portfolio above. Daniel
Lascano is a Vice President of the Adviser and Morgan Stanley. He joined the
Adviser in 1993 as an equity analyst. Prior to joining the Adviser, Mr. Lascano
worked at Morgan Stanley as a research assistant to Kurt Feuerman. Mr. Lascano
graduated from the University of California at Berkeley with a B.A. in Economics
and Statistics.
AGGRESSIVE EQUITY PORTFOLIOS -- KURT A. FEUERMAN. Information about Mr.
Feuerman is included under the Equity Growth Portfolio above.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a
"Plan"). Under each Plan, the Distributor is entitled to receive from each
Portfolio a distribution fee, which is accrued daily and paid quarterly, of
0.25% of the Class B shares' average daily net assets on an annualized basis.
Each Plan is designed to compensate the Distributor for its services in
connection with distribution assistance. The Distributor may retain any portion
of the fee that it does not expend in meeting its obligations to the Fund. The
Distributor may compensate financial intermediaries, plan fiduciaries and
administrators for providing distribution-related services, including account
maintenance services, to shareholders (including, where applicable, underlying
beneficial owners) of Class B shares.
25
<PAGE>
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees, and
printing and mailing costs) as specified in its agreements with the Adviser and
Morgan Stanley.
PURCHASE OF SHARES
Class A shares of each Portfolio and Class B shares of each Portfolio may be
purchased at the net asset value per share next determined after receipt by the
Fund of a purchase order. The net asset value per share of each Portfolio is
calculated on days that the New York Stock Exchange ("NYSE") and Chase (the
"Custodian Bank") are open for business as of the close of trading of the NYSE,
normally 4:00 p.m. Eastern Time (the "Pricing Time").
MINIMUM INVESTMENT
The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares of each Portfolio. These minimums may be waived at the
discretion of the Adviser for certain types of investors, including trust
departments, brokers, dealers, agents, financial planners, financial services
firms, investment advisers or various retirement and deferred compensation plans
("Financial Intermediaries"), certain accounts managed by the Adviser and its
affiliates ("Managed Accounts"), and certain employees and customers of Morgan
Stanley and its affiliates. The Fund's determination of an investor's
eligibility to purchase shares of a given class will take precedence over the
investor's selection of a class.
METHODS OF PURCHASE
Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolios by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or because your
check does not clear, you will be responsible for any loss the Fund or its
agents incur. If you are already a shareholder, the Fund may redeem shares from
your account(s) to reimburse the Fund or its agents for any loss. In addition,
you may be prohibited or restricted from making future investments in the Fund.
FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian Bank are open for business.
Your bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:
1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide
you with a confirmation number.
2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
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<PAGE>
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring the funds.
3. Complete and sign the Account Registration Form and mail it to the
address shown thereon.
When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the close of the Federal Funds Wire Control Center
("FFWCC") (normally 6:00 p.m. Eastern Time), the purchase will be executed at
the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the close of the FFWCC, will be executed at the net asset value next
determined. Certain institutional investors and financial institutions have
entered into an arrangement with Morgan Stanley, pursuant to which they may
place orders prior to the Pricing Time, but make payment in Federal Funds for
those shares on the following business day.
BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and which bank is handling the wire, money transferred by bank
wire may or may not be converted into Federal Funds prior to the close of the
FFWCC. Prior to conversion to Federal Funds and receipt by the Fund, an
investor's money will not be invested.
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share of each of the
Portfolios determined on the next business day after receipt. An investor's
money will not be invested prior to crediting of Federal Funds.
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. Each business evening, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day and places a net purchase
and/or redemption order(s) by the morning of the next business day. These orders
normally are executed at the net asset value that was computed for each
Portfolio as of the close of the previous business day.
ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 per
Portfolio. The minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases directly from the
Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.
27
<PAGE>
INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES
Class A and Class B shares of each Portfolio may be subject to the
involuntary conversion and redemption features described below. The conversion
and redemption features may be waived at the discretion of the Adviser for
shares held in a Managed Account and shares purchased through a Financial
Intermediary. Accounts that were open prior to January 2, 1996 are not subject
to involuntary conversion or redemption. The Fund reserves the right to modify
or terminate the conversion or redemption features of the shares at any time
upon 60 days notice to shareholders.
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account
containing Class A shares falls below $500,000 (but remains at or above
$100,000) because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $500,000 (but remains at or
above $100,000) for a continuous 60-day period, the Class A shares in such
account will convert to Class B shares and will be subject to the distribution
fee and other features applicable to Class B shares. The Fund will not convert
Class A shares to Class B shares based solely upon changes in the market that
reduce the net asset value of shares. Under current tax law, conversion between
share classes is not a taxable event to the shareholder.
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares increases to $500,000 or more, whether due to
shareholder purchases or market activity, the Class B shares will convert to
Class A shares. Class B shares purchased through a Financial Intermediary that
has entered into an arrangement with the Fund for the purchase of such shares
may not be converted. Under current tax law, such conversion is not a taxable
event to the shareholder. Class A shares converted from Class B shares are
subject to the same minimum account size requirements as are applicable to New
Accounts containing Class A shares described above.
INVOLUNTARY REDEMPTION OF SHARES. If the value of an account falls below
$100,000 because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $100,000 for a continuous
60-day period, the shares in such account will be subject to redemption by the
Fund. The Fund will not redeem shares based solely upon changes in the market
that reduce the net asset value of shares. If redeemed, redemption proceeds will
be promptly paid to the shareholder.
REDEMPTION OF SHARES
Class A and Class B shares of each Portfolio may be redeemed at any time and
without charge at the net asset value per share next determined after receipt by
the Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds may be more or less than the purchase price of your shares
depending on, among other factors, the market value of the investment securities
held by a Portfolio.
METHODS OF REDEMPTION
Shares may be redeemed directly from the Fund by mail or by telephone.
However, shares purchased through a Financial Intermediary must be redeemed
through a Financial Intermediary. Certain Financial Intermediaries may charge an
additional service or transaction fee.
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<PAGE>
BY MAIL. Each Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, to Morgan Stanley Institutional Fund, Inc.,
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following:
1. A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
2. Any required signature guarantees; and
3. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.
BY TELEPHONE. If you have previously elected the Telephone Redemption
Option on the Account Registration Form, you can redeem Portfolio shares by
calling the Fund and requesting that the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to receive
redemption proceeds, send a written request to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. An investor may be
required to provide personal identification information at the time an account
is opened and prior to effecting each telephone transaction. In addition, all
telephone transaction requests will be recorded and investors may be required to
provide additional telecopied written instructions regarding transaction
requests. Neither the Fund nor the Transfer Agent will be responsible for any
loss, liability, cost or expense for following instructions received by
telephone that either of them reasonably believes to be genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to accept redemption
requests from underlying beneficial owners. These redemptions may be processed
in the same way as purchases made through such Financial Intermediaries, as
described above.
FURTHER REDEMPTION INFORMATION
The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event more than seven days after
receipt of a redemption request in good order. However, payments to investors
redeeming shares which were purchased by check will not be made until payment
for the purchase has been collected, which may take up to eight days after the
date of purchase. The Fund may suspend
29
<PAGE>
the right of redemption or postpone the date upon which redemptions are effected
at times when the NYSE is closed, or under any emergency conditions as
determined by the Securities and Exchange Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required to verify the identity of the person who has authorized
certain redemptions. Please contact the Fund or see the Statement of Additional
Information for further information.
ACCOUNT POLICIES AND SERVICES
EXCHANGE FEATURES
You may exchange shares of each Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced or Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase. Therefore, an
exchange will be considered a taxable event for shareholders subject to tax.
Exchange transactions will be processed at the net asset value per share next
determined after receipt of the request. Shares of the portfolios may be
exchanged by mail or telephone. The telephone exchange privilege is automatic
and made available without shareholder election. The exchange privilege may be
modified or terminated by the Fund at any time upon 60-days notice to
shareholders.
BY MAIL. To exchange shares by mail, send a written exchange request to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798. Your written exchange request should include (i) the name, class of
shares and account number of your current Portfolio; (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to exchange
shares; and (iii) the signatures of all registered account holders.
BY TELEPHONE. To exchange shares by telephone, call the Fund at the phone
number provided on the cover of this Prospectus. A Fund representative will
request (i) the name, class of shares and account number of your current
Portfolio, and (ii) the name(s) and class(es) of shares of the portfolio(s) into
which you intend to exchange shares. For additional information regarding
responsibility for the authenticity of telephoned instructions, see "Redemption
of Shares" above.
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<PAGE>
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by sending a written request to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. It may not be possible to
transfer the registration of certain shares purchased through a Financial
Intermediary. As with redemptions, the written request must be received in "good
order" before any transfer can be made. Transferring the registration of shares
may affect the eligibility of your account for a given class of shares and may
result in involuntary conversion or redemption of your shares.
OTHER ACCOUNT INFORMATION
The Fund does not issue share certificates for the Portfolios. All shares
purchased are confirmed to you and credited to your account on the Fund's books
maintained by the Adviser or its agents. You will have the same rights and
ownership with respect to such shares as if certificates had been issued.
EXCESSIVE TRADING
Frequent trades in your account(s) can disrupt management of a Portfolio and
raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of each Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a portfolio of the Fund within any 120-day
period. For example, the following series of transactions would amount to
excessive trading: exchanging shares of Portfolio A for shares of Portfolio B,
then exchanging shares of Portfolio B for shares of Portfolio C and then
exchanging shares of Portfolio C for shares of Portfolio A within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios, and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.
INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS
Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the Portfolios used for investment by these accounts may
experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the Portfolios.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such class, less any liabilities attributable
to such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of a
Portfolio. Net asset value per share is determined as of the close of the
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<PAGE>
NYSE (normally 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business. Price information on listed securities is taken from the exchange
where the security is primarily traded. Securities listed on a U.S. securities
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date and for which market quotations are
not readily available are valued at a price within a range not exceeding the
current asked price nor less than the current bid price. The current bid and
asked prices are determined based on the average of the bid and asked prices
quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such 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. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine prices in accordance
with the above-stated procedures are determined in good faith at fair value
using methods determined by the Board of Directors. For purposes of calculating
net asset value per share, all assets and liabilities initially expressed in
foreign currencies will be translated into U.S. dollars at the mean of the bid
and asked price of such currencies against the U.S. dollar as quoted by a major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.
Each of the Portfolios may advertise "total return" which shows what an
investment in a class of a Portfolio would have earned over a specified period
of time (such as one, five or ten years), assuming that all distributions and
dividends by the Portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividends and
32
<PAGE>
distributions or on redemption. The Fund may also include comparative
performance information in advertising or marketing the Portfolios' shares,
including data from Lipper Analytical Services, Inc., other industry
publications, business periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
when, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
elects to receive income dividends and capital gains distributions in cash.
The Emerging Growth Portfolio expects to distribute substantially all of its
taxable net investment income in the form of annual dividends and the Equity
Growth and the Aggressive Equity Portfolios expect to distribute substantially
all of their net investment income in the form of quarterly dividends. Net
realized gains for each Portfolio, if any, after reduction for any available tax
loss carryforwards will also be distributed annually.
Undistributed net investment income is included in each Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends
33
<PAGE>
paid by a Portfolio will generally qualify for the dividends-received deduction
for corporate shareholders only to the extent of the aggregate qualifying
dividend income received by the Portfolio from U.S. corporations. Each Portfolio
will report annually to its shareholders the amount of dividend income
qualifying for such treatment.
Distributions of net capital gain are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio (such
designation being dependent upon the holding period of the Portfolio in the
underlying asset generating the net capital gain), regardless of how long
shareholders have held their shares. Each Portfolio will send reports annually
to its shareholders of the federal income tax status of all distributions made
during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss, including any available capital loss carryforwards), prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (i) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) who has not certified to the Fund that such
shareholder is not subject to backup withholding. This backup withholding is not
an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceeds or is
less than the shareholder's adjusted tax basis in the sold, exchanged or
redeemed shares. If capital gains distributions have been made with respect to
shares that are sold at a loss after being held for six months or less, however,
then the loss is treated as a long-term capital loss to the extent of the
capital gains distributions.
Conversions of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, it is
not expected that a Portfolio or its shareholders would be able to claim a
credit for U.S. tax purposes with respect to any such foreign taxes.
34
<PAGE>
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolios will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with their
respective objectives and policies. For the fiscal year ended December 31, 1997,
the Equity Growth and Aggressive Equity Portfolios had a portfolio turnover rate
of [186%] and [380%], respectively. As portfolio turnover increases, the
Portfolios may expect to pay correspondingly increased brokerage and trading
costs. In addition to transaction costs, higher portfolio turnover may result in
the realization of capital gains. As discussed under "Taxes," to the extent net
short-term capital gains are realized, any distributions resulting from such
gains are considered ordinary income for federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 40 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of
35
<PAGE>
Directors has the power to designate one or more classes of shares of common
stock and to classify and reclassify any unissued shares with respect to such
classes. The shares of common stock of each Portfolio are currently classified
into two classes, the Class A shares and the Class B shares.
The shares of the Portfolios, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as
defined in the 1940 Act) such Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports. The
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Commission for the purpose of providing
custodial services for such assets. MSTC may also hold certain domestic assets
for the Fund. For more information on the custodians, see "General Information
- -- Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits the annual financial statements of each Portfolio.
LITIGATION
The Fund is not involved in any litigation.
36
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
EQUITY GROWTH, EMERGING GROWTH
AND AGGRESSIVE EQUITY PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
If you need assistance in filling out this form for the
ACCOUNT INFORMATION Morgan Stanley Institutional Fund, Inc., please contact your
Fill in where applicable Morgan Stanley representative or call us toll free
1-800-548-7786. Please print all items except signature, and
mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First
Name Initial Last Name
2.
First
Name Initial Last Name
First
Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
<TABLE>
<C> <S> <C> <C>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
OR
1. TAXPAYER SOCIAL SECURITY NUMBER
IDENTIFICATION NUMBER ("SSN")
("TIN") ------------- -------------
------------ ------------ ------------- - - - - - - - -
------------ - - - - - - - - -
-
--
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien
Permanent Address (Where you reside permanently for tax purposes)
of a minor (Uniform -- -- OR SSN
2. TIN - - - - - - - ------------- -------------
-- - - - ------------- - - - - - - - -
-- -
Street Address
City
Country Postal Code
-- -- TIN - SSN
-- - - - - - - - - - ------------- -------------
------------- - - - - - - - -
-
Home Telephone No. Business Telephone No.
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer)
with your correct TIN(s) or SSN(s). Accounts that have a
missing or incorrect
--
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
-- --
TIN(s) or SSN(s) will be subject to backup withholding at a
31% rate on dividends, distributions and other payments. If
you have not provided us with your correct TIN(s) or SSN(s),
you may be subject to a $50 penalty imposed by the Internal
Revenue Service.
Backup withholding is not an additional tax; the tax liability
of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding
under Section 3406(a)(1)(C) of the Internal Revenue Code
C) TAXPAYER because you have underreported interest or dividends or you
IDENTIFICATION
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED were required to, but failed to, file a return which would
UNLESS have included a reportable interest or dividend payment.
TENANCY IN COMMON Enter your Taxpayer Identification Number. For most individual
IS INDICATED) taxpayers, this is your Social Security Number.
For Custodian account
Gifts/Transfers to Minor OR
Acts), give the Social
Security Number of
the minor.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SECTION Portfolio(s): / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 for Equity Growth Portfolio / / Class A Shares $ / / Class B Shares $
each Portfolio and Class B shares Emerging Growth Portfolio
minimum $100,000 for each Portfolio). Aggressive Equity Portfolio
Please indicate Portfolio, class and
amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio and manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone
AND EXCHANGE requests to wire redemption proceeds to
OPTION the commercial bank indicated at right
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests
shares by telephone. A are believed to be authentic.
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated
YOUR FUND ACCOUNT. by telephone are genuine. These
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal
NOT BE HONORED UNLESS THE BOX identification information at the time
IS CHECKED. an account is opened and prior to
effecting each transaction requested by
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
<CAPTION>
G)
Name of COMMERCIAL Bank (Not Savings Bank)
Bank Account No.
Bank ABA No.
Name(s) in which your Bank Account is Established
Bank's Street Address
City State Zip
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY Name
OPTION Address
In addition to the account statement City State Zip Code
sent to my/our registered address, I/we
hereby authorize the Fund to mail
duplicate statements to the name and
address provided at right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative
No. Branch
No.
</TABLE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE
ARE SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE
HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL
SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE
UNDERSTAND THAT IF I/WE DO NOT PROVIDE EITHER NUMBER TO CHASE
GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE
DATE OF THIS APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR
CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY
AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION
PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU
MAY REQUEST SUCH FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 8
Investment Objectives and Policies................ 12
Additional Investment Information................. 14
Investment Limitations............................ 23
Management of the Fund............................ 23
Purchase of Shares................................ 26
Redemption of Shares.............................. 28
Account Policies and Services..................... 30
Valuation of Shares............................... 31
Performance Information........................... 32
Dividends and Capital Gains Distributions......... 33
Taxes............................................. 33
Portfolio Transactions............................ 35
General Information............................... 35
Account Registration Form
</TABLE>
EQUITY GROWTH PORTFOLIO
EMERGING GROWTH PORTFOLIO
AGGRESSIVE EQUITY PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
- ---------------------------------
- ---------------------------------
- ---------------------------------
- ---------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
ASIAN REAL ESTATE PORTFOLIO
U.S. REAL ESTATE PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
thirty-two portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the European Real Estate, Asian Real Estate and U.S. Real Estate Portfolios
(each a "Portfolio" and together, the "Portfolios"). The Class A and Class B
shares currently offered by the Portfolios have different minimum investment
requirements and fund expenses. Shares of the Portfolios are offered with no
sales charge, exchange fee or redemption fee.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Asian Real Estate, Emerging Markets,
European Equity, European Real Estate, Global Equity, Gold, International
Equity, International Magnum, International Small Cap, Japanese Equity and Latin
American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth,
Equity Growth, Small Cap Value Equity, Technology, U.S. Equity Plus, U.S. Real
Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced
Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global
Fixed Income, High Yield and Municipal Bond Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information about
the Fund is contained in a "Statement of Additional Information" dated May 1,
1998, which is incorporated herein by reference. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the Fund
are available upon request and without charge by writing or calling the Fund at
the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
each Portfolio will incur:
<TABLE>
<CAPTION>
EUROPEAN ASIAN U.S.
REAL REAL REAL
ESTATE ESTATE ESTATE
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................... None None None
Class B................................................... None None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................... None None None
Class B................................................... None None None
Deferred Sales Load
Class A................................................... None None None
Class B................................................... None None None
Redemption Fees
Class A................................................... None None None
Class B................................................... None None None
Exchange Fees
Class A................................................... None None None
Class B................................................... None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C> <C>
Management Fee (Net of Fee Waivers)*
Class A................................................... % % %
Class B................................................... % % %
12b-1 Fees
Class A................................................... None None None
Class B................................................... 0.25% 0.25% 0.25%
Other Expenses
Class A................................................... % % %
Class B................................................... % % %
--- --- ---
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................... % % %
Class B................................................... % % %
--- --- ---
--- --- ---
</TABLE>
- ------------------------
*The Adviser has agreed to waive its management fees and/or reimburse the
Portfolios, if necessary, if such fees would cause the total annual operating
expenses of each of the Portfolios to exceed a specified percentage of its
respective average daily net assets. As a result of these reductions, the
Management Fees stated above are lower than the contractual fees stated under
"Management of the Fund." The Adviser reserves the right to terminate any of
its fee waivers and/or expense reimbursements at any time in its sole
discretion. For further information on Fund expenses, see "Management of the
Fund." Set forth below, for each Portfolio, are the management fees and total
operating expenses absent such fee waivers and/or expense reimbursements as a
percentage of the average daily net assets of the Class A shares and Class B
shares, respectively.
2
<PAGE>
<TABLE>
<CAPTION>
TOTAL OPERATING
MANAGEMENT EXPENSES
FEE ABSENT FEE WAIVERS
ABSENT FEE -------------------------
PORTFOLIO WAIVERS CLASS A CLASS B
- ---------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
European Real Estate Portfolio.......... 0.80% % %
Asian Real Estate Portfolio............. 0.80% % %
U.S. Real Estate Portfolio.............. 0.80% % %
</TABLE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees for the Portfolios are based on actual figures for
the period ended December 31, 1997. Due to the continuous nature of Rule 12b-1
fees, long term Class B shareholders may pay more than the equivalent of the
maximum front-end sales charges otherwise permitted by the National Association
of Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (i) a 5% annual rate of return and (ii) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The example is based on total operating expenses
of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
European Real Estate Portfolio
Class A.......................................................... $ $ * *
Class B.......................................................... * *
Asian Real Estate Portfolio
Class A.......................................................... * *
Class B.......................................................... * *
U.S. Real Estate Portfolio
Class A..........................................................
Class B..........................................................
</TABLE>
- ------------------------
*Because the European Real Estate and Asian Real Estate Portfolios are new, the
Fund has not projected expenses for these Portfolios beyond the three year
period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A and Class
B shares of each of the Portfolios for each of the periods presented. The
audited financial highlights for each Portfolio's shares for each of the periods
presented are part of the Fund's financial statements which appear in the Fund's
December 31, 1997 Annual Report to Shareholders and which are incorporated by
reference into the Fund's Statement of Additional Information. Each Portfolio's
financial highlights for each of the periods presented have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also incorporated by
reference into the Statement of Additional Information. Additional performance
information is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. The following information
should be read in conjunction with the financial statements and notes thereto.
4
<PAGE>
U.S. REAL ESTATE PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
------------------------------------------ CLASS B
---------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED DECEMBER 31, FEBRUARY 24, JANUARY 2,
1995* TO YEAR ENDED 1996*** TO
--------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 11.42 $ 10.00 $ 11.50
------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................. 0.37 0.26 0.35
Net Realized and Unrealized Gain on
Investments............................... 4.02 1.84 3.92
------------ ------------ ------------ ------------ ------------
Total from Investment Operations......... 4.39 2.10 4.27
------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income...................... (0.39) (0.24) (0.37)
Net Realized Gain.......................... (1.01) (0.44) (1.01)
------------ ------------ ------------ ------------ ------------
Total Distributions...................... (1.40) (0.68) (1.38)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD............... $ 14.41 $ 11.42 $ 14.39
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
TOTAL RETURN................................. 39.56% 21.07% 38.23%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $210,368 $69,509 $8,734
Ratio of Expenses to Average Net
Assets (1)................................ 1.00% 1.00%** 1.25%**
Ratio of Net Investment Income to Average
Net Assets (1)............................ 3.08% 4.04%** 2.91%**
Portfolio Turnover Rate.................... 171% 158% 171%
Average Commission Rate#................... $0.0568 N/A $0.0568
</TABLE>
- ------------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income............................... $0.02 $0.02 $0.02
Ratios before expense limitation:
Expenses to Average Net Assets........ 1.14% 1.33%** 1.37%**
Net Investment Income to Average Net
Assets............................... 2.93% 3.71%** 2.79%**
</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
commisions were charged, during the period.
5
<PAGE>
EUROPEAN REAL ESTATE PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ ------------
PERIOD FROM PERIOD FROM
OCTOBER 1, OCTOBER 1,
1997* TO 1997* TO
DECEMBER 31, DECEMBER 31,
1997 1997
------------ ------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ $
------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)..................
Net Realized and Unrealized Gain on
Investments...............................
------------ ------------
Total from Investment Operations.........
------------ ------------
DISTRIBUTIONS
Net Investment Income......................
Net Realized Gain..........................
------------ ------------
Total Distributions......................
------------ ------------
NET ASSET VALUE, END OF PERIOD............... $ $
------------ ------------
------------ ------------
TOTAL RETURN................................. % %
------------ ------------
------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $ $
Ratio of Expenses to Average Net
Assets (1)................................ %** %**
Ratio of Net Investment Income to Average
Net Assets (1)............................ %** %**
Portfolio Turnover Rate.................... % %
Average Commission Rate#................... N/A $
</TABLE>
- ------------------------------
<TABLE>
<C> <S> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income............................... $ $
Ratios before expense limitation:
Expenses to Average Net Assets........ %** %**
Net Investment Income to Average Net
Assets............................... %** %**
</TABLE>
* Commencement of operations.
** Annualized.
# 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.
6
<PAGE>
ASIAN REAL ESTATE PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ ------------
PERIOD FROM PERIOD FROM
OCTOBER 1, OCTOBER 1,
1997* TO 1997* TO
DECEMBER 31, DECEMBER 31,
1997 1997
------------ ------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ $
------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)..................
Net Realized and Unrealized Gain on
Investments...............................
------------ ------------
Total from Investment Operations.........
------------ ------------
DISTRIBUTIONS
Net Investment Income......................
Net Realized Gain..........................
------------ ------------
Total Distributions......................
------------ ------------
NET ASSET VALUE, END OF PERIOD............... $ $
------------ ------------
------------ ------------
TOTAL RETURN................................. % %
------------ ------------
------------ ------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $ $
Ratio of Expenses to Average Net
Assets (1)................................ %** %**
Ratio of Net Investment Income to Average
Net Assets (1)............................ %** %**
Portfolio Turnover Rate.................... % %
Average Commission Rate#................... N/A $
</TABLE>
- ------------------------------
<TABLE>
<C> <S> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income............................... $ $
Ratios before expense limitation:
Expenses to Average Net Assets........ %** %**
Net Investment Income to Average Net
Assets............................... %** %**
</TABLE>
* Commencement of operations.
** Annualized.
# 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.
7
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of thirty-two portfolios, offering institutional investors
and high net worth individual investors a broad range of investment choices
coupled with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and Class B shares, except for
the International Small Cap and Municipal Money Market Portfolios which offer
only Class A shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of each
Portfolio described in this Prospectus is as follows:
- - The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income
and long-term capital appreciation by investing primarily in equity
securities of companies in the European real estate industry.
- - The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of
companies in the Asian real estate industry.
- - 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 substantial investment in real estate investment
trusts.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- - The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings
determined by the Adviser in equity securities of non-U.S. issuers
which, in the aggregate, replicate broad country indices.
- - The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- - The CHINA GROWTH PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of issuers
in The People's Republic of China, Hong Kong and Taiwan.
- - The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of emerging country
issuers.
- - The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of European issuers.
- - The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the
world, including U.S. issuers.
- - The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers
engaged in gold-related activities.
- - The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital
appreciation by investing primarily in equity securities of non-U.S.
issuers.
8
<PAGE>
<TABLE>
<S> <C>
- - The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital
appreciation by investing primarily in equity securities of non-U.S.
issuers domiciled in EAFE countries.
- - The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital
appreciation by investing primarily in equity securities of non-U.S.
issuers with equity market capitalizations of less than $1 billion.
- - The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of Japanese issuers.
- - The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers
and, from time to time, debt securities issued or guaranteed by
Latin American governments or governmental entities.
U.S. EQUITY:
- - The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by
investing primarily in corporate equity and equity-linked
securities.
- - The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation
by investing primarily in growth-oriented equity securities of
small- to medium-sized corporations.
- - The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of medium
and large capitalization companies.
- - The MICROCAP PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small
corporations.
- - The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total
return by investing in equity securities of small- to medium-sized
companies which the Adviser believes to be undervalued.
- - The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of companies that, in the
opinion of the Adviser, are expected to benefit from their
involvement in technology and technology-related industries.
- - The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of issuers included in
the Standard & Poor's 500 Index ("S&P 500").
- - The VALUE EQUITY PORTFOLIO seeks high total return by investing in
equity securities which the Adviser believes to be undervalued
relative to the stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
- - The BALANCED PORTFOLIO seeks high total return while preserving
capital by investing in a combination of equity securities which the
Adviser believes to be undervalued and fixed income securities.
FIXED INCOME:
- - The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by
investing primarily in debt securities of government,
government-related and corporate issuers located in emerging
countries.
- - The FIXED INCOME PORTFOLIO seeks to produce a high total return
consistent with the preservation of capital by investing in a
diversified portfolio of fixed income securities.
- - The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive
real rate of return while preserving capital by investing in fixed
income securities of issuers throughout the world, including U.S.
issuers.
</TABLE>
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<TABLE>
<S> <C>
- - 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 of the recognized rating
services.
- - The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a
level of current income as is consistent with the preservation of
capital by investing primarily in a variety of investment grade
mortgage-backed securities.
- - The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of
current income consistent with preservation of principal by
investing in municipal obligations, the interest on which is exempt
from federal income tax.
MONEY MARKET:
- - The MONEY MARKET PORTFOLIO seeks to maximize current income and
preserve capital while maintaining high levels of liquidity through
investing in high quality money market instruments with remaining
maturities of one year or less.
- - The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current
tax-exempt income and preserve capital while maintaining high levels
of liquidity through investing in high quality money market
instruments with remaining maturities of one year or less which are
exempt from federal income tax.
</TABLE>
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund and
each of its portfolios. As of , 1998, Morgan Stanley Asset
Management Inc. and its affiliated institutional asset management companies
(exclusive of Miller Anderson & Sherrerd, LLP) managed assets of approximately
$ billion. See "Management of the Fund -- Investment Adviser" and "Management
of the Fund -- Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. Share purchases
may be made by sending investments directly to the Fund or through the
Distributor. The minimum initial investment, generally, is $500,000 for Class A
shares of each Portfolio and $100,000 for the Class B shares of each Portfolio.
The minimum initial investment amount is reduced for certain categories of
investors. For additional information on how to purchase shares and minimum
initial investments, see "Purchase of Shares."
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the applicable
class next determined after receipt of the redemption request. The redemption
price may be more or less than the purchase price. Certain redemptions that
cause the value of an account to remain for a continuous 60-day period below the
minimum investment amount for Class A shares
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or for Class B shares may result in involuntary redemption or automatic
conversion. For additional information on how to redeem shares and involuntary
redemption or conversion, see "Purchase of Shares" and "Redemption of Shares."
RISK FACTORS
Investing in each of the Portfolios entails certain risks and considerations
of which an investor should be aware. The Portfolios' share prices and
investment returns fluctuate and, when redeemed, an investment in the Portfolios
may be worth more or less than its original cost. The investment policies of the
Portfolios may entail the following risk factors:
- EQUITY SECURITIES. Each Portfolio may invest in equity securities. Prices
of equity securities fluctuate in response to many factors, including the
financial health of the issuers and changes in economic and market
conditions.
- REAL ESTATE INVESTING. Each Portfolio will invest in the securities of
companies principally engaged in the real estate industry and may be
subject to the risks associated with the direct ownership of real estate
and investment in real estate investment trusts ("REITs"). Risks commonly
associated with the direct ownership of real estate include fluctuations in
the value of underlying properties and defaults by borrowers or tenants. In
addition to these risks, REITs are dependent on specialized management
skills and some REITs may have limited diversification, subjecting them to
risks inherent in investments in a limited number of properties, in a
narrow geographic area, or in a single property type.
- FIXED INCOME SECURITIES. Each Portfolio will be subject to credit risk and
market risk associated with investment in fixed income securities. Credit
risk is the possibility that an issuer may be unable to meet scheduled
principal and interest payments. Market risk is the possibility that a
change in interest rates or the market's perception of the issuer's
prospects may adversely affect the value of a fixed income security.
- FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. The risks of foreign investment include fluctuations in foreign
currency values, political events affecting the country of issuance and
potentially greater market volatility and lower liquidity.
- EMERGING MARKET COUNTRY SECURITIES. The European Real Estate and Asian
Real Estate Portfolios may invest in emerging market country securities
which entail risks typically associated with investment in more established
foreign markets. However, these risks may be intensified due to higher
volatility and less liquidity of emerging markets, possible political risks
associated with the country of issuance and generally weaker financial
condition of issuers in these markets.
- DERIVATIVES. Each Portfolio may invest in instruments that derive their
values from those of specified securities, indices, currencies or other
points of reference. These derivatives, including those used to manage
risk, are themselves subject to the risks of the different markets in which
they are traded and, therefore, may or may not serve their intended
purposes.
For additional information about risk factors, see also "Investment Objectives
and Policies" and "Additional Investment Information."
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies each Portfolio will employ in its efforts to achieve its objective.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. The investment policies described below are non-fundamental policies
unless otherwise noted and may be changed without shareholder approval.
Each of the Portfolios invests in equity securities of companies in the real
estate industry. Equity securities include common stocks, rights or warrants to
purchase common stocks, securities convertible into common stocks, preferred
stocks, equity-linked securities and shares or units of beneficial interest in
specialized ownership vehicles, such as property unit trusts and real estate
investment trusts ("REITs"). For purposes of each Portfolio's investment
policies, a company is principally engaged in the real estate industry if (i) it
derives at least 50% of its revenues or profits from the ownership,
construction, management, financing or sale of residential, commercial or
industrial real estate; or (ii) it has at least 50% of the fair market value of
its assets invested in residential, commercial or industrial real estate. For
example, companies in the real estate industry may include, among others: real
estate development companies, real estate operating companies, companies
principally engaged in the ownership of income-producing real property,
specialized ownership vehicles, and companies with substantial real estate
holdings, such as hotel companies, residential builders and land-rich companies.
In addition to the investments and strategies described below, the Portfolios
may invest in certain securities and obligations as set forth in "Additional
Investment Information" below.
EUROPEAN REAL ESTATE PORTFOLIO
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. The
Portfolio seeks to achieve its objective by investing primarily in securities of
European issuers, including those located in Germany, France, Switzerland,
Belgium, Italy, Spain, Portugal, Finland, Sweden, Denmark, Norway, Ireland and
the United Kingdom. Investments may also be made in equity securities of
companies located in the smaller and emerging markets of Europe.
The Portfolio will invest primarily in securities which are traded on
recognized stock exchanges in Europe and in equity securities of companies
organized under the laws of a European country whose business is conducted
principally in Europe. The Portfolio may also invest in Depositary Receipts of
European issuers and, to the extent that they become available, REITs that
invest in Europe. At least 65% of the total assets of the Portfolio will be
invested in equity securities of companies principally engaged in the European
real estate industry. While the Portfolio is not limited in the portion of its
assets that may be invested in a single country, it currently intends to spread
its investments among several countries to reduce investment risk and currency
risk.
The Portfolio's investments may include securities of companies located in
emerging countries and traded in emerging markets. These securities pose greater
liquidity risks and other risks than securities of companies located in
developed countries and traded in more established markets. For a description of
special considerations and certain risks associated with investment in foreign
issuers, see "Additional Investment Information."
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ASIAN REAL ESTATE PORTFOLIO
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. The Portfolio seeks to achieve its
objective by investing primarily in equity securities which are traded on
recognized stock exchanges in Asia and in equity securities of companies
organized under the laws of an Asian country whose business is conducted
principally in Asia. The Portfolio may also invest in Depositary Receipts of
Asian issuers and, to the extent that they become available, REITs that invest
in Asia.
The Portfolio will invest primarily in the more established Asian markets,
including Singapore, Malaysia, Hong Kong and Thailand, but additional
opportunities also are sought in markets such as South Korea and Taiwan and
other emerging markets that are open to foreign investment. In addition, the
Portfolio may invest in Japan, Australia and New Zealand. At least 65% of the
total assets of the Portfolio will be invested in equity securities of companies
principally engaged in the Asian real estate industry. While the Portfolio is
not limited in the portion of its assets that may be invested in a single
country, it currently intends to spread its investments among several countries
to reduce investment risk and currency risk. Allocation of investments will
depend on the relative attractiveness of the stocks of companies in the
respective countries. Government regulation and restrictions in many of the
countries of Asia may limit the amount, mode and extent of investment in
companies of such countries.
The Portfolio's investments will include securities of companies located in
emerging countries and traded in emerging markets. These securities pose greater
liquidity risks and other risks than securities of companies located in
developed countries and traded in more established markets. For a description of
special considerations and certain risks associated with investment in foreign
issuers, see "Additional Investment Information."
U.S. REAL ESTATE PORTFOLIO
The investment objective of the U.S. Real Estate Portfolio is 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 substantial investment in REITs. Under normal circumstances, at least
65% of the Portfolio's total assets will be invested in income producing equity
securities of U.S. and non-U.S. companies principally engaged in the U.S. real
estate industry. The Portfolio seeks to invest in equity securities of companies
that provide a dividend yield that exceeds the composite dividend yield of
securities comprising the S&P 500.
ADDITIONAL INVESTMENT INFORMATION
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES. The
Portfolios may invest in securities such as convertible securities, preferred
stock, warrants or other securities exchangeable under certain circumstances for
shares of common stock. Warrants are instruments giving holders the right, but
not the obligation, to buy shares of a company at a given price during a
specified period. The Portfolios may also invest in equity-linked securities,
which are securities that are convertible into, or the value of which is based
upon the value of, equity securities upon certain terms and conditions. The
amount received by an investor at maturity of such securities is not fixed but
is based on the price of the underlying common stock. It is impossible to
predict whether the price of the underlying common stock will rise or fall.
Trading prices of the underlying common stock will be influenced by the issuer's
operational results, by complex, interrelated political, economic, financial, or
other factors affecting the capital markets, the stock exchanges on which the
underlying common
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stock is traded and the market segment of which the issuer is a part. In
addition, it is not possible to predict how equity-linked securities will trade
in the secondary market, although the market for such securities is fairly
developed and generally liquid. The market for such securities may be shallow,
however, and high volume trades may be possible only with discounting. In
addition to the foregoing risks, the return on such securities depends on the
creditworthiness of the issuer of the securities, which may be the issuer of the
underlying securities or a third party investment banker or other lender. The
creditworthiness of such third party issuer of equity-linked securities may, and
often does, exceed the creditworthiness of the issuer of the underlying
securities. The advantage of using equity-linked securities over traditional
equity and debt securities is that the former are income-producing vehicles that
may provide a higher income than the dividend income on the underlying equity
securities while allowing some participation in the capital appreciation of the
underlying equity securities. Another advantage of using equity-linked
securities is that they may be used for hedging to reduce the risk of investing
in the generally more volatile underlying equity securities.
DEPOSITARY RECEIPTS. The Portfolios may invest in Depositary Receipts,
including American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") and other Depositary Receipts
(which, together with ADRs, GDRs and EDRs, are hereinafter collectively referred
to as "Depositary Receipts"), to the extent that such Depositary Receipts are or
become available. ADRs are securities, typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer (the "underlying issuer") and
deposited with the depositary. ADRs may be "sponsored" or "unsponsored."
Sponsored ADRs are established jointly by a depositary and the underlying
issuer, whereas unsponsored ADRs may be established by a depositary without
participation by the underlying issuer. The issuers of the stock of unsponsored
ADRs are not obligated to disclose material information in the United States
and, therefore, there may not be a correlation between such information and the
market value of the ADR. GDRs, EDRs and other types of Depositary Receipts are
typically issued by foreign depositaries, although they may also be issued by
U.S. depositaries, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. The Portfolios may invest in
sponsored and unsponsored Depositary Receipts. For purposes of the Portfolios'
investment policies, the Portfolios' investments in Depositary Receipts will be
deemed to be investments in the underlying securities.
FIXED INCOME SECURITIES. Each Portfolio will invest in fixed income (debt)
securities. The market value of the fixed income securities in which a Portfolio
invests will be affected by changes in the creditworthiness of issuers and will
change in response to interest rate changes and other factors. Generally, the
values of fixed income securities vary inversely with changes in interest rates,
so that during periods of falling interest rates, the values of outstanding
fixed income securities generally rise and during periods of rising interest
rates, the values of such securities generally decline. While securities with
longer maturities tend to produce higher yields, the prices of longer maturity
securities are subject to greater market fluctuations as a result of changes in
interest rates.
FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolios may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolios
may use such contracts to protect against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, lock in the U.S.
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dollar value of dividends and interest on securities held by the Portfolio, and
generally to protect the U.S. dollar value of securities held by the Portfolio
against exchange rate fluctuation. While forward contracts may limit losses as a
result of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will be at least equal to the amount of
the Portfolio's commitments with respect to such contracts. The Portfolios may
also invest in currency options, futures and options on futures. See "Derivative
Instruments" below.
FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. Investment in securities of foreign issuers involves investment risks
somewhat different from those affecting securities of U.S. issuers. The
Portfolio's investments will be subject to political and economic events that
affect the countries in which it invests. Foreign issuers may be subject to
different accounting, auditing and financial standards and requirements. There
also may be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the United States. Many foreign
securities markets have substantially less trading volume than U.S. national
securities exchanges and, therefore, securities of some foreign issuers are less
liquid and more volatile than securities of comparable U.S. issuers. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the United States. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes, which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Portfolios by domestic companies. Investments in securities
of foreign issuers are generally denominated in foreign currencies and, since a
Portfolio may temporarily hold uninvested reserves in bank deposits in foreign
currencies, the value of a Portfolio's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations, and a Portfolio may incur costs in connection with
conversions between various currencies.
The European Real Estate and Asian Real Estate Portfolios may also invest in
emerging market country securities. Investing in emerging markets entails the
risks associated with foreign investment described above, however, these risks
may be intensified in emerging markets. Emerging markets can include every
nation in the world except the United States, Canada, Japan, Australia, New
Zealand and most nations located in Western Europe. Certain emerging market
countries have historically experienced, and may continue to experience, high
rates of inflation, high interest rates, exchange rate fluctuations, large
amounts of external debt, trade difficulties and unemployment. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls and other protectionist
measures imposed or negotiated by the countries in which they trade. There also
are risks associated with the possibility of nationalization, expropriation or
confiscatory taxation, political changes, government regulation, social
instability or diplomatic developments (including war) that could adversely
affect the economies of such countries or the value of a Portfolio's investments
in those countries.
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The Asian Real Estate Portfolio may invest in securities of issuers located
in Hong Kong. Hong Kong was established as a British colony in the 1840's and,
until recently, was governed by Great Britain through an appointed Governor.
Effective July 1, 1997, Hong Kong reverted to Chinese sovereignty and is
governed as a Special Administrative Region of China. Although China has made
certain commitments to preserve the economic and social freedoms enjoyed in Hong
Kong during British rule, there can be no assurances that China's commitments
will be maintained. Action taken by the Chinese government which limits or
causes uncertainty with regard to these economic and social freedoms could have
an adverse affect on the Portfolio's investments in securities of issuers
located in Hong Kong.
INVESTMENT FUNDS. Some emerging countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain emerging countries through investment funds which have been specifically
authorized. The Portfolios may invest in these investment funds subject to the
provisions of the Investment Company Act of 1940, as amended (the "1940 Act")
and other applicable laws. If a Portfolio invests in such investment funds, the
Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
Adviser), but also will indirectly bear similar expenses of the underlying
investment funds.
Certain of the investment funds referred to in the preceding paragraph are
advised by the Adviser. The Portfolios may, to the extent permitted under the
1940 Act and other applicable law, invest in these investment funds. If a
Portfolio elects to make an investment in such an investment fund, it will only
purchase the securities of such investment fund in the secondary market.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. Each Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of its total assets.
MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money
market instruments, although the Portfolios intend to stay invested in
securities satisfying their primary investment objectives to the extent
practical. Consistent with their investment policies, the Portfolios may make
money market investments pending other investment or settlement for liquidity.
In addition, the Portfolios may invest in money market instruments for temporary
defensive purposes during adverse market conditions. The money market
investments permitted for the Portfolios include: obligations of the U.S.
Government and its agencies and instrumentalities, commercial paper, bank
obligations (including certificates of deposit), other debt securities and
repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. Each Portfolio may invest in securities that are neither listed on
a stock exchange nor traded over-the-counter. Such unlisted equity securities
may involve a higher degree of business and financial risk that can result in
substantial losses. As a result of the absence of a public trading market for
these securities, they may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from
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these sales could be less than those originally paid by the Portfolio or less
than what may be considered the fair value of such securities. Further,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.
As a general matter, each Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Securities that are not registered under the
Securities Act of 1933, as amended (the "1933 Act"), but that can be offered and
sold to qualified institutional buyers under Rule 144A under the 1933 Act ("Rule
144A Securities") will not be included within the foregoing 15% restriction if
the securities are determined to be liquid. The Board of Directors has adopted
guidelines and delegated to the Adviser, subject to the supervision of the Board
of Directors, the daily function of determining and monitoring the liquidity of
Rule 144A Securities. Rule 144A Securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
REITS. A substantial portion of the U.S. Real Estate Portfolio's total
assets will be invested in securities of REITs. The European Real Estate and
Asian Real Estate Portfolios may also, to the extent they become available,
invest in REITs that invest in Europe or Asia, respectively. REITs pool
investors' funds for investment primarily in income producing real estate or
real estate related loans or interests. A REIT is not taxed on income
distributed to its shareholders or unitholders if it complies with regulatory
requirements relating to its organization, ownership, assets and income, and
with a regulatory requirement that it distribute to its shareholders or
unitholders at least 95% of its taxable income for each taxable year. Generally,
REITs can be classified as Equity REITs, Mortgage REITs or Hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
their income primarily from rents and capital gains from appreciation realized
through property sales. Equity REITs are further categorized according to the
types of real estate securities they own, e.g., apartment properties, retail
shopping centers, office and industrial properties, hotels, health-care
facilities, manufactured housing and mixed-property types. Mortgage REITs invest
the majority of their assets in real estate mortgages and derive their income
primarily from interest payments. Hybrid REITs combine the characteristics of
both Equity and Mortgage REITs. The U.S. Real Estate Portfolio will invest
primarily in Equity REITs.
A shareholder in any of the Portfolios should realize that, by investing in
REITs indirectly through the Portfolio, he will bear not only his proportionate
share of the expenses of the Portfolio, but also, indirectly, the management
expenses of underlying REITs. Because it is expected that the U.S. Real Estate
Portfolio will invest a substantial portion of its assets in REITs and the
European Real Estate and Asian Real Estate Portfolios may invest a portion of
their assets in REITs, the Portfolios will also be subject to certain risks
associated with the direct investments of REITs. REITs may be affected by
changes in the value of their underlying properties and by defaults by borrowers
or tenants. Mortgage REITs may be affected by the quality of the credit
extended. Furthermore, REITs are dependent on specialized management skills.
Some REITs may have limited diversification and may be subject to risks inherent
in investments in a limited number of properties, in a narrow geographic area,
or in a single property type. REITs depend generally on their ability to
generate cash flow to make distributions to shareholders or unitholders, and may
be subject to defaults by borrowers and to self-
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liquidations. In addition, the performance of a REIT may be affected by its
failure to qualify for tax-free pass-through of income under the Internal
Revenue Code of 1986, as amended (the "Code"), or its failure to maintain
exemption from registration under the 1940 Act.
REAL ESTATE INVESTING. Each of the Portfolios invests primarily in equity
securities of issuers engaged in the real estate industry, which entails certain
risks and considerations of which an investor should be aware. In particular,
securities of such issuers may be subject to the risks associated with the
direct ownership of real estate. These risks include: the cyclical nature of
real estate values, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, demographic trends and variations in rental income, changes
in zoning laws, casualty or condemnation losses, environmental risks, regulatory
limitations on rents, changes in neighborhood values, changes in the appeal of
properties to tenants, increases in interest rates and other real estate capital
market influences. Generally, increases in interest rates will increase the
costs of obtaining financing, which could directly and indirectly decrease the
value of the Portfolios' investments.
REPURCHASE AGREEMENTS. The Portfolios may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolios may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 15% of the market value of the Portfolio's net assets are invested in
these agreements and other investments for which market quotations are not
readily available or which are otherwise illiquid.
SPECIALIZED OWNERSHIP VEHICLES. Each Portfolio may invest in specialized
ownership vehicles which pool investors' funds for investment primarily in
income-producing real estate or real estate related loans or interests. Such
specialized ownership vehicles in which the Portfolios may invest include
property unit trusts, REITs and other similar specialized investment vehicles.
Investments in such specialized ownership vehicles may have favorable or
unfavorable legal, regulatory or tax implications for a Portfolio and, to the
extent such vehicles are structured similarly to investment funds, may cause the
Portfolios' shareholders to indirectly bear certain additional operating
expenses.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, each Portfolio
may, for temporary defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and medium-term debt obligations in which a Portfolio may invest consist of (i)
obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolios may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment, but will
take place no more than 120 days after the trade date. The Portfolios will
maintain with the Custodian a segregated account of cash or liquid securities in
an amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time the Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if the general level of
interest rates has changed. It is a current policy of the Portfolios not to
enter into when-issued commitments exceeding, in the aggregate, 15% of the
market value of the Portfolio's total assets less liabilities other than the
obligations created by these commitments.
DERIVATIVE PRODUCTS (DERIVATIVES)
The Portfolios are permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but are
not limited to: futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other derivative
products yet to be developed, so long as these new products are used in a manner
consistent with the objectives of the Portfolios. These derivative products may
be based upon a wide variety of underlying rates, indices, instruments,
securities and other products, such as interest rates, foreign currencies,
foreign and domestic fixed income and equity securities, groups or "baskets" of
securities and securities indices (for each derivative product, the
"underlying"). Exclusive of forward foreign currency contracts and any
derivative products used for hedging purposes, each Portfolio will limit its use
of derivative products to 33 1/3% of its total assets, measured by the aggregate
notional amount of outstanding derivative products.
The Portfolios may use derivative products under a number of different
circumstances to further their investment objectives. For example, a Portfolio
may purchase derivatives to gain exposure to a market quickly in response to
changes in the Portfolio's investment strategy, upon the inflow of investable
cash or when the derivative provides greater liquidity than the underlying
market. A Portfolio may also use derivatives when it is restricted from directly
owning the "underlying" or when derivatives provide a pricing advantage or lower
transaction costs. The Portfolios also may purchase combinations of derivatives
in order to gain exposure to an investment in lieu of actually purchasing such
investment. Derivatives may also be used by a Portfolio for hedging or risk
management purposes and in other circumstances when the Adviser believes it
advantageous to do so consistent with the Portfolio's investment objectives and
policies. The Portfolios will not use derivatives in a manner that creates
leverage, except to the extent that the use of leverage is expressly permitted
by a particular Portfolio's investment policies, and then only in a manner
consistent with such policies.
The use of derivative products is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Portfolios will be less favorable than it would
have been if these investment techniques had not been used.
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Some of the derivative products in which the Portfolios may invest and some
of the risks related thereto are described in more detail below.
FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)
The Portfolios may purchase and sell futures contracts, such as futures on
securities indices, baskets of securities, foreign currencies and interest rates
of the type generally known as financial futures. These are standardized
contracts that are bought and sold on organized exchanges. A futures contract
obligates a party to buy or sell a specific amount of the "underlying," such as
for example, a particular foreign currency, on a specified future date at a
specified price or to settle the value in cash.
The Portfolios may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolios may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Forward Contracts" above. These
forward contracts are privately negotiated and are bought and sold in the
over-the-counter market. Like a future, a forward contract obligates a party to
buy or sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.
In some cases, the Portfolios may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolios will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolios may utilize futures contracts, forward contracts and related options
are as follows:
The Portfolios may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market exposure.
There currently are limited securities index futures and options on such futures
in many countries, particularly emerging countries. The nature of the strategies
adopted by the Adviser, and the extent to which those strategies are used, may
depend on the development of such markets. The Portfolios may also purchase and
sell foreign currency futures to hedge their respective holdings and commitments
against changes in the level of future currency rates or to adjust their
exposure to a particular currency.
The Portfolios may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely with
changes in interest rates. The Portfolios may engage in such transactions to
hedge their holdings of debt instruments against future changes in interest
rates or for other purposes.
The Portfolios may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these contracts also rises and falls inversely with
changes in interest rates. The Portfolios may engage in financial futures and
forward contracts for both hedging and non-hedging purposes.
Gains and losses on futures contracts, forward contracts and related options
depend on the Adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors. Other risks associated with
the use of these instruments include (i) imperfect correlation between the
change in market value of investments held by a Portfolio and the prices of
derivative products relating to investments purchased
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or sold by the Portfolio, and (ii) possible lack of a liquid secondary market
for a derivative product and the resulting inability to close out a position.
The risk that a Portfolio will be unable to close out a position will be
minimized by only entering into transactions for which there appears to be a
liquid exchange or secondary market. In some strategies, the risk of loss in
trading on futures and related transactions can be substantial, due both to the
low margin deposits required and the extremely high degree of leverage involved
in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the
"CFTC"), each Portfolio may, without registering with the CFTC as a Commodity
Pool Operator, enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-bona
fide hedging activities.
OPTION TRANSACTIONS
The Portfolios may seek to increase their returns or may hedge their
portfolio investments through options transactions with respect to individual
securities, indices or baskets in which such Portfolios may invest; other
financial instruments; and foreign currency. Various options may be purchased
and sold on either the exchange-traded or over-the-counter markets.
Each Portfolio may purchase put and call options. Purchasing a put option
gives a Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period.
Purchasing a call option gives a Portfolio a similar right, but not the
obligation, to purchase the underlying. The purchaser pays a premium to the
seller (also known as the writer) of the option.
Each Portfolio also may write put and call options on investments held in
its portfolio, as well as foreign currency options. A Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, a Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, a Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.
By writing an option, a Portfolio incurs an obligation either to buy (in the
case of a put option) or sell (in the case of a call option) the underlying from
the purchaser of the option at the option's exercise price, upon exercise by the
purchaser. Pursuant to guidelines established by the Board of Directors, the
Portfolios may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will continue to own (i) the underlying; (ii) securities or instruments
convertible or exchangeable without the payment of any consideration into the
underlying; or (iii) a call option on the same underlying with a strike price no
higher than the price at which the underlying was sold pursuant to a short
option position. In the case of a put option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will own another put option on the same underlying with an equal or higher
strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolios' use of options as
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<PAGE>
described include (i) imperfect correlation between the change in market value
of investments held, purchased or sold by a Portfolio and the prices of options
relating to such investments, and (ii) possible lack of a liquid secondary
market for an option.
INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS
Swaps are privately negotiated over-the-counter derivative products in which
two parties agree to exchange payment streams calculated in relation to a rate,
index, instrument or certain securities and a particular "notional amount." As
with many of the other derivative products available to the Portfolios, the
underlying may include an interest rate (fixed or floating), a currency exchange
rate, a commodity price index, and a security, securities index or a combination
thereof. A great deal of flexibility is possible in the way the products may be
structured, with the effect being that the parties may have exchanged amounts
equal to the return on one rate, index or group of securities for another. For
example, in a simple fixed-to-floating interest rate swap, one party makes
payments equivalent to a fixed interest rate, and the other makes payments
equivalent to a specified interest rate index. A Portfolio may engage in simple
or more complex swap transactions involving a wide variety of underlyings. The
currency swaps that the Portfolios may enter will generally involve an agreement
to pay interest streams in one currency based on a specified index in exchange
for receiving interest streams denominated in another currency. Such swaps may
involve initial and final exchanges that correspond to the agreed upon notional
amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. A Portfolio may use one or more of these products in addition to or in
lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar is a combination product in which the same party, such as the Portfolio,
buys a cap from and sells a floor to the other party. As with put and call
options, the amount at risk is limited for the buyer, but, if the cap or floor
is not hedged or covered, may be unlimited for the seller. Under current market
practice, caps, collars and floors between the same two parties are generally
documented under the same "master agreement." In some cases, options and forward
agreements may also be governed by the same master agreement. In the event of a
default, amounts owed under all transactions entered into under, or covered by,
the same master agreement would be netted and only a single payment would be
made.
Swaps, caps, collars and floors are credit-intensive products. A Portfolio
that enters into a swap transaction bears the risk of default, i.e. nonpayment,
by the other party. The guidelines under which each Portfolio enters derivative
transactions, along with some features of the transactions themselves, are
intended to reduce these risks to the extent reasonably practicable, although
they cannot eliminate the risks entirely. Under guidelines established by the
Board of Directors, a Portfolio may enter into swaps only with parties that meet
certain credit rating guidelines. Consistent with current market practices, a
Portfolio will generally enter into swap transactions on a net basis, and all
swap transactions with the same party will be documented under a single master
agreement to provide for net payment upon default. In addition, a Portfolio's
obligations under an agreement
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will be accrued daily (offset against any amounts owing to the Portfolio) and
any accrued, but unpaid, net amounts owed to the other party to a master
agreement will be covered by the maintenance of a segregated account consisting
of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, a Portfolio's risk of loss will consist of the payments
that a Portfolio is contractually entitled to receive from the other party. This
may not be true for currency swaps that require the delivery of the entire
notional amount of one designated currency in exchange for the other. If there
is a default by the other party, a Portfolio may have contractual remedies
pursuant to the agreements related to the transaction.
STRUCTURED NOTES
Structured notes are derivative securities for which the amount of principal
repayment and/or interest payments is based upon the movement of one or more
factors. These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices,
such as the S&P 500 Index. In some cases, the impact of the movements of these
factors may increase or decrease through the use of multipliers or deflators.
The Portfolios may use structured notes to tailor their investments to the
specific risks and returns the Adviser wishes to accept while avoiding or
reducing certain other risks.
INVESTMENT LIMITATIONS
As non-diversified investment companies, the Portfolios are not limited by
the 1940 Act in the proportion of their assets that may be invested in the
obligations of a single issuer. Thus, each Portfolio may invest a greater
proportion of its assets in the securities of a smaller number of issuers and,
as a result, will be subject to greater risk with respect to its portfolio
securities. Any economic, political, or regulatory developments affecting the
value of the securities the Portfolio holds could have a greater impact on the
total value of the Portfolio's holdings than would be the case if the
Portfolio's securities were diversified among more issuers. The Portfolios,
however, intend to comply with the diversification requirements imposed by the
Code for qualification as regulated investment companies. In addition, each
Portfolio will concentrate in the real estate industry, but will not invest more
than 25% of its total assets in the securities of companies in any one other
industry (for these purposes the U.S. Government and its agencies and
instrumentalities are not considered an industry). See "Investment Limitations"
in the Statement of Additional Information.
Each Portfolio operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
limitations, see "Investment Limitations" in the Statement of Additional
Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and
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<PAGE>
generally manages each Portfolio's investments. Set forth below as an annual
percentage of average daily net assets are the management fees payable to the
Adviser quarterly by each Portfolio pursuant to terms of the Investment Advisory
Agreement. The Adviser has voluntarily agreed to a reduction in the fees payable
to it and to reimburse the Portfolios, if necessary, if such fees would cause
total annual operating expenses of the Portfolios to exceed the maximums set
forth in the table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING
EXPENSES AFTER FEE WAIVERS
--------------------------
PORTFOLIO MANAGEMENT FEE CLASS A CLASS B
- -------------------------------------------------------------------- ------------------- ------------ ------------
<S> <C> <C> <C>
European Real Estate Portfolio...................................... 0.80% 1.00% 1.25%
Asian Real Estate Portfolio......................................... 0.80% 1.00% 1.25%
U.S. Real Estate Portfolio.......................................... 0.80% 1.00% 1.25%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD")
is the direct parent of the Adviser and Morgan Stanley. MSDWD is a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses -- securities, asset management and credit
services. At , 1998, the Adviser, together with its affiliated
institutional asset management companies (exclusive of Miller Anderson &
Sherrerd, LLP), managed assets of approximately $ billion. See "Management of
the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. The following individuals have primary portfolio
management responsibility for the Portfolios noted below:
EUROPEAN REAL ESTATE PORTFOLIO. -- JAN WILLEM DE GEUS. Jan Willem de Geus
joined the Adviser in 1997. He is responsible for the Adviser's real estate
investment management business in Europe, with a focus on real estate securities
research. He has had primary management responsibility for the Portfolio since
it commenced operations. Before joining the Adviser, he was employed at the
Dutch Metalworkers Pensionfund (MPMA), where he worked for four years in the
international real estate department. At the MPMA he was involved in the
acquisition of direct real estate, was responsible for selecting REIT managers
in the United States, and was a portfolio manager of international real estate
securities. He graduated from the University of Nijmegen in 1991 with a
doctorate in city planning with a specialization in real estate and received a
masters degree in real estate investment from the Pennsylvania State University
in 1993. He is currently in the final stage of finishing his RBA (the Dutch
equivalent of an American CFA).
ASIAN REAL ESTATE PORTFOLIO. -- KIAT SENG SEAH. Kiat Seng Seah joined the
Adviser's Singapore office in 1990 as a portfolio manager/analyst specializing
in the Southeast Asian markets. He is currently a Principal and is responsible
for investments in Taiwan, Korea and Singapore. He has had primary management
responsibility for the Portfolio since it commenced operations. Previously, Kiat
Seng worked at Barclays de Zoete Wedd (BZW), where he was a senior investment
analyst, with particular responsibility for coverage of the real estate sectors
in Singapore and Malaysia, and helped pioneer BZW's research effort in
Singapore. Kiat Seng is a Chartered Financial Analyst and a qualified real
estate valuer who spent a total of four years as a real estate
24
<PAGE>
appraiser, first for the New Zealand Government and then for the Singapore
Ministry of Finance. He was a Colombo Plan Scholar at the University of
Auckland, New Zealand and graduated with a degree in Property Administration.
U.S. REAL ESTATE PORTFOLIO. -- RUSSELL C. PLATT AND THEODORE R.
BIGMAN. Russell Platt joined Morgan Stanley in 1982 and currently is a Managing
Director of the Adviser. Mr. Platt has primary responsibility for managing the
real estate securities investment business for the Adviser and serves as a
member of the Investment Committee of The Morgan Stanley Real Estate Fund
("MSREF"). Previously, Mr. Platt served as a Director of MSREF, where he was
involved in capital raising, acquisitions, oversight of investments and investor
relations. From 1991 to 1993, Mr. Platt was head of Morgan Stanley's Transaction
Development Group, which was responsible for identifying and structuring real
estate investment opportunities for the Firm and its clients worldwide. From
1990 to 1991, Mr. Platt was based in Morgan Stanley Realty's London office,
where he was responsible for European transaction development. Prior to this, he
had extensive transaction responsibilities involving portfolio, retail, office,
hotel and apartment sales and financings. Mr. Platt graduated from Williams
College in 1982 with a B.A. in Economics and received his M.B.A. from Harvard
Business School in 1986.
Theodore Bigman joined Morgan Stanley in 1995 and currently is a Principal
of the Adviser. Together with Russell Platt, he is responsible for the Adviser's
real estate securities research. Prior to joining the Adviser, he was a Director
at CS First Boston, where he worked for eight years in the Real Estate Group.
While at CS First Boston, Mr. Bigman established and managed the REIT effort,
including primary responsibility for $2.5 billion of initial public offerings by
real estate investment trusts. Previously, Mr. Bigman had extensive real estate
experience in a wide variety of transactions involving the financing and sale of
both individual assets and portfolios of real estate assets as well as the
acquisition and sale of several real estate companies. Mr. Bigman graduated from
Brandeis University in 1983 with a B.A. in Economics and received his M.B.A.
from Harvard University in 1987.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The officers of the Fund conduct and supervise its daily business
operations.
25
<PAGE>
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a
"Plan"). Under each Plan, the Distributor is entitled to receive from each
Portfolio a distribution fee, which is accrued daily and paid quarterly, of
0.25% of the Class B shares' average daily net assets on an annualized basis.
Each Plan is designed to compensate the Distributor for its services in
connection with distribution assistance. The Distributor may retain any portion
of the fee that it does not expend in meeting its obligations to the Fund. The
Distributor may compensate financial intermediaries, plan fiduciaries and
administrators for providing distribution-related services, including account
maintenance services, to shareholders (including, where applicable, underlying
beneficial owners) of Class B shares.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees, and
printing and mailing costs) as specified in its agreements with the Adviser and
Morgan Stanley.
PURCHASE OF SHARES
Class A shares of each Portfolio and Class B shares of each Portfolio may be
purchased at the net asset value per share next determined after receipt by the
Fund of a purchase order. The net asset value per share of each Portfolio is
calculated on days that the New York Stock Exchange ("NYSE") and Chase (the
"Custodian Bank") are open for business as of the close of trading of the NYSE,
normally 4:00 p.m. Eastern Time (the "Pricing Time").
MINIMUM INVESTMENT
The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares of each Portfolio. These minimums may be waived at the
discretion of the Adviser for certain types of investors, including trust
departments, brokers, dealers, agents, financial planners, financial services
firms, investment advisers or various retirement and deferred compensation plans
("Financial Intermediaries"), certain accounts managed by the Adviser and its
affiliates ("Managed Accounts"), and certain employees and customers of Morgan
Stanley and its affiliates. The Fund's determination of an investor's
eligibility to purchase shares of a given class will take precedence over the
investor's selection of a class.
METHODS OF PURCHASE
Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolios by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or because your
check does not clear, you will be
26
<PAGE>
responsible for any loss the Fund or its agents incur. If you are already a
shareholder, the Fund may redeem shares from your account(s) to reimburse the
Fund or its agents for any loss. In addition, you may be prohibited or
restricted from making future investments in the Fund.
FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian Bank are open for business.
Your bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:
1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide
you with a confirmation number.
2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring the funds.
3. Complete and sign the Account Registration Form and mail it to the
address shown thereon.
When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the close of the Federal Funds Wire Control Center
("FFWCC") (normally 6:00 p.m. Eastern Time), the purchase will be executed at
the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the close of the FFWCC, will be executed at the net asset value next
determined. Certain institutional investors and financial institutions have
entered into an arrangement with Morgan Stanley, pursuant to which they may
place orders prior to the Pricing Time, but make payment in Federal Funds for
those shares on the following business day.
BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and which bank is handling the wire, money transferred by bank
wire may or may not be converted into Federal Funds prior to the close of the
FFWCC. Prior to conversion to Federal Funds and receipt by the Fund, an
investor's money will not be invested.
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
27
<PAGE>
The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share of each of the
Portfolios determined on the next business day after receipt. An investor's
money will not be invested prior to crediting of Federal Funds.
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. Each business evening, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day and places a net purchase
and/or redemption order(s) by the morning of the next business day. These orders
normally are executed at the net asset value that was computed for each
Portfolio as of the close of the previous business day.
ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 per
Portfolio. The minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases directly from the
Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.
INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES
Class A and Class B shares of each Portfolio may be subject to the
involuntary conversion and redemption features described below. The conversion
and redemption features may be waived at the discretion of the Adviser for
shares held in a Managed Account and shares purchased through a Financial
Intermediary. Accounts that were open prior to January 2, 1996 are not subject
to involuntary conversion or redemption. The Fund reserves the right to modify
or terminate the conversion or redemption features of the shares at any time
upon 60 days notice to shareholders.
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account
containing Class A shares falls below $500,000 (but remains at or above
$100,000) because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $500,000 (but remains at or
above $100,000) for a continuous 60-day period, the Class A shares in such
account will convert to Class B shares and will be subject to the distribution
fee and other features applicable to Class B shares. The Fund will not convert
Class A shares to Class B shares based solely upon changes in the market that
reduce the net asset value of shares. Under current tax law, conversion between
share classes is not a taxable event to the shareholder.
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares increases to $500,000 or more, whether due to
shareholder purchases or market activity, the Class B shares will convert to
Class A shares. Class B shares purchased through a Financial Intermediary that
has entered into an arrangement with the Fund for the purchase of such shares
may not be converted. Under current tax law, such conversion is not a taxable
event to the shareholder. Class A shares converted from Class B shares are
subject to the same minimum account size requirements as are applicable to New
Accounts containing Class A shares described above.
INVOLUNTARY REDEMPTION OF SHARES. If the value of an account falls below
$100,000 because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $100,000 for
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<PAGE>
a continuous 60-day period, the shares in such account will be subject to
redemption by the Fund. The Fund will not redeem shares based solely upon
changes in the market that reduce the net asset value of shares. If redeemed,
redemption proceeds will be promptly paid to the shareholder.
REDEMPTION OF SHARES
Class A and Class B shares of each Portfolio may be redeemed at any time and
without charge at the net asset value per share next determined after receipt by
the Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds may be more or less than the purchase price of your shares
depending on, among other factors, the market value of the investment securities
held by a Portfolio.
METHODS OF REDEMPTION
Shares may be redeemed directly from the Fund by mail or by telephone.
However, shares purchased through a Financial Intermediary must be redeemed
through a Financial Intermediary. Certain Financial Intermediaries may charge an
additional service or transaction fee.
BY MAIL. Each Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, to Morgan Stanley Institutional Fund, Inc.,
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following:
1. A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which they are registered;
2. Any required signature guarantees; and
3. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit-sharing
plans and other organizations.
Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.
BY TELEPHONE. If you have previously elected the Telephone Redemption
Option on the Account Registration Form, you can redeem Portfolio shares by
calling the Fund and requesting that the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to receive
redemption proceeds, send a written request to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. An investor may be
required to provide personal identification information at
29
<PAGE>
the time an account is opened and prior to effecting each telephone transaction.
In addition, all telephone transaction requests will be recorded and investors
may be required to provide additional telecopied written instructions regarding
transaction requests. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following instructions
received by telephone that either of them reasonably believes to be genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to accept redemption
requests from underlying beneficial owners. These redemptions may be processed
in the same way as purchases made through such Financial Intermediaries, as
described above.
FURTHER REDEMPTION INFORMATION
The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event more than seven days after
receipt of a redemption request in good order. However, payments to investors
redeeming shares which were purchased by check will not be made until payment
for the purchase has been collected, which may take up to eight days after the
date of purchase. The Fund may suspend the right of redemption or postpone the
date upon which redemptions are effected at times when the NYSE is closed, or
under any emergency conditions as determined by the Securities and Exchange
Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required to verify the identity of the person who has authorized
certain redemptions. Please contact the Fund or see the Statement of Additional
Information for further information.
ACCOUNT POLICIES AND SERVICES
EXCHANGE FEATURES
You may exchange shares of each Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced or Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase. Therefore, an
exchange will be considered a taxable event for shareholders subject to tax.
Exchange transactions will be processed at the net asset value per share next
determined after receipt of the
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<PAGE>
request. Shares of the portfolios may be exchanged by mail or telephone. The
telephone exchange privilege is automatic and made available without shareholder
election. The exchange privilege may be modified or terminated by the Fund at
any time upon 60-days notice to shareholders.
BY MAIL. To exchange shares by mail, send a written exchange request to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798. Your written exchange request should include (i) the name, class of
shares and account number of your current Portfolio; (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to exchange
shares; and (iii) the signatures of all registered account holders.
BY TELEPHONE. To exchange shares by telephone, call the Fund at the phone
number provided on the cover of this Prospectus. A Fund representative will
request (i) the name, class of shares and account number of your current
Portfolio, and (ii) the name(s) and class(es) of shares of the portfolio(s) into
which you intend to exchange shares. For additional information regarding
responsibility for the authenticity of telephoned instructions, see "Redemption
of Shares" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by sending a written request to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. It may not be possible to
transfer the registration of certain shares purchased through a Financial
Intermediary. As with redemptions, the written request must be received in "good
order" before any transfer can be made. Transferring the registration of shares
may affect the eligibility of your account for a given class of shares and may
result in involuntary conversion or redemption of your shares.
OTHER ACCOUNT INFORMATION
The Fund does not issue share certificates for the Portfolios. All shares
purchased are confirmed to you and credited to your account on the Fund's books
maintained by the Adviser or its agents. You will have the same rights and
ownership with respect to such shares as if certificates had been issued.
EXCESSIVE TRADING
Frequent trades in your account(s) can disrupt management of a Portfolio and
raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of each Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a portfolio of the Fund within any 120-day
period. For example, the following series of transactions would amount to
excessive trading: exchanging shares of Portfolio A for shares of Portfolio B,
then exchanging shares of Portfolio B for shares of Portfolio C and then
exchanging shares of Portfolio C for shares of Portfolio A within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios, and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.
INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS
Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the Portfolios used for investment by these accounts may
31
<PAGE>
experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the Portfolios.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such class, less any liabilities attributable
to such class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolios. Net asset value per share is determined as of the close of the NYSE
(normally 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business. Price information on listed securities is taken from the exchange
where the security is primarily traded. Securities listed on a U.S. securities
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date and for which market quotations are
not readily available are valued at a price within a range not exceeding the
current asked price nor less than the current bid price. The current bid and
asked prices are determined based on the average of the bid and asked prices
quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such 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. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine the prices in
accordance with the above-stated procedures are determined in good faith at fair
value using methods determined by the Board of Directors. For purposes of
calculating net asset value per share, all assets and liabilities initially
expressed in foreign currencies will be translated into U.S. dollars at the mean
of the bid and asked price for such currencies against the U.S. dollar last
quoted by a major bank.
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Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of a
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.
Each of the Portfolios may advertise "total return" which shows what an
investment in a class of a Portfolio would have earned over a specified period
of time (such as one, five or ten years), assuming that all distributions and
dividends by the Portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividends and distributions or on
redemption. The Fund may also include comparative performance information in
advertising or marketing the Portfolios' shares, including data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
when, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
elects to receive income dividends and capital gains distributions in cash.
Each Portfolio expects to distribute substantially all of its taxable net
investment income in the form of quarterly dividends. Net realized capital
gains, if any, after reduction for any available tax loss carryforwards will
also be distributed annually.
Undistributed net investment income is included in a Portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
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<PAGE>
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolios or their shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, the excess of net short-term
capital gain over net long-term capital loss) to shareholders. Dividends from a
Portfolio's net investment income are taxable to shareholders as ordinary
income, whether received in cash or in additional shares. Such dividends paid by
a Portfolio will generally qualify for the corporate dividends received
deduction only to the extent of the aggregate qualifying dividend income
received by the Portfolio from U.S. corporations. Each Portfolio will report
annually to its shareholders the amount of dividend income qualifying for the
corporate dividend received deduction.
