-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, nZS8OLqKP8laT87SNI1/8Lp9kHfEAubFPwecYFMjeasFVpaV0nFWivKg0D8ZxGSN b+PWQA4KWsqfKV35l+5EpQ== 0000912057-95-005108.txt : 199507050000912057-95-005108.hdr.sgml : 19950705 ACCESSION NUMBER: 0000912057-95-005108 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950630 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: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-23166 FILM NUMBER: 95551810 BUSINESS ADDRESS: STREET 1: 73 TREMONT STREET STREET 2: 8TH FLOOR CITY: BOSTON STATE: MA ZIP: 02108 BUSINESS PHONE: 6175578742 MAIL ADDRESS: STREET 1: 73 TREMONT STREET STREET 2: 8TH FLOOR CITY: BOSTON STATE: MA ZIP: 02108 497 1 497 SUPPLEMENT DATED JUNE 30, 1995 TO PROSPECTUS DATED MAY 1, 1995 OF MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798 BOSTON, MASSACHUSETTS 02208-2798 ------------- The prospectus dated May 1, 1995 (the "Prospectus") of the Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed Securities, High Yield, Real Yield, Money Market and Municipal Money Market Portfolios of the Morgan Stanley Institutional Fund, Inc. (the "Fund") is hereby amended and supplemented by adding the following paragraph to page 31 before the paragraph with the heading "REDEMPTION OF SHARES": EXCESSIVE TRADING. Frequent trades involving either substantial fund assets or a substantial portion of your account or accounts controlled by you can disrupt management of a Portfolio and raise its expenses. Consequently, in the interest of all the stockholders of the Portfolio and the Portfolio's performance, the Fund may in its discretion bar a stockholder that engages in excessive trading of shares of a Portfolio from further purchases of shares of the Fund for an indefinite period. The Fund considers excessive trading to be more than one purchase and sale involving shares of the same Portfolio of the Fund within any 120-day period. For example, exchanging shares of Portfolios of the Fund as follows: exchanging shares of Portfolio A for shares of Portfolio B, then exchanging shares of Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C for shares of Portfolio B within a 120-day period amounts to excessive trading. Two types of transactions are exempt from these excessive trading restrictions: (1) trades exclusively between money market portfolios; and (2) trades done in connection with an asset allocation service managed or advised by MSAM and/or any of its affiliates. - -------------------------------------------------------------------------------- P R O S P E C T U S ----------------------------------------------------------------------------- FIXED INCOME PORTFOLIO GLOBAL FIXED INCOME PORTFOLIO MUNICIPAL BOND PORTFOLIO MORTGAGE-BACKED SECURITIES PORTFOLIO HIGH YIELD PORTFOLIO REAL YIELD PORTFOLIO MONEY MARKET PORTFOLIO MUNICIPAL MONEY MARKET PORTFOLIO PORTFOLIOS OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798 FOR INFORMATION CALL 1-800-548-7786 ---------------- Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end management investment company with diversified and non-diversified series ("portfolios"). The Fund currently consists of twenty-seven portfolios offering a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. Shares of the portfolios are offered with no sales charge or exchange or redemption fee (with the exception of one of the portfolios). This Prospectus pertains to eight portfolios (the "Portfolios") with the following range of investment choices: (i) UNITED STATES FIXED INCOME FUNDS -- Fixed Income Portfolio, Municipal Bond Portfolio, Mortgage-Backed Securities Portfolio, and High Yield Portfolio; (ii) GLOBAL FIXED INCOME FUNDS -- Global Fixed Income Portfolio, and Real Yield Portfolio; (iii) MONEY MARKET FUNDS -- Money Market Portfolio, and Municipal Money Market Portfolio. THE HIGH YIELD PORTFOLIO INVESTS PREDOMINANTLY IN LOWER RATED BONDS, COMMONLY REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THIS PORTFOLIO. SEE "RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES." INVESTMENTS IN THE MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. INVESTORS SHOULD NOTE THAT THE GLOBAL FIXED INCOME AND REAL YIELD PORTFOLIOS MAY EACH INVEST UP TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES. INVESTMENTS IN RESTRICTED SECURITIES IN EXCESS OF 5% OF A PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE GREATER RISK AND MAY INCREASE THE PORTFOLIO'S EXPENSES. THE REAL YIELD PORTFOLIO IS NOT CURRENTLY OFFERING SHARES. The Fund is designed to meet the investment needs of discerning investors who place a premium on quality and personal service. With Morgan Stanley Asset Management Inc. as Adviser and Administrator, (the "Adviser" and the "Administrator") and with Morgan Stanley & Co. Incorporated ("Morgan Stanley") as Distributor, the Fund makes available to institutional and high net worth individual investors a series of portfolios which benefit from the investment expertise and commitment to excellence associated with Morgan Stanley and its affiliates. This Prospectus is designed to set forth concisely the information about the Fund that a prospective investor should know before investing and it should be retained for future reference. The Fund offers additional portfolios which are described in other prospectuses and under the Prospectus Summary section herein. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity, U.S. Real Estate and Value Equity Portfolios; (iii) BALANCED -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities, Municipal Bond and Real Yield Portfolios; and (v) MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional information about the Fund is contained in a "Statement of Additional Information" dated May 1, 1995, which is incorporated herein by reference. The Statement of Additional Information and Prospectuses pertaining to the other portfolios of the Fund are available upon request and without charge by writing or calling the Fund at the address and telephone number set forth above. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS MAY 1, 1995. FUND EXPENSES The following table illustrates all expenses and fees that a shareholder of the Portfolios indicated below will incur:
GLOBAL MORTGAGE- FIXED FIXED MUNICIPAL BACKED MONEY INCOME INCOME BOND SECURITIES HIGH YIELD REAL YIELD MARKET SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - ----------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Maximum Sales Load Imposed on Purchases............................... None None None None None None None Maximum Sales Load Imposed on Reinvested Dividends............................... None None None None None None None Deferred Sales Load...................... None None None None None None None Redemption Fees.......................... None None None None None None None Exchange Fees............................ None None None None None None None MUNICIPAL MONEY MARKET SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO - ----------------------------------------- ----------- Maximum Sales Load Imposed on Purchases............................... None Maximum Sales Load Imposed on Reinvested Dividends............................... None Deferred Sales Load...................... None Redemption Fees.......................... None Exchange Fees............................ None GLOBAL MORTGAGE- FIXED FIXED MUNICIPAL BACKED MONEY INCOME INCOME BOND SECURITIES HIGH YIELD REAL YIELD MARKET ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - ----------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Investment Advisory Fee (Net of Fee Waivers)................................ 0.22%* 0.24%* 0.20%* 0.20%* 0.49%* 0.34%* 0.30%* Administrative & Shareholder Account Costs........................... 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 12b-1 Fees............................... None None None None None None None Custody Fees............................. 0.02% 0.05% 0.01% 0.01% 0.02% 0.04% 0.01% Other Expenses........................... 0.06% 0.06% 0.09% 0.09% 0.09% 0.22% 0.03% ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Operating Expenses (Net of Fee Waivers)............................ 0.45%* 0.50%* 0.45%* 0.45%* 0.75%* 0.75%* 0.49%* ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- MUNICIPAL MONEY MARKET ANNUAL FUND OPERATING EXPENSES PORTFOLIO - ----------------------------------------- ----------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Investment Advisory Fee (Net of Fee Waivers)................................ 0.30%* Administrative & Shareholder Account Costs........................... 0.15% 12b-1 Fees............................... None Custody Fees............................. 0.02% Other Expenses........................... 0.04% ----------- Total Operating Expenses (Net of Fee Waivers)............................ 0.51%* ----------- ----------- - ------------------ *The Adviser has agreed to a reduction in the fees payable to it as Adviser and to reimburse the Portfolios, if necessary, if such fees would cause any of such Portfolios' total annual operating expenses to exceed specified percentages of their respective average daily net assets. Set forth below are the maximum total operating expenses after fee waivers and/or expenses reimbursements and total operating expenses absent such fee waivers and/or reimbursements, each stated as a percent of average daily net assets:
MAXIMUM TOTAL OPERATING EXPENSES TOTAL OPERATING EXPENSES PORTFOLIO AFTER FEE WAIVERS ABSENT FEE WAIVERS - ----------------------------------------------------- ----------------------- ------------------------- Fixed Income........................................ 0.45% 0.58% Global Fixed Income................................. 0.50% 0.66% Municipal Bond...................................... 0.45% 0.60%+ Mortgage-Backed Securities.......................... 0.45% 0.60%+ High Yield.......................................... 0.75% 0.76% Real Yield.......................................... 0.75% 0.91%+ Money Market........................................ 0.55% 0.49%++ Municipal Money Market.............................. 0.57% 0.51%++ - -------------- +Estimated. ++No fee/expense reimbursement was in effect for this Portfolio for the year ended December 31, 1994.
These reductions became or will become effective as of the inception of each Portfolio. As a result of these reductions, the Investment Advisory Fees stated above are lower than the contractual fees stated under "Management of the Fund." For further information on Fund expenses see "Management of the Fund." 2 The purpose of this table is to assist the investor in understanding the various expenses that an investor in the Fund will bear directly or indirectly. The fees and expenses for the Fixed Income, Global Fixed Income, High Yield, Money Market and Municipal Money Market Portfolios are based on actual figures for the fiscal year ended December 31, 1994. The fees and expenses for the Municipal Bond, Mortgage-Backed Securities and Real Yield Portfolios are based on estimates and assume that the average daily net assets will be $50,000,000 with respect to each of such Portfolios. "Other Expenses" include Board of Directors' fees and expenses, amortization of organizational costs, professional fees, filing fees, and costs for reports to shareholders. The following example illustrates the expenses that you would pay on a $1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at the end of each time period. As noted in the table above, the Portfolios charge no redemption fees of any kind. The following example is based on total operating expenses of the Portfolios after fee waivers.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- Fixed Income Portfolio........................................... $ 5 $ 14 $ 25 $ 57 Global Fixed Income.............................................. 5 16 28 63 Municipal Bond Portfolio......................................... 5 14 * * Mortgage-Backed Securities Portfolio............................. 5 14 * * High Yield Portfolio............................................. 8 24 42 93 Real Yield Portfolio............................................. 8 24 * * Money Market Portfolio........................................... 5 16 27 62 Municipal Money Market Portfolio................................. 5 16 29 64 - -------------- *Because the Municipal Bond, Mortgage-Backed Securities and Real Yield Portfolios were not operational as of the Fund's fiscal year end, the Fund has not projected expenses beyond the three-year period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The Fund intends to continue to comply with all state laws that restrict investment company expenses. Currently, the most restrictive state law requires that the aggregate annual expenses of an investment company shall not exceed two and one-half percent (2 1/2%) of the first $30 million of average net assets, two percent (2%) of the next $70 million of average net assets, and one and one-half percent (1 1/2%) of the remaining net assets of such investment company. The Adviser has agreed to a reduction in the amounts payable to it, and to reimburse any Portfolio, if necessary, if in any fiscal year the sum of the Portfolio's expenses exceeds the limit set by applicable state law. 3 FINANCIAL HIGHLIGHTS The following tables provide financial highlights for the Fixed Income, Global Fixed Income, High Yield, Money Market and Municipal Money Market Portfolios for each of the periods presented and are part of the Fund's financial statements which appear in the Fund's December 31, 1994 Annual Report to Shareholders, and which are incorporated by reference into the Fund's Statement of Additional Information. The financial highlights for each of the periods presented have been audited by Price Waterhouse LLP, whose report thereon was unqualified and is also incorporated by reference into the Statement of Additional Information. Additional performance information for the Fixed Income, Global Fixed Income, High Yield, Money Market and Municipal Money Market Portfolios is contained in the Annual Report. The Annual Report and the financial statements therein, along with the Statement of Additional Information, are available at no cost from the Fund at the address and telephone number noted on the cover page of this Prospectus. The Municipal Bond, Mortgage-Backed Securities and Real Yield Portfolios were not operational as of December 31, 1994. Subsequent to October 31, 1992, the Fund changed its fiscal year end to December 31. The Real Yield Portfolio ceased offering shares and terminated its operations as of August 26, 1994. The following information should be read in conjunction with the financial statements and notes thereto. FIXED INCOME PORTFOLIO
TWO MONTHS MAY 15, 1991 YEAR ENDED ENDED YEAR ENDED YEAR ENDED TO OCTOBER OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 31, 1991 1992 1992 1993 1994 ------------ ----------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD....... $ 10.00 $ 10.55 $ 10.92 $ 10.93 $ 11.05 ------------ ----------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)................ 0.22 0.69 0.10 0.54 0.59 Net Realized and Unrealized Gain/(Loss) on Investments.......................... 0.49 0.39 0.01 0.41 (0.92) ------------ ----------- ------------- ------------- ------------- Total from Investment Operations......... 0.71 1.08 0.11 0.95 (0.33) ------------ ----------- ------------- ------------- ------------- DISTRIBUTIONS Net Investment Income.................... (0.16) (0.69) (0.10) (0.56) (0.53) In Excess of Net Investment Income....... -- -- -- (0.01) -- Net Realized Gain........................ -- (0.02) -- (0.26) (0.37) In Excess of Net Realized Gain........... -- -- -- -- (0.00) ------------ ----------- ------------- ------------- ------------- Total Distributions...................... (0.16) (0.71) (0.10) (0.83) (0.90) ------------ ----------- ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD............. $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82 ------------ ----------- ------------- ------------- ------------- ------------ ----------- ------------- ------------- ------------- TOTAL RETURN............................... 7.12% 10.61% 1.02% 9.07% (3.10)% ------------ ----------- ------------- ------------- ------------- ------------ ----------- ------------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).... $72,326 $146,546 $154,210 $240,668 $209,331 Ratio of Expenses to Average Net Assets (1)(2).................................. 0.45%** 0.45% 0.45%** 0.45% 0.45% Ratio of Net Investment Income to Average Net Assets (1)(2)....................... 7.29%** 6.59% 5.56%** 4.97% 5.73% Portfolio Turnover Rate.................. 48% 105% 15% 240% 388% - --------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income.................................... $ 0.01 $ 0.02 $ 0.01 $ 0.02 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets............................... 0.81%** 0.59% 0.75%** 0.60% 0.58% Net Investment Income to Average Net Assets............................... 6.93%** 6.45% 5.26%** 4.82% 5.60% (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.35% of the average daily net assets of the Fixed Income Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 0.45% of the average daily net assets of the Portfolio. In the period ended October 31, 1991, the year ended October 31, 1992, the two month period ended December 31, 1992, and the years ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expenses totalling $69,000, $165,000, $74,000, $307,000 and $276,000, respectively, for the Fixed Income Portfolio. * Commencement of Operations. ** Annualized.
