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Previous: MORGAN STANLEY INSTITUTIONAL FUND INC, N-30B-2, 1998-06-04 |
Next: MORGAN STANLEY INSTITUTIONAL FUND INC, N-30B-2, 1998-06-04 |
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS OFFICERS
Barton M. Biggs Stefanie V. Chang
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Asset Harold J. Schaaff, Jr.
Management 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.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
CUSTODIANS
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------------------------------
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.
U.S. EQUITY PLUS PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The U.S. Equity Plus Portfolio seeks long-term capital appreciation by investing
primarily in equity securities of issuers in the S&P 500 Index. Equity
securities include common and preferred stocks, convertible securities, and
rights and warrants to purchase common stocks.
The Portfolio investment process utilizes systematic quantitative and
qualitative inputs. The quantitative inputs include several proprietary
valuation and momentum models, as well as a market conditions model. The
qualitative inputs include stock ratings from Morgan Stanley's Equity Research
analysts. These inputs are combined in a systematic way to produce an
attractiveness measure for every stock in the Portfolio investment universe. The
Portfolio is designed to have consistently higher returns than the S&P 500 with
a volatility of portfolio return that is approximately equal
PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
----------------------------
SINCE
YTD INCEPTION
--------------- -----------
<S> <C> <C>
PORTFOLIO--CLASS A(3)...................... 12.12 % 16.54 %
PORTFOLIO--CLASS B(3)...................... 12.12 16.53
S&P 500 INDEX.............................. 13.95 16.73
</TABLE>
1. The S&P 500 Index is an unmanaged index of common stocks.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio commenced operations on July 31, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ------------------------------
THE PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
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.
to that of the S&P 500. This is sought by using a multi-factor risk model for
building the Portfolio and by maintaining sector neutrality with respect to the
S&P 500 Index. The active exposure to any single company is also kept to a
modest level.
For the three months ended March 31, 1998, the Portfolio had a total return of
12.12% for the Class A shares and 12.12% for the Class B shares compared to
13.95% for the S&P 500 Index (the "Index"). For the period from inception on
July 31, 1997 to March 31, 1998, the Portfolio had a total return of 16.54% for
Class A shares and 16.53% for Class B shares compared to 16.73% for the Index.
After a year like 1997 with large-capitalization U.S. equities returning over
30%, most market participants expected stocks to take a breather during the
first quarter of 1998. Instead stocks roared ahead posting double-digit gains in
spite of collapsing corporate earnings expectations.
The Portfolio is sector neutral to the S&P 500, so sector weights had no impact
on incremental performance. The performance of a sector in the Portfolio is
completely driven by stock selection (and relative weights) within the sector.
Based on stock selection, our best performing sectors were banking, basic
industries, insurance and electric utilities. Our worst performing sectors were
technology, consumer non-durables, consumer services and telephones.
Virtually all of the differential performance between the Portfolio and the
benchmark came from active stock selection. The five largest contributions to
our performance relative to the S&P 500 came from the following stocks: 1)
Becton Dickinson, which manufactures and sells a broad line of medical supplies,
devices and diagnostics, rose by 36% on impressive earnings despite severe
foreign exchange translation impacts. 2) McDonalds, the worldwide fast-food
system of restaurants, posted a healthy 25% gain as the company announced plans
to restructure operations, cut costs and install a high-tech cooking system. 3)
Royal Dutch
2
<PAGE>
Petroleum, a company involved in all phases of the petroleum industry from
exploration to final processing, put in a very meager performance for the
quarter as crude prices dropped to a four-year low and as demand in Europe and
the U.S. sagged. An underweight position in Royal Dutch contributed to our
performance. 4) Likewise, global research-based pharmaceutical producer Eli
Lilly & Co. experienced a 14% drop during the quarter. Our underweight position
in the stock was rewarded as concerns about Lilly's new breast cancer drug hurt
expected 1998 earnings. 5) Chase Manhattan, a diversified global financial
service provider, had a stellar quarter, returning 23% as investors responded to
a continuing flow of news on a favorable outlook for earnings growth.