Distributions of net capital gain are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio (such
designation being dependent upon the holding period of the Portfolio in the
underlying asset generating the net capital gain), regardless of how long
shareholders have held their shares. Each Portfolio will send reports annually
to its shareholders of the federal income tax status of all distributions made
during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss) prior to the end of each calendar year to avoid liability for federal
excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (i) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) who has not certified to the Fund that such
shareholder is not subject to backup withholding. This backup withholding is not
an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, redemption or exchange of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption
34
<PAGE>
proceeds exceeds or is less than the shareholder's adjusted tax basis in the
redeemed, exchanged or sold shares. Any such taxable gain or loss generally will
be treated as long-term capital gain or loss if the shares have been held for
more than one year and otherwise generally will be treated as short-term capital
gain or loss. If capital gains distributions have been made with respect to
shares that are sold at a loss after being held for six months or less, however,
the loss is treated as a long-term capital loss to the extent of the capital
gains distributions.
Conversions of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Asian Real Estate Portfolio or the European Real Estate
Portfolio is liable for foreign income taxes so withheld, such Portfolio intends
to operate so as to meet the requirements of the Code to pass through to its
shareholders credit, if any, for foreign income taxes paid. Although each of the
Asian Real Estate and European Real Estate Portfolios intends to meet Code
requirements to pass through credit for such taxes, there can be no assurance
that it will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolios
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held.
35
<PAGE>
Market conditions in a given year could result in a higher or lower portfolio
turnover rate than expected and the Portfolios will not consider portfolio
turnover rate a limiting factor in making investment decisions consistent with
its respective objective and policies. For the fiscal year ended December 31,
1997, the U.S. Real Estate Portfolio had a portfolio turnover rate of [171%].
The European Real Estate and Asian Real Estate Portfolios are not expected to
have portfolio turnover rates in excess of 100%. If portfolio turnover exceeds
100%, the Portfolios may expect to pay correspondingly increased brokerage and
trading costs. In addition to transaction costs, higher portfolio turnover may
result in the realization of capital gains. As discussed under "Taxes," to the
extent net short-term capital gains are realized, any distributions resulting
from such gains are considered ordinary income for federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 40 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of the Portfolio may be presumed to "control" (as
defined in the 1940 Act) such Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports. The
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser, or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Securities
36
<PAGE>
and Exchange Commission for the purpose of providing custodial services for such
assets. MSTC may also hold certain domestic assets for the Fund. For more
information on the custodians, see "General Information -- Custody Arrangements"
in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits the annual financial statements of each Portfolio.
LITIGATION
The Fund is not involved in any litigation.
37
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
EUROPEAN REAL ESTATE, ASIAN REAL ESTATE AND U.S. REAL ESTATE
PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
If you need assistance in filling out this
form for the Morgan Stanley Institutional
ACCOUNT INFORMATION Fund, Inc., please contact your Morgan
Fill in where applicable Stanley representative or call us toll free
1-800-548-7786. Please print all items except
signature, and mail to the Fund at the
address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First
Name Initial Last Name
2.
First
Name Initial Last Name
First
Name Initial Last Name
<TABLE>
<S> <C>
<FN>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional documents that may be required to set
up account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual taxpayers, this is
IDENTIFICATION your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor.
1. TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER
NUMBER ("TIN") ("SSN")
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C>
2. TIN OR SSN
TIN OR SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your correct
TIN(s) or SSN(s). Accounts that have a missing or incorrect TIN(s) or SSN(s) will
be subject to backup withholding at a 31% rate on dividends, distributions and
other payments. If you have not provided us with your correct TIN(s) or SSN(s),
you may be subject to a $50 penalty imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of persons subject
to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding under Section
3406(a)(1)(C) of the Internal Revenue Code because you have underreported interest
or dividends or you were required to, but failed to, file a return which would
have included a reportable interest or dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following
CLASS SECTION Portfolio: / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 for European Real Estate Portfolio / / Class A Shares $ / / Class B Shares $
each Portfolio and Class B shares Asian Real Estate Portfolio / / Class A Shares $ / / Class B Shares $
minimum $100,000 for each Portfolio). U.S. Real Estate Portfolio
Please indicate name of Portfolio, class
and amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio and manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From - - - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone
AND EXCHANGE requests to wire redemption proceeds to
OPTION the commercial bank indicated at right
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests
shares by telephone. A are believed to be authentic.
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated
YOUR FUND ACCOUNT. by telephone are genuine. These
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal
NOT BE HONORED UNLESS THE BOX identification information at the time
IS CHECKED. an account is opened and prior to
effecting each transaction requested by
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
<CAPTION>
G)
Name of COMMERCIAL Bank (Not Savings Bank)
Bank Account No.
Bank ABA No.
Name(s) in which your Bank Account is Established
Bank's Street Address
City State Zip
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the
account statement sent to
my/our registered Address
address, I/we hereby
authorize the Fund to City State Zip Code
mail duplicate statements
to the name and address
provided at right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative
No. Branch
No.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity to purchase and redeem shares of the Fund and
affirm that I/we have received a current Prospectus of the Morgan Stanley Institutional Fund, Inc. and agree to be bound
by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF PERJURY THAT THE INFORMATION ON THIS APPLICATION IS
COMPLETE AND CORRECT AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE
ARE NOT SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE
HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE SUBJECT TO BACKUP WITHHOLDING AS A
RESULT OF A FAILURE TO REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED ME/US THAT I AM/WE ARE NO
LONGER SUBJECT TO BACKUP WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE
SOCIAL SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF I/WE DO NOT PROVIDE EITHER NUMBER
TO CHASE GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS APPLICATION OR IF I/WE FAIL
TO FURNISH MY/OUR CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP WITHHOLDING ON
DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S. CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN
PERSONS AS DEFINED BY THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS
REQUIRED TO AVOID BACKUP WITHHOLDING.
(X) (X)
Signature Date Signature (if joint account, both must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses............................................................. 2
Financial Highlights...................................................... 4
Prospectus Summary........................................................ 8
Investment Objectives and Policies........................................ 12
Additional Investment Information......................................... 13
Investment Limitations.................................................... 23
Management of the Fund.................................................... 23
Purchase of Shares........................................................ 26
Redemption of Shares...................................................... 29
Account Policies and Services............................................. 30
Valuation of Shares....................................................... 32
Performance Information................................................... 33
Dividends and Capital Gains Distributions................................. 33
Taxes..................................................................... 34
Portfolio Transactions.................................................... 35
General Information....................................................... 36
Account Registration Form
</TABLE>
EUROPEAN REAL ESTATE PORTFOLIO
ASIAN REAL ESTATE PORTFOLIO
U.S. REAL ESTATE PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
INTERNATIONAL MAGNUM PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
thirty-two portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and Class B shares of the
International Magnum Portfolio (the "Portfolio"). The Class A and Class B shares
currently offered by the Portfolio have different minimum investment
requirements and fund expenses. Shares of the Portfolio are offered with no
sales charge, exchange fee or redemption fee.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Asian Real Estate, Emerging-Markets,
European Equity, European Real Estate, Global Equity, Gold, International
Equity, International Magnum, International Small Cap, Japanese Equity and Latin
American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth,
Equity Growth, Small Cap Value Equity, Technology, U.S. Equity Plus, U.S. Real
Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced
Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global
Fixed Income, High Yield and Municipal Bond Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information about
the Fund is contained in a "Statement of Additional Information," dated May 1,
1998, which is incorporated herein by reference. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the Fund
are available upon request and without charge by writing or calling the Fund at
the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
the International Magnum Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................. None
Class B................................................................................. None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................. None
Class B................................................................................. None
Deferred Sales Load
Class A................................................................................. None
Class B................................................................................. None
Redemption Fees
Class A................................................................................. None
Class B................................................................................. None
Exchange Fees
Class A................................................................................. None
Class B................................................................................. None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (Net of Fee Waiver)*
Class A................................................................................. %
Class B................................................................................. %
12b-1 Fees
Class A................................................................................. None
Class B................................................................................. %
Other Expenses
Class A................................................................................. %
Class B................................................................................. %
-----------
Total Operating Expenses (Net of Fee Waivers)*
Class A................................................................................. %
Class B................................................................................. %
-----------
-----------
</TABLE>
- ------------------------
* The Adviser has agreed to waive its management fees and/or to reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed a specified percentage of its average
daily net assets. Absent the fee waiver, the management fee would be 0.80%.
Absent the fee waiver and/or expense reimbursement, the Portfolio's total
operating expenses would be % of the average daily net assets of the Class
A shares and % of the average daily net assets of the Class B shares. As a
result of this reduction, the Management Fee stated above is lower than the
contractual fee stated under "Management of the Fund." The Adviser reserves
the right to terminate any of its fee waivers and/or expense reimbursements at
any time in its sole discretion. For further information on Fund expenses, see
"Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1997. Due to the continuous nature of Rule 12b-1 fees,
long-term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the National Association of
Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (i) a 5% annual rate of return and (ii) redemption at
the end of each time period. As noted in the table above, the Portfolio charges
no redemption fees of any kind. The following example is based on the total
operating expenses of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
International Magnum Portfolio
Class A.......................................................... $ $ $ $
Class B..........................................................
</TABLE>
- ------------------------
* Because the Portfolio has recently commenced operations, the Fund has not
projected expenses for the Portfolio beyond the 3-year period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A and Class
B shares of the Portfolio for each of the periods presented. The audited
financial highlights for the Portfolio's shares for the fiscal period ended
December 31, 1997 are part of the Fund's financial statements which appear in
the Fund's December 31, 1997 Annual Report to Shareholders and which are
incorporated by reference into the Fund's Statement of Additional Information.
The Portfolio's financial highlights for each of the periods presented have been
audited by Price Waterhouse LLP, whose unqualified report thereon is also
incorporated by reference into the Statement of Additional Information.
Additional performance information is included in the Annual Report. The Annual
Report and the financial statements therein, along with the Statement of
Additional Information, are available at no cost from the Fund at the address
and telephone number noted on the cover page of this Prospectus. The following
information should be read in conjunction with the financial statements and
notes thereto.
4
<PAGE>
INTERNATIONAL MAGNUM PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------- --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED MARCH 15, 1996* YEAR ENDED MARCH 15, 1996*
DECEMBER 31, TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 10.00 $ 10.00
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1)....................... 0.06 0.01
Net Realized and Unrealized Gain on
Investments.................................... 0.76 0.78
------- ------- ------- -------
Total from Investment Operations.............. 0.82 0.79
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income........................... (0.13) (0.13)
In Excess of Net Investment Income.............. (0.02) (0.02)
Net Realized Gain............................... (0.01) (0.01)
------- ------- ------- -------
Total Distributions........................... (0.16) (0.16)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD.................... $ 10.66 $ 10.63
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN...................................... 8.25% 7.90%
------- ------- ------- -------
------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA:.....................
Net Assets, End of Period (Thousands)........... $ 85,316 $ 23,173
Ratio of Expenses to Average Net Assets (1)..... 1.00%** 1.25%**
Ratio of Net Investment Income to Average Net
Assets (1)..................................... 0.99%** 0.60%**
Portfolio Turnover Rate......................... 18% 18%
Average Commission Rate#........................ $0.0211 $0.0211
</TABLE>
- ------------------------
<TABLE>
<C> <S> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation during
the period:
Per share benefit to net investment income... $0.03 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets............... 1.54 %** 1.69 %**
Net Investment Income to Average Net
Assets...................................... 0.44 %** 0.15 %**
</TABLE>
* Commencement of operations.
** Annualized
# For the period ended December 31, 1996, the average commission rate paid in
trades on which commissions were charged was 0.25% of the trade amount.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of thirty-two portfolios, offering institutional investors
and high net worth individual investors a broad range of investment choices
coupled with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A and Class B shares, except for the
International Small Cap and Municipal Money Market Portfolios, which offer only
Class B shares. Each portfolio has its own investment objective and policies
designed to meet its specific goals. The investment objective of the Portfolio
described in this Prospectus is as follows:
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
of this Prospectus. The investment objectives of these other portfolios are
listed below.
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of companies in
the Asian real estate industry.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and
long-term capital appreciation by investing primarily in equity securities
of companies in the European real estate industry.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
6
<PAGE>
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in equity securities of small- to medium-sized companies which
the Adviser believes to be undervalued.
-The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Adviser, are expected to benefit from their involvement in technology and
technology-related industries.
-The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers included in the
Standard & Poor's 500 Index ("S&P 500").
-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
substantial investment in real estate investment trusts.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of equity securities which the Adviser believes
to be undervalued and fixed income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
7
<PAGE>
-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 of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with preservation of capital by
investing primarily in a variety of investment grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing in municipal
obligations, the interest on which is exempt from federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high-quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund and
each of its portfolios. As of , 1998, Morgan Stanley Asset Management
Inc. and its affiliated institutional asset management companies (exclusive of
Miller Anderson & Sherrerd, LLP) managed assets of approximately $ billion. See
"Management of the Fund -- Investment Adviser" and "Management of the Fund --
Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25%, on an
annualized basis, of the Class B shares' average daily net assets. The minimum
initial investment, generally, is $500,000 for Class A shares and $100,000 for
Class B shares of the Portfolio. The minimum initial investment amount is
reduced for certain categories of investors. For additional information on how
to purchase shares and minimum initial investments, see "Purchase of Shares."
8
<PAGE>
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of the applicable class
next determined after receipt of the redemption request. The redemption price
may be more or less than the purchase price. Certain redemptions that cause the
value of an account to remain for a continuous 60-day period below the minimum
investment amount for Class A or for Class B shares may result in involuntary
redemption or automatic conversion. For additional information on how to redeem
shares and involuntary redemption or conversion, see "Purchase of Shares" and
"Redemption of Shares."
RISK FACTORS
Investing in the Portfolio entails certain risks and considerations of which
an investor should be aware. The Portfolio's share price and investment returns
fluctuate and, when redeemed, an investment in the Portfolio may be worth more
or less than its original cost. The investment policies of the Portfolio may
entail the following risk factors:
-EQUITY SECURITIES. The Portfolio may invest in equity securities. Prices
of equity securities fluctuate in response to many factors, including the
financial health of the issuers and changes in economic and market
conditions.
-FIXED INCOME SECURITIES. The Portfolio will be subject to credit risk and
market risk associated with investment in fixed income securities. Credit
risk is the possibility that an issuer may be unable to meet scheduled
principal and interest payments. Market risk is the possibility that a
change in interest rates or the market's perception of the issuer's
prospects may adversely affect the value of a fixed income security.
-FOREIGN INVESTMENT. The Portfolio may invest in the securities of foreign
issuers. The risks of foreign investment include fluctuations in foreign
currency values, political events affecting the country of issuance and
potentially greater market volatility and lower liquidity.
-DERIVATIVES. The Portfolio may invest in instruments that derive their
values from those of specified securities, indices, currencies or other
points of reference. These derivatives, including those used to manage
risk, are themselves subject to the risks of the different markets in which
they are traded and, therefore, may or may not serve their intended
purposes.
For additional information about risk factors, see also "Investment Objectives
and Policies" and "Additional Investment Information."
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is to provide long-term capital
appreciation. The production of any current income is incidental to this
objective. The Portfolio seeks to achieve its objective by investing primarily
in equity securities of non-U.S. issuers domiciled in the EAFE countries
(defined below). The countries in which the Portfolio will invest are those
comprising the Morgan Stanley Capital International EAFE Index (the "Index"),
which includes Australia, Japan, New Zealand, most nations located in Western
Europe and certain developed countries in Asia, such as Hong Kong and Singapore
(each an "EAFE country," and collectively the "EAFE countries"). The Portfolio's
investment objective is a fundamental policy which may not be changed without
the approval of a majority of the Portfolio's outstanding voting securities.
There is no assurance that the Portfolio will attain its objective. The
investment policies described below are not fundamental policies unless
otherwise noted and may be changed without shareholder approval.
The Portfolio invests primarily in equity securities, which include common
and preferred stocks, convertible securities and rights and warrants to purchase
common stocks and may be denominated in any currency. At least 65% of the total
assets of the Portfolio will be invested in equity securities of issuers in at
least three different EAFE countries under normal circumstances. The Portfolio
also may invest up to 5% of its total assets in the securities of issuers
domiciled in countries which do not comprise part of the Index. By analyzing a
variety of macroeconomic and political factors, the Adviser develops fundamental
projections on comparative interest rates, currencies, corporate profits and
economic growth among the various regions represented in the Index. These
projections are used to establish regional allocation strategies. Within these
regional allocations, the Adviser then selects equity securities among issuers
of a region.
The Adviser's approach in selecting among equity securities within EAFE
countries is oriented to individual stock selection and is value driven. The
Adviser identifies those equity securities which it believes to be undervalued
in relation to the issuer's assets, cash flow, earnings and revenues. In
selecting investments, the Adviser utilizes the research of a number of sources,
including Morgan Stanley Capital International, an affiliate of the Adviser
located in Geneva, Switzerland. Portfolio holdings are regularly reviewed and
subjected to fundamental analysis to determine whether they continue to conform
to the Adviser's investment criteria. Equity securities which no longer conform
to such investment criteria are sold.
Although the Portfolio intends to invest primarily in equity securities
listed on stock exchanges in EAFE countries, the Portfolio may invest in equity
securities that are traded over the counter or that are not listed on a stock
exchange or dealt in a regulated market. As a result of the absence of a public
trading market, such securities may pose liquidity risks. The Portfolio may also
invest in private placements or initial public offerings. Such investments
generally entail short-term liquidity risks.
The Portfolio may invest up to 10% of its total assets in (i) investment
funds with investment objectives similar to that of the Portfolio; and (ii) for
temporary defensive purposes, money market funds and pooled investment vehicles.
If the Portfolio invests in other investment funds, stockholders will bear not
only their proportionate share of the expenses of the Portfolio (including
operating expenses and fees of the Adviser), but also will indirectly bear
similar expenses of the underlying investment fund. Although the Portfolio
anticipates being fully invested in the equity securities described above, the
Portfolio may invest, under normal circumstances for cash management purposes,
up to 35% of its total assets in certain short-term (less than twelve months to
maturity) and medium-term (not greater than five years to maturity) fixed income
securities or hold
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cash. In addition to the investments and strategies described above, the
Portfolio may invest in certain securities and obligations as set forth in
"Additional Investment Information" below and as described under "Investment
Objectives and Policies" in the Statement of Additional Information.
ADDITIONAL INVESTMENT INFORMATION
FIXED INCOME SECURITIES. The short-term and medium-term fixed income
securities in which the Portfolio may invest consist of (i) obligations of
governments, agencies or instrumentalities of any member state of the
Organization for Economic Cooperation and Development ("OECD"), including the
United States; (ii) bank deposits and bank obligations (including certificates
of deposit, time deposits and bankers' acceptances) of banks organized under the
laws of any member state of the OECD, including the United States, denominated
in any currency; and (iii) finance company and corporate commercial paper and
other short-term corporate debt obligations of corporations organized under the
laws of any member state of the OECD, including the United States, meeting the
Portfolio's credit quality standards, provided that no more than 20% of the
Portfolio's assets is invested in any one of such issuers. The short-term and
medium-term debt securities in which the Portfolio may invest will be rated
investment grade by recognized rating services such as Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P") (in the
case of Moody's and S&P, meaning rated A or higher by either), or if unrated,
will be determined to be of comparable quality by the Adviser. The Portfolio
will be subject to credit risk and market risk associated with investment in
fixed income securities. Credit risk is the possibility that an issuer may be
unable to meet scheduled principal and interest payments. Market risk is the
possibility that a change in interest rates or the market's perception of the
issuer's prospects, may adversely affect the value of a fixed income security.
FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolio may
use such contracts to protect against a decline in a foreign currency against
the U.S. dollar between the trade date and settlement date when the Portfolio
purchases or sells securities, lock in the U.S. dollar value of dividends and
interest on securities held by the Portfolio, and generally to protect the U.S.
dollar value of securities held by the Portfolio against exchange rate
fluctuation. While forward contracts may limit losses as a result of exchange
rate fluctuations, they will also limit any gains that might otherwise have been
realized. The Portfolio's Custodian may be required to place cash or liquid
securities in a segregated account in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward contracts. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will be at least equal to the amount of the
Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. The Portfolio may invest in the securities of foreign
issuers. Investment in securities of foreign issuers involves investment risks
somewhat different from those affecting securities of U.S. issuers. The
Portfolio's investments will be subject to political and economic events that
affect the countries in which it invests. Foreign issuers may be subject to
different accounting, auditing and financial standards and requirements. There
also may be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the United States. Many foreign
securities markets have substantially less traded volume than U.S. national
securities exchanges and, therefore, securities of some foreign issuers are less
liquid and more volatile than securities of comparable U.S. issuers. Brokerage
commissions and other
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transaction costs on foreign securities exchanges are generally higher than in
the United States. Dividends and interest paid by foreign issuers may be subject
to withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Portfolio
by domestic companies. Investments in securities of foreign issuers are
generally denominated in foreign currencies and, since the Portfolio may
temporarily hold uninvested reserves in bank deposits in foreign currencies, the
value of the Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency exchange rates and exchange
control regulations, and the Portfolio may incur costs in connection with
conversions between various currencies.
INVESTMENT FUNDS. Some foreign countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is sometimes
permitted through investment funds which have been specifically authorized. The
Portfolio may invest in these investment funds subject to the provisions of the
Investment Company Act of 1940, as amended (the "1940 Act"), and other
applicable laws. If the Portfolio invests in such investment funds, the
Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
Adviser), but also will indirectly bear similar expenses of the underlying
investment funds. Certain of these investment funds are advised by the Adviser.
The Portfolio may, to the extent permitted under the 1940 Act and other
applicable law, invest in these investment funds.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding in the aggregate 33 1/3% of the market value of the Portfolio's total
assets.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
Consistent with its investment policies, the Portfolio may make money market
investments pending other investment or settlement for liquidity. In addition,
the Portfolio may invest in money market instruments for temporary defensive
purposes during adverse market conditions. The money market investments
permitted for the Portfolio include: obligations of the U.S. Government and its
agencies and instrumentalities, obligations of foreign sovereignties, commercial
paper, bank obligations (including certificates of deposit), other debt
securities and repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted equity securities may involve a higher degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Portfolio or less than what may be
considered the fair value of such securities. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be
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<PAGE>
applicable if their securities were publicly traded. If such securities are
required to be registered under the securities laws of one or more jurisdictions
before being resold, the Portfolio may be required to bear the expenses of
registration.
As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Also, as a general matter, the Portfolio may
not invest more than 10% of its total assets in securities that are restricted
from sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). However, the Portfolio may
invest up to 25% of its total assets in liquid Restricted Securities that can be
offered and sold to qualified institutional buyers under Rule 144A under that
Act ("Rule 144A Securities"). The Board of Directors has adopted guidelines and
delegated to the Adviser, subject to the supervision of the Board of Directors,
the daily function of determining and monitoring the liquidity of Rule 144A
Securities. Rule 144A Securities may become illiquid if qualified institutional
buyers are not interested in acquiring the securities.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week
and never exceeds one year. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolio may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 15% of the market value of the Portfolio's net assets would be
invested in such repurchase agreements and in other investments for which market
quotations are not readily available or which are otherwise illiquid.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, each Portfolio
may, for temporary defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and medium-term debt obligations in which a Portfolio may invest consist of (i)
obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the custodian a separate account with a segregated portfolio of
cash or liquid securities in an amount at least equal to these commitments. The
payment obligation and the interest rates that will be received are each fixed
at the time the Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the
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purchase price if, among other factors, the general level of interest rates has
changed. It is a current policy of the Portfolio not to enter into when-issued
commitments exceeding in the aggregate 15% of the market value of the
Portfolio's total assets less liabilities, other than the obligations created by
these commitments.
DERIVATIVE PRODUCTS (DERIVATIVES)
The Portfolio is permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but are
not limited to: futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other derivative
products yet to be developed, so long as these new products are used in a manner
consistent with the objective of the Portfolio. These derivative products may be
based upon a wide variety of underlying rates, indices, instruments, securities
and other products, such as interest rates, foreign currencies, foreign and
domestic fixed income and equity securities, groups or "baskets" of securities
and securities indices (for each derivative product, the "underlying").
Exclusive of forward foreign currency contracts and any derivative products used
for hedging purposes, the Portfolio will limit its use of derivative products to
33 1/3% of its total assets, measured by the aggregate notional amount of
outstanding derivative products.
The Portfolio may use derivative products under a number of different
circumstances to further its investment objective. For example, the Portfolio
may purchase derivatives to gain exposure to a market quickly in response to
changes in the Portfolio's investment strategy, upon the inflow of investable
cash or when the derivative provides greater liquidity than the underlying
market. The Portfolio may also use derivatives when it is restricted from
directly owning the "underlying" or when derivatives provide a pricing advantage
or lower transaction costs. The Portfolio also may purchase combinations of
derivatives in order to gain exposure to an investment in lieu of actually
purchasing such investment. Derivatives may also be used by the Portfolio for
hedging or risk management purposes and in other circumstances when the Adviser
believes it advantageous to do so consistent with the Portfolio's investment
objective and policies. The Portfolio will not use derivatives in a manner that
creates leverage, except to the extent that the use of leverage is expressly
permitted by the Portfolio's investment policies, and then only in a manner
consistent with such policies.
The use of derivative products is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Portfolio will be less favorable than it would
have been if these investment techniques had not been used.
Some of the derivative products in which the Portfolio may invest and some
of the risks related thereto are described in more detail below.
FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)
The Portfolio may purchase and sell futures contracts, such as futures on
securities indices, baskets of securities, foreign currencies and interest rates
of the type generally known as financial futures. These are standardized
contracts that are bought and sold on organized exchanges. A futures contract
obligates a party to buy or sell a specific amount of the "underlying", such as
for example, a particular foreign currency, on a specified future date at a
specified price or to settle the value in cash.
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The Portfolio may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolio may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Forward Contracts" above. These
forward contracts are privately negotiated and are bought and sold in the
over-the-counter market. Like a future, a forward contract obligates a party to
buy or sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.
In some cases, the Portfolio may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolio will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolio may utilize futures contracts, forward contracts and related options
are as follows:
The Portfolio may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market exposure.
There currently are limited securities index futures and options on such futures
in many countries, particularly emerging countries. The nature of the strategies
adopted by the Adviser, and the extent to which those strategies are used, may
depend on the development of such markets. The Portfolio may also purchase and
sell foreign currency futures to hedge its respective holdings and commitments
against changes in the level of future currency rates or to adjust its exposure
to a particular currency.
The Portfolio may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely with
changes in interest rates. The Portfolio may engage in such transactions to
hedge its holdings of debt instruments against future changes in interest rates
or for other purposes.
The Portfolio may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these contracts also rises and falls inversely with
changes in interest rates. The Portfolio may engage in financial futures and
forward contracts for both hedging and non-hedging purposes.
Gains and losses on futures contracts, forward contracts and related options
depend on the Advisers ability to predict correctly the direction of securities
prices, interest rates and other economic factors. Other risks associated with
the use of these instruments include (i) imperfect correlation between the
change in market value of investments held by the Portfolio and the prices of
derivative products relating to investments purchased or sold by the Portfolio,
and (ii) possible lack of a liquid secondary market for a derivative product and
the resulting inability to close out a position. The risk that the Portfolio
will be unable to close out a position will be minimized by only entering into
transactions for which there appears to be a liquid exchange or secondary
market. In some strategies, the risk of loss in trading on futures and related
transactions can be substantial, due both to the low margin deposits required
and the extremely high degree of leverage involved in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the
"CFTC"), the Portfolio may, without registering with the CFTC as a Commodity
Pool Operator, enter into futures contracts and options
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thereon for both hedging and non-hedging purposes, provided that not more than
5% of the Portfolio's total assets at the time of entering the transaction are
required as margin and option premiums to secure obligations under such
contracts relating to non-bona fide hedging activities.
OPTION TRANSACTIONS
The Portfolio may seek to increase its returns or may hedge its portfolio
investments through options transactions with respect to individual securities,
indices or baskets in which the Portfolio may invest; other financial
instruments; and foreign currency. Various options may be purchased and sold on
either the exchange-traded or over-the-counter markets.
The Portfolio may purchase put and call options. Purchasing a put option
gives the Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period.
Purchasing a call option gives the Portfolio a similar right, but not the
obligation, to purchase the underlying. The purchaser pays a premium to the
seller (also known as the writer) of the option.
The Portfolio also may write put and call options on investments held in its
portfolio, as well as foreign currency options. The Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, the Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, the Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.
By writing an option, the Portfolio incurs an obligation either to buy (in
the case of a put option) or sell (in the case of a call option) the underlying
from the purchaser of the option at the option's exercise price, upon exercise
by the purchaser. Pursuant to guidelines established by the Board of Directors,
the Portfolio may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will continue to own (i) the underlying; (ii) securities or instruments
convertible or exchangeable without the payment of any consideration into the
underlying; or (iii) a call option on the same underlying with a strike price no
higher than the price at which the underlying was sold pursuant to a short
option position. In the case of a put option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will own another put option on the same underlying with an equal or higher
strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolio's use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by the
Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.
INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS
Swaps are privately negotiated over-the-counter derivative products in which
two parties agree to exchange payment streams calculated in relation to a rate,
index, instrument or certain securities and a particular "notional amount". As
with many of the other derivative products available to the Portfolio, the
underlying may
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include an interest rate (fixed or floating), a currency exchange rate, a
commodity price index, and a security, securities index or a combination
thereof. A great deal of flexibility is possible in the way the products may be
structured, with the effect being that the parties may have exchanged amounts
equal to the return on one rate, index or group of securities for another. For
example, in a simple fixed-to-floating interest rate swap, one party makes
payments equivalent to a fixed interest rate, and the other makes payments
equivalent to a specified interest rate index. The Portfolio may engage in
simple or more complex swap transactions involving a wide variety of
underlyings. The currency swaps that the Portfolio may enter will generally
involve an agreement to pay interest streams in one currency based on a
specified index in exchange for receiving interest streams denominated in
another currency. Such swaps may involve initial and final exchanges that
correspond to the agreed upon notional amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. The Portfolio may use one or more of these products in addition to or
in lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar is a combination product in which the same party, such as the Portfolio,
buys a cap from and sells a floor to the other party. As with put and call
options, the amount at risk is limited for the buyer, but, if the cap or floor
is not hedged or covered, may be unlimited for the seller. Under current market
practice, caps, collars and floors between the same two parties are generally
documented under the same "master agreement." In some cases, options and forward
agreements may also be governed by the same master agreement. In the event of a
default, amounts owed under all transactions entered into under, or covered by,
the same master agreement would be netted and only a single payment would be
made.
Swaps, caps, collars and floors are credit-intensive products. When the
Portfolio that enters into a swap transaction it bears the risk of default, i.e.
nonpayment, by the other party. The guidelines under which the Portfolio enters
derivative transactions, along with some features of the transactions
themselves, are intended to reduce these risks to the extent reasonably
practicable, although they cannot eliminate the risks entirely. Under guidelines
established by the Board of Directors, the Portfolio may enter into swaps only
with parties that meet certain credit rating guidelines. Consistent with current
market practices, the Portfolio will generally enter into swap transactions on a
net basis, and all swap transactions with the same party will be documented
under a single master agreement to provide for net payment upon default. In
addition, the Portfolios obligations under an agreement will be accrued daily
(offset against any amounts owing to the Portfolio) and any accrued, but unpaid,
net amounts owed to the other party to a master agreement will be covered by the
maintenance of a segregated account consisting of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, the Portfolio's risk of loss will consist of the payments
that the Portfolio is contractually entitled to receive from the other party.
This may not be true for currency swaps that require the delivery of the entire
notional amount of one designated currency in exchange for the other. If there
is a default by the other party, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction.
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STRUCTURED NOTES
Structured notes are derivative securities for which the amount of principal
repayment and/or interest payments is based upon the movement of one or more
factors. These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices,
such as the S&P 500 Index. In some cases, the impact of the movements of these
factors may increase or decrease through the use of multipliers or deflators.
The Portfolio may use structured notes to tailor its investments to the specific
risks and returns the Adviser wishes to accept while avoiding or reducing
certain other risks.
INVESTMENT LIMITATIONS
The Portfolio is a non-diversified investment company under the 1940 Act,
which means that the Portfolio is not limited by the 1940 Act in the proportion
of its total assets that may be invested in the obligations of a single issuer.
Thus, the Portfolio may invest a greater proportion of its total assets in the
securities of a smaller number of issuers and, as a result, will be subject to
greater risk with respect to its respective portfolio securities. Nevertheless,
the Portfolio intends to comply with the more limited diversification
requirements imposed by the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company.
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares and certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on the fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and the Portfolio. The Adviser provides investment
advice and portfolio management services pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each Portfolio's
investments. The Adviser is entitled to receive an annual management fee,
payable quarterly, equal to 0.80% of the average daily net assets of the
International Magnum Portfolio.
The fees of the Portfolio are higher than those of most investment companies
because the Portfolio invests internationally. The Adviser believes that the
fees are comparable to those of other investment companies that invest
internationally. The Adviser has voluntarily agreed to a reduction in the fees
payable to it and to reimburse the Portfolio, if necessary, if such fees would
cause total annual operating expenses of the Portfolio to exceed 1.00% of the
average daily net assets of the Class A shares of the Portfolio and 1.25% of the
average daily net assets of the Class B shares of the Portfolio.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD")
is the direct parent of the Adviser and Morgan Stanley. MSDWD is a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses -- securities, asset management and
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credit services. At , 1998, the Adviser, together with its
affiliated institutional asset management companies (exclusive of Miller
Anderson & Sherrerd, LLP), managed assets of approximately $ billion. See
"Management of the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGER. FRANCINE J. BOVICH. Francine Bovich joined the Adviser
as a Principal in 1993. She is responsible for portfolio management and
communication of the Adviser's asset allocation strategy to institutional
investor clients. Previously, Ms. Bovich was a Principal and Executive Vice
President of Westwood Management Corp. ("Westwood"), a registered investment
adviser. Before joining Westwood, she was a Managing Director of Citicorp
Investment Management, Inc. (now Chancellor Capital Management), where she was
responsible for the Institutional Investment Management group. Ms. Bovich began
her investment career with Banker's Trust Company. She holds a B.A. in Economics
from Connecticut College and an M.B.A. in Finance from New York University.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of the Fund.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
the Distributor is entitled to receive from the Portfolio a distribution fee,
which is accrued daily and paid quarterly, of 0.25% of the Class B shares'
average daily net assets on an annualized basis. Each Plan is designed to
compensate the Distributor for its services in connection
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with distribution assistance. The Distributor may retain any portion of the fee
that it does not expend in meeting its obligations to the Fund. The Distributor
may compensate financial intermediaries, plan fiduciaries and administrators for
providing distribution-related services, including account maintenance services,
to shareholders (including, where applicable, underlying beneficial owners) of
Class B shares.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) as specified in its agreements with the Adviser and
Morgan Stanley.
PURCHASE OF SHARES
Class A shares and Class B shares of the Portfolio may be purchased at the
net asset value per share next determined after receipt by the Fund of a
purchase order. The net asset value per share of the Portfolio is calculated on
days that the New York Stock Exchange ("NYSE") and Chase (the "Custodian Bank")
are open for business as of the close of trading of the NYSE, normally 4:00 p.m.
Eastern Time (the "Pricing Time").
MINIMUM INVESTMENT
The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares of the Portfolio. These minimums may be waived at the
discretion of the Adviser for certain types of investors, including trust
departments, brokers, dealers, agents, financial planners, financial services
firms, investment advisers or various retirement and deferred compensation plans
("Financial Intermediaries"), certain accounts managed by the Adviser and its
affiliates ("Managed Accounts"), and certain employees and customers of Morgan
Stanley and its affiliates. The Fund's determination of an investor's
eligibility to purchase shares of a given class will take precedence over the
investor's selection of a class.
METHODS OF PURCHASE
Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolio by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or because your
check does not clear, you will be responsible for any loss the Fund or its
agents incur. If you are already a shareholder, the Fund may redeem shares from
your account(s) to reimburse the Fund or its agents for any loss. In addition,
you may be prohibited or restricted from making future investments in the Fund.
FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian Bank are open for business.
Your bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:
1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide you
with a confirmation number.
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2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring the funds.
3. Complete and sign the Account Registration Form and mail it to the
address shown thereon.
When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the close of the Federal Funds Wire Control Center
("FFWCC") (normally 6:00 p.m. Eastern Time), the purchase will be executed at
the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the close of the FFWCC, will be executed at the net asset value next
determined. Certain institutional investors and financial institutions have
entered into an arrangement with Morgan Stanley, pursuant to which they may
place orders prior to the Pricing Time, but make payment in Federal Funds for
those shares on the following business day.
BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and which bank is handling the wire, money transferred by bank
wire may or may not be converted into Federal Funds prior to the close of the
FFWCC. Prior to conversion to Federal Funds and receipt by the Fund, an
investor's money will not be invested.
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share determined on the next
business day after receipt. An investor's money will not be invested prior to
crediting of Federal Funds.
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. Each business evening, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day
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and places a net purchase and/or redemption order(s) by the morning of the next
business day. These orders normally are executed at the net asset value that was
computed for the Portfolio as of the close of the previous business day.
ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 for the
Portfolio. The minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases directly from the
Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.
INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES
Class A and Class B shares of the Portfolio may be subject to the
involuntary conversion and redemption features described below. The conversion
and redemption features may be waived at the discretion of the Adviser for
shares held in a Managed Account and shares purchased through a Financial
Intermediary. Accounts that were open prior to January 2, 1996 are not subject
to involuntary conversion or redemption. The Fund reserves the right to modify
or terminate the conversion or redemption features of the shares at any time
upon 60 days notice to shareholders.
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account
containing Class A shares falls below $500,000 (but remains at or above
$100,000) because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $500,000 (but remains at or
above $100,000) for a continuous 60-day period, the Class A shares in such
account will convert to Class B shares and will be subject to the distribution
fee and other features applicable to Class B shares. The Fund will not convert
Class A shares to Class B shares based solely upon changes in the market that
reduce the net asset value of shares. Under current tax law, conversion between
share classes is not a taxable event to the shareholder.
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares increases to $500,000 or more, whether due to
shareholder purchases or market activity, the Class B shares will convert to
Class A shares. Class B shares purchased through a Financial Intermediary that
has entered into an arrangement with the Fund for the purchase of such shares
may not be converted. Under current tax law, such conversion is not a taxable
event to the shareholder. Class A shares converted from Class B shares are
subject to the same minimum account size requirements as are applicable to New
Accounts containing Class A shares described above.
INVOLUNTARY REDEMPTION OF SHARES. If the value of an account falls below
$100,000 because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $100,000 for a continuous
60-day period, the shares in such account will be subject to redemption by the
Fund. The Fund will not redeem shares based solely upon changes in the market
that reduce the net asset value of shares. If redeemed, redemption proceeds will
be promptly paid to the shareholder.
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REDEMPTION OF SHARES
Class A and Class B shares of the Portfolio may be redeemed at any time and
without charge at the net asset value per share next determined after receipt by
the Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds may be more or less than the purchase price of your shares
depending on, among other factors, the market value of the investment securities
held by the Portfolio.
METHODS OF REDEMPTION
Shares may be redeemed directly from the Fund by mail or by telephone.
However, shares purchased through a Financial Intermediary must be redeemed
through a Financial Intermediary. Certain Financial Intermediaries may charge an
additional service or transaction fee.
BY MAIL. The Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, to Morgan Stanley Institutional Fund, Inc.,
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following:
1. A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
2. Any required signature guarantees; and
3. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.
BY TELEPHONE. If you have previously elected the Telephone Redemption
Option on the Account Registration Form, you can redeem Portfolio shares by
calling the Fund and requesting that the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to receive
redemption proceeds, send a written request to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. An investor may be
required to provide personal identification information at the time an account
is opened and prior to effecting each telephone transaction. In addition, all
telephone transaction requests will be recorded and investors may be required to
provide additional telecopied written
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instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to accept redemption
requests from underlying beneficial owners. These redemptions may be processed
in the same way as purchases made through such Financial Intermediaries, as
described above.
FURTHER REDEMPTION INFORMATION
The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event more than seven days after
receipt of a redemption request in good order. However, payments to investors
redeeming shares which were purchased by check will not be made until payment
for the purchase has been collected, which may take up to eight days after the
date of purchase. The Fund may suspend the right of redemption or postpone the
date upon which redemptions are effected at times when the NYSE is closed, or
under any emergency conditions as determined by the Securities and Exchange
Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required to verify the identity of the person who has authorized
certain redemptions. Please contact the Fund or see the Statement of Additional
Information for further information.
ACCOUNT POLICIES AND SERVICES
EXCHANGE FEATURES
You may exchange shares of the Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced or Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase. Therefore, an
exchange will be considered a taxable event for shareholders subject to tax.
Exchange transactions will be processed at the net asset value per share next
determined after receipt of the
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request. Shares of the portfolios may be exchanged by mail or telephone. The
telephone exchange privilege is automatic and made available without shareholder
election. The exchange privilege may be modified or terminated by the Fund at
any time upon 60-days notice to shareholders.
BY MAIL. To exchange shares by mail, send a written exchange request to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798. Your written exchange request should include (i) the name, class of
shares and account number of your current Portfolio; (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to exchange
shares; and (iii) the signatures of all registered account holders.
BY TELEPHONE. To exchange shares by telephone, call the Fund at the phone
number provided on the cover of this Prospectus. A Fund representative will
request (i) the name, class of shares and account number of your current
Portfolio, and (ii) the name(s) and class(es) of shares of the portfolio(s) into
which you intend to exchange shares. For additional information regarding
responsibility for the authenticity of telephoned instructions, see "Redemption
of Shares" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by sending a written request to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. It may not be possible to
transfer the registration of certain shares purchased through a Financial
Intermediary. As with redemptions, the written request must be received in "good
order" before any transfer can be made. Transferring the registration of shares
may affect the eligibility of your account for a given class of shares and may
result in involuntary conversion or redemption of your shares.
OTHER ACCOUNT INFORMATION
The Fund does not issue share certificates for the Portfolio. All shares
purchased are confirmed to you and credited to your account on the Fund's books
maintained by the Adviser or its agents. You will have the same rights and
ownership with respect to such shares as if certificates had been issued.
EXCESSIVE TRADING
Frequent trades in your account(s) can disrupt management of the Portfolio
and raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of the Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a portfolio of the Fund within any 120-day
period. For example, the following series of transactions would amount to
excessive trading: exchanging shares of Portfolio A for shares of Portfolio B,
then exchanging shares of Portfolio B for shares of Portfolio C and then
exchanging shares of Portfolio C for shares of Portfolio A within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios, and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.
INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS
Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the portfolios used for investment by these accounts may
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experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the portfolio.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the close of the NYSE
(normally 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business. Price information on listed securities is taken from the exchange
where the security is primarily traded. Securities listed on a U.S. securities
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date and for which market quotations are
not readily available are valued at a price within a range not exceeding the
current asked price nor less than the current bid price. The current bid and
asked prices are determined based on the average of the bid and asked prices
quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such 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. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine prices in accordance
with the above-stated procedure are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid and asked
price of such currencies against the U.S. dollar last quoted by a major bank.
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Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.
"Total return" shows what an investment in a class of the Portfolio would
have earned over a specified period of time (such as one, five or ten years),
assuming that all distributions and dividends by the Portfolio were reinvested
in the same class on the reinvestment dates during the period. Total return does
not take into account any federal or state income taxes that may be payable on
dividends and distributions or on redemption. The Fund may also include
comparative performance information in advertising or marketing the Portfolio's
shares, including data from Lipper Analytical Services, Inc., other industry
publications, business periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares of such class at net asset
value, except when, upon written notice to the Fund or by checking off the
appropriate box in the Distribution Option Section on the Account Registration
Form, a shareholder elects to receive income dividends and capital gains
distributions in cash.
The Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual dividends. Net realized capital gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
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TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
The Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from the Portfolio's net investment income are taxable
to shareholders as ordinary income, whether received in cash or reinvested in
additional shares. Such dividends paid by the Portfolio will generally not
qualify for the dividends-received deduction for corporate shareholders. The
Portfolio will report annually to its shareholders the amount of dividend income
qualifying for such treatment.
Distributions of net capital gain are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio (such
designation being dependent upon the holding period of the Portfolio in the
underlying asset generating the net capital gain), regardless of how long the
shareholder has held the Portfolio's shares. The Portfolio will send reports
annually to shareholders of the federal income tax status of all distributions
made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
losses, including any available capital loss carryforwards) prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (i) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) who has not certified to the Fund that such
shareholder is not subject to backup withholding. This backup withholding is not
an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
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The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption proceeds exceed or are
less than the shareholder's adjusted tax basis in the sold, exchanged or
redeemed shares. If capital gains distributions have been made with respect to
shares that are sold at a loss after being held for six months or less, then the
loss is treated as a long-term capital loss to the extent of the capital gains
distributions.
Conversions of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
Investment income received by the Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that the Portfolio is liable for foreign income taxes so withheld, the
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that the Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolio generally does not invest for short-term trading purposes,
however, when circumstances warrant, the Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the
29
<PAGE>
Portfolio will not consider portfolio turnover rate a limiting factor in making
investment decisions consistent with its respective objective and policies. As
portfolio turnover increases, the Portfolio necessarily will experience
increased transaction costs and additional realization of capital gains.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 40 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of the
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no pre-emptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of the Portfolio may be presumed to "control" (as that term
is defined in the 1940 Act) the Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports. The
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Commission for the purpose of providing
custodial services for such assets. MSTC may also hold certain domestic assets
for the Fund. For more information on the custodians, see "General Information
- -- Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
30
<PAGE>
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
31
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
INTERNATIONAL MAGNUM PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, Inc., please contact your Morgan Stanley
representative or call us toll free 1-800-548-7786. Please print all
items except signature, and mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor.
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY
NUMBER ("TIN") NUMBER ("SSN")
OR
2. TIN
SSN
OR
TIN
SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct TIN(s) or SSN(s). Accounts that have a missing or incorrect
TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on
dividends, distributions and other payments. If you have not provided us
with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of
persons subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
You may be notified that you are subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code because you have
underreported interest or dividends or you were required to, but failed
to, file a return which would have included a reportable interest or
dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following
CLASS SECTION Portfolio: / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 International Magnum Portfolio
for the Portfolio and Class B
shares minimum $100,000 for the
Portfolio). Please indicate class
and amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio
and manner of payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the account
statement sent to my/our registered
address, I/we hereby authorize the Address
Fund to mail duplicate statements
to the name and address provided at City State Zip Code
right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative No. Branch
No.
</TABLE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE
SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE
APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL SECURITY
ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF
I/ WE DO NOT PROVIDE EITHER NUMBER TO CHASE GLOBAL FUNDS
SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS
APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR CORRECT SSN(S)
OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP
WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE
PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 11
Investment Limitations............................ 18
Management of the Fund............................ 18
Purchase of Shares................................ 20
Redemption of Shares.............................. 23
Account Policies and Services..................... 24
Valuation of Shares............................... 26
Performance Information........................... 27
Dividends and Capital Gains Distributions......... 27
Taxes............................................. 28
Portfolio Transactions............................ 29
General Information............................... 30
Account Registration Form
</TABLE>
INTERNATIONAL MAGNUM PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
TECHNOLOGY PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and nondiversified investment portfolios ("portfolios").
The Fund is designed to provide clients with attractive alternatives for meeting
their investment needs. The Fund currently consists of thirty-two portfolios
representing a broad range of investment choices. This prospectus (the
"Prospectus") pertains to the Class A and Class B shares of the Technology
Portfolio (the "Portfolio"). The Class A and Class B shares currently offered by
the Portfolio have different minimum investment requirements and fund expenses.
Shares of the Portfolio are offered with no sales charge, exchange fee or
redemption fee.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Asian Real Estate, Emerging Markets,
European Equity, European Real Estate, Global Equity, Gold, International
Equity, International Magnum, International Small Cap, Japanese Equity and Latin
American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth,
Equity Growth, Small Cap Value Equity, Technology, U.S. Equity Plus, U.S. Real
Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced
Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global
Fixed Income, High Yield and Municipal Bond Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information about
the Fund is contained in a "Statement of Additional Information," dated May 1,
1998, which is incorporated herein by reference. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the Fund
are available upon request and without charge by writing or calling the Fund at
the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
the Technology Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A................................................................................... None
Class B................................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
Class A................................................................................... None
Class B................................................................................... None
Deferred Sales Load
Class A................................................................................... None
Class B................................................................................... None
Redemption Fees
Class A................................................................................... None
Class B................................................................................... None
Exchange Fees
Class A................................................................................... None
Class B................................................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- --------------------------------------------------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C>
Management Fee (Net of Fee Waiver)*
Class A................................................................................... %
Class B................................................................................... %
12b-1 Fees
Class A................................................................................... None
Class B................................................................................... 0.25%
Other Expenses
Class A................................................................................... %
Class B................................................................................... %
---------
Total Operating Expenses (Net of Fee Waivers or Expense Reimbursements)*
Class A................................................................................... %
Class B................................................................................... %
---------
---------
</TABLE>
- --------------
*The Adviser has agreed to waive its management fees and/or reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed a specified percentage of its average daily
net assets. Absent the fee waiver, the management fee would be 1.00%. Absent
the fee waivers and/or expense reimbursements, the Portfolio's total operating
expenses would be 8.51% of the average daily net assets of the Class A shares
and 9.14% of the average daily net assets of the Class B shares. As a result of
this reduction, the Management Fee stated above is lower than the contractual
fee stated under "Management of the Fund." The Adviser reserves the right to
terminate any of its fee waivers and/or expense reimbursements at any time in
its sole discretion. For further information on Portfolio expenses, see
"Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. Expenses and fees for the Portfolio are based on actual figures for
the fiscal period ended December 31, 1997. Due to the continuous nature of Rule
12b-1 fees, long-term Class B shareholders may pay more than the equivalent of
the maximum front-end sales charges otherwise permitted by the National
Association of Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (i) a 5% annual rate of return and (ii) redemption at
the end of each time period. As noted in the table above, the Portfolio charges
no redemption fees of any kind. The following example is based on the total
operating expenses of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Technology Portfolio
Class A........................................................ $ $ $ $
Class B........................................................
</TABLE>
- ------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. THE PORTFOLIO IS NEW AND ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A and Class
B shares for the Technology Portfolio. The audited financial highlights for the
Portfolio's shares for the fiscal period ended December 31, 1997 are included in
the Fund's financial statements which appear in the Fund's December 31, 1997
Annual Report to Shareholders and which are incorporated by reference into the
Fund's Statement of Additional Information. The Portfolio's financial highlights
have been audited by Price Waterhouse LLP, whose unqualified report thereon is
also incorporated by reference into the Statement of Additional Information.
Additional information is included in the Annual Report. The Annual Report and
the financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. The following information
should be read in conjunction with the financial statements and notes thereto.
4
<PAGE>
THE TECHNOLOGY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------- ----------------------------
PERIOD FROM PERIOD FROM
SEPTEMBER 16, SEPTEMBER 16,
YEAR ENDED 1996* TO YEAR ENDED 1996* TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................. $ 10.00 $ 10.00
------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).......................... (0.02) (0.02)
Net Realized and Unrealized Gain on Investments.... 0.73 0.73
------------- ------------- ------------- -------------
Total from Investment Operations................. 0.71 0.71
------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD....................... $ 10.71 $ 10.71
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
TOTAL RETURN......................................... 7.10% 7.10%
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands).............. $ 3,595 $ 1,487
Ratio of Expenses to Average Net Assets (1)........ 1.25%** 1.50%**
Ratio of Net Investment Income to Average Net
Assets (1)........................................ (0.70)%** (1.00)%**
Portfolio Turnover Rate............................ 77% 77%
Average Commission Rate............................ $ 0.0374 $ 0.0374
- ------------------------
(1) Effect of voluntary expense limitation during the period:
Per share benefit to net investment income...... $0.22 $0.19
Ratios before expense limitation:
Expenses to Average Net Assets.................. 8.51%** 9.14%**
Net Investment Income to Average Net Assets (7.96)%** (8.65)%**
</TABLE>
* Commencement of operations.
** Annualized
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of thirty-two portfolios, offering institutional investors
and high net worth individual investors a broad range of investment choices
coupled with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and Class B shares, except for
the International Small Cap and Municipal Money Market Portfolios which offer
only Class A shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. This Prospectus pertains to the
Class A and Class B shares of the Technology Portfolio, the investment objective
of which is as follows:
-The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Adviser, are expected to benefit from their involvement in technology and
technology-related industries.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
of this Prospectus. The investment objectives of these other portfolios are
listed below.
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of companies in
the Asian real estate industry.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and
long-term capital appreciation by investing primarily in equity securities
in the European real estate industry.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
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-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in equity securities of small- to medium-sized companies which
the Adviser believes to be undervalued.
-The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers included in the
Standard & Poor's 500 Index ("S&P 500").
-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
substantial investment in real estate investment trusts.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of equity securities which the Adviser believes
to be undervalued and fixed income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-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 of the recognized rating services.
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-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing in municipal
obligations, the interest on which is exempt from federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund and
each of its portfolios. As of , 1998, Morgan Stanley Asset Management
Inc. and its affiliated institutional asset management companies (exclusive of
Miller Anderson & Sherrerd, LLP) managed assets of approximately $ billion. See
"Management of the Fund -- Investment Adviser" and "Management of the Fund --
Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. The minimum
initial investment, generally, is $250,000 for Class A shares of the Portfolio
and $50,000 for Class B shares of the Portfolio. The minimum initial investment
amount is reduced for certain categories of investors. For additional
information on how to purchase shares and minimum initial investments, see
"Purchase of Shares."
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of the applicable class
next determined after receipt of the redemption request. The redemption price
may be more or less than the purchase price. Certain redemptions that cause the
value of an account to remain for a continuous 60-day period below the minimum
investment amount for Class A shares or for Class B shares may result in
involuntary redemption or automatic conversion. For additional information on
how to redeem shares and involuntary redemption or conversion, see "Purchase of
Shares" and "Redemption of Shares."
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RISK FACTORS
Investing in the Portfolio entails certain risks and considerations of which
an investor should be aware. The Portfolio's share price and investment returns
fluctuate and, when redeemed, an investment in the Portfolio may be worth more
or less than its original cost. The investment policies of the Portfolio may
entail the following risk factors:
-EQUITY SECURITIES. The Portfolio may invest in equity securities. Prices
of equity securities fluctuate in response to many factors, including the
financial health of the issuers and changes in economic and market
conditions.
-FIXED INCOME SECURITIES. The Portfolio will be subject to credit risk and
market risk associated with investment in fixed income securities. Credit
risk is the possibility that an issuer may be unable to meet scheduled
principal and interest payments. Market risk is the possibility that a
change in interest rates or the market's perception of the issuer's
prospects may adversely affect the value of a fixed income security.
-HIGH YIELD SECURITIES. The Portfolio may invest in lower rated and unrated
fixed income securities (i.e., high yield or high risk securities), which
are often issued by smaller or less creditworthy companies. High yield
securities generally are subject to greater market risk and credit risk
than other fixed income securities.
-FOREIGN INVESTMENT. The Portfolio may invest in the securities of foreign
issuers. The risks of foreign investment include fluctuations in foreign
currency values, political events affecting the country of issuance and
potentially greater market volatility and lower liquidity.
-EMERGING MARKET COUNTRY SECURITIES. The Portfolio may invest in emerging
market country securities which entail risks typically associated with
investment in more established foreign markets. However, these risks may be
intensified due to higher volatility and less liquidity of emerging
markets, possible political risks associated with the country of issuance
and generally weaker financial condition of issuers in these markets.
-DERIVATIVES. The Portfolio may invest in instruments that derive their
values from those of specified securities, indices, currencies or other
points of reference. These derivatives, including those used to manage
risk, are themselves subject to the risks of the different markets in which
they are traded and, therefore, may or may not serve their intended
purposes.
For additional information about risk factors, see also "Investment
Objectives and Policies" and "Additional Investment Information."
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is to provide long-term capital
appreciation by investing primarily in equity securities of companies that, in
the opinion of the Adviser, are expected to benefit from their investment in
technology and technology-related industries. The production of current income
is incidental to this objective. Under normal circumstances, at least 65% of the
total assets of the Portfolio will be invested in the equity securities of such
"technology" companies. The Portfolio expects to invest in companies in a broad
range of technology and technology-related industries including, but not limited
to: computers, software and peripheral products; electronics; communications
equipment and services; entertainment; multimedia; and information services.
With respect to the Portfolio, equity securities include common and preferred
stocks, convertible securities, rights and warrants to purchase common stocks,
and any similar equity interests, such as trust or partnership interests. Such
equity securities may or may not pay dividends or distributions and may or may
not carry voting rights. The Portfolio's investment objective is a fundamental
policy which may not be changed without the approval of a majority of the
Portfolio's outstanding voting securities. There is no assurance that the
Portfolio will attain its objective. Other investment policies described below
are not fundamental policies unless otherwise noted and may be changed without
shareholder approval. In addition to the investments and strategies described
below, the Portfolio may invest in certain securities and obligations as set
forth in "Additional Investment Information" and as described under "Investment
Objectives and Policies" in the Statement of Additional Information.
The Portfolio may invest up to 35% of its total assets in the equity or
fixed income securities of foreign issuers to permit the Portfolio to
participate sufficiently in the global technology market. The Portfolio's
investments in foreign issuers may be denominated in any currency and may be in
the form of Depositary Receipts or direct investment in listed or unlisted
securities.
The Portfolio may invest in the equity securities of both large and small
companies. While the Adviser believes that smaller companies may provide greater
growth potential than larger, more established firms, investing in the
securities of smaller companies also involves greater risk and portfolio price
volatility. Among the reasons for this greater price volatility are the lower
degree of market liquidity (the securities of companies with small stock market
capitalizations may trade less frequently and in limited volume) and the greater
sensitivity of small companies to changing economic conditions.
ADDITIONAL INVESTMENT INFORMATION
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES. The
Portfolio may invest in securities such as convertible securities, preferred
stock, warrants or other securities exchangeable under certain circumstances for
shares of common stock. Warrants are instruments giving holders the right, but
not the obligation, to buy shares of a company at a given price during a
specified period.
The Portfolio may invest in equity-linked securities, which are securities
that are convertible into, or the value of which is based upon the value of,
equity securities upon certain terms and conditions. The amount received by an
investor at maturity of such securities is not fixed but is based on the price
of the underlying common stock. It is impossible to predict whether the price of
the underlying common stock will rise or fall. Trading prices of the underlying
common stock will be influenced by the issuer's operational results, by complex,
interrelated political, economic, financial, or other factors affecting the
capital markets, the stock
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exchanges on which the underlying common stock is traded and the market segment
of which the issuer is a part. In addition, it is not possible to predict how
equity-linked securities will trade in the secondary market, which is fairly
developed and liquid. The market for such securities may be shallow, however,
and high volume trades may be possible only with discounting. In addition to the
foregoing risks, the return on such securities depends on the creditworthiness
of the issuer of the securities, which may be the issuer of the underlying
securities or a third party investment bank or other lender. The
creditworthiness of such third party issuer of equity-linked securities may, and
often does, exceed the creditworthiness of the issuer of the underlying
securities. The advantage of using equity-linked securities over traditional
equity and debt securities is that the former are income producing vehicles that
may provide a higher income than the dividend income on the underlying equity
securities while allowing some participation in the capital appreciation of the
underlying equity securities. Another advantage of using equity-linked
securities is that they may be used for hedging to reduce the risk of investing
in the generally more volatile underlying equity securities.
DEPOSITARY RECEIPTS. The Portfolio may invest in Depositary Receipts,
including American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") and other Depositary Receipts
(which, together with ADRs, GDRs and EDRs, are hereinafter collectively referred
to as "Depositary Receipts"), to the extent that such Depositary Receipts are or
become available. ADRs are securities typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests in a security or
pool of securities issued by a foreign issuer (the "underlying issuer") and
deposited with the depositary. ADRs may be "sponsored" or "unsponsored."
Sponsored ADRs are established jointly by a depositary and the underlying
issuer, whereas unsponsored ADRs may be established by a depositary without
participation by the underlying issuer. The issuers of the stock of unsponsored
ADRs are not obligated to disclose material information in the United States and
therefore, there may not be a correlation between such information and the
market value of the ADR. GDRs, EDRs and other types of Depositary Receipts are
typically issued by foreign depositaries, although they may also be issued by
U.S. depositaries, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. The Portfolio may invest in
sponsored and unsponsored Depositary Receipts. For purposes of the Portfolio's
investment policies, the Portfolio's investments in Depositary Receipts will be
deemed to be investments in the underlying securities.
FIXED INCOME SECURITIES. The Portfolio will invest in fixed income (debt)
securities. The market value of the fixed income securities in which the
Portfolio invests will be affected by changes in the creditworthiness of issuers
and will change in response to interest rate changes and other factors.
Generally, the values of fixed income securities vary inversely with changes in
interest rates, so that during periods of falling interest rates, the values of
outstanding fixed income securities generally rise and during periods of rising
interest rates, the values of such securities generally decline. While
securities with longer maturities tend to produce higher yields, the prices of
longer maturity securities are subject to greater market fluctuations as a
result of changes in interest rates.
FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolio may
use such contracts to protect against a decline in a foreign currency against
the U.S. dollar between the trade date and settlement date when the Portfolio
purchases or sells securities, lock in the U.S.
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dollar value of dividends and interest on securities held by the Portfolio, and
generally to protect the U.S. dollar value of securities held by the Portfolio
against exchange rate fluctuation. While forward contracts may limit losses as a
result of exchange rate fluctuations, they will also limit any gains that might
otherwise have been realized. The Portfolio's Custodian may be required to place
cash or liquid securities in a segregated account in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will be at least equal to the amount of
the Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. The Portfolio may invest in the securities of foreign
issuers. Investment in securities of foreign issuers involves investment risks
somewhat different from those affecting securities of U.S. issuers. The
Portfolio's investments will be subject to political and economic events that
affect the countries in which it invests. Foreign issuers may be subject to
different accounting, auditing and financial standards and requirements. There
also may be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the United States. Many foreign
securities markets have substantially less trading volume than U.S. national
securities exchanges and, therefore, securities of some foreign issuers are less
liquid and more volatile than securities of comparable U.S. issuers. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the United States. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes, which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Portfolio by domestic companies. Investments in securities
of foreign issuers are generally denominated in foreign currencies and, since
the Portfolio may temporarily hold uninvested reserves in bank deposits in
foreign currencies, the value of the Portfolio's assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency exchange
rates and exchange control regulations, and the Portfolio may incur costs in
connection with conversions between various currencies.
The Portfolio may also invest in emerging market country securities.
Investing in emerging markets entails the risks associated with foreign
investment described above, however, these risks may be intensified in emerging
markets. Emerging markets can include every nation in the world except the
United States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe. Certain emerging market countries have historically experienced,
and may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, large amounts of external debt, trade difficulties
and unemployment. Further, the economies of developing countries generally are
heavily dependent upon international trade and, accordingly, have been, and may
continue to be, adversely affected by trade barriers, exchange controls and
other protectionist measures imposed or negotiated by the countries in which
they trade. There also are risks associated with the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could adversely affect the economies of such countries or the value of
the Portfolio's investments in those countries.
HIGH YIELD SECURITIES. The Portfolio may invest in lower rated or unrated
debt securities, commonly referred to as high yield, high risk securities or
junk bonds. High yield securities are debt securities rated below the four
highest rating categories (i.e., Ba through C by Moody's Investors Service, Inc.
or BB through D by
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Standard & Poor's Rating Group ("S&P")), and unrated securities considered to be
of equivalent quality by the Adviser. Such securities carry a high degree of
risk and are considered speculative by the major credit rating agencies.
While such securities offer high yields, they also normally carry with them
a greater degree of risk than securities with higher ratings. The values of high
yield securities are more volatile and may react with greater sensitivity to
market changes. Also, high yield securities are often issued by smaller, less
creditworthy companies, or by highly leveraged (indebted) companies, which are
generally less able than more established or less leveraged companies to make
scheduled payments of interest and principal. The price movement of these
securities is influenced less by changes in interest rates and more by the
financial position of the issuing corporation.
INVESTMENT FUNDS. Some foreign countries have laws and regulations that
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities of companies
listed and traded on the stock exchanges in these countries is permitted by
certain foreign countries through investment funds which have been specifically
authorized. The Portfolio may invest in these investment funds subject to the
provisions of the Investment Company Act of 1940, as amended (the "1940 Act"),
and other applicable laws. If the Portfolio invests in such investment funds,
the Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
Adviser), but also will indirectly bear similar expenses of the underlying
investment funds. Certain of the investment funds are advised by the Adviser.
The Portfolio may, to the extent permitted under the 1940 Act and other
applicable law, invest in these investment funds.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
Consistent with its investment policies, the Portfolio may make money market
investments pending other investment or settlement for liquidity. In addition,
the Portfolio may invest in money market instruments for temporary defensive
purposes during adverse market conditions. The money market investments
permitted for the Portfolio include: obligations of the U.S. Government and its
agencies and instrumentalities, obligations of foreign sovereignties, commercial
paper, bank obligations (including certificates of deposit), other debt
securities and repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolio may invest in securities that are neither listed on a
stock exchange nor traded over the counter. Such unlisted equity securities may
involve a higher degree of business and financial risk that can result in
substantial losses. As a result of the absence of a public trading market for
these securities, they may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from
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these sales could be less than those originally paid by the Portfolio or less
than what may be considered the fair value of such securities. Further,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.
As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Securities that are not registered under the
Securities Act of 1933, as amended, but that can be offered and sold to
qualified institutional buyers under Rule 144A under that Act ("Rule 144A
Securities") will not be included within the foregoing 15% restriction if the
securities are determined to be liquid. The Board of Directors has adopted
guidelines and delegated to the Adviser, subject to the supervision of the Board
of Directors, the daily function of determining and monitoring the liquidity of
Rule 144A securities. Rule 144A securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities. In
addition, the Portfolio may invest up to 10% of its total assets in restricted
securities, and up to 25% of its total assets in restricted securities that are
Rule 144A securities.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week
and never exceeds one year. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities with a market value at least equal to the purchase
price (including accrued interest) as collateral, and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolio may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 15% of the market value of the Portfolio's net assets are invested in
these agreements and other investments for which market quotations are not
readily available or which are otherwise illiquid.
SHORT SALES. The Portfolio may, and currently intends to, from time to
time, sell securities short without limitation, but consistent with applicable
legal requirements. A short sale is a transaction in which the Portfolio sells
securities it owns or has the right to acquire at no added cost (i.e., "against
the box") or does not own (but has borrowed) in anticipation of a decline in the
market price of the securities. To deliver the securities to the buyer, the
Portfolio arranges through a broker to borrow the securities and, in so doing,
the Portfolio becomes obligated to replace the securities borrowed at their
market price at the time of replacement. When the Portfolio makes a short sale
of borrowed securities, the proceeds it receives from the sale will be held on
behalf of a broker until the Portfolio replaces the borrowed securities. The
Portfolio may have to pay a premium to borrow the securities and must pay any
dividends or interest payable on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or other liquid securities. In addition, if the short sale is
not "against the box", the Portfolio will place in a segregated account with the
Custodian an amount of cash or other liquid securities equal to the difference,
if any, between (i) the market value of the securities sold at
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the time they were sold short; and (ii) any cash or other liquid securities
deposited as collateral with the broker in connection with the short sale. Short
sales by the Portfolio 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 can equal only the total amount invested.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, the Portfolio
may, for temporary defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and medium-term debt obligations in which the Portfolio may invest consist of
(i) obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the custodian a segregated account of cash or liquid securities in
an amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time the Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if, among other factors, the
general level of interest rates has changed. It is a current policy of the
Portfolio not to enter into when-issued commitments exceeding in the aggregate
15% of the market value of the Portfolio's total assets less liabilities, other
than the obligations created by these commitments.
DERIVATIVE PRODUCTS (DERIVATIVES)
The Portfolio is permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but are
not limited to: futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other derivative
products yet to be developed, so long as these new products are used in a manner
consistent with the objective of the Portfolio. These derivative products may be
based upon a wide variety of underlying rates, indices, instruments, securities
and other products, such as interest rates, foreign currencies, foreign and
domestic fixed income and equity securities, groups or "baskets" of securities
and securities indices (for each derivative product, the "underlying").
Exclusive of forward foreign currency contracts and any derivative products used
for hedging purposes, the Portfolio will limit its use of derivative products to
33 1/3% of its total assets, measured by the aggregate notional amount of
outstanding derivative products.
The Portfolio may use derivative products under a number of different
circumstances to further its investment objective. For example, the Portfolio
may purchase derivatives to gain exposure to a market quickly in response to
changes in the Portfolio's investment strategy, upon the inflow of investable
cash or when the derivative provides greater liquidity than the underlying
market. The Portfolio may also use derivatives when it is restricted from
directly owning the "underlying" or when derivatives provide a pricing advantage
or lower
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transaction costs. The Portfolio also may purchase combinations of derivatives
in order to gain exposure to an investment in lieu of actually purchasing such
investment. Derivatives may also be used by the Portfolio for hedging or risk
management purposes and in other circumstances when the Adviser believes it
advantageous to do so consistent with the Portfolio's investment objective and
policies. The Portfolio will not use derivatives in a manner that creates
leverage, except to the extent that the use of leverage is expressly permitted
by the Portfolio's investment policies, and then only in a manner consistent
with such policies.
The use of derivative products is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Portfolio will be less favorable than it would
have been if these investment techniques had not been used.
Some of the derivative products in which the Portfolio may invest and some
of the risks related thereto are described in more detail below.
FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)
The Portfolio may purchase and sell futures contracts, such as futures on
securities indices, baskets of securities, foreign currencies and interest rates
of the type generally known as financial futures. These are standardized
contracts that are bought and sold on organized exchanges. A futures contract
obligates a party to buy or sell a specific amount of the "underlying," such as
for example, a particular foreign currency, on a specified future date at a
specified price or to settle the value in cash.
The Portfolio may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolio may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Forward Contracts" above. These
forward contracts are privately negotiated and are bought and sold in the
over-the-counter market. Like a future, a forward contract obligates a party to
buy or sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.
In some cases, the Portfolio may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolio will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolio may utilize futures contracts, forward contracts and related options
are as follows:
The Portfolio may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market exposure.
There currently are limited securities index futures and options on such futures
in many countries, particularly emerging countries. The nature of the strategies
adopted by the Adviser, and the extent to which those strategies are used, may
depend on the development of such markets. The Portfolio may also purchase and
sell foreign currency futures to hedge its respective holdings and commitments
against changes in the level of future currency rates or to adjust its exposure
to a particular currency.
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The Portfolio may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely with
changes in interest rates. The Portfolio may engage in such transactions to
hedge its holdings of debt instruments against future changes in interest rates
or for other purposes.
The Portfolio may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these contracts also rises and falls inversely with
changes in interest rates. The Portfolio may engage in financial futures and
forward contracts for both hedging and non-hedging purposes.
Gains and losses on futures contracts, forward contracts and related options
depend on the Adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors. Other risks associated with
the use of these instruments include (i) imperfect correlation between the
change in market value of investments held by the Portfolio and the prices of
derivative products relating to investments purchased or sold by the Portfolio,
and (ii) possible lack of a liquid secondary market for a derivative product and
the resulting inability to close out a position. The risk that the Portfolio
will be unable to close out a position will be minimized by only entering into
transactions for which there appears to be a liquid exchange or secondary
market. In some strategies, the risk of loss in trading on futures and related
transactions can be substantial, due both to the low margin deposits required
and the extremely high degree of leverage involved in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the
"CFTC"), the Portfolio may, without registering with the CFTC as a Commodity
Pool Operator, enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of the Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-bona
fide hedging activities.
OPTION TRANSACTIONS
The Portfolio may seek to increase its returns or may hedge its portfolio
investments through options transactions with respect to individual securities,
indices or baskets in which the Portfolio may invest; other financial
instruments; and foreign currency. Various options may be purchased and sold on
either the exchange-traded or over-the-counter markets.
The Portfolio may purchase put and call options. Purchasing a put option
gives the Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period.
Purchasing a call option gives the Portfolio a similar right, but not the
obligation, to purchase the underlying. The purchaser pays a premium to the
seller (also known as the writer) of the option.
The Portfolio also may write put and call options on investments held in its
portfolio, as well as foreign currency options. The Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, the Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, the Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.
By writing an option, the Portfolio incurs an obligation either to buy (in
the case of a put option) or sell (in the case of a call option) the underlying
from the purchaser of the option at the option's exercise price, upon
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exercise by the purchaser. Pursuant to guidelines established by the Board of
Directors, the Portfolio may only write options that are "covered." A covered
call option means that until the expiration of the option, the Portfolio will
either earmark or segregate sufficient liquid assets to cover its obligations
under the option or will continue to own (i) the underlying; (ii) securities or
instruments convertible or exchangeable without the payment of any consideration
into the underlying; or (iii) a call option on the same underlying with a strike
price no higher than the price at which the underlying was sold pursuant to a
short option position. In the case of a put option, the Portfolio will either
earmark or segregate sufficient liquid assets to cover its obligations under the
option or will own another put option on the same underlying with an equal or
higher strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolio's use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by the
Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.
INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS
Swaps are privately negotiated over-the-counter derivative products in which
two parties agree to exchange payment streams calculated in relation to a rate,
index, instrument or certain securities and a particular "notional amount." As
with many of the other derivative products available to the Portfolio, the
underlying may include an interest rate (fixed or floating), a currency exchange
rate, a commodity price index, and a security, securities index or a combination
thereof. A great deal of flexibility is possible in the way the products may be
structured, with the effect being that the parties may have exchanged amounts
equal to the return on one rate, index or group of securities for another. For
example, in a simple fixed-to-floating interest rate swap, one party makes
payments equivalent to a fixed interest rate, and the other makes payments
equivalent to a specified interest rate index. The Portfolio may engage in
simple or more complex swap transactions involving a wide variety of
underlyings. The currency swaps that the Portfolio may enter will generally
involve an agreement to pay interest streams in one currency based on a
specified index in exchange for receiving interest streams denominated in
another currency. Such swaps may involve initial and final exchanges that
correspond to the agreed upon notional amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. The Portfolio may use one or more of these products in addition to or
in lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar is a combination product in which the same party, such as the Portfolio,
buys a cap from and sells a floor to the other party. As with put and call
options, the amount at risk is limited for the buyer, but, if the cap or floor
is not hedged or covered, may be unlimited for the seller. Under current market
practice, caps, collars and floors between the same two parties are generally
documented under the same "master agreement." In some cases,
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options and forward agreements may also be governed by the same master
agreement. In the event of a default, amounts owed under all transactions
entered into under, or covered by, the same master agreement would be netted and
only a single payment would be made.
Swaps, caps, collars and floors are credit-intensive products. When the
Portfolio enters into a swap transaction it bears the risk of default, i.e.
nonpayment, by the other party. The guidelines under which the Portfolio enters
derivative transactions, along with some features of the transactions
themselves, are intended to reduce these risks to the extent reasonably
practicable, although they cannot eliminate the risks entirely. Under guidelines
established by the Board of Directors, the Portfolio may enter into swaps only
with parties that meet certain credit rating guidelines. Consistent with current
market practices, the Portfolio will generally enter into swap transactions on a
net basis, and all swap transactions with the same party will be documented
under a single master agreement to provide for net payment upon default. In
addition, the Portfolio's obligations under an agreement will be accrued daily
(offset against any amounts owing to the Portfolio) and any accrued, but unpaid,
net amounts owed to the other party to a master agreement will be covered by the
maintenance of a segregated account consisting of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, the Portfolio's risk of loss will consist of the payments
that the Portfolio is contractually entitled to receive from the other party.
This may not be true for currency swaps that require the delivery of the entire
notional amount of one designated currency in exchange for the other. If there
is a default by the other party, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction.
STRUCTURED NOTES
Structured notes are derivative securities for which the amount of principal
repayment and/or interest payments is based upon the movement of one or more
factors. These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices,
such as the S&P 500 Index. In some cases, the impact of the movements of these
factors may increase or decrease through the use of multipliers or deflators.
The Portfolio may use structured notes to tailor its investments to the specific
risks and returns the Adviser wishes to accept while avoiding or reducing
certain other risks.
INVESTMENT LIMITATIONS
The Portfolio is a non-diversified portfolio under the 1940 Act, which means
that the Portfolio is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. Thus, the
Portfolio may invest a greater proportion of its assets in the securities of a
small number of issuers and as a result will be subject to greater risk with
respect to its portfolio securities. However, the Portfolio intends to comply
with diversification requirements imposed by the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as a regulated investment company.
See "Investment Limitations" in the Statement of Additional Information.
The Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of the Portfolio's outstanding shares and
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under certain non-fundamental investment limitations that may be changed without
shareholder approval. For additional information on fundamental and
non-fundamental investment limitations, see "Investment Limitations" in the
Statement of Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each of the
Portfolio's investments. The Adviser is entitled to receive from the Portfolio
an annual management fee, payable quarterly, equal to 1.00% of the average daily
net assets of the Portfolio. The Adviser has voluntarily agreed to a reduction
in the fees payable to it and to reimburse the Portfolio, if necessary, if such
fees would cause total annual operating expenses of the Portfolio to exceed
1.25% of the average daily net assets of the Class A shares of the Portfolio and
1.50% of the average daily net assets of the Class B shares of the Portfolio.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD")
is the direct parent of the Adviser and Morgan Stanley. MSDWD is a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses--securities, asset management and credit
services. At , 1998, the Adviser, together with its affiliated
institutional asset management companies (exclusive of Miller Anderson &
Sherrerd, LLP), managed assets of approximately $ billion. See "Management of
the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. STEPHEN C. SEXAUER AND WILLIAM T. CORCORAN. Stephen C.
Sexauer is a Principal of Morgan Stanley and the Adviser and is a member of the
Adviser's investment management team. In addition to portfolio management, his
equity research responsibilities include financials, energy, utilities and
technology. Mr. Sexauer joined the Adviser in July 1989 after three years as
Vice President at Salomon Brothers. Previously, he was with Merrill Lynch
Economics and Wharton Econometrics. Mr. Sexauer received a B.S. in Economics
from the University of Illinois and an M.B.A. in Economics and Statistics from
the University of Chicago. William T. Corcoran joined the Adviser in 1996 as a
Securities Analyst in the Emerging Growth Stock and Technology Groups. Prior to
joining the Adviser, he worked at Scotia McLeod, Inc. for three years in
Corporate Finance and Equity Research. Mr. Corcoran received his B.A. degree
from McGill University in 1991 and M.B.A. from Columbia Business School in 1996.
He is a Chartered Financial Analyst.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will
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provide dividend disbursing and transfer agent services to the Fund. For its
services under the Administration Agreement, the Fund pays the Adviser a monthly
fee which on an annual basis equals 0.15% of the average daily net assets of the
Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of any Portfolio.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
the Distributor is entitled to receive from the Portfolio a distribution fee,
which is accrued daily and paid quarterly, of 0.25% of the Class B shares'
average daily net assets on an annualized basis. Each Plan is designed to
compensate the Distributor for its services in connection with distribution
assistance. The Distributor may retain any portion of the fee that it does not
expend in meeting its obligations to the Fund. The Distributor may compensate
financial intermediaries, plan fiduciaries and administrators for providing
distribution-related services, including account maintenance services, to
shareholders (including, where applicable, underlying beneficial owners) of
Class B shares.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) as specified in its agreements with the Adviser and
Morgan Stanley.
PURCHASE OF SHARES
Class A shares and Class B shares of the Portfolio may be purchased at the
net asset value per share next determined after receipt by the Fund of a
purchase order. The net asset value per share of the Portfolio is calculated on
days that the New York Stock Exchange ("NYSE") and Chase (the "Custodian Bank")
are open for business as of the close of trading of the NYSE, normally 4:00 p.m.
Eastern Time (the "Pricing Time").
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MINIMUM INVESTMENT
The minimum initial investment is $250,000 for Class A shares and $50,000
for Class B shares of the Portfolio. These minimums may be waived at the
discretion of the Adviser for certain types of investors, including trust
departments, brokers, dealers, agents, financial planners, financial services
firms, investment advisers or various retirement and deferred compensation plans
("Financial Intermediaries"), certain accounts managed by the Adviser and its
affiliates ("Managed Accounts"), and certain employees and customers of Morgan
Stanley and its affiliates. The Fund's determination of an investor's
eligibility to purchase shares of a given class will take precedence over the
investor's selection of a class.
METHODS OF PURCHASE
Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolio by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or because your
check does not clear, you will be responsible for any loss the Fund or its
agents incur. If you are already a shareholder, the Fund may redeem shares from
your account(s) to reimburse the Fund or its agents for any loss. In addition,
you may be prohibited or restricted from making future investments in the Fund.
FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian Bank are open for business.
Your bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:
1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide you
with a confirmation number.
2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring the funds.
3. Complete and sign the Account Registration Form and mail it to the
address shown thereon.
When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the close of the Federal Funds Wire Control Center
("FFWCC") (normally 6:00 p.m. Eastern Time), the purchase will be executed at
the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the close of the FFWCC, will be executed at
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the net asset value next determined. Certain institutional investors and
financial institutions have entered into an arrangement with Morgan Stanley,
pursuant to which they may place orders prior to the Pricing Time, but make
payment in Federal Funds for those shares on the following business day.
BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and which bank is handling the wire, money transferred by bank
wire may or may not be converted into Federal Funds prior to the close of the
FFWCC. Prior to conversion to Federal Funds and receipt by the Fund, an
investor's money will not be invested.
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share determined on the next
business day after receipt. An investor's money will not be invested prior to
crediting of Federal Funds.
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. Each business evening, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day and places a net purchase
and/or redemption order(s) by the morning of the next business day. These orders
normally are executed at the net asset value that was computed for the Portfolio
as of the close of the previous business day.
ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 for the
Portfolio. The minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases directly from the
Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.
INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES
Class A and Class B shares of the Portfolio may be subject to the
involuntary conversion and redemption features described below. The conversion
and redemption features may be waived at the discretion of the Adviser for
shares held in a Managed Account and shares purchased through a Financial
Intermediary. Accounts that were open prior to January 2, 1996 are not subject
to involuntary conversion or redemption. The Fund reserves the right to modify
or terminate the conversion or redemption features of the shares at any time
upon 60 days notice to shareholders.
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account
containing Class A shares falls below $250,000 (but remains at or above $50,000)
because of shareholder redemption(s), the Fund will notify the
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shareholder, and if the account value remains below $250,000 (but remains at or
above $50,000) for a continuous 60-day period, the Class A shares in such
account will convert to Class B shares and will be subject to the distribution
fee and other features applicable to Class B shares. The Fund will not convert
Class A shares to Class B shares based solely upon changes in the market that
reduce the net asset value of shares. Under current tax law, conversion between
share classes is not a taxable event to the shareholder.
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares increases to $250,000 or more, whether due to
shareholder purchases or market activity, the Class B shares will convert to
Class A shares. Class B shares purchased through a Financial Intermediary that
has entered into an arrangement with the Fund for the purchase of such shares
may not be converted. Under current tax law, such conversion is not a taxable
event to the shareholder. Class A shares converted from Class B shares are
subject to the same minimum account size requirements as are applicable to New
Accounts containing Class A shares described above.
INVOLUNTARY REDEMPTION OF SHARES. If the value of an account falls below
$50,000 because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $50,000 for a continuous
60-day period, the shares in such account will be subject to redemption by the
Fund. The Fund will not redeem shares based solely upon changes in the market
that reduce the net asset value of shares. If redeemed, redemption proceeds will
be promptly paid to the shareholder.
REDEMPTION OF SHARES
Class A and Class B shares of the Portfolio may be redeemed at any time and
without charge at the net asset value per share next determined after receipt by
the Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds may be more or less than the purchase price of your shares
depending on, among other factors, the market value of the investment securities
held by the Portfolio.
METHODS OF REDEMPTION
Shares may be redeemed directly from the Fund by mail or by telephone.
However, shares purchased through a Financial Intermediary must be redeemed
through a Financial Intermediary. Certain Financial Intermediaries may charge an
additional service or transaction fee.
BY MAIL. The Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, to Morgan Stanley Institutional Fund, Inc.,
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following:
1. A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are registered;
2. Any required signature guarantees; and
3. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
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Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.
BY TELEPHONE. If you have previously elected the Telephone Redemption
Option on the Account Registration Form, you can redeem Portfolio shares by
calling the Fund and requesting that the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to receive
redemption proceeds, send a written request to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. An investor may be
required to provide personal identification information at the time an account
is opened and prior to effecting each telephone transaction. In addition, all
telephone transaction requests will be recorded and investors may be required to
provide additional telecopied written instructions regarding transaction
requests. Neither the Fund nor the Transfer Agent will be responsible for any
loss, liability, cost or expense for following instructions received by
telephone that either of them reasonably believes to be genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to accept redemption
requests from underlying beneficial owners. These redemptions may be processed
in the same way as purchases made through such Financial Intermediaries, as
described above.
FURTHER REDEMPTION INFORMATION
The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event more than seven days after
receipt of a redemption request in good order. However, payments to investors
redeeming shares which were purchased by check will not be made until payment
for the purchase has been collected, which may take up to eight days after the
date of purchase. The Fund may suspend the right of redemption or postpone the
date upon which redemptions are effected at times when the NYSE is closed, or
under any emergency conditions as determined by the Securities and Exchange
Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required to verify the identity of the person who has authorized
certain redemptions. Please contact the Fund or see the Statement of Additional
Information for further information.
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ACCOUNT POLICIES AND SERVICES
EXCHANGE FEATURES
You may exchange shares of the Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced or Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase. Therefore, an
exchange will be considered a taxable event for shareholders subject to tax.
Exchange transactions will be processed at the net asset value per share next
determined after receipt of the request. Shares of the portfolios may be
exchanged by mail or telephone. The telephone exchange privilege is automatic
and made available without shareholder election. The exchange privilege may be
modified or terminated by the Fund at any time upon 60-days notice to
shareholders.
BY MAIL. To exchange shares by mail, send a written exchange request to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798. Your written exchange request should include (i) the name, class of
shares and account number of your current Portfolio; (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to exchange
shares; and (iii) the signatures of all registered account holders.
BY TELEPHONE. To exchange shares by telephone, call the Fund at the phone
number provided on the cover of this Prospectus. A Fund representative will
request (i) the name, class of shares and account number of your current
Portfolio, and (ii) the name(s) and class(es) of shares of the portfolio(s) into
which you intend to exchange shares. For additional information regarding
responsibility for the authenticity of telephoned instructions, see "Redemption
of Shares" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by sending a written request to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. It may not be possible to
transfer the registration of certain shares purchased through a Financial
Intermediary. As with redemptions, the written request must be received in "good
order" before any transfer can be made. Transferring the registration of shares
may affect the eligibility of your account for a given class of shares and may
result in involuntary conversion or redemption of your shares.
OTHER ACCOUNT INFORMATION
The Fund does not issue share certificates for the Portfolio. All shares
purchased are confirmed to you and credited to your account on the Fund's books
maintained by the Adviser or its agents. You will have the same rights and
ownership with respect to such shares as if certificates had been issued.
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EXCESSIVE TRADING
Frequent trades in your account(s) can disrupt management of the Portfolio
and raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of the Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a portfolio of the Fund within any 120-day
period. For example, the following series of transactions would amount to
excessive trading: exchanging shares of Portfolio A for shares of Portfolio B,
then exchanging shares of Portfolio B for shares of Portfolio C and then
exchanging shares of Portfolio C for shares of Portfolio A within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios, and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.
INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS
Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the portfolios used for investment by these accounts may
experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the portfolio.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the close of the NYSE
(normally 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business. Price information on listed securities is taken from the exchange
where the security is primarily traded. Securities listed on a U.S. securities
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date and for which market quotations are
not readily available are valued at a price within a range not exceeding the
current asked price nor less than the current bid price. The current bid and
asked prices are determined based on the average of the bid and asked prices
quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the
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basis of prices provided by a pricing service when such prices are believed to
reflect the fair market value of such 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. Securities not priced in
this manner are valued at the most recently quoted bid price or when securities
exchange valuations are used, at the latest quoted sale price on the day of
valuation. If there is no such reported sale, the latest quoted bid price will
be used. Securities purchased with remaining maturities of 60 days or less are
valued at amortized cost, if it approximates market value. In the event that
amortized cost does not approximate market value, market prices as determined
above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine prices in accordance
with the above-stated procedure are determined in good faith at fair value using
methods determined by the Board of Directors. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid and asked
price of such currencies against the U.S. dollar last quoted by a major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.
"Total return" shows what an investment in a class of the Portfolio would
have earned over a specified period of time (such as one, five or ten years),
assuming that all distributions and dividends by the Portfolio were reinvested
in the same class on the reinvestment dates during the period. Total return does
not take into account any federal or state income taxes that may be payable on
dividends and distributions or on redemption. The Fund may also include
comparative performance information in advertising or marketing the Portfolio's
shares, including data from Lipper Analytical Services, Inc., other industry
publications, business periodicals, rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
when, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
elects to receive income dividends and capital gains distributions in cash.
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The Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual dividends. Net realized capital gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
The Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, the excess of net short-term
capital gain over net long-term capital loss) to shareholders. Dividends from
the Portfolio's net investment income are taxable to shareholders as ordinary
income, whether received in cash or in additional shares. Such dividends paid by
the Portfolio will generally qualify for the 70% dividends-received deduction
for corporate shareholders to the extent of qualifying dividend income received
by the Portfolio from U.S. corporations. The Portfolio will report annually to
its shareholders the amount of dividend income qualifying for such treatment.
Distributions of net capital gains are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio (such
designation being dependent upon the holding period of the Portfolio in the
underlying asset generating the net capital gain), regardless of how long the
shareholder has held the Portfolio's shares. The Portfolio will send reports
annually to shareholders of the federal income tax status of all distributions
made during the preceding year.
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The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss, including any available capital loss carryforwards), prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (i) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) who has not certified to the Fund that such
shareholder is not subject to backup withholding. This backup withholding is not
an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, redemption or exchange of shares will result in taxable gain or
loss to the selling, redeeming or exchanging shareholder, depending upon whether
the fair market value of the sale, redemption or exchange proceeds exceed or is
less than the shareholder's adjusted tax basis in the sold, redeemed or
exchanged shares. If capital gains distributions have been made with respect to
shares that are sold at a loss after being held for six months or less, then the
loss is treated as a long-term capital loss to the extent of the capital gains
distributions.
Conversions of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
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Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolio generally does not invest for short-term trading purposes,
however, when circumstances warrant, the Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolio will not consider portfolio turnover rate a
limiting factor in making investment decisions consistent with their respective
objective and policies. As portfolio turnover increases, the Portfolio may
expect to pay correspondingly increased brokerage and trading costs. In addition
to transaction costs, higher portfolio turnover may result in the realization of
capital gains. As discussed under "Taxes," to the extent net short-term capital
gains are realized, any distributions resulting from such gains are considered
ordinary income for federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 40 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of the
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no pre-emptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of the Portfolio may be presumed to "control" (as that term
is defined in the 1940 Act) the Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports. The
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
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In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's Custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Commission for the purpose of providing
custodial services for such assets. MSTC may also hold certain domestic assets
for the Fund. For more information on the custodians, see "General Information
- -- Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
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MORGAN STANLEY INSTITUTIONAL FUND, INC.
TECHNOLOGY PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
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<C> <S> <C>
If you need assistance in filling out this form for the
ACCOUNT INFORMATION Morgan Stanley Institutional Fund, Inc., please contact your
Fill in where applicable Morgan Stanley representative or call us toll free
1-800-548-7786. Please print all items except signature, and
mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF
SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First
Name Initial Last Name
2.
First
Name Initial Last Name
First
Name Initial Last Name
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<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund
for additional documents
that may be required to
set up account and to
authorize transactions.
</TABLE>
3.
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<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
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/ / TRUST ________________________ / / OTHER (Specify) ________________________
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<C> <S> <C>
B) MAILING ADDRESS
Please fill in
completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
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<S> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF
SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
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<PAGE>
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<S> <S> <C> <C>
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor.
OR
1. TAXPAYER SOCIAL SECURITY NUMBER
IDENTIFICATION NUMBER ("SSN")
("TIN")
OR
2. TIN SSN
OR
TIN SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer)
with your correct TIN(s) or SSN(s). Accounts that have a
missing or incorrect TIN(s) or SSN(s) will be subject to
backup withholding at a 31% rate on dividends, distributions
and other payments. If you have not provided us with your
correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability
of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding
under Section 3406(a)(1)(C) of the Internal Revenue Code
because you have underreported interest or dividends or you
were required to, but failed to, file a return which would
have included a reportable interest or dividend payment.
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<PAGE>
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<C> <S> <C> <C>
D) PORTFOLIO AND For Purchase of the following
CLASS SECTION Portfolio: / / Class A Shares
(Class A shares minimum Technology Portfolio $ / / Class B Shares $
$250,000 for the Total Initial Investment
Portfolio and Class B $
shares minimum $50,000
for the Portfolio).
Please indicate class and
amount.
</TABLE>
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<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio
and manner of payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
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<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on - - - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
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<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
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<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
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<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the
account statement sent to
my/our registered Address
address, I/we hereby
authorize the Fund to City State Z
mail duplicate statements Code
to the name and address
provided at right.
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<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative
No. Branch
No.
</TABLE>
<PAGE>
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<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
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<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE
ARE SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE
HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL
SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE
UNDERSTAND THAT IF I/WE DO NOT PROVIDE EITHER NUMBER TO CHASE
GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE
DATE OF THIS APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR
CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY
AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION
PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU
MAY REQUEST SUCH FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
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- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 10
Investment Limitations............................ 19
Management of the Fund............................ 20
Purchase of Shares................................ 21
Redemption of Shares.............................. 24
Account Policies and Services..................... 26
Valuation of Shares............................... 27
Performance Information........................... 28
Dividends and Capital Gains Distributions......... 28
Taxes............................................. 29
Portfolio Transactions............................ 30
General Information............................... 31
Account Registration Form
</TABLE>
TECHNOLOGY PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
INCORPORATED
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
- --------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
JAPANESE EQUITY PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and non-diversified investment portfolios
("portfolios"). The Fund is designed to provide clients with attractive
alternatives for meeting their investment needs. The Fund currently consists of
thirty-two portfolios representing a broad range of investment choices. This
prospectus (the "Prospectus") pertains to the Class A and the Class B shares of
the Asian Equity and Japanese Equity Portfolios (each, a "Portfolio" and
collectively, the "Portfolios"). The Class A and Class B shares currently
offered by the Portfolios have different minimum investment requirements and
fund expenses. Shares of the Portfolios are offered with no sales charge,
exchange fee or redemption fee.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley as Distributor, the Fund makes
available to institutional and high net worth individual investors a series of
portfolios which benefit from the investment expertise and commitment to
excellence associated with Morgan Stanley and its affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Asian Real Estate, Emerging Markets,
European Equity, European Real Estate, Global Equity, Gold, International
Equity, International Magnum, International Small Cap, Japanese Equity and Latin
American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth,
Equity Growth, Small Cap Value Equity, Technology, U.S. Equity Plus, U.S. Real
Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced
Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global
Fixed Income, High Yield and Municipal Bond Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information about
the Fund is contained in a "Statement of Additional Information," dated May 1,
1998 as supplemented through September 26, 1997, which is incorporated herein by
reference. The Statement of Additional Information and the prospectuses
pertaining to the other portfolios of the Fund are available upon request and
without charge by writing or calling the Fund at the address and telephone
number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
each Portfolio listed below will incur.
<TABLE>
<CAPTION>
ASIAN EQUITY JAPANESE EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------- --------------- -----------------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A............................................................................ None None
Class B............................................................................ None None
Maximum Sales Load Imposed on Reinvested Dividends
Class A............................................................................ None None
Class B............................................................................ None None
Deferred Sales Load
Class A............................................................................ None None
Class B............................................................................ None None
Redemption Fees
Class A............................................................................ None None
Class B............................................................................ None None
Exchange Fees
Class A............................................................................ None None
Class B............................................................................ None None
</TABLE>
<TABLE>
<CAPTION>
ASIAN
EQUITY JAPANESE EQUITY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO
- ------------------------------------------------ ----------- ---------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C>
Management Fee (Net of Fee Waivers)*
Class A....................................... % %
Class B....................................... % %
12b-1 Fees
Class A....................................... None None
Class B....................................... 0.25% 0.25%
Other Expenses
Class A....................................... % %
Class B....................................... % %
----------- -------
Total Operating Expenses (Net of Fee Waivers)*
Class A....................................... % %
Class B....................................... % %
----------- -------
----------- -------
</TABLE>
* The Adviser has agreed to waive its management fees and/or reimburse the
Portfolios, if necessary, if such fees would cause the total annual operating
expenses of each of the Portfolios to exceed a specified percentage of its
respective average daily net assets. As a result of these reductions, the
Management Fees stated above are lower than the contractual fees stated under
"Management of the Fund." The Adviser reserves the right to terminate any of
its fee waivers and/or expense reimbursements at any time in its sole
discretion. For further information on Fund expenses, see "Management of the
Fund." Set forth below, for each Portfolio, as applicable, are the management
fees and total operating expenses absent such fee waivers and/or expense
reimbursements as a percentage of average daily net assets of the Class A and
Class B shares of the Portfolios.
<TABLE>
<CAPTION>
TOTAL
OPERATING EXPENSES
ABSENT
MANAGEMENT FEE WAIVERS
FEES ABSENT FEE --------------------------
PORTFOLIO WAIVERS CLASS A CLASS B
- -------------------------------------------------------------- --------------- ------------ ------------
<S> <C> <C> <C>
Asian Equity.................................................. 0.80% % %
Japanese Equity............................................... 0.80% % %
</TABLE>
2
<PAGE>
The purpose of the table is to assist the investor in understanding the
various expenses that an investor in the Portfolios will bear directly or
indirectly. Expenses and fees are based on actual figures for the fiscal year
ended December 31, 1997. Due to the continuous nature of Rule 12b-1 fees,
long-term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the National Association of
Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (i) a 5% annual rate of return and (ii) redemption at
the end of each time period. As noted in the table above, the Portfolios charge
no redemption fees of any kind. The following example is based on total
operating expenses of the Portfolios after fee waivers.
<TABLE>
<CAPTION>
3 5 10
1 YEAR YEARS YEARS YEARS
------ ------ ------ -------
<S> <C> <C> <C> <C>
Asian Equity Portfolio
Class A.......................... $ $ $ $
Class B..........................
Japanese Equity Portfolio
Class A..........................
Class B..........................
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide financial highlights for the Class A and Class
B shares of the Portfolios for each of the periods presented. The audited
financial highlights for each of the Portfolio's shares for each of the periods
presented are part of the Fund's financial statements which appear in the Fund's
December 31, 1997 Annual Report to Shareholders and which are incorporated by
reference into the Fund's Statement of Additional Information. Each Portfolio's
financial highlights for each of the periods presented have been audited by
Price Waterhouse LLP, whose unqualified report thereon is also incorporated by
reference into the Statement of Additional Information. Additional performance
information is included in the Annual Report. The Annual Report and the
financial statements therein, along with the Statement of Additional
Information, are available at no cost from the Fund at the address and telephone
number noted on the cover page of this Prospectus. After October 31, 1992, the
Fund changed its fiscal year end to December 31. The following information
should be read in conjunction with financial statements and notes thereto.
4
<PAGE>
ASIAN EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1997 1996 1995 1994 1993 1992 1992
------------ ------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 19.48 $ 21.54 $ 26.20 $ 13.11 $ 13.63 $ 9.67
------------ ------------ ------------ ------------ ------------ ------------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)................... 0.17 0.18 0.11 0.10 0.01 0.14
Net Realized and
Unrealized Gain (Loss)
on Investments........ 0.50 1.11 (4.15) 13.38 (0.53) 3.86
------------ ------------ ------------ ------------ ------------ ------------ -----------
Total from Investment
Operations.......... 0.67 1.29 (4.04) 13.48 (0.52) 4.00
------------ ------------ ------------ ------------ ------------ ------------ -----------
DISTRIBUTIONS
Net Investment
Income................ (0.15) (0.34) (0.09) (0.01) -- (0.04)
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......... -- -- -- (0.13) -- --
------------ ------------ ------------ ------------ ------------ ------------ -----------
Total
Distributions....... (1.42) (3.35) (0.62) (0.39) -- (0.04)
------------ ------------ ------------ ------------ ------------ ------------ -----------
NET ASSET VALUE, END OF
PERIOD.................. $ 18.73 $ 19.48 $ 21.54 $ 26.20 $ 13.11 $ 13.63
------------ ------------ ------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ ------------ ------------ -----------
TOTAL RETURN............. 3.49% 6.87% (15.81)% 105.71% (3.82)% 41.50%
------------ ------------ ------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ ------------ ------------ -----------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $363,498 $314,884 $276,906 $287,136 $ 41,978 $41,017
Ratio of Expenses to
Average Net Assets
(1)................... 1.00% 1.00% 1.00% 1.00% 1.00%** 1.00%
Ratio of Net Investment
Income to Average Net
Assets (1)............ 0.74% 0.97% 0.52% 0.83% 0.61%** 1.53%
Portfolio Turnover
Rate.................. 69% 42% 47% 18% 10% 33%
Average Commission
Rate#................. $0.0111 N/A N/A N/A N/A N/A
<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..... $ 19.55
------------ ------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(1)................... 0.11
Net Realized and
Unrealized Gain (Loss)
on Investments........ 0.46
------------ ------------
Total from Investment
Operations.......... 0.57
------------ ------------
DISTRIBUTIONS
Net Investment
Income................ (0.11)
In Excess of Net
Investment Income..... --
Net Realized Gain...... (1.27)
In Excess of Net
Realized Gain......... --
------------ ------------
Total
Distributions....... (1.38)
------------ ------------
NET ASSET VALUE, END OF
PERIOD.................. $ 18.74
------------ ------------
------------ ------------
TOTAL RETURN............. 2.92%
------------ ------------
------------ ------------
RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of
Period (Thousands).... $ 11,002
Ratio of Expenses to
Average Net Assets
(1)................... 1.25%**
Ratio of Net Investment
Income to Average Net
Assets (1)............ 0.58%**
Portfolio Turnover
Rate.................. 69%
Average Commission
Rate#................. $0.0111
</TABLE>
- ------------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary
expense limitation
during the period:
Per share benefit
to net
investment
income............ $0.05 $0.03 $0.04 $0.05 $0.02 $0.06
Ratios before expense
limitation:
Expenses to Average
Net Assets........ 1.25% 1.18% 1.20% 1.38% 2.02%** 1.63%
Net Investment
Income (Loss) to
Average Net
Assets............ 0.54% 0.79% 0.32% 0.45% (0.41)%** 0.90%
<CAPTION>
(1)
$0.04
1.52%**
0.37%**
<CAPTION>
</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. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.52% of the trade amount.
5
<PAGE>
JAPANESE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------------- -------------
PERIOD FROM
APRIL 25,
YEAR ENDED YEAR ENDED YEAR ENDED 1994* TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996++ 1995 1994 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 9.27 $ 9.83 $ 10.00
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1)........... -- 0.04 (0.01)
Net Realized and Unrealized Loss on
Investments+.............................. (0.13) (0.40) (0.16)
------------- ------------- ------------- ------------- -------------
Total from Investment Operations......... (0.13) (0.36) (0.17)
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income...................... (0.66) -- --
In Excess of Net Investment Income......... (0.52) (0.20) --
------------- ------------- ------------- ------------- -------------
Total Distributions...................... (1.18) (0.20) --
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD............... $ 7.96 $ 9.27 $ 9.83
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
TOTAL RETURN................................. (1.40)% (3.64)% (1.70)%
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $ 152,229 $ 119,278 $ 50,332
Ratio of Expenses to Average Net Assets
(1)....................................... 1.00% 1.00% 1.00%**
Ratio of Net Investment Income (Loss) to
Average Net Assets (1).................... (0.04)% 0.15% (0.10)%**
Portfolio Turnover Rate.................... 38% 52% 1%
Average Commission Rate#................... $0.0561 N/A N/A
<CAPTION>
PERIOD FROM
JANUARY 2,
1996*** TO
DECEMBER 31,
1996++
-------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 9.25
-------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (1)........... (0.02)
Net Realized and Unrealized Loss on
Investments+.............................. (0.14)
-------------
Total from Investment Operations......... (0.16)
-------------
DISTRIBUTIONS
Net Investment Income...................... (0.64)
In Excess of Net Investment Income......... (0.51)
-------------
Total Distributions...................... (1.15)
-------------
NET ASSET VALUE, END OF PERIOD............... $ 7.94
-------------
-------------
TOTAL RETURN................................. (1.67)%
-------------
-------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)...... $3,431
Ratio of Expenses to Average Net Assets
(1)....................................... 1.25%**
Ratio of Net Investment Income (Loss) to
Average Net Assets (1).................... (0.26)%**
Portfolio Turnover Rate.................... 38%
Average Commission Rate#................... $0.0561
</TABLE>
- ------------------------------
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C>
(1) Effect of voluntary expense limitation
during the period:
Per share benefit to net investment
income (loss)......................... $0.01 $0.06 $0.02 $0.01
Ratios before expense limitation:
Expenses to Average Net Assets......... 1.07% 1.20% 1.27%** 1.31%**
Net Investment Income (Loss) to Average
Net Assets............................ (0.11)% (0.05)% (0.37)%** (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
outstanding shares.
# 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. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.43% of the trade amount.
6
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of thirty-two portfolios, offering institutional investors
and high net worth individual investors a broad range of investment choices
coupled with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and Class B shares, except for
the International Small Cap and Municipal Money Market Portfolios which offer
only Class A shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of each
Portfolio described in this Prospectus is as follows:
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of companies in
the Asian real estate industry.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and
long-term capital appreciation by investing primarily in equity securities
of companies in the European real estate industry.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
7
<PAGE>
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in equity securities of small- to medium-sized companies which
the Adviser believes to be undervalued.
-The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Adviser, are expected to benefit from their involvement in technology and
technology-related industries.
-The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers included in the S&P 500
Index ("S&P 500").
-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
substantial investment in real estate investment trusts.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of equity securities which the Adviser believes
to be undervalued and fixed income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
8
<PAGE>
-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 of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment grade mortgage-backed
securities.
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing in municipal
obligations, the interest on which is exempt from federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high-quality money market instruments with remaining maturities of one year
or less.
-
The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high-quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund and
each of its portfolios. As of , 1998, Morgan Stanley Asset Management
Inc. and its affiliated institutional asset management companies (exclusive of
Miller Anderson & Sherrerd, LLP) managed assets of approximately $ billion. See
"Management of the Fund -- Investment Adviser" and "Management of the Fund --
Administrator."
HOW TO INVEST
Class A shares of each Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of each
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. The minimum
initial investment, generally, is $500,000 for Class A shares of each Portfolio
and $100,000 for Class B shares of each Portfolio. The minimum initial
investment amount is reduced for certain categories of investors. For additional
information on how to purchase shares and minimum initial investments, see
"Purchase of Shares."
HOW TO REDEEM
Class A shares or Class B shares of each Portfolio may be redeemed at any
time, without cost, at the net asset value per share of the applicable class
next determined after receipt of the redemption request. The redemption price
may be more or less than the purchase price. Certain redemptions that cause the
value of an account to remain for a continuous 60-day period below the minimum
investment amount for Class A shares or for Class B shares may result in
involuntary redemption or automatic conversion. For additional information on
how to redeem shares and involuntary redemption or conversion, see "Purchase of
Shares" and "Redemption of Shares."
9
<PAGE>
RISK FACTORS
Investing in each of the Portfolios entails certain risks and considerations
of which an investor should be aware. The Portfolios' share prices and
investment returns fluctuate and, when redeemed, an investment in the Portfolios
may be worth more or less than its original cost. The investment policies of the
Portfolios may entail the following risk factors:
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EQUITY SECURITIES. Each Portfolio may invest in equity securities. Prices of
equity securities fluctuate in response to many factors, including the
financial health of the issuers and changes in economic and market
conditions.
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FIXED INCOME SECURITIES. The Japanese Equity Portfolio will be subject to
credit risk and market risk associated with investment in fixed income
securities. Credit risk is the possibility that an issuer may be unable to
meet scheduled principal and interest payments. Market risk is the
possibility that a change in interest rates or the market's perception of
the issuer's prospects may adversely affect the value of a fixed income
security.
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FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. The risks of foreign investment include fluctuations in foreign
currency values, political events affecting the country of issuance and
potentially greater market volatility and lower liquidity.
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EMERGING MARKET COUNTRY SECURITIES. The Asian Equity Portfolio may invest in
emerging market country securities which entail risks typically associated
with investment in more established foreign markets. However, these risks
may be intensified due to higher volatility and less liquidity of emerging
markets, possible political risks associated with the country of issuance
and generally weaker financial condition of issuers in these markets.
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DERIVATIVES. Each Portfolio may invest in instruments that derive their
values from those of specified securities, indices, currencies or other
points of reference. These derivatives, including those used to manage risk,
are themselves subject to the risks of the different markets in which they
are traded and, therefore, may or may not serve their intended purposes.
For additional information about risk factors, see also "Investment
Objectives and Policies" and "Additional Investment Information."
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is described below, together with
the policies each Portfolio will employ in its efforts to achieve its objective.
Each Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolios will attain their
objectives. Each of the Portfolios invests in equity securities, which include
common and preferred stocks, convertible securities, rights and warrants to
purchase common stocks. In addition to the investments and strategies described
below, the Portfolios may invest in certain securities and obligations as set
forth in "Additional Investment Information" and as described under "Investment
Objectives and Policies" in the Statement of Additional Information. The
investment policies described below are not fundamental policies unless
otherwise noted and may be changed without shareholder approval.
THE ASIAN EQUITY PORTFOLIO
The investment objective of the Asian Equity Portfolio is to provide
long-term capital appreciation. The production of any current income is
incidental to this objective. The Portfolio seeks to achieve its objective by
investing primarily in equity securities which are traded on recognized stock
exchanges of the countries in Asia described below and in equity securities of
companies organized under the laws of an Asian country whose business is
conducted principally in Asia. The Portfolio does not intend to invest in equity
securities which are principally traded in markets in Japan or in companies
organized under the laws of Japan.
The Portfolio will invest primarily in the more established Asian markets,
including Hong Kong, Singapore, Malaysia, Thailand, the Philippines and
Indonesia. The Portfolio may also invest in common stocks traded on markets in
Taiwan, South Korea, India, Pakistan, Sri Lanka and other emerging markets that
are open to foreign investment. There is no requirement that the Portfolio, at
any given time, invest in any or all of the countries listed above or in any
other Asian countries. The Portfolio has no set policy for allocating
investments among the various Asian countries. Allocation of investments will
depend on the relative attractiveness of the stocks of issuers in the respective
countries. Government regulation and restrictions in many of the countries of
interest may limit the amount, mode and extent of investment in companies of
such countries.
Under normal circumstances, at least 65% of the total assets of the
Portfolio will be invested in common stocks of Asian countries. The Portfolio
may also invest in Depositary Receipts of Asian issuers and equity securities
traded in over-the-counter markets. The remaining portion of the Portfolio will
be kept in any combination of debt instruments, bills and bonds of governmental
entities in Asia and the United States, in notes, debentures and bonds of
companies in Asia and in money market instruments. Pending investment or
settlement, and for liquidity purposes, the Portfolio may invest in domestic,
Eurodollar and foreign short-term money market instruments. The Portfolio may
also invest in initial public offerings in the form of oversubscriptions or
private placements. Such investments generally entail short-term liquidity
risks.
The Adviser's approach in selecting investments for the Portfolio is
oriented to individual stock selection, and is value driven. In selecting stocks
for the Portfolio, the Adviser initially identifies those stocks which it
believes to be undervalued in relation to the issuer's assets, cash flow,
earnings and revenues, and then evaluates the future value of such stocks by
running the results of an in-depth study of the issuer through a dividend
discount model. The Adviser utilizes the research of a number of sources,
including Morgan Stanley Capital International, an affiliate of the Adviser
located in Geneva, Switzerland, in identifying attractive securities, and
applies a number of proprietary screening criteria to identify those securities
it believes to be undervalued.
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Portfolio holdings are regularly reviewed and subjected to fundamental analysis
to determine whether they continue to conform to the Adviser's value criteria.
Securities which no longer conform to such value criteria are sold. The Adviser
will analyze assets, revenues and earnings of an issuer. In selecting industries
and particular issuers, the Adviser will evaluate costs of labor and raw
materials, access to technology, export of products and government regulation.
Although the Portfolio seeks to invest in larger companies, it may invest in
medium-sized and small companies that, in the Adviser's opinion, have potential
for growth.
THE JAPANESE EQUITY PORTFOLIO
The investment objective of the Japanese Equity Portfolio is to provide
long-term capital appreciation. The Portfolio seeks to achieve this objective by
investing primarily in equity securities of Japanese issuers. Under normal
circumstances, the Portfolio will invest at least 80% of its total assets in
securities of issuers that are organized under the laws of Japan, affiliates of
Japanese companies (wherever organized or traded) and issuers not organized
under the laws of Japan but deriving 50% or more of their revenues from Japan.
The Portfolio currently intends to focus its investments in Japanese companies
that have an active market for their shares and that the Adviser believes show a
potential for above-average growth. In making investment decisions, the Adviser
will consider, among other factors, the size of the company, its financial
condition, its marketing and technical strengths and its competitiveness in its
industry. The Portfolio anticipates that most equity securities of Japanese
companies in which it invests, either directly or indirectly by means of
Depositary Receipts or convertible debentures, will be listed on securities
exchanges in Japan. The Portfolio may also invest in equity securities of
Japanese companies that are traded in an over-the-counter market.
The Portfolio also may invest in debt securities (issued by the Japanese
government or by Japanese companies) when the Adviser believes that the
potential for capital appreciation from investment in debt securities equals or
exceeds that available from investment in equity securities. All debt securities
in which the Portfolio may invest will be rated investment grade or, if unrated,
of comparable quality as determined by the Adviser. The convertible securities
in which the Portfolio may invest include bonds, notes, debentures, preferred
stocks and other securities convertible into common stocks and may be fixed
income or zero coupon debt securities. Prior to their conversion, convertible
securities may have characteristics similar to non-convertible debt securities.
[RISK FACTORS RELATING TO JAPANESE EQUITY PORTFOLIO. Investors should
consider the following factors inherent in investment in Japan.]
[TRADE ISSUES. Because of the concentration of Japanese exports in highly
visible products such as automobiles, machine tools and semiconductors, and the
large trade surpluses ensuing therefrom, Japan is in a difficult phase in its
relation with its trading partners, particularly the United States, where the
trade imbalance is the greatest. Retaliatory action taken by such trading
partners could affect the ability of Japanese companies to export goods to these
countries, which could negatively impact the value of securities in the
Portfolio.]
[CURRENCY FACTORS. Over time, the yen has generally appreciated in relation
to the U.S. dollar. The yen's appreciation would add to the returns of dollars
invested through the Portfolio in Japan. A decline in the value of the yen would
have the opposite effect, adversely affecting the value of the Portfolio in U.S.
dollar terms.]
[THE JAPANESE STOCK MARKET. Like other stock markets, the Japanese stock
market can be volatile. A decline in the market may have an adverse effect on
the availability of credit and on the value of the substantial
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stock holdings of Japanese companies, in particular, Japanese banks, insurance
companies and other financial institutions. The common stocks of many Japanese
companies continue to trade at high price-earnings ratios even after the recent
market decline. Differences in accounting methods make it difficult to compare
the earnings of Japanese companies with those of companies in other countries,
especially the United States. In general, however, reported net income in Japan
is understated relative to U.S. accounting standards. In addition, Japanese
companies have tended historically to have higher growth rates than U.S.
companies, and Japanese interest rates have generally been lower than in the
United States, both of which factors tend to result in lower discount rates and
higher price-earnings ratios in Japan than in the United States.]
ADDITIONAL INVESTMENT INFORMATION
DEPOSITARY RECEIPTS. The Portfolios may invest in Depositary Receipts,
including American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") and other Depositary Receipts
(which, together with ADRs, GDRs and EDRs, are hereinafter collectively referred
to as "Depositary Receipts"), to the extent that such Depositary Receipts are or
become available. ADRs are securities, typically issued by a U.S. financial
institution (a "depositary"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer (the "underlying issuer") and
deposited with the depositary. ADRs may be "sponsored" or "unsponsored."
Sponsored ADRs are established jointly by a depositary and the underlying
issuer, whereas unsponsored ADRs may be established by a depositary without
participation by the underlying issuer. The issuers of the stock of unsponsored
ADRs are not obligated to disclose material information in the United States and
therefore, there may not be a correlation between such information and the
market value of the ADR. GDRs, EDRs and other types of Depositary Receipts are
typically issued by foreign depositaries, although they may also be issued by
U.S. depositaries, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. The Portfolios may invest in
sponsored and unsponsored Depositary Receipts. For purposes of the Portfolios'
investment policies, the Portfolios' investments in Depositary Receipts will be
deemed to be investments in the underlying securities.
FIXED INCOME SECURITIES. Each Portfolio will invest in fixed income (debt)
securities. The market value of the fixed income securities in which a Portfolio
invests will be affected by changes in the creditworthiness of issuers and will
change in response to interest rate changes and other factors. Generally, the
values of fixed income securities vary inversely with changes in interest rates,
so that during periods of falling interest rates, the values of outstanding
fixed income securities generally rise and during periods of rising interest
rates, the values of such securities generally decline. While securities with
longer maturities tend to produce higher yields, the prices of longer maturity
securities are subject to greater market fluctuations as a result of changes in
interest rates.
FOREIGN CURRENCY FORWARD CONTRACTS. Each Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolios
may use such contracts to protect against a decline in a foreign currency
against the U.S. dollar between the trade date and settlement date when the
Portfolio purchases or sells securities, lock in the U.S. dollar value of
dividends and interest on securities held by the Portfolio, and generally to
protect the U.S. dollar value of securities held by the Portfolio against
exchange rate fluctuation. While forward contracts may limit
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losses as a result of exchange rate fluctuations, they will also limit any gains
that might otherwise have been realized. The Portfolio's Custodian may be
required to place cash or liquid securities in a segregated account in an amount
equal to the value of the Portfolio's total assets committed to the consummation
of forward contracts. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account on
a daily basis so that the value of the account will be at least equal to the
amount of the Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. Each Portfolio may invest in the securities of foreign
issuers. Investment in securities of foreign issuers involves investment risks
somewhat different from those affecting securities of U.S. issuers. The
Portfolio's investments will be subject to political and economic events that
affect the countries in which it invests. Foreign issuers may be subject to
different accounting, auditing and financial standards and requirements. There
also may be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the United States. Many foreign
securities markets have substantially less trading volume than U.S. national
securities exchanges and, therefore, securities of some foreign issuers are less
liquid and more volatile than securities of comparable U.S. issuers. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the United States. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes, which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Portfolios by domestic companies. Investments in securities
of foreign issuers are generally denominated in foreign currencies and, since a
Portfolio may temporarily hold uninvested reserves in bank deposits in foreign
currencies, the value of a Portfolio's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations, and a Portfolio may incur costs in connection with
conversions between various currencies.
The Asian Equity Portfolio may also invest in emerging market country
securities. Investing in emerging markets entails the risks associated with
foreign investment described above, however, these risks may be intensified in
emerging markets. Emerging markets can include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe. Certain emerging market countries have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, large amounts of external debt,
trade difficulties and unemployment. Further, the economies of developing
countries generally are heavily dependent upon international trade and,
accordingly, have been, and may continue to be, adversely affected by trade
barriers, exchange controls and other protectionist measures imposed or
negotiated by the countries in which they trade. There also are risks associated
with the possibility of nationalization, expropriation or confiscatory taxation,
political changes, government regulation, social instability or diplomatic
developments (including war) that could adversely affect the economies of such
countries or the value of the Portfolio's investments in those countries.
The Asian Equity Portfolio may invest in securities of issuers located in
Hong Kong. Hong Kong was established as a British colony in the 1840's and,
until recently, was ruled by the British Government through an appointed
Governor. Effective July 1, 1997, Hong Kong reverted to Chinese sovereignty and
is governed as a Special Administrative Region of China. Although China has made
certain commitments to preserve the economic and social freedoms enjoyed in Hong
Kong during British rule, there can be no assurances China's
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commitments will be maintained. Action taken by the Chinese government which
limits or causes uncertainty with regard to these economic and social freedoms
could have an adverse affect on the Portfolio's investments in securities of
issuers located in Hong Kong.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. A Portfolio will not enter into securities loan transactions
exceeding in the aggregate 33 1/3% of the market value of the Portfolio's total
assets.
MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money
market instruments, although each Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
Consistent with their investment policies, each Portfolio may make money market
investments pending other investment or settlement for liquidity. In addition,
the Portfolios may invest in money market instruments for temporary defensive
purposes during adverse market conditions. The money market investments
permitted for the Portfolios include: obligations of the U.S. Government and its
agencies and instrumentalities, obligations of foreign sovereignties, commercial
paper, bank obligations (including certificates of deposit), other debt
securities and repurchase agreements.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Asian Equity Portfolio may invest in securities that are
neither listed on a stock exchange nor traded over-the-counter, including
privately placed securities. Such unlisted equity securities may involve a
higher degree of business and financial risk that can result in substantial
losses. As a result of the absence of a public trading market for these
securities, they may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the
Portfolio or less than what may be considered the fair value of such securities.
Further, companies whose securities are not publicly traded may not be subject
to the disclosure and other investor protection requirements which might be
applicable if their securities were publicly traded. If such securities are
required to be registered under the securities laws of one or more jurisdictions
before being resold, the Portfolio may be required to bear the expenses of
registration.
As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market. Also, as a general matter, the Portfolio may
not invest more than 10% of its total assets in securities that are restricted
from sale to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended (the "1933 Act"). However, the Portfolio may
invest up to 25% of its total assets in liquid Restricted Securities that can be
offered and sold to qualified institutional buyers under Rule 144A under the
1933 Act ("Rule 144A Securities"). The Board of Directors has adopted guidelines
and delegated to the Adviser, subject to the supervision of the Board of
Directors, the daily function of determining and monitoring the liquidity of
Rule 144A Securities. Rule 144A Securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement,
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the Portfolio buys a security from a seller that has agreed to repurchase it at
a mutually agreed upon date and price, reflecting the interest rate effective
for the term of the agreement. The term of these agreements is usually from
overnight to one week and never exceeds one year. A repurchase agreement may be
viewed as a fully collateralized loan of money by the Portfolio to the seller.
The Portfolio always receives securities with a market value at least equal to
the purchase price (including accrued interest) as collateral, and this value is
maintained during the term of the agreement. If the seller defaults and the
collateral value declines, the Portfolio might incur a loss. If bankruptcy
proceedings are commenced with respect to the seller, the Portfolio's
realization upon the collateral may be delayed or limited. The Portfolio may not
enter into repurchase agreements with more than seven days to maturity if, as a
result, more than 15% of the market value of the Portfolio's net assets are
invested in these agreements and other investments for which market quotations
are not readily available or which are otherwise illiquid.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, each Portfolio
may, for temporary defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and medium-term debt obligations in which a Portfolio may invest consist of (i)
obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. Each Portfolio will
maintain with the Custodian a segregated account of cash or liquid securities in
an amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time a Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if, among other factors, the
general level of interest rates has changed. It is a current policy of each
Portfolio not to enter into when-issued commitments or delayed delivery
securities exceeding in the aggregate 15% of the market value of the Portfolio's
total assets less liabilities, other than the obligations created by these
commitments.
DERIVATIVE PRODUCTS (DERIVATIVES)
The Portfolios are permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but are
not limited to: futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other derivative
products yet to be developed, so long as these new products are used in a manner
consistent with the objectives of the Portfolios. These derivative products may
be based upon a wide variety of underlying rates, indices, instruments,
securities and other products, such as interest rates, foreign currencies,
foreign and domestic fixed income and equity securities, groups or "baskets" of
securities and securities indices (for each derivative product, the
"underlying"). Exclusive of forward foreign currency contracts and any
derivative products used for hedging purposes, each Portfolio will limit its use
of derivative products to 33 1/3% of its total assets, measured by the aggregate
notional amount of outstanding derivative products.
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The Portfolios may use derivative products under a number of different
circumstances to further their investment objectives. For example, a Portfolio
may purchase derivatives to gain exposure to a market quickly in response to
changes in the Portfolio's investment strategy, upon the inflow of investable
cash or when the derivative provides greater liquidity than the underlying
market. A Portfolio may also use derivatives when it is restricted from directly
owning the "underlying" or when derivatives provide a pricing advantage or lower
transaction costs. The Portfolios also may purchase combinations of derivatives
in order to gain exposure to an investment in lieu of actually purchasing such
investment. Derivatives may also be used by a Portfolio for hedging or risk
management purposes and in other circumstances when the Adviser believes it
advantageous to do so consistent with the Portfolio's investment objectives and
policies. The Portfolios will not use derivatives in a manner that creates
leverage, except to the extent that the use of leverage is expressly permitted
by a particular Portfolio's investment policies, and then only in a manner
consistent with such policies.
The use of derivative products is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Portfolios will be less favorable than it would
have been if these investment techniques had not been used.
Some of the derivative products in which the Portfolios may invest and some
of the risks related thereto are described in more detail below.
FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)
The Portfolios may purchase and sell futures contracts, such as futures on
securities indices, baskets of securities, foreign currencies and interest rates
of the type generally known as financial futures. These are standardized
contracts that are bought and sold on organized exchanges. A futures contract
obligates a party to buy or sell a specific amount of the "underlying," such as
for example, a particular foreign currency, on a specified future date at a
specified price or to settle the value in cash.
The Portfolios may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolios may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Forward Contracts" above. These
forward contracts are privately negotiated and are bought and sold in the
over-the-counter market. Like a future, a forward contract obligates a party to
buy or sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.
In some cases, the Portfolios may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolios will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolios may utilize futures contracts, forward contracts and related options
are as follows:
The Portfolios may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market exposure.
There currently are limited securities index futures and options on such futures
in many countries, particularly emerging countries. The
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nature of the strategies adopted by the Adviser, and the extent to which those
strategies are used, may depend on the development of such markets. The
Portfolios may also purchase and sell foreign currency futures to hedge their
respective holdings and commitments against changes in the level of future
currency rates or to adjust their exposure to a particular currency.
The Portfolios may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely with
changes in interest rates. The Portfolios may engage in such transactions to
hedge their holdings of debt instruments against future changes in interest
rates or for other purposes.
The Portfolios may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these contracts also rises and falls inversely with
changes in interest rates. The Portfolios may engage in financial futures and
forward contracts for both hedging and non-hedging purposes.
Gains and losses on futures contracts, forward contracts and related options
depend on the Adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors. Other risks associated with
the use of these instruments include (i) imperfect correlation between the
change in market value of investments held by a Portfolio and the prices of
derivative products relating to investments purchased or sold by the Portfolio,
and (ii) possible lack of a liquid secondary market for a derivative product and
the resulting inability to close out a position. The risk that a Portfolio will
be unable to close out a position will be minimized by only entering into
transactions for which there appears to be a liquid exchange or secondary
market. In some strategies, the risk of loss in trading on futures and related
transactions can be substantial, due both to the low margin deposits required
and the extremely high degree of leverage involved in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the
"CFTC"), each Portfolio may, without registering with the CFTC as a Commodity
Pool Operator, enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-bona
fide hedging activities.
OPTION TRANSACTIONS
The Portfolios may seek to increase their returns or may hedge their
portfolio investments through options transactions with respect to individual
securities, indices or baskets in which such Portfolios may invest; other
financial instruments; and foreign currency. Various options may be purchased
and sold on either the exchange-traded or over-the-counter markets.
Each Portfolio may purchase put and call options. Purchasing a put option
gives a Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period.
Purchasing a call option gives a Portfolio a similar right, but not the
obligation, to purchase the underlying. The purchaser pays a premium to the
seller (also known as the writer) of the option.
Each Portfolio also may write put and call options on investments held in
its portfolio, as well as foreign currency options. A Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a
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call option, a Portfolio will limit its opportunity to profit from an increase
in the market value of the underlying above the exercise price of the option. By
writing a put option, a Portfolio will be exposed to the amount by which the
price of the underlying is less than the strike price.
By writing an option, a Portfolio incurs an obligation either to buy (in the
case of a put option) or sell (in the case of a call option) the underlying from
the purchaser of the option at the option's exercise price, upon exercise by the
purchaser. Pursuant to guidelines established by the Board of Directors, the
Portfolios may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will continue to own (i) the underlying; (ii) securities or instruments
convertible or exchangeable without the payment of any consideration into the
underlying; or (iii) a call option on the same underlying with a strike price no
higher than the price at which the underlying was sold pursuant to a short
option position. In the case of a put option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will own another put option on the same underlying with an equal or higher
strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolios' use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by a
Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.
INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS
Swaps are privately negotiated over-the-counter derivative products in which
two parties agree to exchange payment streams calculated in relation to a rate,
index, instrument or certain securities and a particular "notional amount." As
with many of the other derivative products available to the Portfolios, the
underlying may include an interest rate (fixed or floating), a currency exchange
rate, a commodity price index, and a security, securities index or a combination
thereof. A great deal of flexibility is possible in the way the products may be
structured, with the effect being that the parties may have exchanged amounts
equal to the return on one rate, index or group of securities for another. For
example, in a simple fixed-to-floating interest rate swap, one party makes
payments equivalent to a fixed interest rate, and the other makes payments
equivalent to a specified interest rate index. A Portfolio may engage in simple
or more complex swap transactions involving a wide variety of underlyings. The
currency swaps that the Portfolios may enter will generally involve an agreement
to pay interest streams in one currency based on a specified index in exchange
for receiving interest streams denominated in another currency. Such swaps may
involve initial and final exchanges that correspond to the agreed upon notional
amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. A Portfolio may use one or more of these products in addition to or in
lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar
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is a combination product in which the same party, such as the Portfolio, buys a
cap from and sells a floor to the other party. As with put and call options, the
amount at risk is limited for the buyer, but, if the cap or floor is not hedged
or covered, may be unlimited for the seller. Under current market practice,
caps, collars and floors between the same two parties are generally documented
under the same "master agreement." In some cases, options and forward agreements
may also be governed by the same master agreement. In the event of a default,
amounts owed under all transactions entered into under, or covered by, the same
master agreement would be netted and only a single payment would be made.
Swaps, caps, collars and floors are credit-intensive products. A Portfolio
that enters into a swap transaction bears the risk of default, i.e. nonpayment,
by the other party. The guidelines under which each Portfolio enters derivative
transactions, along with some features of the transactions themselves, are
intended to reduce these risks to the extent reasonably practicable, although
they cannot eliminate the risks entirely. Under guidelines established by the
Board of Directors, a Portfolio may enter into swaps only with parties that meet
certain credit rating guidelines. Consistent with current market practices, a
Portfolio will generally enter into swap transactions on a net basis, and all
swap transactions with the same party will be documented under a single master
agreement to provide for net payment upon default. In addition, a Portfolio's
obligations under an agreement will be accrued daily (offset against any amounts
owing to the Portfolio) and any accrued, but unpaid, net amounts owed to the
other party to a master agreement will be covered by the maintenance of a
segregated account consisting of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, a Portfolio's risk of loss will consist of the payments
that a Portfolio is contractually entitled to receive from the other party. This
may not be true for currency swaps that require the delivery of the entire
notional amount of one designated currency in exchange for the other. If there
is a default by the other party, a Portfolio may have contractual remedies
pursuant to the agreements related to the transaction.
STRUCTURED NOTES
Structured notes are derivative securities for which the amount of principal
repayment and/or interest payments is based upon the movement of one or more
factors. These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices,
such as the S&P 500 Index. In some cases, the impact of the movements of these
factors may increase or decrease through the use of multipliers or deflators.
The Portfolios may use structured notes to tailor their investments to the
specific risks and returns the Adviser wishes to accept while avoiding or
reducing certain other risks.
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INVESTMENT LIMITATIONS
Each Portfolio is a diversified investment company under the Investment
Company Act of 1940, as amended (the "1940 Act") and is therefore subject to the
following limitations: (i) as to 75% of its total assets, a Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government and its agencies and
instrumentalities, and (ii) a Portfolio may not own more than 10% of the
outstanding voting securities of any one issuer.
Each Portfolio also operates under certain investment restrictions that are
deemed fundamental limitations and may be changed only with the approval of the
holders of a majority of such Portfolio's outstanding shares and under certain
non-fundamental investment limitations that may be changed without shareholder
approval. For additional information on fundamental and non-fundamental
investment limitations, see "Investment Limitations" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each of the
Portfolio's investments. Set forth below as an annual percentage of average
daily net assets are the management fees payable to the Adviser quarterly by
each Portfolio pursuant to the terms of the Investment Advisory Agreement. The
Adviser has voluntarily agreed to a reduction in the fees payable to it and to
reimburse the Portfolios, if necessary, if such fees would cause total annual
operating expenses of the Portfolios to exceed the maximums set forth in the
table below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL ANNUAL
OPERATING
MANAGEMENT FEES EXPENSES AFTER FEE WAIVERS
ABSENT FEE --------------------------
PORTFOLIO WAIVERS CLASS A CLASS B
- ------------------------------------------ ------------------- ------------ ------------
<S> <C> <C> <C>
Asian Equity 0.80% 1.00% 1.25%
Japanese Equity 0.80% 1.00% 1.25%
</TABLE>
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD")
is the parent of the Adviser and Morgan Stanley. MSDWD is a preeminent global
financial services firm that maintains leading market positions in each of its
three primary businesses -- securities, asset management and credit services. At
, 1998, the Adviser, together with its affiliated institutional asset
management companies (exclusive of Miller Anderson & Sherrerd, LLP), managed
assets of approximately $ billion. See "Management of the Fund" in the
Statement of Additional Information.
PORTFOLIO MANAGERS. The following individuals have primary portfolio
management responsibility for the Portfolios noted below:
ASIAN EQUITY PORTFOLIO -- EAN WAH CHIN AND VINOD SETHI.Ean Wah Chin is a
Managing Director of Morgan Stanley and the Adviser. She has been primarily
responsible for managing the Portfolio's assets since its
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<PAGE>
inception. Prior to joining Morgan Stanley in 1986, Ms. Chin spent eight years
with the Monetary Authority of Singapore and the Government of Singapore
Investment Corporation, where she was a portfolio manager of one of the largest
portfolios in Asia. Vinod Sethi joined the Adviser in 1989 and since then, has
been actively involved in the Adviser's emerging market group. Mr. Sethi is a
Managing Director of Morgan Stanley and the Adviser and is the Adviser's Chief
Investment Officer for the Asian region. He received his undergraduate degree in
Chemical Engineering from I.I.T. (Bombay) and his M.B.A. from New York
University School of Business.
JAPANESE EQUITY PORTFOLIO -- JOHN R. ALKIRE AND KUNIHIKO SUGIO. John R.
Alkire is a Managing Director of Morgan Stanley and the Adviser. He has been
primarily responsible for managing the Portfolio's assets since June 1997. Mr.
Alkire joined the Adviser in 1981 to initiate foreign equity sales and trading
to Pacific basin institutions. He was appointed President of Morgan Stanley
Investment Advisory, Japan in October 1993. Prior to 1993, he specialized in
Japanese warrants and cash equity sales and trading to Japanese financial
institutions in the Tokyo office. Mr. Alkire is a graduate of University of
Victoria Canada. Kunihiko Sugio, a Principal of Morgan Stanley and the Adviser,
joined the Adviser in December 1993 and manages dedicated Japanese equity
portfolios. He has been primarily responsible for managing the Portfolio's
assets since its inception. Prior to joining the Adviser, he worked with Baring
International Investment Management, Tokyo, where he was a Director and fund
manager. He graduated from Wakayama Kokuritsu University.
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of each Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of each Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
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<PAGE>
The Fund has adopted a Plan of Distribution with respect to the Class B
shares of each Multiclass Portfolio pursuant to Rule 12b-1 under the 1940 Act
(each, a "Plan"). Under each Plan, the Distributor is entitled to receive from
each Multiclass Portfolio a distribution fee, which is accrued daily and paid
quarterly, of 0.25% of the Class B shares' average daily net assets on an
annualized basis. Each Plan is designed to compensate the Distributor for its
services in connection with distribution assistance. The Distributor may retain
any portion of the fee that it does not expend in meeting its obligations to the
Fund. The Distributor may compensate financial intermediaries, plan fiduciaries
and administrators for providing distribution-related services, including
account maintenance services, to shareholders (including, where applicable,
underlying beneficial owners) of Class B shares.
EXPENSES. Each Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountant's fees, custodial fees and
printing and mailing costs) as specified in its agreements with the Adviser and
Morgan Stanley.
PURCHASE OF SHARES
Class A shares of each Portfolio and Class B shares of each Portfolio may be
purchased at the net asset value per share next determined after receipt by the
Fund of a purchase order. The net asset value per share of each Portfolio is
calculated on days that the New York Stock Exchange ("NYSE") and Chase (the
"Custodian Bank") are open for business as of the close of trading of the NYSE,
normally 4:00 p.m. Eastern Time (the "Pricing Time").
MINIMUM INVESTMENT
The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares of each Portfolio. These minimums may be waived at the
discretion of the Adviser for certain types of investors, including trust
departments, brokers, dealers, agents, financial planners, financial services
firms, investment advisers or various retirement and deferred compensation plans
("Financial Intermediaries"), certain accounts managed by the Adviser and its
affiliates ("Managed Accounts"), and certain employees and customers of Morgan
Stanley and its affiliates. The Fund's determination of an investor's
eligibility to purchase shares of a given class will take precedence over the
investor's selection of a class.
METHODS OF PURCHASE
Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolios by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or because your
check does not clear, you will be responsible for any loss the Fund or its
agents incur. If you are already a shareholder, the Fund may redeem shares from
your account(s) to reimburse the Fund or its agents for any loss. In addition,
you may be prohibited or restricted from making future investments in the Fund.
FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian Bank are open for business.
Your bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:
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<PAGE>
1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide you
with a confirmation number.
2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring the funds.
3. Complete and sign the Account Registration Form and mail it to the
address shown thereon.
When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the close of the Federal Funds Wire Control Center
("FFWCC") (normally 6:00 p.m. Eastern Time), the purchase will be executed at
the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the close of the FFWCC, will be executed at the net asset value next
determined. Certain institutional investors and financial institutions have
entered into an arrangement with Morgan Stanley, pursuant to which they may
place orders prior to the Pricing Time, but make payment in Federal Funds for
those shares on the following business day.
BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and which bank is handling the wire, money transferred by bank
wire may or may not be converted into Federal Funds prior to the close of the
FFWCC. Prior to conversion to Federal Funds and receipt by the Fund, an
investor's money will not be invested.
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -[portfolio name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share of each of the
Portfolios determined on the next business day after receipt. An investor's
money will not be invested prior to crediting of Federal Funds.
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. Each business evening, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day
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<PAGE>
and places a net purchase and/or redemption order(s) by the morning of the next
business day. These orders normally are executed at the net asset value that was
computed for each Portfolio as of the close of the previous business day.
ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 per
Portfolio. The minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases directly from the
Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.
INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES
Class A and Class B shares of each Portfolio may be subject to the
involuntary conversion and redemption features described below. The conversion
and redemption features may be waived at the discretion of the Adviser for
shares held in a Managed Account and shares purchased through a Financial
Intermediary. Accounts that were open prior to January 2, 1996 are not subject
to involuntary conversion or redemption. The Fund reserves the right to modify
or terminate the conversion or redemption features of the shares at any time
upon 60 days notice to shareholders.
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account
containing Class A shares falls below $500,000 (but remains at or above
$100,000) because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $500,000 (but remains at or
above $100,000) for a continuous 60-day period, the Class A shares in such
account will convert to Class B shares and will be subject to the distribution
fee and other features applicable to Class B shares. The Fund will not convert
Class A shares to Class B shares based solely upon changes in the market that
reduce the net asset value of shares. Under current tax law, conversion between
share classes is not a taxable event to the shareholder.
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares increases to $500,000 or more, whether due to
shareholder purchases or market activity, the Class B shares will convert to
Class A shares. Class B shares purchased through a Financial Intermediary that
has entered into an arrangement with the Fund for the purchase of such shares
may not be converted. Under current tax law, such conversion is not a taxable
event to the shareholder. Class A shares converted from Class B shares are
subject to the same minimum account size requirements as are applicable to New
Accounts containing Class A shares described above.
INVOLUNTARY REDEMPTION OF SHARES. If the value of an account falls below
$100,000 because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $100,000 for a continuous
60-day period, the shares in such account will be subject to redemption by the
Fund. The Fund will not redeem shares based solely upon changes in the market
that reduce the net asset value of shares. If redeemed, redemption proceeds will
be promptly paid to the shareholder.
25
<PAGE>
REDEMPTION OF SHARES
Class A and Class B shares of each Portfolio may be redeemed at any time and
without charge at the net asset value per share next determined after receipt by
the Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds may be more or less than the purchase price of your shares
depending on, among other factors, the market value of the investment securities
held by a Portfolio.
METHODS OF REDEMPTION
Shares may be redeemed directly from the Fund by mail or by telephone.
However, shares purchased through a Financial Intermediary must be redeemed
through a Financial Intermediary. Certain Financial Intermediaries may charge an
additional service or transaction fee.
BY MAIL. Each Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, to Morgan Stanley Institutional Fund, Inc.,
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must include the
following:
1. A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
2. Any required signature guarantees; and
3. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.
BY TELEPHONE. If you have previously elected the Telephone Redemption
Option on the Account Registration Form, you can redeem Portfolio shares by
calling the Fund and requesting that the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to receive
redemption proceeds, send a written request to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. An investor may be
required to provide personal identification information at the time an account
is opened and prior to effecting each telephone transaction. In addition, all
telephone transaction requests will be recorded and investors may be required to
provide additional telecopied written
26
<PAGE>
instructions regarding transaction requests. Neither the Fund nor the Transfer
Agent will be responsible for any loss, liability, cost or expense for following
instructions received by telephone that either of them reasonably believes to be
genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to accept redemption
requests from underlying beneficial owners. These redemptions may be processed
in the same way as purchases made through such Financial Intermediaries, as
described above.
FURTHER REDEMPTION INFORMATION
The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event more than seven days after
receipt of a redemption request in good order. However, payments to investors
redeeming shares which were purchased by check will not be made until payment
for the purchase has been collected, which may take up to eight days after the
date of purchase. The Fund may suspend the right of redemption or postpone the
date upon which redemptions are effected at times when the NYSE is closed, or
under any emergency conditions as determined by the Securities and Exchange
Commission (the "Commission").
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required to verify the identity of the person who has authorized
certain redemptions. Please contact the Fund or see the Statement of Additional
Information for further information.
ACCOUNT POLICIES AND SERVICES
EXCHANGE FEATURES
You may exchange shares of each Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced or Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase. Therefore, an
exchange will be considered a taxable event for shareholders subject to tax.
Exchange transactions will be processed at the net asset value per share next
determined after receipt of the
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<PAGE>
request. Shares of the portfolios may be exchanged by mail or telephone. The
telephone exchange privilege is automatic and made available without shareholder
election. The exchange privilege may be modified or terminated by the Fund at
any time upon 60-days notice to shareholders.
BY MAIL. To exchange shares by mail, send a written exchange request to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798. Your written exchange request should include (i) the name, class of
shares and account number of your current Portfolio; (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to exchange
shares; and (iii) the signatures of all registered account holders.
BY TELEPHONE. To exchange shares by telephone, call the Fund at the phone
number provided on the cover of this Prospectus. A Fund representative will
request (i) the name, class of shares and account number of your current
Portfolio, and (ii) the name(s) and class(es) of shares of the portfolio(s) into
which you intend to exchange shares. For additional information regarding
responsibility for the authenticity of telephoned instructions, see "Redemption
of Shares" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by sending a written request to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. It may not be possible to
transfer the registration of certain shares purchased through a Financial
Intermediary. As with redemptions, the written request must be received in "good
order" before any transfer can be made. Transferring the registration of shares
may affect the eligibility of your account for a given class of shares and may
result in involuntary conversion or redemption of your shares.
OTHER ACCOUNT INFORMATION
The Fund does not issue share certificates for the Portfolios. All shares
purchased are confirmed to you and credited to your account on the Fund's books
maintained by the Adviser or its agents. You will have the same rights and
ownership with respect to such shares as if certificates had been issued.
EXCESSIVE TRADING
Frequent trades in your account(s) can disrupt management of a Portfolio and
raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of each Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a portfolio of the Fund within any 120-day
period. For example, the following series of transactions would amount to
excessive trading: exchanging shares of Portfolio A for shares of Portfolio B,
then exchanging shares of Portfolio B for shares of Portfolio C and then
exchanging shares of Portfolio C for shares of Portfolio A within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios, and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.
INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS
Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the Portfolios used for investment by these accounts may
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<PAGE>
experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the Portfolios.
VALUATION OF SHARES
The net asset value per share of a class of shares of each of the Portfolios
is determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such class, less any liabilities attributable
to such class, by the total number of outstanding shares of each class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolios. Net asset value per share is determined as of the close of the NYSE
(normally 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business. Price information on listed securities is taken from the exchange
where the security is primarily traded. Securities listed on a U.S. securities
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date and for which market quotations are
not readily available are valued at a price within a range not exceeding the
current asked price nor less than the current bid price. The current bid and
asked prices are determined based on the average of the bid and asked prices
quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such 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. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine the prices in
accordance with the above-stated procedures are determined in good faith at fair
value using methods determined by the Board of Directors. For purposes of
calculating net asset value per share, all assets and liabilities initially
expressed in foreign currencies will be translated into U.S. dollars at the mean
of the bid and asked price for such currencies against the U.S. dollar last
quoted by a major bank.
29
<PAGE>
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expenses charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise the "total return" for each class
of a Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE.
Each of the Portfolios may advertise "total return" which shows what an
investment in a class of a Portfolio would have earned over a specified period
of time (such as one, five or ten years) assuming that all distributions and
dividends by the Portfolio were reinvested in the same class on the reinvestment
dates during the period. Total return does not take into account any federal or
state income taxes that may be payable on dividends and distributions or on
redemption. The Fund may also include comparative performance information in
advertising or marketing the Portfolios' shares, including data from Lipper
Analytical Services, Inc., other industry publications, business periodicals,
rating services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
when, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
elects to receive income dividends and capital gains distributions in cash.
Each Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual dividends. Net realized capital gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually.
Undistributed net investment income is included in a Portfolio's net assets
for the purpose of calculating net asset value per share. Therefore, on the
"ex-dividend" date, the net asset value per share excludes the dividend (i.e.,
is reduced by the per share amount of the dividend). Dividends paid shortly
after the purchase of shares by an investor, although in effect a return of
capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolios will differ at times.