4 GLOBAL FIXED INCOME PORTFOLIO
MAY 1, 1991* YEAR ENDED TWO MONTHS YEAR ENDED YEAR ENDED TO OCTOBER OCTOBER 31, ENDED DECEMBER DECEMBER 31, DECEMBER 31, 31, 1991 1992 31, 1992 1993 1994 ------------ -------------- -------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD..... $ 10.00 $ 10.61 $ 11.41 $ 11.26 $ 11.68 ------------ ------- ------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1).............. 0.16 0.53 0.14 0.69 0.70 Net Realized and Unrealized Gain (Loss) on Investments........................ 0.45 0.55 (0.29) 0.90 (1.38) ------------ ------- ------- ------------- ------------- Total from Investment Operations......... 0.61 1.08 (0.15) 1.59 (0.68) ------------ ------- ------- ------------- ------------- DISTRIBUTIONS Net Investment Income.................. -- (0.27) -- (0.79) (0.40) In Excess of Net Investment Income..... -- -- -- (0.22) -- Net Realized Gain...................... -- (0.01) -- (0.16) (0.31) ------------ ------- ------- ------------- ------------- Total Distributions...................... -- (0.28) -- (1.17) (0.71) ------------ ------- ------- ------------- ------------- NET ASSET VALUE, END OF PERIOD........... $ 10.61 $ 11.41 $ 11.26 $ 11.68 $ 10.29 ------------ ------- ------- ------------- ------------- ------------ ------- ------- ------------- ------------- TOTAL RETURN............................. 6.10% 10.29% (1.31)% 15.34% (6.08)% ------------ ------- ------- ------------- ------------- ------------ ------- ------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).... $28,236 $94,847 $92,897 $172,468 $130,675 Ratio of Expenses to Average Net Assets (1)(2).................................. 0.50%** 0.50% 0.50%** 0.50% 0.50% Ratio of Net Investment Income to Average Net Assets (1)(2)....................... 7.24%** 6.92% 6.99%** 5.99% 6.34% Portfolio Turnover Rate.................. 20% 144% 9% 108% 171% - --------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income............................. $ 0.02 $ 0.03 $ 0.01 $ 0.02 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets....... 1.62%** 0.86% 0.90%** 0.70% 0.66% Net Investment Income to Average Net Assets............................. 6.12%** 6.56% 6.59%** 5.79% 6.18% (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.40% of the average daily net assets of the Global Fixed Income Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 0.50% of the average daily net assets of the Portfolio. In the fiscal period ended October 31, 1991, the year ended October 31, 1992, the two months ended December 31, 1992, and the years ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expenses totalling $67,000, $201,000, $64,000, $260,000 and $238,000, respectively, for the Global Fixed Income Portfolio. * Commencement of Operations. ** Annualized.
5 HIGH YIELD PORTFOLIO
SEPTEMBER 28, TWO MONTHS 1992 ENDED YEAR ENDED YEAR ENDED TO OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1992 1992 1993 1994 -------------- -------------- -------------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD................. $ 10.00 $ 9.77 $ 9.95 $ 11.16 ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1).......................... 0.08 0.14 0.90 0.97 Net Realized and Unrealized Gain/(Loss) on Investments....................................... (0.31) 0.19 1.21 (1.40) ------- ------- ------- ------- Total from Investment Operations................... (0.23) 0.33 2.11 (0.43) ------- ------- ------- ------- DISTRIBUTIONS Net Investment Income.............................. -- (0.15) (0.90) (0.97) Net Realized Gain.................................. -- -- -- (0.21) ------- ------- ------- ------- Total Distributions................................ -- (0.15) (0.90) (1.18) NET ASSET VALUE, END OF PERIOD....................... $ 9.77 $ 9.95 $ 11.16 $ 9.55 ------- ------- ------- ------- ------- ------- ------- ------- TOTAL RETURN......................................... (2.30)% 3.41% 22.11% (4.18)% ------- ------- ------- ------- ------- ------- ------- ------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).............. $16,950 $20,194 $74,500 $97,223 Ratio of Expenses to Average Net Assets (1)(2)..... 0.75%** 0.75%** 0.75% 0.75% Ratio of Net Investment Income to Average Net Assets (1)(2)..................................... 9.89%** 8.96%** 8.70% 9.42% Portfolio Turnover Rate............................ 9% 24% 104% 74% - --------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income....... $ 0.01 $ 0.01 $ 0.02 $ 0.001 Ratios before expense limitation: Expenses to Average Net Assets................... 1.23%** 1.62%** 0.96% 0.76% Net Investment Income to Average Net Assets...... 9.41%** 8.09%** 8.49% 9.41% (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.50% of the average daily net assets of the High Yield Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 0.75% of the average daily net assets of the Portfolio. In the period ended October 31, 1992, the two months ended December 31, 1992, and the years ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expenses totalling $22,000, $27,000, $82,000 AND $7,000, respectively, for the High Yield Portfolio. * Commencement of Operations. ** Annualized.
6 MONEY MARKET PORTFOLIO
NOVEMBER 15, TWO MONTHS 1988* TO YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1989 1990 1991 1992 1992 1993 1994 ------------- ----------- ----------- ----------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ------------- ----------- ----------- ----------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)..... 0.085 0.079 0.062 0.039 0.005(1) 0.027(1) 0.040 ------------- ----------- ----------- ----------- ------------- ------------- ------------- DISTRIBUTIONS Net Investment Income......... (0.085) (0.079) (0.062) (0.039) (0.005) (0.027) (0.040) In Excess of Net Investment Income....................... -- -- -- -- -- (0.000) -- ------------- ----------- ----------- ----------- ------------- ------------- ------------- Total Distributions........... (0.085) (0.079) (0.062) (0.039) (0.005) (0.027) (0.040) ------------- ----------- ----------- ----------- ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ------------- ----------- ----------- ----------- ------------- ------------- ------------- ------------- ----------- ----------- ----------- ------------- ------------- ------------- TOTAL RETURN.................... 8.81% 8.16% 6.37% 3.77% 0.50% 2.76% 3.84% ------------- ----------- ----------- ----------- ------------- ------------- ------------- ------------- ----------- ----------- ----------- ------------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).................... $ 158,582 $ 516,182 $ 607,087 $ 612,968 $ 599,172 $ 657,163 $ 690,503 Ratio of Expenses to Average Net Assets (1)(2).................. 0.55%** 0.55% 0.53% 0.52% 0.55%** 0.53% 0.49% Ratio of Net Investment Income to Average Net Assets (1)(2)... 8.80%** 7.87% 6.11% 3.74% 3.11%** 2.71% 3.77% Portfolio Turnover Rate......... N/A N/A N/A N/A N/A N/A N/A - ------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income..................... $ 0.001 $ 0.000 N/A N/A $ 0.000 $ 0.000 N/A Ratios before expense limitation: Expenses to Average Net Assets......................... 0.64%** 0.58% N/A N/A 0.59%** 0.54% N/A Net Investment Income to Average Net Assets................. 8.71%** 7.85% N/A N/A 3.07%** 2.70% N/A (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.30% of the average daily net assets of the Money Market Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed a set percentage (currently set at 0.55%) of the average daily net assets of the Portfolio. The Adviser did not waive fees or reimburse expenses for the years ended October 31, 1991, October 31, 1992 and December 31, 1994. In the year ended October 31, 1990, the two months ended December 31, 1992, and the year ended December 31, 1993, the Adviser waived advisory fees and/or reimbursed expenses totalling approximately $110,000, $75,000, $37,000 and $18,000 respectively. * Commencement of Operations. ** Annualized.
7 MUNICIPAL MONEY MARKET PORTFOLIO
FEBRUARY 10, TWO MONTHS 1989* TO YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1989 1990 1991 1992 1992 1993 1994 ------------ ----------- ----------- ----------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD.......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ------------ ----------- ----------- ----------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)...... 0.046 0.054 0.043 0.026 0.004 0.019 0.020 ------------ ----------- ----------- ----------- ------------- ------------- ------------- DISTRIBUTIONS Net Investment Income.......... 0.046 (0.054) (0.043) (0.026) (0.004) (0.019) (0.020) In Excess of Net Investment Income........................ -- -- -- -- -- (0.000) -- ------------ ----------- ----------- ----------- ------------- ------------- ------------- Total Distributions............ (0.046) (0.054) (0.043) (0.026) (0.004) (0.019) (0.020) ------------ ----------- ----------- ----------- ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ------------ ----------- ----------- ----------- ------------- ------------- ------------- ------------ ----------- ----------- ----------- ------------- ------------- ------------- TOTAL RETURN..................... 4.6% 5.51% 4.35% 2.74% 0.37% 1.91% 2.44% ------------ ----------- ----------- ----------- ------------- ------------- ------------- ------------ ----------- ----------- ----------- ------------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)..................... $ 38,540 $ 102,195 $ 166,953 $ 206,691 $ 208,866 $ 266,524 $ 359,444 Ratio of Expenses to Average Net Assets (1)(2)................... 0.32%** 0.51% 0.56% 0.55% 0.57%** 0.54% 0.51% Ratio of Net Investment Income to Average Net Assets (1)(2)....... 6.05%** 5.38% 4.18% 2.66% 2.31%** 1.89% 2.42% Portfolio Turnover Rate.......... N/A N/A N/A N/A N/A N/A N/A - --------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income........... $ 0.002 $ 0.001 N/A N/A $ 0.000 $ 0.000 N/A Ratios before expense limitation: Expenses to Average Net Assets.................. 0.74%** 0.63% N/A N/A 0.67%** 0.56% N/A Net Investment Income to Average Net Assets.......... 5.63%** 5.26% N/A N/A 2.21%** 1.87% N/A (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.30% of the average daily net assets of the Municipal Money Market Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed a set percentage (currently set at 0.57%) of the average daily net assets of the Portfolio. The Adviser did not waive fees or reimburse expenses for the years ended October 31, 1991, October 31, 1992 and December 31, 1994. In the period ended October 31, 1989, the year ended October 31, 1990, the two months ended December 31, 1992, and the year ended December 31, 1993, the Adviser waived advisory fees and/or reimbursed expenses totalling approximately $75,000, $92,000, $36,000 and $46,000, respectively. * Commencement of Operations. ** Annualized.
