<PAGE>
THE MORGAN STANLEY HIGH YIELD FUND, INC.
- ---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS Frederick B. Whittemore
Warren J. Olsen DIRECTOR
PRESIDENT AND DIRECTOR James W. Grisham
Peter J. Chase VICE PRESIDENT
DIRECTOR Harold J. Schaaff, Jr.
John W. Croghan VICE PRESIDENT
DIRECTOR Joseph P. Stadler
David B. Gill VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
Graham E. Jones SECRETARY
DIRECTOR James R. Rooney
John A. Levin TREASURER
DIRECTOR Joanna M. Haigney
ASSISTANT TREASURER
</TABLE>
- ---------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank, N.A.
73 Tremont Street
Boston, Massachusetts 02108
- ---------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company (International)
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank, N.A. (Domestic)
770 Broadway
New York, New York 10003
- ---------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- ---------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
- ---------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- ---------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
----------
THE
MORGAN STANLEY
HIGH YIELD
FUND, INC.
----------
THIRD QUARTER REPORT
SEPTEMBER 30, 1995
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- -------
The high yield market continued to show positive returns during the third
quarter, with coupon income providing the bulk of the gain and bond prices
rallying modestly. High yield slightly outperformed Treasuries for the quarter,
with the spread to Treasuries narrowing by 17 basis points. Based on net asset
value per share, the Fund had a total return of 4.54% for the quarter versus
3.01% for the First Boston High Yield Index (the "Index"). Our outperformance of
the Index was due to our overweight positions in cable, media, and utilities,
and our underweighting in retailers, supermarkets, restaurants, and food and
tobacco companies. We also benefited from a modest position in emerging markets
bonds, which rallied over the quarter, and gained approximately 45 basis points
by using leverage. For the nine months ended September 30, 1995, the Fund had a
total return of 20.94%, based on net asset value per share, compared to 14.11%
for the Index.
The quarter saw $13.2 billion of new issues priced, with $5.8 billion priced
during September. The forward calendar of new issues remained steady at $6.0
billion. Mutual fund inflows continued to provide support for our market,
totaling $924 million for September and $2.5 billion for the quarter. There
appears to be substantial amounts of cash in the hands of many portfolio
managers, but they are generally discerning about what types of new issues they
will buy. Established companies with strong cash flows are aggressively bid for,
while newer, more speculative enterprises (such as direct broadcast satellite
companies Iridium and Globalstar) are having their offerings postponed or
cancelled, despite strong alliances with premier partners like Motorola and
large equity market capitalizations.
While cyclicals outperformed defensive industries by 3.30% to 2.90% for the
quarter, cyclicals began to underperform defensive issues towards the end of the
quarter. Steel and paper companies reported disappointing inventory levels and
price discounting as the quarter ended. While underweighted in these sectors, we
are comfortable with the excess free cash flow of the companies we own. The
positive implications of the Turner/Time Warner merger improved the outlook for
media companies, which led the defensive sector. We are comfortable with our
overweighting in this sector, and continue to add modestly to our positions in
both cable and media bonds. Over the course of the quarter, we also increased
our commitments to companies in the chemical and healthcare industries. Finally,
we lightened positions in the casino sector and in certain cyclicals such as
textiles and steel.
Our outlook for the high yield market remains positive. A moderate new issue
calendar, continued strong mutual fund inflows, and high cash positions at many
funds complete a positive technical picture. The current spread to Treasuries of
445 basis points is more than reasonable given the relatively strong credit
characteristics of our market today. New bond issues in the third quarter had
cash flow coverage of interest of 2.4 times on average and only 48% were rated
single B or lower, versus 75% in 1989 (right before the severe downturn in our
market). With these credit statistics, we see the default rate remaining low,
and the high yield market continuing to offer good potential returns.
Sincerely,
[SIG]
Barton M. Biggs
CHAIRMAN
[SIG]
Robert E. Angevine
PORTFOLIO MANAGER
October 25, 1995
1
<PAGE>
The Morgan Stanley High Yield Fund, Inc.