Expenses of the Portfolios allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
30
<PAGE>
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolios or their shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. Each Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends paid by a Portfolio will generally not qualify for the
dividends-received deduction for corporate shareholders. Each Portfolio will
report annually to its shareholders the amount of dividend income qualifying for
such treatment.
Distributions of net capital gain are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio (such
designation being dependent upon the holding period of the Portfolio in the
underlying asset generating the net capital gain), regardless of how long
shareholders have held their shares. Each Portfolio will send reports annually
to its shareholders of the federal income tax status of all distributions made
during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss, including any available capital loss carryforwards) prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (i) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) who has not certified to the Fund that such
shareholder is not subject to backup withholding. This backup withholding is not
an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the sale, exchange or redemption
31
<PAGE>
proceeds exceed or are less than the shareholder's adjusted tax basis in the
sold, exchanged or redeemed shares. If capital gains distributions have been
made with respect to shares that are sold at a loss after being held for six
months or less, then the loss is treated as a long-term capital loss to the
extent of the capital gains distributions.
Conversions of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
Investment income received by a Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at the source. To the
extent that a Portfolio is liable for foreign income taxes so withheld, each
Portfolio intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although each
Portfolio intends to meet Code requirements to pass through credit for such
taxes, there can be no assurance that each Portfolio will be able to do so.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolios generally do not invest for short-term trading purposes,
however, when circumstances warrant, each Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolios will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with their
respective objectives and policies. As portfolio turnover increases, the
Portfolios may expect to pay
32
<PAGE>
correspondingly increased brokerage and trading costs. In addition to
transaction costs, higher portfolio turnover may result in the realization of
capital gains. As discussed under "Taxes," to the extent net short-term capital
gains are realized, any distributions resulting from such gains are considered
ordinary income for federal income tax purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 40 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares.
The shares of each Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
or other features and have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Persons or organizations owning 25% or more
of the outstanding shares of a Portfolio may be presumed to "control" (as
defined in the 1940 Act) such Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports. The
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs sub-custodians approved by the Board of Directors of the Fund
in accordance with regulations of the Commission for the purpose of providing
custodial services for such assets. MSTC may also hold certain domestic assets
for the Fund. For more information on the custodians, see "General Information
- -- Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
33
<PAGE>
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
34
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
ASIAN EQUITY AND JAPANESE EQUITY PORTFOLIOS
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
ACCOUNT INFORMATION If you need assistance in filling out this form for the Morgan Stanley
Fill in where applicable Institutional Fund, Inc., please contact your Morgan Stanley
representative or call us toll free 1-800-548-7786. Please print all
items except signature, and mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor.
OR
1. TAXPAYER IDENTIFICATION SOCIAL SECURITY
NUMBER ("TIN") NUMBER ("SSN")
OR
2. TIN
SSN
OR
TIN
SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer) with your
correct TIN(s) or SSN(s). Accounts that have a missing or incorrect
TIN(s) or SSN(s) will be subject to backup withholding at a 31% rate on
dividends, distributions and other payments. If you have not provided us
with your correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability of
persons subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
You may be notified that you are subject to backup withholding under
Section 3406(a)(1)(C) of the Internal Revenue Code because you have
underreported interest or dividends or you were required to, but failed
to, file a return which would have included a reportable interest or
dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following / / Class A Shares $ / / Class B Shares $
CLASS SECTION Portfolio(s): / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 Asian Equity Portfolio
for each Portfolio and Class B Japanese Equity Portfolio
shares minimum $100,000 for each
Portfolio). Please indicate
Portfolio, class and amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio
and manner of payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the account
statement sent to my/our registered
address, I/we hereby authorize the Address
Fund to mail duplicate statements
to the name and address provided at City State Zip Code
right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative No. Branch
No.
</TABLE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE ARE
SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE
APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL SECURITY
ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND THAT IF
I/ WE DO NOT PROVIDE EITHER NUMBER TO CHASE GLOBAL FUNDS
SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE DATE OF THIS
APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR CORRECT SSN(S)
OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP
WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE
PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU MAY REQUEST SUCH
FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
<PAGE>
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses..................................... 2
Financial Highlights.............................. 4
Prospectus Summary................................ 7
Investment Objectives and Policies................ 11
Additional Investment Information................. 13
Investment Limitations............................ 21
Management of the Fund............................ 21
Purchase of Shares................................ 23
Redemption of Shares.............................. 26
Account Policies and Services..................... 27
Valuation of Shares............................... 29
Performance Information........................... 30
Dividends and Capital Gains Distributions......... 30
Taxes............................................. 31
Portfolio Transactions............................ 32
General Information............................... 33
Account Registration Form
</TABLE>
ASIAN EQUITY PORTFOLIO
JAPANESE EQUITY PORTFOLIO
PORTFOLIOS OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
----------------------------------------------------------------------
U.S. EQUITY PLUS PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, or mutual fund, which offers redeemable shares in
a series of diversified and nondiversified investment portfolios ("portfolios").
The Fund is designed to provide clients with attractive alternatives for meeting
their investment needs. The Fund currently consists of thirty-two portfolios
representing a broad range of investment choices. This prospectus (the
"Prospectus") pertains to the Class A and Class B shares of the U.S. Equity Plus
Portfolio (the "Portfolio"). The Class A and Class B shares currently offered by
the Portfolio have different minimum investment requirements and fund expenses.
Shares of the Portfolio are offered with no sales charge, exchange fee or
redemption fee.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser and Administrator (the "Adviser" and the
"Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley")
as Distributor, the Fund makes available to institutional and high net worth
individual investors a series of portfolios which benefit from the investment
expertise and commitment to excellence associated with Morgan Stanley and its
affiliates.
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. The Fund offers additional portfolios which are
described in other prospectuses and under "Prospectus Summary" below. The Fund
currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY
- -- Active Country Allocation, Asian Equity, Asian Real Estate, Emerging Markets,
European Equity, European Real Estate, Global Equity, Gold, International
Equity, International Magnum, International Small Cap, Japanese Equity and Latin
American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth,
Equity Growth, Small Cap Value Equity, Technology, U.S. Equity Plus, U.S. Real
Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced
Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global
Fixed Income, High Yield and Municipal Bond Portfolios; (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information about
the Fund is contained in a "Statement of Additional Information," dated May 1,
1998, which is incorporated herein by reference. The Statement of Additional
Information and the prospectuses pertaining to the other portfolios of the Fund
are available upon request and without charge by writing or calling the Fund at
the address and telephone number set forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
the U.S. Equity Plus Portfolio will incur:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- ----------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A..................................................................................... None
Class B..................................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
Class A..................................................................................... None
Class B..................................................................................... None
Deferred Sales Load
Class A..................................................................................... None
Class B..................................................................................... None
Redemption Fees
Class A..................................................................................... None
Class B..................................................................................... None
Exchange Fees
Class A..................................................................................... None
Class B..................................................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ----------------------------------------------------------------------------------------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C>
Management Fee (Net of Fee Waiver)*
Class A..................................................................................... %
Class B..................................................................................... %
12b-1 Fees
Class A..................................................................................... None
Class B..................................................................................... 0.25%
Other Expenses
Class A..................................................................................... %
Class B..................................................................................... %
---------
Total Operating Expenses (Net of Fee Waivers or Expense Reimbursements)*
Class A..................................................................................... %
Class B..................................................................................... %
---------
---------
</TABLE>
- --------------
* The Adviser has agreed to waive its management fees and/or reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed a specified percentage of its average
daily net assets. Absent the fee waiver, the management fee would be 0.45%.
Absent the fee waivers and/or expense reimbursements, the Portfolio's total
operating expenses are expected to be % of the average daily net assets of
the Class A shares and % of the average daily net assets of the Class B
shares. As a result of this reduction, the Management Fee stated above is
lower than the contractual fee stated under "Management of the Fund." The
Adviser reserves the right to terminate any of its fee waivers and/or expense
reimbursements at any time in its sole discretion. For further information on
Portfolio expenses, see "Management of the Fund."
2
<PAGE>
The purpose of the table above is to assist the investor in understanding
the various expenses that an investor in the Portfolio will bear directly or
indirectly. Expenses and fees for the Portfolio are based on estimates assuming
that the average daily net assets of both the Class A and Class B shares of the
Portfolio will be $50,000,000. Due to the continuous nature of Rule 12b-1 fees,
long-term Class B shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by the National Association of
Securities Dealers, Inc. ("NASD") Conduct Rules.
The following example illustrates the expenses that you would pay on a
$1,000 investment assuming (i) a 5% annual rate of return and (ii) redemption at
the end of each time period. As noted in the table above, the Portfolio charges
no redemption fees of any kind. The following example is based on the total
operating expenses of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A................................................ $ $ * *
Class B................................................ $ $ * *
</TABLE>
- ------------------
* Because the Portfolio is new, the Fund has not projected expenses for the
Portfolio beyond the three year period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. THE PORTFOLIO IS NEW AND ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the Class A and Class
B shares of the U.S. Equity Plus Portfolio for the period presented. The audited
financial highlights for the Portfolio's shares for the period presented are
part of the Fund's financial statements which appear in the Fund's December 31,
1997 Annual Report to Shareholders and which are incorporated by reference into
the Fund's Statement of Additional Information. The Portfolio's financial
highlights for the period presented have been audited by Price Waterhouse LLP,
whose unqualified report thereon is also included in the Annual Report. The
Annual Report and the financial statements therein, along with the Statement of
Additional Information, are available at no cost from the Fund at the address
and telephone number noted on the cover page of this Prospectus. The following
information should be read in conjunction with the financial statements and
notes thereto.
4
<PAGE>
U.S. EQUITY PLUS PORTFOLIO
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------- ---------------------
PERIOD FROM PERIOD FROM
AUGUST 1, 1997* TO AUGUST 1, 1997* TO
DECEMBER 31, 1997+ DECEMBER 31, 1997+
<S> <C> <C>
---------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ $
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (1).................................
Net Realized and Unrealized Gain on Investments...........
------- -------
Total from Investment Operations........................
------- -------
------- -------
DISTRIBUTIONS
Net Investment Income.....................................
Net Realized Gain.........................................
------- -------
Total Distributions.....................................
------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ $
------- -------
------- -------
TOTAL RETURN................................................ % %
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)....................... $ $
Ratio of Expenses to Average Net Assets (1)................. %** %**
Ratio of Net Investment Income to Average Net Assets (1).... %** %**
Portfolio Turnover Rate..................................... % %
Average Commission Rate Per Share........................... $ $
- ----------------
(1) Effect of voluntary expense limitation during the
period:
Per share benefit to net investment income............. $ $
Ratios before expense limitation:
Expenses to Average Net Assets......................... %** %**
Net Investment Loss to Average Net Assets.............. %** %**
</TABLE>
* Commencement of Operations
** Annualized
+ Per share amounts for the period ended December 31, 1997 are based on average
outstanding shares.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of thirty-two portfolios, offering institutional investors
and high net worth individual investors a broad range of investment choices
coupled with the advantages of a no-load mutual fund with Morgan Stanley and its
affiliates providing customized services as Adviser, Administrator and
Distributor. Each portfolio offers Class A shares and Class B shares, except for
the International Small Cap and Municipal Money Market Portfolios, which offer
only Class A shares. Each portfolio has its own investment objective and
policies designed to meet its specific goals. The investment objective of the
Portfolio described in this Prospectus is as follows:
-The U.S. EQUITY PLUS PORTFOLIO seeks long term capital appreciation by
investing primarily in equity securities of issuers included in the
Standard & Poor's 500 Index ("S&P 500").
The other portfolios of the Fund are described in other prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
of this Prospectus. The investment objectives of these other portfolios are
listed below.
GLOBAL AND INTERNATIONAL EQUITY:
-The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
-The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
-The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of companies in
the Asian real estate industry.
-The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
-The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
-The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
-The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and
long-term capital appreciation by investing primarily in equity securities
of companies in the European real estate industry.
-The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
-The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
-The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
-The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
-The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with equity
market capitalizations of less than $1 billion.
6
<PAGE>
-The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
-The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
-The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
-The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
-The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
-The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
-The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in equity securities of small- to medium-sized companies which
the Adviser believes to be undervalued.
-The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Adviser, are expected to benefit from their involvement in technology and
technology-related industries.
-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
substantial investment in real estate investment trusts.
-The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
-The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of equity securities which the Adviser believes
to be undervalued and fixed income securities.
FIXED INCOME:
-The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
-The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio of
fixed income securities.
-The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
-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 of the recognized rating services.
-The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment grade mortgage-backed
securities.
7
<PAGE>
-The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing in municipal
obligations, the interest on which is exempt from federal income tax.
MONEY MARKET:
-The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one year
or less.
-The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund and
each of its portfolios. As of , 1998, Morgan Stanley Asset Management
Inc. and its affiliated institutional asset management companies (exclusive of
Miller Anderson & Sherred, LLP) managed assets of approximately $ billion. See
"Management of the Fund -- Investment Adviser" and "Management of the Fund --
Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but with a
12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the
Class B shares' average daily net assets on an annualized basis. The minimum
initial investment, generally, is $500,000 for Class A shares of the Portfolio
and $100,000 for Class B shares of the Portfolio. The minimum initial investment
amount is reduced for certain categories of investors. For additional
information on how to purchase shares and minimum initial investments, see
"Purchase of Shares."
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of the applicable class
next determined after receipt of the redemption request. The redemption price
may be more or less than the purchase price. Certain redemptions that cause the
value of an account to remain for a continuous 60-day period below the minimum
investment amount for Class A shares or for Class B shares may result in
involuntary redemption or automatic conversion. For additional information on
how to redeem shares and involuntary redemption or conversion, see "Purchase of
Shares" and "Redemption of Shares."
8
<PAGE>
RISK FACTORS
Investing in the Portfolio entails certain risks and considerations of which
an investor should be aware. The Portfolio's share price and investment returns
fluctuate and, when redeemed, an investment in the Portfolio may be worth more
or less than its original cost. The investment policies of the Portfolio may
entail the following risk factors:
-EQUITY SECURITIES. The Portfolio may invest in equity securities. Prices of
equity securities fluctuate in response to many factors, including the
financial health of the issuers and changes in economic and market
conditions.
-DERIVATIVES. The Portfolio may invest in instruments that derive their
values from those of specified securities, indices, currencies or other
points of reference. These derivatives, including those used to manage
risk, are themselves subject to the risks of the different markets in which
they are traded and, therefore, may or may not serve their intended
purposes.
For additional information about risk factors, see also "Investment
Objectives and Policies" and "Additional Investment Information."
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Portfolio's investment objective is to provide long-term capital
appreciation by investing primarily in equity securities of issuers included in
the S&P 500. The Portfolio's investment objective is a fundamental policy which
may not be changed without the approval of a majority of the Portfolio's
outstanding voting securities. There is no assurance that the Portfolio will
attain its objective. Other investment policies described below are not
fundamental policies unless otherwise noted and may be changed without
shareholder approval. In addition to the investments and strategies described
below, the Portfolio may invest in certain securities and obligations as set
forth in "Additional Investment Information" and as described under "Investment
Objectives and Policies" in the Statement of Additional Information.
The Portfolio seeks a total return that exceeds the return of the S&P 500
with price volatility similar to that of the S&P 500. With respect to the
Portfolio, equity securities include common and preferred stocks, convertible
securities, and rights and warrants to purchase common stocks. Under normal
circumstances, the Portfolio will invest at least 65% of its assets in U.S.
equity securities (including American Depositary Receipts ("ADRs")) and at least
80% of its assets in equity securities. In addition, the Portfolio may enter
into securities index futures contracts that are traded on recognized securities
or futures exchanges. The Portfolio may enter into such futures contracts as an
efficient way to initiate an investment in a basket of securities and/or to gain
equity market exposure with small cash balances.
The S&P 500 is a widely recognized, unmanaged index of U.S. equity market
activity. The performance of the S&P 500 is based upon the aggregate performance
of a selected portfolio of publicly traded common stocks which are market value
weighted (shares outstanding times stock price) so that each company's influence
on index performance is directly proportional to its market value. The S&P 500
includes monthly adjustments to reflect reinvestment of dividends and other
distributions thereby reflecting the total return of the securities comprising
the index. The S&P 500 is produced by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"). "Standard & Poor's", "S&P" and "S&P 500"
are trademarks of S&P and have been licensed for use by Morgan Stanley.
The Adviser's approach in selecting among the issuers comprising the S&P 500
is both value and growth driven. By applying its proprietary portfolio
management process, the Adviser will seek to identify those securities which it
believes to be undervalued and/or to have superior growth potential. In
constructing the Portfolio's investment portfolio, the Adviser will apply a
systematic stock screening and selection process using current and historical
stock prices, earnings, cash flow, dividend yield information, consensus
earnings and earnings growth forecasts, and Morgan Stanley analyst
recommendations for the stocks represented in the S&P 500, as well as other
economic variables. In the selection process, the Adviser seeks to produce a
portfolio of stocks and portfolio weightings thereof which maximizes the
expected performance of the Portfolio relative to the S&P 500 while maintaining
a stable difference between the return of the Portfolio and the return of the
index.
ADDITIONAL INVESTMENT INFORMATION
AMERICAN DEPOSITARY RECEIPTS. The Portfolio may invest in ADRs. ADRs are
securities, typically issued by a U.S. financial institution (a "depositary"),
that evidence ownership interests in a security or a pool of securities issued
by a foreign issuer (the "underlying issuer") and deposited with the depositary.
ADRs include
10
<PAGE>
American Depositary Shares and New York Shares and may be "sponsored" or
"unsponsored." Sponsored ADRs are established jointly by a depositary and the
underlying issuer, whereas unsponsored ADRs may be established by a depositary
without participation by the underlying issuer. The issuers of the stock of
unsponsored ADRs are not obligated to disclose material information in the
United States and therefore, there may not be a correlation between such
information and the market value of the ADR. Generally, ADRs in registered form
are designed for use in the U.S. securities market and ADRs in bearer form are
designed for use in securities markets outside the United States.
CONVERTIBLE SECURITIES AND WARRANTS. The Portfolio may invest in securities
such as convertible securities, preferred stock, warrants or other securities
exchangeable under certain circumstances for shares of common stock. Warrants
are instruments giving holders the right, but not the obligation, to buy shares
of a company at a given price during a specified period.
FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the purchase
or sale of an amount of a specified currency at a future date. The Portfolio may
use such contracts to protect against a decline in a foreign currency against
the U.S. dollar between the trade date and settlement date when the Portfolio
purchases or sells securities, lock in the U.S. dollar value of dividends and
interest on securities held by the Portfolio, and generally to protect the U.S.
dollar value of securities held by the Portfolio against exchange rate
fluctuation. While forward contracts may limit losses as a result of exchange
rate fluctuations, they will also limit any gains that might otherwise have been
realized. The Portfolio's Custodian may be required to place cash or liquid
securities in a segregated account in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward contracts. If
the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will be at least equal to the amount of the
Portfolio's commitments with respect to such contracts.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing net investment income. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be risks of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's
total assets.
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent practical.
Consistent with its investment policies, the Portfolio may make money market
investments pending other investment or settlement for liquidity. In addition,
the Portfolio may invest in money market instruments for temporary defensive
purposes during adverse market conditions. The money market investments
permitted for the Portfolio include: obligations of the U.S. Government and its
agencies and instrumentalities, obligations of foreign sovereignties, commercial
paper, bank obligations (including certificates of deposit), other debt
securities and repurchase agreements.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement,
11
<PAGE>
the Portfolio buys a security from a seller that has agreed to repurchase it at
a mutually agreed upon date and price, reflecting the interest rate effective
for the term of the agreement. The term of these agreements is usually from
overnight to one week and never exceeds one year. A repurchase agreement may be
viewed as a fully collateralized loan of money by the Portfolio to the seller.
The Portfolio always receives securities with a market value at least equal to
the purchase price (including accrued interest) as collateral, and this value is
maintained during the term of the agreement. If the seller defaults and the
collateral value declines, the Portfolio might incur a loss. If bankruptcy
proceedings are commenced with respect to the seller, the Portfolio's
realization upon the collateral may be delayed or limited. The Portfolio may not
enter into repurchase agreements with more than seven days to maturity if, as a
result, more than 15% of the market value of the Portfolio's net assets are
invested in these agreements and other investments for which market quotations
are not readily available or which are otherwise illiquid.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes
in economic, financial or political conditions make it advisable, each Portfolio
may, for temporary defensive purposes, invest up to 100% of its total assets in
certain short-term and medium-term debt obligations or hold cash. The short-term
and medium-term debt obligations in which a Portfolio may invest consist of (i)
obligations of the U.S. or foreign governments, their respective agencies or
instrumentalities; (ii) money market instruments; and (iii) instruments
denominated in any currency issued by international development agencies.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. In such transactions,
instruments are bought with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous yield or price at the
time of the transaction. Delivery of and payment for these securities may take
as long as a month or more after the date of the purchase commitment but will
take place no more than 120 days after the trade date. The Portfolio will
maintain with the custodian a segregated account of cash or liquid securities in
an amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time the Portfolio
enters into the commitment and no interest accrues to the Portfolio until
settlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if, among other factors, the
general level of interest rates has changed. It is a current policy of the
Portfolio not to enter into when-issued commitments exceeding in the aggregate
15% of the market value of the Portfolio's total assets less liabilities, other
than the obligations created by these commitments.
DERIVATIVE PRODUCTS (DERIVATIVES)
The Portfolio is permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but are
not limited to: futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other derivative
products yet to be developed, so long as these new products are used in a manner
consistent with the objective of the Portfolio. These derivative products may be
based upon a wide variety of underlying rates, indices, instruments, securities
and other products, such as interest rates, foreign currencies, foreign and
domestic fixed income and equity securities, groups or "baskets" of securities
and securities indices (for each derivative product, the "underlying").
Exclusive of forward foreign currency contracts and any derivative products used
for hedging purposes, the Portfolio will limit its use of derivative products to
33 1/3% of its total assets, measured by the aggregate notional amount of
outstanding derivative products.
12
<PAGE>
The Portfolio may use derivative products under a number of different
circumstances to further its investment objective. For example, the Portfolio
may purchase derivatives to gain exposure to a market quickly in response to
changes in the Portfolio's investment strategy, upon the inflow of investable
cash or when the derivative provides greater liquidity than the underlying
market. The Portfolio may also use derivatives when it is restricted from
directly owning the "underlying" or when derivatives provide a pricing advantage
or lower transaction costs. The Portfolio also may purchase combinations of
derivatives in order to gain exposure to an investment in lieu of actually
purchasing such investment. Derivatives may also be used by the Portfolio for
hedging or risk management purposes and in other circumstances when the Adviser
believes it advantageous to do so consistent with the Portfolio's investment
objective and policies. The Portfolio will not use derivatives in a manner that
creates leverage, except to the extent that the use of leverage is expressly
permitted by the Portfolio's investment policies, and then only in a manner
consistent with such policies.
The use of derivative products is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Portfolio will be less favorable than it would
have been if these investment techniques had not been used.
Some of the derivative products in which the Portfolio may invest and some
of the risks related thereto are describe in more detail below.
FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)
The Portfolio may purchase and sell futures contracts, such as futures on
securities indices, baskets of securities, foreign currencies and interest rates
of the type generally known as financial futures. These are standardized
contracts that are bought and sold on organized exchanges. A futures contract
obligates a party to buy or sell a specific amount of the "underlying," such as
for example, a particular foreign currency, on a specified future date at a
specified price or to settle the value in cash.
The Portfolio may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolio may also
use foreign currency forward contracts which are separately discussed elsewhere
in this Prospectus. See "Foreign Currency Forward Contracts" above. These
forward contracts are privately negotiated and are bought and sold in the
over-the-counter market. Like a future, a forward contract obligates a party to
buy or sell a specific amount of the underlying on a specified future date at a
specified price. The terms of the forward contract are customized. Forward
contracts, like other over-the-counter contracts that are negotiated directly
with an individual counterparty, subject the Portfolio to the risk of
counterparty default.
In some cases, the Portfolio may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolio will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolio may utilize futures contracts, forward contracts and related options
are as follows:
The Portfolio may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market exposure.
There currently are limited securities index futures and options on such futures
in many countries, particularly emerging countries. The
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nature of the strategies adopted by the Adviser, and the extent to which those
strategies are used, may depend on the development of such markets. The
Portfolio may also purchase and sell foreign currency futures to hedge its
respective holdings and commitments against changes in the level of future
currency rates or to adjust its exposure to a particular currency.
The Portfolio may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely with
changes in interest rates. The Portfolio may engage in such transactions to
hedge its holdings of debt instruments against future changes in interest rates
or for other purposes.
The Portfolio may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these contracts also rises and falls inversely with
changes in interest rates. The Portfolio may engage in financial futures and
forward contracts for both hedging and non-hedging purposes.
Gains and losses on futures contracts, forward contracts and related options
depend on the Adviser's ability to predict correctly the direction of securities
prices, interest rates and other economic factors. Other risks associated with
the use of these instruments include (i) imperfect correlation between the
change in market value of investments held by the Portfolio and the prices of
derivative products relating to investments purchased or sold by the Portfolio,
and (ii) possible lack of a liquid secondary market for a derivative product and
the resulting inability to close out a position. The risk that the Portfolio
will be unable to close out a position will be minimized by only entering into
transactions for which there appears to be a liquid exchange or secondary
market. In some strategies, the risk of loss in trading on futures and related
transactions can be substantial, due both to the low margin deposits required
and the extremely high degree of leverage involved in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the
"CFTC"), the Portfolio may, without registering with the CFTC as a Commodity
Pool Operator, enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of the Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-bona
fide hedging activities.
OPTION TRANSACTIONS
The Portfolio may seek to increase its returns or may hedge its portfolio
investments through options transactions with respect to individual securities,
indices or baskets in which the Portfolio may invest; other financial
instruments; and foreign currency. Various options may be purchased and sold on
either the exchange-traded or over-the-counter markets.
The Portfolio may purchase put and call options. Purchasing a put option
gives the Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period.
Purchasing a call option gives the Portfolio a similar right, but not the
obligation, to purchase the underlying. The purchaser pays a premium to the
seller (also known as the writer) of the option.
The Portfolio also may write put and call options on investments held in its
portfolio, as well as foreign currency options. The Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by
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writing a call option, the Portfolio will limit its opportunity to profit from
an increase in the market value of the underlying above the exercise price of
the option. By writing a put option, the Portfolio will be exposed to the amount
by which the price of the underlying is less than the strike price.
By writing an option, the Portfolio incurs an obligation either to buy (in
the case of a put option) or sell (in the case of a call option) the underlying
from the purchaser of the option at the option's exercise price, upon exercise
by the purchaser. Pursuant to guidelines established by the Board of Directors,
the Portfolio may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will continue to own (i) the underlying; (ii) securities or instruments
convertible or exchangeable without the payment of any consideration into the
underlying; or (iii) a call option on the same underlying with a strike price no
higher than the price at which the underlying was sold pursuant to a short
option position. In the case of a put option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will own another put option on the same underlying with an equal or higher
strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolio's use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by the
Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.
INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS, COLLARS AND FLOORS
Swaps are privately negotiated over-the-counter derivative products in which
two parties agree to exchange payment streams calculated in relation to a rate,
index, instrument or certain securities and a particular "notional amount." As
with many of the other derivative products available to the Portfolio, the
underlying may include an interest rate (fixed or floating), a currency exchange
rate, a commodity price index, and a security, securities index or a combination
thereof. A great deal of flexibility is possible in the way the products may be
structured, with the effect being that the parties may have exchanged amounts
equal to the return on one rate, index or group of securities for another. For
example, in a simple fixed-to-floating interest rate swap, one party makes
payments equivalent to a fixed interest rate, and the other makes payments
equivalent to a specified interest rate index. The Portfolio may engage in
simple or more complex swap transactions involving a wide variety of
underlyings. The currency swaps that the Portfolio may enter will generally
involve an agreement to pay interest streams in one currency based on a
specified index in exchange for receiving interest streams denominated in
another currency. Such swaps may involve initial and final exchanges that
correspond to the agreed upon notional amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. The Portfolio may use one or more of these products in addition to or
in lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar
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is a combination product in which the same party, such as the Portfolio, buys a
cap from and sells a floor to the other party. As with put and call options, the
amount at risk is limited for the buyer, but, if the cap or floor is not hedged
or covered, may be unlimited for the seller. Under current market practice,
caps, collars and floors between the same two parties are generally documented
under the same "master agreement." In some cases, options and forward agreements
may also be governed by the same master agreement. In the event of a default,
amounts owed under all transactions entered into under, or covered by, the same
master agreement would be netted and only a single payment would be made.
Swaps, caps, collars and floors are credit-intensive products. When the
Portfolio enters into a swap transaction it bears the risk of default, i.e.
nonpayment, by the other party. The guidelines under which the Portfolio enters
derivative transactions, along with some features of the transactions
themselves, are intended to reduce these risks to the extent reasonably
practicable, although they cannot eliminate the risks entirely. Under guidelines
established by the Board of Directors, the Portfolio may enter into swaps only
with parties that meet certain credit rating guidelines. Consistent with current
market practices, the Portfolio will generally enter into swap transactions on a
net basis, and all swap transactions with the same party will be documented
under a single master agreement to provide for net payment upon default. In
addition, the Portfolio's obligations under an agreement will be accrued daily
(offset against any amounts owing to the Portfolio) and any accrued, but unpaid,
net amounts owed to the other party to a master agreement will be covered by the
maintenance of a segregated account consisting of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, the Portfolio's risk of loss will consist of the payments
that the Portfolio is contractually entitled to receive from the other party.
This may not be true for currency swaps that require the delivery of the entire
notional amount of one designated currency in exchange for the other. If there
is a default by the other party, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction.
STRUCTURED NOTES
Structured notes are derivative securities for which the amount of principal
repayment and/or interest payments is based upon the movement of one or more
factors. These factors include, but are not limited to, currency exchange rates,
interest rates (such as the prime lending rate and LIBOR) and stock indices,
such as the S&P 500 Index. In some cases, the impact of the movements of these
factors may increase or decrease through the use of multipliers or deflators.
The Portfolio may use structured notes to tailor its investments to the specific
risks and returns the Adviser wishes to accept while avoiding or reducing
certain other risks.
INVESTMENT LIMITATIONS
The Portfolio is a diversified investment company and is therefore subject
to the following fundamental limitations: as to 75% of its total assets, the
Portfolio may not (i) invest more than 5% of its total assets in the securities
of any one issuer, except obligations of the U.S. Government, its agencies, and
instrumentalities; or
(ii) own more than 10% of the outstanding voting securities of any one issuer.
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The Portfolio also operates under certain investment restrictions that are
deemed fundamental investment limitations and may be changed only with the
approval of the holders of a majority of the Portfolio's outstanding shares and
under certain non-fundamental investment limitations that may be changed without
shareholder approval. See "Investment Limitations" in the Statement of
Additional Information."
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser and
Administrator of the Fund and each Portfolio. The Adviser provides investment
advice and portfolio management services, pursuant to an Investment Advisory
Agreement and, subject to the supervision of the Fund's Board of Directors,
makes each of the Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages each of the
Portfolio's investments. The Adviser is entitled to receive from the Portfolio
an annual management fee, payable quarterly, equal to 0.45% of the average daily
net assets of the Portfolio. The Adviser has voluntarily agreed to a reduction
in the fees payable to it and/or to reimburse the Portfolio, if necessary, if
such fees would cause total annual operating expenses of the Portfolio to exceed
0.80% of the average daily net assets of the Class A shares of the Portfolio and
1.05% of the average daily net assets of the Class B shares of the Portfolio.
The Adviser, with principal offices at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers in the
United States and abroad. Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD")
is the direct parent of the Adviser and Morgan Stanley. MSDWD is a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses -- securities, asset management and credit
services. At , 1998, the Adviser, together with its affiliated
institutional asset management companies (exclusive of Miller Anderson &
Sherrerd, LLP), managed assets of approximately $ billion. See "Management of
the Fund" in the Statement of Additional Information.
PORTFOLIO MANAGERS. NARAYAN RAMACHANDRAN AND EUGENE FLOOD JR. Narayan
Ramachandran joined the Adviser in 1996. He is a Principal of the Adviser and
Morgan Stanley and leads the quantitative equity strategies effort of the
Structured Asset Management business at the Adviser. He was previously Managing
Director at RogersCasey Associates, Inc. ("RogersCasey"), an investment
consulting and special assets advisory firm based in Darien, Connecticut. As
President of RogersCasey's investment advisory subsidiary, he was responsible
for leading the special assets advisory business with $2 billion in assets under
management. Prior to that, he was Director of Research for RogersCasey, with his
research efforts focused on quantitative investment models. He has a B.S. in
Chemical Engineering from the Indian Institute of Technology in Bombay and an
M.B.A. from the University of Michigan at Ann Arbor. Eugene Flood joined Morgan
Stanley in 1987. He is a Senior Equity Portfolio Manager of Structured Asset
Management and a Principal of the Adviser and Morgan Stanley. He has traded a
broad spectrum of instruments including equities, fixed income, foreign exchange
and commodities. Additionally, he has consulted for a variety of private sector
companies and government agencies. Prior to joining Morgan Stanley, Dr. Flood
was on the faculty of Stanford University's Graduate School of Business, where
he taught Finance. Dr. Flood received an A.B. in Economics from Harvard
University and a Ph.D. in Economics from the Massachusetts Institute of
Technology.
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ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing and
transfer agent services to the Fund. For its services under the Administration
Agreement, the Fund pays the Adviser a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current offering
price described in this Prospectus. Morgan Stanley is not obligated to sell any
certain number of shares of any Portfolio.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B
shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan,
the Distributor is entitled to receive from the Portfolio a distribution fee,
which is accrued daily and paid quarterly, of 0.25% of the Class B shares'
average daily net assets on an annualized basis. Each Plan is designed to
compensate the Distributor for its services in connection with distribution
assistance. The Distributor may retain any portion of the fee that it does not
expend in meeting its obligations to the Fund. The Distributor may compensate
financial intermediaries, plan fiduciaries and administrators for providing
distribution-related services, including account maintenance services, to
shareholders (including, where applicable, underlying beneficial owners) of
Class B shares.
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees and
printing and mailing costs) as specified in its agreements with the Adviser and
Morgan Stanley.
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PURCHASE OF SHARES
Class A shares and Class B shares of the Portfolio may be purchased at the
net asset value per share next determined after receipt by the Fund of a
purchase order. The net asset value per share of the Portfolio is calculated on
days that the New York Stock Exchange ("NYSE") and Chase (the "Custodian Bank")
are open for business as of the close of trading of the NYSE, normally 4:00 p.m.
Eastern Time (the "Pricing Time").
MINIMUM INVESTMENT
The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares of the Portfolio. These minimums may be waived at the
discretion of the Adviser for certain types of investors, including trust
departments, brokers, dealers, agents, financial planners, financial services
firms, investment advisers or various retirement and deferred compensation plans
("Financial Intermediaries"), certain accounts managed by the Adviser and its
affiliates ("Managed Accounts"), and certain employees and customers of Morgan
Stanley and its affiliates. The Fund's determination of an investor's
eligibility to purchase shares of a given class will take precedence over the
investor's selection of a class.
METHODS OF PURCHASE
Shares may be purchased directly from the Fund by Federal Funds wire, by
bank wire or by check. Investors may also invest in the Portfolio by purchasing
shares through Financial Intermediaries that have made arrangements with Morgan
Stanley. Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or because your
check does not clear, you will be responsible for any loss the Fund or its
agents incur. If you are already a shareholder, the Fund may redeem shares from
your account(s) to reimburse the Fund or its agents for any loss. In addition,
you may be prohibited or restricted from making future investments in the Fund.
FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal
Funds to the Fund's bank account. Federal Funds purchase orders will be accepted
only on a day on which the Fund and the Custodian Bank are open for business.
Your bank may charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please follow these
steps:
1. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide you
with a confirmation number.
2. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring the funds.
3. Complete and sign the Account Registration Form and mail it to the
address shown thereon.
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When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the close of the Federal Funds Wire Control Center
("FFWCC") (normally 6:00 p.m. Eastern Time), the purchase will be executed at
the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the close of the FFWCC, will be executed at the net asset value next
determined. Certain institutional investors and financial institutions have
entered into an arrangement with Morgan Stanley, pursuant to which they may
place orders prior to the Pricing Time, but make payment in Federal Funds for
those shares on the following business day.
BANK WIRE. A purchase of shares by bank wire must follow the same procedure
as for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and which bank is handling the wire, money transferred by bank
wire may or may not be converted into Federal Funds prior to the close of the
FFWCC. Prior to conversion to Federal Funds and receipt by the Fund, an
investor's money will not be invested.
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- [portfolio name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share determined on the next
business day after receipt. An investor's money will not be invested prior to
crediting of Federal Funds.
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to receive purchase and
redemption orders from underlying beneficial owners, such as retirement plan
participants, generally on each business day. Each business evening, the
Financial Intermediary aggregates all orders received from underlying beneficial
owners prior to the Pricing Time on that business day and places a net purchase
and/or redemption order(s) by the morning of the next business day. These orders
normally are executed at the net asset value that was computed for the Portfolio
as of the close of the previous business day.
ADDITIONAL INVESTMENTS. You may purchase additional shares for your account
at any time by purchasing shares at net asset value by any of the methods
described above. The minimum additional investment generally is $1,000 for the
Portfolio. The minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases directly from the
Fund, your account name, the Portfolio name and the class selected must be
specified in the letter or wire to assure proper crediting to your account.
INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES
Class A and Class B shares of the Portfolio may be subject to the
involuntary conversion and redemption features described below. The conversion
and redemption features may be waived at the discretion of the Adviser for
shares held in a Managed Account and shares purchased through a Financial
Intermediary. Accounts
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<PAGE>
that were open prior to January 2, 1996 are not subject to involuntary
conversion or redemption. The Fund reserves the right to modify or terminate the
conversion or redemption features of the shares at any time upon 60 days notice
to shareholders.
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account
containing Class A shares falls below $500,000 (but remains at or above
$100,000) because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $500,000 (but remains at or
above $100,000) for a continuous 60-day period, the Class A shares in such
account will convert to Class B shares and will be subject to the distribution
fee and other features applicable to Class B shares. The Fund will not convert
Class A shares to Class B shares based solely upon changes in the market that
reduce the net asset value of shares. Under current tax law, conversion between
share classes is not a taxable event to the shareholder.
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account
containing Class B shares increases to $500,000 or more, whether due to
shareholder purchases or market activity, the Class B shares will convert to
Class A shares. Class B shares purchased through a Financial Intermediary that
has entered into an arrangement with the Fund for the purchase of such shares
may not be converted. Under current tax law, such conversion is not a taxable
event to the shareholder. Class A shares converted from Class B shares are
subject to the same minimum account size requirements as are applicable to New
Accounts containing Class A shares described above.
INVOLUNTARY REDEMPTION OF SHARES. If the value of an account falls below
$100,000 because of shareholder redemption(s), the Fund will notify the
shareholder, and if the account value remains below $100,000 for a continuous
60-day period, the shares in such account will be subject to redemption by the
Fund. The Fund will not redeem shares based solely upon changes in the market
that reduce the net asset value of shares. If redeemed, redemption proceeds will
be promptly paid to the shareholder.
REDEMPTION OF SHARES
Class A and Class B shares of the Portfolio may be redeemed at any time and
without charge at the net asset value per share next determined after receipt by
the Fund of a redemption order as described under "Methods of Redemption."
Redemption proceeds may be more or less than the purchase price of your shares
depending on, among other factors, the market value of the investment securities
held by the Portfolio.
METHODS OF REDEMPTION
Shares may be redeemed directly from the Fund by mail or by telephone.
However, shares purchased through a Financial Intermediary must be redeemed
through a Financial Intermediary. Certain Financial Intermediaries may charge an
additional service or transaction fee.
BY MAIL. The Portfolio will redeem shares upon receipt of a redemption
request in "good order." Redemption requests may be sent by regular mail to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798 or, by overnight courier, to Morgan Stanley Institutional Fund, Inc.,
c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
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"Good order" means that the request to redeem shares must include the
following:
1. A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all
registered owners of the shares in the exact names in which they are
registered;
2. Any required signature guarantees; and
3. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.
BY TELEPHONE. If you have previously elected the Telephone Redemption
Option on the Account Registration Form, you can redeem Portfolio shares by
calling the Fund and requesting that the redemption proceeds be mailed to you or
wired to your bank. Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to receive
redemption proceeds, send a written request to the Fund at the address above.
Requests to change the bank or account must be signed by each shareholder and
each signature must be guaranteed. The telephone redemption option may be
difficult to implement at times, particularly during volatile market conditions.
If you experience difficulty in making a telephone redemption, you may redeem
shares by mail as described above.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. An investor may be
required to provide personal identification information at the time an account
is opened and prior to effecting each telephone transaction. In addition, all
telephone transaction requests will be recorded and investors may be required to
provide additional telecopied written instructions regarding transaction
requests. Neither the Fund nor the Transfer Agent will be responsible for any
loss, liability, cost or expense for following instructions received by
telephone that either of them reasonably believes to be genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial
Intermediaries have made arrangements with the Fund to accept redemption
requests from underlying beneficial owners. These redemptions may be processed
in the same way as purchases made through such Financial Intermediaries, as
described above.
FURTHER REDEMPTION INFORMATION
The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event more than seven days after
receipt of a redemption request in good order. However, payments to investors
redeeming shares which were purchased by check will not be made until payment
for the purchase has been collected, which may take up to eight days after the
date of purchase. The Fund may suspend the right of redemption or postpone the
date upon which redemptions are effected at times when the NYSE is closed, or
under any emergency conditions as determined by the Securities and Exchange
Commission (the "Commission").
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If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable rules of the Commission. Shareholders may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.
To protect your account, the Fund and its agents from fraud, signature
guarantees are required to verify the identity of the person who has authorized
certain redemptions. Please contact the Fund or see the Statement of Additional
Information for further information.
ACCOUNT POLICIES AND SERVICES
EXCHANGE FEATURES
You may exchange shares of the Portfolio that you own for shares of any
other available portfolio(s) of the Fund, subject to certain limitations. You
cannot exchange for shares of the International Equity, Emerging Markets, Small
Cap Value Equity, Balanced or Gold Portfolios because they are currently closed
to new investors. In addition, certain portfolios may be unavailable to
shareholders who purchased portfolio shares through a Financial Intermediary.
Contact your Financial Intermediary to determine which portfolios are available
for exchange.
Before you make an exchange, you should read the prospectus of the
portfolio(s) in which you seek to invest. The class of shares you receive in the
exchange will be determined in the same manner as any other purchase of shares,
including minimum initial investment and account size requirements, and will not
be based on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase. Therefore, an
exchange will be considered a taxable event for shareholders subject to tax.
Exchange transactions will be processed at the net asset value per share next
determined after receipt of the request. Shares of the portfolios may be
exchanged by mail or telephone. The telephone exchange privilege is automatic
and made available without shareholder election. The exchange privilege may be
modified or terminated by the Fund at any time upon 60-days notice to
shareholders.
BY MAIL. To exchange shares by mail, send a written exchange request to
Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts
02208-2798. Your written exchange request should include (i) the name, class of
shares and account number of your current Portfolio: (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to exchange
shares; and (iii) the signatures of all registered account holders.
BY TELEPHONE. To exchange shares by telephone, call the Fund at the phone
number provided on the cover of this Prospectus. A Fund representative will
request (i) the name, class of shares and account number of your current
Portfolio, and (ii) the name(s) and class(es) of shares of the portfolio(s) into
which you intend to exchange shares. For additional information regarding
responsibility for the authenticity of telephoned instructions, see "Redemption
of Shares" above.
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio shares to another
person by sending a written request to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798. It may
23
<PAGE>
not be possible to transfer the registration of certain shares purchased through
a Financial Intermediary. As with redemptions, the written request must be
received in "good order" before any transfer can be made. Transferring the
registration of shares may affect the eligibility of your account for a given
class of shares and may result in involuntary conversion or redemption of your
shares.
OTHER ACCOUNT INFORMATION
The Fund does not issue share certificates for the Portfolio. All shares
purchased are confirmed to you and credited to your account on the Fund's books
maintained by the Adviser or its agents. You will have the same rights and
ownership with respect to such shares as if certificates had been issued.
EXCESSIVE TRADING
Frequent trades in your account(s) can disrupt management of the Portfolio
and raise its expenses. Consequently, the Fund may, in its discretion and in the
interest of the Portfolio's shareholders and performance, bar a shareholder who
trades excessively from making further share purchases for an indefinite period.
The Fund considers excessive trading to be more than one purchase and sale
involving shares of the same class of a portfolio of the Fund within any 120-day
period. For example, the following series of transactions would amount to
excessive trading: exchanging shares of Portfolio A for shares of Portfolio B,
then exchanging shares of Portfolio B for shares of Portfolio C and then
exchanging shares of Portfolio C for shares of Portfolio A within a 120-day
period. Two types of transactions are exempt from these excessive trading
restrictions: (i) trades exclusively between money market portfolios, and (ii)
trades made in connection with an asset allocation service managed or advised by
the Adviser and/or any of its affiliates.
INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS
Morgan Stanley or its affiliates, including Morgan Stanley Asset Management
Inc., manage investment accounts for other clients, including other investment
companies, that invest in Class A or Class B shares of the portfolios. From time
to time, one or more of the portfolios used for investment by these accounts may
experience relatively large investments or redemptions due to investment
decisions made on behalf of these accounts. These transactions will affect the
portfolios, since portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional cash will have
to invest it in additional portfolio securities. It is impossible to predict the
overall impact of these transactions over time, however, there could be adverse
effects on portfolio management. These transactions also could have tax
consequences if sales of portfolio securities result in gains or could increase
transaction costs. The Adviser, representing the interests of the portfolios, is
committed to minimizing the impact of these transactions to the portfolios. The
Adviser, however, will have a conflict in fulfilling this responsibility in that
it also advises these investment accounts. The Adviser will monitor the impact
of these transactions on the portfolio.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less any liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share is determined as of the close of the NYSE
(normally 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business. Price information on listed securities is taken from the exchange
where the security is primarily traded. Securities listed on a U.S. securities
24
<PAGE>
exchange for which market quotations are available are valued at the last quoted
sale price on the day the valuation is made. Unlisted securities and listed
securities not traded on the valuation date and for which market quotations are
not readily available are valued at a price within a range not exceeding the
current asked price nor less than the current bid price. The current bid and
asked prices are determined based on the average of the bid and asked prices
quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such 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. Securities
not priced in this manner are valued at the most recently quoted bid price or,
when securities exchange valuations are used, at the latest quoted sale price on
the day of valuation. If there is no such reported sale, the latest quoted bid
price will be used. Securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. In the event
that amortized cost does not approximate market value, market prices as
determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted securities) and those securities for
which it is inappropriate to determine prices in accordance with the above-
stated procedure are determined in good faith at fair value using methods
determined by the Board of Directors. For purposes of calculating net asset
value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid and asked
price of such currencies against the U.S. dollar last quoted by any major bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense differential among the classes. The net asset
value of Class B shares will generally be lower than the net asset value of the
Class A shares as a result of the distribution expense charged to Class B
shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.
The Portfolio may advertise"total return" which shows what an investment in
a class of the Portfolio would have earned over a specified period of time (such
as one, five or ten years), assuming that all distributions and dividends by the
Portfolio were reinvested in the same class on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes that may be payable on dividends and distributions or on redemption. The
Fund may also include comparative performance information in advertising or
marketing the Portfolio's shares, including data from Lipper Analytical
Services, Inc., other industry publications, business periodicals, rating
services and market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
25
<PAGE>
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
when, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
elects to receive income dividends and capital gains distributions in cash.
The Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual dividends. Net realized capital gains,
if any, after reduction for any available tax loss carryforwards will also be
distributed annually.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
The Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, the excess of net short-term
capital gain over net long-term capital loss) to shareholders. Dividends from
the Portfolio's net investment income are taxable to shareholders as ordinary
income, whether received in cash or in additional shares. Such dividends paid by
the Portfolio will generally qualify for the dividends-received deduction for
corporate shareholders to the extent of qualifying dividend income received by
the Portfolio from U.S. corporations. The Portfolio will report annually to its
shareholders the amount of dividend income qualifying for such treatment.
Distributions of net capital gains are taxable to shareholders as a 20% rate
gain distribution (taxed at a rate of 20%) or a 28% rate gain distribution
(taxed at a rate of 28%), depending upon the designation by the Portfolio (such
designation being dependent upon the holding period of the Portfolio in the
underlying asset generating
26
<PAGE>
the net capital gain), regardless of how long the shareholder has held the
Portfolio's shares. The Portfolio will send reports annually to shareholders of
the federal income tax status of all distributions made during the preceding
year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss, including any available capital loss carryforwards), prior to the end of
each calendar year to avoid liability for federal excise tax.
Dividends and other distributions declared by the Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by the Portfolio and received by
the shareholders in that year if the distributions are paid by the Portfolio at
any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (i) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) who has not certified to the Fund that such
shareholder is not subject to backup withholding. This backup withholding is not
an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, redemption or exchange of shares will result in taxable gain or
loss to the selling, redeeming or exchanging shareholder, depending upon whether
the fair market value of the sale, redemption or exchange proceeds exceed or is
less than the shareholder's adjusted tax basis in the sold, redeemed or
exchanged shares. If capital gains distributions have been made with respect to
shares that are sold at a loss after being held for six months or less, then the
loss is treated as a long-term capital loss to the extent of the capital gains
distributions.
Conversions of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio,
which may differ from the federal income tax consequences described above.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
27
<PAGE>
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 40 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of each
portfolio are currently classified into two classes, the Class A shares and the
Class B shares, except for the International Small Cap, Money Market and
Municipal Money Market Portfolios, which offer only Class A shares.
The shares of the Portfolio, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no pre-emptive rights. The shares of the Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of the Portfolio may be presumed to "control" (as that term
is defined in the 1940 Act) the Portfolio. Under Maryland law, the Fund is not
required to hold an annual meeting of its shareholders unless required to do so
under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual reports. The
financial statements appearing in annual reports are audited by independent
accountants. Monthly unaudited portfolio data is also available from the Fund
upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's Custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the
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<PAGE>
Adviser and the Distributor, acts as the Fund's custodian for assets held
outside the United States and employs subcustodians approved by the Board of
Directors of the Fund in accordance with regulations of the Commission for the
purpose of providing custodial services for such assets. MSTC may also hold
certain domestic assets for the Fund. For more information on the custodians,
see "General Information -- Custody Arrangements" in the Statement of Additional
Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits its annual financial statements.
LITIGATION
The Fund is not involved in any litigation.
29
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
U.S. EQUITY PLUS PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
If you need assistance in filling out this form for the
ACCOUNT INFORMATION Morgan Stanley Institutional Fund, Inc., please contact your
Fill in where applicable Morgan Stanley representative or call us toll free
1-800-548-7786. Please print all items except signature, and
mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF
SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First Name Initial Last Name
2.
First Name Initial Last Name
First Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund
for additional documents
that may be required to
set up account and to
authorize transactions.
</TABLE>
3.
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<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in
completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
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<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number.
NUMBER
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF
SURVIVORSHIP PRESUMED
UNLESS
TENANCY IN COMMON
IS INDICATED)
For Custodian account
of a minor (Uniform
Gifts/Transfers to Minor
Acts), give the Social
Security Number of
the minor.
OR
1. TAXPAYER SOCIAL SECURITY NUMBER
IDENTIFICATION NUMBER ("SSN")
("TIN")
OR
2. TIN SSN
OR
TIN SSN
IMPORTANT TAX INFORMATION
You (as a payee) are required by law to provide us (as payer)
with your correct TIN(s) or SSN(s). Accounts that have a
missing or incorrect TIN(s) or SSN(s) will be subject to
backup withholding at a 31% rate on dividends, distributions
and other payments. If you have not provided us with your
correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability
of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding
under Section 3406(a)(1)(C) of the Internal Revenue Code
because you have underreported interest or dividends or you
were required to, but failed to, file a return which would
have included a reportable interest or dividend payment.
</TABLE>
<PAGE>
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<C> <S> <C> <C>
D) PORTFOLIO AND For Purchase of the following
CLASS SECTION Portfolio(s): / / Class A Shares
(Class A shares minimum U.S. Equity Plus Portfolio $ / / Class B Shares $
$500,000 and Class B Total Initial Investment
shares minimum $100,000). $
Please indicate class and
amount.
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate portfolio
and manner of payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--PORTFOLIO NAME)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
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<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
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<C> <S> <C> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone Name of COMMERCIAL Bank (Not Savings
AND EXCHANGE requests to wire redemption proceeds to Bank)
OPTION the commercial bank indicated at right Bank Account No.
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests Bank
shares by telephone. A are believed to be authentic. ABA
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent No.
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated Name(s) in which your Bank Account is
YOUR FUND ACCOUNT. by telephone are genuine. These Established
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal Bank's Street
NOT BE HONORED UNLESS THE BOX identification information at the time Address
IS CHECKED. an account is opened and prior to
effecting each transaction requested by City State Zip
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
</TABLE>
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<C> <S> <C>
H) INTERESTED PARTY
OPTION Name
In addition to the
account statement sent to
my/our registered Address
address, I/we hereby
authorize the Fund to City State Zip Code
mail duplicate statements
to the name and address
provided at right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative
No. Branch
No.
</TABLE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity to purchase and redeem shares
of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley
Institutional Fund, Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF PERJURY THAT THE INFORMATION ON
THIS APPLICATION IS COMPLETE AND CORRECT AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE
BOXES BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM IS/ARE THE CORRECT SSN(S) OR
TIN(S) AND (2) I/WE ARE NOT SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE
SERVICE ("IRS") THAT I/WE ARE SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED ME/US THAT I AM/WE ARE NO
LONGER SUBJECT TO BACKUP WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE HAVE APPLIED, OR INTEND TO APPLY,
TO THE IRS OR THE SOCIAL SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE UNDERSTAND
THAT IF I/WE DO NOT PROVIDE EITHER NUMBER TO CHASE GLOBAL FUNDS SERVICES COMPANY ("CGFSC")
WITHIN 60 DAYS OF THE DATE OF THIS APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR CORRECT
SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP WITHHOLDING ON
DISTRIBUTIONS AND REDEMPTION PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU
MAY REQUEST SUCH FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S. CITIZENS OR RESIDENTS AND I/WE ARE
EXEMPT FOREIGN PERSONS AS DEFINED BY THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER
THAN THE CERTIFICATIONS REQUIRED TO AVOID BACKUP WITHHOLDING.
(X) (X)
Signature Date Signature (if joint account, both must sign) Date
</TABLE>
<PAGE>
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- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Fund Expenses..................................... 2
Prospectus Summary................................ 6
Investment Objective and Policies................. 10
Additional Investment Information................. 10
Investment Limitations............................ 16
Management of the Fund............................ 17
Purchase of Shares................................ 19
Redemption of Shares.............................. 21
Account Policies and Services..................... 23
Valuation of Shares............................... 24
Performance Information........................... 25
Dividends and Capital Gains Distributions......... 26
Taxes............................................. 26
Portfolio Transactions............................ 27
General Information............................... 28
Account Registration Form
</TABLE>
U.S. EQUITY PLUS PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
INCORPORATED
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
-------------------------------------------------------------------------
MICROCAP PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY INSTITUTIONAL FUND, INC.
P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798
FOR INFORMATION CALL 1-800-548-7786
----------------
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load,
open-end management investment company, or mutual fund, which offers
redeemable shares in a series of diversified and non-diversified
investment portfolios ("portfolios"). The Fund is designed to
provide clients with attractive alternatives for meeting their investment
needs. The Fund currently consists of thirty-two portfolios representing a
broad range of investment choices. This prospectus (the "Prospectus")
pertains to the Class A and the Class B shares of the MicroCap Portfolio
(the "Portfolio"). Shares of the Portfolio are offered with no sales charge,
exchange fee or redemption fee. The MicroCap Portfolio currently is not
being offered.
The Fund is designed to meet the investment needs of discerning
investors who place a premium on quality and personal service. With Morgan
Stanley Asset Management Inc. as Adviser and Administrator (the
"Adviser" and the "Administrator"), and with Morgan Stanley & Co.
Incorporated ("Morgan Stanley") as Distributor, the Fund makes available to
institutional investors and high net worth individual investors a series
of portfolios which benefit from the investment expertise and commitment
to excellence associated with Morgan Stanley and its affiliates.
This Prospectus is designed to set forth concisely the information about
the Fund that a prospective investor should know before investing and it
should be retained for future reference. The Fund offers additional
portfolios which are described in other prospectuses and under "Prospectus
Summary" below. The Fund currently offers the following portfolios: (i)
GLOBAL AND INTERNATIONAL EQUITY -- Active Country Allocation, Asian Equity,
Asian Real Estate, Emerging Markets, European Equity, European Real Estate,
Global Equity, Gold, International Equity, International Magnum,
International Small Cap, Japanese Equity and Latin American Portfolios;
(ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth,
Small Cap Value Equity, Technology, U.S. Equity Plus, U.S. Real Estate and
Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced Portfolio;
(iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed
Income, High Yield and Municipal Bond Portfolios; and (v) MONEY MARKET --
Money Market and Municipal Money Market Portfolios. Additional information
about the Fund is contained in a "Statement of Additional
Information" dated May 1, 1998, which is incorporated herein by reference.
The Statement of Additional Information and the prospectuses pertaining to
the other portfolios of the Fund are available upon request and without
charge by writing or calling the Fund at the address and telephone number set
forth above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Portfolio will incur:
<TABLE>
<CAPTION>
MICROCAP
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO
- ------------------------------------------------------- -----------
<S> <C>
Maximum Sales Load Imposed on Purchases
Class A.............................................. None
Class B.............................................. None
Maximum Sales Load Imposed on Reinvested Dividends
Class A.............................................. None
Class B.............................................. None
Deferred Sales Load
Class A.............................................. None
Class B.............................................. None
Redemption Fees
Class A.............................................. None
Class B.............................................. None
Exchange Fees
Class A.............................................. None
Class B.............................................. None
</TABLE>
<TABLE>
<CAPTION>
MICROCAP
ANNUAL FUND OPERATING EXPENSES PORTFOLIO
- ------------------------------------------------------- -----------
<S> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee (Net of Fee Waivers)*
Class A.............................................. 1.05%+
Class B.............................................. 1.05%+
12b-1 Fees
Class A.............................................. None
Class B.............................................. 0.25%
Other Expenses
Class A.............................................. 0.45%+
Class B.............................................. 0.45%+
-----------
Total Operating Expenses (Net of Fee Waivers)*
Class A.............................................. 1.50%+
Class B.............................................. 1.75%+
-----------
-----------
</TABLE>
- ------------------------
+ Estimated
* The Adviser has agreed to waive its management fees and/or reimburse the
Portfolio, if necessary, if such fees would cause the total annual operating
expenses of the Portfolio to exceed a specified percentage of its average
daily net assets. These reductions will become effective as of the
inception of the Portfolio. As a result of these reductions, the Management
Fee stated above is lower than the contractual fee stated under "Management
of the Fund." The Adviser reserves the right to terminate its fee
2
<PAGE>
waivers and/or expense reimbursements at any time in its sole discretion. For
further information on Fund expenses, see "Management of the Fund." Set forth
below are the management fees and total operating expenses absent such
fee waivers and/or expense reimbursements as a percent of average daily net
assets of the Class A shares and Class B shares, respectively, of the
Portfolio.
<TABLE>
<CAPTION>
TOTAL OPERATING EXPENSES
ABSENT FEE WAIVERS
MANAGEMENT FEES ABSENT ------------------------
PORTFOLIO FEE WAIVERS CLASS A CLASS B
- ------------------------------------------------------------ ------------------------- ----------- -----------
<S> <C> <C> <C>
MicroCap.................................................... 1.25% 1.50%+ 1.75%+
</TABLE>
- ------------------------------
+ Estimated.
The purpose of the table above is to assist the investor in
understanding the various expenses that an investor in the Portfolio will
bear directly or indirectly. The expenses and fees for the MicroCap
Portfolio are based on estimates, assuming that the average daily net assets
of the MicroCap Portfolio will be $50,000,000. Due to the continuous nature
of Rule 12b-1 fees, long-term Class B shareholders may pay more than the
equivalent of the maximum front-end charges otherwise permitted by the
National Association of Securities Dealers, Inc. ("NASD") Conduct Rules.
3
<PAGE>
The following example illustrates the expenses that you would pay on
a $1,000 investment assuming (i) a 5% annual rate of return and (ii)
redemption at the end of each time period. As noted in the table above, the
Portfolio charges no redemption fees of any kind. The example is based on
total operating expenses of the Portfolio after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
MicroCap Portfolio*
Class A.......................................................... $ 15 $ 47 * *
Class B.......................................................... 18 55 * *
</TABLE>
- ------------------------------
* Because the MicroCap Portfolio has not yet commenced operations the Fund has
not projected expenses beyond the 3-year period shown for the Portfolio.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
4
<PAGE>
FINANCIAL HIGHLIGHTS
Financial highlights are not available for the MicroCap Portfolio as it has
not yet commenced operations.
5
<PAGE>
PROSPECTUS SUMMARY
THE FUND
The Fund consists of thirty-two portfolios, offering institutional
investors and high net worth individual investors a broad range of investment
choices coupled with the advantages of a no-load mutual fund with Morgan
Stanley and its affiliates providing customized services as Adviser,
Administrator and Distributor. Each portfolio offers Class A shares and
Class B shares except the International Small Cap and Municipal Money Market
Portfolios which offer only Class A shares. Each portfolio has its own
investment objective and policies designed to meet its specific goals. The
investment objective of the Portfolio described in this Prospectus is as
follows:
- The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
The other portfolios of the Fund are described in other Prospectuses which
may be obtained from the Fund at the address and phone number noted on the cover
page of this Prospectus. The investment objectives of these other portfolios are
listed below:
GLOBAL AND INTERNATIONAL EQUITY:
- The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined
by the Adviser in equity securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices.
- The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
- The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital
appreciation by investing primarily in equity securities of companies in
the Asian real estate industry.
- The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of issuers in The People's
Republic of China, Hong Kong and Taiwan.
- The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of emerging country issuers.
- The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
- The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and
long-term capital appreciation by investing primarily in equity
securities in the European real estate industry.
- The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers throughout the world,
including U.S. issuers.
- The GOLD PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of foreign and domestic issuers engaged in
gold-related activities.
- The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
6
<PAGE>
- The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
- The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers with
equity market capitalizations of less than $1 billion.
- The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
- The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of Latin American issuers and,
from time to time, debt securities issued or guaranteed by Latin American
governments or governmental entities.
U.S. EQUITY:
- The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
- The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small- to
medium-sized corporations.
- The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing in growth-oriented equity securities of medium and large
capitalization companies.
- The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in equity securities of small- to medium-sized companies
which the Adviser believes to be undervalued.
- The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of the
Adviser, are expected to benefit from their involvement in
technology and technology-related industries.
- The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of issuers included in the
Standard & Poor's 500 Index ("S&P 500").
- 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
substantial investment in real estate investment trusts.
- The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which the Adviser believes to be undervalued relative to the
stock market in general at the time of purchase.
EQUITY AND FIXED INCOME:
- The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of equity securities which the Adviser
believes to be undervalued and fixed income securities.
FIXED INCOME:
- The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and
corporate issuers located in emerging countries.
- The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent
with the preservation of capital by investing in a diversified portfolio
of fixed income securities.
- The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate
of return while preserving capital by investing in fixed income securities
of issuers throughout the world, including U.S. issuers.
- 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 of the recognized rating services.
- The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level
of current income as is consistent with the preservation of capital by
investing primarily in a variety of investment grade mortgage-backed
securities.
7
<PAGE>
- The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current
income consistent with preservation of principal by investing in
municipal obligations, the interest on which is exempt from federal income
tax.
MONEY MARKET:
- The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve
capital while maintaining high levels of liquidity through investing in
high quality money market instruments with remaining maturities of one
year or less.
- The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt
income and preserve capital while maintaining high levels of liquidity
through investing in high quality money market instruments with remaining
maturities of one year or less which are exempt from federal income tax.
THE CHINA GROWTH, MICROCAP AND MORTGAGE-BACKED SECURITIES PORTFOLIOS ARE
CURRENTLY NOT BEING OFFERED.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., acts as investment adviser to the Fund
and each of its portfolios. As of ______, 1998, Morgan Stanley Asset
Management Inc. and its affiliated institutional asset management companies
(exclusive of Miller Anderson & Sherrerd, LLP.) managed assets of approximately
$____ billion. See "Management of the Fund -- Investment Adviser" and
"Management of the Fund -- Administrator."
HOW TO INVEST
Class A shares of the Portfolio are offered directly to investors at net
asset value with no sales commission or 12b-1 charges. Class B shares of the
Portfolio are offered at net asset value with no sales commission, but
with a 12b-1 fee, which is accrued daily and paid quarterly, equal to
0.25% of the Class B shares' average daily net assets on an annualized
basis. The minimum initial investment, generally, is $500,000 for
Class A shares of the Portfolio and $100,000 for Class B shares of
the Portfolio. The minimum initial investment amount is reduced for
certain categories of investors. For additional information on how
to purchase shares and minimum initial investments, see "Purchase
of Shares."
HOW TO REDEEM
Class A shares or Class B shares of the Portfolio may be redeemed at any
time, without cost, at the net asset value per share of shares of the
applicable class next determined after receipt of the redemption request.
The redemption price may be more or less than the purchase price. Certain
redemptions that cause the value of an account to remain for a continuous
60-day period below the minimum investment amount for Class A shares or
for Class B shares may result in involuntary redemption or automatic
conversion. For additional information on how to redeem shares and
involuntary redemption or conversion, see "Purchase of Shares"
and "Redemption of Shares."
RISK FACTORS
Investing in the Portfolio entails certain risks and considerations of which
an investor should be aware. The Portfolio's share price and investment
returns fluctuate and, when redeemed, an investment in the Portfolio may be
worth more or less than its original cost. The investment policies of the
Portfolio may entail the following risk factors:
8
<PAGE>
- EQUITY SECURITIES. The Portfolio may invest in equity securities.
Prices of equity securities fluctuate in response to many factors,
including the financial health of the issuers and changes in economic
and market conditions.
- FOREIGN INVESTMENT. The Portfolio may invest in the securities of
foreign issuers. The risks of foreign investment include fluctuations
in foreign currency values, political events affecting the country of
issuance and potentially greater market volatility and lower liquidity.
- DERIVATIVES. The Portfolio may invest in instruments that derive
their values from those of specified securities, indices, currencies
or other points of reference. These derivatives, including those used
to manage risk, are themselves subject to the risks of the different
markets in which they are traded and, therefore, may or may not serve
their intended purposes.
For additional information about risk factors, see also
"Investment Objectives and Policies" and "Additional Investment
Information."
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is described below, together with
the policies the Portfolio will employ in its efforts to achieve its objective.
The Portfolio's investment objective is a fundamental policy which may not be
changed without the approval of a majority of the Portfolio's outstanding voting
securities. There is no assurance that the Portfolio will attain its
objective. In addition to the investments and strategies described below, the
Portfolio may invest in certain securities and obligations as set forth in
"Additional Investment Information" below and as described under "Investment
Objectives and Policies" in the Statement of Additional Information. The
investment policies described below are not fundamental policies unless
otherwise noted and may be changed without shareholder approval.
THE MICROCAP PORTFOLIO
The Portfolio's investment objective is to provide long-term capital
appreciation by investing primarily in growth-oriented equity securities of
small domestic corporations and, to a limited extent as described below, foreign
corporations. The production of any current income is incidental to this
objective. Such companies generally have, at time of purchase, annual gross
revenues of $150 million or less or market capitalizations of $250 million or
less. With respect to the Portfolio, equity securities include common and
preferred stocks, convertible securities, rights and warrants to purchase common
stocks, and any similar equity interest, such as trust or partnership interests.
Such equity securities may or may not pay dividends or distributions and may or
may not carry voting rights.
The Adviser employs a flexible investment program in pursuit of the
Portfolio's investment objective. The Portfolio is not restricted to investments
in specific market sectors. The Portfolio will invest in equity securities,
including securities purchased in initial public offerings, of small companies
that are early in their life cycle, but which, in the Adviser's judgement, have
the potential to achieve long-term capital appreciation. The Adviser uses its
judgment and research capabilities to assess economic, industry, market and
company developments to select investments in promising companies that are
expected to benefit from new technology or new products or services. In
addition, the Adviser looks for special developments, such as research
discoveries, changes in customer demand, rejuvenated management or basic changes
in the economic environment. These situations are only illustrative of the types
of investments the Portfolio may make. The Portfolio is free to invest in any
equity security which in the Adviser's judgment provides above-average potential
for capital appreciation.
The Portfolio intends to manage its investments actively to accomplish its
investment objective. Since the Portfolio has a long-term investment
perspective, the Adviser does not intend to respond to short-term market
fluctuations or to acquire securities for the purpose of short-term trading;
however, the Adviser may take advantage of short-term opportunities that are
consistent with its objective.
The Portfolio may invest up to 25% of its total assets at the time of
purchase in securities of foreign companies. The Portfolio may invest in such
securities of foreign issuers directly or in the form of Depositary Receipts.
The Portfolio may enter into foreign currency forward contracts which provide
for the purchase or sale of foreign currencies in connection with the settlement
of foreign securities transactions or to hedge the underlying currency exposure
related to foreign investments. The Portfolio will not enter into these
commitments for speculative purposes. Investors should recognize that investing
in foreign companies involves certain special considerations which are not
typically associated with investing in U.S. companies.
The Portfolio may invest in convertible securities of domestic and,
subject to the above restrictions, foreign issuers on occasions when, due to
market conditions, it is more advantageous to purchase such securities than
to purchase common stock. The Portfolio will not invest in debt securities
that are not rated at least investment grade by either S&P or Moody's. Since
the Portfolio invests in both common stocks and convertible securities, the
risks of investing in the general equity markets may be tempered to a degree
by the Portfolio's investments in convertible securities, which are often not
as volatile as equity securities.
10
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
CONVERTIBLE SECURITIES AND WARRANTS. The Portfolio may invest in
securities such as convertible securities, preferred stock, warrants or other
securities exchangeable under certain circumstances for shares of common
stock. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.
DEPOSITARY RECEIPTS. The Portfolio may invest in Depositary Receipts,
including American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") and other Depositary Receipts
(which, together with ADRs, GDRs and EDRs, are hereinafter collectively
referred to as "Depositary Receipts"), to the extent that such Depositary
Receipts are or become available. ADRs are securities, typically issued by a
U.S. financial institution (a "depositary"), that evidence ownership
interests in a security or a pool of securities issued by a foreign issuer
(the "underlying issuer") and deposited with the depositary. ADRs may be
"sponsored" or "unsponsored." Sponsored ADRs are established jointly by a
depositary and the underlying issuer, whereas unsponsored ADRs may be
established by a depositary without participation by the underlying issuer.
The issuers of the stock of unsponsored ADRs are not obligated to disclose
material information in the United States and therefore, there may not be a
correlation between such information and the market value of the ADR. GDRs,
EDRs and other types of Depositary Receipts are typically issued by foreign
depositaries, although they may also be issued by U.S. depositaries, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States. The Portfolio may invest in sponsored and
unsponsored Depositary Receipts. For purposes of the Portfolio's investment
policies, the Portfolio's investments in Depositary Receipts will be deemed
to be investments in the underlying securities.
FIXED INCOME SECURTIES. The Portfolio will invest in fixed income (debt)
securities. The market value of the fixed income securities in which the
Portfolio invests will be affected by changes in the creditworthiness of
issuers and will change in response to interest rate changes and other
factors. Generally, the values of fixed income securities vary inversely with
changes in interest rates, so that during periods of falling interest rates,
the values of outstanding fixed income securities generally rise and during
periods of rising interest rates, the values of such securities generally
decline. While securities with longer maturities tend to produce higher
yields, the prices of longer maturity securities are subject to greater
market fluctuations as a result of changes in interest rates.
FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolio may enter into foreign
currency forward contracts ("forward contracts") that provide for the
purchase or sale of an amount of a specified currency at a future date. The
Portfolio may use such contracts to protect against a decline in a foreign
currency against the U.S. dollar between the trade date and settlement date
when the Portfolio purchases or sells securities, lock in the U.S. dollar
value of dividends and interest on securities held by the Portfolio, and
generally to protect the U.S. dollar value of securities held by the
Portfolio against exchange rate fluctuation. While forward contracts may
limit losses as a result of exchange rate fluctuations, they will also limit
any gains that might otherwise have been realized. The Portfolio's Custodian
may be required to place cash or liquid securities in a segregated account in
an amount equal to the value of the Portfolio's total assets committed to the
consummation of forward contracts.
11
<PAGE>
If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis
so that the value of the account will be at least equal to the amount of the
Portfolio's commitments with respect to such contracts.