8 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-seven portfolios, offering institutional and high net worth individual investors a broad range of investment choices coupled with the advantages of a no-load mutual fund with Morgan Stanley and its affiliates providing customized services as Adviser, Administrator and Distributor. Each portfolio has its own investment objectives and policies designed to meet its specific goals. This Prospectus pertains to the Fixed Income, Global Fixed, Municipal Bond, Mortgage-Backed Securities, High Yield, Real Yield, Money Market and Municipal Money Market Portfolios (the Real Yield Portfolio is not currently offering shares): -The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent with the preservation of capital by investing in a diversified portfolio of fixed income securities. -The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate of return while preserving capital by investing in fixed income securities of issuers throughout the world, including U.S. issuers. -The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current income consistent with preservation of principal through investment primarily in municipal obligations, the interest on which is exempt from federal income tax. -The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level of current income as is consistent with the preservation of capital by investing primarily in a variety of investment-grade mortgage-backed securities. -The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a diversified portfolio of high yield fixed income securities that offer a yield above that generally available on debt securities in the three highest rating categories of the recognized rating services. -The REAL YIELD PORTFOLIO seeks to produce a high total return consistent with preservation of capital by investing in fixed income securities of issuers throughout the world, including U.S. issuers. -The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less. -The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less which are exempt from federal income tax. The other portfolios of the Fund are described in other prospectuses which may be obtained from the Fund at the address and telephone number noted on the cover page of this Prospectus. The objectives of these other portfolios are listed below: GLOBAL AND INTERNATIONAL EQUITY: -The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital appreciation by investing in accordance with country weightings determined by the Adviser in common stocks of non-U.S. issuers which, in the aggregate, replicate broad country indices. -The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of Asian issuers. -The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in the equity securities of issuers in The People's Republic of China, Hong Kong and Taiwan. 9 -The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of emerging country issuers. -The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of European issuers. -The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of issuers throughout the world, including U.S. issuers. -The GOLD PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of foreign and domestic issuers engaged in gold-related activities. -The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of non-U.S. issuers. -The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of non-U.S. issuers with equity market capitalizations of less than $500 million. -The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Japanese issuers. -The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Latin American issuers and debt securities issued or guaranteed by Latin American governments or governmental entities. U.S. EQUITY: -The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing primarily in corporate equity and equity-linked securities. -The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented common stocks of small- to medium-sized corporations. -The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented common stocks of medium and large capitalization companies. -The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued common stocks of small- to medium-sized companies. -The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current income and long-term capital appreciation by investing primarily in equity securities of companies in the U.S. real estate industry, including real estate investment trusts. -The VALUE EQUITY PORTFOLIO seeks high total return by investing in common stocks which the Adviser believes to be undervalued relative to the stock market in general at the time of purchase. BALANCED: -The BALANCED PORTFOLIO seeks high total return while preserving capital by investing in a combination of undervalued common stocks and fixed income securities. FIXED INCOME: -The EMERGING MARKETS DEBT PORTFOLIO seeks high current income, and secondarily, capital appreciation, by investing primarily in debt securities of government, government-related and corporate issuers located in emerging countries. 10 INVESTMENT MANAGEMENT Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan Stanley Group Inc., which, together with its affiliated asset management companies, at December 31, 1994 had approximately $48.7 billion in assets under management as an investment manager or as a fiduciary adviser, acts as investment adviser to the Fund and each of its portfolios. See "Management of the Fund -- Investment Adviser" and "Management of the Fund -- Administrator." HOW TO INVEST Shares of each Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. While each of the Money Market and Municipal Money Market Portfolios expects to maintain a net asset value per share of $1.00, there can be no assurance that either Portfolio can maintain a net asset value of $1.00 per share. Share purchases may be made by sending investments directly to the Fund. The minimum initial investment for each of the Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed Securities, High Yield and Real Yield Portfolios is $500,000; the minimum initial investment for each of the Money Market and Municipal Money Market Portfolios is $50,000. The minimum subsequent investment is $1,000 for each Portfolio (except for automatic reinvestment of dividends and capital gains distributions for which there is no minimum). The minimum investment levels may be waived for certain Morgan Stanley employees and customers at the discretion of the Adviser, including those who participate in the Automatic Purchase of Portfolio Shares program. See "Purchase of Shares." HOW TO REDEEM Shares of each Portfolio may be redeemed at any time, without cost, at the net asset value per share of the Portfolio next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. If a shareholder reduces its total investment in shares of the Fixed Income, Municipal Bond, Mortgage-Backed Securities, High Yield or Real Yield Portfolios to less than $500,000, or of the Money Market or Municipal Money Market Portfolios to less than $10,000, the investment may be subject to redemption. See "Redemption of Shares." RISK FACTORS The investment policies of each of the Portfolios entail certain risks and considerations of which an investor should be aware. The Fixed Income, Global Fixed Income, High Yield, Real Yield and Money Market Portfolios may invest in securities of foreign issuers, which are subject to certain risks not typically associated with U.S. securities. In addition, the High Yield Portfolio may invest in lower rated and unrated securities which are subject to risk factors. In particular: (1) adverse economic and corporate changes and changes in interest rates may have a greater impact on issuers of such securities and may lead to greater price volatility, and (2) such securities may be more difficult to value accurately or sell in the secondary market. See "Investment Objectives and Policies" and "Additional Investment Information." In addition, each Portfolio may invest in repurchase agreements, lend its portfolio securities and purchase securities on a when-issued or delayed delivery basis. The Money Market Portfolio may invest in reverse repurchase agreements. Each Portfolio, except the Global Fixed Income and Real Yield Portfolios, may invest in futures contracts and options on futures contracts. The Fixed Income, Global Fixed Income, High Yield and Real Yield Portfolios may invest in forward foreign currency exchange contracts to hedge currency risks associated with investment in non-U.S. dollar denominated securities. The Municipal Money Market Portfolio may invest in "puts" on municipal bonds or notes and the Municipal Bond and Municipal Money Market Portfolios may invest up to 20% of such Portfolios' total assets in taxable securities. Each of these investment strategies involves specific risks which are described under "Investment Objectives and Policies" and "Additional Investment Information" herein and under "Investment Objectives and Policies" in the Statement of Additional Information. 11 INVESTMENT OBJECTIVES AND POLICIES The investment objectives of each Portfolio are described below, together with the policies the Fund employs in its efforts to achieve these objectives. Each Portfolio's investment objective is a fundamental policy which may not be changed without the approval of a majority of the Portfolio's outstanding voting securities. There is no assurance that the Portfolio will attain its objectives. The investment policies described below are not fundamental policies unless otherwise noted and may be changed without shareholder approval. THE FIXED INCOME PORTFOLIO The Portfolio seeks to produce a high total return consistent with the preservation of capital by investing primarily in a diversified portfolio of U.S. Government securities, corporate bonds (including competitively priced Eurodollar bonds), mortgage backed securities and other fixed income securities, such as certificates of deposit and short-term money market instruments. Short- and intermediate-term bonds form the core of the Portfolio, and long-term bonds (i.e., those with maturities over ten years) are purchased on a short-term opportunistic basis when the Adviser believes they will enhance return without significantly increasing risk. The Adviser sets an annual target rate of return for the Portfolio based on current and projected market and economic conditions and manages the Portfolio conservatively -- primarily through gradual shifts in maturities in attempting to achieve this target rate. Emphasis in the Portfolio will be on U.S. Government and mortgage-backed securities. Typically, between 50% and 75% of the Portfolio's total assets will be invested in these securities. When corporate bonds are purchased, they will generally be rated in the two highest rating categories by Moody's Investors Service, Inc. ("Moody's") (Aaa or Aa) or Standard & Poor's Corporation ("S&P") (AAA or AA). The Portfolio will not invest in a corporate security if at the time of investment the security is not rated at least investment grade by either rating agency. Although U.S. dollar-denominated securities will represent the major portion of the Portfolio, up to 15% of the Portfolio may be invested in foreign currency obligations of corporate and governmental issuers when the Adviser feels that the currency component and underlying market characteristics of such obligations will add value to the Portfolio. For information about these and other permitted investment practices, see "Additional Investment Information" in this Prospectus. THE GLOBAL FIXED INCOME PORTFOLIO The Global Fixed Income Portfolio seeks to produce an attractive real rate of return while preserving capital by investing in fixed income securities of U.S. and foreign issuers denominated in U.S. dollars and in other currencies. The Portfolio seeks to achieve its objectives by investing in U.S. government securities, foreign government securities, securities of supranational entities, Eurobonds, and corporate bonds with varying maturities denominated in various currencies. In selecting portfolio securities, the Adviser evaluates the currency, market, and individual features of the securities being considered for investment. At least 65% of the total assets of the Portfolio will be invested in fixed income securities under normal circumstances. The Adviser seeks to minimize investment risk by investing only in high quality debt securities. U.S. Government securities that the Portfolio may invest in include obligations issued or guaranteed by the U.S. Government, such as U.S. Treasury securities, as well as those backed by the full-faith and credit of the U.S., such as obligations of the Government National Mortgage Association and The Export-Import Bank. The Portfolio may also invest in obligations issued or guaranteed by U.S. Government agencies or instrumentalities where the Portfolio must look principally to the issuing or guaranteeing agency for ultimate repayment. The Portfolio may 12 invest in obligations issued or guaranteed by foreign governments and their political subdivisions, authorities, agencies or instrumentalities, and by supranational entities (such as the World Bank, The European Economic Community, The Asian Development Bank and the European Coal and Steel Community). Investment in foreign government securities will be limited to those of developed nations which the Adviser believes to pose limited credit risk. These countries currently include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, The United Kingdom and Germany. Corporate and supranational obligations which the Portfolio will invest in will be limited to those rated A or better by Moody's Investors Service, Inc., Standard & Poor's Corporation or IBCA Ltd., or if unrated, to those that are of comparable quality in the determination of the Board of Directors and the Adviser. The Adviser's approach to multicurrency fixed-income management is strategic and value-based and designed to produce an attractive real rate of return. The Adviser's assessment of the bond markets and currencies is based on an analysis of real interest rates. Current nominal yields of securities are adjusted for inflation prevailing in each currency sector using an analysis of past and projected inflation rates. The Portfolio's aim is to invest in bond markets which offer the most attractive real returns relative to inflation. The Portfolio will have a neutral investment position in medium-term securities (I.E., those with a remaining maturity of between three and seven years) and will respond to changing interest rate levels by shortening or lengthening portfolio maturity through investment in longer or shorter term instruments. For example, the Portfolio will respond to high levels of real interest rates through a lengthening in portfolio maturity. Current and historical yield spreads among the three main market segments -- the Government, Foreign and Euro markets -- guide the Adviser's selection of markets and particular securities within those markets. The analysis of currencies is made independent of the analysis of markets. Value in foreign exchange is determined by relative purchasing power parity of a given currency. The Portfolio seeks to invest in currencies currently undervalued based on purchasing power parity. The Adviser analyzes current account and capital account performance and real interest rates to adjust for shorter-term currency flows. The Portfolio seeks to maintain portfolio turnover at a low level. Although the Portfolio's primary objective is not to invest for short-term trading, the Portfolio will seek to take advantage of trading opportunities as they arise to the extent that they are consistent with the Portfolio's objectives. It is anticipated that the Portfolio's annual turnover rate will not exceed 100% in normal circumstances, but the Portfolio's annual turnover rate may exceed 100%. An annual turnover rate that exceeds 100% involves correspondingly greater brokerage commissions or transaction costs which will be borne directly by the Portfolio. In addition, high portfolio turnover may result in more capital gains which would be taxable to the shareholders of the Portfolio. The Portfolio will occasionally enter into forward currency exchange contracts. These are used to hedge foreign currency exchange exposures when required. See "Forward Currency Exchange Contracts" in this Prospectus and "Investment Objectives and Policies -- Forward Currency Exchange Contracts" in the Statement of Additional Information. THE MUNICIPAL BOND PORTFOLIO The Portfolio seeks high current income consistent with preservation of principal through investment in a portfolio consisting primarily of intermediate- and long-term investment grade Municipal Obligations, the interest on which is exempt from federal income tax. "Municipal Obligations" include notes, bonds and other securities issued by or on behalf of states, territories and possessions of the U.S. and the District of Columbia, 13 and their political subdivisions, agencies and instrumentalities, the interest on such Obligations, in the opinion of counsel for the issuer or the Portfolio, is exempt from federal income tax. See the Statement of Additional Information for a further description of Municipal Obligations. The Portfolio will only invest in Municipal Obligations that are "investment grade securities." Investment grade securities are (i) bonds rated within one of the four highest rating categories of Moody's (Aaa, Aa, A or Baa) or S&P (AAA, AA, A or BBB); (ii) notes rated within one of the two highest rating categories of Moody's (MIG1 or MIG2) or one of the two highest rating categories of S&P (SP-1 or SP-2); (iii) commercial paper rated P-1 or P-2 by Moody's or A-1 or A-2 by S&P; (iv) variable rate securities rated VMIG1 or VMIG2 by Moody's; and (iv) unrated Municipal Obligations that the Adviser believes are of comparable quality to securities in the foregoing rating categories. See the Statement of Additional Information for a further description of these rating categories. Bonds rated Baa by Moody's or BBB by S&P have speculative characteristics. Under normal market conditions, the Portfolio will invest at least 80% of its net assets in Municipal Obligations (or futures contracts or options on futures relating thereto), which at the time of investment are "investment grade securities." This policy is fundamental and may not be changed without the approval of a majority of the Portfolio's outstanding voting securities. In addition, under normal market conditions, at least 65% of the Portfolio's net assets will be invested in such Municipal Obligations having an initial maturity of more than one year. Although there are no maturity restrictions on the Municipal Obligations in which the Portfolio invests, it is currently anticipated that the average maturity of the Portfolio will range between 7 and 20 years. The Adviser will actively manage the Portfolio, and adjust the average maturity thereof (including the use of futures contracts and options on futures), depending on its assessment of the relative yields available on securities of different maturities and its expectations of future changes in interest rates. During periods of rising interest rates and declining prices, the average maturity of the Portfolio may be shorter, while during periods of declining interest rates and rising prices, the Portfolio may have a longer average maturity. The Portfolio may also invest up to 20% of its net assets in cash, cash equivalents, U.S. Government Securities and taxable corporate "investment grade securities." U.S. Government Securities consist of direct obligations of the U.S. Treasury and securities issued or guaranteed by agencies or instrumentalities of the U.S. Government. Securities issued or guaranteed by agencies or instrumentalities may be backed by the full faith and credit of the United States (such as securities issued by the Government National Mortgage Association), or supported by the issuing agency's right to borrow from the U.S. Treasury (such as Federal Home Loan Banks), or backed only by the credit of the issuing instrumentality (e.g., the Federal National Mortgage Association). In addition, for temporary defensive purposes, the Portfolio may invest part or all of its assets in cash or in short-term securities, including certificates of deposit, commercial paper, U.S. Government Securities and repurchase agreements involving such government securities. The Portfolio will not invest more than 20% of its net assets in Municipal Obligations the interest on which is subject to alternative minimum tax. For information about these and other permitted investment practices, see "Additional Investment Information" in this Prospectus. THE MORTGAGE-BACKED SECURITIES PORTFOLIO The Portfolio seeks to produce as high a level of current income as is consistent with preservation of capital by investment primarily in mortgage-backed securities either (i) issued or guaranteed by the U.S. Government or (ii) rated A or higher by Moody's or S&P, or if unrated, determined by the Adviser to be of comparable quality. 