-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A4CSEpcqWf3VYzZDe+VEnNQAWr+kRFyy+VVOT0sz5u3bEKuTgPo71t42VCLZOsAJ zb/FWbxvT5tihu2+X4LLAQ== 0000912057-96-011853.txt : 19960612 0000912057-96-011853.hdr.sgml : 19960612 ACCESSION NUMBER: 0000912057-96-011853 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960607 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY INSTITUTIONAL FUND INC CENTRAL INDEX KEY: 0000836487 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-05624 FILM NUMBER: 96578227 BUSINESS ADDRESS: STREET 1: 1221 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 6175578742 MAIL ADDRESS: STREET 1: 1221 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 N-30B-2 1 N-30B-2 - -------------------------------------------------- OFFICERS AND DIRECTORS Barton M. Biggs James W. Grisham CHAIRMAN OF THE BOARD VICE PRESIDENT Frederick B. Whittemore Michael F. Klein VICE-CHAIRMAN OF THE VICE PRESIDENT BOARD Harold J. Schaaff, Jr. Warren J. Olsen VICE PRESIDENT PRESIDENT AND DIRECTOR Joseph P. Stadler John D. Barrett II VICE PRESIDENT DIRECTOR Valerie Y. Lewis Gerard E. Jones SECRETARY DIRECTOR Karl O. Hartmann Andrew McNally, IV ASSISTANT SECRETARY DIRECTOR James R. Rooney Samuel T. Reeves TREASURER DIRECTOR Joanna M. Haigney Fergus Reid ASSISTANT TREASURER DIRECTOR Frederick O. Robertshaw DIRECTOR - -------------------------------------------------- INVESTMENT ADVISER AND ADMINISTRATOR Morgan Stanley Asset Management Inc. 1221 Avenue of the Americas New York, New York 10020 - -------------------------------------------------- DISTRIBUTOR Morgan Stanley & Co. Incorporated 1251 Avenue of the Americas New York, New York 10020 - -------------------------------------------------- CUSTODIANS The Chase Manhattan Bank, N.A. 770 Broadway New York, New York 10003 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. SMALL CAP VALUE EQUITY PORTFOLIO FIRST QUARTER REPORT MARCH 31, 1996 LETTER TO SHAREHOLDERS - ------- The Small Cap Value Equity Portfolio invests in small companies that our research indicates are undervalued, of high quality, and will reward the shareholder through high current dividend income. The Portfolio's disciplined value approach seeks to outperform the Russell 2500 Small Company Index in the longer term. We believe our emphasis on high quality companies will help the Portfolio perform particularly well in difficult markets. The Small Cap Value Equity Portfolio selects companies that can be purchased at bargain prices. Bargains mostly arise as a result of public overreactions to temporary problems associated with an otherwise healthy company, or because a company is neglected and currently out-of-the limelight of investors' interest. Often, these companies operate as major players in very focused markets and are not widely followed by the investment community. PERFORMANCE COMPARED TO THE RUSSELL 2500 INDEX AND S&P 500 INDEX(1) - ----------------------------------------------------
TOTAL RETURNS(2) --------------------------------------- ONE AVERAGE ANNUAL YTD YEAR SINCE INCEPTION --------- --------- ----------------- PORTFOLIO--CLASS A................ 4.62% 20.80% 12.21% PORTFOLIO--CLASS B(3)............. 4.27 N/A N/A RUSSELL 2500...................... 5.87 29.83 16.67 S&P 500........................... 5.36 32.07 15.81