FOREIGN INVESTMENT. The Portfolio may invest in the securities of
foreign issuers. Investment in securities of foreign issuers involves
investment risks somewhat different from those affecting securities of U.S.
issuers. The Portfolio's investments will be subject to political and
economic events that affect the countries in which it invests. Foreign
issuers may be subject to different accounting, auditing and financial
standards and requirements. There also may be less government supervision and
regulation of foreign securities exchanges, brokers and listed companies than
in the United States. Many foreign securities markets have substantially less
trading volume than U.S. national securites exchanges and therefore,
securities of some foreign issuers are less liquid and more volatile than
securites of comparable U.S. issuers. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than
in the United States. Dividends and interest paid by foreign issuers may be
subject to withholding and other foreign taxes, which may decrease the net
return on foreign investments as compared to dividends and interest paid to
the Portfolio by domestic companies. Investments in securities of foreign
issuers are generally denominated in foreign currencies and, since the
Portfolio may temporarily hold uninvested reserves in bank deposits in
foreign currencies, the value of the Portfolio's assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency
exchange rates and exchange control regulations, and the Portfolio may incur
costs in connection with conversions between various currencies.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions
for the purpose of increasing net investment income. These loans must be
secured continuously by cash or equivalent collateral, or by a letter of
credit at least equal to the market value of the securities loaned plus
accrued interest or income. There may be a risk of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of
the securities fail financially. The Portfolio will not enter into securities
loan transactions exceeding, in the aggregate, 33 1/3% of the market value of
its total assets.
12
<PAGE>
MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money
market instruments, although the Portfolio intends to stay invested in
securities satisfying its primary investment objective to the extent
practical. Consistent with its investment policies, the Portfolio may make
money market investments pending other investment or settlement for
liquidity. In addition, the Portfolio may invest in money market instruments
for temporary, defensive purposes during adverse market conditions. The money
market investments permitted for the Portfolio include obligations of the
U.S. Government and its agencies and instrumentalities, commercial paper,
bank obligations (including certificates of deposit), other debt securities
and repurchase agreements.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines established by
the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week,
and never exceeds one year. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities, with a market value at least equal to the purchase
price (including accrued interest) as collateral and this value is maintained
during the term of the agreement. If the seller defaults and the collateral
value declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
collateral may be delayed or limited. The Portfolio may not enter into
repurchase agreements with more than seven days to maturity if, as a result,
more than 15% of the market value of the Portfolio's net assets are invested in
these agreements and other investments for which market quotations are not
readily available or which are otherwise illiquid.
13
<PAGE>
SMALL COMPANIES. Because the Portfolio seeks long-term
capital appreciation by investing primarily in small companies, companies that
are more vulnerable to financial and other risks than larger, more
established companies, investment in the Portfolio may involve a higher
degree of risk and price volatility than the general equity markets.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes
changes in economic, financial or political conditions make it advisable, the
Portfolio may, for temporary defensive purposes, invest up to 100% of its
total assets in certain short-term and medium-term debt obligations or hold
cash. The short-term and medium-term debt obligations in which the Portfolio
may invest consist of (i) obligations of the U.S. or foreign governments,
their respective agencies or instrumentalities; (ii) money market
instruments; and (iii) instruments denominated in any currency issued by
international development agencies.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may
purchase securities on a when-issued or delayed delivery basis. In such
transactions, instruments are bought with payment and delivery taking place
in the future in order to secure what is considered to be an advantageous
yield or price at the time of the transaction. Delivery of and payment for
these securities may take as long as a month or more after the date of the
purchase commitment, but will take place no more than 120 days after the
trade date. The Portfolio will maintain with the Custodian a segregated
account of cash or liquid securities in an amount at least equal to
these commitments. The payment obligation and the interest rates that
will be received are each fixed at the time the Portfolio enters into
the commitment and no interest accrues to the Portfolio until settlement.
Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if the general level of
interest rates has changed. It is a current policy of the Portfolios not
to enter into when-issued commitments exceeding in the aggregate 15%
of the Portfolio's net assets other than the obligations created by these
commitments.
14
<PAGE>
DERIVATIVE PRODUCTS (DERIVATIVES)
The Portfolio is permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but
are not limited to: futures contracts ("futures"); forward contracts
("forwards"); options; swaps, caps, collars and floors; structured notes; and
other derivative products yet to be developed, so long as these new products
are used in a manner consistent with the objective of the Portfolio. These
derivative products may be based upon a wide variety of underlying rates,
indices, instruments, securities and other products, such as interest rates,
foreign currencies, foreign and domestic fixed income and equity securities,
groups or "baskets" of securities and securities indices (for each derivative
product, the "underlying"). Exclusive of forward foreign currency contracts
and any derivative products used for hedging purposes, the Portfolio will
limit its use of derivative products to 33 1/3% of its total assets, measured
by the aggregate notional amount of outstanding derivative products.
The Portfolio may use derivative products under a number of different
circumstances to further its investment objective. For example, the
Portfolio may purchase derivatives to gain exposure to a market quickly in
response to changes in the Portfolio's investment strategy, upon the inflow
of investable cash or when the derivative provides greater liquidity than the
underlying market. The Portfolio may also use derivatives when it is
restricted from directly owning the "underlying" or when derivatives provide
a pricing advantage or lower transaction costs. The Portfolio also may
purchase combinations of derivatives in order to gain exposure to an
investment in lieu of actually purchasing such investment. Derivatives may
also be used by the Portfolio for hedging or risk management purposes and in
other circumstances when the Adviser believes it advantageous to do so
consistent with the Portfolio's investment objective and policies. The
Portfolio will not use derivatives in a manner that creates leverage, except
to the extent that the use of leverage is expressly permitted by the
Portfolio's investment policies, and then only in a manner consistent with
such policies.
The use of derivative products is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Portfolio will be less favorable than it would
have been if these investment techniques had not been used.
Some of the derivative products in which the Portfolio may invest and
some of the risks related thereto are described in more detail below.
FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS)
The Portfolio may purchase and sell futures contracts, such as futures
on securities indices, baskets of securities, foreign currencies and interest
rates of the type generally known as
15
<PAGE>
financial futures. These are standardized contracts that are bought and sold
on organized exchanges. A futures contract obligates a party to buy or sell
a specific amount of the "underlying," such as for example, a particular
foreign currency, on a specified future date at a specified price or to
settle the value in cash.
The Portfolio may also purchase and sell forward contracts, such as
forward rate agreements and other financial forward contracts. The Portfolio
may also use foreign currency forward contracts which are separately
discussed elsewhere in this Prospectus. See "Foreign Currency Forward
Contracts" above. These forward contracts are privately negotiated and are
bought and sold in the over-the-counter market. Like a future, a forward
contract obligates a party to buy or sell a specific amount of the underlying
on a specified future date at a specified price. The terms of the forward
contract are customized. Forward contracts, like other over-the-counter
contracts that are negotiated directly with an individual counterparty,
subject the Portfolio to the risk of counterparty default.
In some cases, the Portfolio may be able to use either futures
contracts, forward contracts or exchange-traded or over-the-counter options
to accomplish similar purposes. In all cases, the Portfolio will use these
products only as permitted by applicable laws and regulations. Some of the
ways in which the Portfolio may utilize futures contracts, forward contracts
and related options are as follows:
The Portfolio may sell securities index futures contracts and/or index
options thereon in anticipation of or during a market decline to attempt to
offset the decrease in market value of investments in its portfolio, or may
purchase securities index futures or options in order to gain market
exposure. There currently are limited securities index futures and options
on such futures in many countries, particularly emerging countries. The
nature of the strategies adopted by the Adviser, and the extent to which
those strategies are used, may depend on the development of such markets.
The Portfolio may also purchase and sell foreign currency futures to hedge
its respective holdings and commitments against changes in the level of
future currency rates or to adjust its exposure to a particular currency.
The Portfolio may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely
with changes in interest rates. The Portfolio may engage in such
transactions to hedge its holdings of debt instruments against future changes
in interest rates or for other purposes.
The Portfolio may also purchase or sell futures and forwards on other
financial instruments, such as U.S. Government securities and certificates of
deposit. The value of these contracts also rises and falls inversely with
changes in interest rates. The Portfolio may engage in financial futures and
forward contracts for both hedging and non-hedging purposes.
Gains and losses on futures contracts, forward contracts and related
options depend on the Adviser's ability to predict correctly the direction of
securities prices, interest rates and other
16
<PAGE>
economic factors. Other risks associated with the use of these instruments
include (i) imperfect correlation between the change in market value of
investments held by the Portfolio and the prices of derivative products
relating to investments purchased or sold by the Portfolio, and (ii) possible
lack of a liquid secondary market for a derivative product and the resulting
inability to close out a position. The risk that the Portfolio will be
unable to close out a position will be minimized by only entering into
transactions for which there appears to be a liquid exchange or secondary
market. In some strategies, the risk of loss in trading on futures and
related transactions can be substantial, due both to the low margin deposits
required and the extremely high degree of leverage involved in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the
"CFTC"), the Portfolio may, without registering with the CFTC as a Commodity
Pool Operator, enter into futures contracts and options thereon for both
hedging and non-hedging purposes, provided that not more than 5% of the
Portfolio's total assets at the time of entering the transaction are required
as margin and option premiums to secure obligations under such contracts
relating to non-bona fide hedging activities.
OPTION TRANSACTIONS
The Portfolio may seek to increase its returns or may hedge its
portfolio investments through options transactions with respect to individual
securities, indices or baskets in which the Portfolio may invest; other
financial instruments; and foreign currency. Various options may be
purchased and sold on either the exchange-traded or over-the-counter markets.
The Portfolio may purchase put and call options. Purchasing a put
option gives the Portfolio the right, but not the obligation, to sell the
underlying (such as a securities index or a particular foreign currency) at
the exercise price either on a specific date or during a specified exercise
period. Purchasing a call option gives the Portfolio a similar right, but
not the obligation, to purchase the underlying. The purchaser pays a premium
to the seller (also known as the writer) of the option.
The Portfolio also may write put and call options on investments held in
its portfolio, as well as foreign currency options. The Portfolio that has
written an option receives a premium that increases the Portfolio's return on
the underlying in the event the option expires unexercised or is closed out
at a profit. However, by writing a call option, the Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, the
Portfolio will be exposed to the amount by which the price of the underlying
is less than the strike price.
By writing an option, the Portfolio incurs an obligation either to buy
(in the case of a put option) or sell (in the case of a call option) the
underlying from the purchaser of the option at the option's exercise price,
upon exercise by the purchaser. Pursuant to guidelines established by the
Board of Directors, the Portfolio may only write options that are "covered."
A covered call
17
<PAGE>
option means that until the expiration of the option, the Portfolio will
either earmark or segregate sufficient liquid assets to cover its obligations
under the option or will continue to own (i) the underlying; (ii) securities
or instruments convertible or exchangeable without the payment of any
consideration into the underlying; or (iii) a call option on the same
underlying with a strike price no higher than the price at which the
underlying was sold pursuant to a short option position. In the case of a put
option, the Portfolio will either earmark or segregate sufficient liquid
assets to cover its obligations under the option or will own another put
option on the same underlying with an equal or higher strike price.
There currently are limited options markets in many countries,
particularly emerging market countries, and the nature of the strategies
adopted by the Adviser and the extent to which those strategies are used will
depend on the development of these options markets. The primary risks
associated with the Portfolio's use of options as described include (i)
imperfect correlation between the change in market value of investments held,
purchased or sold by the Portfolio and the prices of options relating to such
investments, and (ii) possible lack of a liquid secondary market for an
option.
INTEREST RATE, CURRENCY, COMMODITY AND EQUITY SWAPS, CAPS,
COLLARS AND FLOORS
Swaps are privately negotiated over-the-counter derivative products
in which two parties agree to exchange payment streams calculated in relation
to a rate, index, instrument or certain securities and a particular "notional
amount." As with many of the other derivative products available to the
Portfolio, the underlying may include an interest rate (fixed or floating), a
currency exchange rate, a commodity price index, and a security, securities
index or a combination thereof. A great deal of flexibility is possible in
the way the products may be structured, with the effect being that the
parties may have exchanged amounts equal to the return on one rate, index or
group of securities for another. For example, in a simple fixed-to-floating
interest rate swap, one party makes payments equivalent to a fixed interest
rate, and the other makes payments equivalent to a specified interest rate
index. The Portfolio may engage in simple or more complex swap transactions
involving a wide variety of underlyings. The currency swaps that the
Portfolio may enter will generally involve an agreement to pay interest
streams in one currency based on a specified index in exchange for receiving
interest streams denominated in another currency. Such swaps may involve
initial and final exchanges that correspond to the agreed upon notional
amount.
Caps, collars and floors are privately-negotiated option-based
derivative products. The Portfolio may use one or more of these products in
addition to or in lieu of a swap involving a similar rate or index. As in
the case of a put or call option, the buyer of a cap or floor pays a premium
to the writer. In exchange for that premium, the buyer receives the right to
a payment equal to the differential if the specified index or rate rises
above (in the case of a cap) or falls below (in the case of a floor) a
pre-determined strike level. As in the case of swaps, obligations under caps
and floors are calculated based upon an agreed notional amount, and like most
swaps (other than foreign currency swaps), the entire notional amount is not
exchanged and thus is not
18
<PAGE>
at risk. A collar is a combination product in which the same party,
such as the Portfolio, buys a cap from and sells a floor to the other
party. As with put and call options, the amount at risk is limited for
the buyer, but, if the cap or floor is not hedged or covered, may be unlimited
for the seller. Under current market practice, caps, collars and floors
between the same two parties are generally documented under the same "master
agreement." In some cases, options and forward agreements may also be governed
by the same master agreement. In the event of a default, amounts owed under
all transactions entered into under, or covered by, the same master agreement
would be netted and only a single payment would be made.
Swaps, caps, collars and floors are credit-intensive products. When the
Portfolio enters into a swap transaction it bears the risk of default, i.e.
nonpayment, by the other party. The guidelines under which the Portfolio
enters derivative transactions, along with some features of the transactions
themselves, are intended to reduce these risks to the extent reasonably
practicable, although they cannot eliminate the risks entirely. Under
guidelines established by the Board of Directors, the Portfolio may enter
into swaps only with parties that meet certain credit rating guidelines.
Consistent with current market practices, the Portfolio will generally enter
into swap transactions on a net basis, and all swap transactions with the
same party will be documented under a single master agreement to provide for
net payment upon default. In addition, the Portfolio's obligations under an
agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued, but unpaid, net amounts owed to the other party
to a master agreement will be covered by the maintenance of a segregated
account consisting of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets,
or principal. In such case, if the other party to an interest rate or total
rate of return swap defaults, the Portfolio's risk of loss will consist of
the payments that the Portfolio is contractually entitled to receive from the
other party. This may not be true for currency swaps that require the
delivery of the entire notional amount of one designated currency in exchange
for the other. If there is a default by the other party, the Portfolio may
have contractual remedies pursuant to the agreements related to the
transaction.
STRUCTURED NOTES
Structured notes are derivative securities for which the amount of
principal repayment and/or interest payments is based upon the movement of
one or more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices, such as the S&P 500 Index. In some cases, the impact of the
movements of these factors may increase or decrease through the use of
multipliers or deflators. The Portfolio may use structured notes to tailor
its investments to the specific risks and returns the Adviser wishes to
accept while avoiding or reducing certain other risks.
19
<PAGE>
INVESTMENT LIMITATIONS
The MicroCap Portfolio is a non-diversified portfolio under the 1940 Act,
which means that the Portfolio is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. Thus, the Portfolio may invest a greater proportion of its assets in
the securities of a small number of issuers and as a result will be subject
to greater risk with respect to its portfolio securities. Nevertheless, the
Portfolio intends to comply with more limited diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as regulated investment companies.
The Portfolio also operates under certain investment restrictions that
are deemed fundamental limitations and may be changed only with the approval
of the holders of a majority of the Portfolio's outstanding shares and under
certain non-fundamental investment limitations that may be changed without
shareholder approval. For additional information on fundamental and
non-fundamental investment limitations, see "Investment Limitations" in the
Statement of Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Adviser
and Administrator of the Fund and the Portfolio. The Adviser provides
investment advice and portfolio management services pursuant to an
Investment Advisory Agreement and, subject to the supervision of the
Fund's Board of Directors, makes the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and
generally manages the Portfolio's investments. Set forth below as an
annual percentage of average daily net assets are the management fees
payable to the Adviser quarterly by the Portfolio pursuant to the terms of
the Investment Advisory Agreement. The fees for the MicroCap Portfolio are
higher than most investment companies because the Portfolio invests
internationally. The Adviser believes that the fees are comparable to those
of other investment companies that invest internationally. The Adviser has
voluntarily agreed to a reduction in the fees payable to it and to reimburse
the Portfolio, if necessary, if such fees would cause the total annual
operating expenses of the Portfolio to exceed the maximums set forth below.
<TABLE>
<CAPTION>
MAXIMUM TOTAL OPERATING
EXPENSES AFTER FEE
WAIVER
------------------------
PORTFOLIO MANAGEMENT FEE CLASS A CLASS B
- --------------------------------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
MicroCap Portfolio 1.25% 1.50% 1.75%
</TABLE>
20
<PAGE>
The Adviser, with principal offices at 1221 Avenue of the Americas,
New York, New York 10020, conducts a worldwide portfolio management
business and provides a broad range of portfolio management services to
customers in the United States and abroad. Morgan Stanley, Dean Witter,
Discover & Co. ("MSDWD") is the direct parent of the Adviser and Morgan
Stanley. MSDWD is a preeminent global financial services firm that maintains
leading market positions in each of its three primary business-securities,
asset management and credit services. At ____, 1998, the Adviser, together
with its affiliated institutional asset management companies (exclusive of
Miller Anderson & Sherrerd, LLP), managed assets of approximately $________
billion. See "Management of the Fund" in the Statement of Additional
Information.
PORTFOLIO MANAGER. MARGARET K. JOHNSON. Margaret Johnson is a Principal
of the Adviser and Morgan Stanley and a Portfolio Manager in the
Institutional Equity Group. She joined the Adviser in 1984 and worked as an
Analyst in the Marketing and Fiduciary Advisor areas. Ms. Johnson became an
Equity Analyst in 1986 and a Portfolio Manager in 1989. Prior to joining
Morgan Stanley, she worked for the New York City PBS affiliate, WNET, Channel
13. She holds a B.A. degree from Yale College and is a Chartered Financial
Analyst. Ms. Johnson has had primary responsibility for managing the
Portfolio's assets since April 1991.
21
<PAGE>
ADMINISTRATOR. The Adviser also provides administrative services to the
Fund pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statements under federal laws. The Administration Agreement also provides that
the Administrator, through its agents, will provide dividend disbursing
and transfer agent services to the Fund. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15% of the average daily net assets of the Portfolio.
Under an agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase provides certain administrative services to the Fund through
its corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The
Adviser supervises and monitors such administrative services provided by CGFSC.
Their services are also subject to the supervision of the Board of Directors of
the Fund. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation,
the Board of Directors decides upon matters of general policy and reviews the
actions of the Fund's Adviser, Administrator, Distributor and other service
providers. The officers of the Fund conduct and supervise its daily business
operations.
DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the
shares of the Fund. Under its Distribution Agreement with the Fund, Morgan
Stanley sells shares of the Portfolio upon the terms and at the current
offering price described in this Prospectus. Morgan Stanley is not obligated to
sell any certain number of shares of any Portfolio.
The Portfolio currently offers only the classes of shares offered by this
Prospectus. The Portfolio may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the
Class B shares of the Portfolio pursuant to Rule 12b-1 under the 1940 Act
(the "Plan"). Under the Plan, the Distributor is entitled to receive from
the Portfolio a distribution fee, which is accrued daily and paid
quarterly, of 0.25% of the Class B shares' average daily net assets on an
annualized basis. Each Plan is designed to compensate the Distributor for its
services in connection with distribution assistance. The Distributor may
retain any portion of the fee that it does not expend in meeting its
obligations to the Fund. The Distributor may compensate financial
intermediaries, plan fiduciaries and administrators for providing
distribution-related services, including account maintenance services, to
shareholders (including, where applicable, underlying beneficial owners) of
Class B shares.
22
<PAGE>
EXPENSES. The Portfolio is responsible for payment of certain other fees
and expenses (including legal fees, accountants' fees, custodial fees, and
printing and mailing costs) as specified in its agreements with the Adviser
and Morgan Stanley.
PURCHASE OF SHARES
Class A shares and Class B shares of the Portfolio may be
purchased at the net asset value per share next determined after
receipt by the Fund of a purchase order. The net asset value per
share of the Portfolio is calculated on days that the New York
Stock Exchange ("NYSE") and Chase (the "Custodian Bank") are open
for business as of the close of trading of the NYSE, normally
4:00 p.m. Eastern Time (the "Pricing Time").
MINIMUM INVESTMENT
The minimum initial investment is $500,000 for Class A
shares and $100,000 for Class B shares of the Portfolio. These
minimums may be waived at the discretion of the Adviser for
certain types of investors, including trust departments, brokers,
dealers, agents, financial planners, financial services firms,
investment advisers or various retirement and deferred
compensation plans ("Financial Intermediaries"), certain accounts
managed by the Adviser and its affiliates ("Managed Accounts"),
and certain employees and customers of Morgan Stanley and its
affiliates. The Fund's determination of an investor's
eligibility to purchase shares of a given class will take
precedence over the investor's selection of a class.
METHODS OF PURCHASE
Shares may be purchased directly from the Fund by Federal
Funds wire, by bank wire or by check. Investors may also invest
in the Portfolio by purchasing shares through Financial
Intermediaries that have made arrangements with Morgan Stanley.
Some Financial Intermediaries may charge an additional service or
transaction fee. If a purchase is canceled due to nonpayment or
because your check does not clear, you will be responsible for
any loss the Fund or its agents incur. If you are already a
shareholder, the Fund may redeem shares from your account(s) to
reimburse the Fund or its agents for any loss. In addition, you
may be prohibited or restricted from making future investments in
the Fund.
FEDERAL FUNDS WIRE. Purchases may be made by having your
bank wire Federal Funds to the Fund's bank account. Federal
Funds purchase orders will be accepted only on a day on which the
Fund and the Custodian Bank are open for business. Your bank may
charge a service fee for wiring Federal Funds. In order to ensure
proper handling of your purchase by Federal Funds wire, please
follow these steps:
1. Place your order by telephoning the Fund at 1-800-548-7786.
A Fund representative will request certain
purchase information and provide you with a
confirmation number.
2. Instruct your bank to wire the specified amount to the
Fund's Wire Concentration Bank Account as follows:
23
<PAGE>
The Chase Manhattan Bank
One Manhattan Plaza
New York, NY 10081-1000
ABA# 021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Ref: (Portfolio name, your account number, your account name)
Please call the Fund at 1-800-548-7786 prior to wiring
the funds.
3. Complete and sign the Account Registration Form and
mail it to the address shown thereon.
When a purchase order is received prior to the Pricing Time
and Federal Funds are received prior to the close of the Federal
Funds Wire Control Center ("FFWCC") (normally 6:00 p.m. Eastern
Time), the purchase will be executed at the net asset value
computed on the date of receipt. Purchases for which an order is
received after the Pricing Time or for which Federal Funds are
received after the close of the FFWCC, will be executed at the
net asset value next determined. Certain institutional investors
and financial institutions have entered into an arrangement with
Morgan Stanley, pursuant to which they may place orders prior to
the Pricing Time, but make payment in Federal Funds for those
shares on the following business day.
BANK WIRE. A purchase of shares by bank wire must follow
the same procedure as for a Federal Funds wire, described above.
However, depending on the time the bank wire is sent and which
bank is handling the wire, money transferred by bank wire may or
may not be converted into Federal Funds prior to the close of the
FFWCC. Prior to conversion to Federal Funds and receipt by the
Fund, an investor's money will not be invested.
CHECK. An account may be opened by completing and signing
an Account Registration Form and mailing it, together with a
check payable to "Morgan Stanley Institutional Fund, Inc. -
[portfolio name]" to:
Morgan Stanley Institutional Fund, Inc.
P.O. Box 2798
Boston, Massachusetts 02208-2798
The Fund ordinarily is credited with Federal Funds within
one business day of deposit of a check. Thus, a purchase of
shares by check ordinarily will be credited to your account at
the net asset value per share determined on the next business day
after receipt. An investor's money will not be invested prior to
crediting of Federal Funds.
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain
Financial Intermediaries have made arrangements with the Fund to
receive purchase and redemption orders from underlying
24
<PAGE>
beneficial owners, such as retirement plan participants, generally on each
business day. Each business evening, the Financial Intermediary aggregates
all orders received from underlying beneficial owners prior to the Pricing
Time on that business day and places a net purchase and/or redemption
order(s) by the morning of the next business day. These orders normally are
executed at the net asset value that was computed for the Portfolio as of the
close of the previous business day.
ADDITIONAL INVESTMENTS. You may purchase additional shares
for your account at any time by purchasing shares at net asset
value by any of the methods described above. The minimum
additional investment generally is $1,000 for the Portfolio. The
minimum additional investment may be lower for certain accounts,
described above under "Minimum Investment." For purchases
directly from the Fund, your account name, the Portfolio name and
the class selected must be specified in the letter or wire to
assure proper crediting to your account.
INVOLUNTARY CONVERSION AND REDEMPTION OF NEW ACCOUNT SHARES
Class A and Class B shares of the Portfolio may be subject
to the involuntary conversion and redemption features described
below. The conversion and redemption features may be waived at
the discretion of the Adviser for shares held in a Managed
Account and shares purchased through a Financial Intermediary.
Accounts that were open prior to January 2, 1996 are not subject
to involuntary conversion or redemption. The Fund reserves the
right to modify or terminate the conversion or redemption
features of the shares at any time upon 60 days notice to
shareholders.
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of
an account containing Class A shares falls below $500,000 (but
remains at or above $100,000) because of shareholder
redemption(s), the Fund will notify the shareholder, and if the
account value remains below $500,000 (but remains at or above
$100,000) for a continuous 60-day period, the Class A shares in
such account will convert to Class B shares and will be subject
to the distribution fee and other features applicable to Class B
shares. The Fund will not convert Class A shares to Class B
shares based solely upon changes in the market that reduce the
net asset value of shares. Under current tax law, conversion
between share classes is not a taxable event to the shareholder.
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of
an account containing Class B shares increases to $500,000 or
more, whether due to shareholder purchases or market activity,
the Class B shares will convert to Class A shares. Class B
shares purchased through a Financial Intermediary that has
entered into an arrangement with the Fund for the purchase of
such shares may not be converted. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A
shares converted from Class B shares are subject to the same
minimum account size requirements as are applicable to New
Accounts containing Class A shares described above.
25
<PAGE>
INVOLUNTARY REDEMPTION OF SHARES. If the value of an
account falls below $100,000 because of shareholder
redemption(s), the Fund will notify the shareholder, and if the
account value remains below $100,000 for a continuous 60-day
period, the shares in such account will be subject to redemption
by the Fund. The Fund will not redeem shares based solely upon
changes in the market that reduce the net asset value of shares.
If redeemed, redemption proceeds will be promptly paid to the
shareholder.
REDEMPTION OF SHARES
Class A and Class B shares of the Portfolio may be redeemed
at any time and without charge at the net asset value per share
next determined after receipt by the Fund of a redemption order
as described under "Methods of Redemption." Redemption proceeds
may be more or less than the purchase price of your shares
depending on, among other factors, the market value of the
investment securities held by the Portfolio.
METHODS OF REDEMPTION
Shares may be redeemed directly from the Fund by mail or by
telephone. However, shares purchased through a Financial
Intermediary must be redeemed through a Financial Intermediary.
Certain Financial Intermediaries may charge an additional service
or transaction fee.
BY MAIL. The Portfolio will redeem shares upon receipt of
a redemption request in "good order." Redemption requests may be
sent by regular mail to Morgan Stanley Institutional Fund, Inc.,
P.O. Box 2798, Boston, Massachusetts 02208-2798 or, by overnight
courier, to Morgan Stanley Institutional Fund, Inc., c/o Chase
Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913.
"Good order" means that the request to redeem shares must
include the following:
1. A letter of instruction or a stock assignment
specifying the class and number of shares or dollar amount to be
redeemed, signed by all registered owners of the shares in the
exact names in which they are registered;
2. Any required signature guarantees; and
3. Other supporting legal documents, if required, in the
case of estates, trusts, guardianships, custodianships,
corporations, pension and profit-sharing plans and other
organizations.
Redemption requests received in "good order" prior to the
Pricing Time will be executed at the net asset value computed on
the date of receipt. Redemption requests received after the
26
<PAGE>
Pricing Time will be executed at the next determined net asset
value. Shareholders who are uncertain of requirements for
redemption by mail should consult with a Fund representative.
BY TELEPHONE. If you have previously elected the Telephone
Redemption Option on the Account Registration Form, you can
redeem Portfolio shares by calling the Fund and requesting that
the redemption proceeds be mailed to you or wired to your bank.
Please contact one of the Fund's representatives for further
details. To change the commercial bank or account designated to
receive redemption proceeds, send a written request to the Fund
at the address above. Requests to change the bank or account
must be signed by each shareholder and each signature must be
guaranteed. The telephone redemption option may be difficult to
implement at times, particularly during volatile market
conditions. If you experience difficulty in making a telephone
redemption, you may redeem shares by mail as described above.
The Fund and the Transfer Agent will employ reasonable
procedures to confirm that instructions communicated by telephone
are genuine. An investor may be required to provide personal
identification information at the time an account is opened and
prior to effecting each telephone transaction. In addition, all
telephone transaction requests will be recorded and investors may
be required to provide additional telecopied written instructions
regarding transaction requests. Neither the Fund nor the
Transfer Agent will be responsible for any loss, liability, cost
or expense for following instructions received by telephone that
either of them reasonably believes to be genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain
Financial Intermediaries have made arrangements with the Fund to
accept redemption requests from underlying beneficial owners.
These redemptions may be processed in the same way as purchases
made through such Financial Intermediaries, as described above.
FURTHER REDEMPTION INFORMATION
The Fund normally makes payment for all shares redeemed
within one business day of receipt of the request, and in no
event more than seven days after receipt of a redemption request
in good order. However, payments to investors redeeming shares
which were purchased by check will not be made until payment for
the purchase has been collected, which may take up to eight days
after the date of purchase. The Fund may suspend the right of
redemption or postpone the date upon which redemptions are
effected at times when the NYSE is closed, or under any emergency
conditions as determined by the Securities and Exchange
Commission (the "Commission").
If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders
of the Portfolio to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution-in-kind
of readily marketable portfolio securities in accordance with
applicable rules of the Commission. Shareholders may incur
brokerage charges on the sale of portfolio securities received in
payment of redemptions.
27
<PAGE>
To protect your account, the Fund and its agents from fraud,
signature guarantees are required to verify the identity of the
person who has authorized certain redemptions. Please contact
the Fund or see the Statement of Additional Information for
further information.
ACCOUNT POLICIES AND SERVICES
EXCHANGE FEATURES
You may exchange shares of the Portfolio that you own for
shares of any other available portfolio(s) of the Fund, subject
to certain limitations. You cannot exchange for shares of the
International Equity, Emerging Markets, Small Cap Value Equity,
Balanced or Gold Portfolios because they are currently closed to
new investors. In addition, certain portfolios may be
unavailable to shareholders who purchased portfolio shares
through a Financial Intermediary. Contact your Financial
Intermediary to determine which portfolios are available for
exchange.
Before you make an exchange, you should read the prospectus
of the portfolio(s) in which you seek to invest. The class of
shares you receive in the exchange will be determined in the same
manner as any other purchase of shares, including minimum initial
investment and account size requirements, and will not be based
on the class of shares you surrender for the exchange. Exchange
transactions are treated as a redemption followed by a purchase.
Therefore, an exchange will be considered a taxable event for
shareholders subject to tax. Exchange transactions will be
processed at the net asset value per share next determined after
receipt of the request. Shares of the portfolios may be
exchanged by mail or telephone. The telephone exchange privilege
is automatic and made available without shareholder election.
The exchange privilege may be modified or terminated by the Fund
at any time upon 60-days notice to shareholders.
BY MAIL. To exchange shares by mail, send a written
exchange request to Morgan Stanley Institutional Fund, Inc., P.O.
Box 2798, Boston, Massachusetts 02208-2798. Your written
exchange request should include (i) the name, class of shares and
account number of your current Portfolio; (ii) the name(s) and
class(es) of shares of the portfolio(s) into which you intend to
exchange shares; and (iii) the signatures of all registered
account holders.
BY TELEPHONE. To exchange shares by telephone, call the
Fund at the phone number provided on the cover of this
Prospectus. A Fund representative will request (i) the name,
class of shares and account number of your current Portfolio, and
(ii) the name(s) and class(es) of shares of the portfolio(s)
into which you intend to exchange shares. For additional
information regarding responsibility for the authenticity of
telephoned instructions, see "Redemption of Shares" above.
28
<PAGE>
TRANSFER OF REGISTRATION
You may transfer the registration of any of your Portfolio
shares to another person by sending a written request to Morgan
Stanley Institutional Fund, Inc., P.O. Box 2798, Boston,
Massachusetts 02208-2798. It may not be possible to transfer the
registration of certain shares purchased through a Financial
Intermediary. As with redemptions, the written request must be
received in "good order" before any transfer can be made.
Transferring the registration of shares may affect the
eligibility of your account for a given class of shares and may
result in involuntary conversion or redemption of your shares.
OTHER ACCOUNT INFORMATION
The Fund does not issue share certificates for the
Portfolio. All shares purchased are confirmed to you and
credited to your account on the Fund's books maintained by the
Adviser or its agents. You will have the same rights and
ownership with respect to such shares as if certificates had been
issued.
EXCESSIVE TRADING
Frequent trades in your account(s) can disrupt management of
the Portfolio and raise its expenses. Consequently, the Fund
may, in its discretion and in the interest of the Portfolio's
shareholders and performance, bar a shareholder who trades
excessively from making further share purchases for an indefinite
period. The Fund considers excessive trading to be more than
one purchase and sale involving shares of the same class of a
portfolio of the Fund within any 120-day period. For example,
the following series of transactions would amount to excessive
trading: exchanging shares of Portfolio A for shares of Portfolio
B, then exchanging shares of Portfolio B for shares of Portfolio
C and then exchanging shares of Portfolio C for shares of
Portfolio A within a 120-day period. Two types of transactions
are exempt from these excessive trading restrictions: (i) trades
exclusively between money market portfolios, and (ii) trades made
in connection with an asset allocation service managed or advised
by the Adviser and/or any of its affiliates.
INVESTMENT IN PORTFOLIOS BY OTHER INVESTMENT ACCOUNTS
Morgan Stanley or its affiliates, including Morgan Stanley
Asset Management Inc., manage investment accounts for other
clients, including other investment companies, that invest in
Class A or Class B shares of the portfolios. From time to time,
one or more of the portfolios used for investment by these
accounts may experience relatively large investments or
redemptions due to investment decisions made on behalf of these
accounts. These transactions will affect the portfolios, since
portfolios that experience significant redemptions may have to
sell portfolio securities and portfolios that receive additional
cash will have to invest it in additional portfolio securities.
It is impossible to predict the overall impact of these
transactions over time, however, there could be adverse effects
on portfolio management. These transactions
<PAGE>
also could have tax consequences if sales of portfolio securities result
in gains or could increase transaction costs. The Adviser, representing
the interests of the portfolios, is committed to minimizing the
impact of these transactions to the portfolios. The Adviser,
however, will have a conflict in fulfilling this responsibility
in that it also advises these investment accounts. The Adviser
will monitor the impact of these transactions on the portfolio.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments
and other assets attributable to such class, less any liabilities
attributable to such class, by the total number of outstanding shares of
such class of the Portfolio. Net asset value is calculated separately
for each class of a Portfolio. Net asset value per share is determined
as of the close of the NYSE (normally 4:00 p.m. Eastern Time) on each day
that the NYSE is open for business. Price information on listed securities
is taken from the exchange where the security is primarily traded.
Securities listed on a U.S. securities exchange for which market
quotations are available are valued at the last quoted sale price on the day
the valuation is made. Securities listed on a foreign exchange are valued
at their closing price. Unlisted securities and listed securities not
traded on the valuation date and for which market quotations are not
readily available are valued at a price within a range not exceeding the
current asked price nor less than the current bid price. The current bid and
asked prices are determined based on the average of the bid and asked
prices quoted on such valuation date by reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such 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
29
<PAGE>
specific securities. Securities not priced in this manner are valued at the most
recently quoted bid price or, when securities exchange valuations are used, at
the latest quoted sale price on the day of valuation. If there is no such
reported sale, the latest quoted bid price will be used. Securities purchased
with remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used.
The value of other assets and securities for which quotations are not
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine prices in accordance
with the above-stated procedures are determined in good faith at fair value
using methods determined by the Board of Directors. For purposes of calculating
net asset value per share, all assets and liabilities initially expressed in
foreign currencies will be translated into U.S. dollars at the mean of the bid
and asked price of such currencies against the U.S. dollar as quoted by a major
bank.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of the Class A shares as a result of the distribution expense charged to
Class B shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise total return for each class of the
Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.
The Portfolio may advertise "total return" which shows what an
investment in a class of the Portfolio would have earned over a specified
period of time (such as one, five or ten years), assuming that all
distributions and dividends by the Portfolio were reinvested in the same
class on the reinvestment dates during the period. Total return does not
take into account any federal or state income taxes that may be payable on
dividends and distributions or on redemption. The Fund may also include
comparative performance information in advertising or marketing the
Portfolio's shares, including data from Lipper Analytical Services, Inc.,
other industry publications, business periodicals, rating services and
market indices.
The performance figures for Class B shares will generally be lower than
those for Class A shares because of the distribution fee charged to Class B
shares.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All income dividends and capital gains distributions for a class of shares
will be automatically reinvested in additional shares at net asset value, except
when, upon written notice to the Fund or by checking off the appropriate box in
the Distribution Option Section on the Account Registration Form, a shareholder
elects to receive income dividends and capital gains distributions in cash.
The Portfolio expects to distribute substantially all of its taxable net
investment income in the form of annual dividends.
30
<PAGE>
Net realized gains for the Portfolio, if any, after reduction for any
available tax loss carryforwards will also be distributed annually.
Undistributed net investment income is included in the Portfolio's net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable to shareholders subject to income tax.
Because of the distribution fee and any other expenses that may be
attributable to the Class B shares, the net income attributable to and the
dividends payable on Class B shares will be lower than the net income
attributable to and the dividends payable on Class A shares. As a result, the
net asset value per share of the classes of the Portfolio will differ at times.
Expenses of the Portfolio allocated to a particular class of shares will be
borne on a pro rata basis by each outstanding share of that class.
TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the
federal, state, or local income tax treatment of the Portfolio or its
shareholders. Accordingly, shareholders are urged to consult their tax
advisors regarding specific questions as to federal, state and local income
taxes.
The Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other portfolios. The Portfolio
intends to qualify for the special tax treatment afforded regulated investment
companies under Subchapter M of the Code, so that the Portfolio will be relieved
of federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
The Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends paid by a Portfolio will generally qualify for the
dividends-received deduction for corporate shareholders only to the extent of
the aggregate qualifying dividend income received by the Portfolio from U.S.
corporations. The Portfolio will report annually to its shareholders the amount
of dividend income qualifying for such treatment.
Distributions of net capital gain are taxable to shareholders as a 20%
rate gain distribution (taxed at a rate of 20%) or a 28% rate gain
distribution (taxed at a rate of 28%), depending upon the designation by the
Portfolio (such designation being dependent upon the holding period of the
Portfolio in the underlying asset generating the net capital gain),
regardless of how long shareholders have held their shares. The Portfolio
will send reports annually to its shareholders of the federal income tax
status of all distributions made during the preceding year.
The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income (the excess of
short-term and long-term capital gain over short-term and long-term capital
loss, including any available capital loss carryforwards), prior to the end of
each calendar year to avoid liability for federal excise tax.
31
<PAGE>
Dividends and other distributions declared by the Portfolio in
October, November or December of any year and payable to shareholders of
record on a date in such month will be deemed to have been paid by the
Portfolio and received by the shareholders in that year if the distributions
are paid by the Portfolio at any time during the following January.
The Fund may be required to withhold and remit to the U.S. Treasury 31%
of any dividends, capital gains distributions and redemption proceeds paid
to any individual or certain other non-corporate shareholder (i) who has
failed to provide a correct taxpayer identification number (generally an
individual's social security number or non-individual's employer
identification number) on the Account Registration Form; (ii) who is subject
to backup withholding by the Internal Revenue Service; or (iii) who has not
certified to the Fund that such shareholder is not subject to backup
withholding. This backup withholding is not an additional tax, and
any amounts withheld may be credited against the shareholder's
ultimate U.S. tax liability.
The sale, exchange or redemption of shares will result in taxable gain
or loss to the selling, exchanging or redeeming shareholder, depending upon
whether the fair market value of the sale, exchange or redemption proceeds
exceeds or is less than the shareholder's adjusted tax basis in the sold,
exchanged or redeemed shares. If capital gains distributions have been made
with respect to shares that are sold at a loss after being held for six
months or less, however, the loss is treated as a long-term capital loss to
the extent of the capital gains distributions.
Conversions of shares between classes are not taxable events to the
shareholder.
Shareholders are urged to consult with their tax advisors concerning the
application of state and local income taxes to investments in a Portfolio, which
may differ from the federal income tax consequences described above.
Investment income received by the Portfolio from sources within
foreign countries may be subject to foreign income taxes withheld at the
source. To the extent that the Portfolio is liable for foreign income taxes
so withheld, it is not expected that the Portfolio or its shareholders
would be able to claim a credit for U.S. tax purposes with respect to any
such foreign taxes.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO.
32
<PAGE>
PORTFOLIO TRANSACTIONS
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for each of the Fund's portfolios. The
Adviser seeks the best execution of all portfolio transactions. A portfolio may
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the Fund's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary brokers or
dealers. However, the Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the applicable portfolio to
their clients or who act as agents in the purchase of shares of the portfolio
for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser, including
Morgan Stanley, to effect portfolio brokerage transactions under procedures
adopted by the Fund's Board of Directors. For such transactions, the commission
rates and other remuneration paid to Morgan Stanley or other affiliates must be
fair and reasonable in comparison to those of other broker-dealers for
comparable transactions involving similar securities being purchased or sold
during a comparable time period.
PORTFOLIO TURNOVER
The Portfolio generally does not invest for short-term trading
purposes, however, when circumstances warrant, the Portfolio may sell
investment securities without regard to the length of time they have
been held. Market conditions in a given year could result in a higher or
lower portfolio turnover rate than expected and the Portfolio will not
consider portfolio turnover rate a limiting factor in making investment
decisions consistent with their respective objectives and policies. If
portfolio turnover exceeds 100%, the Portfolio may expect to pay
correspondingly increased brokerage and trading costs. In addition to
transaction costs, higher portfolio turnover may result in the
realization of capital gains. As discussed under "Taxes," to the extent
net short-term capital gains are realized, any distributions resulting
from such gains are considered ordinary income for federal income tax
purposes.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was organized as a Maryland corporation on June 16, 1988. The
Articles of Incorporation, as amended and restated, permit the Fund to issue up
to 40 billion shares of common stock, with $.001 par value per share. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may increase the
number of shares the Fund is authorized to issue without the approval of the
shareholders of the Fund. The Board of Directors has the power to designate one
or more classes of shares of common stock and to classify and reclassify any
unissued shares with respect to such classes. The shares of common stock of the
Portfolio are currently classified into two classes, the Class A shares and the
Class B shares.
The shares of the Portfolio, when issued, will be fully paid,
nonassessable, fully transferable and redeemable at the option of the holder.
The shares have no preference as to conversion, exchange, dividends, retirement
33
<PAGE>
or other features and have no pre-emptive rights. The shares of each
Portfolio have non-cumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of Directors can elect
100% of the Directors if they choose to do so. Persons or organizations
owning 25% or more of the outstanding shares of a Portfolio may be
presumed to "control" (as defined in the 1940 Act) such Portfolio. Under
Maryland law, the Fund is not required to hold an annual meeting of its
shareholders unless required to do so under the 1940 Act.
REPORTS TO SHAREHOLDERS
The Fund will send to its shareholders annual and semi-annual
reports. The financial statements appearing in annual reports are
audited by independent accountants. Monthly unaudited portfolio data is
also available from the Fund upon request.
In addition, the Adviser or its agent, as Transfer Agent, will send to each
shareholder having an account directly with the Fund a monthly statement showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid.
CUSTODIAN
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust
Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the
Distributor, acts as the Fund's custodian for assets held outside the United
States and employs subcustodians approved by the Board of Directors of the Fund
in accordance with regulations of the Commission for the purpose of providing
custodial services for such assets. MSTC may also hold certain domestic assets
for the Fund. For more information on the custodians, see "General Information
- -- Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the
Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as independent accountants for the Fund and
audits the annual financial statements of each Portfolio.
LITIGATION
The Fund is not involved in any litigation.
34
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
MICROCAP PORTFOLIO
P.O. BOX 2798, BOSTON, MA 02208-2798
ACCOUNT REGISTRATION FORM
<TABLE>
<C> <S> <C>
If you need assistance in filling out this form for the
ACCOUNT INFORMATION Morgan Stanley Institutional Fund, Inc., please contact your
Fill in where applicable Morgan Stanley representative or call us toll free
1-(800)-548-7786. Please print all items except signature,
and mail to the Fund at the address above.
A) REGISTRATION
1. INDIVIDUAL
2. JOINT TENANTS
(RIGHTS OF SURVIVORSHIP PRESUMED UNLESS
TENANCY IN COMMON
IS INDICATED)
</TABLE>
1.
First
Name Initial Last Name
2.
First
Name Initial Last Name
First
Name Initial Last Name
<TABLE>
<C> <S> <C>
3. CORPORATIONS,
TRUSTS AND OTHERS
Please call the Fund for additional
documents that may be required to set up
account and to authorize transactions.
</TABLE>
3.
<TABLE>
<S> <C> <C> <C> <C>
Type of Registration: / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR
ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED)
</TABLE>
/ / TRUST ________________________ / / OTHER (Specify) ________________________
<TABLE>
<C> <S> <C>
B) MAILING ADDRESS
Please fill in completely, including
telephone number(s).
</TABLE>
/ / United States Citizen / / Resident Alien
Street or P.O. Box
City
State Zip
Home Telephone No. Business Telephone No.
/ / Non-Resident Alien
Permanent Address (Where you reside permanently for tax purposes)
Street Address
City
Country Postal Code
Home Telephone No. Business Telephone No.
Current Mailing Address (If different from Permanent Address)
Street Address
City
Country
Postal Code
Home Telephone No. Business Telephone No.
<TABLE>
<C> <S> <C> <C>
C) TAXPAYER Enter your Taxpayer Identification Number. For most individual
IDENTIFICATION taxpayers, this is your Social Security Number. OR
NUMBER SOCIAL SECURITY NUMBER
1. INDIVIDUAL 1. TAXPAYER ("SSN")
2. JOINT TENANTS IDENTIFICATION NUMBER ------------- -------------
(RIGHTS OF SURVIVORSHIP PRESUMED ("TIN") ------------- - - - - - - - -
UNLESS ------------ ------------ -
------------ - - - - - - - -
-
--
TENANCY IN COMMON -- -- OR
IS INDICATED) SSN
For Custodian account 2. TIN - - - - - - - ------------- -------------
of a minor (Uniform -- - - - ------------- - - - - - - - -
Gifts/Transfers to Minor. -
OR
--
Acts), give the Social -- -- TIN - SSN
Security Number of -- - - - - - - - - - ------------- -------------
the minor ------------- - - - - - - - -
-
IMPORTANT TAX INFORMATION
--
-- --
You (as a payee) are required by law to provide us (as payer)
with your correct TIN(s) or SSN(s). Accounts that have a
missing or incorrect TIN(s) or SSN(s) will be subject to
backup withholding at a 31% rate on dividends, distributions
and other payments. If you have not provided us with your
correct TIN(s) or SSN(s), you may be subject to a $50 penalty
imposed by the Internal Revenue Service.
Backup withholding is not an additional tax; the tax liability
of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
You may be notified that you are subject to backup withholding
under Section 3406(a)(1)(C) of the Internal Revenue Code
because you have underreported interest or dividends or you
were required to, but failed to, file a return which would
have included a reportable interest or dividend payment.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
D) PORTFOLIO AND For Purchase of the following
CLASS SECTION Portfolio: / / Class A Shares $ / / Class B Shares $
(Class A shares minimum $500,000 for MicroCap Portfolio
the Portfolio and Class B shares
minimum $100,000 for the Portfolio).
Please indicate class and amount.
Total Initial Investment $
</TABLE>
<TABLE>
<C> <S> <C>
E) METHOD OF
INVESTMENT
Please indicate, manner of
payment.
</TABLE>
Payment by:
/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND,
INC.--MicroCap Portfolio)
<TABLE>
<S> <C>
/ / Exchange $ From -- - - - - - - - - - -- - -
Name of Portfolio Account No.
/ / Account previously established by: / / Phone exchange / / Wire on -- - - - - - - - - - -- - -
Account No. (Check
(Previously assigned by the Fund) Digit)
Date
</TABLE>
<TABLE>
<C> <S> <C>
F) DISTRIBUTION Income dividends and capital gains distributions (if any) to
OPTION be reinvested in additional shares unless either box below
is checked.
/ / Income dividends to be paid in cash, capital gains
distributions (if any) in shares.
/ / Income dividends and capital gains distributions (if
any) to be paid in cash.
</TABLE>
<TABLE>
<C> <S> <C>
G) TELEPHONE / / I/we hereby authorize the Fund and
REDEMPTION its agents to honor any telephone
AND EXCHANGE requests to wire redemption proceeds to
OPTION the commercial bank indicated at right
Please select at time of and/or mail redemption proceeds to the
initial application if you name and address in which my/our fund
wish to redeem or exchange account is registered if such requests
shares by telephone. A are believed to be authentic.
SIGNATURE GUARANTEE IS The Fund and the Fund's Transfer Agent
REQUIRED IF BANK ACCOUNT IS will employ reasonable procedures to
NOT REGISTERED IDENTICALLY TO confirm that instructions communicated
YOUR FUND ACCOUNT. by telephone are genuine. These
TELEPHONE REQUESTS FOR procedures include requiring the
REDEMPTIONS OR EXCHANGE WILL investor to provide certain personal
NOT BE HONORED UNLESS THE BOX identification information at the time
IS CHECKED. an account is opened and prior to
effecting each transaction requested by
telephone. In addition, all telephone
transaction requests will be recorded
and investors may be required to provide
additional telecopied written
instructions of transaction requests.
Neither the Fund nor the Transfer Agent
will be responsible for any loss,
liability, cost or expense for following
instructions received by telephone that
it reasonably believes to be genuine.
<CAPTION>
G)
Name of COMMERCIAL Bank (Not Savings Bank)
Bank Account No.
Bank ABA No.
Name(s) in which your BANK Account is Established
Bank's Street Address
City State Zip
</TABLE>
<TABLE>
<C> <S> <C>
H) INTERESTED PARTY Name
OPTION Address
In addition to the account statement City State Zip Code
sent to my/our registered address, I/we
hereby authorize the Fund to mail
duplicate statements to the name and
address provided at right.
</TABLE>
<TABLE>
<C> <S> <C>
I) DEALER
INFORMATION
Representative Name Representative
No. Branch
No.
</TABLE>
<TABLE>
<C> <S> <C>
J) SIGNATURE OF
ALL HOLDERS
AND TAXPAYER
CERTIFICATION
Sign Here ,
</TABLE>
<TABLE>
<S> <C>
The undersigned certify that I/we have full authority and legal capacity
to purchase and redeem shares of the Fund and affirm that I/we have
received a current Prospectus of the Morgan Stanley Institutional Fund,
Inc. and agree to be bound by its terms.
BY SIGNING THIS APPLICATION, I/WE HEREBY CERTIFY UNDER PENALTIES OF
PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND CORRECT
AND THAT AS REQUIRED BY FEDERAL LAW (PLEASE CHECK APPLICABLE BOXES
BELOW):
/ / U.S. CITIZEN(S)/TAXPAYER(S):
/ / I/WE CERTIFY THAT (1) THE NUMBER(S) SHOWN ABOVE ON THIS FORM
IS/ARE THE CORRECT SSN(S) OR TIN(S) AND (2) I/WE ARE NOT
SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I/WE ARE
EXEMPT FROM BACKUP WITHHOLDING; (B) I/WE HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I/WE
ARE SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO
REPORT ALL INTEREST OR DIVIDENDS; OR (C) THE IRS HAS NOTIFIED
ME/US THAT I AM/WE ARE NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
/ / IF NO TIN(S) OR SSN(S) HAS/HAVE BEEN PROVIDED ABOVE, I/WE
HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR THE SOCIAL
SECURITY ADMINISTRATION FOR A TIN OR A SSN AND I/WE
UNDERSTAND THAT IF I/WE DO NOT PROVIDE EITHER NUMBER TO CHASE
GLOBAL FUNDS SERVICES COMPANY ("CGFSC") WITHIN 60 DAYS OF THE
DATE OF THIS APPLICATION OR IF I/WE FAIL TO FURNISH MY/OUR
CORRECT SSN(S) OR TIN(S), I/WE MAY BE SUBJECT TO A PENALTY
AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS AND REDEMPTION
PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9). YOU
MAY REQUEST SUCH FORM BY CALLING CGFSC AT 800-282-4404.
/ / NON-U.S. CITIZEN(S)/TAXPAYER(S)
UNDER PENALTIES OF PERJURY, I/WE CERTIFY THAT I/WE ARE NOT U.S.
CITIZENS OR RESIDENTS AND I/WE ARE EXEMPT FOREIGN PERSONS AS DEFINED BY
THE INTERNAL REVENUE SERVICE.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY
PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO
AVOID BACKUP WITHHOLDING.
(X)
(X) Signature (if joint account, both
Signature Date must sign) Date
</TABLE>
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
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Fund Expenses..................................... 2
Financial Highlights.............................. 5
Prospectus Summary................................ 9
Investment Objective and Policies................ 13
Additional Investment Information................. 16
Investment Limitations............................ 24
Management of the Fund............................ 24
Purchase of Shares................................ 27
Redemption of Shares.............................. 32
Shareholder Services.............................. 33
Valuation of Shares............................... 34
Performance Information........................... 35
Dividends and Capital Gains Distributions......... 35
Taxes............................................. 36
Portfolio Transactions............................ 38
General Information............................... 38
Account Registration Form
</TABLE>
MICROCAP PORTFOLIO
A PORTFOLIO OF THE
MORGAN STANLEY
INSTITUTIONAL FUND, INC.
Common Stock
($.001 PAR VALUE)
-------------
PROSPECTUS
-------------
Investment Adviser
Morgan Stanley
Asset Management Inc.
Distributor
Morgan Stanley & Co.
Incorporated
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MORGAN STANLEY INSTITUTIONAL FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end
management investment company with diversified and non-diversified series
("Portfolios"). The Fund currently consists of thirty-two Portfolios offering a
broad range of investment choices. The Fund is designed to provide clients with
attractive alternatives for meeting their investment needs. Each Portfolio,
except the Municipal Money Market, International Small Cap and China Growth
Portfolios, offers two classes of shares, the Class A shares and the Class B
shares (each, a "Multiclass Portfolio"). The Class A shares and the Class B
shares currently offered by each Multiclass Portfolio have different minimum
investment requirements and fund expenses. Shares of each Portfolio are offered
with no sales charge or exchange or redemption fee (except that the
International Small Cap Portfolio may impose a 1.00% transaction fee). This
Statement of Additional Information ("SAI") addresses information applicable to
all of the Fund's Portfolios.
The Fund is designed to meet the investment needs of discerning investors
who place a premium on quality and personal service. With Morgan Stanley Asset
Management Inc. as Adviser ("MSAM" or the "Adviser"), and with Morgan Stanley &
Co. Incorporated ("Morgan Stanley") as Distributor, the Fund makes available to
institutional and high net worth individual investors a series of portfolios
which benefit from the investment expertise and commitment to excellence
associated with Morgan Stanley and its affiliates.
This SAI is not a prospectus but should be read in conjunction with the
several prospectuses of the Fund's Portfolios (the "Prospectuses"). To obtain
any of the Prospectuses, please call the Morgan Stanley Institutional Fund, Inc.
Services Group at 1-800-548-7786.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
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INVESTMENT OBJECTIVES AND POLICIES...... 2
TAXES................................... 17
GENERAL REGULATED INVESTMENT COMPANY
QUALIFICATIONS........................ 17
GENERAL TAX TREATMENT OF QUALIFYING RICs
AND SHAREHOLDERS...................... 17
SPECIAL TAX CONSIDERATIONS RELATING TO
MUNICIPAL BOND AND MUNICIPAL MONEY
MARKET PORTFOLIOS..................... 19
SPECIAL TAX CONSIDERATIONS RELATING TO
FOREIGN INVESTMENTS................... 20
TAXES AND FOREIGN SHAREHOLDERS.......... 20
PURCHASE OF SHARES...................... 21
REDEMPTION OF SHARES.................... 21
SHAREHOLDER SERVICES.................... 21
INVESTMENT LIMITATIONS.................. 22
DETERMINING MATURITIES OF CERTAIN
INSTRUMENTS........................... 24
MANAGEMENT OF THE FUND.................. 24
NET ASSET VALUE FOR MONEY MARKET
PORTFOLIOS............................ 33
PERFORMANCE INFORMATION................. 34
GENERAL INFORMATION..................... 41
DESCRIPTION OF RATINGS.................. 42
FINANCIAL STATEMENTS.................... 43
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1998
Prospectus for the European Real Estate Portfolio, Asian Real Estate
Portfolio and U.S. Real Estate Portfolio, dated May 1, 1998
Prospectus for the Asian Equity Portfolio and Japanese Equity Portfolio,
dated May 1, 1998
Prospectus for the Emerging Markets Portfolio, Emerging Markets Debt
Portfolio and Latin American Portfolio, dated May 1, 1998
Prospectus for the Global Equity Portfolio, International Equity Portfolio,
International Small Cap Portfolio and European Equity Portfolio, dated May
1, 1998
Prospectus for the U.S. Equity Plus Portfolio, dated May 1, 1998
Prospectus for the International Magnum Portfolio, dated May 1, 1998
Prospectus for the Fixed Income Portfolio, Municipal Bond Portfolio,
Mortgage-Backed Securities Portfolio, Money Market Portfolio and Municipal
Money Market Portfolio, dated May 1, 1998
Prospectus for the Equity Growth Portfolio, Emerging Growth Portfolio and
Aggressive Equity Portfolio, dated May 1, 1998
Prospectus for the Small Cap Value Equity Portfolio, Value Equity Portfolio,
Balanced Portfolio, Global Fixed Income Portfolio and High Yield Portfolio,
dated May 1, 1998
Prospectus for the Active Country Allocation Portfolio, dated May 1, 1998
Prospectus for the Technology Portfolio, dated May 1, 1998
Prospectus for the Gold Portfolio, dated May 1, 1998
Prospectus for the China Growth Portfolio, dated May 1, 1998
Prospectus for the MicroCap Portfolio dated May 1, 1998
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INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment objectives and policies set
forth in the Fund's Prospectuses. For additional discussion of the investment
policies and techniques of a particular Portfolio, see the Prospectus relating
to that Portfolio.
BRADY BONDS
Certain Portfolios may invest in debt obligations customarily referred to as
"Brady Bonds," which are created through the exchange of existing commercial
bank loans to foreign entities for new obligations in connection with debt
restructuring under a plan introduced by former U.S. Secretary of the Treasury
Nicholas F. Brady (the "Brady Plan"). They may be collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the over-the-counter
secondary market. The Portfolios may purchase Brady Bonds either in the primary
or secondary markets. The price and yield of Brady Bonds purchased in the
secondary market will reflect the market conditions at the time of purchase,
regardless of the stated face amount and the stated interest rate. With respect
to Brady Bonds with no or limited collateralization, a Portfolio will rely for
payment of interest and principal primarily on the willingness and ability of
the issuing government to make payment in accordance with the terms of the
bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to collateralized Brady Bonds that results in
acceleration of the payment obligations of the issuer, the U.S. Treasury zero
coupon obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held to the scheduled maturity of the
defaulted Brady Bonds by the collateral agent, at which time the face amount of
the collateral will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In addition, in light of the residual
risk of the Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds should be viewed as speculative.
EMERGING COUNTRY EQUITY AND DEBT SECURITIES
The definition of emerging country equity or debt securities includes
securities of companies that may have characteristics and business relationships
common to companies in a country or countries other than an emerging country. As
a result, the value of the securities of such companies may reflect economic and
market forces applicable to other countries, as well as to an emerging country.
The Adviser believes, however, that investment in such companies will be
appropriate because the Portfolio intends to invest only in those companies
which, in its view, have sufficiently strong exposure to economic and market
forces in an emerging country that their value will tend to reflect developments
in such emerging country to a greater extent than developments in another
country or countries. For example, a Portfolio may invest in companies organized
and located in countries other than an emerging country, including companies
having their entire production facilities outside of an emerging country, when
securities of such companies meet one or more elements of the Portfolio's
definition of an emerging country equity or debt security and so long as the
Adviser believes at the time of investment that the value of the company's
securities principally reflects conditions in such emerging country.
Investments in emerging country government fixed income securities involve
special risks. Certain emerging countries have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, currency
exchange rate fluctuations, large amounts of external debt, balance of payments
and trade difficulties and extreme poverty and unemployment. The issuer or
governmental authority that controls the repayment of an emerging country's debt
may be unable or unwilling to repay the principal and/or interest when due in
accordance with the terms of such debt. As a result, emerging country government
obligors may be more likely to default on their obligations. If such an event
occurs, a Portfolio may have limited legal recourse against the issuer and/or
guarantor. Remedies must, in some cases, be pursued in the courts of the
defaulting party itself, and the ability of the holder of foreign government
debt securities to obtain recourse may be subject to the political climate in
the relevant country. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other foreign
government debt obligations in the event of default under their commercial bank
loan agreements.
2
<PAGE>
EQUITY-LINKED SECURITIES
Certain Portfolios may invest in equity-linked securities, including, among
others, PERCS, ELKS and LYONs, which are securities that are convertible into or
the value of which is based upon the value of equity securities upon certain
terms and conditions. The amount received by an investor at maturity of such
securities is not fixed but is based on the price of the underlying common
stock. It is impossible to predict whether the price of the underlying common
stock will rise or fall. Trading prices of the underlying common stock will be
influenced by the issuer's operational results, by complex, interrelated
political, economic, financial, or other factors affecting the capital markets,
the stock exchanges on which the underlying common stock is traded and the
market segment of which the issuer is a part. In addition, it is not possible to
predict how equity-linked securities will trade in the secondary market,
although the market for such securities is fairly developed and generally
liquid. The market for such securities may be shallow, however, and high volume
trades may be possible only with discounting. In addition to the foregoing
risks, the return on such securities depends on the creditworthiness of the
issuer of the securities, which may be the issuer of the underlying securities
or a third party investment banker or other lender. The creditworthiness of such
third party issuer of equity-linked securities may, and often does, exceed the
creditworthiness of the issuer of the underlying securities. The advantage of
using equity-linked securities over traditional equity and debt securities is
that equity-linked securities are income producing vehicles that may provide a
higher income than the dividend income on the underlying equity securities while
allowing some participation in the capital appreciation of the underlying equity
securities. Another advantage of using equity-linked securities is that they may
be used for hedging to reduce the risk of investing in the generally more
volatile underlying equity securities.
The following are three examples of equity-linked securities. The Portfolios
may invest in the securities described below or other similar equity-linked
securities.
PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS") technically
is preferred stock with some characteristics of common stock. PERCS are
mandatorily converted into common stock after a period of time, usually three
years, during which the investors' capital gains are capped, usually at 30%.
Commonly, PERCS may be redeemed by the issuer at any time or if the issuer's
common stock is trading at a specified price level or better. The redemption
price starts at the beginning of the PERCS duration period at a price that is
above the cap by the amount of the extra dividends the PERCS holder is entitled
to receive relative to the common stock over the duration of the PERCS and
declines to the cap price shortly before maturity of the PERCS. In exchange for
having the cap on capital gains and giving the issuer the option to redeem the
PERCS at any time or at the specified common stock price level, a Portfolio may
be compensated with a substantially higher dividend yield than that on the
underlying common stock. Investors that seek current income find PERCS
attractive because PERCS provide a higher dividend income than that paid with
respect to a company's common stock.
ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt
securities, in that the principal amount received at maturity is not fixed but
is based on the price of the issuer's common stock. ELKS are debt securities
commonly issued in fully registered form for a term of three years under an
indenture trust. At maturity, the holder of ELKS will be entitled to receive a
principal amount equal to the lesser of a cap amount, commonly in the range of
30% to 55% greater than the current price of the issuer's common stock, or the
average closing price per share of the issuer's common stock, subject to
adjustment as a result of certain dilution events, for the 10 trading days
immediately prior to maturity. Unlike PERCS, ELKS are commonly not subject to
redemption prior to maturity. ELKS usually bear interest during the three-year
term at a substantially higher rate than the dividend yield on the underlying
common stock. In exchange for having the cap on the return that might have been
received as capital gains on the underlying common stock, a Portfolio may be
compensated with higher yield, contingent on how well the underlying common
stock does. Investors that seek current income find ELKS attractive because ELKS
provide a higher dividend income than that paid with respect to a company's
common stock.
LYONS. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. LYONs generally do not pay any
interest until the notes mature, typically in 15 to 20 years, when the notes are
redeemed at face, or par, value. The yield on LYONs, typically, is
lower-than-market rate for debt securities of the same maturity, due in part to
the fact that the LYONs are convertible into common stock of the issuer at any
time at the option of the holder of the LYON. Commonly, the LYONs are redeemable
by the issuer at any time after an initial period or if the issuer's common
stock is trading at a specified price level or better or, at the option of the
holder, on certain fixed dates. The redemption price typically is the purchase
price of the LYON plus accrued original issue discount to the date of
redemption, which amounts to the lower-than-market yield. An investor will
receive only the lower-than-market yield unless the underlying common stock
increases in value at a substantial rate. LYONs are attractive when it appears
that they will increase in value due to the rise in value of the underlying
common stock.
FIXED INCOME SECURITIES
The market value of fixed income or debt securities held by a Portfolio
generally will vary inversely with changes in prevailing interest rates. Each
Portfolio will be subject to credit risk and market risk associated with
investment in fixed income securities. Credit risk is the possibility that an
issuer may be unable to meet scheduled principal and interest payments. Market
risk is the possibility that a change in interest rates or the market's
perception of the issuer's prospects may adversely affect the
3
<PAGE>
value of a fixed income security. When interest rates are falling, the inflow of
net new money to a Portfolio will likely have to be invested in instruments
producing lower yields, thereby reducing portfolio income. While securities with
longer maturities tend to produce higher yields, the prices of longer maturity
securities are subject to greater market fluctuations as a result of changes in
interest rates.
FOREIGN CURRENCY FORWARD CONTRACTS
The U.S. dollar value of the assets of the Portfolios, to the extent they
invest in securities denominated in foreign currencies, may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the Portfolios may incur costs in connection
with conversions between various currencies. The Portfolios may conduct their
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, but also may
enter into forward contracts to purchase or sell foreign currencies. A foreign
currency forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for such trades.
The Portfolios may enter into foreign currency forward contracts in several
circumstances. When a Portfolio enters into a contract for the purchase or sale
of a security denominated in a foreign currency, or when a Portfolio anticipates
the receipt in a foreign currency of dividends or interest payments on a
security which it holds, the Portfolio may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such dividend or interest
payment, as the case may be. By entering into a forward contract for a fixed
amount of dollars, for the purchase or sale of the amount of foreign currency
involved in the underlying transactions, the Portfolio will be able to protect
itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received. Additionally, when any of the Portfolios
anticipates that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar, it may enter into a forward
contract for a fixed amount of dollars, to sell the amount of foreign currency
approximating the value of some or all of such Portfolio's securities
denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. None of the Portfolios intend
to enter into such forward contracts to protect the value of portfolio
securities on a continuous basis. The Portfolios will not enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate such Portfolio to deliver an amount
of foreign currency in excess of the value of such Portfolio's securities or
other assets denominated in that currency.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made with
regard to overall diversification strategies. However, the management of the
Fund believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of the performance
of each Portfolio will thereby be served. Except under circumstances where a
segregated account is not required under the Investment Company Act of 1940, as
amended (the "1940 Act") or the rules adopted thereunder, the Fund's Custodian
will place cash or liquid securities into a segregated account of a Portfolio in
an amount equal to the value of such Portfolio's total assets committed to the
consummation of forward currency exchange contracts. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will be equal to the amount of such Portfolio's commitments with
respect to such contracts.
The Portfolios generally will not enter into a forward contract with a term
of greater than one year. At the maturity of a forward contract, a Portfolio may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for a Portfolio to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that such Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If a Portfolio retains the portfolio security and engages in an offsetting
transaction, such Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between a Portfolio entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, such Portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase,
4
<PAGE>
such Portfolio would suffer a loss to the extent that the price of the currency
it has agreed to purchase exceeds the price of the currency it has agreed to
sell.
The Portfolios are not required to enter into such transactions with regard
to their foreign currency-denominated securities. It also should be realized
that this method of protecting the value of portfolio securities against a
decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange
which one can achieve at some future point in time. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any potential gain which
might result should the value of such currency increase. For a discussion of the
special risks associated with foreign currency transactions, see "Risks
Associated with Foreign Currency Transactions," below in this SAI.
RISKS ASSOCIATED WITH FOREIGN CURRENCY TRANSACTIONS
Transactions in foreign currency forward contracts, foreign currency futures
contracts and options thereon, and options on foreign currencies, are subject to
the risk of governmental actions affecting trading in or the prices of
currencies underlying such contracts, which could restrict or eliminate trading
and could have a substantial adverse effect on the value of positions held by
the Portfolios permitted to engage in such hedging transactions. In addition,
the value of such positions could be adversely affected by a number of other
complex political and economic factors applicable to the countries issuing the
underlying currencies.
Furthermore, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which a Portfolio's trading systems will be
based may not be as complete as the comparable data on which such Portfolio
makes investment and trading decisions in connection with securities and other
transactions. Moreover, because the foreign currency market is a global,
twenty-four hour market, events could occur on that market which will not be
reflected in the forward, futures or options markets until the following day,
thereby preventing a Portfolio from responding to such events in a timely
manner.
Settlement of over-the-counter ("OTC") forward contracts or the exercise of
foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires parties to such contracts to accept
or make delivery of such currencies in conformity with any United States or
foreign restrictions and regulations regarding the maintenance of foreign
banking relationships, fees, taxes or other charges.
Unlike currency futures contracts and exchange-traded options, OTC options
on foreign currencies and foreign currency forward contracts are not traded on
contract markets or national securities exchanges regulated by the Commodity
Futures Trading Commission ("CFTC") or the Securities and Exchange Commission
(the "Commission"), respectively. In an OTC trading environment, many of the
protections associated with transactions on exchanges will not be available.
For example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer could lose amounts substantially in excess of its
initial investment due to the margin and collateral requirements associated with
such option positions. Similarly, there is no limit on the amount of potential
losses on forward contracts to which a Portfolio is a party.
In addition, OTC transactions can only be entered into with a financial
institution willing to take the opposite side, as principal, of a Portfolio's
position unless the institution acts as broker and is able to find another
counterparty willing to enter into the transaction with such Portfolio. Where no
such counterparty is available, it will not be possible to enter into a desired
transaction. There also may be no liquid secondary market in the trading of OTC
contracts, and a Portfolio may be unable to close out options purchased or
written, or forward contracts entered into, until their exercise, expiration or
maturity. This, in turn, could limit a Portfolio's ability to realize profits or
to reduce losses on open positions and could result in greater losses.
Furthermore, OTC transactions are not backed by the guarantee of an
exchange's clearing corporation. A Portfolio will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving as
its counterparty. One or more of such institutions also may decide to
discontinue its role as market-maker in a particular currency, thereby
restricting a Portfolio's ability to enter into desired hedging transactions. A
Portfolio will enter into OTC transactions only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
OTC options on foreign currencies are within the exclusive regulatory
jurisdiction of the CFTC. The CFTC currently permits the trading of such
options, but only subject to a number of conditions regarding the commercial
purpose of the purchaser of such options. The Portfolios are not able to
determine at this time whether or to what extent the CFTC may impose additional
restrictions on the trading of over-the-counter options on foreign currencies at
some point in the future, or the effect that any restrictions may have on the
hedging strategies to be implemented by the Portfolios. Forward contracts and
currency swaps are not presently subject to regulation by the CFTC, although the
CFTC may in the future assert or be granted authority to regulate such
instruments. In such event, a Portfolio's ability to utilize forward contracts
and currency swaps in the manner set forth above and in the applicable
Prospectus could be restricted.
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Options on foreign currencies traded on a national securities exchange are
within the jurisdiction of the Commission, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency options positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default. Further,
a liquid secondary market in options traded on a national securities exchange
may be more readily available than in the OTC market, potentially permitting a
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing members, impose special procedures for
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on exercise.
FOREIGN INVESTMENTS
Certain Portfolios may invest in securities of foreign issuers. Investing in
such foreign securities involves special considerations that are not typically
associated with investing in U.S. issuers. In addition to the effect on the
Portfolios of currency exchange rate fluctuation discussed under "Foreign
Currency Forward Contracts" above, foreign issuers may not be subject to uniform
accounting, auditing and financial reporting standards and may have policies
that are not comparable to those of domestic issuers. Accordingly, there may be
less information available about certain foreign companies than about domestic
issuers and domestic markets. Securities of some foreign issuers and foreign
markets are generally less liquid and more volatile than securities of
comparable domestic issuers. There is generally less government supervision and
regulation of stock exchanges, brokers and listed issuers than in the United
States. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect Portfolio investments
in those countries. Foreign securities not listed on a recognized domestic or
foreign exchange may not be readily marketable and, if so, such investments will
be limited to 15% of a Portfolio's net asset value at the time of purchase.