14 "Mortgage-backed securities" are securities that, directly or indirectly, represent a participation in, or are secured by and payable from, mortgage loans on real property, including governmental pass-through securities such as those issued or guaranteed by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). Unlike GNMA certificates, FNMA and FHLMC obligations are not backed by the full faith and credit of the U.S. government; they are supported by the issuing instrumentality's right to borrow from the U.S. Treasury. Each of GNMA, FNMA and FHLMC guarantees timely distributions of interest to certificate holders and GNMA and FNMA also guarantee timely distributions of scheduled principal. Mortgage-backed securities also include collateralized mortgage obligations ("CMOs") and pass-through securities issued or guaranteed by private sector entities. CMOs are debt obligations or pass-through certificates issued by agencies or instrumentalities of the U.S. government or by private originators or investors in mortgage loans. CMOs are backed by mortgage pass-through securities or whole loans and are evidenced by a series of bonds or certificates issued in multiple classes or tranches. Private pass-through securities are issued by private originators of or investors in mortgage loans and are structured similarly to governmental pass-through securities. Because private pass-throughs typically lack a guarantee by an entity having the credit status of a governmental agency or instrumentality, they are generally structured with one or more types of credit enhancement. See the Statement of Additional Information for a further description of Mortgage-Backed Securities. The Portfolio will only invest in mortgage-backed securities that are either (i) issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities or (ii) at the time of investment rated within one of the three highest rating categories of Moody's (Aaa, Aa or A) or S&P (AAA, AA or A), or if unrated, determined by the Adviser to be of comparable quality. Under normal market conditions, the Adviser expects that at least 75% of the Portfolio's net assets will be invested in mortgage-backed securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities or rated Aaa by Moody's or AAA by S&P. Up to 15% of the Portfolio's net assets may be invested in mortgage-backed securities rated A by Moody's or S&P. The Adviser expects that short- and intermediate-term mortgage-backed securities will form the core of the Portfolio, with long-term securities (i.e., with maturities over ten years) being purchased when the Adviser believes that they will enhance return without significantly increasing risk. The Adviser sets an annual target rate of return for the Portfolio based on current and projected market and economic conditions and manages the Portfolio conservatively -- primarily through gradual shifts in maturities -- in attempting to achieve this target rate. The Portfolio may also invest up to 25% of its net assets in cash, cash equivalents or other short-term securities, including certificates of deposit, commercial paper and money market instruments, U.S. Government securities and repurchase agreements involving such government securities. In addition, the Portfolio may invest up to all of its assets in cash and such instruments for temporary defensive purposes. For information about these and other permitted investment practices, see "Additional Investment Information" in this Prospectus. THE HIGH YIELD PORTFOLIO The Portfolio seeks to maximize total return by investing in a diversified portfolio of high yield fixed income securities that offer a yield above that generally available on debt securities in the three highest rating categories of the recognized rating services. The Portfolio normally invests between 80% and 100% of its total assets in 15 these higher yielding securities, which generally entails increased credit and market risk. To mitigate these risks the Portfolio will diversify its holdings by issuer, industry and credit quality, but investors should carefully review the section below entitled "Risk Factors Relating to Investing in High Yield Securities." Appendix A to this Prospectus sets forth a description of the corporate bond rating categories of Moody's and S&P. Corporate bonds rated below Baa by Moody's or BBB by S&P are considered speculative. Securities in the lowest rating categories may have predominantly speculative characteristics or may be in default. Ratings of S&P and Moody's represent their opinions of the quality of bonds and other debt securities they undertake to rate at the time of issuance. However, ratings are not absolute standards of quality and may not reflect changes in an issuer's creditworthiness. Accordingly, although the Adviser will consider ratings, it will perform its own analysis and will not rely principally on ratings. The Adviser will consider, among other things, the price of the security, and the financial history and condition, the prospects and the management of an issuer in selecting securities for the Portfolio. The Portfolio may buy unrated securities that the Adviser believes are comparable to rated securities and are consistent with the Portfolio's objective and policies. The Adviser may vary the average maturity of the securities in the Portfolio without limit and there is no restriction on the maturity of any individual security. The Portfolio may acquire fixed income securities of both U.S. and foreign issuers, including debt obligations (e.g., bonds, debentures, notes, equipment lease certificates, equipment trust certificates, conditional sales contracts, commercial paper and obligations issued or guaranteed by the U.S. Government, any foreign government with which the United States maintains relations or any of their respective political subdivisions, agencies or instrumentalities) and preferred stock. The Portfolio may not invest more than 5% of its total assets at time of acquisition in either (1) equipment lease certificates, equipment trust certificates and conditional sales contracts or (2) limited partnership interests. The Portfolio may neither invest more than 10% of its total assets in foreign securities nor invest more than 5% of its total assets in foreign governmental issuers in any one country. The Portfolio's fixed income securities may have equity features, such as conversion rights or warrants, and the Portfolio may invest up to 10% of its total assets in equity securities other than preferred stock (common stocks, warrants and rights and limited partnership interests). The Portfolio may invest up to 20% of its total assets in fixed income securities that are investment grade (i.e., rated in one of the top three categories or comparable) and have maturities of one year or less. For temporary defensive purposes, the Portfolio may invest part or all of its total assets in cash or in short-term securities, including certificates of deposit, commercial paper, notes, obligations issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities, and repurchase agreements involving such government securities. The Portfolio may invest in or own securities of companies in various stages of financial restructuring, bankruptcy or reorganization which are not currently paying interest or dividends. The total value, at time of purchase, of the sum of all such securities will not exceed 10% of the value of the Portfolio's total assets. The Portfolio may also invest in zero coupon, pay-in-kind or deferred payment securities. Zero coupon securities are securities that are sold at a discount to par value and securities on which interest payments are not made during the life of the security. Upon maturity, the holder is entitled to receive the par value of the security. While interest payments are not made on such securities, holders of such securities are deemed to have received "phantom income" annually. Because the Portfolio will distribute its "phantom income" to shareholders, to the extent that shareholders elect to receive dividends in cash rather than reinvesting such dividends in additional shares of the Portfolio, it will have fewer assets with which to purchase income producing securities. The Portfolio accrues income with respect to these securities prior to the receipt of cash payments. Pay-in-kind securities are securities that have interest payable by delivery of additional securities. Upon maturity, the holder 16 is entitled to receive the aggregate par value of the securities. Deferred payment securities are securities that remain zero coupon securities until a predetermined date, at which time the stated coupon rate becomes effective and interest becomes payable at regular intervals. Zero coupon, pay-in-kind and deferred payment securities may be subject to greater fluctuation in value and lesser liquidity in the event of adverse market conditions than comparably rated securities paying cash interest at regular interest payment periods. For more information about these and other permitted investment practices, see "Additional Investment Information" in this Prospectus. RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. Fixed income securities are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations (credit risk), and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (market risk). Lower rated or unrated (i.e., high yield) securities are more likely to react to developments affecting market and credit risk than are more highly rated securities, which react to movements in the general level of interest rates primarily. The market values of fixed-income securities tend to vary inversely with the level of interest rates. Yields and market values of high yield securities will fluctuate over time, reflecting not only changing interest rates but the market's perception of credit quality and the outlook for economic growth. When economic conditions appear to be deteriorating, medium to lower rated securities may decline in value due to heightened concern over credit quality, regardless of prevailing interest rates. Fluctuations in the value of the Portfolio's investments will be reflected in the Portfolio's net asset value per share. The Adviser considers both credit risk and market risk in making investment decisions for the Portfolio. Investors should carefully consider the relative risks of investing in high yield securities and understand that such securities are not generally meant for short-term investing. The high yield market is still relatively new and its recent growth parallels a long period of economic expansion and an increase in merger, acquisition and leveraged buyout activity. Adverse economic developments may disrupt the market for high yield securities, and severely affect the ability of issuers, especially highly leveraged issuers, to service their debt obligations or to repay their obligations upon maturity. In addition, the secondary market for high yield securities, which is concentrated in relatively few market makers, may not be as liquid as the secondary market for more highly rated securities. As a result, the Adviser could find it more difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded. Prices realized upon the sale of such lower rated or unrated securities, under these circumstances, may be less than the prices used in calculating the Portfolio's net asset value. Prices for high yield securities may be affected by legislative and regulatory developments. These laws could adversely affect the Portfolio's net asset value and investment practices, the secondary market for high yield securities, the financial condition of issuers of these securities and the value of outstanding high yield securities. For example, federal legislation requiring the divestiture by federally insured savings and loan associations of their investments in high yield bonds and limiting the deductibility of interest by certain corporate issuers of high yield bonds adversely affected the market in recent years. Lower rated or unrated debt obligations also present risks based on payment expectations. If an issuer calls the obligations for redemption, the Fund may have to replace the security with a lower yielding security, resulting in a decreased return for investors. If the Portfolio experiences unexpected net redemptions, it may be forced to sell its higher rated securities, resulting in a decline in the overall credit quality of the Portfolio's investment portfolio and increasing the exposure of the Portfolio to the risks of high yield securities. 17 THE REAL YIELD PORTFOLIO The Real Yield Portfolio seeks to produce a high total return consistent with the preservation of capital by investing in fixed income securities of issuers in global fixed income markets displaying high real (inflation adjusted) yields. The Adviser believes that countries displaying the highest real yields will over time generate a high total return, and accordingly, the Adviser's focus for the Portfolio will be to analyze the relative rates of real yield of twenty global fixed income markets. In selecting securities to be included in the Portfolio, the Adviser will first identify the global markets in which the Portfolio's assets will be invested by ranking such countries in order of highest real yield. The Portfolio will invest its assets primarily in fixed income securities denominated in the currencies of countries within the top quartile of the Adviser's ranking. The Adviser's assessment of the global fixed income markets is based on an analysis of real interest rates. The Adviser calculates real yield for each global market by adjusting current nominal yields of securities in each such market for inflation prevailing in each country using an analysis of past and projected (one-year) inflation rates for that country. The Adviser expects to review and update on a regular basis its real yield ranking of countries and to alter the allocation of the Portfolio's investments among markets as necessary when changes to real yields and inflation estimates significantly alter the relative rankings of the countries. Under normal circumstances, at least 65% of the total assets of the Portfolio will be invested in fixed income securities, allocated among issuers in markets with real yield rates within the top quartile of the Adviser's ranking. Fixed income securities in which the Portfolio may invest include U.S. and foreign government securities, securities of supranational entities, Eurobonds, asset or mortgage-backed securities, and corporate bonds with varying maturities denominated in various currencies. The Portfolio may invest in obligations issued or guaranteed by U.S. or foreign governments and their political subdivisions, authorities, agencies or instrumentalities, and by supranational entities (such as the World Bank, The European Economic Community, The Asian Development Bank and the European Coal and Steel Community). Corporate and supranational obligations in which the Portfolio will invest will be limited to those rated A or better by Moody's Investors Service, Inc., Standard & Poor's Corporation or IBCA Ltd., or if unrated, to those that are of comparable quality in the determination of the Board of Directors and the Adviser. The average time to maturity of the Portfolio's securities varies depending upon the Adviser's perception of market conditions. The Adviser invests in medium-term securities (i.e., those with a remaining maturity of approximately five years) in a market neutral environment. However, when the Adviser believes that real yields are high, the Adviser lengthens the remaining maturities of securities held by the Portfolio, and conversely, when the Adviser believes real yields are low, it shortens the remaining maturities. Accordingly, the Adviser is not restricted to any maximum or minimum time to maturity in purchasing Portfolio securities. The Portfolio seeks to maintain portfolio turnover at a low level. Although the Portfolio's primary objective is not to invest for short-term trading, the Portfolio will seek to take advantage of trading opportunities as they arise to the extent that they are consistent with the Portfolio's objectives. It is anticipated that the Portfolio's annual turnover rate will not exceed 100% in normal circumstances. The Portfolio may enter into forward currency exchange contracts. These are used to hedge foreign currency exchange exposures when required. See "Forward Currency Exchange Contracts" in this Prospectus and "Investment Objectives and Policies -- Forward Currency Exchange Contracts" in the Statement of Additional Information. 18 THE MONEY MARKET PORTFOLIO The Portfolio's investment objectives are to maximize current income and preserve capital while maintaining high levels of liquidity through investing in the following high quality money market instruments which have effective maturities of one year or less. The Portfolio's average maturity (on a dollar-weighted basis) will not exceed 90 days. The Portfolio will purchase only securities having a remaining maturity of one year or less. The Portfolio is expected to maintain a net asset value of $1.00 per share. There can be no assurance, however, that the Portfolio will be successful in maintaining a net asset value of $1.00 per share. See "Valuation of Shares." UNITED STATES GOVERNMENT OBLIGATIONS. The Money Market Portfolio may invest in obligations issued or guaranteed by the United States Government, such as U.S. Treasury securities and those backed by the full faith and credit of the United States, such as obligations of GNMA, the Farmers Home Administration and the Export-Import Bank. The Portfolio may also invest in obligations issued or guaranteed by United States Government agencies or instrumentalities where the Portfolio must look principally to the issuing or guaranteeing agency for ultimate repayment; some examples of agencies or instrumentalities issuing these obligations are the Federal Farm Credit System and the Federal Home Loan Banks. MORTGAGE-BACKED SECURITIES. Mortgage-backed securities in which the Money Market Portfolio may invest, such as GNMA securities, differ from other fixed income securities in that the principal is paid back by the borrower over the life of the loan rather than returned in a lump sum at maturity. When prevailing interest rates rise, the value of a GNMA security may decrease as do other debt securities. When prevailing interest rates decline, however, the value of GNMA securities may not rise on a comparable basis with other debt securities because of the prepayment feature of GNMA securities. Additionally, if a GNMA certificate is purchased at a premium above its principal value because its fixed rate of interest exceeds the prevailing level of yields, the decline in price to par may result in a loss of the premium in the event of prepayment. Funds received from prepayments may be reinvested at the prevailing interest rates which may be lower than the rate of interest that had previously been earned. BANK OBLIGATIONS. The Money Market Portfolio may invest in high quality U.S. dollar-denominated negotiable certificates of deposit, time deposits, deposit notes and bankers' acceptances of (i) banks, savings and loan associations and savings banks which have more than $2 billion in total assets and are organized under United States Federal or state law, (ii) foreign branches of these banks ("Euros") and (iii) U.S. branches of foreign banks of equivalent size ("Yankees"). See "Additional Investment Information" for further information on foreign investments. The Portfolio may also invest in obligations of the International Bank for Reconstruction and Development ("World Bank"). These obligations are supported by appropriated but unpaid commitments of the World Bank's member countries, and there is no assurance these commitments will be undertaken or met in the future. COMMERCIAL PAPER; CORPORATE BONDS. The Money Market Portfolio may invest in high quality commercial paper and corporate bonds issued by U.S. corporations. The Portfolio may also invest in commercial paper issued by foreign corporations if the issuer is a direct subsidiary of a U.S. corporation, the obligation is U.S. dollar-denominated and is not subject to foreign withholding tax, and the aggregate of these foreign investments does not exceed 10% of the Fund's net assets. For more information about foreign investments, see "Additional Investment Information." QUALITY INFORMATION. The Money Market Portfolio utilizes the amortized cost method of valuation in accordance with regulations issued by the Securities and Exchange Commission. See "Valuation of Shares." 19 Accordingly, the Portfolio will limit its portfolio investments to those instruments that present minimal credit risks and are of "eligible quality" as determined by the Adviser under the supervision of the Board of Directors in accordance with regulations of the Securities and Exchange Commission, as they may from time to time be amended. For this purpose, "eligible quality" means a security rated (i) in one of the two highest rating categories by at least two nationally recognized statistical rating organizations assigning a rating to the security or issuer or, (ii) if only one rating organization assigned a rating, by that rating organization or (iii) if unrated, of comparable quality as determined by the Board of Directors. Among the criteria adopted by the Board of Directors, the Money Market Portfolio will not purchase any bank or corporate obligation unless it is rated at least Aa or Prime-1 by Moody's or AA or A-1 by S&P, or it is unrated, and in the determination of the Board of Directors and the Adviser, it is of comparable quality. Ratings, however, are not the only criteria utilized under the procedures adopted by the Board of Directors. For a more detailed discussion of other quality requirements applicable to the Portfolio, see "Description of Securities and Ratings and Policies" in the Statement of Additional Information. These standards must be satisfied at the time an investment is made. In the event that an investment held by the Portfolio is assigned a lower rating or ceases to be rated, the Adviser under the supervision of the Board of Directors will promptly reassess whether such security presents minimal credit risk and whether the Portfolio should continue to hold the security in its portfolio. If a portfolio security no longer presents minimal credit risk or is in default, the Portfolio will dispose of the security as soon as reasonably practicable unless the Board of Directors determines that to do so is not in the best interests of the Portfolio. THE MUNICIPAL MONEY MARKET PORTFOLIO The Portfolio's investment objectives are to maximize current income that is exempt from federal income tax and preserve capital while maintaining high levels of liquidity through investing in the following high quality municipal money market instruments which, in the opinion of bond counsel for the issuer, earn interest exempt from federal income tax. The Portfolio will purchase only securities having a remaining maturity of one year or less. Under normal circumstances, the Portfolio will invest at least 80% of its assets in tax-exempt municipal securities. Additionally, the Portfolio will not purchase private activity bonds, the interest from which is subject to the alternative minimum tax. Interest on tax-exempt municipal securities may be subject to state and local taxes. See "Taxes." The Portfolio's average maturity (on a dollar-weighted basis) will not exceed 90 days. The Portfolio is expected to maintain a net asset value of $1.00 per share. There can be no assurance, however, that the Portfolio will be successful in maintaining a net asset value of $1.00 per share. See "Valuation of Shares." MUNICIPAL BONDS. The Portfolio may invest in bonds issued by or on behalf of states, territories and possessions of the U.S. and its political subdivisions, agencies, authorities and instrumentalities. These obligations may be general obligation bonds secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest, or they may be revenue bonds payable from specific revenue sources, but not generally backed by the issuer's taxing power. These obligations include private activity bonds where payment is the responsibility of the private industrial user of the facility financed by the bonds. The Portfolio may invest more than 25% of its total assets in private activity bonds (provided that the interest on such bonds is not subject to the alternative