Investment Summary as of September 30, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
TOTAL RETURN (%)
----------------------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
---------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
<S> <C> <C> <C> <C> <C> <C>
---------------------------- ---------------------------- ----------------------------
CURRENT QUARTER 2.44% -- 4.54% -- 3.01% --
FISCAL YEAR TO DATE 18.27 -- 20.94 -- 14.11 --
ONE YEAR 13.26 13.26% 20.11 20.11% 14.06 14.06%
SINCE INCEPTION* 6.27 3.37 14.26 7.54 14.42 7.63
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION (2)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PERIODS ENDED SEPTEMBER 30:
1993* 1994 9 MONTHS ENDED 9/30/95 (UNAUDITED)
<S> <C> <C> <C>
Net Asset Value $ 14.10 $ 11.96 $ 13.44
Income Dividends - 1.37 0.91
Capital Gains and Other Distributions - - -
Fund Total Return (2) 0.00% -5.53% 20.94%
Index Total Return (3) 1.26% -0.98% 14.11%
</TABLE>
(1)Assumes dividends and distributions, if any, were reinvested.
(2)Total investment return based on per share net asset value reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to differences
between the market price of the stock and the net asset value of the Fund.
(3)First Boston High Yield Index
*The Fund commenced operations on November 30, 1993.
2
<PAGE>
The Morgan Stanley High Yield Fund, Inc.
Portfolio Summary as of September 30, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Debt Securities 97.9%
Short-Term Investments 2.1%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Chemicals 17.1%
Broadcast - Radio & Television 13.2%
Food Service & Lodging 6.1%
Textiles & Apparel 5.2%
Health Care Supplies & Services 4.9%
Utilities 4.9%
Aerospace & Defense 4.8%
Telecommunications 4.8%
Energy 4.6%
Other 34.4%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<C> <S>
1. Tracor, Inc., 10.875%, 8/15/01
2. Heritage Media Services, 11.00%,
10/1/02
3. Ackerley Communications, Inc.,
'A' 10.75%, 10/1/03
4. Owens-Illinois, Inc., 10.50%,
6/15/02
5. McGaw, Inc., 10.375%, 4/1/99
6. Sherritt, Inc., 9.75%, 4/1/03
7. Triton Energy Corp., 0% to
12/15/96, 9.75% to 12/15/00
8. Arcadian Partners, L.P., 'B'
10.75%, 5/1/05
9. First PV Funding Lease Obligation
Bonds 10.15%, 1/15/16
10. IMC Global, Inc., 9.45%, 12/15/11
</TABLE>
3
<PAGE>
INVESTMENTS (UNAUDITED)
(Showing Percentage of Total Value of Investments)
- ---------
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------
- -------------
CORPORATE BONDS AND NOTES (93.4%)
- --------------------------------------------------
- ----------
AEROSPACE & DEFENSE (4.8%)
Sabreliner Corp., 'A',
12.50%, 4/15/03 $ 2,000 $ 1,855
Tracor, Inc., 10.875%,
8/15/01 4,750 4,934
------------
6,789
------------
- -----------------------------------------------------------
- -------------
BROADCAST -- RADIO & TELEVISION (13.2%)
Ackerley Communications,
Inc., 'A' 10.75%, 10/1/03 3,500 3,692
Cablevision Systems Corp.,
9.875%, 2/15/13 1,000 1,055
Century Communications
Corp., 9.50%, 8/15/00 1,000 1,010
Comcast Corp., 9.50%,
1/15/08 1,000 1,015
Continental Cablevision,
Inc., 9.50%, 8/1/13 2,500 2,612
Groupe Videotron Ltee,
10.625%, 2/15/05 750 793
Heritage Media Services,
11.00%, 10/1/02 3,675 3,913
Katz Corp., 12.75%, 11/15/02 700 734
Marcus Cable Co., 0% to
6/15/00, 14.25% to 12/15/05 3,500 2,038
New World Communications
Group,
Inc. 'B', 0%, 6/15/99 2,500 1,666
------------
18,528
------------
- -----------------------------------------------------------
- -------------