1. The Russell 2500 and the S&P 500 indices are unmanaged indices of common stock. 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 began offering Class B shares on January 2, 1996. 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. For the three month period ended March 31, 1996, the Portfolio had a total return of 4.62% for the Class A shares and 4.27% for the Class B shares, as compared to a total return of 5.87% and 5.36% for the Russell 2500 Index and S&P 500 Index, respectively. The average annual total return for the twelve months ended March 31, 1996 and for the period from inception on December 17, 1992 through March 31, 1996 was 20.80% and 12.21%, respectively, for the Class A shares, as compared to 29.83% and 16.67%, respectively, for the Russell 2500 Index and 32.07% and 15.81%, respectively, for the S&P 500 Index. PERFORMANCE REVIEW Volatility and opportunity were the key words for U.S. small cap market performance for the first quarter of 1996. The Russell 2000 Small Company Index recovered from an interim low of -4.5% in January to close at +5.1% by the end of the quarter. Small company stock underperformance versus the S&P 500 reversed in February, and by quarter-end the Russell 2000 Small Company Index lagged the S&P 500 only slightly. Style effects with regard to 'value' or 'growth' investing were very strong during each month. However, there was no clear trend for either growth or value style throughout the three month period. The consensus economic forecast at the beginning of the year called for a soft landing and continued slow growth. Soon this forecast came into question as being too conservative as economic data--despite severe winter weather in large parts of the country--indicated a more vigorous U.S. economy. Interest rates rose sharply as the bond market saw the renewed specter of accelerating inflation. The impact on the Portfolio was mixed. The Portfolio's deeply cyclical companies benefited nicely from the anticipation of stronger economic growth and earnings. In particular, its holdings in the metal, paper and packaging, capital goods, and consumer durable industries performed strongly. The Portfolio's energy stocks also showed above market returns as higher energy prices are expected to translate into improved earnings results for these companies. While the Portfolio's small cap economic sensitive issues performed well during the quarter their performance 2 lagged large cap cyclical companies. We believe this was related to higher trading liquidity of large cap stocks and, hence, expect small cap cyclical companies' performance to follow suit. In addition to a slowly accelerating domestic economic environment, small cap cyclical companies continue to benefit from an inexpensive U.S. currency and strong product demand from Asia. While expectations of accelerated economic growth was positive for the Portfolio's cyclical companies it had a dampening impact on its interest rate sensitive companies, particularly utilities, finance, and insurance companies. Following a disappointing Christmas retail season and after being shunned for a long time, the retail industry staged the first signs of a turnaround and produced excellent returns averaging 13% for the Portfolio. We took advantage of the high volatility in this sector and increased turnover in consumer retail stocks. On a company fundamental basis the most exciting events were earnings reports for the last quarter and full year of 1995. We are pleased to observe strong earnings comparisons for the Portfolio's companies. In particular, 71% of reporting companies showed positive comparisons over last year, with an average positive earnings increase of 33%. During the quarter, we purchased Dallas Semiconductor, Susquehanna Bancshares, True North Communications Inc., and Stanhome Inc. Dallas Semiconductor produces electronic items for various niche markets. Its largest segments are electronic time keeping products