<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS OFFICERS
Barton M. Biggs Stefanie V. Chang
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Asset Management Harold J. Schaaff, Jr.
Inc. and Morgan Stanley VICE PRESIDENT
Asset Management Limited; Managing Joseph P. Stadler
Director, Morgan Stanley & Co. Incorporated VICE PRESIDENT
Michael F. Klein Valerie Y. Lewis
DIRECTOR AND PRESIDENT SECRETARY
Principal, Morgan Stanley Asset Management Inc. and Karl O. Hartmann
Morgan Stanley & Co. Incorporated ASSISTANT SECRETARY
John D. Barrett II Joanna M. Haigney
Chairman and Director, TREASURER
Barrett Associates, Inc. Rene J. Feuerman
Gerard E. Jones ASSISTANT TREASURER
Partner, Richards & O'Neil LLP
Andrew McNally IV
River Road Partners
Samuel T. Reeves
Chairman of the Board and Chief Executive Officer,
Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer, LumeLite
Plastics Corporation
Frederick O. Robertshaw
Of Counsel, Copple, Chamberlin &
Boehm, P.C.
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INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, New York 10020
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CUSTODIANS
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
For current performance, current net asset value, or for assistance with your
account, please contact the Fund at (800) 548-7786. This report is authorized
for distribution only when preceded or accompanied by prospectuses of the Morgan
Stanley Institutional Fund, Inc.
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. Box 2798
Boston, MA 02208-2798
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
ASIAN EQUITY PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The investment objective of the Asian Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities which are
traded on recognized exchanges of Hong Kong, Singapore, Malaysia, Thailand,
Indonesia and the Philippines. The Portfolio may also invest in equity
securities traded on markets in Taiwan, South Korea, India, Pakistan, Sri Lanka
and other Asian developing markets which are open for foreign investment. The
Portfolio does not intend to invest
PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI)
ALL-COUNTRY FAR EAST FREE EX-JAPAN INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------------------
AVERAGE AVERAGE
ANNUAL ANNUAL
ONE FIVE SINCE
YTD YEAR YEAR INCEPTION
------- ------- ------- ---------
<S> <C> <C> <C> <C>
PORTFOLIO--CLASS A....... 0.32% -45.60% -2.18% 4.05%
PORTFOLIO--CLASS B....... 0.43 -45.71 N/A -24.49
INDEX--CLASS A........... 9.21 -37.85 0.57 5.11
INDEX--CLASS B........... 9.21 -37.85 N/A -17.57
</TABLE>
1. The MSCI All-Country Far East Free ex-Japan Index is an unmanaged index of
common stocks and includes Indonesia, Hong Kong, Malaysia, the Philippines,
Korea, Singapore, Taiwan and Thailand (includes dividends).
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY THE MSCI
ALL-COUNTRY FAR EAST FREE EX-JAPAN INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY
AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE
PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
in securities which are principally traded in Japan or in companies organized
under the laws of Japan.
For the three months ended March 31, 1998, the Portfolio had a total return of
0.32% for the Class A shares and 0.43% for the Class B shares compared to a
total return of 9.21% for the Morgan Stanley Capital International (MSCI)
All-Country Far East Free ex-Japan Index (The "Index.") For the one year ended
March 31, 1998, the Portfolio had a total return of -45.60% for the Class A
shares and -45.71% for the Class B shares compared to -37.85% for the Index. For
the five-year period ending March 31, 1998, the average annual total return for
Class A was -2.18% compared to 0.57% for the Index. From inception on July 1,
1991 to March 31, 1998, the average annual total return of Class A was 4.05%
compared to 5.11% for the Index. From inception on January 2, 1996 to March 31,
1998 the average annual total return of Class B was -24.49% compared to -17.57%
for the Index.
The devastating slide which haunted the Asian markets in the second half of 1997
was finally reversed in the first quarter of 1998, with the regional MSCI
All-Country Far East Free ex-Japan Index climbing 9.8% in the quarter. Although
this gain pushed the Index to 318.1, it is strong evidence of the size of the
Asian collapse that it is the same level which the Index traded at almost five
years ago in the second quarter of 1993.