Although the Portfolios will endeavor to achieve the most favorable
execution costs in their portfolio transactions, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges.
FUTURES CONTRACTS
Certain Portfolios may enter into futures contracts and options on futures
contracts. Futures contracts provide for the future sale by one party and
purchase by another party of a specified amount of a specific security at a
specified future time and at a specified price. Futures contracts, which are
standardized as to maturity date and underlying financial instrument, are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the CFTC.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures contracts on securities indices or other indices do not require the
physical delivery of securities, but merely provide for profits and losses
resulting from changes in the market value of a contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures position is simply closed out. Changes in the
market value of a particular futures contract reflect changes in the level of
the index on which the futures contract is based.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold for prices that
may range upward from less than 5% of the value of the contract being traded.
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After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of an
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Portfolios
expect to earn interest income on their margin deposits. With respect to each
long position in a futures contract or option thereon, the underlying commodity
value of such contract will always be covered by cash and cash equivalents set
aside plus accrued profits held at the futures commission merchant.
Portfolios may purchase and write call and put options on futures contracts
which are traded on a U.S. Exchange or on any recognized securities or futures
exchange to the extent permitted by the CFTC and enter into closing transactions
with respect to such options to terminate an existing position. An option on a
futures contract gives the purchaser the right (in return for the premium paid)
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put) at a specified exercise price
at any time during the term of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by delivery of the accumulated balance in the
writer's futures margin account, which represents the amount by which the market
price of the futures contract exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
The Portfolios will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the underlying securities with futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from market
fluctuations. The Portfolios intend to use futures contracts only for hedging
purposes.
Regulations of the CFTC applicable to the Portfolios require that all
futures transactions constitute bona fide hedging transactions except that a
Portfolio may engage in futures transactions that do not constitute bona fide
hedging to the extent that not more than 5% of the liquidation value of a
Portfolio's total assets are required as margin deposits or premiums for such
transactions. The Portfolios will only sell futures contracts to protect
securities owned against declines in price or purchase contracts to protect
against an increase in the price of securities intended for purchase. As
evidence of this hedging interest, the Portfolios expect that approximately 75%
of their futures contracts will be "completed"; that is, equivalent amounts of
related securities will have been purchased or are being purchased by the
Portfolios upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolios' exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While the Portfolios will incur commission expenses in both opening and closing
out futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. None of the Portfolios will
enter into futures contract transactions to the extent that, immediately
thereafter, the sum of its initial margin deposits on open contracts exceeds 5%
of the market value of its total assets. In addition, each Portfolio will limit
its use of derivative instruments, including futures contracts, to 33 1/3% of
its total assets measured by the aggregate notional amount of outstanding
derivative instruments.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contracts at any specific time. Thus, it may
not be possible to close a futures position. In the event of adverse price
movements, the Portfolios would continue to be required to make daily cash
payments to maintain their required margin. In such situations, if a Portfolio
has insufficient cash, it may have to sell portfolio securities to meet its
daily margin requirement at a time when it may be disadvantageous to do so. In
addition, a Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Portfolio's ability
to effectively hedge.
The Portfolios will minimize the risk that they will be unable to close out
a futures contract by generally entering into futures which are traded on
recognized international or national futures exchanges and for which there
appears to be a liquid secondary market, however the Portfolios may enter into
over-the-counter futures transactions to the extent permitted by applicable law.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the
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futures contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit if
the contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the contract. However,
because the Portfolios engage in futures strategies only for hedging purposes,
the Adviser does not believe that the Portfolios are subject to the risks of
loss frequently associated with futures transactions. A Portfolio would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying security or currency and sold it after the
decline.
Utilization of futures transactions by the Portfolios does involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities or currencies being
hedged. It is also possible that a Portfolio could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by a Portfolio of margin deposits in the event of
bankruptcy of a broker with whom the Portfolio has an open position in a futures
contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses. For a discussion of the special risks associated
with foreign currency transactions, see "Risks Associated with Foreign Currency
Transactions" in this SAI.
HIGH YIELD SECURITIES
The market for lower rated and unrated debt securities, also known as "high
yield securities" or "junk bonds", is relatively new and its recent growth
paralleled a long period of economic expansion and an increase in merger,
acquisition and leveraged buyout activity. Adverse economic developments may
disrupt the market for U.S. corporate lower rated and unrated debt securities
and for emerging country debt securities. Such disruptions may severely affect
the ability of issuers, especially highly leveraged issuers, to service their
debt obligations or to repay their obligations upon maturity. In addition, the
secondary market for lower rated and unrated debt securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. As a result, the Adviser
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded. In
addition there may be limited trading markets for debt securities of issuers
located in emerging countries. Prices realized upon the sale of such lower rated
or unrated securities, under these circumstances, may be less than the prices
used in calculating a Portfolio's net asset value.
Prices for lower rated and unrated debt securities may be affected by
legislative and regulatory developments. These laws could adversely affect a
Portfolio's net asset value and investment practices, the secondary market for
lower rated and unrated debt securities, the financial condition of issuers of
such securities and the value of outstanding lower rated and unrated debt
securities. For example, U.S. federal legislation requiring the divestiture by
federally insured savings and loan associations of their investments in lower
rated and unrated debt securities and limiting the deductibility of interest by
certain corporate issuers of lower rated and unrated debt securities has
adversely affected the market in recent years.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, a Portfolio may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If a Portfolio experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of a Portfolio's investment portfolio
and increasing the exposure of a Portfolio to the risks of lower rated and
unrated debt securities.
LOAN PARTICIPATIONS AND ASSIGNMENTS
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"). The Portfolio's
investments in Loans are expected in most instances to be in the form of
participations in Loans ("Participations") and assignments of all or a portion
of Loans ("Assignments") from third parties. The Portfolio's investment in
Participations typically will result in the Portfolio having a contractual
relationship only with the Lender and not with the borrower. The Portfolio will
have the right to receive payments of principal, interest and any fees to which
it is entitled only from the Lender selling the Participation and only upon
receipt by the Lender of the payments from the borrower. In connection with
purchasing Participations, the Portfolio generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the borrower, and the Portfolio may not
directly benefit from any collateral supporting the underlying Loan. As a
result, the Portfolio may be subject to the credit risk of both the borrower and
the Lender that is selling the Participation. In the event of the insolvency of
the Lender selling a Participation, the Portfolio may
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be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. Certain Participations may be
structured in a manner designed to avoid purchasers of Participations being
subject to the credit risk of the Lender with respect to the Participation, but
even under such a structure, in the event of the Lender's insolvency, the
Lender's servicing of the Participation may be delayed and the assignability of
the Participation impaired. The Portfolio will acquire Participations only if
the Lender interpositioned between the Portfolio and the borrower is determined
by the Adviser to be creditworthy.
When the Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, however, 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. The assignability of certain sovereign debt obligations
is restricted by the governing documentation as to the nature of the assignee
such that the only way in which the Portfolio may acquire an interest in a Loan
is through a Participation and not an Assignment. The Portfolio may have
difficulty disposing of Assignments and Participations because to do so it will
have to assign such securities to a third party. Because there is no liquid
market for such securities, the Portfolio anticipates that such securities could
be sold only to a limited number of institutional investors. The lack of a
liquid secondary market may have an adverse impact on the value of such
securities and the Portfolio's ability to dispose of particular Assignments or
Participations when necessary to meet the Portfolio's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Portfolio
to assign a value to these securities for purposes of valuing the Portfolio's
securities and calculating its net asset value.
MORTGAGE RELATED SECURITIES
Mortgage related securities are securities that, directly or indirectly,
represent a participation in, or are secured by and payable from, mortgage loans
on real property. Mortgage related securities include collateralized mortgage
obligations and mortgage-backed securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government or by private sector entities.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations or multiclass pass-through certificates issued by
agencies or instrumentalities of the U.S. Government or by private originators
or investors in mortgage loans. They are backed by mortgage-backed securities
(discussed below) or whole loans (all such assets, the "Mortgage Assets") and
are evidenced by a series of bonds or certificates issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," may be issued with a
specific fixed or floating coupon rate and has a stated maturity or final
scheduled distribution date. The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways. Interest is paid or accrues on CMOs on a monthly, quarterly or
semi-annual basis.
CMOs may be issued by agencies or instrumentalities of the U.S. Government,
or by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity having
the credit status of a governmental agency or instrumentality are generally
structured with one or more types of credit enhancement as described below. An
issuer of CMOs may elect to be treated, for federal income tax purposes, as a
Real Estate Mortgage Investment Conduit (a "REMIC"). An issuer of CMOs issued
after 1991 must elect to be treated as a REMIC or it will be taxable as a
corporation under rules regarding taxable mortgage pools.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of a CMO in many ways. The general goal in allocating cash
flows on Mortgage Assets to the various classes of a CMO is to create certain
tranches on which the expected cash flows have a higher degree of predictability
than the underlying Mortgage Assets. As a general matter, the more predictable
the cash flow is on a particular CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on Mortgage Assets. As part of the process of creating more predictable
cash flows on certain tranches of a CMO, one or more tranches generally must be
created that absorb most of the changes in the cash flows on the underlying
Mortgage Assets. The yields on these tranches are generally higher than
prevailing market yields on other mortgage related securities with similar
average lives. Principal prepayments on the underlying Mortgage Assets may cause
the CMOs to be retired substantially earlier than their stated maturities or
final scheduled distribution dates. Because of the uncertainty of the cash flows
on these tranches, the market prices of and yields on these tranches are more
volatile. In addition, some inverse floating rate obligation CMOs exhibit
extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of these CMOs is sensitive not only to changes in interest rates, but
also to changes in prepayment rates on the related underlying Mortgage Assets.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a type of
CMO tranche or series designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience on
the underlying mortgage loans falls within a predefined range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted. The
magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than
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predicted. Because of these features, PAC Bonds generally are less subject to
the risks of prepayment than are other types of mortgage related securities.
MORTGAGE-BACKED SECURITIES. With mortgage-backed securities ("MBSs"), many
mortgagees' monthly payments to their lending institution are pooled together
and passed through to investors such as a Portfolio. The pools are assembled by
various governmental, Government-related and private organizations. A Portfolio
may invest in securities issued or guaranteed by Government National Mortgage
Association ("GNMA" or "Ginnie Mae"), Federal Home Loan Mortgage Corporation
("FHLMC" or Freddie Mac"), Fannie Mae, private issuers and other government
agencies. There can be no assurance that the private issuers can meet their
obligations under the policies. MBSs issued by non-agency issuers, whether or
not such securities are subject to guarantees, may entail greater risk. If there
is no guarantee provided by the issuer, MBSs purchased by a Portfolio will be
those which at the time of purchase are rated investment grade by one or more
nationally recognized statistical rating organizations ("NRSRO") or, if unrated,
are deemed by the Adviser to be of comparable quality.
MBSs are issued or guaranteed by private sector originators of or investors
in mortgage loans and are structured similarly to governmental pass-through
securities. Because private pass-throughs typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality,
they are generally structured with one or more types of credit enhancement
described below. Fannie Mae and FHLMC obligations are not backed by the full
faith and credit of the U.S. Government as GNMA certificates are, but Fannie Mae
and FHLMC securities are supported by the instrumentalities' right to borrow
from the U.S. Treasury. Each of GNMA, Fannie Mae and FHLMC guarantees timely
distributions of interest to certificate holders. Each of GNMA and Fannie Mae
also guarantees timely distributions of scheduled principal. FHLMC has in the
past guaranteed only the ultimate collection of principal of the underlying
mortgage loan; however, FHLMC has now issued MBSs (FHLMC Gold PCS) which also
guarantee timely payment of monthly principal reductions. Resolution Funding
Corporation ("REFCORP") obligations are backed, as to principal payments, by
zero coupon U.S. Treasury bonds, and as to interest payment, ultimately by the
U.S. Treasury. Obligations issued by such U.S. Governmental agencies and
instrumentalities are described more fully below.
There are two methods of trading MBSs. A specified pool transaction is a
trade in which the pool number of the security to be delivered on the settlement
date is known at the time the trade is made. This is in contrast with the
typical MBS transaction, called a TBA (to be announced) transaction, in which
the type of MBS to be delivered is specified at the time of trade but the actual
pool numbers of the securities that will be delivered are not known at the time
of the trade. The pool numbers of the pools to be delivered at settlement will
be announced shortly before settlement takes place. The terms of the TBA trade
may be made more specific if desired. Generally, agency pass-through MBSs are
traded on a TBA basis.
Like fixed income securities in general, MBSs will generally decline in
price when interest rates rise. Due to prepayment risk, rising interest rates
also tend to discourage refinancings of home mortgages, with the result that the
average life of MBSs held by a Portfolio may be lengthened. As average life
extends, price volatility generally increases. This extension of average life
causes the market price of the MBSs to decrease further than if their average
lives were fixed. However, when interest rates fall, mortgages may not enjoy as
large a gain in market value due to prepayment risk because additional mortgage
prepayments must be reinvested at lower interest rates. Faster prepayment will
shorten the average life and slower prepayments will lengthen it. However, it is
possible to determine what the range of that movement could be and to calculate
the effect that it will have on the price of the MBS. In selecting these MBSs,
the Adviser will look for those that offer a higher yield to compensate for any
variation in average maturity. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Portfolio may fail to fully
recoup its initial investment in these securities, even if the security is in
one of the highest rating categories. A Portfolio may invest, without limit, in
MBSs issued by private issuers when the Adviser deems that the quality of the
investment, the quality of the issuer, and market conditions warrant such
investments. Securities issued by private issuers will be rated investment grade
by Moody's or S&P or be deemed by the Adviser to be of comparable investment
quality.
FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of Fannie Mae are not backed by
the full faith and credit of the U.S. Government.
Each Fannie Mae certificate represents a pro rata interest in one or more
pools of mortgage loans insured by the Federal Housing Administration under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed
by the Department of Veterans Affairs under the Servicemen's Readjustment Act of
1944, as amended ("VA Loans") or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate and adjustable mortgage loans secured by
multi-family projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations solely
of Freddie Mac and are not backed by the full faith and credit of the U.S.
Government.
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Freddie Mac certificates represent a pro rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The
mortgage loans underlying the Freddie Mac certificates consist of fixed rate or
adjustable rate mortgage loans with original terms to maturity of between ten
and thirty years, substantially all of which are secured by first liens on
one-to-four-family residential properties or multi-family projects. Each
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
Freddie Mac Certificate group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and participations
comprising another Freddie Mac Certificate group.
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes Ginnie Mae to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of FHA Loans, VA
Loans or by pools of other eligible mortgage loans. The Housing Act provides
that the full faith and credit of the U.S. Government is pledged to the payment
of all amounts that may be required to be paid under any guaranty. In order to
meet its obligations under such guaranty, Ginnie Mae is authorized to borrow
from the U.S. Treasury with no limitations as to amount.
Each Ginnie Mae certificate represents a pro rata interest in one or more of
the following types of mortgage loans: (i) fixed rate level payment mortgage
loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed rate
growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodical changes in interest rates or in
other payment terms of the mortgage loans; and (ix) mortgage-backed serial
notes. All of these mortgage loans will be FHA Loans or VA Loans and, except as
otherwise specified above, will be fully-amortizing loans secured by first liens
on one- to four-family housing units.
CREDIT ENHANCEMENT. Mortgage related securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failure by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection generally refers to the provision of advances, typically by
the entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties (referred
to herein as "third party credit support"), through various means of structuring
the transaction or through a combination of such approaches.
The ratings of mortgage related securities for which third party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal and
interest thereon, with defaults on the underlying assets being borne first by
the holders of the most subordinated class), creation of "reserve funds" (where
cash or investments, sometimes funded from a portion of the payments on the
underlying assets, are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each security is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX
The EAFE Index is one of seven International Indices, twenty National
Indices and thirty-eight International Industry Indices making up the Morgan
Stanley Capital International Indices. The EAFE Index is based on the share
prices of 1,066 companies listed on the stock exchanges of Europe, Australia,
New Zealand and the Far East. "Europe" includes Austria, Belgium, Denmark,
Finland, France, Germany, Italy, The Netherlands, Norway, Spain, Sweden,
Switzerland and the United Kingdom. "Far East" includes Japan, Hong Kong and
Singapore/Malaysia.
MUNICIPAL BONDS
Municipal Bonds generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and corporations,
to obtain funds to construct, repair or improve various public facilities such
as airports, bridges, highways, hospitals, housing, schools, streets and water
and sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loans to other public institutions
and facilities.
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The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. A Portfolio may also invest in tax-exempt industrial
development bonds, short-term municipal obligations, project notes, demand notes
and tax-exempt commercial paper in accordance with the Portfolio's investment
objectives and policies.
Industrial revenue bonds (i.e., private activity bonds) in most cases are
revenue bonds and generally do not have the pledge of the credit of the issuer.
The payment of the principal and interest on such industrial revenue bonds is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. Short-term municipal
obligations issued by states, cities, municipalities or municipal agencies
include Tax Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation
Notes, Construction Loan Notes and Short-Term Discount Notes. Project Notes are
instruments guaranteed by the Department of Housing and Urban Development but
issued by a state or local housing agency. While the issuing agency has the
primary obligation on such Project notes, they are also secured by the full
faith and credit of the United States.
Note obligations with demand or put options may have a stated maturity in
excess of one year, but allow any holder to demand payment of principal plus
accrued interest upon a specified number of days notice. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal of the notes plus accrued interest upon a specific number
of days notice to the bondholders. The interest rate on a demand note may be
based upon a known lending rate, such as a bank's prime rate, and may be
adjusted when such rate changes, or the interest rate on a demand note may be a
market rate that is adjusted at specified intervals. The demand notes in which
the Municipal Money Market Portfolio will invest are payable on not more than
one year's notice.
The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and S&P represent their opinions of the quality of
the Municipal Bonds and such ratings are general and are not absolute standards
of quality. Consequently, Municipal Bonds with the same maturity, coupon and
rating may have different yields, while Municipal Bonds of the same maturity and
coupon, but with different ratings, also may have the same yield. It will be the
responsibility of the Adviser to appraise independently the fundamental quality
of the bonds held by the Portfolios.
Municipal Bonds are sometimes purchased on a "when issued" basis meaning the
buyer has committed to purchasing certain specified securities at an agreed-upon
price when they are issued. The period between commitment date and issuance date
can be a month or more. It is possible that the securities will never be issued
and the commitment canceled.
From time to time proposals have been introduced before Congress to restrict
or eliminate the Federal income tax exemption for interest on Municipal Bonds.
Similarly, from time to time proposals have been introduced before State and
local legislatures to restrict or eliminate the State and local income tax
exemption (to the extent such an exemption applies, which may not apply in all
cases) for interest on Municipal Bonds. Similar proposals may be introduced in
the future. If any such proposal were enacted, it might restrict or eliminate
the ability of a Portfolio to achieve its investment objective. In that event,
the Fund's Directors and officers would reevaluate such Portfolio's investment
objective and policies and consider recommending changes to its shareholders.
OPTIONS TRANSACTIONS
GENERAL INFORMATION. Certain Portfolios may purchase and sell options on
portfolio securities and securities indices. Additional information with respect
to option transactions is set forth below. Call and put options on equity
securities are listed on various U.S. and foreign securities exchanges ("listed
options") and are written in over-the-counter transactions ("OTC Options").
Listed options are issued or guaranteed by the exchange on which they trade
or by a clearing corporation, such as Options Clearing Corporation ("OCC") in
the United States. Ownership of a listed call option gives the fund the right to
buy from the clearing corporation or exchange, the underlying security covered
by the option at the state exercise price (the price per unit of the underlying
security or currency) by filing an exercise notice prior to the expiration date
of the option. The writer (seller) of the option would then have the obligation
to sell to the clearing corporation or exchange, the underlying security or
currency at that exercise price prior to the expiration date of the option,
regardless of the current market price. Ownership of listed put option would
give the Portfolio the right to sell the underlying security or currency to the
clearing corporation or exchange at the state exercise price. Upon notice of
exercise of the put option, the writer of the option would have the obligation
to purchase the underlying security from the clearing corporation or exchange at
the exercise price.
OTC options are purchased from or sold (written) to dealers of financial
institutions which have entered into direct agreements with the Portfolio. With
OTC options, such variables as expiration date, exercise price and premium will
be agreed upon between the Portfolio and the transactions dealer, without the
intermediation of a third party such as a clearing corporation or exchange. If
the transacting dealer fails to make or take delivery of the securities
underlying an option it has
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written, in accordance with the terms of that option, the Portfolio would lose
the premium paid for the option as well as any anticipated benefit of the
transaction.
COVERED CALL WRITING. The Portfolios may write (i.e., sell) covered call
options on portfolio securities. By doing so, the Portfolio would become
obligated during the terms of the option to deliver the securities underlying
the option should the option holder choose to exercise the option before the
option's termination date. In return for the call it has written, the Portfolio
will receive from the purchaser (or option holder) a premium which is the price
of the option, less a commission charged by a broker. The Portfolio will keep
the premium regardless of whether the option is exercised. A call option is
"covered" if the Portfolio owns the security underlying the option it has
written or has an absolute or immediate right to acquire the security by holding
a call option on such security, or maintains a sufficient amount of cash, cash
equivalents or liquid securities to purchase the underlying security. When the
Portfolio writes covered call options, it augments its income by the premiums
received and is thereby hedged to the extent of that amount against a decline in
the price of the underlying securities and the premiums received will offset a
portion of the potential loss incurred by the Portfolio if the securities
underlying the options are ultimately sold by the Portfolio at a loss. However,
during the option period, the Portfolio has, in return for the premium on the
option, given up the opportunity for capital appreciation above the exercise
price should the market price of the underlying security increase, but has
retained the risk of loss should the price of the underlying security decline.
The size of premiums will fluctuate with varying market conditions.
COVERED PUT WRITING. The Portfolios may write covered put options on
portfolio securities. By doing so, the Portfolio incurs an obligation to buy the
security underlying the option from the purchaser of the put at the option's
exercise price at any time during the option period, at the purchaser's election
(certain listed and OTC options written by the Portfolio will be exercisable by
the purchaser only on a specific date). Generally, a put option is "covered" if
the Portfolio maintains cash or other liquid securities equal to the exercise
price of the option or if the Portfolio holds a put option on the same
underlying security with a similar or higher exercise price.
The Portfolios may write put options to receive the premiums paid by
purchasers; when the Adviser (and also the Sub-Adviser with respect to the Gold
Portfolio) wishes to purchase the security underlying the option at a price
lower than its current market price, in which case it will write the covered put
at an exercise price reflecting the lower purchase price sought; and to close
out long put option positions.
PURCHASE OF PUT AND CALL OPTIONS. When the Portfolio purchases a call
option it acquires the right to purchase a designated security at a designated
price (the "exercise price"), and when the Portfolio purchases a put option it
acquires the right to sell a designated security at the exercise price, in each
case on or before a specified date (the "termination date"), usually not more
than nine months from the date the option is issued.
The Portfolio may purchase call options to close out a covered call position
or to protect against an increase in the price of a security it anticipates
purchasing. The Portfolio may purchase put options on securities which it holds
in its portfolio only to protect itself against a decline in the value of the
security. If the value of the underlying security were to fall below the
exercise price of the put purchased in an amount greater than the premium paid
for the option, the Portfolio would incur no additional loss. The Portfolio may
also purchase put options to close out written put positions in a manner similar
to call option closing purchase transactions.
The amount the Portfolio pays to purchase an option is called a "premium",
and the risk assumed by the Portfolio when it purchases an option is the loss of
this premium. Because the price of an option tends to move with that of its
underlying security, if the Portfolio is to make a profit, the price of the
underlying security must change and the change must be sufficient to cover the
premium and commissions paid. A price change in the security underlying the
option does not assure a profit since prices in the options market may not
always reflect such a change.
OPTIONS ON SECURITIES INDICES. The Portfolios may purchase and write put
and call options on securities indices and enter into related closing
transactions in order to hedge against the risk of market price fluctuations or
to increase income
to the Portfolio.
Call and put options on indices are similar to options on securities except
that, rather than the right to purchase or sell particular securities at a
specified price, options on an index give the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the underlying
index is greater than (or less than, in the case of puts) the exercise price of
the option. This amount of cash is equal to the difference between the closing
price of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual securities,
all settlements are in cash, and gain or loss depends on price movements in the
particular market represented by the index generally (or in a particular
industry or segment of the market) rather than the price movements in individual
securities.
All options written on indices must be covered. When the Portfolio writes an
option on an index, it will establish a segregated account containing cash or
liquid securities with its custodian in an amount at least equal to the market
or value of the option and will maintain the account while the option is open or
will otherwise cover the transaction.
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The Portfolio may choose to terminate an option position by entering into a
closing transaction. The ability of the Portfolio to enter into closing
transactions depends upon the existence of a liquid secondary market for such
transactions.
OPTIONS ON CURRENCIES. The Portfolios may purchase and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter markets) to manage the Portfolio's exposure to changes in
dollar exchange rates. Call options on foreign currency written by the Portfolio
will be "covered," which means that the Portfolio will own an equal amount of
the underlying foreign currency. With respect to put options on foreign currency
written by the Portfolio, the Portfolio will establish a segregated account with
the Fund's Custodian consisting of cash or liquid securities in an amount equal
to the amount the Portfolio would be required to pay upon exercise of the put.
RISK FACTORS IN OPTIONS TRANSACTIONS. The use of options also involves
additional risks. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to a Portfolio
because the maximum amount of risk is the premium paid for the option. The
writing of a call option generates a premium which may partially offset a
decline in the value of a Portfolio's portfolio assets. By writing a call
option, the Portfolio becomes obligated to sell the underlying instrument, which
may have a value higher than the exercise price. Conversely, the writing of a
put option generates a premium, but the Portfolio becomes obligated to purchase
the underlying instrument, which may have a value lower than the exercise price.
Thus, the loss incurred by a Portfolio in writing options may exceed the amount
of the premium received.
The effective use of options strategies is dependent, among other things, on
a Portfolio's ability to terminate options positions at a time when the
portfolio manager deems it desirable to do so. Although a Portfolio will enter
into options positions only if the portfolio manager believes that a liquid
secondary market exists for such options, there is no assurance that the
Portfolio will be able to effect closing transactions at any particular time or
at an acceptable price.
A Portfolio's purchase or sale of put or call options will be based upon
predictions as to anticipated market trends and/or interest rate movements by
the portfolio manager, which could prove to be inaccurate. Even if the
expectations of the portfolio manager are correct, there may be an imperfect
correlation between the change in the value of the options and of the
Portfolio's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Portfolio to write another call option on the underlying security
with either a different exercise price or expiration date or both, in the case
of a written put option, will permit the Portfolio to write another put option
to the extent that the exercise price thereof is secured by depositing liquid
assets. Also, effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any securities subject to the option to be used for
other Portfolio investments. If the Portfolio desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale of the
security.
A Portfolio will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Portfolio will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the
Portfolio.
An options position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might be possible to effect a closing transaction in particular options with
the result that the Portfolio would have to exercise the options in order to
realize any profit. If the Portfolio is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions, or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operation
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on an exchange; (v) the facilities of an exchange or OCC may not at all times be
adequate to handle current trading volume; or (vi) one or more exchange could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that Exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by OCC as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
PORTFOLIO TURNOVER
The portfolio turnover rate for a year is the lesser of the value of the
purchases or sales for the year divided by the average monthly market value of
the Portfolio for the year, excluding U.S. Government securities and securities
with maturities of one year or less. The portfolio turnover rate for a year is
calculated by dividing the lesser of sales or the average monthly value of the
Portfolio's portfolio purchases of portfolio securities during that year by
securities, excluding money market instruments. The rate of portfolio turnover
will not be a limiting factor when a Portfolio deems it appropriate to purchase
or sell securities for the Portfolio.
PRECIOUS METALS FORWARD AND FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Gold Portfolio may enter into futures contacts on precious metals
("precious metals futures") as a hedge against changes in the prices of precious
metals held or intended to be acquired by the Portfolio, but not for speculation
or for achieving leverage. The Portfolio's hedging activities may include
purchases of futures contracts as an offset against the effect of anticipated
increases in the price of a precious metal which the Portfolio intends to
acquire ("anticipatory hedge") or sales of futures contracts as an offset
against the effect of anticipated declines in the price of precious metal which
the Portfolio owns ("hedge against an existing position").
The Portfolio will enter into precious metals forward contracts which are
similar to precious metals futures contracts, in that they provide for the
purchase or sale of precious metals at an agreed price with delivery to take
place at an agreed future time. However, unlike futures contracts, forward
contracts are negotiated contracts which are primarily used in the dealer
market. Unlike the futures contract market, which is regulated by the CFTC and
by the regulations of the commodity exchanges, the forward contract market is
unregulated. The Portfolio will use forward contracts for the same hedging
purposes as those applicable to futures contracts, as described above. When the
Portfolio enters into a forward contract it will establish with the custodian a
segregated account consisting of cash, liquid assets or bullion equal to the
market value of the forward contract purchased.
Precious metals futures and forward contract prices can be volatile and are
influenced principally by changes in spot market prices, which in turn are
affected by a variety of political and economic factors. In addition,
expectations of changing market conditions may at times influence the prices of
such futures and forward contracts, and changes in the cost of holding physical
precious metals, including storage, insurance and interest expense, will also
affect the relationship between spot and futures or forward prices. While the
correlation between changes in prices of futures and forward contracts and
prices of the precious metals being hedged by such contracts has historically
been very strong, the correlation may at times be imperfect and even a well
conceived hedge may be unsuccessful to some degree because of market behavior or
unexpected precious metals price trends. To the extent that interest rates move
in a direction opposite to that anticipated, the Portfolio may realize a loss on
a futures transaction not offset by an increase in the value of portfolio
securities. Moreover there is a possibility of a lack of a liquid secondary
market for closing out a futures position or futures option. The success of any
hedging technique depends upon the Adviser's and Sub-Adviser's accuracy in
predicting the direction of a market. If these predictions are incorrect, the
Portfolio may realize a loss.
The Portfolio may also purchase (buy) and write (sell) covered call or put
options on precious metals futures contracts. Such options would be purchased
solely for hedging purposes similar to those applicable to the purchase and sale
of futures contracts. Call options might be purchased to hedge against an
increase in the price of precious metals the Portfolio intends to acquire, and
put options may be purchased to hedge against a decline in the price of precious
metals owned by the Portfolio. As is the case with futures contracts, options on
precious metals futures may facilitate the Portfolio's acquisition of precious
metals or permit the Portfolio to defer disposition of precious metals for tax
or other purposes. The Portfolio may not purchase options on precious metals and
precious metals futures contracts if the premiums paid for all such options,
together with margin deposits on precious metals future contracts, would exceed
5% of the Portfolio's total assets at the time the option is purchased.
One of the risks which may arise in employing futures contracts to protect
against the price volatility of the Portfolio's assets is that the price of
precious metals subject to futures contracts (and thereby the futures contracts
prices) may correlate imperfectly with the prices of such assets. A correlation
may also be distorted by the fact that the futures market is dominated by
short-term traders seeking to profit from the difference between a contract or
security price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.
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SECURITIES LENDING
A Portfolio may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its 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 during the term of the loan would be for the
account of the Portfolio. A Portfolio may lend its investment securities to
qualified brokers, dealers, domestic and foreign banks or other financial
institutions, so long as the terms, structure and the aggregate amount of such
loans are not inconsistent with the 1940 Act, or the Rules and Regulations or
interpretations of the Commission thereunder, which currently require that (i)
the borrower pledge and maintain with the portfolio collateral consisting of
cash, an irrevocable letter of credit issued by a domestic U.S. bank, or
securities issued or guaranteed by the U.S. Government having a value at all
times not less than 100% of the value of the securities loaned; (ii) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis); (iii) the
loan be made subject to termination by the Portfolio at any time; and (iv) the
Portfolio receive reasonable interest on the loan (which may include the
Portfolio investing any cash collateral in interest bearing short-term
investments), any distributions on the loaned securities and any increase in
their market value. There may be risks of delay in recovery of the securities or
even loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will only be made to borrowers deemed by the Adviser
or Sub-Adviser to be of good standing and when, in the judgment of the Adviser
or Sub-Adviser, the consideration which can be earned currently from such
securities loans justifies the attendant risk. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Board of Directors of the Fund.
At the present time, the staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Board of Directors. In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
SHORT SALES
Certain Portfolios may from time to time sell securities short without
limitation but consistent with applicable legal requirements. A short sale is a
transaction in which the Portfolio sells securities it owns or has the right to
acquire at no added cost (i.e., "against the box") or does not own (but has
borrowed) in anticipation of a decline in the market price of the securities.
When the Portfolio makes a short sale of borrowed securities, the proceeds it
receives from the sale will be held on behalf of a broker until the Portfolio
replaces the borrowed securities. To deliver the securities to the buyer, the
Portfolio will need to arrange through a broker to borrow the securities and, in
so doing, the Portfolio will become obligated to replace the securities borrowed
at their market price at the time of replacement, whatever that price may be.
The Portfolio may have to pay a premium to borrow the securities and must pay
any dividends or interest payable on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or liquid securities. In addition, if the short sale is not
"against the box," the Portfolio will place in a segregated account with its
custodian, or designated sub-custodian, an amount of cash or liquid securities
equal to the difference, if any, between the market value of the securities sold
short and any cash or liquid securities deposited as collateral with the broker
in connection with the short sale. Until it replaces the borrowed securities,
the Portfolio will maintain the segregated account daily at a level so that the
amount deposited in the account plus the amount deposited with the broker will
equal the current market value of the securities sold short.
Short sales by the Portfolio 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 can equal only the total amount
invested.
U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the U.S. Government, and by various
instrumentalities which have been established or sponsored by the U.S.
Government.
U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, an investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain agencies and instrumentalities, such
as the GNMA, are, in effect, backed by the full faith and credit of the United
States through provisions in their charters that they may make "indefinite and
unlimited" drawings on the Treasury if needed to service debt. Debt from certain
other agencies and instrumentalities,
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including the Federal Home Loan Bank and Fannie Mae, are not guaranteed by the
United States, but those institutions are protected by the discretionary
authority for the U.S. Treasury to purchase certain amounts of their securities
to assist the institution in meeting its debt obligations. However, the U.S.
Treasury has no lawful obligation to assume the financial liabilities of these
agencies or others. Finally, other agencies and instrumentalities, such as the
Farm Credit System and the FHLMC, are federally chartered institutions under
Government supervision, but their debt securities are backed only by the
creditworthiness of those institutions, not the U.S. Government.
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and the Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency organized
under Federal charter with Government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Immediate Credit
Banks, and Fannie Mae.
TAXES
The following is only a summary of certain additional federal income tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectuses. No attempt is made to present a detailed
explanation of the federal, state or local tax treatment of the Fund or its
shareholders, and the discussion here and in the Fund's Prospectuses is not
intended as a substitute for careful tax planning.
The following discussion of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Each Portfolio within the Fund is generally treated as a separate
corporation for federal income tax purposes, and thus the provisions of the Code
generally will be applied to each Portfolio separately, rather than to the Fund
as a whole.
GENERAL REGULATED INVESTMENT COMPANY QUALIFICATIONS
Each Portfolio intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, each Portfolio must, among other things, (a) derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; and (b)
diversify its holdings so that, at the end of each fiscal quarter of the
Portfolio's taxable year, (i) at least 50% of the market value of the
Portfolio's total assets is represented by cash and cash items, United States
Government securities, securities of other RICs, and other securities, with such
other securities limited, in respect to any one issuer, to an amount not greater
than 5% of the value of the Portfolio's total assets or 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities (other than United States Government
securities or securities of other RICs) of any one issuer or two or more issuers
which the Portfolio controls and which are engaged in the same, similar, or
related trades or business. For purposes of the 90% of gross income requirement
described above, foreign currency gains which are not directly related to a
Portfolio's principal business of investing in stock or securities (or options
or futures with respect to stock or securities) may be excluded from income that
qualifies under the 90% requirement.
In addition to the requirements described above, in order to qualify as a
RIC, a Portfolio must distribute at least 90% of its net investment income
(which generally includes dividends, taxable interest, and the excess of net
short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax-exempt interest income, for each tax
year, if any, to its shareholders. If a Portfolio meets all of the RIC
requirements, it will not be subject to federal income tax on any of its net
investment income or capital gains that it distributes to shareholders.
If a Portfolio fails to qualify as a RIC for any year, all of its income
will be subject to tax at corporate rates, and its distributions (including
capital gains distributions) will be taxable as ordinary income dividends to its
shareholders to the extent of the Portfolio's current and accumulated earnings
and profits, and will be eligible for the corporate dividends received deduction
for corporate shareholders.
GENERAL TAX TREATMENT OF QUALIFYING RICS AND SHAREHOLDERS
Each Portfolio will decide whether to distribute or to retain all or part of
any net capital gains (the excess of net long-term capital gains over net
short-term capital losses) in any year for reinvestment. If any such gains are
retained, the Portfolio will pay federal income tax thereon, and, if the
Portfolio makes an election, the shareholders will include such undistributed
gains in their income, will increase their basis in Portfolio shares by 65% of
the amount included in their income and will be able to claim their share of the
tax paid by the Portfolio as a refundable credit.
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A gain or loss realized by a shareholder on the sale, exchange or redemption
of shares of a Portfolio held as a capital asset will be capital gain or loss,
and such gain or loss will be long-term if the holding period for the shares
exceeds 18 months, will be mid-term if the holding period exceeds 12 months, but
does not exceed 18 months, and otherwise will be short-term. Any loss realized
on a sale, exchange or redemption of shares of a Portfolio will be disallowed to
the extent the shares disposed of are replaced within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
Any loss realized by a shareholder on the disposition of shares held 6 months or
less is treated as a long-term capital loss to the extent of any distributions
of net long-term capital gains received by the shareholder with respect to such
shares or any inclusion of undistributed capital gain with respect to such
shares.
The conversion of Class A shares to Class B shares should not be a taxable
event to the shareholder.
Each Portfolio will generally be subject to a nondeductible 4% federal
excise tax to the extent it fails to distribute by the end of any calendar year
at least 98% of its ordinary income for that year and 98% of its capital gain
net income (the excess of short- and long-term capital gains over short- and
long-term capital losses) for the one-year period ending on October 31 of that
year, plus certain other amounts.
Each Portfolio is required by federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions, and
redemptions) paid to shareholders who have not certified on the Account
Registration Form or on a separate form supplied by the Portfolio, that the
Social Security or Taxpayer Identification Number provided is correct and that
the shareholder is exempt from backup withholding or is not currently subject to
backup withholding.
A Section 1256 position held by a Fund will generally be marked-to-market
(i.e. treated as if it were sold for fair market value) on the last business day
of a Fund's fiscal year, and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by Section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. The effect of Section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within a Fund. The acceleration of income on Section 1256 positions may
require a Fund to accrue taxable income without the corresponding receipt of
cash. In order to generate cash to satisfy the distribution requirements of the
Code, a Fund may be required to dispose of portfolio securities that they
otherwise would have continued to hold or to use cash flows from other sources
such as the sale of Fund shares. In these ways, any or all of these rules may
affect the amount, character and timing of income earned and in turn distributed
to shareholders by a Fund.
As discussed above, in order for each Portfolio to continue to qualify for
federal income tax treatment as a RIC, at least 90% of its gross income for a
taxable year must be derived from certain qualifying income, including
dividends, interest, income derived from loans of securities, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
related income, including gains from options, futures and forward contracts,
derived with respect to its business of investing in stock, securities or
currencies. Any net gain realized from the closing out of futures contracts will
therefore generally be qualifying income for purposes of the 90% requirement.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS. In general, gains
from foreign currencies and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in stock,
securities or foreign currencies are currently considered to be qualifying
income for purposes of determining whether the Fund qualifies as a regulated
investment company. It is currently unclear, however, who will be treated as the
issuer of certain foreign currency instruments or how foreign currency options,
futures, or forward foreign currency contracts will be valued for purposes of
the regulated investment company diversification requirements applicable to the
Fund. The Fund may request a private letter ruling from the Internal Revenue
Service on some or all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from forward contracts, from futures
contracts that are not "regulated futures contracts", and from unlisted options
will be treated as ordinary income or loss under Code Section 988. Also, certain
foreign exchange gains or losses derived with respect to foreign fixed-income
securities are also subject to Section 988 treatment. In general, therefore,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Fund's net capital gain.
If the Fund invests in an entity which is classified as a "passive foreign
investment company" ("PFIC") for U.S. tax purposes, the application of certain
technical tax provisions applying to such companies could result in the
imposition of federal income tax with respect to such investments at the Fund
level which could not be eliminated by distributions to shareholders. The U.S.
Treasury issued proposed regulation section 1.1291-8 which establishes a
mark-to-market regime which allows investment companies investing in PFIC's to
avoid most, if not all, of the difficulties posed by the PFIC rules. In any
event, it is not anticipated that any taxes on the Fund with respect to
investments in PFIC's would be significant.
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A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock indices
and certain other securities, including transactions involving actual or deemed
short sales or foreign exchange gains or losses are subject to many complex and
special tax rules. For example, over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under Section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse or closing out
of the option or sale of the underlying stock or security. By contrast, a Fund's
treatment of certain other options, futures and forward contracts entered into
by a Fund is generally governed by Section 1256 of the Code. These "Section
1256" positions generally include listed options on debt securities, options on
broad-based stock indexes, options on securities indexes, options on futures
contracts, regulated futures contracts and certain foreign currency contracts
and options thereon.
When a Fund holds options or contracts which substantially diminish their
risk of loss with respect to other positions (as might occur in some hedging
transactions), this combination of positions could be treated as a "straddle"
for tax purposes, resulting in possible deferral of losses, adjustments in the
holding periods of Fund securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
i.e., straddles comprised of at least one Section 1256 position and at least one
non-Section 1256 position which may reduce or eliminate the operation of these
straddle rules.
SPECIAL TAX CONSIDERATIONS RELATING TO MUNICIPAL BOND AND
MUNICIPAL MONEY MARKET PORTFOLIOS
Each of the Municipal Bond Portfolio and the Municipal Money Market
Portfolio will qualify to pay "exempt interest dividends" to its shareholders
provided that, at the close of each quarter of its taxable year at least 50% of
the value of its total assets consists of obligations the interest on which is
exempt from federal income tax. Current federal tax law limits the types and
volume of bonds qualifying for federal income tax exemption of interest, which
may have an effect on the ability of these Portfolios to purchase sufficient
amounts of tax-exempt securities to satisfy this requirement. Any loss on the
sale or exchange of shares of the Municipal Bond Portfolio or the Municipal
Money Market Portfolio held for six months or less will be disallowed to the
extent of any exempt-interest dividends received by the selling shareholder with
respect to such shares.
As noted in the Prospectus for the Municipal Bond Portfolio and the
Municipal Money Market Portfolio, exempt-interest dividends are excludable from
a shareholder's gross income for regular Federal income tax purposes.
Exempt-interest dividends may nevertheless be subject to the alternative minimum
tax (the "Alternative Minimum Tax") imposed by Section 55 of the Code or the
environmental tax (the "Environmental Tax") imposed by Section 59A of the Code.
The Alternative Minimum Tax is imposed at the rate of up to 28% in the case of
non-corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers, to the extent it exceeds the taxpayer's regular tax liability. The
Environmental Tax is imposed at the rate of 0.12% and applies only to corporate
taxpayers. The Alternative Minimum Tax and the Environmental Tax may be affected
by the receipt of exempt-interest dividends in two circumstances. First,
exempt-interest dividends derived from certain "private activity bonds" issued
after August 7, 1986, will generally be an item of tax preference and therefore
potentially subject to the Alternative Minimum Tax and the Environmental Tax.
The Portfolios intend, when possible, to avoid investing in private activity
bonds. Second, in the case of exempt-interest dividends received by corporate
shareholders, all exempt-interest dividends, regardless of when the bonds from
which they are derived were issued or whether they are derived from private
activity bonds, will be included in the corporation's "adjusted current
earnings," as defined in Section 56(g) of the Code, in calculating the
corporation's alternative minimum taxable income for purposes of determining the
Alternative Minimum Tax and the Environmental Tax.
The percentage of income that constitutes "exempt-interest dividends" will
be determined for each year for the Municipal Bond Portfolio and the Municipal
Money Market Portfolio and will be applied uniformly to all dividends declared
with respect to the Portfolios during that year. This percentage may differ from
the actual percentage for any particular day.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Municipal Bond Portfolio or the Municipal Money Market
Portfolio will not be deductible for federal income tax purposes. The deduction
otherwise allowable to property and casualty insurance companies for "losses
incurred" will be reduced by an amount equal to a portion of exempt-interest
dividends received or accrued during any taxable year. Foreign corporations
engaged in a trade or business in the United States will be subject to a "branch
profits tax" on their "dividend equivalent amount" for the taxable year, which
will include exempt-interest dividends. Certain Subchapter S corporations may
also be subject to taxes on their "passive investment income," which could
include exempt-interest dividends. Up to 85% of the Social Security benefits or
railroad retirement benefits received by an individual during any taxable year
will be included in the gross income of such individual if the individual's
"modified adjusted gross income" (which includes exempt-interest dividends) plus
one-half of the Social Security benefits or railroad retirement benefits
received by such individual during that taxable year exceeds the base amount
described in Section 86 of the Code.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds or
private activity bonds should consult their tax advisors before purchasing
shares of the Municipal Bond Portfolio or the Municipal Money Market Portfolio.
"Substantial user" is defined generally for these purposes
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as including a "non-exempt person" who regularly uses in trade or business a
part of a facility financed from the proceeds of such bonds.
Issuers of bonds purchased by the Municipal Bond Portfolio (or the
beneficiary of such bonds) may have made certain representations or covenants in
connection with the issuance of such bonds to satisfy certain requirements of
the Code that must be satisfied subsequent to the issuance of such bonds.
Investors should be aware that exempt-interest dividends derived from such bonds
may become subject to federal income taxation retroactively to the date thereof
if such representations are determined to have been inaccurate or if the issuer
of such bonds (or the beneficiary of such bonds) fails to comply with such
covenants.
The state and local tax consequences of an investment in either the
Municipal Bond or Municipal Money Market Portfolios may differ from the federal
consequences described above and shareholders are urged to consult their tax
advisers with respect to such aspects.
SPECIAL TAX CONSIDERATIONS RELATING TO FOREIGN INVESTMENTS
Gains or losses attributable to foreign currency contracts, or to
fluctuations in exchange rates that occur between the time a Portfolio accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Portfolio actually collects
such receivables or pays such liabilities are treated as ordinary income or
ordinary loss to the Portfolio. Similarly, gains or losses on disposition of
debt securities denominated in a foreign currency attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition also are treated as ordinary gain or loss
to the Portfolio. These gains or losses increase or decrease the amount of a
Portfolio's net investment income available to be distributed to its
shareholders as ordinary income.
It is expected that each Portfolio will be subject to foreign withholding
taxes with respect to its dividend and interest income from foreign countries,
and a Portfolio may be subject to foreign income taxes with respect to other
income. So long as more than 50% in value of a Portfolio's total assets at the
close of the taxable year consists of stock or securities of foreign
corporations, the Portfolio may elect to treat certain foreign income taxes
imposed on it for U.S. federal income tax purposes as paid directly by its
shareholders. A Portfolio will make such an election only if it deems it to be
in the best interest of its shareholders and will notify shareholders in writing
each year if it makes an election and of the amount of foreign income taxes, if
any, to be treated as paid by the shareholders. If a Portfolio makes the
election, shareholders will be required to include in income their proportionate
shares of the amount of foreign income taxes treated as imposed on the Portfolio
and will be entitled to claim either a credit (subject to the limitations
discussed below) or, if they itemize deductions, a deduction, for their shares
of the foreign income taxes in computing their federal income tax liability.
Certain foreign governments levy withholding or other taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. Except in the case of
the International Equity, Global Equity, European Equity, Japanese Equity, Asian
Equity, Global Fixed Income, International Fixed Income, International Magnum,
International Small Cap, Latin American and China Growth Portfolios, it is not
expected that a Portfolio or its shareholders would be able to claim a credit
for U.S. tax purposes with respect to any such foreign taxes. However, these
foreign withholding taxes may not have a significant impact on such Portfolios,
because each Portfolio's investment objective is to seek long-term capital
appreciation and any dividend or interest income should be considered
incidental.
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to a number of complex limitations regarding the
availability and utilization of the credit. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by a Portfolio.
Shareholders are urged to consult their tax advisors regarding the application
of these rules to their particular circumstances.
TAXES AND FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, a foreign trust or estate, a foreign corporation, or a foreign
partnership ("Foreign Shareholder") depends on whether the income from the
Portfolio is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Portfolio is not effectively connected with a U.S.
trade or business carried on by a Foreign Shareholder, distributions of net
investment income plus the excess of net short-term capital gains over net
long-term capital losses will be subject to U.S. withholding tax at the rate of
30% (or such lower treaty rate as may be applicable) upon the gross amount of
the dividend. Furthermore, Foreign Shareholders will generally be exempt from
U.S. federal income tax on gains realized on the sale of shares of the
Portfolio, distributions of net long-term capital gains, and amounts retained by
the Fund which are designated as undistributed capital gains.
If the income from the Portfolio is effectively connected with a U.S. trade
or business carried on by a Foreign Shareholder, then distributions from the
Portfolio and any gains realized upon the sale of shares of the Portfolio, will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
and residents or domestic corporations.
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The Portfolio may be required to withhold U.S. federal income tax on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless the Foreign Shareholder complies with Internal
Revenue Service certification requirements.
The tax consequences to a Foreign Shareholder entitled to claim the benefits
of an applicable tax treaty may differ from those described here. Furthermore,
Foreign Shareholders are strongly urged to consult their own tax advisors with
respect to the particular tax consequences to them of an investment in a
Portfolio, including the potential application of the provisions of the Foreign
Investment in Real Estate Property Tax Act of 1980, as amended.
PURCHASE OF SHARES
Shares of the Fund may be purchased on any day the New York Stock Exchange
(the "NYSE") is open. The NYSE will be closed on the following days: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Each Portfolio
reserves the right in its sole discretion (i) to suspend the offering of its
shares, (ii) to reject purchase orders when in the judgment of management such
rejection is in the best interest of the Fund, and (iii) to reduce or waive the
minimum for initial and subsequent investments for certain accounts such as
employee benefit plans or under circumstances where certain economies can be
achieved in sales of a Portfolio's shares. The International Equity, Emerging
Markets, Small Cap Value Equity, Gold and Balanced Portfolios are currently
closed to new investors with the exception of certain Morgan Stanley customers,
employees of Morgan Stanley, certain tax-qualified retirement plans and other
investment companies advised by Morgan Stanley Asset Management Inc. and its
affiliates.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the NYSE is closed, or trading on the NYSE is
restricted as determined by the Commission; (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for a Portfolio to dispose of securities owned
by it, or fairly to determine the value of its assets; and (iii) for such other
periods as the Commission may permit.
No charge is made by any Portfolio for redemptions except for the 1%
transaction fee that may be assessed upon redemption of the International Small
Cap Portfolio. Any redemption may be more or less than the shareholder's cost
depending on the market value of the securities held by the Portfolio.
To protect your account and the Fund from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Fund to verify
the identity of the person who has authorized a redemption from your account.
Signature guarantees are required in connection with: (i) all redemptions,
regardless of the amount involved, when the proceeds are to be paid to someone
other than the registered owner(s) and/or registered address; and (ii) share
transfer requests. An "eligible guarantor institution" guarantor may include a
bank, a trust company, a credit union or savings and loan association, a member
firm of a domestic stock exchange, or a foreign branch of any of the foregoing.
Notaries public are not acceptable guarantors. The signature guarantees must
appear either: (i) on the written request for redemption; (ii) on a separate
instrument for assignment ("stock power") which should specify the total number
of shares to be redeemed; or (iii) on all stock certificates tendered for
redemption and, if shares held by the Fund are also being redeemed, on the
letter or stock power.
The Fund has made an election with the Commission pursuant to Rule 18f-1
under the 1940 Act to pay in cash all redemptions requested by any shareholder
of record limited in amount during any 90-day period to the lesser of $250,000
or 1% of the net assets of a Portfolio at the beginning of such period. Such
commitment is irrevocable without the prior approval of the Commission.
Redemptions in excess of the above limits may be paid in whole or in part in
investment securities or in cash, as the Board of Directors may deem advisable
as being in the best interests of the Fund. If redemptions are paid in
investment securities, such securities will be valued as set forth in the Fund's
Prospectus under "Valuation of Shares". A redeeming shareholder would normally
incur brokerage expenses in converting these securities to cash.
SHAREHOLDER SERVICES
EXCHANGE FEATURES
Shares of each Portfolio of the Fund may be exchanged for shares of any
other available Portfolio (other than the International Equity, Emerging
Markets, Small Cap Value Equity and Balanced Portfolios, which are closed to new
investors). Any such exchange will be based on the respective net asset values
of the shares involved. There is no sales commission or sales charge of any
kind. Before making an exchange, a shareholder should consider the investment
objectives of the Portfolio to be purchased.
Exchange requests may be made either by mail or telephone. Exchange requests
by mail should be sent to Morgan Stanley Institutional Fund, Inc., P.O. Box
2798, Boston, Massachusetts 02208-2798. Telephone exchanges will be accepted
only if the certificates for the shares to be exchanged are held by the Fund for
the account of the shareholder and the registration of the
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two accounts will be identical. Exchanges may be subject to limitations as to
amounts or frequency, and to other restrictions established by the Board of
Directors to assure that such exchanges do not disadvantage the Fund and its
shareholders.
TRANSFER OF SHARES
Shareholders may transfer shares of the Fund's Portfolios to another person
by making a written request to the Fund. The request should clearly identify the
account and number of shares to be transferred, and include the signature of all
registered owners and all stock certificates, if any, which are subject to the
transfer. The signature on the letter of request, the stock certificate or any
stock power must be guaranteed in the same manner as described under "Redemption
of Shares". As in the case of redemptions, the written request must be received
in good order before any transfer can be made. Transferring shares may affect
the eligibility of an account for a given class of the Portfolio's shares and
may result in involuntary conversion or redemption of such shares.
INVESTMENT LIMITATIONS
Each current Portfolio has adopted the following restrictions which are
fundamental policies and may not be changed without the approval of the lesser
of: (i) at least 67% of the voting securities of the Portfolio present at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Portfolio are present or represented by proxy; or (ii) more than 50% of the
outstanding voting securities of the Portfolio. Each Portfolio of the Fund will
not:
(1) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent the
Portfolio from purchasing or selling options or futures contracts or from
investing in securities or other instruments backed by physical commodities),
and except that the Gold Portfolio may invest in gold bullion in accordance with
its investment objectives and policies;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies that deal in real estate and may purchase and sell
securities that are secured by interests in real estate;
(3) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;
(4) except with respect to the Global Fixed Income, Emerging Markets,
Emerging Markets Debt, China Growth, Latin American, MicroCap, Aggressive
Equity, European Real Estate, Asian Real Estate, Technology and U.S. Real Estate
Portfolios (i) purchase more than 10% of any class of the outstanding voting
securities of any issuer and (ii) purchase securities of an issuer (except
obligations of the U.S. Government and its agencies and instrumentalities) if as
a result, with respect to 75% of its total assets, more than 5% of the
Portfolio's total assets, at market value, would be invested in the securities
of such issuer;
(5) issue senior securities and will not borrow, except from banks and as a
temporary measure for extraordinary or emergency purposes and then, in no event,
in excess of 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings), except that each of the Emerging Markets
Debt and Latin American Portfolios may borrow from banks and other entities, and
the Technology Portfolio may borrow from banks, in an amount not in excess of
33 1/3% of its total assets (including the amount borrowed) less liabilities in
accordance with its investment objectives and policies;
(6) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act in
the disposition of restricted securities;
(7) acquire any securities of companies within one industry if, as a result
of such acquisition, more than 25% of the value of the Portfolio's total assets
would be invested in securities of companies within such industry; provided,
however, that there shall be no limitation on the purchase of obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, or (in
the case of the Money Market Portfolio or the Municipal Money Market Portfolio)
instruments issued by U.S. Banks, except that (i) the Latin American Portfolio
may invest more than 25% of its total assets in companies involved in the
telecommunications industry or financial services industry; (ii) the Gold
Portfolio may invest more than 25% of its total assets in securities of
companies in the group of industries involved in gold-related or
precious-metals-related activities, as described in its prospectus, and may
invest more than 25% of its total assets in one or more of the industries that
are a part of such group of industries, as described in its prospectus; (iii)
each of the Asian Real Estate, European Real Estate and U.S. Real Estate
Portfolios will invest more than 25% of its total assets in the Asian, European
and U.S. real estate industries, respectively, as described in their
prospectuses; and (iv) the Technology Portfolio may invest more than 25% of its
assets in securities of companies in the technology or technology-related
industries; and
(8) write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
In addition, each current Portfolio of the Fund has adopted non-fundamental
investment limitations as stated below and in their respective Prospectuses.
Such limitations may be changed without shareholder approval. Each current
Portfolio of the Fund will not:
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(1) purchase on margin or sell short, except (i) that the Emerging Markets
Debt, Latin American, Aggressive Equity and Technology Portfolios may from time
to time sell securities short without limitation but consistent with applicable
legal requirements as stated in its Prospectus; (ii) that each Portfolio, except
the Money Market and Municipal Money Market Portfolios may enter into option
transactions and futures contracts as described in its Prospectus; and (iii) as
specified above in fundamental investment limitation number (1) above;
(2) except for the High Yield Portfolio, purchase or retain securities of
an issuer if those officers and Directors of the Fund or its investment adviser
owning more than 1/2 of 1% of such securities together own more than 5% of such
securities;
(3) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% of its total assets at fairmarket value, except that the High Yield
Portfolio may pledge, mortgage or hypothecate a maximum of 50% of its assets,
not counting assets segregated to comply with coverage requirements under
Section 18(f) of the 1940 Act, and the SEC's rules, regulations, orders, and
interpretations thereunder;
(4) invest for the purpose of exercising control over management of any
company;
(5) invest its assets in securities of any investment company, except as
permitted by the 1940 Act or the rules, regulations, interpretations or orders
of the SEC and its staff thereunder;
(6) except for the U.S. Real Estate, European Real Estate and Asian Real
Estate Portfolios, invest in real estate limited partnership interests, and the
U.S. Real Estate, European Real Estate and Asian Real Estate Portfolios may not
invest in such interests that are not publicly traded;
(7) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the respective Prospectuses) that are publicly distributed, except
that the High Yield Portfolio also may purchase such securities that are not
publicly distributed; (ii) by lending its portfolio securities to banks,
brokers, dealers and other financial institutions so long as such loans are not
inconsistent with the 1940 Act or the Rules and Regulations or interpretations
of the Commission thereunder; and (iii) the High Yield Portfolio may lend
securities to institutional investors in addition to entities described in (ii);
(8) borrow money, except from banks for extraordinary or emergency
purposes, and then only in amounts up to 10% of the value of the Portfolio's
total assets, or purchase securities while borrowings exceed 5% of its total
assets, except that (i) the Latin American, Emerging Markets Debt and Technology
Portfolios may borrow in accordance with fundamental investment limitation
number (5) above; and (ii) the High Yield Portfolio may borrow up to 33 1/3% of
its total assets in the aggregate, including reverse repurchase agreements; and
(9) except for the High Yield Portfolio, invest in fixed time deposits with
a duration of over seven calendar days or invest in fixed time deposits with a
duration of from two business days to seven calendar days if more than 10% of
the Portfolio's total assets would be invested in these deposits.
The Balanced, Fixed Income and Value Equity Portfolios will only issue
shares for securities or assets other than cash in a bona fide reorganization,
statutory merger, or in other acquisitions of portfolio securities (except for
municipal debt securities issued by state political subdivisions or their
agencies or instrumentalities) which (i) meet their respective investment
objectives; and (ii) are acquired for investment and not for resale.
Each of the Global Fixed Income, Emerging Markets, Emerging Markets Debt,
China Growth, Latin American, Aggressive Equity, European Real Estate, Asian
Real Estate and U.S. Real Estate Portfolios will diversify its holdings so that,
at the close of each quarter of its taxable year, (i) at least 50% of the market
value of the Portfolio's total assets is represented by cash (including cash
items and receivables), U.S. Government securities, and other securities, with
such other securities limited, in respect of any one issuer, for purposes of
this calculation to an amount not greater than 5% of the value of the
Portfolio's total assets and 10% of the outstanding voting securities of such
issuer; and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities).
With respect to fundamental investment limitation number (7), the Fund will
determine industry concentration in accordance with the classifications of
industries based on the Industry Numbers from the Standard Industrial
Classification Manual as prepared by the Office of Management and Budget, except
that (i) with respect to the Money Market, Municipal Money Market and High Yield
Portfolios, (a) financial service companies will be classified according to the
end users of their services, for example, automobile finance, bank finance and
diversified finance will each be considered a separate industry and (b)
asset-backed securities will be classified according to the underlying assets
securing such securities; and (ii) with respect to the High Yield Portfolio,
utility companies will be classified according to their services, for example,
electric, gas, gas transmission, and telephone will be treated as separate
industries.
In accordance with fundamental investment limitation number (7), the Latin
American Portfolio will only invest more than 25% of its total assets in
companies involved in the telecommunications industry or financial services
industry if the Board of Directors determines that the Latin American markets
are dominated by securities of issuers in such industries and that, in light of
the anticipated return, investment quality, availability and liquidity of the
issuers in such industries, the Portfolio's ability to achieve its investment
objective would, in light of the investment policies and limitations, be
materially
23
<PAGE>
adversely affected if the Portfolio was not able to invest greater than 25% of
its total assets in such industries. As stated in the Prospectus, the Board of
Directors has made the foregoing determination and, accordingly, the Latin
American Portfolio will invest between 25% and 40% of its assets in securities
of issuers engaged in the telecommunications industry.
The percentage limitations contained in these restrictions apply at the time
of purchase of securities. Future Portfolios of the Fund may adopt different
limitations.
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS
Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining until the date noted on the face of the instrument as the date
on which the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be made.
However, instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (i) a Government
Obligation with a variable rate of interest readjusted no less frequently than
annually may be deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate; (ii) an instrument with a variable
rate of interest, the principal amount of which is scheduled on the face of the
instrument to be paid in one year or less, may be deemed to have a maturity
equal to the period remaining until the next readjustment of the interest rate;
(iii) an instrument with a variable rate of interest that is subject to a demand
feature may be deemed to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand; (iv) an
instrument with a floating rate of interest that is subject to a demand feature
may be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand; and (v) a repurchase agreement
may be deemed to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to occur, or
where no date is specified, but the agreement is subject to demand, the notice
period applicable to a demand for the repurchase of the securities.
MANAGEMENT OF THE FUND
OFFICERS AND DIRECTORS
The Fund's officers, under the supervision of the Board of Directors, manage
the day-to-day operations of the Fund. The Directors set broad policies for the
Fund and choose its officers. Two Directors and all of the officers of the Fund
are directors, officers or employees of the Adviser, Morgan Stanley or the
administrative services provider. Directors and officers of the Fund are also
directors and officers of some or all of the other investment companies managed,
administered, advised or distributed by the Adviser or its affiliates. The other
Directors have no affiliation with the Adviser, Morgan Stanley or the
administrative services provider. A list of the Directors and officers of the
Fund and a brief statement of their present positions and principal occupations
during the past five years is set forth below:
<TABLE>
<CAPTION>
NAME, ADDRESS AND DATE OF BIRTH POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------------------- ---------------------- --------------------------------------------------
<S> <C> <C>
Barton M. Biggs* Chairman and Director Chairman, Director and Managing Director of Morgan
1221 Avenue of the Americas Stanley Asset Management Inc. and Morgan Stanley
New York, NY 10020 Asset Management Limited; Managing Director of
11/26/32 Morgan Stanley & Co. Incorporated; Director of
Rand McNally Company; Member of the Yale
Development Board; Chairman and Director of
various U.S. registered investment companies
managed by Morgan Stanley Asset Management Inc.
Michael F. Klein* Director and President Principal of Morgan Stanley Asset Management Inc;
1221 Avenue of the Americas President and Director of various investment
New York, NY 10020 companies managed by Morgan Stanley Asset
12/12/58 Management Inc.; Previously practiced law with
the New York firm of Rogers & Wells.
John D. Barrett, II Director Chairman and Director of Barrett Associates, Inc.
521 Fifth Avenue (investment counseling); Director of the
New York, NY 10135 Ashforth Company (real estate); Director of
8/21/35 Morgan Stanley Universal Funds, Inc. and Morgan
Stanley Strategic Adviser Fund, Inc.
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law firm);
43 Arch Street Director of Morgan Stanley Universal Funds, Inc.
Greenwich, CT 06830 and Morgan Stanley Strategic Adviser Fund, Inc.
1/23/37
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND DATE OF BIRTH POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------------------- ---------------------- --------------------------------------------------
<S> <C> <C>
Andrew McNally IV Director Director of Allendale Insurance Co., Mercury
8255 North Central Park Avenue Finance (consumer finance); Zenith Electronics,
Skokie, IL 60076 Hubbell, Inc. (industrial electronics); Director
11/11/39 of Morgan Stanley Universal Funds, Inc. and
Morgan Stanley Strategic Adviser Fund, Inc.;
Formerly, Chairman and Chief Executive Officer
of Rand McNally & Company (publishing).
Samuel T. Reeves Director Chairman of the Board and CEO, Pinacle L.L.C.
8211 North Fresno Street (investment firm); Director, Pacific Gas and
Fresno, CA 93720 Electric and PG&E Enterprises (utilities);
7/28/34 Director of Morgan Stanley Universal Funds, Inc.
and Morgan Stanley Strategic Adviser Fund, Inc.
Fergus Reid Director Chairman and Chief Executive Officer of LumeLite
85 Charles Colman Blvd Plastics Corporation (injection molding firm);
Pawling, NY 12564 Trustee and Director of Vista Mutual Fund Group;
8/12/32 Director of the Morgan Stanley Universal Funds,
Inc.
Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin Boehm, P.C.;
2800 North Central Avenue Formerly of Counsel, Bryan, Cave LLP; (law
Phoenix, AZ 85004 firms); Director of Morgan Stanley Universal
1/24/34 Funds, Inc. and Morgan Stanley Strategic Adviser
Fund, Inc.
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley & Co. Incorporated and
1221 Avenue of the Americas of Morgan Stanley Asset Management Inc.; General
New York, NY 10020 Counsel and Secretary of Morgan Stanley Asset
6/10/60 Management Inc.; Vice President of various U.S.
registered investment companies managed by
Morgan Stanley Asset Management Inc.
Joseph P. Stadler* Vice President Principal of Morgan Stanley & Co. Incorporated and
1221 Avenue of the Americas Morgan Stanley Asset Management Inc.; Previously
New York, NY 10020 with Price Waterhouse LLP (accounting); Vice
6/7/54 President of various U.S. registered investment
companies managed by Morgan Stanley Asset
Management Inc.
Stefanie V. Chang* Vice President Vice President of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated and Morgan Stanley Asset Management
New York, NY 10020 Inc.; Vice President of various investment
11/30/66 companies managed by Morgan Stanley Asset
Management Inc. Previously practiced law with
the New York law firm of Rogers & Wells.
Valerie Y. Lewis* Secretary Vice President of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated and Morgan Stanley Asset Management
New York, NY 10020 Inc.; Previously with Citicorp (banking);
3/26/56 Secretary of various U.S. registered investment
companies managed by Morgan Stanley Asset
Management Inc.
Karl O. Hartmann Assistant Secretary Senior Vice President, Secretary and General
73 Tremont Street Counsel of Chase Global Funds Services Company;
Boston, MA 02108-3913 Previously, Leland, O'Brien, Rubinstein
3/7/55 Associates, Inc. (investments).
Joanna Haigney Treasurer Assistant Vice President, Senior Manager of Fund
73 Tremont Street Administration and Compliance Services, Chase
Boston, MA 02108-3913 Global Funds Services Company; Officer of
10/10/66 various investment companies managed by Morgan
Stanley Asset Management Inc. Previously with
Coopers & Lybrand LLP.
Rene J. Feuerman Assistant Treasurer Manager of Fund Administration and Compliance
73 Tremont Street Services, Chase Global Funds Services Company.
Boston, MA 02108-3913 Previously Fund Administrator and Senior Fund
1/25/67 Accountant, Chase Global Funds Services Company.
</TABLE>
- --------------
* "Interested Person" within the meaning of the 1940 Act.
25
<PAGE>
REMUNERATION OF DIRECTORS AND OFFICERS
Effective June 28, 1995, the Fund and other funds managed by MSAM (the "Fund
Complex") will pay each of the Directors who is not an "interested person" an
annual aggregate fee of $55,000, plus out-of-pocket expenses. The Fund Complex
will pay each of the members of the Fund's Audit Committee, which consists of
the Fund's Directors who are not "interested persons," an additional annual
aggregate fee of $10,000 for serving on such committee. The allocation of such
fees will be among the funds in the Fund Complex in proportion to their
respective average net assets. For the fiscal year ended December 31, 1997, the
Fund paid approximately $ in Directors' fees and expenses. Directors who
are also officers or affiliated persons receive no remuneration for their
services as Directors. The Fund's officers and employees are paid by the Adviser
or its agents. As of February 12, 1998, to Fund management's knowledge, the
Directors and officers of the Fund, as a group, owned less than 1% of the
outstanding common stock of the Fund. The following table shows aggregate
compensation paid to each of the Fund's Directors by the Fund and the Fund
Complex, respectively, in the fiscal year ended December 31, 1997.
The Fund maintains an unfunded Deferred Compensation Plan ("Plan") which
allows each independent Director to defer payment of all, or a portion, of the
fees he or she receives for attending meetings of the Board of Directors
throughout the year. Each eligible Director may elect to have the deferred
amounts credited with a return equal to either of the following: (i) a rate
equal to the prevailing rate for 90-day U.S. Treasury Bills; or (ii) a rate
equal to the total return on any portfolios of the Fund selected by the
Director. Distributions to an Eligible Trustee generally are in the form of
equal annual installments over a period of five (5) years beginning on the first
day of the year following the year in which the Director's service terminates,
except that the Board of Directors, in its sole discretion, may accelerate or
extend such distribution. The Fund intends that the Plan shall be maintained at
all times on an unfunded basis for federal income tax purposes under the
Internal Revenue Code of 1986. The rights of an eligible Director and the
beneficiaries to the amounts held under the Plan are unsecured and such amounts
are subject to the claims of the creditors of the Fund.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(4)
(2) (3) ESTIMATED (5)
AGGREGATE PENSION OR RETIREMENT ANNUAL TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED BENEFITS FROM REGISTRANT
(1) FROM AS PART OF FUND UPON AND FUND COMPLEX
NAME OF PERSON, POSITION REGISTRANT EXPENSES RETIREMENT PAID TO DIRECTORS
- -------------------------------------------------- ------------- --------------------- ------------- -------------------
<S> <C> <C> <C> <C>
Barton M. Biggs,
Director and Chairman of the Board............... None N/A N/A None
Warren J. Olsen,*
Director and President........................... None N/A N/A None
Michael F. Klein,**
Director and President........................... None N/A N/A None
John D. Barrett, II
Director......................................... 59,485 N/A N/A 68,777
Gerard E. Jones,
Director......................................... 59,485 N/A N/A 75,877
Andrew McNally, IV
Director......................................... 55,023 N/A N/A 63,195
Samuel T. Reeves,
Director......................................... 53,287 N/A N/A 61,331
Fergus Reid,
Director......................................... 67,434 N/A N/A 77,220
Frederick O. Robertshaw,
Director......................................... 50,834 N/A N/A 58,777
Frederick B. Whittemore,***
Director......................................... None N/A N/A None
</TABLE>
- ------------------
* As of May 31, 1997, Mr. Olsen resigned from the Board of Directors.
** Mr. Klein was appointed to the Board of Directors effective May 31, 1997.
*** As of March 14, 1997, Mr. Whittemore resigned from the Board of Directors.
INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS
MSAM is a wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover &
Co. The principal offices of Morgan Stanley, Dean Witter, Discover & Co. are
located at 1585 Broadway, New York, NY 10036, and the principal offices of MSAM
are located at 1221 Avenue of the Americas, New York, NY 10020. As compensation
for advisory services for the fiscal years ended December 31, 1995, December 31,
1996 and December 31, 1997, the Adviser earned fees of approximately
$40,534,000, $55,465,000 and $ , respectively, and from such fees
voluntarily waived fees of $3,526,000, $4,340,000 and $ ,
26
<PAGE>
respectively. For the fiscal years ended December 31, 1995, December 31, 1996
and December 31, 1997, the Fund paid brokerage commissions of approximately
$10,317,515, $17,014,335 and $ , respectively. For the fiscal years ended
December 31, 1995, December 31, 1996 and December 31, 1997, the Fund paid in the
aggregate $377,000, $826,686 and $ , respectively, as brokerage
commissions to Morgan Stanley & Co. Incorporated ("Morgan Stanley" or the
"Distributor"), an affiliated broker-dealer, which represented 4%, 5% and % of
the total amount of brokerage commissions paid in each respective period. For
the fiscal years ended December 31, 1995, December 31, 1996 and December 31,
1997, the Fund paid administrative fees to MSAM of approximately $5,238,000,
$7,298,531 and $ , respectively.
