<PAGE>
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DIRECTORS OFFICERS
Barton M. Biggs Stefanie V. Chang
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Asset Management Harold J. Schaaff, Jr.
Inc. and Morgan Stanley VICE PRESIDENT
Asset Management Limited; Managing Joseph P. Stadler
Director, Morgan Stanley & Co. Incorporated VICE PRESIDENT
Michael F. Klein Valerie Y. Lewis
DIRECTOR AND PRESIDENT SECRETARY
Principal, Morgan Stanley Asset Management Inc. and Karl O. Hartmann
Morgan Stanley & Co. Incorporated ASSISTANT SECRETARY
John D. Barrett II Joanna M. Haigney
Chairman and Director, TREASURER
Barrett Associates, Inc. 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
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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
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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.
BALANCED PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The Balanced Portfolio's value investment objective is to seek high total return
while preserving capital by investing in a combination of undervalued equity
securities and fixed income securities.
PERFORMANCE COMPARED TO INDATA BALANCED-MEDIAN INDEX(1)
- ----------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
------------------------------------------------
AVERAGE
AVERAGE ANNUAL
ONE ANNUAL FIVE SINCE
YTD YEAR YEARS INCEPTION
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PORTFOLIO--CLASS A............... 7.55% 24.48% 12.35% 11.89%
PORTFOLIO--CLASS B............... 7.44 24.12 N/A 15.62
INDEX--CLASS A................... 8.29 26.97 14.03 13.14
INDEX--CLASS B................... 8.29 26.97 N/A 18.54
</TABLE>
1. The Indata Balanced-Median Index is an unmanaged index and includes an asset
allocation of 5% cash, 35% bonds and 60% equity based on $56 billion in
assets among 759 portfolios as of March 31, 1998 (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 PERFORMANCE RESULTS PROVIDED ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST
PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The Balanced Portfolio's asset allocation strategy between equities, fixed
income and cash is based upon our estimate of the portfolio's risk. Since
equities are the highest risk asset class, we have maintained a below average
equity exposure during past periods of high market valuation. Typically, our
equity exposure will range between 35% and 65% with an expected long term
average of 55%.
For the three months ended March 31, 1998, the Portfolio had a total return of
7.55% for the Class A shares and 7.44% for the Class B shares compared to a
total return of 8.29% for the Indata Balanced-Median Index (the "Index"). For
the one year ended March 31, 1998, the Portfolio had a total return of 24.48%
for the Class A shares and 24.12% for the Class B shares, compared to a total
return of 26.97% for the Index. For the five year period ended March 31, 1998,
the average annual total return of Class A was 12.35% compared to 14.03% for the
Index. From inception on February 20, 1990 through March 31, 1998, the average
annual total return of Class A was 11.89% compared to 13.14% for the Index. From
inception on January 2, 1996 through March 31, 1998, the average annual total
return of Class B was 15.62% compared to 18.54% for the Index.
Our asset allocation, based on market value at March 31, 1998, is as follows:
<TABLE>
<S> <C>
EQUITIES........................................... 51.7%
FIXED INCOME....................................... 37.2
CASH............................................... 11.1
---
100%
---
---
</TABLE>
For the quarter ended March 31, 1998, the equity component of the Balanced
Portfolio had a gross return of 13.56% compared to the S&P 500 return of 13.96%.
A rough beginning to the quarter in early January developed into a surprisingly
resilient market and double digit gains. Profit concerns subsided early in the
quarter as fourth quarter earnings releases failed to generate any significant
surprises. Views on Asia continued to shift
2
<PAGE>
during the quarter, subsiding as evidence appeared of a strengthening U.S.
economy and employment, and resurfacing as new evidence of earnings pressure
appeared. However, even reduced first quarter earnings expectations did not
prevent the market from setting new highs. A strong economy, low inflation, low
interest rates, favorable liquidity and a reasonable profit outlook beyond the
first quarter were the prevailing factors that drove the market.
Large cap stocks continued to outperform small cap stocks and growth
outperformed value during the first quarter. The larger cap Russell 1000
returned 13.30% for the quarter compared to the smaller cap Russell 2000 return
of 10.11%. The Russell 1000 Value Index increased 11.66% for the quarter
compared to the Russell 1000 Growth Index return of 15.01%.