The region wide Index masked a vast disparity between the performance of
individual markets. Four of the nine countries covered by the MSCI All-Country
Far East Free ex-Japan Index rose by over 30%, led by Korea (+59.1%) and
Thailand (+43.4%), two of the worst performing markets over the last two years.
Malaysia (+33.9%) and the Philippines (+34.9%) also demonstrated strong
performances. Indonesia by contrast actually fell -11.2%, while Hong Kong and
Singapore managed minor positive returns of 1.0% and 2.1%, respectively.
2
<PAGE>
Although many of the problems which triggered the Asian financial crisis still
abound, it appears that both the equity and currency markets have stabilized. In
Thailand, Korea and the Philippines, announcements of IMF agreements are finally
being followed, albeit with varying levels of concrete action. This has lent
considerable strength to markets throughout the region. Sharp appreciations in
many of the regional currencies, most notably the baht whose depreciation
triggered the crisis, has renewed the confidence of international investors
flooding into Asia.
Despite this strong regional performance, we remain cautious of the markets'
ability to continue a rapid rise, at least in the short term. We are especially
wary of the banking shares, which dominate many of the exchanges. Much of the
bad news regarding corporate bankruptcy is still to emerge, and when combined
with the collapse of loan growth, many banks are likely to see their non-
performing loans as a percentage of total assets skyrocket. It will be a
difficult path to steer for banks throughout the region, and those that do
survive will require massive amounts of re-capitalization. The dilutive effects
of this exercise will make it very difficult for any regional bank to post
strong performance even in the medium term, with solid profits at least 3-4
years away. Property shares are also likely to suffer, with huge oversupply
forcing further corrections in property prices.
On a country by country basis, weaknesses in the banking and property sectors
will obviously have a negative impact on the Hong Kong market. The maintenance
of the Hong Kong dollar peg to the U.S. dollar has buoyed confidence in the Hong
Kong government, but the consequent loss of competitiveness versus its neighbors
is likely to lead to intense asset deflation as the prices of the world's most
expensive property are forced down to reasonable levels. Furthermore, the
Chinese economy continues to slow down. Though official figures are sketchy,
secondary evidence such as electricity consumption leads to the conclusion that
Chinese growth will be far below the targeted 9%. Immense debt problems in the
Chinese banking sectors will also retard development, and the net result on Hong
Kong as a gateway to the world's biggest market should suffer accordingly. The
Portfolio will concentrate on stocks with a strong and dependable cash flow such
as utilities, which should continue to perform as other portions of the economy
weaken.
Similarly, our outlook for the Singapore market is generally pessimistic. We are
wary of the banking stocks which dominate the exchange, due to their large
exposure to other regional economies as well as the lack of transparency which
clouds any detailed analysis of the sector. The Portfolio will concentrate on
certain electronics companies which supply international companies in growth
areas.
Following their recent gains, the Portfolio is also likely to rotate out of
Korea and Thailand. Both countries enjoyed very positive developments during the
quarter; Korea successfully completed key discussions with its labor unions,
while Thailand basked in the afterglow of the abolition of its foreign currency
controls as well as the increasing powerbase of its new prime minister. Although
these developments are very positive for the economies, the ensuing rapid
increases in both the equity and currency markets appear to be over-stretched,
and we will look to take profits in order to rotate into other, less successful
markets.
One such market is likely to be Indonesia, which has borne the worst of the
currency crisis as the rupiah depreciated by as much as 80% from its prevailing
level of the year before. Though it continues to play a dangerous game of
'chicken' with the IMF, we feel that in the end the country will have little
choice but to implement the key reforms the IMF has demanded. At its lowest
levels, the currency appears to have priced in the risk of an ignition of
hyperinflation, and a number of solid companies trade at bombed out valuations.
Taiwan also will likely command increased attention from the Portfolio, though
it has been the best performing East Asian market over the year. Huge foreign
reserves as well as a stable currency have enabled Taiwan to emerge from the
regional crisis relatively intact, and it should continue to enjoy strong growth
relative to its neighbors. Its economy has a diversified base of
3
<PAGE>
world competitive electronics companies, whose ties with MNCs will continue to
allow certain Taiwanese companies to enjoy enviable growth.