BUSINESS SERVICES (4.0%)
ADT Operations 9.25%, 8/1/03 2,500 2,618
Graphics Controls 12.00%,
12/9/05 1,000 1,008
Scotsman Group, Inc., 9.50%,
12/15/00 2,000 1,955
------------
5,581
------------
- -----------------------------------------------------------
- -------------
CAPITAL GOODS/CONSTRUCTION (0.7%)
International Wire Group,
Inc., 11.75%, 6/1/05 1,000 998
------------
- -----------------------------------------------------------
- -------------
CHEMICALS (17.1%)
Acetex Corp. 9.75%, 10/1/03 1,500 1,523
Agricultural Minerals &
Chemicals, Inc. 10.75%,
9/30/03 2,000 2,095
Arcadian Partners, L.P., 'B'
10.75%, 5/1/05 3,000 3,128
Foamex L.P., 9.50%, 6/1/00 3,000 2,932
Freeport-McMoRan Resource
L.P., 8.75%, 2/15/04 1,500 1,518
Harris Chemical North
America, 10.75%, 10/15/03 1,750 1,476
IMC Global, Inc., 9.25%,
10/1/00 500 514
IMC Global, Inc., 9.45%,
12/15/11 3,000 3,083
IMC Global, Inc., 10.125%,
6/15/01 2,000 2,130
Plastic Specialties &
Technologies, Inc., 11.25%,
12/1/03 2,250 2,087
Sherritt, Inc. 9.75%, 4/1/03 3,475 3,492
------------
23,978
------------
- -----------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
DIVERSIFIED (3.0%)
Primark Corp., 8.75%,
10/15/00 $ 2,300 $ 2,305
Valcor Inc., 9.625%, 11/1/03 2,000 1,828
------------
4,133
------------
- -----------------------------------------------------------
- -------------
ENERGY (4.6%)
Maxus Energy Corp., 11.50%,
11/15/15 1,000 1,030
OPI International, 12.875%,
7/15/02 2,000 2,263
Triton Energy Corp., 0% to
12/15/96, 9.75% to 12/15/00 3,500 3,220
------------
6,513
------------
- -----------------------------------------------------------
- -------------
ENTERTAINMENT & LEISURE (2.0%)
Kloster Cruise Ltd., 13.00%,
5/1/03 135 97
Six Flags Theme Parks, Inc.,
0% to 6/15/98, 12.25% to
6/15/05 3,600 2,700
------------
2,797
------------
- -----------------------------------------------------------
- -------------
ENVIRONMENTAL CONTROLS (1.7%)
Envirosource, Inc., 9.75%,
6/15/03 2,000 1,828
Envirotest Systems Corp.,
9.125%, 3/15/01 750 510
------------
2,338
------------
- -----------------------------------------------------------
- -------------
FINANCIAL SERVICES (3.8%)
Imperial Credit Industries,
Inc., 9.75%,
1/15/04 3,500 2,975
Lomas Mortgage USA, 10.25%,
10/1/02 800 560
Tiphook Finance Corp.,
8.00%, 3/15/00 2,263 1,810
------------
5,345
------------
- -----------------------------------------------------------
- -------------
FOOD SERVICE & LODGING (6.1%)
Family Restaurant, Inc.,
9.75%, 2/1/02 2,000 1,030
Flagstar Corp., 10.875%,
12/1/02 1,000 939
Grand Union, 12.00%, 9/1/04 1,200 1,154
Host Marriot Travel, 9.50%,
5/15/05 500 484
La Quinta Inns, Inc., 9.25%,
5/15/03 2,000 2,095
Pilgrim's Pride Corp.,
10.875%, 8/1/03 2,900 2,784
------------
8,486
------------
- -----------------------------------------------------------
- -------------
GAMING & LODGING (0.3%)
Louisiana Casino Cruise,
11.50%, 12/1/98 369 358
------------
- -----------------------------------------------------------
- -------------
HEALTH CARE SUPPLIES & SERVICES (4.9%)
McGaw, Inc., 10.375%, 4/1/99 3,400 3,519
Ornda HealthCorp., 12.25%,
5/15/02 2,000 2,225
Tenet Healthcare, 10.125%,
3/1/05 1,000 1,058
------------
6,802
------------
- -----------------------------------------------------------
- -------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
INSURANCE (2.0%)
Life Partners Group, Inc.,
12.75%, 7/15/02 $ 1,400 $ 1,549
Nacolah Holding Corp.,
9.50%, 12/1/03 500 469
Terra Nova Holdings, 10.75%,
7/1/05 750 764
------------