On the other side, the five most negative contributions to our performance
relative to the S&P 500 came from the following stocks: 1) Philip Morris, a
diversified consumer packaged goods company, fell 7% on pending legislation
imposing higher prices and stricter regulations on tobacco products. 2) Lucent
Technologies, which designs, develops and manufactures communications systems,
had a tremendous quarter. Our underweight position in Lucent proved costly as a
stock split and reports of robust capital spending on Lucent products set its
shares soaring. 3) Likewise, Dell Computers Corporation, an integrated computer
systems company, returned 61%. An underweight position in Dell was hurt by its
strong performance due to its low cost structure and aggressive inventory
management. 4) Sun Inc., a petroleum and petrochemical company, posted a meager
2% drop reflecting the impact of lower refining margins and refinery downtime.
5) Raychem, a supplier of high performance industrial products, also experienced
a difficult quarter. Its stock price was weighed down by analysts' fears about
the company's economic and currency exposures to Asia.
Overall, the first quarter of 1998 was a terrific period for U.S. equities.
While two aspects of the investment environment remained friendly to stocks
during the quarter, namely moderate economic expansion and supportive interest
rates, a third aspect of the environment, earnings estimates, turned hostile.
Normally this is bad news for stocks, however, market participants apparently
feel that SOMETHING IS DIFFERENT THIS TIME. In spite of the plummeting earnings
expectations stock prices advanced rapidly on the back of a strong level of
purchases from mutual funds, corporate takeover activity and corporate share
repurchases. As we move into the second quarter, we believe the economy will
continue to expand at a moderate rate, the rate of capital appreciation on
stocks will begin to ease and the negative sentiment on corporate earnings will
partially rebound. If this scenario does indeed unfold, a more normal
relationship between corporate earnings and stock prices should return. This
should bode well for our approach to security selection and the performance of
the Portfolio.
Narayan Ramachandran
PORTFOLIO MANAGER
Eugene Flood
PORTFOLIO MANAGER
April 1998
3
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCK (98.6%)
BASIC MATERIALS (5.1%)
ALUMINUM (0.4%)
1,600 Aluminum Company of America $ 110
---------
CHEMICALS (1.5%)
3,700 E.I. Du Pont De Nemours & Co. 252
1,300 Rohm & Haas Co. 134
1,000 Union Carbide Corp. 50
---------
436
---------
CHEMICALS (DIVERSIFIED) (1.2%)
1,000 Engelhard Corp. 19
3,900 Goodrich (BF) Co. 199
2,300 Monsanto Co. 120
---------
338
---------
CHEMICALS (SPECIALTY) (0.2%)
1,200 Hercules, Inc. 59
---------
CONTAINERS & PACKAGING (PAPER) (0.5%)
2,900 Bemis Company, Inc. 131
---------
IRON & STEEL (1.2%)
4,000 Allegheny Teledyne, Inc. 112
5,700 USX - U.S. Steel Group, Inc. 215
---------
327
---------
PAPER & FOREST (0.1%)