Furthermore, the Portfolio is likely to overweight India which has separated
itself from the East Asian conflagration in the minds of most investors. Still
in the early stages of development, it has developed few of the economic
excesses which cut down the more advanced Asian economies, and there is little
rationale for the belief it will fall into a similar trap. The equity market
itself has traded sideways for the last four years, while companies have taken
substantial charges to restructure their operations. As those efficiency
improvements begin to take effect, rapid earnings growth should lead to
increased share prices.
On a stock specific basis, the Portfolio will continue to emphasize stocks of
well run companies which are in non-financial businesses and whose management
has consistently achieved high returns on equity. Companies with irreplaceable
franchises, world competitive technology and/or strong links with
multinationals, as well as those which do not require external financing will
increasingly trade at a premium to the market as the effect of the Asian
financial crisis continues to impact the domestic economies of the Asian region.
On a long term basis, these companies should have the capability and the
opportunity to reap the eventual rewards of the bombed out Asian markets.
Vinod Sethi
PORTFOLIO MANAGER
April 1998
4
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (96.1%)
HONG KONG (32.9%)
1,440,000 CLP Holdings Ltd. $ 7,248
196,400 HSBC Holdings pcl 6,007
2,681,000 Hong Kong & China Gas Co., Ltd. 4,498
628,000 Hong Kong Electric Holdings Ltd. 2,156
3,677,000 Hong Kong Telecommunications Ltd. 7,593
798,000 Hutchison Whampoa Ltd. 5,613
747,000 Li & Fung Ltd. 1,186
932,000 Ng Fung Hong Ltd. 908
220,000 Television Broadcasts Ltd. 579
---------
35,788
---------
INDIA (7.1%)
147,500 Bharat Heavy Electricals, Ltd. 1,333
1,268 Castrol (India) Ltd. 22
31,000 Container Corp of India, Ltd. 330
26,300 Hero Honda Motors Ltd. 582
32,000 Housing Development Finance Corp.,
Ltd. 2,575
5,800 Reckitt & Coleman of India Ltd. 52
550 Smithkline Beecham Pharmaceuticals
(India) Ltd. 9
158,050 State Bank of India 1,112
62,900 T.V.S. Suzuki Ltd. 783
129,980 Tata Engineering & Locomotive Co.,
Ltd. 964
---------
7,762
---------
INDONESIA (2.4%)
64,500 Bat Indonesia 220
253,500 Gudang Garam 351
11,900 Gulf Indonesia Resources Ltd. 214
446,500 London Sumatra Indonesia 141
3,711,000 Mayora Indah 311
256,400 Unilever Indonesia 1,334
---------
2,571
---------
KOREA (6.0%)
10,200 Hankuk Glass Industry Co., Ltd. 162
8,085 LG Information & Communication
Ltd. 281
22,020 Pohang Iron & Steel Co., Ltd. 1,212
6,460 S1 Corp. 904
298 SK Telecom Co. Ltd. 168
72,198 Samsung Electronics Co. 3,805
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
100 Samsung Electronics Co. GDR,
Series 144A $ 3
---------
6,535
---------
MALAYSIA (8.3%)
328,000 Carlsberg Brewery Malaysia Bhd 1,276
434,000 Guinness Anchor Bhd 713
173,000 Hap Seng Consolidated Bhd 236
264,000 Nestle Malaysia Bhd 1,461
592,000 Petronas Gas Bhd 1,573
671,000 R.J. Reynolds Bhd 1,232
122,000 Rothmans of Pall Mall Malaysia Bhd 1,019
341,000 Sime Darby Bhd 381
332,000 Telekom Malaysia Bhd 1,146
---------
9,037
---------
PAKISTAN (1.3%)
36,100 Lever Brothers Pakistan Ltd. 1,187
32,900 Shell Pakistan Ltd. 216
---------
1,403
---------
PHILIPPINES (3.9%)
24,000 La Tondena Distillers Inc. 19
4,697,000 Music Corp. 1,823
6,997,000 SM Prime Holdings 1,363
637,000 San Miguel Corp., Class B 1,106
---------
4,311
---------
SINGAPORE (10.1%)
73,600 Creative Technology Ltd. 1,656
751,000 Natsteel Electronics Ltd. 1,460
384,000 Parkway Holdings Ltd. 861
176,598 Singapore Press Holdings Ltd. 2,023
745,000 Singapore Telecommunications Ltd. 1,310
403,200 United Overseas Bank Ltd.