2,782
------------
- -----------------------------------------------------------
- -------------
MACHINERY (0.4%)
Portola Packaging, Inc.,
10.75%, 10/1/05 500 503
------------
- -----------------------------------------------------------
- -------------
METALS (2.9%)
Algoma Steel, Inc., 12.375%,
7/15/05 1,000 920
GS Technologies 12.25%,
10/1/05 2,000 2,005
Ucar Global Enterprises,
12.00%, 1/15/05 265 296
Weirton Steel Corp., 10.75%,
6/1/05 1,000 930
------------
4,151
------------
- -----------------------------------------------------------
- -------------
PACKAGING & CONTAINER (3.7%)
Owens-Illinois, Inc.,
10.50%, 6/15/02 3,500 3,648
Stone Container Corp.,
10.75%, 10/1/02 1,000 1,038
Stone Container Corp.,
11.875%, 12/1/98 500 542
------------
5,228
------------
- -----------------------------------------------------------
- -------------
PUBLISHING (1.3%)
Marvel III Holdings, Inc.
9.125%, 2/15/98 2,000 1,858
------------
- -----------------------------------------------------------
- -------------
REAL ESTATE (0.4%)
HMH Properties, Inc., 9.50%,
5/15/05 500 493
------------
- -----------------------------------------------------------
- -------------
RETAIL -- GENERAL (1.6%)
Southland Corp., 5.00%,
12/15/03 3,000 2,295
------------
- -----------------------------------------------------------
- -------------
TELECOMMUNICATIONS (4.8%)
Dial Call Communications, 0%
to 4/15/04, 12.25% to
4/15/04 2,500 1,331
Horizon Cellular Telephone,
0% to 10/1/00, 11.375% to
10/1/00 2,000 1,658
Nextel Communications, 0% to
2/15/99, 9.75% to 8/15/04 1,500 739
Paging Network, 10.125%,
8/1/07 1,000 1,041
Sinclair Broadcasting,
10.00%, 9/30/05 500 508
Telefonica de Argentina,
11.875%, 11/1/04 1,500 1,506
------------
6,783
------------
- -----------------------------------------------------------
- -------------
TEXTILES & APPAREL (5.2%)
Dominion Textile (USA),
Inc., 8.875%, 11/1/03 2,300 2,289
Polysindo Eka Perkasa,
13.00%, 6/15/01 1,000 1,040
Synthetic Industries, Inc.,
12.75%, 12/1/02 2,000 1,945
Westpoint Stevens, Inc.,
9.375%, 12/15/05 2,000 1,980
------------
7,254
------------
- -----------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
UTILITIES (4.9%)
Beaver Valley II Funding
Corp. Lease Obligation
Bonds 9.00%, 6/1/17 $ 1,477 $ 1,219
California Energy, 9.875%,
6/30/03 1,000 1,020
Columbia Gas Systems, Inc.,
10.50%, 6/1/12 1,000 1,505
First PV Funding Lease
Obligation Bonds 10.15%,
1/15/16 3,000 3,086
------------
6,830
------------
- -----------------------------------------------------------
- -------------
TOTAL CORPORATE BONDS AND NOTES
(Cost $130,369) 130,823
------------
- -----------------------------------------------------------
- -------------
FOREIGN GOVERNMENT BONDS (1.5%)
- ---------------------------------------------------------
- ------------
ARGENTINA (0.7%)
+++Republic of Argentina,
7.3125%, 3/31/05 1,500 933
------------
- -----------------------------------------------------------
- -------------
BRAZIL (0.8%)
+++Federative Republic of
Brazil 'YL4'Bond 4.25%,
4/15/24 2,500 1,097
- -----------------------------------------------------------
- -------------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $2,001) 2,030
------------
- -----------------------------------------------------------
- -------------
<CAPTION>
NO. OF
UNITS
(000)
<S> <C> <C>
- -----------------------------------------------------------
- -------------
UNITS (3.0%)
- ---------------------------------------------------------
- ------------
GAMING & LODGING (1.3%)