Sun Valley Gold Company (the "Sub-Adviser"), with principal offices at 620
Sun Valley Road, Sun Valley, Idaho, serves as the investment sub-adviser of the
Gold Portfolio, pursuant to a sub-advisory agreement among the Fund, the Adviser
and the Sub-Adviser (the "Sub-Advisory Agreement"). The Adviser and the
Sub-Adviser have entered into an indemnification agreement under which,
generally, the Sub-Adviser has agreed to indemnify the Adviser and the Fund for
claims or losses in connection with any failure by the Sub-Adviser to comply
with its obligations under the Sub-Advisory Agreement or related agreements or
any act or omission that amounts to negligence, misfeasance or bad faith, and
the Adviser has agreed to indemnify the Sub-Adviser for claims or losses in
connection with any failure by the Adviser to comply with its obligations under
the Sub-Advisory Agreement or related agreements. As compensation for
sub-advisory services for the fiscal years ended December 31, 1995, December 31,
1996 and December 31, 1997, the Sub-Adviser earned fees of approximately
$73,000, $110,000 and $ , respectively, and from such fees voluntarily
waived fees of $37,000, $52,000 and $ , respectively. For the fiscal
years ended December 31, 1995, December 31, 1996 and December 31, 1997, the Fund
paid $450, $0 and $ , respectively, as brokerage commissions to Sun
Valley Gold Trading, Inc., a broker-dealer affiliated with the Sub-Adviser.
Pursuant to the MSAM Administration Agreement between the Adviser and the
Fund, the Adviser provides Administrative Services. For its services under the
Administration Agreement, the Fund pays the Adviser a monthly fee which on an
annual basis equals 0.15 of 1% of the average daily net assets of each
Portfolio.
Under the Agreement between the Adviser and The Chase Manhattan Bank
("Chase"), Chase Global Funds Services Company ("CGFSC," a corporate affiliate
of Chase) provides certain administrative services to the Fund. CGFSC provides
operational and administrative services to investment companies with
approximately $69 billion in assets and having approximately shareholder
accounts as of December 31, 1997. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913.
DISTRIBUTION OF FUND SHARES
The Distributor, a wholly-owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co., serves as the Distributor of the Fund's shares pursuant to a
Distribution Agreement for the Fund and a Plan of Distribution for the Class B
shares of the Portfolios (except the Municipal Money Market and International
Small Cap Portfolios which do not have Class B shares) pursuant to Rule 12b-1
under the 1940 Act (each, a "Plan" and collectively, the "Plans"). Under each
Plan the Distributor is entitled to receive as compensation from these
Portfolios a fee, which is accrued daily and paid quarterly, at an annual rate
of up to 0.25% of the average daily net assets of the Class B shares of these
Portfolios. The Plans for the Class B shares were most recently approved by the
Fund's Board of Directors, including those directors who are not "interested
persons" of the Fund as that term is defined in the 1940 Act and who have no
direct or indirect financial interest in the operation of a Plan or in any
agreements related thereto, on December 11, 1997.
The Class B shares commenced operations on January 2, 1996. Therefore, no
Rule 12b-1 fees were paid to the Distributor for the fiscal year ended December
31, 1995. For the fiscal years ended December 31, 1996 and December 31, 1997,
the Fund paid to the Distributor fees of approximately $178,205 and $ ,
respectively, pursuant to the Distribution Plan in accordance with Rule 12b-1
under the 1940 Act. The Mortgage-Backed Securities, China Growth and MicroCap
Portfolios had not commenced operations as of December 31, 1997.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which incorporates the Code of Ethics of the Adviser
(together, the "Codes"). The Codes significantly restrict the personal investing
activities of all employees of the Adviser and, as described below, impose
additional, more onerous, restrictions on the Fund's investment personnel.
The Codes require that all employees of the Adviser preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Adviser include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Adviser.
Furthermore, the Codes provide for trading "blackout periods" that prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security.
27
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The names and addresses of the holders of 5% or more of the outstanding
shares of any class of the Fund as of January 30, 1998 and the percentage of
outstanding shares of such classes owned beneficially or of record by such
shareholders as of such date are, to Fund management's knowledge, as follows:
ACTIVE COUNTRY ALLOCATION PORTFOLIO: The Trustees of Columbia University in
the City of New York, 475 Riverside Drive, Suite 401, New York, NY 10115, owned
20.29% of such Portfolio's total outstanding Class A shares.
Key Trust Company of Ohio, N.A., FBO Oglebay Norton Company, 127 Public
Square, Cleveland, OH 44114, owned 14.03% of such Portfolio's total outstanding
Class A shares.
State Street Bank & Trust Co., FBO MEMC Pension Plan, 200 Newport Avenue,
North Quincy, MA 02171, owned 9.44% of such Portfolio's total outstanding Class
A shares.
Sahara Enterprises, Inc., 3 First National Plaza, Suite 2000, Chicago, IL
60602-4260, owned 8.71% of such Portfolio's total outstanding Class A shares.
Kinghugh S.A. c/o Morgan Stanley Asset Management Inc., 1221 Avenue of the
Americas, New York, NY 10020, owned 7.22% of such Portfolio's total outstanding
Class A shares.
The Flinn Foundation, Northern Trust Co., Master Trust Dept., 7th Floor,
P.O. Box 92984, Chicago, IL 60675, owned 5.47% of such Portfolio's total
outstanding Class A shares.
Fidelity Investments Institutional Operations Co. As Agent For Certain
Employee Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 77.49% of
such Portfolio's total outstanding Class B shares.
David M. & Sharon M. Platter, 9 Palmer Lane, Riverside, CT 06878, owned
22.51% of such Portfolio's total outstanding Class B shares.
AGGRESSIVE EQUITY PORTFOLIO: Northern Trust Company Trustee, FBO Morgan
Stanley Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned
12.25% of such Portfolio's total outstanding Class A shares.
Ministers and Missionaries Benefit Board of the American Baptist Churches,
Attn: Morgan Stanley Asset Management Inc., 1221 Avenue of the Americas, New
York, NY 10020, owned 10.08% of such Portfolio's total outstanding Class A
shares.
Bank Morgan Stanley AG, Bahnhogstrasse 92, Zurich CH-8023, Switzerland,
owned 5.70% of such Portfolio's total outstanding Class A shares.
Kinghugh S.A., c/o Morgan Stanley Asset Management Inc., 1221 Avenue of the
Americas, New York, NY 10020, owned 5% of such Portfolio's total outstanding
Class A shares.
ASIAN EQUITY PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 15.46% of
such Portfolio's total outstanding Class A shares.
Association De Biefsaissance Et De Retraite Des Pollciers De La Communaute
Urbaine De Montreal, 480 Gilford Street, Montreal, Quebec H2J1N3, owned 15.27%
of such Portfolio's total outstanding Class A shares.
Kenneth P. Ulickey, Charitable Remdr Unitrust, Trustee, Kenneth P. Ulickey,
277 Arboretum Circle, Wheaton, IL 60187-8701 owned 11.41% of such Portfolio's
total outstanding Class B shares.
Rosekrans Family Partnership, 220 Montgomery Street, Suite 1940, San
Francisco, CA 94104, owned 10.10% of such Portfolio's total outstanding Class B
shares.
Mr. James Fuld, Jr., 114 East 72nd Street, New York, NY 10021, owned 8.80%
of such Portfolio's total outstanding Class B shares.
Steve & Julie Gerhardt, 6030 Quail Hill Drive, Cincinnati, OH 45233, owned
6.91% of such Portfolio's total outstanding Class B shares.
John A. Mansour, 111 Congress Avenue, Suite 3000, Austin, TX 78701-4043,
owned 6.59% of such Portfolio's total outstanding Class B shares.
Gururai Deshpande, 9 Sparta Way, Andover, MA 01810, owned 5.79% of such
Portfolio's total outstanding Class B shares.
Berl Bernhard & Karen Bernhard, Trustee FBO The Berl Bernhard Trust, 1693
Epping Farms Lane, Annapolis, MD 21401, owned 5.08% of such Portfolio's total
outstanding Class B shares.
ASIAN REAL ESTATE PORTFOLIO: Morgan Stanley Asset Management Inc., 1221
Avenue of the Americas, New York, NY 10020, owned 73.49% of such Portfolio's
total outstanding Class A shares.
28
<PAGE>
Joseph Perella & James I. Black, Trustees, 998 Fifth Avenue, New York, NY
10028-0126, owned 11.29% of such Portfolio's total outstanding Class A shares.
Amy M. Perella & James I. Black, Trustees, 998 Fifth Avenue, New York, NY
10028-0126, owned 11.29% of such Portfolio's total outstanding Class A shares.
BALANCED PORTFOLIO: First Bank, N.A. Trustee, Kinney Printing Co., P.O. Box
64010, St. Paul, MN 55154-0010, owned 23.18% of such Portfolio's total
outstanding Class A shares.
H. Conrad & Sarah Meyer, One Woodland Avenue, Bronxville, NY 10708-3208,
owned 17.06% of such Portfolio's total outstanding Class A shares.
Guarantee & Trust Company, Trustee FBO H. Conrad Meyer III, IRA Rollover,
One Woodland Avenue, Bronxville, NY 10708-3208, owned 10.32% of such Portfolio's
total outstanding Class A shares.
Jeffery R. Holzschuh, 21 Kenilworth Terrace, Greenwich, CT 06830, owned
6.78% of such Portfolio's total outstanding Class A shares.
William Guthrie, IRA Rollover, MSTC Custodian, 435 Sheridan Road, Winnetka,
IL 60093-2626, owned 62.56% of such Portfolio's total outstanding Class B
shares.
Ramakrishna Kothalanka M.D., Profit Sharing Plan, MSTC Custodian, 126
Bentley Avenue, Jersey City, NJ 07304-1702, owned 36.04% of such Portfolio's
total outstanding Class B shares.
EMERGING GROWTH PORTFOLIO: Northern Trust Company Trustee, FBO Morgan
Stanley Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned
54.05% of such Portfolio's total outstanding Class A shares.
Allendale Mutual Insurance Co., P.O. Box 7500, Johnston, RI 02919-0750,
owned 19.68% of such Portfolio's total outstanding Class A shares.
NOAM/A/EC, c/o Philip Winters, Morgan Stanley Asset Management Inc., 1221
6th Avenue, New York, NY 10020, owned 8.70% of such Portfolio's total
outstanding Class A shares.
Anne W. Rohrbach, c/o Gleacher Avenue, 660 Madison Avenue, 19th Floor, New
York, NY 10021, owned 11.36% of such Portfolio's total outstanding Class B
shares.
Donald Axinn #2, 131 Jericho Turnpike, Jericho, NY 11753-1017, owned 7.98%
of such Portfolio's total outstanding Class B shares.
Penthouse Manufacturers Co., Inc., 225 Buffalo Avenue, Freeport, NY
11520-4709, owned 7.86% of such Portfolio's total outstanding Class B shares.
Lawrence M. Howell, Howell Capital, One Maritime Plaza, Suite 1700, San
Francisco, CA 94104, owned 7.57% of such Portfolio's total outstanding Class B
shares.
Julian Eisner, 871 Oak Lane, North Woodmere, NY 11581, owned 6.91% of such
Portfolio's total outstanding Class B shares.
H. Conrad & Sarah Meyer, One Woodland Avenue, Bronxville, NY 10708, owned
6.62% of such Portfolio's total outstanding Class B shares.
Bruce S. Ives, 163 Gallows Hill Road, West Redding, CT 06896, owned 6.01% of
such Portfolio's total outstanding Class B shares.
William B. O'Connor, 18 Monfort Road, Port Washington, NY 11050, owned 5.68%
of such Portfolio's total outstanding Class B shares.
EMERGING MARKETS PORTFOLIO: Ewing Marion Kauffman Foundation, 4900 Oak
Street, Kansas City, MO 64112-2776, owned 5.90% of such Portfolio's total
outstanding Class A shares.
Ministers & Missionaries Benefit Board of the American Baptist Churches, 475
Riverside Drive, New York, NY 10115, owned 5.90% of such Portfolio's total
outstanding Class A shares.
EQUITY GROWTH PORTFOLIO: Fidelity Management Trust Company as Trustee for
GTE Master Savings Trust, 82 Devonshire Street, Boston, MA 02109, owned 21.59%
of such Portfolio's total outstanding Class A shares.
Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675-2956, owned 16.86% of such Portfolio's total
outstanding Class A shares.
Fidelity Investments Institutional Operations Company As Agent for Certain
Employee Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 10.43% of
such Portfolio's total outstanding Class A shares.
29
<PAGE>
St. Raymonds Cemetery Reserve Fund, P.O. Box 92800, Rochester, NY 14692,
owned 5.09% of such Portfolio's total outstanding Class A shares.
Bankers Trust Co. As Custodian for Marriott International Inc. Employees'
Profit Sharing, Retirement and Savings Plan and Trust, 100 Plaza One, Jersey
City, NJ 07311-3999, owned 5.44% of such Portfolio's total outstanding Class B
shares.
EUROPEAN EQUITY PORTFOLIO: Alan Gerry, c/o Granite Associates LP, 1
Cablevision Center, Liberty, NY 12754, owned 5.13% of such Portfolio's total
outstanding Class A shares.
Wayne Gretzky, Trustee of the Gretzky Trust of 1989, 9100 Wilshire Blvd,
Suite 10000, Beverly Hills, CA 90210, owned 5.73% of such Portfolio's total
outstanding Class B shares.
Gururai Deshpande, 9 Sparta Way, Andover, MA 01810, owned 5.11% of such
Portfolio's total outstanding Class B shares.
HVA Limited Partnership, 1301 W. Newport Center Drive, Deerfield Beach, FL
33442-7734 owned 5.05% of such Portfolio's total outstanding Class B shares.
EUROPEAN REAL ESTATE PORTFOLIO: Donald E. Axinn, 131 Jericho Turnpike,
Jericho, NY 11753-1017 owned 24.45% of such Portfolio's total outstanding Class
B shares.
Irene R. Miller & Anoush Khoshkish, 186 Riverside Drive, Apt 10E, New York,
NY 10024-1007 owned 12.81% of such Portfolio's total outstanding Class B shares.
Janet G. Burdick, 1414 East Dean Road, Milwaukee, WI 53217, owned 12.41% of
such Portfolio's total outstanding Class B shares.
John W. Rutledge, 1122 N. Clark Street, Suite 1905, Chicago, IL 60610-2865,
owned 12.32% of such Portfolio's total outstanding Class B shares.
Virginia A. Cram, 2383 61st Street Drive, Binton, IA 52349-9476, owned
12.15% of such Portfolio's total outstanding Class B shares.
James L. Cram, 2383 61st Street Drive, Binton, IA 52349-9476, owned 12.15%
of such Portfolio's total outstanding Class B shares.
FIXED INCOME PORTFOLIO: Burton D. Cohen, 3912 Zenith Avenue South,
Minneapolis, MN 55410-1169, owned 6.75% of such Portfolio's total outstanding
Class B shares.
Michael S. Virgil, Trustee, Mary Ann Young Brownsey Trust, 330 N. Wabash
Avenue, 22nd Floor, Chicago, IL 60611, owned 6.45% of such Portfolio's total
outstanding Class B shares.
Max Jeffrey Baum, IRA Rollover, MSTC Custodian, 620 Green Bay Road, Highland
Park, IL 60035, owned 5.86% of such Portfolio's total outstanding Class B
shares.
Joan M. Hunt Trust, 8627 Madison Drive, Niles, IL 60648, owned 5.57% of such
Portfolio's total outstanding Class B shares.
Laverne M. Brownsey Trust, 330 N. Wabash Avenue, 22nd Floor, Chicago, IL
60611-3603, owned 5.30% of such Portfolio's total outstanding Class B shares.
First United Methodist Church of Chicago-Endowment Fund, 77 West Washington,
Chicago, IL 60602-2801, owned 5.17% of such Portfolio's total outstanding Class
B shares.
GLOBAL EQUITY PORTFOLIO: Robert College of Istanbul Turkey c/o Morgan
Stanley Asset Management Inc., 1221 Avenue of the Americas, New York, NY 10020,
owned 44% of such Portfolio's total outstanding Class A shares.
JM Kaplan Fund, Inc., 880 Third Avenue, 3rd Floor, New York, NY 10022, owned
12.31% of such Portfolio's total outstanding Class A shares.
Kaplan, Choate Value Partners, L.P., 880 Third Avenue, New York, NY
10022-4730, owned 8.95% of such Portfolio's total outstanding Class A shares.
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104,
owned 6.79% of such Portfolio's total outstanding Class A shares.
Gooss & Company, c/o Chase Manhattan Bank, 1211 6th Avenue, New York, NY
10036, owned 6.26% of such Portfolio's total outstanding Class A shares.
Fidelity Investments Institutional Operations as Agent for Certain Employee
Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 19.97% of such
Portfolio's total outstanding Class B shares.
30
<PAGE>
Edward J. Prostic, 2225 Stratford Road, Mission Hills, KS 66208, owned 6.56%
of such Portfolio's total outstanding Class B shares.
Eduardo Abad Trustee, Abad Charitable Remainder Trust 1, 277 North
Deepspring, Orange, CA 92669-6505, owned 6.31% of such Portfolio's total
outstanding Class B shares.
V. Marc Droppert IRA, MSTC Custodian, 13106 184th NE, Redmond, WA 98052,
owned 5.44% of such Portfolio's total outstanding Class B shares.
GLOBAL FIXED INCOME PORTFOLIO: American Industries Trust Company Inc.,
Trustee for AG First Farm Credit Bank Retirement Plan, 5700 NW Central Drive,
4th Floor, Houston, TX 77092, owned 22.89% of such Portfolio's total outstanding
Class A shares.
Northern Trust Company as Custodian, FBO The Lund Foundation, P.O. Box
92956, Chicago, IL 60675, owned 18.22% of such Portfolio's total outstanding
Class A shares.
Northern Trust Company as Custodian, FBO The LBD Foundation, P.O. Box 92956,
Chicago, IL 60675, owned 6.95% of such Portfolio's total outstanding Class A
shares.
The Northern Trust Co. FBO Christel Dehaan, P.O. Box 92956, Chicago, IL
60675-2956, owned 6.95% of such Portfolio's total outstanding Class A shares.
National Bank of Commerce Trustee, FBO National Bank of Commerce Pension
Plan, c/o NBC Trust Dept., One Commerce Square, Memphis, TN 38150, owned 6.28%
of such Portfolio's total outstanding Class A shares.
Radiology Associates PA Employee Benefit Plan, 500 South University, Suite
604, Little Rock, AR 72205, owned 5.86% of such Portfolio's total outstanding
Class A shares.
Investment and Research In Education c/o Philip W. Winters, Morgan Stanley
Asset Management Inc., 1221 Avenue of the Americas, New York, NY 10020, owned
5.65% of such Portfolio's total outstanding Class A shares.
David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ, England, UK, owned
5.92% of such Portfolio's total outstanding Class B shares.
HIGH YIELD PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley
Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 23.67% of
such Portfolio's total outstanding Class A shares.
Sandra Gerry, 79 Loomis Road, Liberty, NY 12754-2709, owned 7.80% of such
Portfolio's total outstanding Class A shares.
INTERNATIONAL EQUITY PORTFOLIO: Vanguard Fiduciary Trust Company, FBO Ball
Corp. Plan 91324, The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482,
owned 30% of such Portfolio's total outstanding Class B shares.
Ramakrishna Kothalanka, IRA Rollover, MSTC Custodian, 126 Bentley Ave.,
Jersey City, NJ 07304-1702, owned 5% of such Portfolio's total outstanding Class
B shares.
INTERNATIONAL MAGNUM PORTFOLIO: Bankers Trust Trustee, Harris Corporation
Retirement Plan & Harris Corporation Union Retirement Plan, 1025 W. Nasa
Boulevard, Melbourne, FL 32919, owned 33.14% of such Portfolio's total
outstanding Class A shares.
Lutheran Brotherhood, 625 Fourth Avenue, Minneapolis, MN 55415, owned 6.79%
of such Portfolio's total outstanding Class A shares.
Fidelity Investments Institutional Operations Company As Agent for Certain
Employee Benefit Plans, 100 Magellan Way, Covington, KY 41015, owned 71.99% of
such Portfolio's total outstanding Class B shares.
INTERNATIONAL SMALL CAP PORTFOLIO: The Skillman Foundation, Attn: Jean E.
Gregory, 600 Renaissance Center, Suite 1700, Detroit, MI 48243, owned 9.97% of
such Portfolio's total outstanding Class A shares.
Trustees of Boston College Attn: Paul Haran Associate Treasurer, St. Thomas
More Hall 310, Chestnut Hill, MA 02167, owned 7.27% of such Portfolio's total
outstanding Class A shares.
General Mills, Inc. Master Trust: Pooled International Fund, One General
Mills Blvd., Minneapolis, MN 55426, owned 6.93% of such Portfolio's total
outstanding Class A shares.
State Street Bank & Trust Co. As Trustee for Nissan Retirement Savings Plan,
P.O. Box 1992, Boston, MA 02105-1992, owned 5.72% of such Portfolio's total
outstanding Class A shares.
Cornell University, c/o Gail Reeke, Morgan Stanley Asset Management Inc.,
1221 Avenue of the Americas, New York, NY 10020, owned 5.15% of such Portfolio's
total outstanding Class A shares.
31
<PAGE>
JAPANESE EQUITY PORTFOLIO: The Northern Trust Company As Trustee, FBO
Portland General Holdings, Inc., Investment Plan Trust, Attn: William J. Valach,
121 SW Salmon Street, Portland, OR 97204, owned 6.12% of such Portfolio's total
outstanding Class A shares.
LATIN AMERICAN PORTFOLIO: The Hostetter Foundation, The Pilot House, Lewis
Wharf, Boston, MA 02110, owned 12.09% of such Portfolio's total outstanding
Class A shares.
T.R. Ansco & Company, P.O. Box 48698, Wichita, KS 67201, owned 17.72% of
such Portfolio's total outstanding Class B shares.
Raymond Dunn, III, 2310 Washington St., Suite 330, Newton, MA 02162-1440,
owned 5.27% of such Portfolio's total outstanding Class B shares.
Joseph G. Fogg, III, JG Fogg & Co. Inc., 400 Post Avenue, Suite 404,
Westbury, NY 11590-2226, owned 5.05% of such Portfolio's total outstanding Class
B shares.
MUNICIPAL BOND PORTFOLIO: Daniel F. and Maria J. McDonald, 8550 Old
Dominion Drive, McLean, VA 22102, owned 10.10% of such Portfolio's total
outstanding Class A shares.
Cushman Trust, c/o Cambrian Services, 1114 Avenue of the Americas, Suite
2702, New York, NY 10036, owned 8.91% of such Portfolio's total outstanding
Class A shares.
Frank R. Mori, 935 Park Avenue, New York, NY 10028, owned 8.17% of such
Portfolio's total outstanding Class A shares.
Sevenson Environmental Services, P.O. Box 396, 2749 Lockport Road, Niagra
Falls, NY 14305, owned 6.78% of such Portfolio's total outstanding Class A
shares.
Donna Karan, c/o Stephan Weiss, The Donna Karan Company, 550 Seventh Avenue,
New York, NY 10018, owned 6.39% of such Portfolio's total outstanding Class A
shares.
SMALL CAP VALUE EQUITY PORTFOLIO: John A. Mansour, 111 Congress Avenue,
Suite 3000, Austin, TX 78701-4043 owned 5.97% of such Portfolio's total
outstanding Class B shares.
TECHNOLOGY PORTFOLIO: Valassis Enterprises-Equity, c/o Franklin
Enterprises, 520 Lake Cook Road, Suite 380, Deerfield, IL 60015, owned 15.84% of
such Portfolio's total outstanding Class A shares.
Bruce W. Bastian and McKay S. Matthews, Trustees FBO Bruce W. Bastian
Charitable Trust, 51 West Center #755, Orem, UT 84057-4605 owned 15.03% of such
Portfolio's total outstanding Class A shares.
Kinghugh S.A., c/o Morgan Stanley Asset Management Inc., 1221 Avenue of the
Americas, New York, NY 10020, owned 10.32% of such Portfolio's total outstanding
Class A shares.
Donald L. Gustafson, IRA Rollover, MSTC Custodian, 3420 Norman Drive, Reno,
NV 85909-5089 owned 13.12% of such Portfolio's total outstanding Class B shares.
Sonali Lakhani & Snvdarshan Lakhani, 30 Kristy Lane, Watchung, NJ 07060,
owned 9.93% of such Portfolio's total outstanding Class B shares.
Paul Krieger, 23 Fairview Avenue, Great Neck, NY 11023, owned 8.23% of such
Portfolio's total outstanding Class B shares.
Jonathan J. Williams, IRA Rollover, MSTC Custodian, 132 Ready Road, Walnut
Creek, CA 94598-2329, owned 8.19% of such Portfolio's total outstanding Class B
shares.
Dr. William A. Tansey III, M.D., IRA Rollover, 8 Chestnut Place, Short
Hills, NJ 07078-2816, owned 8.06% of such Portfolio's total outstanding Class B
shares.
Andrew G. Lockhart, Flat 2 19A Weatherby Gardens, London, England SW5 OJP,
owned 7.68% of such Portfolio's total outstanding Class B shares.
Dr. Norman J. Nichols, IRA Rollover, MSTC Custodian, 5234 Netherland Avenue,
Bronx, NY 10471-2810, owned 7.59% of such Portfolio's total outstanding Class B
shares.
Robert Weinstein, IRA Rollover, MSTC Custodian, 875 N. Michigan Avenue,
Suite 2930, Chicago, IL 60611, owned 6.22% of such Portfolio's total outstanding
Class B shares.
Harvey A. Wagner & Arlene L. Wagner, 2660 Peachtree Road NW#32G, Atlanta, GA
30305, owned 5.66% of such Portfolio's total outstanding Class B shares.
Philip L. Rafnson, 7667 Cahill Road, Minneapolis, MN 55439, owned 5.62% of
such Portfolio's total outstanding Class B shares.
32
<PAGE>
Lisa S. Mendelson, 16 Tunstall Road, Scarsdale, NY 10586, owned 5.61% of
such Portfolio's total outstanding Class B shares.
The Chase Manhattan Bank, Custodian of the IRA Rollover of Ruth Malkoff,
108-19 Flatlands 9th St., Brooklyn, NY 11236, owned 5.39% of such Portfolio's
total outstanding Class B shares.
U.S. EQUITY PLUS PORTFOLIO: Morgan Stanley Asset Management Inc., 1221
Avenue of the Americas, New York, NY 10020, owned 5.42% of such Porfolio's total
outstanding Class A shares.
Lawrence Menaker and Cecelia Menaker, 734 Ninth Street, Wilmette, IL
60091-2616, owned 99.99% of such Portfolio's total outstanding Class B shares.
U.S. REAL ESTATE PORTFOLIO: Northern Trust Company Trustee, FBO Anderson
Worldwide Profit Sharing 401k Retirement Trust, P.O. Box 92956, Chicago, IL
60675, owned 12.91% of such Portfolios total outstanding Class A Shares.
Northwestern University, Attn: Investment Department, 633 Clark Street,
Suite 1-209, Evanston, IL 60208, owned 7.89% of such Portfolio's total
outstanding Class A shares.
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104,
owned 6.20% of such Portfolio's total outstanding Class A Shares.
Northern Trust Company Trustee FBO Morgan Stanley Profit Sharing Plan, P.O.
Box 92956, Chicago, IL 60675-2956, owned 5.47% of such Portfolio's total
outstanding Class A shares.
Morgan Stanley & Co. Pension Fund, c/o Northern Trust Company, 770 Broadway,
New York, NY 10003, owned 5.18% of such Portfolio's total outstanding Class A
shares.
Merrill Lynch Trust Co., Trustee FBO Qualified Retirement Plans, 265
Davidson Avenue, 4th Floor, Somerset, NJ 08873, owned 49.03% of such Portfolio's
total outstanding Class B shares.
VALUE EQUITY PORTFOLIO: San Diego Museum of Art, Board Designated Fund #6,
P.O. Box 2107, San Diego, CA 92110-2107, owned 5.15% of such Portfolio's total
outstanding Class A shares.
Alice H. Bartlett Trust, Paul D. Bartlett, Jr., Trustee, 4800 Main Street,
Suite 600, Kansas City, MO 64112, owned 19.58% of such Portfolio's total
outstanding Class B shares.
Paul D. Bartlett, Jr., 4800 Main Street, Suite 600, Kansas City, MO 64112,
owned 12.77% of such Portfolio's total outstanding Class B shares.
R. Douglas Spedding, Trustee of R. Douglas Spedding 1996 Trust, c/o ROS 4380
E. Alameda, Glendale, CO 80222, owned 10.77% of such Portfolio's total
outstanding Class B shares.
David Brooks Gendron, 2 Montpelier Place, London SW7 1HJ England, UK, owned
8.02% of such Portfolio's total outstanding Class B shares.
First United Methodist Church of Chicago - Endowment Fund, 77 West
Washington, Chicago, IL 60602, owned 6.08% of such Portfolio's total outstanding
Class B shares.
George N. & Susan P. Fugelsang, 17 Calhoun Drive, Greenwich, CT 06831, owned
5.98% of such Portfolio's total outstanding Class B shares.
Laverne M. Brownsey Trust, 333 N. Wabash Avenue, 22nd Floor, Chicago, IL
60611 owned 5.19% of such Portfolio's total outstanding Class B shares.
NET ASSET VALUE FOR MONEY MARKET PORTFOLIOS
The Money Market Portfolio and the Municipal Money Market Portfolio seek to
maintain a stable net asset value per share of $1.00. These Portfolios use the
amortized cost method of valuing their securities, which does not take into
account unrealized gains or losses. The use of amortized cost and the
maintenance of each Portfolio's per share net asset value at $1.00 is based on
the Portfolio's election to operate under the provisions of Rule 2a-7 under the
1940 Act. As a condition of operating under that Rule, each of the Money Market
Portfolios must maintain a dollar-weighted average portfolio maturity of 90 days
or less, purchase only instruments having remaining maturities of 397 days or
less, and invest only in securities which are of "eligible quality" as
determined in accordance with regulations of the Commission.
The Rule also requires that the Directors, as a particular responsibility
within the overall duty of care owed to shareholders, establish procedures
reasonably designed, taking into account current market conditions and each
Portfolio's investment objectives, to stabilize the net asset value per share as
computed for the purposes of sales and redemptions at $1.00. These procedures
include periodic review, as the Directors deem appropriate and at such intervals
as are reasonable in light of current market conditions, of the relationship
between the amortized cost value per share and a net asset value per share based
upon available indications of market value. In such review, investments for
which market quotations are readily available are valued at the most recent bid
price or quoted yield available for such securities or for securities of
comparable
33
<PAGE>
maturity, quality and type as obtained from one or more of the major market
makers for the securities to be valued. Other investments and assets are valued
at fair value, as determined in good faith by the Directors.
In the event of a deviation of over 1/2 of 1% between a Portfolio's net
asset value based upon available market quotations or market equivalents and
$1.00 per share based on amortized cost, the Directors will promptly consider
what action, if any, should be taken. The Directors will also take such action
as they deem appropriate to eliminate or to reduce to the extent reasonably
practicable any material dilution or other unfair results which might arise from
differences between the two. Such action may include redemption in kind, selling
instruments prior to maturity to realize capital gains or losses or to shorten
the average maturity, withholding dividends, paying distributions from capital
or capital gains or utilizing a net asset value per share as determined by using
available market quotations.
There are various methods of valuing the assets and of paying dividends and
distributions from a money market fund. Each of the Money Market and Municipal
Money Market Portfolios values its assets at amortized cost while also
monitoring the available market bid price, or yield equivalents. Since dividends
from net investment income will be declared daily and paid monthly, the net
asset value per share of each Portfolio will ordinarily remain at $1.00, but
each Portfolio's daily dividends will vary in amount. Net realized gains, if
any, will normally be declared and paid monthly.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to
illustrate the Portfolios' past performance.
Performance quotations by investment companies are subject to rules adopted
by the Commission, which require the use of standardized performance quotations.
In the case of total return, non-standardized performance quotations may be
furnished by the Fund but must be accompanied by certain standardized
performance information computed as required by the Commission. Current yield
and average annual compounded total return quotations used by the Fund are based
on the standardized methods of computing performance mandated by the Commission.
An explanation of those and other methods used by the Fund to compute or express
performance follows.
TOTAL RETURN
From time to time each Portfolio, except the Money Market and Municipal
Money Market Portfolios, may advertise total return for each class of shares of
the Portfolio. Total return figures are based on historical earnings and are not
intended to indicate future performance. The average annual total return is
determined by finding the average annual compounded rates of return over 1-, 5-,
and 10-year periods (or over the life of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1-, 5-, and 10-year period (or over the life of the Portfolio) and the
deduction of all applicable Fund expenses on an annual basis.
The average annual compounded rates of return (unless otherwise noted) for
the Fund's Portfolios for the one year and five year periods ended December 31,
1997 and for the period from inception through December 31, 1997 are as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL
INCEPTION ONE AVERAGE ANNUAL SINCE
NAME OF PORTFOLIO+ DATE YEAR FIVE YEARS INCEPTION
- -------------------------------------------------- --------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Active Country Allocation
Class A......................................... 1/17/92 8.61% 11.37% 8.69%
Class B......................................... 1/02/96 8.35% N/A 7.65%
Aggressive Equity
Class A......................................... 3/08/95 33.31% N/A 41.36%
Class B......................................... 1/02/96 32.90% N/A 36.62%
Asian Equity
Class A......................................... 7/01/91 (48.29)% (0.14 )% 4.16%
Class B......................................... 1/02/96 (48.48)% N/A (27.21 )%
Asian Real Estate
Class A......................................... 10/01/97 (19.92)%* N/A N/A
Class B......................................... 10/01/97 (19.70)%* N/A N/A
Balanced
Class A......................................... 2/20/90 17.30% 11.98% 11.25%
Class B......................................... 1/02/96 16.94% N/A 13.56%
Emerging Growth
Class A......................................... 11/01/89 11.36% 8.88% 11.88%
Class B......................................... 1/02/96 11.13% N/A 7.30%
Emerging Markets
Class A......................................... 9/25/92 (1.03)% 10.23% 10.13%
Class B......................................... 1/02/96 (1.31)% N/A 4.69%
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
INCEPTION ONE AVERAGE ANNUAL SINCE
NAME OF PORTFOLIO+ DATE YEAR FIVE YEARS INCEPTION
- -------------------------------------------------- --------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Emerging Markets Debt
Class A......................................... 2/01/94 18.29% N/A 18.77%
Class B......................................... 1/02/96 18.05% N/A 32.46%
Equity Growth
Class A......................................... 4/02/91 31.32% 21.86% 19.07%
Class B......................................... 1/02/96 31.05% N/A 30.53%
European Equity
Class A......................................... 4/02/93 17.88% N/A 19.25%
Class B......................................... 1/02/96 17.73% N/A 19.26%
European Real Estate
Class A......................................... 10/01/97 (4.76)%* N/A N/A
Class B......................................... 10/01/97 (4.76)%* N/A N/A
Fixed Income
Class A......................................... 5/15/91 9.54% 7.54% 8.53%
Class B......................................... 1/02/96 9.48% N/A 6.89%
Global Equity
Class A......................................... 7/15/92 23.75% 22.71% 20.03%
Class B......................................... 1/02/96 23.37% N/A 22.74%
Global Fixed Income
Class A......................................... 5/01/91 1.50% 6.91% 7.42%
Class B......................................... 1/02/96 1.29% N/A 3.68%
Gold
Class A......................................... 2/01/94 (55.64)% N/A (14.67 )%
Class B......................................... 1/02/96 (55.17)% N/A (28.74 )%
High Yield
Class A......................................... 9/28/92 15.87% 13.98% 13.46%
Class B......................................... 1/02/96 15.48% N/A 14.94%
International Equity
Class A......................................... 8/04/89 13.91% 20.19% 12.19%
Class B......................................... 1/02/96 13.57% N/A 16.07%
International Magnum
Class A......................................... 3/15/96 6.58%* N/A 8.28%
Class B......................................... 3/15/96 6.33%* N/A 7.94%
International Small Cap
Class A......................................... 12/15/92 (0.55)% 12.76% 12.84%
Japanese Equity
Class A......................................... 4/25/94 (9.23)% N/A (4.38 )%
Class B......................................... 1/02/96 (9.64)% N/A (5.75 )%
Latin American
Class A......................................... 1/18/95 41.28% N/A 24.70%
Class B......................................... 1/02/96 40.37% N/A 41.47%
Municipal Bond
Class A......................................... 1/18/95 7.25% N/A 6.66%
Class B......................................... 1/02/96 (0.01 %** N/A N/A
Small Cap Value Equity
Class A......................................... 12/17/92 36.80% 18.30% 18.46%
Class B......................................... 1/02/96 36.51% N/A 29.27%
Technology
Class A......................................... 9/16/96 37.27% N/A 34.80%
Class B......................................... 9/16/96 36.90% N/A 34.52%
U.S. Equity Plus
Class A......................................... 7/31/97 3.94%* N/A N/A
Class B......................................... 7/31/97 3.93%* N/A N/A
U.S. Real Estate
Class A......................................... 2/24/95 27.62% N/A 30.92%
Class B......................................... 1/02/96 27.21% N/A 32.66%
Value Equity
Class A......................................... 1/31/90 29.20% 18.64% 14.89%
Class B......................................... 1/02/96 28.70% N/A 23.56%
</TABLE>
- ------------------
+ The China Growth, Mortgage-Backed Securities and MicroCap Portfolios had not
commenced operations as of December 31, 1997.
* Cumulative (unannualized) total return since inception of the Portfolio.
**Per share amounts for the year ended October 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.
35
<PAGE>
These figures were calculated according to the following formula:
<TABLE>
<C> <C> <S>
P(1+T)to the power of n = ERV
</TABLE>
where:
<TABLE>
<C> <C> <S>
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of hypothetical $1,000 payment made at the beginning
of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year
periods (or fractional portion thereof).
</TABLE>
CALCULATION OF YIELD FOR NON-MONEY MARKET PORTFOLIOS
From time to time certain of the Fund's Portfolios may advertise yield.
Current yield reflects the income per share earned by a Portfolio's
investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period.
The respective current yields for certain of the Fund's Portfolios for the
30-day period ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
CLASS A
PORTFOLIO NAME SHARES CLASS B SHARES
- -------------------------------------------------- --------- --------------
<S> <C> <C>
Emerging Markets Debt............................. % %
Fixed Income...................................... % %
Global Fixed Income............................... % %
High Yield........................................ % %
Municipal Bond.................................... % %
</TABLE>
These figures were obtained using the following formula:
<TABLE>
<S> <C> <C>
Yield = 2[(a - b + 1)to the power of 6 - 1]
-------------------
cd
</TABLE>
where:
<TABLE>
<S> <C> <C>
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive income distributions
d = the maximum offering price per share on the last day of the
period.
</TABLE>
CALCULATION OF YIELD FOR MONEY MARKET PORTFOLIOS
The current yield of the Money Market and Municipal Money Market Portfolios
is calculated daily on a base period return for a hypothetical account having a
beginning balance of one share for a particular period of time (generally 7
days). The return is determined by dividing the net change (exclusive of any
capital changes in such account) by its average net asset value for the period,
and then multiplying it by 365/7 to determine the annualized current yield. The
calculation of net change reflects the value of additional shares purchased with
the dividends by the Portfolio, including dividends on both the original share
and on such additional shares. The yields of the Money Market and Municipal
Money Market Portfolios for the 7-day period ended December 31, 1997 were %
and %, respectively. An effective yield, which reflects the effects of
compounding and represents an annualization of the current yield with all
dividends reinvested, may also be calculated for each Portfolio by dividing the
base period return by 7, adding 1 to the quotient, raising the sum to the 365th
power, and subtracting 1 from the result. The effective yields of the Money
Market and Municipal Money Market Portfolios for the 7-day period ended December
31, 1997 were % and %, respectively.
The yield of a Portfolio will fluctuate. The annualization of a week's
dividend is not a representation by the Portfolio as to what an investment in
the Portfolio will actually yield in the future. Actual yields will depend on
such variables as investment quality, average maturity, the type of instruments
the Portfolio invests in, changes in interest rates on instruments, changes in
the expenses of the Fund and other factors. Yields are one basis investors may
use to analyze the Portfolios of the Fund, and other investment vehicles;
however, yields of other investment vehicles may not be comparable because of
the factors set forth in the preceding sentence, differences in the time periods
compared, and differences in the methods used in valuing portfolio instruments,
computing net asset value and calculating yield.
36
<PAGE>
TAXABLE EQUIVALENT YIELD FOR THE MUNICIPAL BOND
AND MUNICIPAL MONEY MARKET PORTFOLIO
It is easy to calculate your own taxable equivalent yield if you know your
tax bracket. The formula is:
<TABLE>
<C> <C> <S>
Tax Free Yield
- ------------------- = Your Taxable Equivalent
1 - Your Tax Bracket Yield
</TABLE>
For example, if you are in the 28% tax bracket and can earn a tax-free yield
of 7.5%, the taxable equivalent yield would be 10.42%.
The table below indicates the advantages of investments in Municipal Bonds
for certain investors. Tax-exempt rates of interest payable on a Municipal Bond
(shown at the top of each column) are equivalent to the taxable yields set forth
opposite the respective income tax levels, based on income tax rates effective
for the tax year 1997 under the Internal Revenue Code. There can, of course, be
no guarantee that the Municipal Bond Portfolio or Municipal Money Market
Portfolio will achieve a specific yield. Also, it is possible that some portion
of the Portfolio's dividends may be subject to Federal income taxes. A
substantial portion, if not all, of such dividends may be subject to state and
local taxes.
TAXABLE EQUIVALENT YIELD TABLE
<TABLE>
<CAPTION>
SAMPLE LEVEL OF FEDERAL
TAXABLE INCOME INCOME TAXABLE EQUIVALENT RATES BASED ON TAX-EXEMPT YIELD OF:
- ------------------------------------- TAX -----------------------------------------------------------------
JOINT RETURN SINGLE RETURN BRACKETS 3% 4% 5% 6% 7% 8% 9% 10% 11%
- ----------------- ------------------ ----- ---- ---- ---- ---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-39,000 $0-23,350 15.0% 3.5% 4.7% 5.9% 7.1% 8.2% 9.4% 10.6% 11.8% 12.9%
39,000-94,250 23,350-56,550 28.0 4.2 5.6 6.9 8.3 9.7 11.1 12.5 13.9 15.3
94,250-143,600 56,550-117,950 31.0 4.3 5.8 7.2 8.7 10.1 11.6 13.0 14.5 15.9
143,600-256,500 117,950-256,500 36.0 4.7 6.3 7.8 9.4 10.9 12.5 14.1 15.6 17.2
over 256,500 over 256,500 39.6 5.0 6.6 8.3 9.9 11.6 13.2 14.9 16.6 18.2
</TABLE>
- ------------------
* Net amount subject to 1997 Federal Income Tax after deductions and exemptions,
not indexed for 1996 income tax rates.
The taxable equivalent yields for the Municipal Money Market and Municipal
Bond Portfolios for the seven days ended December 31, 1997 assuming a Federal
income tax rate of 39.6% (maximum rate), were % and %, respectively. The
taxable equivalent effective yields for the Municipal Money Market and Municipal
Bond Portfolios for the seven days ended December 31, 1997, assuming the same
tax rate, were % and %, respectively.
COMPARISONS
To help investors better evaluate how an investment in a Portfolio of Morgan
Stanley Institutional Fund, Inc. might satisfy their investment objective,
advertisements regarding the Fund may discuss various measures of Fund
performance as reported by various financial publications. Advertisements may
also compare performance (as calculated above) to performance as reported by
other investments, indices and averages. The following publications may be used:
(a) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
- -- analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
(b) Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global
Investor, Investor's Daily, Lipper Analytical Services, Inc., Morningstar, Inc.,
New York Times, Personal Investor, Wall Street Journal and Weisenberger
Investment Companies Service -- publications that rate fund performance over
specified time periods.
(c) Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Lehman Brothers and Bloomberg L.P.
(d) Lipper -- Mutual Fund Performance Analysis and Lipper -- Fixed Income
Fund Performance Analysis -- measures total return and average current yield for
the mutual fund industry. Ranks individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive of
any applicable sales charges.
37
<PAGE>
(e) Mutual Fund Source Book, published by Morningstar, Inc. -- analyzes
price, yield, risk and total return for equity funds.
(f) Savings and Loan Historical Interest Rates -- as published in the U.S.
Savings & Loan League Fact Book.
(g) Stocks, Bonds, Bills and Inflation, published by Hobson Associates --
historical measure of yield, price and total return for common and small company
stock, long-term government bonds, U.S. Treasury bills and inflation.
The following indices and averages may also be used:
(a) Composite Indices -- 70% Standard & Poor's 500 Stock Index and 30%
NASDAQ Industrial Index; 35% Standard & Poor's 500 Stock Index and 65% Salomon
Brothers High Grade Bond Index; and 65% Standard & Poor's 500 Stock Index and
35% Salomon Brothers High Grade Bond Index.
(b) Consumer Price Index (or cost of Living Index), published by the U.S.
Bureau of Labor Statistics -- a statistical measure of change, over time, in the
price of goods and services in major expenditure groups.
(c) Donoghue's Money Fund Average -- an average of all major money market
fund yields, published weekly for 7 and 30-day yields.
(d) Dow Jones Composite Average or its component averages -- an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
(e) CS First Boston High Yield Index -- generally includes over 180 issues
with an average maturity range of seven to ten years with a minimum
capitalization of $100 million. All issues are individually trader-priced
monthly.
(f) CS First Boston Upper/Middle Tier High Yield Index -- an unmanaged index
of bonds rated B to BBB.
(g) Goldman Sachs 100 Convertible Bond Index -- currently includes 67 bonds
and 33 preferred. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
(h) GPR Life European Real Estate T.R. Index -- a European market
capitalization weighted index of listed property/ real estate securities
measuring total return.
(i) GPR Life Far East Asia Real Estate T.R. Index -- a Far East market
capitalization weighted index of listed property/ real estate securities
measuring total return.
(j) IFC Global Total Return Composite Index -- an unmanaged index of common
stocks and includes 18 developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (net of dividends reinvested).
(k) Indata Balanced-Median Index -- 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 year ended December 31, 1997 (assumes
dividends reinvested).
(l) Indata Equity-Median Stock Index -- an unmanaged index which 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 year ended December 31, 1996.
(m) J.P. Morgan Emerging Markets Bond Index -- a market-weighted index
composed of all Brady bonds outstanding and includes Argentina, Brazil,
Bulgaria, Mexico, Nigeria, the Philippines, Poland and Venezuela.
(n) J.P. Morgan Emerging Markets Bond Index Plus -- expanding on the J.P.
Morgan Emerging Markets Bond Index, which only trades Brady Bonds, this index
reflects total returns for external debt instruments which have been traded in
emerging markets. Brady Bonds are included amoung such instruments, as well as
Eurobonds, loans and U.S. dollar denominated local market instruments. Countries
included in the index are Argentina, Brazil, Bulgaria, Ecuador, Mexico, Morocco,
Nigeria, Panama, Peru, the Phillipines, Poland, Russia, South Africa and
Venezuela. A more comprehensive benchmark than the EMBI, the EMBI+ covers 49
instruments from these countries. At $96 billion, its market cap is nearly 50%
higher than the EMBI's. The EMBI+ is not, however, intended to replace the EMBI
but rather to complement it. The EMBI continues to represent the most liquid,
most easily traded segment of the market, including more of the assets that
investors typically hold in their portfolios. Both of these indices are
published daily.
(o) J.P. Morgan Traded Global Bond Index -- an unmanaged index of securities
and includes Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
The Netherlands, Spain, Sweden, United Kingdom and the United States.
(p) Lehman Brothers Aggregate Bond Index -- an unmanaged index made up of
the Government/Corporate Index, the Mortgage Backed Securities Index and the
Asset-Backed Securities Index.
(q) Lehman Brothers LONG-TERM Treasury Bond -- composed of all bonds covered
by the Lehman Brothers Treasury Bond Index with maturities of 10 years or
greater.
38
<PAGE>
(r) The Lehman 7 Year Municipal Bond Index -- an unmanaged index which
consists of investment grade bonds with maturities between 6-8 years rated BAA
or better. All bonds have been taken from deals done within the last 5 years,
with assets of $50 million or larger.
(s) Lipper Capital Appreciation Index -- a composite of mutual funds managed
for maximum capital gains.
(t) Morgan Stanley Capital International Combined Far East Free ex-Japan
Index -- a market-capitalization weighted index comprising stocks in China Free
Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and
Thailand. Korea is included in the MSCI Combined Far East Free ex-Japan Index at
20% of its market capitalization.
(u) Morgan Stanley Capital International EAFE Index -- an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
(v) Morgan Stanley Capital International Emerging Markets Global Latin
America Index -- an unmanaged, arithmetic market value weighted average of the
performance of over 196 securities on the stock exchanges of Argentina, Brazil,
Chile, Colombia, Mexico, Peru and Venezuela (Assumes reinvestment of dividends).
(w) Morgan Stanley Capital International Europe Index -- an unmanaged index
of common stocks and includes 14 countries throughout Europe.
(x) Morgan Stanley Capital International Japan Index -- an unmanaged index
of common stocks.
(y) Morgan Stanley Capital International Latin America Index -- a
broad-based market capitalization-weighted composite index covering at least 60%
of markets in Mexico, Argentina, Brazil, Chile, Colombia, Peru and Venezuela
(assumes dividends reinvested).
(z) Morgan Stanley Capital International World Index -- an arithmetic,
market value-weighted average of the performance of over 1,470 securities listed
on the stock exchanges of countries in Europe, Australia, the Far East, Canada
and the United States.
(aa) NASDAQ Composite Index -- an unmanaged index of common stocks.
(bb) NASDAQ Industrial Index -- a capitalization-weighted index composed of
more than 3,000 domestic stocks taken from the following industry sectors:
agriculture, mining, construction, manufacturing, electronic components,
services and public administration enterprises. It is a value-weighted index
calculated on price change only and does not include income.
(cc) National Association of Real Estate Investment Trusts ("NAREIT") Index
- -- an unmanaged market weighted index of tax qualified REITs (excluding
healthcare REITs) listed on the New York Stock Exchange, American Stock Exchange
and the NASDAQ National Market System including dividends.
(dd) The New York Stock Exchange composite or component indices -- unmanaged
indices of all industrial, utilities, transportation and finance company stocks
listed on the New York Stock Exchange.
(ee) Philadelphia Gold and Silver Index -- an unmanaged index comprised of
seven leading companies involved in the mining of gold and silver.
(ff) Russell 2000 Growth Index -- comprised of those Russell 2000 Securities
with an above-average growth orientation. Here, securities tend to exhibit
higher price-to-book and price-earnings ratios, lower divided yeilds and higher
forecasted growth than the Value universe.
(gg) Russell 2500 Index -- comprised of the bottom 500 stocks in the Russell
1000 Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
(hh) Salomon Brothers GNMA Index -- includes pools of mortgages originated
by private lenders and guaranteed by the mortgage pools of the Government
National Association.
(ii) Salomon Brothers High Grade Corporate Bond Index -- consists of
publicly issued, non-convertible corporate bonds rated AA or AAA. It a is
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater.
(jj) Salomon Brothers Broad Investment Grade Bond -- a market-weighted index
that contains approximately 4700 individually priced investment grade corporate
bonds rated BBB or better, U.S. Treasury/agency issues and mortgage pass-through
securities.
(kk) Standard & Poor's 500 Stock Index or its component indices -- unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
company stocks and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
39
<PAGE>
(ll) Standard & Poor's Small Cap 600 Index -- a capitalization-weighted
index of 600 domestic stocks having market capitalizations which reside within
the 50th and the 83rd percentiles of the market capitalization of the entire
stock market, chosen for certain liquidity characteristics and for industry
representation.
(mm)Wilshire 5000 Equity Index or its component indices -- represents the
return on the market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume reinvestment of
dividends.
(nn) Lipper Science and Technology Fund Index -- a composite index of the
mutual funds which invest at least 65% of their assets in science and technology
stocks.
(oo) Hambrecht and Quist Technology Index -- an index of computer and chip
makers, biotechnology concerns and other high-tech companies.
(pp) Sound View Technology Index -- an unweighted index consisting of more
than 100 technology companies.
(qq) Morgan Stanley High Tech 35 Index -- an index comprised of thirty-five
technology stocks chosen by Morgan Stanley.
(rr) Pacific Stock Exchange Index -- an index consisting of approximately
100 technololgy and healthcare technology concerns.
In assessing such comparisons of performance an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the composition of investments in the Fund's Portfolios, that
the averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its futures. In addition, there can be no assurance that the
Fund will continue this performance as compared to such other averages.
GENERAL PERFORMANCE INFORMATION
Each Portfolio's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze a Portfolio as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing their portfolio instruments, computing net asset value and
determining performance.
From time to time, a Portfolio's performance may be compared to other mutual
funds tracked by financial or business publications and periodicals. For
example, a Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of the
Funds to one another in appropriate categories over specific periods of time may
also be quoted in advertising.
Portfolio advertising may include data on historical returns of the capital
markets in the United States compiled or published by Ibbotson Associates of
Chicago, Illinois ("Ibbotson"), including returns on common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital markets is based on the returns of
different indices. The Portfolios may use the performance of these capital
markets in order to demonstrate general risk-versus-reward investment scenarios.
Performance comparisons may also include the value of a hypothetical investment
in any of these capital markets. The risks associated with the security types in
any capital market may or may not correspond directly to those of the
Portfolios. The Portfolios may also compare their performance to that of other
compilations or indices that may be developed and made available in the future.
The Portfolios may include in advertisements, charts, graphs or drawings
which illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, foreign securities, stocks,
bonds, treasury bills and shares of a Portfolio. In addition, advertisements may
include a discussion of certain attributes or benefits to be derived by an
investment in a Portfolio and/or other mutual funds, shareholder profiles and
hypothetical investor scenarios, timely information on financial management, tax
and retirement planning and various investment alternatives. Advertisements may
include lists of representative Morgan Stanley clients. The Portfolios may also
from time to time include discussions or illustrations of the effects of
compounding in advertisements. "Compounding" refers to the fact that, if
dividends or other distributions on a Portfolio investment are reinvested by
being paid in additional Portfolio shares, any future income or capital
appreciation of a Portfolio would increase the value, not only of the original
investment in the Portfolio, but also of the additional Portfolio shares
received through reinvestment.
The Portfolios may include in its advertisements, discussions or
illustrations of the potential investment goals of a prospective investor
(including materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, goal setting, questionnaires
designed to help create a personal financial profile, worksheets used to project
40
<PAGE>
savings needs based on assumed rates of inflation and hypothetical rates of
return and action plans offering investment alternatives), investment management
techniques, policies or investment suitability of a Portfolio (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer, automatic account rebalancing, the advantages and disadvantages
of investing in tax-deferred and taxable investments). Advertisements and sales
materials relating to a Portfolio may include information regarding the
background and experience of its portfolio managers; the resources, expertise
and support made available to the portfolio managers by Morgan Stanley; and the
portfolio manager's goals, strategies and investment techniques.
The Portfolios' advertisements may discuss economic and political conditions
of the United States and foreign countries, the relationship between sectors of
the U.S., a foreign, or the global economy and the U.S., a foreign, or the
global economy as a whole and the effects of inflation. The Portfolios may
include discussions and illustrations of the growth potential of various global
markets including, but not limited to, Africa, Asia, Europe, Latin America,
North America, South America, Emerging Markets and individual countries. These
discussions may include the past performance of the various markets or market
sectors; forecasts of population, gross national product and market performance;
and the underlying data which supports such forecasts. From time to time,
advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in the
Portfolios' shareholder reports (including the investment composition of a
Portfolio), as well as the views of Morgan Stanley as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Portfolio.
The Portfolios may quote various measures of volatility and benchmark
correlation in advertising. The Portfolios may compare these measures to those
of other funds. Measures of volatility seek to compare the historical share
price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. A Portfolio may also advertise its current interest rate
sensitivity, duration, weighted average maturity or similar maturity
characteristics.
The Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Portfolio at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when prices
are low. While such a strategy does not assure a profit or guard against loss in
a declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund's Articles of Incorporation, as amended and restated, permit the
Directors to issue 40 billion shares of common stock, par value $.001 per share,
from an unlimited number of classes ("Portfolios") of shares. Currently the Fund
consists of shares of thirty-two Portfolios (the China Growth, Mortgage-Backed
Securities and MicroCap Portfolios are not currently offering shares).
The shares of each Portfolio of the Fund are fully paid and nonassessable,
and have no preference as to conversion, exchange, dividends, retirement or
other features. The shares of each Portfolio of the Fund have no pre-emptive
rights. The shares of the Fund have non-cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they choose to do so. A shareholder
is entitled to one vote for each full share held (and a fractional vote for each
fractional share held), then standing in his name on the books of the Fund.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund's policy is to distribute substantially all of each Portfolio's net
investment income, if any. The Fund may also distribute any net realized capital
gains in the amount and at the times that will avoid both income (including
taxable gains) taxes on it and the imposition of the federal excise tax on
income and capital gains (see discussion under "Taxes" in this Statement of
Additional Information). However, the Fund may also choose to retain net
realized capital gains and pay taxes on such gains. The amounts of any income
dividends or capital gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of a
Portfolio by an investor may have the effect of reducing the per share net asset
value of that Portfolio by the per share amount of the dividend or distribution.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to income taxes for shareholders subject to tax as set
forth herein and in the applicable Prospectus.
As set forth in the Prospectuses, unless the shareholder elects otherwise in
writing, all dividends and capital gains distributions for a class of shares are
automatically received in additional shares of such class of that Portfolio of
the Fund at net asset value (as of the business day following the record date).
This automatic reinvestment of dividends and distributions will remain in effect
until the Fund is notified by the shareholder in writing at least three days
prior to the record date that
41
<PAGE>
either the Income Option (income dividends in cash and capital gains
distributions in additional shares at net asset value) or the Cash Option (both
income dividends and capital gains distributions in cash) has been elected.
CUSTODY ARRANGEMENTS
Chase is the Fund's custodian for domestic and certain foreign assets. Chase
is not affiliated with the Adviser or Morgan Stanley. Morgan Stanley Trust
Company, Brooklyn, NY, acts as the Fund's custodian for foreign assets held
outside the United States and employs subcustodians who were approved by the
Directors of the Fund in accordance with Rule 17f-5 adopted by the Commission
under the 1940 Act. Morgan Stanley Trust Company is an affiliate of the Adviser
and Morgan Stanley. In the selection of foreign subcustodians, the Directors
consider a number of factors, including, but not limited to, the reliability and
financial stability of the institution, the ability of the institution to
provide efficiently the custodial services required for the Fund, and the
reputation of the institution in the particular country or region.
ADVISER'S USE OF COMPANIES COMPRISING THE S&P 500 INDEX
The Adviser uses the 500 companies included in the S&P 500 Index as the
universe of potential investments for the U.S. Equity Plus Portfolio. The U.S.
Equity Plus Portfolio is not sponsored, endorsed, sold or promoted by Standard &
Poor's ("S&P"), a division of The McGraw-Hill Companies, Inc. S&P makes no
representation or warranty, express or implied, to investors in the U.S. Equity
Plus Portfolio or any member of the public regarding the advisability of
investing in the U.S. Equity Plus Portfolio or the ability of the S&P 500 Index
to track general stock market performance. S&P's only relationship to the
Adviser is the licensing of certain trademarks and trade names of S&P and of the
S&P 500 Index which is determined, composed and calculated by S&P without regard
to the Adviser or the U.S. Equity Plus Portfolio. S&P has no obligation to take
the needs of the Adviser or the investors in the U.S. Equity Plus Portfolio into
consideration in determining, composing or calculating the S&P 500 Index. S&P is
not responsible for, does not participate in and has no obligation or liability
in connection with the management, administration or marketing of the U.S.
Equity Plus Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO THE PERFORMANCE OF THE ADVISER OR THE U.S. EQUITY PLUS PORTFOLIO, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY
LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS) ARISING OUT OF ANY USE OF THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
DESCRIPTION OF RATINGS
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
EXCERPTS FROM MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") DESCRIPTION OF
BOND RATINGS: Aaa -- Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Aa --
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than Aaa securities. A -- Bonds which
are rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future. Baa --
Bonds which are rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Ba -- Bonds which are rated Ba are judged
to have speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. B -- Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Moody's applies numerical modifiers
1, 2 and 3 in each generic voting classification from Aa through B. The modifier
1 indicates that the security ranks at a higher end of the rating category;
modifier 2 indicates a mid-range rating; and the modifier 3 indicates that the
issue ranks at the lower end of the rating category. Caa -- Bonds which are
rated Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest. Ca -- Bonds
which are rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked
42
<PAGE>
shortcomings. C -- Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
EXCERPTS FROM S&P'S DESCRIPTION OF BOND RATINGS: AAA -- Bonds rated AAA
have the highest rating assigned by Standard & Poor's to a debt obligation and
indicate an extremely strong capacity to pay principal and interest. AA -- Bonds
rated AA have a very strong capacity to pay interest and repay principal and
differ from the highest rated issues only to a small degree. A -- Bonds rated A
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than bonds in higher rated categories. BBB -- Debt rated BBB
is regarded as having an adequate capacity to pay interest and repay principal.
Whereas they normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than for
debt in higher rated categories. BB, B, CCC, CC and C -- Debt rated BB, B, CCC,
CC and C is regarded, on balance, as predominantly speculative with respect to
43
<PAGE>
capacity to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. C -- The rating C may be used to cover a
situation where a bankruptcy petition has been filed or similar action has been
taken, but payments on this obligation are being continued. D -- Debt rated D is
in default, and payment of interest and/or repayment of principal is in arrears.
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used are as follows: MIG-1
- -- best quality, enjoying strong protection from established cash flows of funds
for their servicing or from established broad-based access to the market for
refinancing, or both; MIG-2 -- high quality with margins of protection ample
although not so large as in the preceding group; MIG-3 - favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1") --
Judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.
EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: SP-1+ -- very strong
capacity to pay principal and interest; SP-2 -- strong capacity to pay principal
and interest.
DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS: A-1+ -- this
designation indicates the degree of safety regarding timely payment is extremely
strong. A-1 -- this designation indicates the degree of safety regarding timely
payment is strong.
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal year ended December 31, 1997,
including notes thereto and the report of Price Waterhouse LLP will be filed by
amendment. A copy of the Fund's Annual Report to Shareholders must accompany the
delivery of this Statement of Additional Information. The China Growth,
Mortgage-Backed Securities and MicroCap Portfolios had not commenced operations
at December 31, 1997.
44
<PAGE>
PART C
Morgan Stanley Institutional Fund, Inc.
Other Information
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
--------------------
1. INCLUDED IN PART A (PROSPECTUSES)
The Registrant's audited financial highlights for the Money
Market, Municipal Money Market, Aggressive Equity, Emerging
Growth, Equity Growth, Value Equity, Small Cap Value Equity,
U.S. Real Estate, Balanced, Active Country Allocation, Global
Equity, International Equity, International Small Cap,
European Equity, Asian Equity, Emerging Markets, Gold,
Japanese Equity, Latin American, Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Municipal Bond, U.S.
Equity Plus, European Real Estate, Asian Real Estate,
Technology and International Magnum Portfolios, respectively,
for the fiscal year ended December 31, 1997, will be filed by
amendment.
The Fund's Mortgage-Backed Securities, China Growth and
MicroCap Portfolios were not operational as of December 31,
1997. Accordingly, no audited financial highlights will be
included in the respective prospectus of each of the foregoing
portfolios.
2. INCORPORTED BY REFERENCE INTO PART B (STATEMENT OF ADDITIONAL
INFORMATION)
The Registrant's audited financial statements for the Money
Market, Municipal Money Market, Aggressive Equity, Emerging
Growth, Equity Growth, Value Equity, Small Cap Value Equity,
U.S. Real Estate, Balanced, Active Country Allocation, Global
Equity, International Equity, International Small Cap,
European Equity, Asian Equity, Emerging Markets, Gold,
Japanese Equity, Latin American, Emerging Markets Debt, Fixed
Income, Global Fixed Income, High Yield, Municipal Bond, U.S.
Equity Plus, European Real Estate, Asian Real Estate,
International Magnum and Technology Portfolios, respectively, for
the fiscal year ended December 31, 1997, including Price
Waterhouse LLP's report thereon, will be filed by amendment.
The Fund's Mortgage-Backed Securities, China Growth and
MicroCap Portfolios were not operational as of December 31,
1997. Accordingly, no audited financial statements will be
included in the Statement of Additional Information.
<PAGE>
(B) EXHIBITS
--------
1 (a) Articles of Amendment and Restatement are incorporated by
reference to Post-Effective Amendment No. 26 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on October 13, 1995.
(b) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (reclassifying shares) is incorporated by reference
to Post-Effective Amendment No. 30 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on May 24, 1996.
(c) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (adding new Technology Portfolio) is incorporated by
reference to Post-Effective Amendment No. 30 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on May 24, 1996.
(d) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (adding U.S. Equity Plus Portfolio), is filed
herewith.
(e) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (adding European Real Estate and Asian Real Estate
Portfolios), is filed herewith.
(f) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (adding Class B shares to the Money Market
Portfolio), is filed herewith.
2 Amended and Restated By-laws are incorporated by reference to
Post-Effective Amendment No. 33 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed
with the SEC via EDGAR on February 28, 1997.
3 Not Applicable.
4 Registrant's Form of Specimen Security was previously filed and is
incorporated herein by reference.
5 (a) Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
(b) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding Registrant's
Value Equity, Balanced and Fixed Income Portfolios) is
incorporated by reference to Post-Effective Amendment No. 25 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on August
1, 1995.
(c) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Global
Equity, Global Fixed Income, European Equity and Equity Growth
Portfolios) is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
(d) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Asian Equity
Portfolio) is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
(e) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Active
Country Allocation Portfolio) is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
(f) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Emerging
Markets, High Yield and International Small Cap Portfolios) is
incorporated by reference to Post-Effective Amendment No. 25 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on August
1, 1995.
(g) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Small Cap
Value Equity Portfolio) is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
C-2
<PAGE>
(h) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Emerging
Markets Debt, Mortgage-Backed Securities, Municipal Bond and
Japanese Equity Portfolios) is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
(i) Sub-Advisory Agreement among Registrant, Morgan Stanley Asset
Management Inc. and Sun Valley Gold Company (with respect to the
Gold Portfolio) is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
(j) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the China Growth
Portfolio) is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
(k) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Latin
American Portfolio) is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
(l) Withdrawn.
(m) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the Aggressive
Equity and U.S. Real Estate Portfolios) is incorporated by
reference to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and 811-
5624), as filed with the SEC via EDGAR on August 1, 1995.
(n) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the MicroCap
Portfolio) is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
(o) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding the
International Magnum Portfolio) is incorporated by reference to
Post-Effective Amendment No. 28 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on November 3, 1995.
(p) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding the
Technology Portfolio), is incorporated by reference to
Post-Effective Amendment No. 33 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on February 28, 1997.
(q) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management Inc. (adding U.S. Equity Plus
Portfolio), is filed herewith.
(r) Supplement to Investment Advisory Agreement between Registrant
and Morgan Stanley Asset Management, Inc. (adding European Real
Estate and Asian Real Estate Portfolios), is filed herewith.
6 (a) Distribution Agreement between Registrant and Morgan Stanley &
Co. Incorporated is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
(b) Supplement to Distribution Agreement between Registrant and
Morgan Stanley & Co. Incorporated is incorporated by reference to
Post-Effective Amendment No. 29 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on April 29, 1996.
8 (a) Mutual Fund Custody Agreement (Domestic Custody Agreement)
between Registrant and United States Trust Company of New York
dated March 10, 1994 is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
(b) Registrant's Custody Agreement (International), dated July 31,
1989, as amended is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on
Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
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<PAGE>
(c) Amendment dated April 22, 1996 to Registrant's Custody Agreement
(International), dated July 31, 1989, is incorporated by
reference to Post-Effective Amendment No. 30 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624) as filed with the SEC via EDGAR on May 24, 1996.
9 (a) Administration Agreement between Registrant and Morgan Stanley
Asset Management Inc. (the "MSAM Administration Agreement") is
incorporated by reference to Post-Effective Amendment No. 25 to
the Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on August
1, 1995.
(b) U.S. Trust Administration Agreement is incorporated by reference
to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1, 1995.
10 Opinion of Counsel is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via
EDGAR on August 1, 1995.
11 Consent of Independent Accountants is filed herewith.
13 Purchase Agreement is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement on Form N-
1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR
on August 1, 1995.
15 Plan of Distribution Pursuant to Rule 12b-1 for Class B Shares
(the "Class B Plan") of the Active Country Allocation Portfolio is
incorporated by reference to Post-Effective Amendment No. 33 to the
Registrant's Registration Statement on Form N-1A (File Nos. 33-23166
and 811-5624), as filed with the SEC via EDGAR on February 28, 1997.
The following Class B Plans have been omitted because
they are substantially identical to the one incorporated by reference
herein. The omitted Class B Plans differ from the Class B Plan
incorporated by reference herein only with respect to the portfolio
to which the Class B Plan relates: Fixed Income, Global Fixed Income,
Municipal Bond, Mortgage-Backed Securities, High Yield, Small Cap
Value Equity, Value Equity, Balanced, Gold, Global Equity,
International Equity, International Small Cap, Asian Equity,
European Equity, Japanese Equity, Latin American, Emerging Markets,
Emerging Markets Debt, China Growth, Equity Growth, Emerging Growth,
MicroCap, Aggressive Equity, U.S. Real Estate, International Magnum,
Technology, U.S. Equity Plus, European Real Estate, Asian Real Estate
and Money Market Portfolios.
16 Schedule of Computation of Performance Information is incorporated by
reference to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624),
as filed with the SEC via EDGAR on August 1, 1995.
19 Registrant's Rule 18f-3 Multiple Class Plan is incorporated by
reference to Post-Effective Amendment No. 33 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on February 28, 1997.
24 Powers of Attorney are filed herewith.
27 Financial data schedules for the fiscal year ended December 31, 1996
for Registrant's portfolios in operation during such period (See
Item 24(a)), are filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES ON JANUARY 30, 1998
Active Country Allocation Portfolio
Class A. . . . . . . . . . . . . . . . . . . 85
Class B. . . . . . . . . . . . . . . . . . . 2
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<PAGE>
Aggressive Equity Portfolio
Class A. . . . . . . . . . . . . . . . . . . 503
Class B. . . . . . . . . . . . . . . . . . . 127
Asian Equity Portfolio
Class A. . . . . . . . . . . . . . . . . . . 715
Class B. . . . . . . . . . . . . . . . . . . 50
Balanced Portfolio
Class A. . . . . . . . . . . . . . . . . . . 55
Class B. . . . . . . . . . . . . . . . . . . 2
Emerging Growth Portfolio
Class A. . . . . . . . . . . . . . . . . . . 171
Class B. . . . . . . . . . . . . . . . . . . 32
Emerging Markets Portfolio
Class A. . . . . . . . . . . . . . . . . . . 1,397
Class B. . . . . . . . . . . . . . . . . . . 122
Equity Growth Portfolio
Class A. . . . . . . . . . . . . . . . . . . 748
Class B. . . . . . . . . . . . . . . . . . . 84
Fixed Income Portfolio
Class A. . . . . . . . . . . . . . . . . . . 224
Class B. . . . . . . . . . . . . . . . . . . 43
Global Equity Portfolio
Class A. . . . . . . . . . . . . . . . . . . 143
Class B. . . . . . . . . . . . . . . . . . . 40
Global Fixed Income Portfolio
Class A. . . . . . . . . . . . . . . . . . . 92
Class B. . . . . . . . . . . . . . . . . . . 7
High Yield Portfolio
Class A. . . . . . . . . . . . . . . . . . . 395
Class B. . . . . . . . . . . . . . . . . . . 71
International Equity Portfolio
Class A. . . . . . . . . . . . . . . . . . . 433
Class B. . . . . . . . . . . . . . . . . . . 46
International Small Cap Portfolio
Class A. . . . . . . . . . . . . . . . . . . 135
Latin American Portfolio
Class A. . . . . . . . . . . . . . . . . . . 805
Class B. . . . . . . . . . . . . . . . . . . 89
Money Market Portfolio
Class A. . . . . . . . . . . . . . . . . . . 656
Class B. . . . . . . . . . . . . . . . . . . 0
Municipal Money Market Portfolio
Class A. . . . . . . . . . . . . . . . . . . 297
Small Cap Value Equity Portfolio
Class A. . . . . . . . . . . . . . . . . . . 521
Class B. . . . . . . . . . . . . . . . . . . 70
U.S. Real Estate Portfolio
Class A. . . . . . . . . . . . . . . . . . . 823
Class B. . . . . . . . . . . . . . . . . . . 88
Value Equity Portfolio
Class A. . . . . . . . . . . . . . . . . . . 462
Class B. . . . . . . . . . . . . . . . . . . 24
European Equity Portfolio
Class A. . . . . . . . . . . . . . . . . . . 786
Class B. . . . . . . . . . . . . . . . . . . 56
Municipal Bond Portfolio
Class A. . . . . . . . . . . . . . . . . . . 95
Class B. . . . . . . . . . . . . . . . . . . 0
Mortgage-Backed Securities Portfolio
C-5
<PAGE>
Class A. . . . . . . . . . . . . . . . . . . 0
Class B. . . . . . . . . . . . . . . . . . . 0
Japanese Equity Portfolio
Class A. . . . . . . . . . . . . . . . . . . 575
Class B. . . . . . . . . . . . . . . . . . . 34
Emerging Markets Debt Portfolio
Class A. . . . . . . . . . . . . . . . . . . 530
Class B. . . . . . . . . . . . . . . . . . . 40
Gold Portfolio
Class A. . . . . . . . . . . . . . . . . . . 1
Class B. . . . . . . . . . . . . . . . . . . 1
China Growth Portfolio
Class A. . . . . . . . . . . . . . . . . . . 0
Class B. . . . . . . . . . . . . . . . . . . 0
MicroCap Portfolio
Class A. . . . . . . . . . . . . . . . . . . 0
Class B. . . . . . . . . . . . . . . . . . . 0
International Magnum Portfolio
Class A. . . . . . . . . . . . . . . . . . . 125
Class B. . . . . . . . . . . . . . . . . . . 50
Technology Portfolio
Class A. . . . . . . . . . . . . . . . . . . 129
Class B. . . . . . . . . . . . . . . . . . . 15
U.S. Equity Plus Portfolio
Class A. . . . . . . . . . . . . . . . . . . 12
Class B. . . . . . . . . . . . . . . . . . . 2
European Real Estate Portfolio
Class A. . . . . . . . . . . . . . . . . . . 219
Class B. . . . . . . . . . . . . . . . . . . 14
Asian Real Estate Portfolio
Class A. . . . . . . . . . . . . . . . . . . 6
Class B. . . . . . . . . . . . . . . . . . . 1
ITEM 27. INDEMNIFICATION
Reference is made to Article TEN of the Registrant's Articles of
Incorporation. Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a trustee, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS WITH INVESTMENT ADVISER
Reference is made to the caption "Investment Adviser" in the
Prospectuses constituting Part A of this Registration Statement Information
required by this item with respect to each Officer or Director of the Advisor,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such Officers and Directors
during the past two years is incorporated by reference to Schedules A and D
of Form ADV filed by the Advisors Act (SEC File No. 801-15757).