The equity component of the Balanced Portfolio holds the same undervalued
companies that are held in the Value Equity Portfolio. The equity portion of the
Portfolio has a wide valuation gap as compared to the characteristics of the S&P
500.
<TABLE>
<CAPTION>
PRICE-EARNINGS PRICE-BOOK
--------------- -------------
<S> <C> <C>
VALUE EQUITY PORTFOLIO............... 18.0X 3.7X
S&P 500.............................. 27.0X 6.0X
</TABLE>
During the quarter, the best performing sectors in the equity portion of the
Portfolio were consumer durables, up 24%, retail, also up 24%, and technology,
up 19%. Underperforming sectors for the quarter included consumer non-durables,
down 6%, capital goods, up 5%, and energy, up 6%. The best performing stocks in
the quarter were Banc One, up 29%, Meritor Automotive, JC Penney, and United
Technologies, all up 27%. Stocks providing the biggest disappointment included
Philip Morris, down 7%, Texas Utilities, down 4%, Atlantic Richfield, down 1%,
and Litton Industries, up 0.3%.
Changes made to the portfolio included increasing the exposure to the consumer
durable sector, while decreasing the consumer non-durable exposure. We added to
the Borg Warner Automotive and General Motors positions as valuations remained
attractive and fundamentals remained intact. In consumer non-durables, we sold
the RJR Nabisco position as the tobacco legislative outlook deteriorated in
Congress. At the same time, we slightly increased the position in Philip Morris,
a less contrarian tobacco name which is financially stronger to weather the
coming tobacco battles.
We added to the energy stocks opportunistically after oil prices appeared to
bottom and the sector sold off. In the financial services sector, we sold the
remaining First of America position, as the merger with National City Corp.
neared, and added a position in Allstate which should benefit from improving
trends in the insurance claim area. In the chemical sector, we established a new
position in Millennium Chemicals. We expect Millennium's highly incentivized
management team to eventually exit the lower value commodity businesses and grow
the higher margin operations which should drive both earnings growth and
valuation. In retail, we sold Wal-Mart as the stock performed extremely well,
and reached what we felt was fair value.
Within the aircraft and defense sectors, we sold the positions in Gulfstream
Aerospace and Lockheed Martin, and established new positions in Northrop Grumman
and Thiokol. We established the Northrop Grumman position after their proposed
merger with Lockheed Martin appeared to fall apart. Northrop Grumman remains a
strong fundamental franchise which, if it remains independent, will benefit as a
consolidator of the defense industry. Thiokol has quietly become an industrial
conglomerate and is currently benefiting from the upturn in the commercial
aircraft sector, stabilization in its defense business and strong capital
spending. In the transportation area, we sold American Airlines, while adding to
Continental Airlines and establishing a new position in Northwest Airlines. We
believe the proposed Continental/Northwest alliance should yield significant
long term benefits to both carriers.
Compared to the S&P 500 Index, we continue to overweight financial services and
utilities, and underweight technology and health care.
The fixed income portion of the Balanced Portfolio continues to maintain 100%
exposure to intermediate-term U.S. Government securities. For the quarter ended
March 31, 1998, the fixed income portion of the Portfolio had a total return of
1.58% compared to 1.5% for the Lehman Intermediate-Government/Corporate Index
3
<PAGE>
(MSAM's fixed-income benchmark). The median fixed income return within balanced
portfolios for the same quarter, as measured by Indata, which includes longer-
duration benchmarks, was 1.6%.
The fixed income portion of the Portfolio began the year at a weighted average
maturity of 3.6 years and average duration of 3.2. During the quarter, interest
rates declined across all maturity spectrums, except for the thirty year bond,
with the largest reductions occurring in the three and six month T-bill. At the
end of the first quarter, the portfolio had a weighted average maturity of 3.4
years, and average duration of 2.9. With the uncertain direction of the economy
and inflation, and even possible deflationary conditions from weakening Asian
economies, expectations for interest rate cuts seem to have outweighed any
inflationary expectations caused by the continued economic strength.