Trump Taj Mahal PIK (Bond +
1 Taj Mahal Holding Corp.
'B' Common Stock) 11.35%,
11/15/99 2,045 1,815
- -----------------------------------------------------------
- -------------
METALS (1.7%)
Sheffield Steel Corp. (1st
Mtg. Bond + 5 Common Stock
Warrants) 12.00%, 11/1/01 2,500 2,375
------------
- -----------------------------------------------------------
- -------------
TOTAL UNITS
(Cost $4,561) 4,190
------------
- -----------------------------------------------------------
- -------------
<CAPTION>
NO. OF
WARRANTS
<S> <C> <C>
- ---------------------------------------------------------
- ------------
WARRANTS (0.0%)
- ---------------------------------------------------------
- ------------
AEROSPACE & DEFENSE (0.0%)
Sabreliner Corp., expiring
4/15/03 2,000 20
------------
- -----------------------------------------------------------
- -------------
FOOD SERVICE & LODGING (0.0%)
Petro PSC Properties,
expiring 6/1/97 500 17
------------
- -----------------------------------------------------------
- -------------
GAMING & LODGING (0.0%)
Louisiana Casino Cruises,
expiring 12/1/95 1,108 16
------------
- -----------------------------------------------------------
- -------------
TELECOMMUNICATION (0.0%)
Dial Page Communications,
expiring 4/25/99 2,500 --
------------
- -----------------------------------------------------------
- -------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
(000)
- ---------------------------------------------------------
<S> <C> <C>
- ------------
TOTAL WARRANTS
(Cost $56) $ 53
------------
- -----------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
SHORT-TERM INVESTMENT (2.1%)
- ---------------------------------------------------------
- ------------
REPURCHASE AGREEMENT (2.1%)
Chase Manhattan Bank, N.A.,
6.00%, dated 9/29/95, due
10/02/95, to be repurchased
at U.S.$2,998,
collateralized by $2,425 US
Treasury Bonds 8.875%, due
2/15/19, valued at $3,058
(Cost $2,997) $ 2,997 2,997
- -----------------------------------------------------------
- -------------
TOTAL INVESTMENTS (100.0%)
(Cost $139,984) 140,093
------------
- -----------------------------------------------------------
- -------------
<CAPTION>
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
OTHER ASSETS AND LIABILITIES
Other Assets $ 3,855
Liabilities (26,772 ) $ (22,917)
------------- ------------
- -----------------------------------------------------------
- -------------
NET ASSETS
Applicable to 8,720,544
issued and outstanding $.01
par value shares
(100,000,000 shares
authorized) $ 117,176
-------------
- -----------------------------------------------------------
- -------------
NET ASSET VALUE PER SHARE $ 13.44
-------------
- -----------------------------------------------------------
</TABLE>
+++-- Variable/floating rate security--rate disclosed is as of
September 30, 1995
PIK--Payment-in-Kind
6