minimum tax), but may not invest more than 25% of its total assets in these bonds in projects of similar type or in the same state. MUNICIPAL NOTES. The Portfolio may also invest in municipal notes of various types, including notes issued in anticipation of receipt of taxes, the proceeds of the sale of bonds, other revenues or grant proceeds and project notes, as well as municipal commercial paper and municipal demand obligations. There may be no 20 secondary market for project notes, and it is the intention of the Fund to hold such notes until maturity. There is no specific percentage limitation on these investments. For more information about municipal notes, see "Description of Securities and Ratings" in the Statement of Additional Information. QUALITY INFORMATION. The Portfolio utilizes the amortized cost method of valuation in accordance with regulations issued by the Securities and Exchange Commission. See "Valuation of Shares." Accordingly, the Portfolio will limit its portfolio investments to those instruments which present minimal credit risk and which are of "eligible quality" as determined by the Adviser under the supervision of the Board of Directors in accordance with regulations of the Securities and Exchange Commission, as they may from time to time be amended. For this purpose, "eligible quality" means a security rated (i) in one of the two highest rating categories by at least two nationally recognized statistical rating organizations assigning a rating to the security or issuer or, (ii) if only one rating organization assigned a rating, by that rating organization or (iii) if unrated, of comparable quality as determined by the Board of Directors. Among the criteria adopted by the Board of Directors, the Municipal Money Market Portfolio will not purchase any municipal obligation unless it is rated at least Aa, MIG-1 (or MIG-2 in the case of New York State municipal notes), or Prime-1 by Moody's, or AA, SP-1 or A-1 by S&P, or it is unrated, and in the determination of the Board of Directors and the Adviser it is of comparable quality. Ratings, however, are not the only criteria which must be utilized under the procedures adopted by the Board of Directors. For a more detailed discussion of quality requirements applicable to municipal commercial paper and master demand obligations, see the "Description of Securities and Ratings" in the Statement of Additional Information. These standards must be satisfied at the time an investment is made. In the event that an investment held by the Portfolio is assigned a lower rating or ceases to be rated, the Adviser under the supervision of the Board of Directors will promptly reassess whether such security presents minimal credit risk and whether the Portfolio should continue to hold the security in its portfolio. If a portfolio security no longer presents minimal credit risk or is in default, the Portfolio will dispose of the security as soon as reasonably practicable unless the Board of Directors determines that to do so is not in the best interests of the Portfolio. The credit quality of municipal obligations is frequently enhanced by various arrangements with domestic or foreign financial institutions, such as letters of credit, guarantees and insurance, and these arrangements are considered when investment quality is evaluated. PUTS FOR THE MUNICIPAL MONEY MARKET PORTFOLIO. The Portfolio may purchase without limit municipal bonds or notes together with the right to resell them at an agreed price or yield within a specified period prior to maturity. This right to resell is known as a "put". The aggregate price paid for securities with puts may be higher than the price which otherwise would be paid. The purpose of this practice is to permit the Portfolio to be fully invested in tax-exempt securities while maintaining the necessary liquidity to purchase securities on a when-issued basis, to meet unusually large redemptions, to purchase at a later date securities other than those subject to the put and to facilitate the Adviser's ability to manage the Portfolio actively. The principal risk of puts is that the put writer may default on its obligation to repurchase. The Adviser will monitor each writer's ability to meet its obligations under puts. Under the supervision of the Board of Directors, the Adviser will purchase securities with puts only to the extent that such purchase is consistent with the Portfolio's investment policies. The amortized cost method is used by the Portfolio to value all municipal securities; no value is assigned to any puts. The cost of any such put is carried as an unrealized loss from the time of purchase until it is exercised or expires. 21 ADDITIONAL INVESTMENT INFORMATION REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements with brokers, dealers or banks that meet the credit guidelines of the Fund's Board of Directors. In a repurchase agreement, a Portfolio buys a security from a seller that has agreed to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. The term of these agreements is usually from overnight to one week and never exceeds one year. Repurchase agreements may be viewed as a fully collateralized loan of money by the Portfolio to the seller. The Portfolio always receives securities with a market value at least equal to the purchase price (including accrued interest) as collateral, and this value is maintained during the term of the agreement. If the seller defaults and the collateral value declines, the Portfolio might incur a loss. If bankruptcy proceedings are commenced with respect to the seller, the Portfolio's realization upon the collateral may be delayed or limited. The aggregate of certain repurchase agreements and certain other investments is limited as set forth under "Investment Limitations." LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to brokers, dealers, domestic and foreign banks or other financial institutions for the purpose of increasing its net investment income. These loans must be secured continuously by cash or equivalent collateral or by a letter of credit at least equal to the market value of the securities loaned plus accrued interest or income. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. A Portfolio will not enter into securities loan transactions exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's total assets. For more detailed information about securities lending see "Investment Objectives and Policies" in the Statement of Additional Information. REVERSE REPURCHASE AGREEMENTS FOR THE MONEY MARKET PORTFOLIO. The Money Market Portfolio may enter into reverse repurchase agreements with brokers, dealers, domestic and foreign banks or other financial institutions. In a reverse repurchase agreement, the Portfolio sells a security and agrees to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. It may also be viewed as the borrowing of money by the Portfolio. The Portfolio's investment of the proceeds of a reverse repurchase agreement is the speculative factor known as leverage. The Portfolio may enter into a reverse repurchase agreement only if the interest income from investment of the proceeds is greater than the interest expense of the transaction and the proceeds are invested for a period no longer than the term of the agreement. The Portfolio will maintain with the Custodian a separate account with a segregated portfolio of securities at least equal to its purchase obligations under these agreements. If interest rates rise during a reverse repurchase agreement, it may adversely affect the Portfolio's ability to maintain a stable net asset value. The aggregate of these agreements is limited as set forth under "Investment Limitations." Reverse repurchase agreements are considered to be borrowings and are subject to the percentage limitations on borrowings set forth in "Investment Limitations." WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase securities on a when-issued or delayed delivery basis. In such transactions, instruments are bought with payment and delivery taking place in the future in order to secure what is considered to be an advantageous yield or price at the time of the transaction. Delivery of and payment for these securities may take as long as a month or more after the date of the purchase commitment but will take place no more than 120 days after the trade date. Each Portfolio will maintain with the Custodian a separate account with a segregated portfolio of high-grade debt securities or cash in an amount at least equal to these commitments. The payment obligation and the interest rates that will be received are each fixed at the time a Portfolio enters into the commitment and no interest accrues to the Portfolio 22 until settlement. Thus, it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. It is a fundamental policy of the Money Market Portfolio and a current policy of the Municipal Money Market Portfolio not to enter into when-issued commitments exceeding, in the aggregate, 15% of the market value of the Portfolio's total assets less liabilities other than the obligations created by these commitments. TAXABLE INVESTMENTS FOR THE MUNICIPAL BOND AND MUNICIPAL MONEY MARKET PORTFOLIOS. The Municipal Bond and Municipal Money Market Portfolios attempt to invest 80% and 100%, respectively, of their assets in tax-exempt municipal securities. However, the Portfolios are permitted to invest up to 20% of the value of their total assets in securities, the interest income of which is subject to federal income tax. Either Portfolio may make taxable investments pending investment of proceeds from sales of its shares or portfolio securities or pending settlement of purchases of portfolio securities in order to maintain liquidity to meet redemptions or when it is advisable in the Adviser's opinion because of adverse market conditions. The taxable investments permitted for either Portfolio include obligations of the U.S. Government and its agencies and instrumentalities, bank obligations, commercial paper and repurchase agreements. Fees from loans of tax-exempt securities will also be taxable income of the Portfolio. See "Taxes." FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In order to remain fully invested and to reduce transaction costs, each Portfolio, except the Global Fixed Income and Real Yield Portfolios, may utilize appropriate stock futures contracts and options on futures contracts to a limited extent. Because transaction costs associated with futures and options may be lower than the costs of investing in stocks directly, it is expected that the use of index futures and options to facilitate cash flows may reduce a Portfolio's overall transaction costs. The Portfolios will engage in futures and options on futures transactions only for hedging purposes. Each Portfolio may enter into futures contracts and options on futures provided that not more than 5% of its total assets are required as deposit to secure obligations under such contracts, and provided further that not more than 20% of its total assets are invested, in the aggregate, in futures contracts and options on futures. The primary risks associated with the use of futures and options on futures are (i) imperfect correlation between the change in market value of the stocks held by the Portfolio and the prices of futures and options relating to the stocks purchased or sold by the Portfolio; and (ii) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures position which could have an adverse impact on the Portfolio's ability to hedge. In the opinion of the Board of Directors, the risk that the Portfolio will be unable to close out a futures position or options contract will be minimized by only entering into futures contracts or options transactions for which there appears to be a liquid secondary market. For more detailed information about futures transactions, see "Investment Objectives and Policies" in the Statement of Additional Information. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fixed Income, Global Fixed Income, High Yield and Real Yield Portfolios may enter into forward foreign currency exchange contracts ("forward contracts") that provide for the purchase or sale of an amount of a specified currency at a future date. Purposes for which such contracts may be used include protecting against a decline in a foreign currency against the U.S. dollar between the trade date and settlement date when the Portfolio purchases or sells securities, locking in the U.S. dollar value of dividends and interest on securities held by the Portfolio and generally protecting the U.S. dollar value of securities held by a Portfolio declared against exchange rate fluctuation. Such contracts may also be used as a protective measure against the effects of fluctuating rates of currency exchange and exchange control regulations. While such forward contracts may limit losses to a portfolio as a result of exchange rate fluctuations, they will also limit any gains that may otherwise have been realized. See "Investment Objectives and Policies -- 23 Forward Currency Exchange Contracts" in the Statement of Additional Information. Except in circumstances where segregated accounts are not required by the 1940 Act and the rules adopted thereunder, the Portfolio's Custodian will place cash, U.S. government securities, or high-grade debt securities into a segregated account of a Portfolio in an amount equal to the value of such Portfolio's total assets committed to the consummation of forward foreign currency exchange contracts. If the value of the securities placed in the segregated account declines, additional cash or securities will be placed in the account on a daily basis so that the value of the account will be at least equal to the amount of such Portfolio's commitments with respect to such contracts. See "Investment Objectives and Policies -- Forward Foreign Currency Exchange Contracts" in the Statement of Additional Information. MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money market instruments, although each Portfolio intends to stay invested in securities satisfying its primary investment objective to the extent practical. Each Portfolio may make money market investments pending other investment or settlement for liquidity, or in adverse market conditions. The money market investments permitted for the Portfolios include obligations of the U.S. Government and its agencies and instrumentalities, obligations of foreign sovereignties, other debt securities, commercial paper including bank obligations, certificates of deposit (including Eurodollar certificates of deposit) and repurchase agreements. For more detailed information about these money market investments, see "Description of Securities and Ratings" in the Statement of Additional Information. NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES. The High-Yield Portfolio may not invest more than 15% of its total assets in illiquid securities, including securities for which there is no readily available securities market nor more than 10% of its total assets in securities that are restricted from sale to the public without registration ("Restricted Securities") under the Securities Act of 1933 (the "1933 Act"). Nevertheless, subject to the foregoing limit on illiquid securities, the Portfolio may invest up to 20% of its total assets in Restricted Securities that can be offered and sold to qualified institutional buyers under Rule 144A under that Act ("144A Securities"). The Board of Directors has adopted guidelines and delegated to the Adviser, subject to the supervision of the Board of Directors, the daily function of determining and monitoring the liquidity of 144A securities. Rule 144A securities may become illiquid if qualified institutional buyers are not interested in acquiring the securities. Investors should note that investments in excess of 5% of the Portfolio's total assets may be considered a speculative activity and may involve greater risk and expense to the Portfolio. FOREIGN INVESTMENT RISK FACTORS. The Fixed Income and High Yield Portfolios may invest in U.S. dollar-denominated securities of foreign issuers trading in U.S. markets and in non-U.S. dollar-denominated obligations of foreign issuers. The Money Market Portfolio may invest in U.S. dollar-denominated commercial paper issued by a foreign corporation that is a direct parent or subsidiary of a U.S. corporation. Investment in obligations of foreign issuers and in foreign branches of domestic banks involves somewhat different investment risks than those affecting obligations of U.S. issuers. There may be limited publicly available information with respect to foreign issuers, and foreign issuers are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to domestic companies. Brokerage commissions and other transaction costs on foreign securities exchanges are generally higher than in the U.S. Dividends and interest paid by foreign issuers may be subject to withholding and other foreign taxes, which may decrease the net return on foreign investments as compared to dividends and interest paid to the Portfolio by domestic companies. It is not expected that a Portfolio or its shareholders would be able to claim a credit for U.S. tax purposes with respect to any such foreign taxes. See "Taxes." Additional risks include future political and economic developments, the possibility that a foreign jurisdiction might impose or change withholding taxes on 24 income payable with respect to foreign securities, possible seizure, nationalization or expropriation of the foreign issuer or foreign deposits, and the possible adoption of foreign governmental restrictions such as exchange controls. Many of the foreign countries described above may have less stable political environments than more developed countries. Also, it may be more difficult to obtain a judgment in a court outside the United States. Investments in securities of foreign issuers are frequently denominated in foreign currencies, and since the Portfolios may temporarily hold uninvested reserves in bank deposits in foreign currencies. Therefore, the value of each Portfolio's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations, and the Portfolios may incur costs in connection with conversions between various currencies. INVESTMENT LIMITATIONS As a diversified investment company, each Portfolio, except the Global Fixed Income and Real Yield Portfolios, is subject to the following limitations: (a) as to 75% of its total assets, a Portfolio may not invest more than 5% of its total assets in the securities of any one issuer, except obligations of the U.S. Government and its agencies and instrumentalities, and (b) a Portfolio may not own more than 10% of the outstanding voting securities of any one issuer. The Global Fixed Income and Real Yield Portfolios are non-diversified investment companies under the Investment Company Act of 1940, as amended (the "1940 Act"), which means the Global Fixed Income and Real Yield Portfolios are not limited by the 1940 Act in the proportion of their respective total assets that may be invested in the obligations of a single issuer. Thus, the Global Fixed Income and Real Yield Portfolios may invest a greater proportion of their respective total assets in the securities of a smaller number of issuers and, as a result, will be subject to greater risk with respect to their respective portfolio securities. The Global Fixed Income and Real Yield Portfolios, however, intend to comply with the diversification requirements imposed by the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company. See "Taxes." Each Portfolio also operates under certain investment restrictions that are deemed fundamental limitations and may be changed only with the approval of the holders of a majority of such Portfolio's outstanding shares. See "Investment Limitations" in the Statement of Additional Information. In addition, each Portfolio operates under certain non-fundamental investment limitations as described below and in the Statement of Additional Information. Each Portfolio may not (i) enter into repurchase agreements with more than seven days to maturity if, as a result, more than 15% of the market value of the Portfolio's total assets would be invested in such repurchase agreements and other investments for which market quotations are not readily available or which are otherwise illiquid, except that the limitation is 5% for the Municipal Money Market Portfolio; (ii) borrow money, except from banks for extraordinary or emergency purposes, and then only in amounts up to 10% (which includes reverse repurchase agreements) of the value of the Portfolio's total assets, taken at cost at the time of borrowing; or purchase securities while borrowings exceed 5% (which includes reverse repurchase agreements) of its total assets, or mortgage, pledge or hypothecate any assets except in connection with any such borrowing in amounts up to 10% of the value of the Portfolio's net assets at the time of borrowing; (iii) invest in fixed time deposits with a duration of over seven calendar days; or (iv) invest in fixed time deposits with a duration of from two business days to seven calendar days if more than 5% of the Portfolio's total assets would be invested in these 25 deposits. Furthermore, the Money Market Portfolio may not enter into reverse repurchase agreements exceeding, in the aggregate, one-third of the market value of the Portfolio's total assets, less liabilities other than obligations created by these agreements; and the Municipal Money Market Portfolio may not purchase private activity bonds if, as a result, more than 5% of the Portfolio's total assets would be invested in private activity bonds where payment of principal and interest are the responsibility of companies with fewer than three years of operating history (including predecessors). MANAGEMENT OF THE FUND INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment Adviser and Administrator of the Fund and each of its portfolios. The Adviser provides investment advice and portfolio management services pursuant to an Investment Advisory Agreement and, subject to the supervision of the Fund's Board of Directors, makes the portfolio's day-to-day investment decisions, arranges for the execution of portfolio transactions and generally manages the portfolio's investments. The Adviser is entitled to receive from each Portfolio an annual investment advisory fee, payable quarterly, equal to the percentage of average daily net assets of the respective Portfolio set forth in the table below. However, the Adviser has agreed to a reduction in the fees payable to it as Adviser, and to reimburse the Portfolios, if necessary, if such fees would cause the total annual operating expenses of any Portfolio to exceed the maximum set forth in the table below.