Stephen C. Sexauer
PORTFOLIO MANAGER
April 1998
4
<PAGE>
INVESTMENTS (UNAUDITED)
- ----------
MARCH 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (51.7%)
BANKING (8.1%)
550 Banc One Corp. $ 35
700 BankAmerica Corp. 58
600 BankBoston Corp. 66
550 Bankers Trust (New York) Corp. 66
550 Chase Manhattan Corp. 74
500 Fleet Financial Group, Inc. 43
900 Mellon Bank Corp. 57
950 PNC Bank Corp. 57
---------
456
---------
CAPITAL GOODS (6.9%)
1,600 Case Corp. 109
700 Nothrop Grumman Corp. 75
400 Philips Electronics N.V. (New York
Shares) 29
1,500 Thiokol Corp. 73
1,150 United Technologies Corp. 106
---------
392
---------
CHEMICALS (1.8%)
1,000 E.I. du Pont de Nemours & Co. 68
1,000 Milennium Chemicals Inc. 34
---------
102
---------
COMMUNICATIONS (3.5%)
1,200 AT&T Corp. 79
750 Sprint Corp. 51
1,200 U.S. WEST Communications Group 65
---------
195
---------
CONSUMER CYCLICALS (6.7%)
800 Borg-Warner Automotive, Inc. 51
1,250 General Motors Corp. 84
750 J.C. Penney Co., Inc. 57
2,783 Meritor Automotive, Inc. 74
1,800 Ogden Corp. 52
2,500 Woolworth Corp. 62
---------
380
---------
CONSUMER -- STAPLES (1.3%)
1,825 Philip Morris Cos., Inc. 76
---------
ENERGY (5.2%)
1,300 Ashland, Inc. 73
900 Atlantic Richfield Co. 71
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
900 Mobil Corp. $ 69
2,100 USX-Marathon Group 79
---------
292
---------
FINANCIAL (1.7%)
850 American General Corp. 55
925 SLM Holding Corp. 40
---------
95
---------
HEALTH CARE (0.4%)
550 Bausch & Lomb, Inc. 25
---------
INSURANCE (3.2%)
300 Allstate Corp. 28
1,050 Lincoln National Corp. 89
700 St. Paul Cos., Inc. 62
---------
179
---------
METALS (0.7%)
650 Phelps Dodge Corp. 42
---------
FOREST PRODUCTS (1.6%)
500 Georgia-Pac 33
2,500 Louisiana-Pacific Corp. 58
---------
91
---------
TECHNOLOGY (4.2%)
1,350 Harris Corp. 71
900 Litton Industries, Inc. 52
1,400 SABRE Group Holdings, Inc. 50
1,200 Texas Instruments, Inc. 65
---------
238
---------
TRANSPORTATION (2.9%)
1,800 Continental Airlines, Inc., Class
B 106
500 Northwest Airlines Corp., Class A 31
750 Ryder System, Inc. 28
---------
165
---------
UTILITIES (3.5%)
2,400 NIPSCO Industries, Inc. 67
1,600 Pinnacle West Capital Corp. 71
1,450 Texas Utilities Co. 57
---------
195
---------
TOTAL COMMON STOCKS (Cost $2,118) 2,923
---------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------- ---------
<C> <S> <C>
FIXED INCOME SECURITIES (37.2%)
US TREASURY NOTES (37.2%)
$ 1,603 5.50%, 4/15/00 $ 1,600
500 5.875%, 11/15/05 504
---------
TOTAL FIXED INCOME SECURITIES (Cost $2,064) 2,104
---------
SHORT-TERM INVESTMENT (9.8%)
REPURCHASE AGREEMENT (9.8%)
555 Chase Securities, Inc. 5.60%,
dated 3/31/97, due 4/01/98, to be
repurchased at $555
Collateralized by U.S. Treasury
Notes, 6.250%, due 4/30/01,
valued at $569
(Cost $555) 555
---------
TOTAL INVESTMENTS (98.7%) (Cost $4,737) 5,582
---------
OTHER ASSETS AND LIABILITIES (1.3%)
Other Assets 713
Liabilities (638)
---------
75
---------
NET ASSETS (100%) $ 5,657
---------
---------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(000)
---------
<C> <S> <C>
CLASS A:
NET ASSETS $5,023
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 618,438 outstanding $.001 par value
shares (authorized 500,000,000 shares)
$8.12
---------
---------
CLASS B:
NET ASSETS $634
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 78,371 outstanding $.001 par value
shares (authorized 500,000,000 shares)
$8.09
---------
---------
</TABLE>
6