Listed below are the officers and Directors of Morgan Stanley Asset
Management Inc. ("MSAM").
DIRECTORS
James M. Allwin Director
Barton M. Biggs Director
Gordon S. Gray Director
Peter A. Nadosy Director
Dennis G. Sherva Director
OFFICERS
Barton M. Biggs Chairman
Managing Director
Peter A. Nadosy Vice Chairman
Managing Director
James M. Allwin President
Managing Director
John R. Alkire Managing Director (MSAM) - Tokyo
Francine J. Bovich Managing Director
Stuart J.M. Breslow Managing Director
P. Dominic Caldecott Managing Director (MSAM) - UK
Frances Campion Managing Director (MSAM) - UK
A. Macdonald Caputo Managing Director
Eah Wah Chin Managing Director (MSAM) - Singapore
Stephen C. Cordy Managing Director
Madhav Dhar Managing Director
Kurt A. Feuerman Managing Director
Paul B. Ghaffari Managing Director
Gordon S. Gray Managing Director
Marianne Laing Hay Managing Director (MSAM) - UK/NY
Gary D. Latainer Managing Director
Maryann K. Maiwald Managing Director
Mahmoud A. Mamdani Managing Director
Robert L. Meyer Managing Director
Margaret P. Naylor Managing Director (MSAM) - UK
Russell C. Platt Managing Director
Robert A. Sargent Managing Director (MSAM) - UK
Vinod R. Sethi Managing Director
Dennis G. Sherva Managing Director
James L. Tanner Managing Director (MSAM) - UK
Horacio A. Valeiras Managing Director
Richard G. Woolworth, Jr. Managing Director
Debra M. Aaron Principal
Warren Ackerman III Principal
Robert E. Angevine Principal
Suzanne S. Akers Principal
Gerald P. Barth-Wehrenalp Principal
William Bentley Principal
Theodore R. Bigman Principal
Richard L. Block Principal
Richard F. Brereton Principal
Andrew C. Brown Principal (MSAM) - UK
Jeffrey P. Brown Principal
Terence P. Carmichael Principal
Arthur Certosimo Principal
Jacqueline A. Day Principal (MSAM) - UK
Raye L. Dube Principal
Abigail Jones Feder Principal
Eugene Flood, Jr. Principal
Thomas C. Frame Principal
Nicoaas Simon Frits Fiene Principal
W. Blair Garff Principal
William B. Gerlach Principal
Perry E. Hall II Principal
Kimberly L. Hirschman Principal
Ruth A. Hughes-Guden Principal
Margaret Kinsley Johnson Principal
James Jolinger Principal
Michael F. Klein Principal
George Koshy Principal
Michael B. Kushma Principal
Arthur J. Lev Principal
Khoon-Min Lim Principal
Marianne J. Lippman Principal
William David Lock Principal
Gordon W. Loery Principal
Yvonne Longley Principal (MSAM) - UK
Andrew Mack Principal
Gary J. Mangino Principal
Angelo G. Manioudakis Principal
Jeffrey Margolis Principal
M. Paul Martin Principal
Walter Maynard, Jr. Principal
Alexis E. McCarthy Principal (MSAM) - Tokyo
Yoshiro Okawa Principal (MSAM) - Tokyo
Christopher G. Petrow Principal
Akash Prakash Principal (MSAM) - Bombay
Narayan Ramachandran Principal
Gail Hunt Reeke Principal
Christine I. Reilly Principal
Stefano Russo Principal (MSAM) - Milan
Bruce R. Sandberg Principal
Kiat Seng Seah Principal (MSAM) - Singapore
Roberto M. Sella Principal
Stephen C. Sexauer Principal
Andy B. Skov Principal
Robert M. Smith Principal
Kim I. Spellman Principal
Joseph P. Stadler Principal
Kunihiko Sugio Principal (MSAM) - Tokyo
Ram K. Sundaram Principal
Joseph Y.S. Tern Principal (MSAM) - Singapore
Roberto Vedovotto Principal
Marjorie M. Wilcox Principal
Philip W. Winters Principal
Bruce Wolfe Principal
Peter John Wright Principal
Alford E. Zick, Jr. Principal
Maryann Savadelis Agre Vice President
Peter Aliprantis Vice President
Jeffrey Alvino Vice President
Alistair Anderson Vice President
William S. Auslander Vice President
Kimberly L. Austin Vice President
Marshall T. Bassett Vice President
Joseph C. Benedetti Vice President
Frank J. Biondo Vice President
C-6
<PAGE>
Richard Boon Vice President
Geraldine Boyle Vice President
Paul Boyne Vice President
L. Kenneth Brooks Vice President
Jonathan Paul Buckeridge Vice President (MSAM) - Melbourne
Wendy M. Cambor Vice President
Jacqueline M. Carr Vice President
Stefanie V. Chang Vice President
Mari M. Chazen Vice President
Lori A. Cohane Vice President
Jennifer C. Cole Vice President
William T. Corcoran Vice President
Kate Cornish-Bowden Vice President (MSAM) - UK
Joseph C.S. D'Souza Vice President
Janet E. Day Vice President
Jan-Willem Adriaan De Gues Vice President
Nathalie Francoise Degans Vice President
Nancy J. Deutsch Vice President
Nikhil Dhaon Vice President
John F. Dougherty Vice President
Mimi B. Drake Vice President
Christine H. du Bois Vice President
Paul A. Durose Vice President
Steve Epstein Vice President
Richard S. Farden Vice President
Karen T. Frost Vice President (MSAM) - UK
Lisa Gallo Vice President
Ramalingam Ganesh Vice President
Kaushik Ghosh Vice President
Josephine M. Glass Vice President
Charles A. Golden Vice President
Dimitri Goulandris Vice President
James A. Grasselino Vice President
Kenneth John Greig Vice President (MSAM) - UK
Maureen A. Grover Vice President
Michael Hewett Vice President
Kenneth R. Holley Vice President
Joseph P. Hondros Vice President
Holly D. Hopps Vice President
Etsuko Fuyeya Jennings Vice President
Donald B. Johnston Vice President
Karen D. Kalinowski Vice President
Jaideep Khanna Vice President
Peter L. Kirby Vice President
Paul Koske Vice President
Daniel R. Lascano Vice President
Valerie Y. Lewis Vice President
Thomas J. Machowski Vice President
Marion S. Mitchell Vice President
Yogesh Prabhakar Modak Vice President
Paula J. Morgan Vice President (MSAM) - UK
Nancy Morton Vice President
Cyril Moulle-Berteaux Vice President
John C. Murphy Vice President
Clare K. Muton Vice President
Terumi Nagata Vice President (MSAM) - Tokyo
Bradley Okita Vice President
James M. Olness Vice President
Martin O. Pearce Vice President (MSAM) - UK
Alexander A. Pena Vice President
Anthony J. Pesce Vice President
Sheila R. Piernock Vice President
Karen Post Vice President
Paul C. Psaila Vice President
Vazquez Sergio Rivera Vice President
Gregg A. Robinson Vice President
Gerald D. Rubin Vice President
Donald P. Ryan Vice President
Kenneth M. Schlechter Vice President
Neil Siegel Vice President
Ashutosh Sinha Vice President
Michael James Smith Vice President
Christian K. Stadlinger Vice President
David Stanley Vice President
Catherine Steinhardt Vice President
Keiko Tamaki-Kuroda Vice President
Shunso Tatsumi Vice President
Louise Teeple Vice President
Landon Thomas Vice President
Richard Boon Hwee Toh Vice President (MSAM) - London
Hiroshi Ueda Vice President
K.N. Vaidyanathan Vice President (MSAM) - Bombay
Epco Diederik Van Der Lende Vice President
Oscar Jan Vermeulen Vice President
Willem Pieter Vinke Vice President
Dennis J. Walsh Vice President
Jacob Walthour Vice President
Patricia Woo Vice President
Hajime Yokoyama Vice President
Harold J. Schaaff, Jr. Principal
General Counsel and Secretary
Eileen K. Murray Treasurer
Madeline D. Barkhorn Assistant Secretary
Charlene R. Herzer Assistant Secretary
C-7
<PAGE>
In addition, MSAM acts as investment adviser to the following
registered investment companies: American Advantage International Equity
Fund; certain portfolios of The Enterprise Group of Funds, Inc.; Fountain
Square International Equity Fund; General American Capital Co.; The Latin
American Discovery Fund, Inc.; certain portfolios of The Legends Fund, Inc.;
The Malaysia Fund, Inc.; Morgan Stanley Africa Investment Fund, Inc.; Morgan
Stanley Asia-Pacific Fund, Inc.; Morgan Stanley Emerging Markets Debt Fund,
Inc.; Morgan Stanley Emerging Markets Fund, Inc.; all funds of the Morgan
Stanley Global Opportunity Bond Fund, Inc.; all funds of The Morgan Stanley
High Yield Fund, Inc.; Morgan Stanley India Investment Fund, Inc.; Morgan
Stanley Russia and New Europe Fund, Inc.; certain portfolios of Morgan
Stanley Universal Funds, Inc.; Morgan Stanley Strategic Adviser Fund, Inc.;
The Pakistan Investment
C-8
<PAGE>
Fund, Inc.; The Thai Fund, Inc.; The Turkish Investment Fund, Inc.;
Principal Aggressive Growth Fund, Inc.; Principal Asset Allocation Fund,
Inc.; certain portfolios of the SunAmerica Series Trust and certain
portfolios of the Fortis Series Fund; and acts as sub-adviser to certain
portfolios of the Morgan Stanley Fund, Inc.
ITEM 29. PRINCIPAL UNDERWRITERS
----------------------
Morgan Stanley & Co. Incorporated ("MS&Co.") is distributor for
Morgan Stanley Institutional Fund, Inc., Morgan Stanley Universal Funds, Inc.
and Morgan Stanley Strategic Adviser Fund, Inc. The information required by
this Item 29 with respect to each Director and officer of MS&Co. is
incorporated by reference to Schedule A of Form BD filed by MS&Co. pursuant
to the Securities and Exchange Act of 1934 (SEC File No. 8-15869).
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
The books, accounts and other documents required by Section 31(a)
under the Investment Company Act of 1940 and the rules promulgated thereunder
are maintained in the physical possession of the Registrant; Registrant's
Transfer Agent, Chase Global Funds Services Company, P.O. Box 2798,
Boston, Massachusetts 02208-2798; MSAM; MS&Co.; and the Registrant's
custodian banks, including sub-custodians.
ITEM 31. MANAGEMENT SERVICES
-------------------
The Registrant has entered into a Service Agreement with The Chase
Manhattan Bank, successor in interest to United States Trust Company of
New York, which was filed as Exhibit No. 9(b) to Post-Effective Amendment No. 25
to the Fund's Registration Statement and is incorporated herein by reference.
ITEM 32. UNDERTAKINGS
------------
1. Registrant hereby undertakes to file a post-effective amendment
containing reasonably current financial statements, which need not be
certified, for the China Growth, Mortgage-Backed Securities and MicroCap
Portfolios within four to six months of their effective date or the
commencement of operations, whichever is later.
2. Registrant hereby undertakes that whenever a Shareholder or
Shareholders who meet the requirements of Section 16(c) of the Investment
Company Act of 1940 inform the Board of Directors of his or their desire to
communicate with other Shareholders of the Fund, the Directors will inform such
Shareholder(s) as to the approximate number of Shareholders of record and the
approximate costs of mailing or afford said Shareholders access to a list of
Shareholders.
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the Registrant
certifies that it has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York and State of New York, on February 27,
1998.
MORGAN STANLEY INSTITUTIONAL FUND, INC.
By: /s/ Michael F. Klein
----------------------------
Michael F. Klein
President and Director
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment to the Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Michael F. Klein Director, President February 27, 1998
- ------------------------------- (Principal Executive
Michael F. Klein Officer)
* /s/ Barton M. Biggs Director (Chairman) February 27, 1998
- -------------------------------
Barton M. Biggs
* /s/ Fergus Reid Director February 27, 1998
- -------------------------------
Fergus Reid
* /s/ Frederick O. Robertshaw Director February 27, 1998
- -------------------------------
Frederick O. Robertshaw
* /s/ Andrew McNally IV Director February 27, 1998
- -------------------------------
Andrew McNally IV
* /s/ John D. Barrett II Director February 27, 1998
- -------------------------------
John D. Barrett II
* /s/ Gerard E. Jones Director February 27, 1998
- -------------------------------
Gerard E. Jones
* /s/ Samuel T. Reeves Director February 27, 1998
- -------------------------------
Samuel T. Reeves
/s/ Joanna M. Haigney Treasurer February 27, 1998
- ------------------------------- (Principal
Joanna M. Haigney Accounting
Officer)
*By: /s/ Michael F. Klein
----------------------------
Michael F. Klein
Attorney-In-Fact
<PAGE>
EXHIBIT INDEX
-------------
EDGAR
Exhibit
Number Description
1(a) Articles of Amendment and Restatement are incorporated by
reference to Post-Effective Amendment No. 26 to the
Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on
October 13, 1995.
(b) Articles Supplementary to Registrant's Articles of
Amendment and Restatement (reclassifying shares) is
incorporated by reference to Post-Effective Amendment No. 30
to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-23166 and 811-5624), as filed with the SEC via
EDGAR on May 24, 1996.
(c) Articles Supplementary to Registrant's Articles of
Amendment and Restatement (adding new Technology Portfolio)
is incorporated by reference to Post-Effective Amendment
No. 30 to the Registrant's Registration Statement on Form
N-1A (File No. 33-23166 and 811-5624), as filed with the SEC
via EDGAR on May 24, 1996.
EX-99.B (d) Articles Supplementary to Registrant's Articles of Amendment
and Restatement (adding U.S. Equity Plus Portfolio), is
filed herewith.
EX-99.B (e) Articles Supplementary to Registrant's Articles of Amendment
and Restatement (adding European Real Estate and Asian Real
Estate Portfolios), is filed herewith.
EX-99.B (f) Articles Supplementary to Registrant's Articles of Amendment
and Restatement (adding Class B shares to the Money Market
Portfolio), is filed herewith.
2 Amended and Restated By-laws are incorporated by
reference to Post-Effective Amendment No. 33 to the
Registrant's Registration Statement on Form N-1A
(File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on February 28, 1997.
4 Registrant's Form of Specimen Security was previously filed
and is incorporated herein by reference.
5 (a) Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. is incorporated by reference
to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
5 (b) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
Registrant's Equity, Balanced and Fixed Income Portfolios)
is incorporated by reference to Post-Effective Amendment No.
25 to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-23166 and 811-5624), as filed with the SEC via
EDGAR on August 1, 1995.
5 (c) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Global Equity, Global Fixed Income, European Equity and
Equity Growth Portfolios) is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
5 (d) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Asian Equity Portfolio) is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
5 (e) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Active Country Allocation Portfolio) is incorporated by
reference to Post-Effective Amendment No. 25 to the
Registrant's Registration Statement on Form
<PAGE>
N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on August 1, 1995.
5 (f) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Emerging Markets, High Yield and International Small Cap
Portfolios) is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement
on Form N-1A (File Nos. 33-23166 and 811-5624), as filed
with the SEC via EDGAR on August 1, 1995.
5 (g) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Small Cap Value Equity Portfolio) is incorporated by
reference to Post-Effective Amendment No. 25 to the
Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on
August 1, 1995.
5 (h) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Emerging Markets Debt, Mortgage-Backed Securities,
Municipal Bond and Japanese Equity Portfolios) is
incorporated by reference to Post-Effective Amendment No. 25
to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-23166 and 811-5624), as filed with the SEC via
EDGAR on August 1, 1995.
5 (i) Sub-Advisory Agreement among Registrant, Morgan Stanley
Asset Management Inc. and Sun Valley Gold Company (with
respect to the Gold Portfolio) is incorporated by reference
to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
5 (j) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the China Growth Portfolio) is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
5 (k) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Latin American Portfolio) is incorporated by reference
to Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
5 (l) Withdrawn.
5 (m) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Aggressive Equity and U.S. Real Estate Portfolios) is
incorporated by reference to Post-Effective Amendment No. 25
to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-23166 and 811-5624), as filed with the SEC via
EDGAR on August 1, 1995.
2
<PAGE>
5 (n) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the MicroCap Portfolio) is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
5 (o) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the International Magnum Portfolio) is incorporated by
reference to Post-Effective Amendment No. 28 to the
Registrant's Registration Statement of Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on
November 3, 1995.
5 (p) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
the Technology Portfolio), is incorporated by reference to
Post-Effective Amendment No. 33 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on
February 28, 1997.
EX-99.B 5 (q) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
U.S. Equity Plus Portfolio), is filed herewith.
EX-99.B 5 (r) Supplement to Investment Advisory Agreement between
Registrant and Morgan Stanley Asset Management Inc. (adding
European Real Estate and Asian Real Estate Portfolios), is
filed herewith.
6 (a) Distribution Agreement between Registrant and Morgan Stanley
& Co. Incorporated is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
6 (b) Supplement to Distribution Agreement between Registrant and
Morgan Stanley & Co. Incorporated is incorporated by
reference to Post-Effective Amendment No. 29 to the
Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed with the SEC via EDGAR on
April 29, 1996.
8 (a) Mutual Fund Custody Agreement (Domestic Custody Agreement)
between Registrant and United States Trust Company of New
York dated March 10, 1994 is incorporated by reference to
Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on August 1,
1995.
8 (b) Registrant's Custody Agreement (International), dated July
31, 1989, as amended is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
8 (c) Amendment dated April 22, 1996 to Registrant's Custody
Agreement (International), dated July 31, 1989, is
incorporated by reference to Post-Effective Amendment No.
30 to the Registrant's Registration Statement on Form
N-1A (File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on May 24, 1996.
9 (a) Administration Agreement between Registrant and Morgan
Stanley Asset Management Inc. (the "MSAM Administration
Agreement") is incorporated by reference to Post-Effective
Amendment No. 25 to the Registrant's Registration Statement
on Form N-1A (File Nos. 33-23166 and 811-5624), as filed
with the SEC via EDGAR on August 1, 1995.
9 (b) U.S. Trust Administration Agreement is incorporated by
reference to Post-Effective Amendment No. 25 to the
Registrant's Registration Statement on Form N-1A (File Nos.
33-23166 and 811-5624), as filed
3
<PAGE>
with the SEC via EDGAR on August 1, 1995.
10 Opinion of Counsel is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
EX-99.B 11 Consent of Independent Accountants is filed herewith.
13 Purchase Agreement is incorporated by reference to Post-
Effective Amendment No. 25 to the Registrant's Registration
Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as
filed with the SEC via EDGAR on August 1, 1995.
15 Plan of Distribution Pursuant to Rule 12b-1 for
Class B Shares (the "Class B Plan") of the Active Country
Allocation Portfolio is incorporated by reference to
Post-Effective Amendment No. 33 to the Registrant's
Registration Statement on Form N-1A (File Nos. 33-23166 and
811-5624), as filed with the SEC via EDGAR on
February 28, 1997. The following Class B Plans have been
omitted because they are substantially identical to the
one incorporated by reference herein. The omitted Class B
Plans differ from the Class B Plan incorporated by reference
herein only with respect to the portfolio to which the
Class B Plan relates: Fixed Income, Global Fixed Income,
Municipal Bond, Mortgage-Backed Securities, High Yield,
Money Market, Small Cap Value Equity, Value Equity,
Balanced, Gold, Global Equity, International Equity,
International Small Cap, Asian Equity, European Equity,
Japanese Equity, Latin American, Emerging Markets, Emerging
Markets Debt, China Growth, Equity Growth, Emerging Growth,
MicroCap, Aggressive Equity, U.S. Real Estate, International
Magnum Technology, U.S. Equity Plus, European Real Estate
and Asian Real Estate Portfolios.
16 Schedule of Computation of Performance Information is
incorporated by reference to Post-Effective Amendment No. 25
to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-23166 and 811-5624), as filed with the SEC via
EDGAR on August 1, 1995.
19 Registrant's Rule 18f-3 Multiple Class Plan is incorporated
by reference to Post-Effective Amendment No. 33 to the
Registrant's Registration Statement on Form N-1A
(File Nos. 33-23166 and 811-5624), as filed with the
SEC via EDGAR on February 28, 1997.
EX-99.B 24 Powers of Attorney are filed herewith.
EX-99.B 27 Financial data schedules for the fiscal year ended
December 31, 1996 for Registrant's portfolios in
operation during such period (See Item 24(a)),
are filed herewith.
4
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the reference to us under the heading "Financial
Statements" in the Statement of Additional Information and to the references
to us under the headings "Financial Highlights" and "Independent Accountants"
in the Prospectuses constituting parts of this post-effective amendment No.
38 to the registration statement on Form N-1A of Morgan Stanley Institutional
Fund, Inc.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 26, 1998
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
ARTICLES SUPPLEMENTARY TO THE
ARTICLES OF AMENDMENT AND RESTATEMENT
MORGAN STANLEY INSTITUTIONAL FUND, INC., a Maryland corporation (the
"Corporation"), pursuant to Section 2-208 and 2-208.1 of the Maryland General
Corporation Law ("MGCL"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST, The Corporation is an open-end investment company registered under
the Investment Company Act of 1940, as amended.
SECOND, The Board of Directors of the Corporation at a meeting duly
convened and held on May 21, 1997 adopted a resolution adding one new portfolio,
offering Class A and Class B shares of common stock, and increasing the total
number of shares of stock which the Corporation shall have the authority to
issue from thirty-five billion (35,000,000,000) shares of common stock, par
value $.001 per share, having an aggregate par value of thirty-five million
dollars ($35,000,000) designated and classified in twenty-nine portfolios as
follows:
NUMBER OF SHARES
OF COMMON STOCK
NAME OF CLASS CLASSIFIED AND ALLOCATED
- ------------- -----------------------
Money Market Portfolio - Class A . . . . . . . . . . . . .4,000,000,000 shares
<PAGE>
Municipal Money Market Portfolio - Class A . . . . . . . .4,000,000,000 shares
Emerging Growth Portfolio - Class A. . . . . . . . . . . . .500,000,000 shares
Emerging Growth Portfolio - Class B. . . . . . . . . . . . .500,000,000 shares
International Equity Portfolio - Class A . . . . . . . . . .500,000,000 shares
International Equity Portfolio - Class B . . . . . . . . . .500,000,000 shares
Value Equity Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
Value Equity Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Fixed Income Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
Fixed Income Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Balanced Portfolio - Class A . . . . . . . . . . . . . . . .500,000,000 shares
Balanced Portfolio - Class B . . . . . . . . . . . . . . . .500,000,000 shares
Global Equity Portfolio - Class A. . . . . . . . . . . . . .500,000,000 shares
Global Equity Portfolio - Class B. . . . . . . . . . . . . .500,000,000 shares
Global Fixed Income Portfolio - Class A. . . . . . . . . . .500,000,000 shares
Global Fixed Income Portfolio - Class B. . . . . . . . . . .500,000,000 shares
European Equity Portfolio - Class A. . . . . . . . . . . . .500,000,000 shares
European Equity Portfolio - Class B. . . . . . . . . . . . .500,000,000 shares
Equity Growth Portfolio - Class A. . . . . . . . . . . . . .500,000,000 shares
Equity Growth Portfolio - Class B. . . . . . . . . . . . . .500,000,000 shares
Asian Equity Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
Asian Equity Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Active Country Allocation Portfolio - Class A. . . . . . . .500,000,000 shares
Active Country Allocation Portfolio - Class B. . . . . . . .500,000,000 shares
International Small Cap Portfolio - Class A. . . . . . . .1,000,000,000 shares
High Yield Portfolio - Class A . . . . . . . . . . . . . . .500,000,000 shares
High Yield Portfolio - Class B . . . . . . . . . . . . . . .500,000,000 shares
Emerging Markets Portfolio - Class A . . . . . . . . . . . .500,000,000 shares
Emerging Markets Portfolio - Class B . . . . . . . . . . . .500,000,000 shares
Small Cap Value Equity Portfolio - Class A . . . . . . . . .500,000,000 shares
Small Cap Value Equity Portfolio - Class B . . . . . . . . .500,000,000 shares
Emerging Markets Debt Portfolio - Class A. . . . . . . . . .500,000,000 shares
Emerging Markets Debt Portfolio - Class B. . . . . . . . . .500,000,000 shares
Mortgage-Backed Securities Portfolio - Class A . . . . . . .500,000,000 shares
Mortgage-Backed Securities Portfolio - Class B . . . . . . .500,000,000 shares
Municipal Bond Portfolio - Class A . . . . . . . . . . . . .500,000,000 shares
Municipal Bond Portfolio - Class B . . . . . . . . . . . . .500,000,000 shares
Japanese Equity Portfolio - Class A. . . . . . . . . . . . .500,000,000 shares
Japanese Equity Portfolio - Class B. . . . . . . . . . . . .500,000,000 shares
Gold Portfolio - Class A . . . . . . . . . . . . . . . . . .500,000,000 shares
Gold Portfolio - Class B . . . . . . . . . . . . . . . . . .500,000,000 shares
China Growth Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
China Growth Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Latin American Portfolio - Class A . . . . . . . . . . . . .500,000,000 shares
<PAGE>
Latin American Portfolio - Class B . . . . . . . . . . . . .500,000,000 shares
Aggressive Equity Portfolio - Class A. . . . . . . . . . . .500,000,000 shares
Aggressive Equity Portfolio - Class B. . . . . . . . . . . .500,000,000 shares
U.S. Real Estate Portfolio - Class A . . . . . . . . . . . .500,000,000 shares
U.S. Real Estate Portfolio - Class B . . . . . . . . . . . .500,000,000 shares
MicroCap Portfolio - Class A . . . . . . . . . . . . . . . .500,000,000 shares
MicroCap Portfolio - Class B . . . . . . . . . . . . . . . .500,000,000 shares
International Magnum Portfolio - Class A . . . . . . . . . .500,000,000 shares
International Magnum Portfolio - Class B . . . . . . . . . .500,000,000 shares
Technology Portfolio- Class A . . . . . . . . . . . . . . 500,000,000 shares
Technology Portfolio- Class B . . . . . . . . . . . . . . 500,000,000 shares
to thirty-six billion (36,000,000,000) shares of common stock, par value $.001
per share, having an aggregate par value of thirty-six million dollars
($36,000,000) and adding one new portfolio, offering Class A and Class B shares
of common stock, so that the common stock par value $.001 per share of the
Corporation authorized to be issued is designated and classified in thirty
portfolios as follows:
NUMBER OF SHARES
OF COMMON STOCK
NAME OF CLASS CLASSIFIED AND ALLOCATED
- -------------- -----------------------
Money Market Portfolio - Class A . . . . . . . . . . . . . 4,000,000,000 shares
Municipal Money Market Portfolio - Class A . . . . . . . . 4,000,000,000 shares
Emerging Growth Portfolio - Class A. . . . . . . . . . . . . 500,000,000 shares
Emerging Growth Portfolio - Class B. . . . . . . . . . . . . 500,000,000 shares
International Equity Portfolio - Class A . . . . . . . . . . 500,000,000 shares
International Equity Portfolio - Class B . . . . . . . . . . 500,000,000 shares
Value Equity Portfolio - Class A . . . . . . . . . . . . . . 500,000,000 shares
Value Equity Portfolio - Class B . . . . . . . . . . . . . . 500,000,000 shares
Fixed Income Portfolio - Class A . . . . . . . . . . . . . . 500,000,000 shares
Fixed Income Portfolio - Class B . . . . . . . . . . . . . . 500,000,000 shares
Balanced Portfolio - Class A . . . . . . . . . . . . . . . . 500,000,000 shares
Balanced Portfolio - Class B . . . . . . . . . . . . . . . . 500,000,000 shares
Global Equity Portfolio - Class A. . . . . . . . . . . . . . 500,000,000 shares
<PAGE>
Global Equity Portfolio - Class B. . . . . . . . . . . . . . 500,000,000 shares
Global Fixed Income Portfolio - Class A. . . . . . . . . . . 500,000,000 shares
Global Fixed Income Portfolio - Class B. . . . . . . . . . . 500,000,000 shares
European Equity Portfolio - Class A. . . . . . . . . . . . . 500,000,000 shares
European Equity Portfolio - Class B. . . . . . . . . . . . . 500,000,000 shares
Equity Growth Portfolio - Class A. . . . . . . . . . . . . . 500,000,000 shares
Equity Growth Portfolio - Class B. . . . . . . . . . . . . . 500,000,000 shares
Asian Equity Portfolio - Class A . . . . . . . . . . . . . . 500,000,000 shares
Asian Equity Portfolio - Class B . . . . . . . . . . . . . . 500,000,000 shares
Active Country Allocation Portfolio - Class A. . . . . . . . 500,000,000 shares
Active Country Allocation Portfolio - Class B. . . . . . . . 500,000,000 shares
International Small Cap Portfolio - Class A. . . . . . . . 1,000,000,000 shares
High Yield Portfolio - Class A . . . . . . . . . . . . . . . 500,000,000 shares
High Yield Portfolio - Class B . . . . . . . . . . . . . . . 500,000,000 shares
Emerging Markets Portfolio - Class A . . . . . . . . . . . . 500,000,000 shares
Emerging Markets Portfolio - Class B . . . . . . . . . . . . 500,000,000 shares
Small Cap Value Equity Portfolio - Class A . . . . . . . . . 500,000,000 shares
Small Cap Value Equity Portfolio - Class B . . . . . . . . . 500,000,000 shares
Emerging Markets Debt Portfolio - Class A. . . . . . . . . . 500,000,000 shares
Emerging Markets Debt Portfolio - Class B. . . . . . . . . . 500,000,000 shares
Mortgage-Backed Securities Portfolio - Class A . . . . . . . 500,000,000 shares
Mortgage-Backed Securities Portfolio - Class B . . . . . . . 500,000,000 shares
Municipal Bond Portfolio - Class A . . . . . . . . . . . . . 500,000,000 shares
Municipal Bond Portfolio - Class B . . . . . . . . . . . . . 500,000,000 shares
Japanese Equity Portfolio - Class A. . . . . . . . . . . . . 500,000,000 shares
Japanese Equity Portfolio - Class B. . . . . . . . . . . . . 500,000,000 shares
Gold Portfolio - Class A . . . . . . . . . . . . . . . . . . 500,000,000 shares
Gold Portfolio - Class B . . . . . . . . . . . . . . . . . . 500,000,000 shares
China Growth Portfolio - Class A . . . . . . . . . . . . . . 500,000,000 shares
China Growth Portfolio - Class B . . . . . . . . . . . . . . 500,000,000 shares
Latin American Portfolio - Class A . . . . . . . . . . . . . 500,000,000 shares
Latin American Portfolio - Class B . . . . . . . . . . . . . 500,000,000 shares
Aggressive Equity Portfolio - Class A. . . . . . . . . . . . 500,000,000 shares
Aggressive Equity Portfolio - Class B. . . . . . . . . . . . 500,000,000 shares
U.S. Real Estate Portfolio - Class A . . . . . . . . . . . . 500,000,000 shares
U.S. Real Estate Portfolio - Class B . . . . . . . . . . . . 500,000,000 shares
MicroCap Portfolio - Class A . . . . . . . . . . . . . . . . 500,000,000 shares
MicroCap Portfolio - Class B . . . . . . . . . . . . . . . . 500,000,000 shares
International Magnum Portfolio - Class A . . . . . . . . . . 500,000,000 shares
International Magnum Portfolio - Class B . . . . . . . . . . 500,000,000 shares
Technology Portfolio - Class A . . . . . . . . . . . . . . . 500,000,000 shares
Technology Portfolio - Class B . . . . . . . . . . . . . . . 500,000,000 shares
U.S.Equity Plus Portfolio- Class A.. . . . . . . . . . . . 500,000,000 shares
<PAGE>
U.S Equity Plus Portfolio- Class B . . . . . . .. . . . . . 500,000,000 shares
THIRD: Such shares have been duly authorized and classified by the Board
of Directors pursuant to authority and power contained in Section 2-105(c) of
the MGCL and the Corporation's Articles of Amendment and Restatement.
FOURTH: The description of the shares of stock of each class designated
and classified as set forth above, including any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption is as set forth in the
Articles of Amendment and Restatement and has not changed in connection with
these Articles Supplementary to the Articles of Amendment and Restatement.
<PAGE>
IN WITNESS WHEREOF, MORGAN STANLEY INSTITUTIONAL FUND, INC. has caused
these presents to be signed in its name and on its behalf by its President and
attested by its Secretary on this 21 day of May, 1997.
MORGAN STANLEY INSTITUTIONAL FUND, INC.
By: /s/ Warren J. Olsen
----------------------------
Warren J. Olsen
President
Attest: /s/ Valerie Y. Lewis
------------------------
Valerie Y. Lewis
Secretary
<PAGE>
The undersigned, President of MORGAN STANLEY INSTITUTIONAL FUND, INC., who
executed on behalf of said corporation the foregoing Articles Supplementary to
the Articles of Amendment and Restatement of which this certificate is made a
part, hereby acknowledges, in the name and on behalf of said corporation, the
foregoing Articles Supplementary to the Articles of Amendment and Restatement to
be the corporate act of said corporation and further certifies that, to the best
of his knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all material respects,
under the penalties of perjury.
/s/ Warren J. Olsen
---------------------------
Warren J. Olsen
President
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
ARTICLES SUPPLEMENTARY TO THE
ARTICLES OF AMENDMENT AND RESTATEMENT
MORGAN STANLEY INSTITUTIONAL FUND, INC., a Maryland corporation (the
"Corporation"), pursuant to Section 2-208 and 2-208.1 of the Maryland General
Corporation Law ("MGCL"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST, The Corporation is an open-end investment company registered under
the Investment Company Act of 1940, as amended.
SECOND, The Board of Directors of the Corporation at a meeting duly
convened and held on May 21, 1997 adopted a resolution adding two new
portfolios, offering Class A and Class B shares of common stock, and increasing
the total number of shares of stock which the Corporation shall have the
authority to issue from thirty-six billion (36,000,000,000) shares of common
stock, par value $.001 per share, having an aggregate par value of thirty-six
million dollars ($36,000,000) designated and classified in thirty portfolios as
follows:
NUMBER OF SHARES
OF COMMON STOCK
NAME OF CLASS CLASSIFIED AND ALLOCATED
- -------------- ------------------------
Money Market Portfolio - Class A . . . . . . . . . . . . .4,000,000,000 shares
Municipal Money Market Portfolio - Class A . . . . . . . .4,000,000,000 shares
Emerging Growth Portfolio - Class A. . . . . . . . . . . . .500,000,000 shares
Emerging Growth Portfolio - Class B. . . . . . . . . . . . .500,000,000 shares
International Equity Portfolio - Class A . . . . . . . . . .500,000,000 shares
International Equity Portfolio - Class B . . . . . . . . . .500,000,000 shares
Value Equity Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
Value Equity Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Fixed Income Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
<PAGE>
Fixed Income Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Balanced Portfolio - Class A . . . . . . . . . . . . . . . .500,000,000 shares
Balanced Portfolio - Class B . . . . . . . . . . . . . . . .500,000,000 shares
Global Equity Portfolio - Class A. . . . . . . . . . . . . .500,000,000 shares
Global Equity Portfolio - Class B. . . . . . . . . . . . . .500,000,000 shares
Global Fixed Income Portfolio - Class A. . . . . . . . . . .500,000,000 shares
Global Fixed Income Portfolio - Class B. . . . . . . . . . .500,000,000 shares
European Equity Portfolio - Class A. . . . . . . . . . . . .500,000,000 shares
European Equity Portfolio - Class B. . . . . . . . . . . . .500,000,000 shares
Equity Growth Portfolio - Class A. . . . . . . . . . . . . .500,000,000 shares
Equity Growth Portfolio - Class B. . . . . . . . . . . . . .500,000,000 shares
Asian Equity Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
Asian Equity Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Active Country Allocation Portfolio - Class A. . . . . . . .500,000,000 shares
Active Country Allocation Portfolio - Class B. . . . . . . .500,000,000 shares
International Small Cap Portfolio - Class A. . . . . . . .1,000,000,000 shares
High Yield Portfolio - Class A . . . . . . . . . . . . . . .500,000,000 shares
High Yield Portfolio - Class B . . . . . . . . . . . . . . .500,000,000 shares
Emerging Markets Portfolio - Class A . . . . . . . . . . . .500,000,000 shares
Emerging Markets Portfolio - Class B . . . . . . . . . . . .500,000,000 shares
Small Cap Value Equity Portfolio - Class A . . . . . . . . .500,000,000 shares
Small Cap Value Equity Portfolio - Class B . . . . . . . . .500,000,000 shares
Emerging Markets Debt Portfolio - Class A. . . . . . . . . .500,000,000 shares
Emerging Markets Debt Portfolio - Class B. . . . . . . . . .500,000,000 shares
Mortgage-Backed Securities Portfolio - Class A . . . . . . .500,000,000 shares
Mortgage-Backed Securities Portfolio - Class B . . . . . . .500,000,000 shares
Municipal Bond Portfolio - Class A . . . . . . . . . . . . .500,000,000 shares
Municipal Bond Portfolio - Class B . . . . . . . . . . . . .500,000,000 shares
Japanese Equity Portfolio - Class A. . . . . . . . . . . . .500,000,000 shares
Japanese Equity Portfolio - Class B. . . . . . . . . . . . .500,000,000 shares
Gold Portfolio - Class A . . . . . . . . . . . . . . . . . .500,000,000 shares
Gold Portfolio - Class B . . . . . . . . . . . . . . . . . .500,000,000 shares
China Growth Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
China Growth Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Latin American Portfolio - Class A . . . . . . . . . . . . .500,000,000 shares
Latin American Portfolio - Class B . . . . . . . . . . . . .500,000,000 shares
Aggressive Equity Portfolio - Class A. . . . . . . . . . . .500,000,000 shares
Aggressive Equity Portfolio - Class B. . . . . . . . . . . .500,000,000 shares
U.S. Real Estate Portfolio - Class A . . . . . . . . . . . .500,000,000 shares
U.S. Real Estate Portfolio - Class B . . . . . . . . . . . .500,000,000 shares
MicroCap Portfolio - Class A . . . . . . . . . . . . . . . .500,000,000 shares
MicroCap Portfolio - Class B . . . . . . . . . . . . . . . .500,000,000 shares
International Magnum Portfolio - Class A . . . . . . . . . .500,000,000 shares
<PAGE>
International Magnum Portfolio - Class B . . . . . . . . . .500,000,000 shares
Technology Portfolio- Class A . . . . . . . . . . . . . . .500,000,000 shares
Technology Portfolio- Class B . . . . . . . . . . . . . . .500,000,000 shares
U.S. Equity Plus Portfolio - Class A . . . . . . . . . . . .500,000,000 shares
U.S. Equity Plus Portfolio - Class B . . . . . . . . . . . .500,000,000 shares
to thirty-eight billion (38,000,000,000) shares of common stock, par value $.001
per share, having an aggregate par value of thirty-eight million dollars
($38,000,000) and adding two new portfolios, offering Class A and Class B shares
of common stock, so that the common stock par value $.001 per share of the
Corporation authorized to be issued is designated and classified in thirty-two
portfolios as follows:
NUMBER OF SHARES
OF COMMON STOCK
NAME OF CLASS CLASSIFIED AND ALLOCATED
- -------------- ------------------------
Money Market Portfolio - Class A . . . . . . . . . . . . .4,000,000,000 shares
Municipal Money Market Portfolio - Class A . . . . . . . .4,000,000,000 shares
Emerging Growth Portfolio - Class A. . . . . . . . . . . . .500,000,000 shares
Emerging Growth Portfolio - Class B. . . . . . . . . . . . .500,000,000 shares
International Equity Portfolio - Class A . . . . . . . . . .500,000,000 shares
International Equity Portfolio - Class B . . . . . . . . . .500,000,000 shares
Value Equity Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
Value Equity Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Fixed Income Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
Fixed Income Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Balanced Portfolio - Class A . . . . . . . . . . . . . . . .500,000,000 shares
Balanced Portfolio - Class B . . . . . . . . . . . . . . . .500,000,000 shares
Global Equity Portfolio - Class A. . . . . . . . . . . . . .500,000,000 shares
Global Equity Portfolio - Class B. . . . . . . . . . . . . .500,000,000 shares
Global Fixed Income Portfolio - Class A. . . . . . . . . . .500,000,000 shares
Global Fixed Income Portfolio - Class B. . . . . . . . . . .500,000,000 shares
European Equity Portfolio - Class A. . . . . . . . . . . . .500,000,000 shares
European Equity Portfolio - Class B. . . . . . . . . . . . .500,000,000 shares
Equity Growth Portfolio - Class A. . . . . . . . . . . . . .500,000,000 shares
Equity Growth Portfolio - Class B. . . . . . . . . . . . . .500,000,000 shares
Asian Equity Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
Asian Equity Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Active Country Allocation Portfolio - Class A. . . . . . . .500,000,000 shares
<PAGE>
Active Country Allocation Portfolio - Class B. . . . . . . .500,000,000 shares
International Small Cap Portfolio - Class A. . . . . . . .1,000,000,000 shares
High Yield Portfolio - Class A . . . . . . . . . . . . . . .500,000,000 shares
High Yield Portfolio - Class B . . . . . . . . . . . . . . .500,000,000 shares
Emerging Markets Portfolio - Class A . . . . . . . . . . . .500,000,000 shares
Emerging Markets Portfolio - Class B . . . . . . . . . . . .500,000,000 shares
Small Cap Value Equity Portfolio - Class A . . . . . . . . .500,000,000 shares
Small Cap Value Equity Portfolio - Class B . . . . . . . . .500,000,000 shares
Emerging Markets Debt Portfolio - Class A. . . . . . . . . .500,000,000 shares
Emerging Markets Debt Portfolio - Class B. . . . . . . . . .500,000,000 shares
Mortgage-Backed Securities Portfolio - Class A . . . . . . .500,000,000 shares
Mortgage-Backed Securities Portfolio - Class B . . . . . . .500,000,000 shares
Municipal Bond Portfolio - Class A . . . . . . . . . . . . .500,000,000 shares
Municipal Bond Portfolio - Class B . . . . . . . . . . . . .500,000,000 shares
Japanese Equity Portfolio - Class A. . . . . . . . . . . . .500,000,000 shares
Japanese Equity Portfolio - Class B. . . . . . . . . . . . .500,000,000 shares
Gold Portfolio - Class A . . . . . . . . . . . . . . . . . .500,000,000 shares
Gold Portfolio - Class B . . . . . . . . . . . . . . . . . .500,000,000 shares
China Growth Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
China Growth Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Latin American Portfolio - Class A . . . . . . . . . . . . .500,000,000 shares
Latin American Portfolio - Class B . . . . . . . . . . . . .500,000,000 shares
Aggressive Equity Portfolio - Class A. . . . . . . . . . . .500,000,000 shares
Aggressive Equity Portfolio - Class B. . . . . . . . . . . .500,000,000 shares
U.S. Real Estate Portfolio - Class A . . . . . . . . . . . .500,000,000 shares
U.S. Real Estate Portfolio - Class B . . . . . . . . . . . .500,000,000 shares
MicroCap Portfolio - Class A . . . . . . . . . . . . . . . .500,000,000 shares
MicroCap Portfolio - Class B . . . . . . . . . . . . . . . .500,000,000 shares
International Magnum Portfolio - Class A . . . . . . . . . .500,000,000 shares
International Magnum Portfolio - Class B . . . . . . . . . .500,000,000 shares
Technology Portfolio - Class A . . . . . . . . . . . . . . .500,000,000 shares
Technology Portfolio - Class B . . . . . . . . . . . . . . .500,000,000 shares
U.S. Equity Plus Portfolio- Class A. . . . . . . . . . . . .500,000,000 shares
U.S. Equity Plus Portfolio- Class B. . . . . . . . . . . . .500,000,000 shares
Asian Real Estate Portfolio - Class A. . . . . . . . . . . 500,000,000 shares
Asian Real Estate Portfolio - Class B. . . . . . . . . . . .500,000,000 shares
European Real Estate Portfolio - Class A . . .. . . . . .. .500,000,000 shares
European Real Estate Portfolio - Class B . . . . . . . . . .500,000,000 shares
<PAGE>
THIRD: Such shares have been duly authorized and classified by the Board
of Directors pursuant to authority and power contained in Section 2-105(c) of
the MGCL and the Corporation's Articles of Amendment and Restatement.
FOURTH: The description of the shares of stock of each class designated
and classified as set forth above, including any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption is as set forth in the
Articles of Amendment and Restatement and has not changed in connection with
these Articles Supplementary to the Articles of Amendment and Restatement.
<PAGE>
IN WITNESS WHEREOF, MORGAN STANLEY INSTITUTIONAL FUND, INC. has caused
these presents to be signed in its name and on its behalf by its President and
attested by its Secretary on this 10th day of June, 1997.
MORGAN STANLEY INSTITUTIONAL FUND, INC.
By: /s/ Michael F. Klein
-----------------------------------
Michael F. Klein
President
Attest: /s/ Valerie Y. Lewis
---------------------------
Valerie Y. Lewis
Secretary
<PAGE>
The undersigned, President of MORGAN STANLEY INSTITUTIONAL FUND, INC., who
executed on behalf of said corporation the foregoing Articles Supplementary to
the Articles of Amendment and Restatement of which this certificate is made a
part, hereby acknowledges, in the name and on behalf of said corporation, the
foregoing Articles Supplementary to the Articles of Amendment and Restatement to
be the corporate act of said corporation and further certifies that, to the best
of his knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all material respects,
under the penalties of perjury.
/s/ Michael F. Klein
----------------------------------
Michael F. Klein
President
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
ARTICLES SUPPLEMENTARY TO THE
ARTICLES OF AMENDMENT AND RESTATEMENT
MORGAN STANLEY INSTITUTIONAL FUND, INC., a Maryland corporation (the
"Corporation"), pursuant to Section 2-208 and 2-208.1 of the Maryland General
Corporation Law ("MGCL"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST, The Corporation is an open-end investment company registered under
the Investment Company Act of 1940, as amended.
SECOND, The Board of Directors of the Corporation at a meeting duly
convened and held on December 11, 1997 adopted a resolution adding Class B
shares of common stock to the Corporation's Money Market Portfolio, and
increasing the total number of shares of stock which the Corporation shall have
the authority to issue from thirty-eight billion (38,000,000,000) shares of
common stock, par value $.001 per share, having an aggregate par value of
thirty-eight million dollars ($38,000,000) designated and classified in
thirtytwo portfolios as follows:
NUMBER OF SHARES
OF COMMON STOCK
NAME OF CLASS CLASSIFIED AND ALLOCATED
- ------------- ------------------------
Money Market Portfolio - Class A . . . . . . . . . . . . . .4,000,000,000 shares
Municipal Money Market Portfolio - Class A . . . . . . . . .4,000,000,000 shares
Emerging Growth Portfolio - Class A. . . . . . . . . . . . . .500,000,000 shares
Emerging Growth Portfolio - Class B. . . . . . . . . . . . . .500,000,000 shares
International Equity Portfolio - Class A . . . . . . . . . . .500,000,000 shares
International Equity Portfolio - Class B . . . . . . . . . . .500,000,000 shares
Value Equity Portfolio - Class A . . . . . . . . . . . . . . .500,000,000 shares
Value Equity Portfolio - Class B . . . . . . . . . . . . . . .500,000,000 shares
Fixed Income Portfolio - Class A . . . . . . . . . . . . . . .500,000,000 shares
<PAGE>
Fixed Income Portfolio - Class B . . . . . . . . . . . . . . .500,000,000 shares
Balanced Portfolio - Class A . . . . . . . . . . . . . . . . .500,000,000 shares
Balanced Portfolio - Class B . . . . . . . . . . . . . . . . .500,000,000 shares
Global Equity Portfolio - Class A. . . . . . . . . . . . . . .500,000,000 shares
Global Equity Portfolio - Class B. . . . . . . . . . . . . . .500,000,000 shares
Global Fixed Income Portfolio - Class A. . . . . . . . . . . .500,000,000 shares
Global Fixed Income Portfolio - Class B. . . . . . . . . . . .500,000,000 shares
European Equity Portfolio - Class A. . . . . . . . . . . . . .500,000,000 shares
European Equity Portfolio - Class B. . . . . . . . . . . . . .500,000,000 shares
Equity Growth Portfolio - Class A. . . . . . . . . . . . . . .500,000,000 shares
Equity Growth Portfolio - Class B. . . . . . . . . . . . . . .500,000,000 shares
Asian Equity Portfolio - Class A . . . . . . . . . . . . . . .500,000,000 shares
Asian Equity Portfolio - Class B . . . . . . . . . . . . . . .500,000,000 shares
Active Country Allocation Portfolio - Class A. . . . . . . . .500,000,000 shares
Active Country Allocation Portfolio - Class B. . . . . . . . .500,000,000 shares
International Small Cap Portfolio - Class A. . . . . . . . .1,000,000,000 shares
High Yield Portfolio - Class A . . . . . . . . . . . . . . . .500,000,000 shares
High Yield Portfolio - Class B . . . . . . . . . . . . . . . .500,000,000 shares
Emerging Markets Portfolio - Class A . . . . . . . . . . . . .500,000,000 shares
Emerging Markets Portfolio - Class B . . . . . . . . . . . . .500,000,000 shares
Small Cap Value Equity Portfolio - Class A . . . . . . . . . .500,000,000 shares
Small Cap Value Equity Portfolio - Class B . . . . . . . . . .500,000,000 shares
Emerging Markets Debt Portfolio - Class A. . . . . . . . . . .500,000,000 shares
Emerging Markets Debt Portfolio - Class B. . . . . . . . . . .500,000,000 shares
Mortgage-Backed Securities Portfolio - Class A . . . . . . . .500,000,000 shares
Mortgage-Backed Securities Portfolio - Class B . . . . . . . .500,000,000 shares
Municipal Bond Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
Municipal Bond Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Japanese Equity Portfolio - Class A. . . . . . . . . . . . . .500,000,000 shares
Japanese Equity Portfolio - Class B. . . . . . . . . . . . . .500,000,000 shares
Gold Portfolio - Class A . . . . . . . . . . . . . . . . . . .500,000,000 shares
Gold Portfolio - Class B . . . . . . . . . . . . . . . . . . .500,000,000 shares
China Growth Portfolio - Class A . . . . . . . . . . . . . . .500,000,000 shares
China Growth Portfolio - Class B . . . . . . . . . . . . . . .500,000,000 shares
Latin American Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
Latin American Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Aggressive Equity Portfolio - Class A. . . . . . . . . . . . .500,000,000 shares
Aggressive Equity Portfolio - Class B. . . . . . . . . . . . .500,000,000 shares
U.S. Real Estate Portfolio - Class A . . . . . . . . . . . . .500,000,000 shares
U.S. Real Estate Portfolio - Class B . . . . . . . . . . . . .500,000,000 shares
MicroCap Portfolio - Class A . . . . . . . . . . . . . . . . .500,000,000 shares
MicroCap Portfolio - Class B . . . . . . . . . . . . . . . . .500,000,000 shares
International Magnum Portfolio - Class A . . . . . . . . . . .500,000,000 shares
<PAGE>
International Magnum Portfolio - Class B . . . . . . . . . . .500,000,000 shares
Technology Portfolio - Class A . . . . . . . . . . . . . . . .500,000,000 shares
Technology Portfolio - Class B . . . . . . . . . . . . . . . .500,000,000 shares
U.S. Equity Plus Portfolio - Class A . . . . . . . . . . . . .500,000,000 shares
U.S. Equity Plus Portfolio - Class B . . . . . . . . . . . . .500,000,000 shares
Asian Real Estate Portfolio - Class A. . . . . . . . . . . . .500,000,000 shares
Asian Real Estate Portfolio - Class B. . . . . . . . . . . . .500,000,000 shares
European Real Estate Portfolio - Class A . . . . . . . . . . .500,000,000 shares
European Real Estate Portfolio - Class B . . . . . . . . . . .500,000,000 shares
to forty billion (40,000,000,000) shares of common stock, par value $.001 per
share, having an aggregate par value of forty million dollars ($40,000,000) and
adding Class B shares of common stock to the Money Market Portfolio, so that the
common stock par value $.001 per share of the Corporation authorized to be
issued is designated and classified in thirty-two portfolios as follows:
NUMBER OF SHARES
OF COMMON STOCK
NAME OF CLASS CLASSIFIED AND ALLOCATED
- ------------- ------------------------
Money Market Portfolio - Class A . . . . . . . . . . . . . .4,000,000,000 shares
Money Market Portfolio - Class B . . . . . . . . . . . . . .2,000,000,000 shares
Municipal Money Market Portfolio - Class A . . . . . . . . .4,000,000,000 shares
Emerging Growth Portfolio - Class A. . . . . . . . . . . . . .500,000,000 shares
Emerging Growth Portfolio - Class B. . . . . . . . . . . . . .500,000,000 shares
International Equity Portfolio - Class A . . . . . . . . . . .500,000,000 shares
International Equity Portfolio - Class B . . . . . . . . . . .500,000,000 shares
Value Equity Portfolio - Class A . . . . . . . . . . . . . . .500,000,000 shares
Value Equity Portfolio - Class B . . . . . . . . . . . . . . .500,000,000 shares
Fixed Income Portfolio - Class A . . . . . . . . . . . . . . .500,000,000 shares
Fixed Income Portfolio - Class B . . . . . . . . . . . . . . .500,000,000 shares
Balanced Portfolio - Class A . . . . . . . . . . . . . . . . .500,000,000 shares
Balanced Portfolio - Class B . . . . . . . . . . . . . . . . .500,000,000 shares
Global Equity Portfolio - Class A. . . . . . . . . . . . . . .500,000,000 shares
Global Equity Portfolio - Class B. . . . . . . . . . . . . . .500,000,000 shares
Global Fixed Income Portfolio - Class A. . . . . . . . . . . .500,000,000 shares
Global Fixed Income Portfolio - Class B. . . . . . . . . . . .500,000,000 shares
European Equity Portfolio - Class A. . . . . . . . . . . . . .500,000,000 shares
European Equity Portfolio - Class B. . . . . . . . . . . . . .500,000,000 shares
<PAGE>
Equity Growth Portfolio - Class A. . . . . . . . . . . . . . .500,000,000 shares
Equity Growth Portfolio - Class B. . . . . . . . . . . . . . .500,000,000 shares
Asian Equity Portfolio - Class A . . . . . . . . . . . . . . .500,000,000 shares
Asian Equity Portfolio - Class B . . . . . . . . . . . . . . .500,000,000 shares
Active Country Allocation Portfolio - Class A. . . . . . . . .500,000,000 shares
Active Country Allocation Portfolio - Class B. . . . . . . . .500,000,000 shares
International Small Cap Portfolio - Class A. . . . . . . . .1,000,000,000 shares
High Yield Portfolio - Class A . . . . . . . . . . . . . . . .500,000,000 shares
High Yield Portfolio - Class B . . . . . . . . . . . . . . . .500,000,000 shares
Emerging Markets Portfolio - Class A . . . . . . . . . . . . .500,000,000 shares
Emerging Markets Portfolio - Class B . . . . . . . . . . . . .500,000,000 shares
Small Cap Value Equity Portfolio - Class A . . . . . . . . . .500,000,000 shares
Small Cap Value Equity Portfolio - Class B . . . . . . . . . .500,000,000 shares
Emerging Markets Debt Portfolio - Class A. . . . . . . . . . .500,000,000 shares
Emerging Markets Debt Portfolio - Class B. . . . . . . . . . .500,000,000 shares
Mortgage-Backed Securities Portfolio - Class A . . . . . . . .500,000,000 shares
Mortgage-Backed Securities Portfolio - Class B . . . . . . . .500,000,000 shares
Municipal Bond Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
Municipal Bond Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Japanese Equity Portfolio - Class A. . . . . . . . . . . . . .500,000,000 shares
Japanese Equity Portfolio - Class B. . . . . . . . . . . . . .500,000,000 shares
Gold Portfolio - Class A . . . . . . . . . . . . . . . . . . .500,000,000 shares
Gold Portfolio - Class B . . . . . . . . . . . . . . . . . . .500,000,000 shares
China Growth Portfolio - Class A . . . . . . . . . . . . . . .500,000,000 shares
China Growth Portfolio - Class B . . . . . . . . . . . . . . .500,000,000 shares
Latin American Portfolio - Class A . . . . . . . . . . . . . .500,000,000 shares
Latin American Portfolio - Class B . . . . . . . . . . . . . .500,000,000 shares
Aggressive Equity Portfolio - Class A. . . . . . . . . . . . .500,000,000 shares
Aggressive Equity Portfolio - Class B. . . . . . . . . . . . .500,000,000 shares
U.S. Real Estate Portfolio - Class A . . . . . . . . . . . . .500,000,000 shares
U.S. Real Estate Portfolio - Class B . . . . . . . . . . . . .500,000,000 shares
MicroCap Portfolio - Class A . . . . . . . . . . . . . . . . .500,000,000 shares
MicroCap Portfolio - Class B . . . . . . . . . . . . . . . . .500,000,000 shares
International Magnum Portfolio - Class A . . . . . . . . . . .500,000,000 shares
International Magnum Portfolio - Class B . . . . . . . . . . .500,000,000 shares
Technology Portfolio - Class A . . . . . . . . . . . . . . . .500,000,000 shares
Technology Portfolio - Class B . . . . . . . . . . . . . . . .500,000,000 shares
U.S.Equity Plus Portfolio - Class A. . . . . . . . . . . . . .500,000,000 shares
U.S Equity Plus Portfolio - Class B. . . . . . . . . . . . . .500,000,000 shares
Asian Real Estate Portfolio - Class A. . . . . . . . . . . . .500,000,000 shares
Asian Real Estate Portfolio - Class B. . . . . . . . . . . . .500,000,000 shares
European Real Estate Portfolio - Class A . . . . . . . . . . .500,000,000 shares
European Real Estate Portfolio - Class B . . . . . . . . . . .500,000,000 shares
<PAGE>
THIRD: Such shares have been duly authorized and classified by the Board
of Directors pursuant to authority and power contained in Section 2-105(c) of
the MGCL and the Corporation's Articles of Amendment and Restatement.
FOURTH: The description of the shares of stock of each class designated
and classified as set forth above, including any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption is as set forth in the
Articles of Amendment and Restatement and has not changed in connection with
these Articles Supplementary to the Articles of Amendment and Restatement.
<PAGE>
IN WITNESS WHEREOF, MORGAN STANLEY INSTITUTIONAL FUND, INC. has caused
these presents to be signed in its name and on its behalf by its President and
attested by its Secretary on this 16th day of December, 1997.
MORGAN STANLEY INSTITUTIONAL FUND, INC.
By: /s/ Michael F. Klein
------------------------------------
Michael F. Klein
President
Attest: /s/ Valerie Y. Lewis
---------------------------
Valerie Y. Lewis
Secretary
<PAGE>
The undersigned, President of MORGAN STANLEY INSTITUTIONAL FUND, INC.,
who executed on behalf of said corporation the foregoing Articles Supplementary
to the Articles of Amendment and Restatement of which this certificate is made a
part, hereby acknowledges, in the name and on behalf of said corporation, the
foregoing Articles Supplementary to the Articles of Amendment and Restatement to
be the corporate act of said corporation and further certifies that, to the best
of his knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all material respects,
under the penalties of perjury.
/s/ Michael F. Klein
-----------------------------------
Michael F. Klein
President
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT
U.S. EQUITY PLUS PORTFOLIO
SUPPLEMENT (the "Supplement") TO INVESTMENT ADVISORY AGREEMENT dated
as of May 1, 1997 by and between Morgan Stanley Institutional Fund, Inc. (the
"Fund") and Morgan Stanley Asset Management Inc. (the "Adviser") (the
"Agreement").
RECITALS
WHEREAS, the Fund has executed and delivered the Agreement which sets
forth the rights and obligations of the parties with respect to the management
of the portfolios of the Fund.
WHEREAS, the Fund has created an additional portfolio: U.S. Equity
Plus Portfolio (the "Additional Portfolio").
AGREEMENTS
Now, therefore, the parties agree as follows:
As provided in Section 1 of the Agreement, the Fund hereby appoints
the Adviser to act as investment adviser to the Additional Portfolio.
The compensation of the Adviser as set forth in Paragraph 3 of the
Agreement with respect to the Additional Portfolio will be as set forth below:
Portfolio Percentage Rate
--------- ---------------
U.S. Equity Plus Portfolio 0.45%
This Supplement may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
The parties listed below have executed this Supplement as of the 20th
day of June, 1997.
MORGAN STANLEY ASSET MORGAN STANLEY INSTITUTIONAL
MANAGEMENT INC. FUND, INC.
/s/ Harold J. Schaaff, Jr. /s/ Michael F. Klein
- --------------------------------------- -----------------------------------
Name: Harold J. Schaaff, Jr. Name: Michael F. Klein
Title: Principal, General Counsel and Title: President
Secretary
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT
ASIAN REAL ESTATE PORTFOLIO
EUROPEAN REAL ESTATE PORTFOLIO
SUPPLEMENT (the "Supplement") TO INVESTMENT ADVISORY AGREEMENT dated
as of May 1, 1997 by and between Morgan Stanley Institutional Fund, Inc. (the
"Fund") and Morgan Stanley Asset Management Inc. (the "Adviser") (the
"Agreement").
RECITALS
WHEREAS, the Fund has executed and delivered the Agreement which sets
forth the rights and obligations of the parties with respect to the management
of the portfolios of the Fund.
WHEREAS, the Fund has created two additional portfolios: Asian Real
Estate and European Real Estate Portfolios (the "Additional Portfolios").
AGREEMENTS
Now, therefore, the parties agree as follows:
As provided in Section 1 of the Agreement, the Fund hereby appoints
the Adviser to act as investment adviser to the Additional Portfolios.
The compensation of the Adviser as set forth in Paragraph 3 of the
Agreement with respect to the Additional Portfolios will be as set forth below:
Portfolio Percentage Rate
--------- ---------------
Asian Real Estate Portfolio 0.80%
European Real Estate Portfolio 0.80%
This Supplement may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
The parties listed below have executed this Supplement as of the 20th
day of June, 1997.
MORGAN STANLEY ASSET MORGAN STANLEY INSTITUTIONAL
MANAGEMENT INC. FUND, INC.
/s/ Harold J. Schaaff, Jr. /s/ Michael F. Klein
- ----------------------------------- -------------------------------
Name: Harold J. Schaaff, Jr. Name: Michael F. Klein
Title: Principal, General Counsel and Title: President
Secretary
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
POWER OF ATTORNEY
Barton M. Biggs, whose signature appears below, does hereby constitute and
appoint Michael F. Klein, Harold J. Schaaff, Jr., Valerie Y. Lewis and Stefanie
V. Chang, his true and lawful attorneys and agents, each with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents may deem necessary or
advisable or which may be required to enable Morgan Stanley Institutional Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all amendments thereto, including within the foregoing, the power and
authority to sign in the name and on behalf of the undersigned as a director of
the Fund such Registration Statement and any and all such amendments filed with
the Securities and Exchange Commission under the 1933 Act and the 1940 Act, and
any other instruments or documents related thereto, and the undersigned does
hereby ratify and confirm all that said attorney and agents shall do or cause to
be done by virtue hereof.
/s/ Barton M. Biggs
----------------------------------------
Barton M. Biggs
Date: January 14, 1998
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
POWER OF ATTORNEY
Michael F. Klein, whose signature appears below, does hereby constitute
and appoint Harold J. Schaaff, Jr., Valerie Y. Lewis and Stefanie V. Chang,
his true and lawful attorneys and agents, each with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents may deem necessary or advisable
or which may be required to enable Morgan Stanley Institutional Fund, Inc.
(the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the
"1940 Act"), and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the Fund's
Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act,
together with any and all amendments thereto, including within the foregoing,
the power and authority to sign in the name and on behalf of the undersigned
as a President and a director of the Fund such Registration Statement and any
and all such amendments filed with the Securities and Exchange Commission
under the 1933 Act and the 1940 Act, and any other instruments or documents
related thereto, and the undersigned does hereby ratify and confirm all that
said attorney and agents shall do or cause to be done by virtue hereof.
/s/ Michael F. Klein
----------------------------------------
Michael F. Klein
Date: January 20, 1998
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
POWER OF ATTORNEY
John D. Barrett, II, whose signature appears below, does hereby constitute
and appoint Michael F. Klein, Harold J. Schaaff, Jr., Valerie Y. Lewis and
Stefanie V. Chang, his true and lawful attorneys and agents, each with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents may deem necessary or
advisable or which may be required to enable Morgan Stanley Institutional Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all amendments thereto, including within the foregoing, the power and
authority to sign in the name and on behalf of the undersigned as a director of
the Fund such Registration Statement and any and all such amendments filed with
the Securities and Exchange Commission under the 1933 Act and the 1940 Act, and
any other instruments or documents related thereto, and the undersigned does
hereby ratify and confirm all that said attorney and agents shall do or cause to
be done by virtue hereof.
/s/ John D. Barrett, II
----------------------------------------
John D. Barrett, II
Date: January 15, 1998
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
POWER OF ATTORNEY
Gerard E. Jones, whose signature appears below, does hereby constitute and
appoint Michael F. Klein, Harold J. Schaaff, Jr., Valerie Y. Lewis and Stefanie
V. Chang, his true and lawful attorneys and agents, each with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents may deem necessary or
advisable or which may be required to enable Morgan Stanley Institutional Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all amendments thereto, including within the foregoing, the power and
authority to sign in the name and on behalf of the undersigned as a director of
the Fund such Registration Statement and any and all such amendments filed with
the Securities and Exchange Commission under the 1933 Act and the 1940 Act, and
any other instruments or documents related thereto, and the undersigned does
hereby ratify and confirm all that said attorney and agents shall do or cause to
be done by virtue hereof.
/s/ Gerard E. Jones
----------------------------------------
Gerard E. Jones
Date: January 14, 1998
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
POWER OF ATTORNEY
Andrew McNally, IV, whose signature appears below, does hereby constitute
and appoint Michael F. Klein, Harold J. Schaaff, Jr., Valerie Y. Lewis and
Stefanie V. Chang, his true and lawful attorneys and agents, each with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents may deem necessary or
advisable or which may be required to enable Morgan Stanley Institutional Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all amendments thereto, including within the foregoing, the power and
authority to sign in the name and on behalf of the undersigned as a director of
the Fund such Registration Statement and any and all such amendments filed with
the Securities and Exchange Commission under the 1933 Act and the 1940 Act, and
any other instruments or documents related thereto, and the undersigned does
hereby ratify and confirm all that said attorney and agents shall do or cause to
be done by virtue hereof.
/s/ Andrew McNally, IV
----------------------------------------
Andrew McNally, IV
Date: January 16, 1998
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
POWER OF ATTORNEY
Samuel T. Reeves, whose signature appears below, does hereby constitute and
appoint Michael F. Klein, Harold J. Schaaff, Jr., Valerie Y. Lewis and Stefanie
V. Chang, his true and lawful attorneys and agents, each with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents may deem necessary or
advisable or which may be required to enable Morgan Stanley Institutional Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all amendments thereto, including within the foregoing, the power and
authority to sign in the name and on behalf of the undersigned as a director of
the Fund such Registration Statement and any and all such amendments filed with
the Securities and Exchange Commission under the 1933 Act and the 1940 Act, and
any other instruments or documents related thereto, and the undersigned does
hereby ratify and confirm all that said attorney and agents shall do or cause to
be done by virtue hereof.
/s/ Samuel T. Reeves
----------------------------------------
Samuel T. Reeves
Date: January 14, 1998
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
POWER OF ATTORNEY
Fergus Reid, whose signature appears below, does hereby constitute and
appoint Michael F. Klein, Harold J. Schaaff, Jr., Valerie Y. Lewis and Stefanie
V. Chang, his true and lawful attorneys and agents, each with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents may deem necessary or
advisable or which may be required to enable Morgan Stanley Institutional Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all amendments thereto, including within the foregoing, the power and
authority to sign in the name and on behalf of the undersigned as a director of
the Fund such Registration Statement and any and all such amendments filed with
the Securities and Exchange Commission under the 1933 Act and the 1940 Act, and
any other instruments or documents related thereto, and the undersigned does
hereby ratify and confirm all that said attorney and agents shall do or cause to
be done by virtue hereof.
/s/ Fergus Reid
----------------------------------------
Fergus Reid
Date: January 22, 1998
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
POWER OF ATTORNEY
Frederick O. Robertshaw, whose signature appears below, does hereby
constitute and appoint Michael F. Klein, Harold J. Schaaff, Jr., Valerie Y.
Lewis and Stefanie V. Chang, his true and lawful attorneys and agents, each with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which said attorneys and agents may deem
necessary or advisable or which may be required to enable Morgan Stanley
Institutional Fund, Inc. (the "Fund") to comply with the Securities Act of 1933,
as amended (the "1933 Act") and the Investment Company Act of 1940, as amended
(the "1940 Act"), and any rules, regulations or requirements of the Securities
and Exchange Commission in respect thereof, in connection with the Fund's
Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act,
together with any and all amendments thereto, including within the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a director of the Fund such Registration Statement and any and all such
amendments filed with the Securities and Exchange Commission under the 1933 Act
and the 1940 Act, and any other instruments or documents related thereto, and
the undersigned does hereby ratify and confirm all that said attorney and agents
shall do or cause to be done by virtue hereof.
/s/ Frederick O. Robertshaw
----------------------------------------
Frederick O. Robertshaw
Date: January 21, 1998
<PAGE>
MORGAN STANLEY INSTITUTIONAL FUND, INC.
POWER OF ATTORNEY
Joanna M. Haigney, whose signature appears below, does hereby constitute
and appoint Michael F. Klein, Harold J. Schaaff, Jr., Valerie Y. Lewis and
Stefanie V. Chang, her true and lawful attorneys and agents, each with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents may deem necessary or
advisable or which may be required to enable Morgan Stanley Institutional Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act"),
and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all amendments thereto, including within the foregoing, the power and
authority to sign in the name and on behalf of the undersigned as the treasurer
of the Fund such Registration Statement and any and all such amendments filed
with the Securities and Exchange Commission under the 1933 Act and the 1940 Act,
and any other instruments or documents related thereto, and the undersigned does
hereby ratify and confirm all that said attorney and agents shall do or cause to
be done by virtue hereof.
/s/ Joanna M. Haigney
----------------------------------------
Joanna M. Haigney
Date: January 14, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000836487
<NAME> MORGAN STANLEY INSTITUTIONAL FUND, INC.
<SERIES>
<NUMBER> 141
<NAME> ACTIVE COUNTRY ALLOCATION PORTFOLIO, CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 175,256
<INVESTMENTS-AT-VALUE> 182,885
<RECEIVABLES> 486
<ASSETS-OTHER> 13
<OTHER-ITEMS-ASSETS> 36,118
<TOTAL-ASSETS> 219,502
<PAYABLE-FOR-SECURITIES> 57
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 35,619
<TOTAL-LIABILITIES> 35,676
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 172,825
<SHARES-COMMON-STOCK> 16,009
<SHARES-COMMON-PRIOR> 14,673
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (308)
<ACCUMULATED-NET-GAINS> 2,449
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,860
<NET-ASSETS> 183,826
<DIVIDEND-INCOME> 3,303
<INTEREST-INCOME> 342
<OTHER-INCOME> 0
<EXPENSES-NET> (1,450)
<NET-INVESTMENT-INCOME> 2,195
<REALIZED-GAINS-CURRENT> 26,210
<APPREC-INCREASE-CURRENT> (11,503)
<NET-CHANGE-FROM-OPS> 16,902
<EQUALIZATION> 0
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