INVESTMENT MAXIMUM TOTAL ADVISORY OPERATING EXPENSES PORTFOLIO FEE AFTER FEE WAIVERS - ------------------------------ ------------- ------------------- Fixed Income 0.35% 0.45% Global Fixed Income 0.40% 0.50% Municipal Bond 0.35% 0.45% Mortgage-Backed Securities 0.35% 0.45% High Yield 0.50% 0.75% Real Yield 0.50% 0.75% Money Market 0.30% 0.55% Municipal Money Market 0.30% 0.57%
The Adviser, with principal offices at 1221 Avenue of the Americas, New York, New York 10020, conducts a worldwide portfolio management business, providing a broad range of portfolio management services to customers in the U.S. and abroad. At December 31, 1994, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $48.7 billion, including approximately $35.6 billion under active management and $13.1 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. PORTFOLIO MANAGERS. The following persons have primary responsibility for managing the Portfolios indicated. FIXED INCOME PORTFOLIO -- WARREN ACKERMAN, III. Warren Ackerman is a Principal of the Advisor and a Senior Fixed Income Portfolio Manager. Mr. Ackerman joined the Advisor in December 1993. Prior to joining the Advisor, Mr. Ackerman spent over 14 years with Bankers Trust Company as a Managing Director responsible for institutional active fixed income management. Prior to Bankers, he spent almost seven years as a Vice 26 President with Irving Trust Company in the Trust Investment Division. Mr. Ackerman is a graduate of Monmouth College with a BS in Economics. Mr. Ackerman has had primary responsibility for managing the Portfolio's assets since March 1994. GLOBAL FIXED INCOME PORTFOLIO -- MICHAEL J. SMITH AND ROBERT M. SMITH. Michael Smith joined the Adviser as a Fixed Income Manager in 1990. Mr. Smith became a Vice President of Morgan Stanley in 1992 and has been primarily responsible for managing the Portfolio's assets since January 1993. He was previously employed by Gartmore Investment Management where he had day-to-day responsibility for the management of global and European fixed-income and money market funds. Prior to his three years at Gartmore, Mr. Smith spent four years with Legal & General Investment as an analyst and fund manager responsible for the fixed-income portion of several large segregated funds. Mr. Smith is a graduate of Exeter University, England. Robert Smith joined the Adviser as Vice President in June 1994 and has been primarily responsible for managing the Portfolio's assets since July 1994. Prior to joining the Adviser he spent eight years as Senior Portfolio Manager -- Fixed Income at the State of Florida Pension Fund. Mr. Smith's responsibilities included active total-rate-of-return management of long term portfolios and supervision of other fixed income managers. A graduate of Florida State University with a BS in Business, Mr. Smith also received an MBA -- Finance from Florida State and holds a Chartered Financial Analyst (CFA) designation. MUNICIPAL BOND PORTFOLIO -- LORI A. COHANE. Lori A. Cohane joined the Adviser in 1994 as a Vice President and Municipal Bond Portfolio Manager. Prior to joining the Adviser, Ms. Cohane spent eight years with Salomon Brothers Asset Management as a Vice President, Portfolio Manager and Senior Credit Analyst of municipal bond accounts managing portfolios for high net worth individuals, open- and closed-end bond funds and institutional accounts. Ms. Cohane is a magna cum laude graduate of the State University of New York at Albany with a B.S. degree in Finance and Economics. Ms. Cohane has had primary responsibility for managing the Portfolio's assets since its inception. MORTGAGE-BACKED SECURITIES PORTFOLIO -- WARREN ACKERMAN, III. Information about Mr. Ackerman is included under Fixed Income Portfolio above. Mr. Ackerman has had primary responsibility for managing the Portfolio's assets since its inception. HIGH YIELD PORTFOLIO -- ROBERT ANGEVINE. Robert Angevine is a Principal of the Adviser and the Portfolio Manager for high yield investments. Prior to joining the Adviser in October 1988, he spent over eight years at Prudential Insurance where he was responsible for the largest open-end high yield mutual fund in the country. Mr. Angevine also manages high yield assets for one of the largest corporate pension funds in the country. His other experience includes international treasury operations at a major pharmaceutical company and commercial banking. Mr. Angevine received an M.B.A. from Fairleigh Dickinson University and a B.A. in Economics from Lafayette College. He served two years as a Lieutenant in the U.S. Army. Mr. Angevine has had primary responsibility for managing the Portfolio's assets since September, 1992. REAL YIELD PORTFOLIO -- MICHAEL J. SMITH. Information about Michael J. Smith is included under the Global Fixed Income Portfolio above. Mr. Smith has been primarily responsible for managing the Portfolio's assets since its inception. MONEY MARKET PORTFOLIO -- GERALD BARTH, ABIGAIL JONES FEDER AND KENNETH R. HOLLEY. Gerald P. Barth joined the Adviser in 1987 to establish the short to intermediate-term taxable cash management area and to manage the tax-exempt municipal bond portfolio. He became a Vice President in 1989 and a Principal in 1991. He has had primary management responsibility for the Investment Fund since its inception. Prior to joining the 27 Adviser, Mr. Barth was Director of Investments at Subaru of America for five years, where he managed both the short and intermediate-term corporate cash portfolios. He began his career at Arthur Andersen in the audit department and spent two years in the tax department. He earned a B.S. in Accounting from LaSalle College and became a Certified Public Accountant in 1977. Abigail Feder is a Vice President in the Adviser's Fixed Income Group. She is responsible for managing short-term taxable and tax-exempt portfolios. Ms. Feder joined Morgan Stanley's Corporate Finance Department in 1985. In 1987 she joined the Adviser as a Marketing Analyst and was promoted to a Marketing Director in 1988. She joined the Fixed Income Group as a Portfolio Manager in 1989 and she became a Vice President in 1992. Ms. Feder holds a BA from Vassar College. Kenneth R. Holley joined the Adviser as a short-term fixed income portfolio manager in July, 1993. Prior thereto, he worked for 2 1/2 years as a Finance Officer for the African Development Bank implementing trading strategies for the bank's $1 billion short to intermediate US dollar portfolio. Prior to joining the ADB, Mr. Holley spent 1 1/2 years with Ward and Associates Asset Management as a Vice President responsible for fixed income strategy. Before Ward and Associates he worked in the fixed income department of Salomon Brothers, Inc. Mr. Holley holds a BS degree in Engineering from University of Pennsylvania and an MBA from the Wharton School. Mr. Barth and Ms. Feder have had primary responsibility for managing the Portfolio's assets since inception. Mr. Holley has shared primary responsibility for managing the Portfolio's assets since August, 1993. MUNICIPAL MONEY MARKET PORTFOLIO -- GERALD P. BARTH AND ABIGAIL JONES FEDER. Information about Mr. Barth and Ms. Feder is included under Money Market Bond Portfolio above. Mr. Barth and Ms. Feder have shared primary responsibility for managing the Portfolio's assets since inception. ADMINISTRATOR. The Adviser also provides the Fund with administrative services pursuant to an Administration Agreement. The services provided under the Administration Agreement are subject to the supervision of the Officers and the Board of Directors of the Fund, and include day-to-day administration of matters related to the corporate existence of the Fund, maintenance of its records, preparation of reports, supervision of the Fund's arrangements with its custodian, and assistance in the preparation of the Fund's registration statements under Federal and State laws. The Administration Agreement also provides that the Administrator through its agents will provide the Fund with dividend disbursing and transfer agent services. For its services under the Administration Agreement, the Fund pays the Adviser a monthly fee which on an annual basis equals .15% of the average daily net assets of each Portfolio. Under the U.S. Trust Administration Agreement between the Adviser and United States Trust Company of New York ("U.S. Trust"), U.S. Trust has agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegates its responsibilities to Mutual Funds Service Company ("MFSC"), a subsidiary of U.S. Trust, that provides certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by MFSC. The services provided under the Administration Agreement and the U.S. Trust Administration Agreement are also subject to the supervision of the Board of Directors of the Fund. The Board of Directors of the Fund has approved the provision of services described above pursuant to the Administration Agreement and the U.S. Trust Administration Agreement as being in the best interests of the Fund. MFSC's business address is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information regarding the Administration Agreement or the U.S. Trust Administration Agreement, see "Management of the Fund" in the Statement of Additional Information. 28 DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation, the Board of Directors decides upon matters of general policy and reviews the actions of the Fund's Adviser, Administrator and Distributor. The Officers of the Fund conduct and supervise its daily business operations. DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the shares of the Fund. Under its Distribution Agreement with the Fund, Morgan Stanley sells shares of each Portfolio upon the terms and at the current offering price described in this Prospectus. Morgan Stanley is not obligated to sell any certain number of shares of any Portfolio and receives no compensation for its distribution services. EXPENSES. Each Portfolio is responsible for payment of certain other fees and expenses (including legal fees, accountants' fees, custodial fees and printing and mailing costs) specified in the Administration and Distribution Agreements. PURCHASE OF SHARES Shares of each Portfolio may be purchased without sales commission at the net asset value per share next determined after receipt of the purchase order and, in the case of the Money Market and Municipal Money Market Portfolios, at the price next determined after Federal Funds are available to the Portfolio. See "Valuation of Shares." INITIAL INVESTMENTS 1) BY CHECK. An account may be opened by completing and signing an Account Registration Form and mailing it, together with a check ($500,000 minimum for the Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed Securities, High Yield and Real Yield Portfolios; $50,000 minimum for the Money Market and Municipal Money Market Portfolios; with certain exceptions for Morgan Stanley employees and select customers, including those who participate in the Automatic Purchase of Portfolio Shares program described below) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio name]", to: Morgan Stanley Institutional Fund, Inc. P.O. Box 2798 Boston, Massachusetts 02208-2798 Payment will be accepted only in U.S. dollars, unless prior approval for payment by other currencies is given by the Fund. The portfolio(s) to be purchased should be designated on the Account Registration Form. For purchases by check, the Fund is ordinarily credited with Federal Funds within one business day. Thus your purchase of shares by check is ordinarily credited to your account at the net asset value per share of the relevant Portfolio determined on the next business day after receipt. 2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal Funds to the Fund's bank account. In order to ensure prompt receipt of your Federal Funds Wire, it is important that you follow these steps: A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your name, address, telephone number, Social Security or Tax Identification Number, the portfolio(s) selected, the amount being wired, and by which bank. We will then provide you with a Fund account number. (Investors with existing accounts should also notify the Fund prior to wiring funds.) 29 B. Instruct your bank to wire the specified amount to the Fund's Wire Concentration Bank Account (be sure to have your bank include the name of the portfolio(s) selected and the account number assigned to you): United States Trust Company of New York 114 West 47th Street New York, NY 10036 ABA #0210-0131-8 DDA #20-9310-3 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (portfolio name, your account number, your account name) Please call before wiring funds: 1-800-548-7786 C. Complete the Account Registration Form and mail it to the address shown thereon. Federal Funds purchase orders will be accepted only on a day on which the Fund and United States Trust Company of New York (the "Custodian Bank") are open for business. Share purchases of the Money Market Portfolio in Federal Funds received by 12:00 noon (Eastern Time), and share purchases of the Municipal Money Market Portfolio in Federal Funds received by 11:00 a.m. (Eastern Time) will begin to earn income on the day of receipt.Your bank may charge a service fee for wiring funds. 3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire" above must be followed in purchasing shares by bank wire. However, money transferred by bank wire may or may not be converted into Federal Funds the same day, depending on the time the money is received and the bank handling the wire. Prior to such conversion, an investor's money will not be invested. For the Money Market and Municipal Money Market Portfolios, if money is not converted the same day, it will be converted the next business day and shares will be purchased at the net asset value next determined after such conversion. Your bank may charge a service fee for wiring funds. 4) AUTOMATIC PURCHASE OF PORTFOLIO SHARES. Free cash balances, (i.e., any cash that is available on demand at the close of the previous business day) which are held in certain eligible accounts at Morgan Stanley Asset Management Inc., Morgan Stanley or any other affiliated investment adviser or broker, and which are selected at the discretion of the Adviser, will be automatically invested on the next business day at net asset value in shares of the Money Market Portfolio or the Municipal Money Market Portfolio. A shareholder may elect in writing from time to time in which portfolio to invest. This automatic purchase facility permits certain eligible investment management and brokerage customers of Morgan Stanley to have their free cash balances invested in portfolio shares on a daily basis pending other investments. ADDITIONAL INVESTMENTS You may add to your account at any time (minimum additional investment $1,000 for each portfolio, except for automatic reinvestment of dividends and capital gains distributions for which there are no minimums) by purchasing shares at net asset value by mailing a check to the Fund (payable to "Morgan Stanley Institutional Fund, Inc. -- [Portfolio name]") at the above address or by wiring monies to the Custodian Bank as outlined above. It is very important that your account name and portfolio name be specified in the letter or wire to assure proper crediting to your account. In order to ensure that your wire orders are invested promptly, you are requested to notify one of the Fund's representatives (toll-free 1-800-548-7786) prior to the wire date. 30 OTHER PURCHASE INFORMATION The purchase price of the shares of each portfolio is the net asset value next determined after the order is received. See "Valuation of Shares." An order to purchase shares of the Fixed Income, Municipal Bond, Mortgage-Backed Securities or High Yield Portfolios received prior to the regular close of the New York Stock Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the price computed on the date of receipt; an order received after the regular close of the NYSE will be executed at the price computed the next day the NYSE is open. Orders for the purchase of shares of the Money Market Portfolio or Municipal Money Market Portfolio become effective on the business day Federal Funds are received, and the purchase will be effected at the net asset value next computed after receipt. In the interest of economy and convenience, and because of the operating procedures of the Fund, certificates representing shares of the Portfolio(s) will not be issued. All shares purchased are confirmed to you and credited to your account on the Fund's books maintained by the Adviser or its agents. You will have the same rights and ownership with respect to such shares as if certificates had been issued. To assure that checks are collected by the Fund, withdrawals of investments made by check are not presently permitted until payment for the purchase has been received which may take up to eight business days after the date of purchase. As a condition of this offering, if a purchase is cancelled due to nonpayment or because your check does not clear, you will be responsible for any loss the Fund or its agents incur. If you are already a shareholder, the Fund may redeem shares from your account(s) to reimburse the Fund or its agents for any loss. In addition, you may be prohibited or restricted from making future investments in the Fund. Investors may also invest in the Fund by purchasing shares through registered broker-dealers. Broker-dealers who make purchases for their customers may charge a fee for such services. REDEMPTION OF SHARES You may withdraw all or any portion of the amount in your account by redeeming shares at any time. Please note that purchases made by check are not permitted to be redeemed until payment of the purchase has been collected, which may take up to eight business days after purchase. The Fund will redeem shares of each Portfolio at its next determined net asset value. On days that both the NYSE and the Custodian Bank are open for business, the net asset value per share of the Fixed Income, Municipal Bond, Mortgage-Backed Securities and High Yield Portfolios is determined at the regular close of trading of the NYSE (currently 4:00 p.m. Eastern Time), and the net asset value per share of the Municipal Money Market Portfolio is determined at 11:00 a.m. (Eastern Time) and the net asset value per share of the Money Market Portfolio is determined at 12:00 p.m. (Eastern Time). Shares of a Portfolio may be redeemed by mail or telephone. No charge is made for redemption. Any redemption may be more or less than the purchase price of your shares depending on, among other factors, the market value of the investment securities held by the Portfolio. BY MAIL Each Portfolio will redeem its shares at the net asset value next determined after your request is received if the request is received in "good order." Your request should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798, except that deliveries by overnight courier should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108. 