for PC and non-PC markets. We expect this financially sound company to show an earnings growth rate of 20%. Trading at a price-earnings multiple of 14.0 times, we regard these shares to be undervalued. Susquehanna Bancshares (1.2x price-to-book ratio, 4.5% dividend yield) is expanding its banking franchise into the lucrative Washington D.C./Baltimore area while still being priced as an undiscovered Pennsylvania community bank. We purchased Stanhome Inc, a marketer of precious, collectible giftware such as figurines and dolls, at a low 10x earnings and a dividend yield of 3.7%. Stanhome also operates a direct selling group in Europe offering consumer products sold by independent representatives. We expect the company to grow its earnings substantially in 1996 based on turnaround performance in its direct marketing division. We also took a position in True North Communications, a Chicago based advertising agency. We purchased True North at 13.0 times earnings and a dividend yield of 3.0%. We took advantage of increased price volatility in the retail sector through the sale of DEB Shops and the recently purchased Lillian Vernon Corp. Lillian Vernon retails household, kitchen and garden items through mail order. We purchased the company at close to its book value. Last year's earnings were penalized by higher catalog paper costs which we expect to be mostly reversed in 1996. The Small Cap Value Equity Portfolio offers the consistent application of a disciplined value driven investment process to its shareholders. As such, we will pursue our search for smaller companies that our research shows are undervalued, are of high quality and pay above average dividend yield. We believe these companies will be well positioned to achieve superior total return for the longer term. Christian K. Stadlinger PORTFOLIO MANAGER April 1996 3 INVESTMENTS (UNAUDITED) - ---------- MARCH 31, 1996
VALUE SHARES (000) - --------------- --------- COMMON STOCKS (95.8%) AEROSPACE (2.0%) 27,000 AAR Corp. $ 550 13,000 Thiokol Corp. 570 300 United Industrial Corp. 2 --------- 1,122 --------- BANKING (10.6%) 26,175 First Security Corp. (Delaware) 726 27,000 Greenpoint Financial Corp. 742 17,600 Onbancorp, Inc. 616 29,000 Peoples Heritage Financial Group, Inc. 631 16,000 Standard Federal Bank 680 20,000 Susquehanna Bancshares, Inc. 565 29,000 Trustmark Corp. 653 20,000 Union Planters Corp. 605 21,000 Washington Mutual, Inc. 625 --------- 5,843 --------- BUILDING (1.7%) 13,300 Ameron, Inc. (Delaware) 497 38,800 Gilbert Associates, Inc., Class A 436 --------- 933 --------- CAPITAL GOODS (4.2%) 21,403 Binks Manufacturing Co. 474 43,200 Cascade Corp. 616 21,600 Starret (L.S.) Co., Class A 540 12,200 Tecumseh Products Co., Class A 718 --------- 2,348 --------- CHEMICALS (4.8%) 33,792 Aceto Corp. 532 23,400 Dexter Corp. 620 19,400 Learonal, Inc. 480 29,800 Quaker Chemical Corp. 402 18,000 Witco Corp. 634 --------- 2,668 --------- COMMUNICATIONS (1.3%) 30,200 Comsat Corp. 706 --------- CONSUMER-DURABLES (3.9%) 26,200 Arvin Industries, Inc. 544 30,298 Knape & Vogt Manufacturing Co. 417 31,300 Oneida Ltd. 536 27,100 Smith (A.O.) Corp., Class B 640 --------- 2,137 --------- VALUE SHARES (000) - --------------- --------- CONSUMER-RETAIL (5.1%) 34,800 CPI Corp. $ 557 25,700 Guilford Mills, Inc. 630 20,100 Ross Stores, Inc. 505 14,100 Springs Industries, Inc., Class A 649 15,400 Stanhome, Inc. 491 --------- 2,832 --------- CONSUMER-STAPLES (3.8%) 15,246 Block Drug Co., Inc., Class A 631 25,400 Coors (Adolph), Inc., Class B 454 29,900 International Multifoods Corp. 572 26,400 Nash Finch Co. 442 --------- 2,099 --------- ENERGY (3.3%) 24,600 Ashland Coal, Inc. 575 18,000 Diamond Shamrock, Inc. 585 23,500 Ultramar Corp. 679 --------- 1,839 --------- FINANCIAL-DIVERSIFIED (4.6%) 11,900 Finova Group, Inc. 650 12,100 GATX Corp. 557 32,000 Manufactured Home Communities, Inc. REIT 568 28,000 South West Property Trust REIT 375 19,000 Wellsford Residential Property Trust REIT 416 --------- 2,566 --------- HEALTH CARE (6.1%) 30,000 Analogic Corp. 563 14,500 Beckman Instruments, Inc. 566 22,400 Bergen Brunswig Corp., Class A 585 35,500 Bindley Western Industries, Inc. 564 40,700 Kinetic Concepts, Inc. 544 26,000 United Wisconsin Services, Inc. 562 --------- 3,384 --------- INDUSTRIAL (4.3%) 17,200 American Filtrona Corp. 593 15,400 Barnes Group, Inc. 691 50,700 GenCorp, Inc. 634 44,500 Kaman Corp., Class A 484 --------- 2,402 --------- INSURANCE (5.5%) 16,200 Argonaut Group, Inc. 502 27,000 Enhance Financial Services Group, Inc. 746
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VALUE SHARES (000) - --------------- --------- INSURANCE (CONTINUED) 21,500 Provident Companies, Inc. $ 653 15,900 Selective Insurance Group, Inc. 572 19,950 USLife Corp. 586 --------- 3,059 --------- METALS (2.2%) 41,000 Birmingham Steel Corp. 605 14,100 Cleveland-Cliffs Iron Co. 624 --------- 1,229 --------- PAPER & PACKAGING (2.4%) 23,500 Ball Corp. 729 13,900 Potlatch Corp. 594 --------- 1,323 --------- SERVICES (11.8%) 23,200 ABM Industries, Inc. 768 21,200 Angelica Corp. 450 30,000 Bowne & Co. 548 30,700 Cross (A.T.) Co., Class A 484 43,000 Jackpot Enterprises, Inc. 484 15,400 National Service Industries, Inc. 558 25,900 New England Business Services, Inc. 434 24,400 Ogden Corp. 476 55,400 Piccadilly Cafeterias, Inc. 519 41,500 Russ Berrie & Co., Inc. 705 25,000 Sbarro, Inc. 631 18,300 True North Communications, Inc. 456 --------- 6,513 --------- TECHNOLOGY (8.6%) 38,000 Augat, Inc. 665 48,000 Core Industries, Inc. 708 21,800 Cubic Corp. 586 25,000 Dallas Semiconductor Corp. 459 33,700 Gerber Scientific, Inc. 505 18,900 MTS Systems Corp. 709 30,500 National Computer Systems, Inc. 618 36,000 Scitex Ltd. 499 --------- 4,749 --------- TRANSPORTATION (2.5%) 22,000 Airborne Freight Corp. 556 19,800 Overseas Shipholding Group, Inc. 361 33,000 SkyWest, Inc. 433 --------- 1,350 --------- VALUE SHARES (000) - --------------- --------- UTILITIES (7.1%) 19,700 Central Hudson Gas & Electric $ 596 13,300 Commonwealth Energy Systems Cos. 622 15,000 Eastern Enterprises 533 25,900 Oneok, Inc. 618 13,700 Orange & Rockland Utilities, Inc. 491 13,700 SJW Corp. 536 28,500 Washington Water Power Co. 545 --------- 3,941 --------- TOTAL COMMON STOCKS (Cost $46,208) 53,043 --------- FACE AMOUNT (000) - --------------- SHORT-TERM INVESTMENT (4.1%) REPURCHASE AGREEMENT (4.1%) $ 2,264 The Chase Manhattan Bank, N.A., 5.15%, dated 3/29/96, due 4/01/96, to be repurchased at $2,265, collateralized by $1,520 United States Treasury Bonds, 11.25%, due 2/15/15, valued at $2,312 (Cost $2,264) 2,264 --------- TOTAL INVESTMENTS (99.9%) (Cost $48,472) 55,307 --------- OTHER ASSETS AND LIABILITIES (0.1%) Other Assets 227 Liabilities (153) --------- 74 --------- NET ASSETS (100%) $55,381 --------- --------- CLASS A SHARES: Net Assets $54,249 Shares Issued and Outstanding ($0.001 par value) (Authorized 500,000,000 shares) 4,353 Net Asset Value, Offering and Redemption Price Per Share $12.46 --------- --------- CLASS B SHARES: Net Assets $1,132 Shares Issued and Outstanding ($0.001 par value) (Authorized 500,000,000 shares) 91 Net Asset Value, Offering and Redemption Price Per Share $12.46 --------- ---------
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