300 Mead Corp. 11
500 Weyerhauser Co. 28
---------
39
---------
TOTAL BASIC MATERIALS 1,440
---------
CAPITAL GOODS (10.9%)
AEROSPACE/DEFENSE (1.5%)
6,100 Boeing Co. 318
1,000 Lockheed Martin Corp. 112
---------
430
---------
ELECTRICAL EQUIPMENT (2.2%)
2,600 AMP, Inc. 114
2,800 General Electric Co. 241
4,700 Raychem, Corp. 195
900 Thomas & Betts Corp. 58
---------
608
---------
ENGINEERING & CONSTRUCTION (0.5%)
4,500 Foster Wheeler Corp. 138
---------
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
MACHINERY (DIVERSIFIED) (2.5%)
5,200 Caterpillar, Inc. $ 286
500 Cincinnati Milacron, Inc. 16
600 Cooper Industries, Inc. 36
4,300 Deere & Co. 267
2,700 Timken Co. 91
---------
696
---------
MANUFACTURING (DIVERSIFIED) (3.8%)
900 Aeroquip-Vickers, Inc. 52
4,300 Johnson Controls, Inc. 261
1,200 Tenneco, Inc. 51
1,100 Textron, Inc. 85
6,100 Tyco International Ltd. 333
3,100 United Technologies Corp. 286
---------
1,068
---------
OFFICE EQUIPMENT & SUPPLIES (0.3%)
800 Xerox Corp. 85
---------
TRUCKS & PARTS (0.1%)
400 Cummins Engine Co., Inc. 22
---------
TOTAL CAPITAL GOODS 3,047
---------
COMMUNICATION SERVICES (6.4%)
TELECOMMUNICATIONS (LONG DISTANCE) (1.6%)
7,000 AT&T Corp. 460
---------
TELEPHONE (4.8%)
6,000 Alltel Corp. 262
1,700 Ameritech Corp. 84
1,300 Bell Atlantic Corp. 133
3,500 Bellsouth Corp. 237
7,600 GTE Corp. 455
2,000 SBC Communications, Inc. 87
1,500 U.S. West Communications Group 82
---------
1,340
---------
TOTAL COMMUNICATION SERVICES 1,800
---------
CONSUMER CYCLICALS (9.7%)
AUTO PARTS & EQUIPMENT (0.9%)
2,700 Dana Corp. 157
100 Goodyear Tire & Rubber Co. 7
1,800 ITT Industries, Inc. 69
500 TRW, Inc. 28
---------
261
---------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
AUTOMOBILES (1.6%)
7,000 Chrysler Corp. $ 291
900 Ford Motor Co. 58
1,600 General Motors Corp. 108
---------
457
---------
BUILDING MATERIALS (0.5%)
1,700 Armstrong World Industries, Inc. 147
---------
CONSUMER (JEWELRY, NOVELTIES & GIFTS) (0.6%)
7,400 Jostens, Inc. 178
---------
LODGING - HOTELS (0.1%)
700 Hilton Hotels Corp. 22
---------
PHOTOGRAPHY/IMAGING (0.1%)
400 Polaroid Corp. 18
---------
PUBLISHING (0.4%)
1,600 McGraw-Hill Cos., Inc. 122
---------
RETAIL (BUILDING SUPPLIES) (1.5%)
6,000 Home Depot, Inc. 405
---------
RETAIL (DEPARTMENT STORES) (0.0%)
100 J.C. Penney Co., Inc. 7
---------
RETAIL (GENERAL MERCHANDISE) (1.9%)
900 Dayton Hudson Corp. 79
3,900 Sears Roebuck & Co. 224
4,400 Wal-Mart Stores, Inc. 223
---------
526
---------
RETAIL (SPECIALTY) (0.3%)
1,600 TJX Cos., Inc. 72
---------
SERVICES (ADVERTISING/MARKETING) (1.4%)
6,100 Interpublic Group of Cos., Inc. 379
---------
SERVICES (COMMERCIAL & CONSUMER) (0.3%)
5,600 Laidlaw, Inc. 89
---------
TEXTILES (APPAREL) (0.1%)
700 Russell Corp. 19
---------
TOTAL CONSUMER CYCLICALS 2,702
---------
CONSUMER STAPLES (14.8%)
BEVERAGES (ALCOHOLIC) (0.0%)
100 Brown-Forman Corp., Class B 5
---------
BEVERAGES (NON-ALCOHOLIC) (2.7%)
8,400 Coca Cola Co. 650
2,500 PepsiCo, Inc. 107
---------
757
---------
DISTRIBUTORS (FOOD & HEALTH) (0.6%)