(Foreign) 2,235
375,000 Venture Manufacturing (Singapore)
Ltd. 1,393
---------
10,938
---------
TAIWAN (20.2%)
234,000 Asustek Computer, Inc. 5,310
14,300 Asustek Computer, Inc. GDR 330
165,000 Cathay Construction Corp. 170
168,000 China Development Corp. 509
730,398 Compal Electronics 2,922
48,000 Compeq Manufacturing Co., Ltd. 434
178,000 Delpha Construction Co., Ltd. 330
168,000 Delta Electronics, Inc. 754
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
TAIWAN (CONTINUED)
2,575,056 Far East Textile Ltd. $ 2,820
369,000 Hon Hai Precision Industry 2,211
352,740 Kuoyang Construction 842
203,000 Pou Chen Corp. 1,068
951,200 Siliconware Precision Industries
Co. 2,879
282,000 Taiwan Semiconductor Manufacturing
Co. 1,390
---------
21,969
---------
THAILAND (3.9%)
85,500 Advanced Info Service PCL
(Foreign) 665
211,000 BEC World PCL (Foreign) 1,158
53,000 Delta Electronics (Thailand) PCL
(Foreign) 703
664,200 Eastern Water Resources
Development & Management PCL
(Foreign) 920
39,500 Grammy Entertainment PCL (Foreign) 203
20,000 Gss Array Technology PCL (Foreign) 91
195,170 Thai Farmers Bank PCL (Foreign) 484
---------
4,224
---------
TOTAL COMMON STOCKS (Cost $103,036) 104,538
---------
<CAPTION>
NO. OF RIGHTS
- ---------------
<C> <S> <C>
RIGHTS (0.0%)
KOREA
876 Housing & Commercial Bank, Korea
GDR (Cost $0) 2
---------
TOTAL FOREIGN SECURITIES (96.1%) (Cost $103,036) 104,540
---------
<CAPTION>
FACE AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENT (3.6%)
REPURCHASE AGREEMENT (3.6%)
$ 3,885 Chase Securities, Inc. 5.60%,
dated 3/31/98, due 4/01/98, to be
repurchased at $3,886,
collateralized by U.S. Treasury
Notes, 6.250%, due 4/30/01,
valued at $4,054
(Cost $3,885) 3,885
---------
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
FOREIGN CURRENCY (1.8%)
HKD 518 Hong Kong Dollar $ 67
INR 8,340 Indian Rupee 211
IDR 604 Indonesian Rupiah --
PKR 1,465 Pakistan Rupee 33
PHP 205 Philippine Peso 5
SGD 67 Singapore Dollar 42
KRW 8,681 South Korean Won 6
TWD 52,359 Taiwan Dollar 1,593
---------
TOTAL FOREIGN CURRENCY (Cost $1,964) 1,957
---------
TOTAL INVESTMENTS (101.5%) (Cost $108,885) 110,382
---------
OTHER ASSETS AND LIABILITIES (-1.5%)
Other Assets 8,034
Liabilities (9,702)
---------
(1,668)
---------
NET ASSETS (100%) $ 108,714
---------
---------
CLASS A:
NET ASSETS $ 106,616
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 11,272,702 outstanding $.001 par
value shares (authorized 500,000,000 shares)
$9.46
---------
---------
CLASS B:
NET ASSETS $2,098
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
Applicable to 222,245 outstanding $.001 par
value shares (authorized 500,000,000 shares)
$9.44
---------
---------
</TABLE>
- ----------------------------------
GDR -- Global Depository Receipt
PCL -- Public Company Limited
6