3,800 SUPERVALU, Inc. 177
---------
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
ENTERTAINMENT (1.1%)
2,800 The Walt Disney Co. $ 299
---------
FOODS (1.0%)
400 Bestfoods 47
1,300 Campbell Soup Co. 74
2,300 Sara Lee Corp. 142
---------
263
---------
HOUSEHOLD PRODUCTS (NON-DURABLES) (3.2%)
600 Clorox Co. 51
800 Fort James Corp. 37
2,000 Kimberly-Clark Corp. 100
8,500 Procter & Gamble Co. 717
---------
905
---------
HOUSEWARES (0.7%)
4,500 Fortune Brands, Inc. 179
100 Tupperware Corp. 3
---------
182
---------
RESTAURANTS (1.4%)
6,500 McDonald's Corp. 390
---------
SPECIALTY PRINTING (1.2%)
4,600 Deluxe Corp. 152
12,300 John H. Harland Co. 191
---------
343
---------
TOBACCO (2.9%)
16,900 Philip Morris Cos., Inc. 705
3,200 UST, Inc. 103
---------
808
---------
TOTAL CONSUMER STAPLES 4,129
---------
ENERGY (7.3%)
OIL & GAS (DRILLING) (1.0%)
3,500 Baker Hughes, Inc. 141
2,600 Halliburton Co. 130
---------
271
---------
OIL & GAS (REFINING & MARKETING) (1.2%)
8,200 Sun Co., Inc. 335
---------
OIL (DOMESTIC INTEGRATED) (1.6%)
2,700 Pennzoil Co. 174
7,300 USX-Marathon Group 275
---------
449
---------
OIL (INTERNATIONAL INTEGRATED) (3.5%)
1,500 Amoco Corp. 130
7,300 Chevron Corp. 586
3,300 Mobil Corp. 253
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
OIL (INTERNATIONAL INTEGRATED) (CONTINUED)
100 Texaco, Inc. $ 6
---------
975
---------
TOTAL ENERGY 2,030
---------
FINANCIAL (19.0%)
BANKS (MAJOR REGIONAL) (3.0%)
4,900 Banc One Corp. 310
1,300 BankBoston Corp. 143
1,200 Fleet Financial Group, Inc. 102
900 Huntington Bancshares, Inc. 33
1,200 KeyCorp 45
2,300 National City Corp. 169
300 Republic New York Corp. 40
---------
842
---------
BANKS (MONEY CENTER) (6.7%)
6,200 BankAmerica Corp. 512
4,100 Chase Manhattan Corp. 553
2,500 Citicorp 355
2,300 First Union Corp. 131
4,500 NationsBank Corp. 328
---------
1,879
---------
CONSUMER FINANCE (0.9%)
8,900 Green Tree Financial Corp. 253
---------
FINANCIAL (DIVERSIFIED) (2.2%)
3,500 American Express Co. 321
700 Federal National Mortgage
Association 44
900 MBIA, Inc. 70
4,000 SunAmerica, Inc. 192
---------
627
---------
INSURANCE (MULTI-LINE) (3.5%)
1,700 American International Group, Inc. 214
1,100 CIGNA Corp. 226
4,300 Hartford Financial Service Group,
Inc. 467
1,200 Travelers Group, Inc. 72
---------
979
---------
INSURANCE (PROPERTY - CASUALTY) (1.4%)
2,400 Allstate Corp. 221
900 Chubb Corp. 71
300 General Re Corp. 66
500 SAFECO Corp. 27
---------
385
---------
INVESTMENT BANKING & BROKERAGE (1.1%)
3,800 Merrill Lynch & Co. 315
---------
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
SAVINGS & LOANS (0.2%)
700 Washington Mutual, Inc. $ 50
---------
TOTAL FINANCIAL 5,330
---------
HEALTH CARE (10.4%)
HEALTH CARE (DIVERSIFIED) (5.4%)
3,700 American Home Products Corp. 353
3,900 Bristol-Myers Squibb Co. 407
10,400 Johnson & Johnson 762
---------
1,522
---------
HEALTH CARE (DRUGS - MAJOR PHARMS) (2.0%)
5,600 Pfizer, Inc. 558
---------
HEALTH CARE (HOSPITAL MANAGEMENT) (0.0%)
300 Columbia/HCA Healthcare Corp. 10
---------
HEALTH CARE (LONG-TERM CARE) (0.7%)
5,000 Manor Care, Inc. 185
---------
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) (2.3%)
3,800 Baxter International, Inc. 209
5,800 Becton Dickinson & Co. 395
700 U.S. Surgical Corp. 23
---------
627
---------
TOTAL HEALTH CARE 2,902
---------
TECHNOLOGY (10.7%)
COMMUNICATION EQUIPMENT (1.0%)
2,400 Harris Corp. 125
500 Lucent Technologies, Inc. 64
200 Motorola, Inc. 12
1,200 Northern Telecom Ltd. 78
---------
279
---------
COMPUTERS (HARDWARE) (3.6%)
8,100 Compaq Computer Corp. 210
4,500 Hewlett Packard Co. 285
3,400 International Business Machines
Corp. 353
3,600 Sun Microsystems, Inc. 150
---------
998
---------
COMPUTERS (PERIPHERALS) (0.5%)
4,100 EMC Corp. 155
---------
COMPUTERS (SOFTWARE & SERVICES) (3.7%)
700 Adobe Systems, Inc. 32
2,200 Autodesk, Inc. 95
2,200 Computer Associates International,
Inc. 127
8,700 Microsoft Corp. 779
---------
1,033
---------
ELECTRONICS (DEFENSE) (0.1%)
500 Raytheon Co., Class B 29
---------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
ELECTRONICS (INSTRUMENTATION) (0.2%)
100 Perkin-Elmer Corp. $ 7
900 Tektronix, Inc. 40
---------
47
---------
ELECTRONICS (SEMICONDUCTORS) (1.2%)
4,400 Intel Corp. 343
---------
EQUIPMENT (SEMICONDUCTORS) (0.4%)
3,200 Applied Materials, Inc. 113
---------
TOTAL TECHNOLOGY 2,997
---------
TRANSPORTATION (1.2%)
AIR FREIGHT (0.0%)
200 FDX Corp. 14
---------
AIRLINES (0.5%)
200 AMR Corp. 29
1,000 Delta Air Lines, Inc. 118
---------
147
---------
RAILROADS (0.7%)
1,300 Burlington Northern Santa Fe Corp. 135
300 CSX Corp. 18
600 Union Pacific Corp. 34
---------
187
---------
TOTAL TRANSPORTATION 348
---------
UTILITIES (3.1%)
ELECTRIC COMPANIES (2.5%)
700 Cinergy Corp. 26
1,700 Entergy Corp. 51
11,800 PECO Energy Co. 261
1,100 PG&E Corp. 36
6,800 Southern Co. 188
2,200 Texas Utilities Co. 87
1,400 Unicom Corp. 49
---------
698
---------
NATURAL GAS (0.6%)
1,100 Coastal Corp. 72
400 Columbia Energy Group 31
1,300 Enron Corp. 60
---------
163
---------
TOTAL UTILITIES 861
---------
TOTAL COMMON STOCKS (Cost $25,054) 27,586
---------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
SHORT-TERM INVESTMENT (1.4%)
REPURCHASE AGREEMENT (1.4%)
$ 400 Chase Securities, Inc. 5.60%,
dated 3/31/98, due 4/1/98, to be
repurchased at $400,
collateralized by U.S. Treasury
Bills, due 6/11/98, valued at
$415
(Cost $400) $ 400
---------
TOTAL INVESTMENTS (100.0%) (Cost $25,454) 27,986
---------
OTHER ASSETS AND LIABILITIES (0.0%)
Other Assets 492
Liabilities (491)
---------
1
---------
NET ASSETS (100%) $ 27,987
---------
---------
CLASS A:
NET ASSETS $26,790
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,316,529 outstanding $0.001 par
value shares (authorized 500,000,000 shares)
$11.56
---------
---------
CLASS B:
NET ASSETS $1,197
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 103,527 outstanding $0.001 par
value shares (authorized 500,000,000 shares)
$11.56
---------
---------
</TABLE>
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