31 "Good order" means that the request to redeem shares must include the following documentation: (a) A letter of instruction or a stock assignment specifying the number of shares or dollar amount to be redeemed, signed by all registered owners of the shares in the exact names in which they are registered; (b) Any required signature guarantees (see "Further Redemption Information" below); and (c) Other supporting legal documents, if required, in the case of estates, trusts, guardianships, custodianships, corporations, pension and profit-sharing plans and other organizations. Shareholders who are uncertain of requirements for redemption should consult with a Morgan Stanley Institutional Fund representative. BY TELEPHONE Provided you have previously elected the Telephone Redemption Option on the Account Registration Form, you can request a redemption of your shares by calling the Fund and requesting the redemption proceeds be mailed to you or wired to your bank. Please contact one of Morgan Stanley Institutional Fund's representatives for further details. In times of drastic market conditions, the telephone redemption option may be difficult to implement. If you experience difficulty in making a telephone redemption, your request may be made by mail or overnight courier and will be implemented at the net asset value next determined after it is received. Redemption requests sent to the Fund through overnight courier must be sent to Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 01208. The Fund and the Fund's transfer agent (the "Transfer Agent") will employ reasonable procedures to confirm that the instructions communicated by telephone are genuine. These procedures include requiring the investor to provide certain personal identification information at the time an account is opened and prior to effecting each transaction requested by telephone. In addition, all telephone transaction requests will be recorded and investors may be required to provide additional telecopied written instructions regarding transaction requests. Neither the Fund nor the Transfer Agent will be responsible for any loss, liability, cost or expense for following instructions received by telephone that either of them reasonably believes to be genuine. To change the name of the commercial bank or account designated to receive redemption proceeds, a written request must be sent to the Fund at the address above. Requests to change the bank or account must be signed by each shareholder and each signature must be guaranteed. FURTHER REDEMPTION INFORMATION Normally the Fund will make payment for all shares redeemed within one business day of receipt of the request, but in no event will payment be made more than seven days after receipt of a redemption request in good order. However, payments to investors redeeming shares which were purchased by check will not be made until payment for the purchase has been collected, which may take up to 8 days after the date of purchase. The Fund may suspend the right of redemption or postpone the date upon which redemptions are effected at times when the NYSE is closed, or under any emergency circumstances as determined by the Securities and Exchange Commission (the "Commission"). If the Board of Directors determines that it would be detrimental to the best interests of the remaining shareholders of a Portfolio to make payment wholly or partly in cash, the Fund may pay the redemption proceeds 32 in whole or in part by a distribution-in-kind of securities held by a Portfolio in lieu of cash in conformity with applicable rules of the Commission. Distributions-in-kind will be made in readily marketable securities. Investors may incur brokerage charges on the sale of Portfolio securities so received in payment of redemptions. Due to the relatively high cost of maintaining smaller accounts, the Fund reserves the right to redeem shares in any account invested in the Fixed Income, Municipal Bond, Mortgage-Backed Securities or High Yield Portfolio having a value of less than $500,000, or in the Money Market or Municipal Money Market Portfolio having a value of less than $10,000 (the net asset value of which will be promptly paid to the shareholder). The Fund, however, will not redeem shares based solely upon market reductions in net asset value. If at any time your total investment does not equal or exceed the stated minimum value, you may be notified of this fact and you will be allowed at least 60 days to make an additional investment before the redemption is processed. To protect your account, the Fund and its agents from fraud, signature guarantees are required for certain redemptions to verify the identity of the person who has authorized a redemption from your account. Please contact the Fund for further information. See "Redemption of Shares" in the Statement of Additional Information. SHAREHOLDER SERVICES EXCHANGE PRIVILEGE You may exchange shares that you own in each Portfolio for shares of any other available portfolio(s) of the Fund (except the International Equity Portfolio). Shares of the Portfolios may be exchanged by mail or telephone. Before you make an exchange, you should read the prospectus of the portfolio(s) in which you seek to invest. Because an exchange transaction is treated as a redemption followed by a purchase, an exchange would be considered a taxable event. The exchange privilege is only available with respect to portfolios that are registered for sale in a shareholder's state of residence. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name and account number of your current Portfolio, the name of the portfolio(s) into which you intend to exchange shares, and the signatures of all registered account holders. Send the exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, MA 02208-2798. BY TELEPHONE When exchanging shares by telephone, have ready the name and account number of the current Portfolio, the name of the Portfolio into which you intend to exchange shares, your Social Security number or Tax I.D. number, and your account address. Requests for telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at the close of business that same day based on the net asset value of each of the portfolios at the close of business. Requests received after 4:00 p.m. are processed the next business day based on the net asset value determined at the close of such day. For additional information regarding responsibility for the authenticity of telephoned instructions, see "Redemption of Shares -- By Telephone" above. TRANSFER OF REGISTRATION You may transfer the registration of any of your Fund shares to another person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. As in the case of redemptions, the written request must be received in good order before any transfer can be made. 33 VALUATION OF SHARES The net asset value per share of each of the Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed Securities, High Yield and Real Yield Portfolios (the "Non-Money Portfolios") is determined by dividing the total market value of the Non-Money Portfolio's investments and other assets, less all liabilities, by the number of total outstanding shares of the Portfolio. Net asset value per share of the Non-Money Portfolios is determined as of the regular close of the NYSE on each day that the NYSE is open for business. Securities listed on a U.S. securities exchange for which market quotations are available are valued at the last quoted sale price on the day the valuation is made. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities listed on a foreign exchange are valued at their closing price. Unlisted securities and listed securities not traded on the valuation date for which market quotations are not readily available are valued at a price within a range not exceeding the current asked price nor less than the current bid price. The current bid and asked prices are determined either based on the bid and asked prices quoted on such valuation date by two reputable brokers or as provided by a reliable pricing service. Bonds and other fixed income securities are valued according to the broadest and most representative market, which will ordinarily be the over-the-counter market. Net asset value includes interest on fixed income securities, which is accrued daily unless collection is in doubt. In addition, bonds and other fixed income securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. The prices provided by a pricing service are determined without regard to bid or last sale prices, but take into account institutional size trading in similar groups of securities and any developments related to the specific securities. Securities not priced in this manner are valued at the most recently quoted bid price, or, when securities exchange valuations are used, at the latest quoted sale price on the day of valuation. If there is no such reported sale, the latest quoted bid price will be used. Debt securities purchased with remaining maturities of 60 days or less are valued at amortized cost, if it approximates market value. In the event that amortized cost does not approximate market value, market prices as determined above will be used. The value of other assets and securities for which no quotations are readily available (including restricted and unlisted foreign securities) and those securities for which it is inappropriate to determine prices in accordance with the above-stated procedures are determined in good faith at fair value using methods determined by the Board of Directors. For purposes of calculating net asset value per share, all assets and liabilities initially expressed in foreign currencies will be converted into U.S. dollars at the mean of the bid price and asked price for such currencies against the U.S. dollar last quoted by any major bank. The net asset value per share of each of the Money Market and Municipal Money Market Portfolios is determined by subtracting the Portfolio's liabilities (including accrued expenses and dividends payable) from the total value of the Portfolio's investments and other assets and dividing the result by the total number of outstanding shares of the Portfolio. The net asset values per share of the Municipal Money Market Portfolio and the Money Market Portfolio are determined at 11:00 a.m. and 12:00 noon (Eastern Time), respectively, on the days on which the NYSE is open. For the purpose of calculating each Portfolio's net asset value per share, securities are valued by the "amortized cost" method of valuation, which does not take into account unrealized gains or losses. This involves valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of 34 the instrument. While this method provides certainty in valuation, it may result in periods during which the value, as determined by amortized cost, is higher or lower than the price the Portfolio would receive if it sold the instrument. PERFORMANCE INFORMATION The Fund may from time to time advertise total return of the Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed Securities, High Yield and Real Yield Portfolios. In addition, from time to time the Fund may advertise "yield" for the Global Fixed Income, Municipal Bond, High Yield, Real Yield, Money Market and Municipal Money Market Portfolios and "effective yield" for the Money Market and Municipal Money Market Portfolios. In addition to these yield figures, the Municipal Bond and Municipal Money Market Portfolio may advertise a tax equivalent yield. THESE FIGURES ARE BASED ON HISTORICAL PERFORMANCE AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in the Portfolio would have earned over a specified period of time (such as one, five or ten years) assuming that all distributions and dividends by the Portfolio were reinvested on the reinvestment dates during the period. Total return does not take into account any federal or state income taxes that may be payable on dividends and distributions or upon redemption. The "yield" of the Global Fixed Income, Municipal Bond, High Yield and Real Yield Portfolios refers to the income generated by an investment in the Portfolio over a one-month or 30-day period, while the "yield" of the Money Market and Municipal Money Market Portfolios refers to the income generated by an investment in the Portfolio over a seven-day period (which period will be stated in the advertisement). This income is then "annualized." That is, the amount of income generated by the investment during that 30 or seven day period is assumed to be generated each 30-day period for twelve periods or each week over a 52-week period, and is shown as a percentage of the investment. The "effective yield" is calculated similarly but, when annualized, the income earned on an investment in the Portfolio is assumed to be reinvested. The "effective yield" will be slightly higher than the "yield" because of the compounding effect of this assumed reinvestment. A "tax equivalent yield" is the "yield" of the Portfolio increased by an amount based on an assumed rate of tax for a shareholder. For further information concerning these figures, see "Calculation of Yield and Total Return" in the Statement of Additional Information. The Fund may also use comparative performance information in marketing the Portfolios' shares, including data from Lipper Analytical Services, Inc., Donoghue's Money Fund Report, other industry publications, business periodicals, rating services and market indices. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS FIXED INCOME, GLOBAL FIXED INCOME, MUNICIPAL BOND, MORTGAGE-BACKED SECURITIES, HIGH YIELD AND REAL YIELD PORTFOLIOS All income dividends and capital gains distributions will automatically be reinvested in additional shares at net asset value, except that, upon written notice to the Fund or by checking off the appropriate box in the Distribution Option Section on the Account Registration Form, a shareholder may elect to receive income dividends and capital gains distributions in cash. Each of the Portfolios, except the Global Fixed Income and Real Yield Portfolios, expects to distribute substantially all of its net investment income in the form of monthly dividends and each of the Global Fixed Income and Real Yield Portfolios expects to distribute substantially all of its net investment income in the form of quarterly dividends. Net capital gains of each Portfolio, if any, will also be distributed annually. Confirmations of the purchases of shares of the Portfolios through the automatic reinvestment of income dividends and capital 35 gains distributions will be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of 1934, as amended, on the next quarterly client statement following such purchases of shares. Consequently, confirmations of such purchases will not be provided at the time of completion of such purchases as might otherwise be required by Rule 10b-10. Undistributed net investment income is included in a Portfolio's net assets for the purpose of calculating net asset value per share. Therefore, on the "ex-dividend" date, the net asset value per share excludes the dividend (I.E., is reduced by the per share amount of the dividend). Dividends paid shortly after the purchase of shares by an investor, although in effect a return of capital, are taxable to shareholders. MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS Net investment income is computed and dividends declared as of 1:00 p.m. (Eastern time), on each day. Such dividends are payable to Municipal Money Market Portfolio shareholders of record as of 11:00 a.m. (Eastern time) on that day and to Money Market Portfolio shareholders of record as of 12:00 noon (Eastern time) on that day, if the Fund and Custodian Bank are open for business. This means that shareholders whose purchase orders become effective as of 12:00 noon (for the Money Market Portfolio) or 11:00 a.m. (for the Municipal Money Market Portfolio) receive the dividend for that day. Dividends declared for Saturdays, Sundays and holidays are payable to shareholders of record as of 4:00 p.m. on the last preceding day the Fund and its Custodian Bank were open for business. For the purpose of calculating dividends, net income of each Portfolio shall consist of interest earned, including any discount or premium ratably amortized to the date of maturity, minus estimated expenses of the Portfolio. Each Portfolio's daily dividends are accrued throughout the month and are distributed on the fifteenth calendar day of each month (or next business day if the fifteenth calendar day falls on a holiday or weekend). Dividends of each Portfolio are payable in additional shares, except that, upon written notice to the Fund or by checking off the appropriate box in the Distribution Option Section on the Account Registration Form, a shareholder may elect to receive income dividends and any capital gains distributions in cash. Each shareholder receives a monthly statement summarizing activity in the account. If at any time a shareholder wishes to withdraw all of the funds in an account, the proceeds will be sent to the shareholder by wire or check, according to the shareholder's instructions. If the withdrawal is by wire, a check in the amount of the income to the shareholder's account through the day of withdrawal will be mailed to the shareholder on the next business day. Withdrawals by check will include accrued income through the date of withdrawal. Net realized short-term capital gains, if any, of the Money Market and Municipal Money Market Portfolio are to be distributed whenever the Board of Directors determine that such distributions would be in the best interest of shareholders, but in any event, at least once a year. The Portfolios do not expect to realize any long-term capital gains. Should any such gains be realized, they will be distributed annually. It is an objective of management to maintain the price per share of the Money Market and Municipal Money Market Portfolio as computed for the purpose of sales and redemptions at exactly $1.00. In the event the Board of Directors determine that a deviation from the $1.00 per share price may exist which may result in a material dilution or other unfair results to investors or existing shareholders, they will take corrective action they 36 regard as necessary and appropriate, including the sale of instruments from a Portfolio prior to maturity to realize capital gains or losses; shortening average portfolio maturity; withholding dividends; making a special capital distribution; or redemptions of shares in kind. TAXES GENERAL The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial, or administrative action. No attempt has been made to present a detailed explanation of the federal, state, or local income tax treatment of a Portfolio or its shareholders. Accordingly, shareholders are urged to consult their tax advisors regarding specific questions as to federal, state and local income taxes. Each Portfolio is treated as a separate entity for federal income tax purposes and is not combined with the Fund's other Portfolios. Each Portfolio intends to qualify for the special tax treatment afforded regulated investment companies under Subchapter M of the Code, so that the Portfolio will be relieved of federal income tax on that part of its net investment income and net capital gain that is distributed to shareholders. Each Portfolio distributes substantially all of its net investment income (including, for this purpose, net short-term capital gain) to shareholders. Dividends from a Portfolio's net investment income (other than "exempt-interest dividends," described below) are taxable to shareholders as ordinary income, whether received in cash or in additional shares. Such dividends paid by a Portfolio will generally qualify for the 70% dividends-received deduction for corporate shareholders only to the extent of the aggregate qualifying dividend income received by the Portfolio is from U.S. corporations. Each Portfolio will report annually to its shareholders the amount of dividend income qualifying for such treatment. Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss) are taxable to shareholders as long-term capital gain, regardless of how long shareholders have held their shares. [Distributions of net investment income and net capital gain are not eligible for the corporate dividends-received deduction.] Each Portfolio sends reports annually to its shareholders of the federal income tax status of all distributions made during the preceding year. Each Portfolio intends to make sufficient distributions or deemed distributions of its ordinary income and capital gain net income (the excess of short-term and long-term capital gains over short-term and long-term capital losses) including any available capital loss carryforwards, prior to the end of each calendar year to avoid liability for federal excise tax. Dividends and other distributions declared by a Portfolio in October, November or December of any year and payable to shareholders of record on a date in such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if the distributions are paid by the Portfolio at any time during the following January. The sale or redemption of shares may result in taxable gain or loss to the redeeming shareholder, depending upon whether the fair market value of the redemption proceeds exceeds or is less than the Shareholder's adjusted basis in the redeemed shares. If capital gain distributions have been made with respect to shares that are sold at a loss after being held for six months or less, then the loss is treated as a long-term capital loss to the extent of the capital gain distributions. 37 Shareholders are urged to consult with their tax advisors concerning the application of state and local income taxes to investments in a Portfolio, which may differ from the federal income tax consequences described above. THE MUNICIPAL BOND AND MUNICIPAL MONEY MARKET PORTFOLIOS The dividends payable by the Municipal Bond and the Municipal Money Market Portfolios from net tax-exempt interest from municipal bonds and notes will qualify as "exempt-interest dividends" if, at the close of each quarter of its taxable year, at least 50% of the value of its total assets consists of securities the interest on which is excludable from gross income. Each of the Municipal Bond and Municipal Money Market Portfolios intends to invest a sufficient portion of its assets in municipal bonds and notes to qualify to pay "exempt interest dividends." Exempt-interest dividends are excludable from a shareholder's gross income for regular income tax purposes. However, the receipt of such dividends may have collateral federal income tax consequences, including alternative minimum tax consequences. In addition, the receipt of exempt-interest dividends may cause persons receiving Social Security or Railroad Retirement benefits to be taxable on a portion of such benefits. See the Statement of Additional Information. Current federal tax law limits the types of volume of bonds qualifying for the federal income tax exemption of interest, which may have an effect on the ability of the Portfolios to purchase sufficient amounts of tax-exempt securities to satisfy the Code's requirement for the payment of exempt-interest dividends. All or a portion of the interest on indebtedness incurred or continued by an investor to purchase or carry shares is not deductible for federal income tax purposes. Furthermore, entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by "private activity bonds" or "industrial development bonds" should consult their tax advisors before purchasing shares of the Portfolios. See the Statement of Additional Information. The Portfolios will report annually to their shareholders the portion of dividends that is taxable and the portion that is tax-exempt based on income received by the Portfolios during the year to which the dividends relate. The exemption of dividends paid by the Municipal Bond and Municipal Money Market Portfolio for Federal income tax purposes may not result in similar exemptions under the laws of a particular state or local taxing authority. Each of the Municipal Bond and Municipal Money Market Portfolio will report annually to its shareholders the percentage and source, on a state-by-state basis, of interest income earned on municipal bonds and municipal notes held by the Portfolio during the preceding year. THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO. PORTFOLIO TRANSACTIONS The Investment Advisory Agreement authorizes the Adviser to select the brokers or dealers that will execute the purchases and sales of investment securities for the Portfolios and directs the Adviser to use its best efforts to obtain the best available price and most favorable execution with respect to all transactions for the 38 Portfolios. The Fund has authorized the Adviser to pay higher commissions in recognition of brokerage services which, in the opinion of the Adviser, are necessary for the achievement of better execution, provided the Adviser believes this to be in the best interest of the Fund. Since shares of the Portfolios are not marketed through intermediary brokers or dealers, it is not the Fund's practice to allocate brokerage or principal business on the basis of sales of shares which may be made through such firms. However, the Adviser may place portfolio orders with qualified broker-dealers who recommend the Fund's portfolios or who act as agents in the purchase of shares of the Fund's portfolios for their clients. In purchasing and selling securities for the Portfolios, it is the Fund's policy to seek to obtain quality execution at the most favorable prices, through responsible broker-dealers. In selecting broker-dealers to execute the securities transactions for the Portfolios, consideration will be given to such factors as the price of the security, the rate of the commission, the size and difficulty of the order, the reliability, integrity, financial condition, general execution and operational capabilities of competing broker-dealers, and the brokerage and research services which they provide to the Fund. Some securities considered for investment by the Portfolios may also be appropriate for other clients served by the Adviser. If purchase or sale of securities consistent with the investment policies of a Portfolio and one or more of these other clients served by the Adviser is considered at or about the same time, transactions in such securities will be allocated among the Portfolio and clients in a manner deemed fair and reasonable by the Adviser. Although there is no specified formula for allocating such transactions, the various allocation methods used by the Adviser, and the results of such allocations, are subject to periodic review by the Fund's Directors. Subject to the overriding objective of obtaining the best possible execution of orders, the Adviser may allocate a portion of the Fund's portfolio brokerage transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order for Morgan Stanley or its affiliates to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by Morgan Stanley or such affiliates must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. Furthermore, the Board of Directors of the Fund, including a majority of the Board of Directors who are not "interested persons," as defined in the 1940 Act have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Morgan Stanley or such affiliates are consistent with the foregoing standard. Portfolio securities will not be purchased from or through, or sold to or through, the Adviser or Morgan Stanley or any "affiliated persons," as defined in the 1940 Act, of Morgan Stanley when such entities are acting as principals, except to the extent permitted by law. Although none of the Portfolios will invest for short-term trading purposes, investment securities may be sold from time to time without regard to the length of time they have been held. For each Portfolio, it is anticipated that, under normal circumstances, the annual portfolio turnover rate will not exceed 100%. High portfolio turnover involves correspondingly greater transaction costs which will be borne directly by the respective Portfolio. In addition, high portfolio turnover may result in more capital gains which would be taxable to the shareholders of the respective Portfolio. The tables set forth in "Financial Highlights" present the Portfolios' historical turnover rates. 39 GENERAL INFORMATION DESCRIPTION OF COMMON STOCK The Fund was organized as a Maryland corporation on June 16, 1988. The Articles of Incorporation permit the Fund to issue up to 15,000,000,000 shares of common stock, with $.001 par value per share. Pursuant to the Fund's Articles of Incorporation, the Board of Directors may increase the number of shares the Fund is authorized to issue without the approval of the shareholders of the Fund. The Board of Directors has the power to designate one or more classes of shares of common stock and to classify and reclassify any unissued shares with respect to such classes. The shares of each Portfolio, when issued, will be fully paid, non-assessable, fully transferable and redeemable at the option of the holder. The shares have no preference as to conversion, exchange, dividends, retirement or other features and have no pre-emptive rights. The shares of each Portfolio have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of Directors can elect 100% of the Directors if they choose to do so. Persons or organizations owning 25% or more of the outstanding shares of a Portfolio may be presumed to "control" (as that term is defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is not required to hold an annual meeting of its shareholders unless required to do so under the 1940 Act. REPORTS TO SHAREHOLDERS The Fund will send to its shareholders annual and semi-annual reports; the financial statements appearing in annual reports are audited by independent accountants. Monthly unaudited portfolio data is also available from the Fund upon request. In addition, Morgan Stanley Asset Management Inc., or its agent, as Transfer Agent, will send to each shareholder having an account directly with the Fund a monthly statement showing transactions in the account, the total number of shares owned, and any dividends or distributions paid. CUSTODIAN Domestic securities and cash are held by The United States Trust Company of New York, New York, as the Fund's domestic custodian. Morgan Stanley Trust Company, Brooklyn, New York, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians who were approved by the Board of Directors of the Fund in accordance with regulations of the Securities and Exchange Commission for the purpose of providing custodial services for such assets. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the Fund. INDEPENDENT ACCOUNTANTS Price Waterhouse LLP serves as independent accountants for the Fund and audits its annual financial statements. LITIGATION The Fund is not involved in any litigation. 40 APPENDIX A DESCRIPTION OF CORPORATE BOND RATINGS MOODY'S INVESTORS SERVICE CORPORATE BOND RATINGS: Aaa -- Bonds which are rated Aaa are judged to be the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge." Interest payments are protected by a large or by an exceptionally stable margin, and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. Moody's applies numerical modifiers 1, 2 and 3 in the Aa and A rating categories. The modifier 1 indicates that the security ranks at a higher end of the rating category, modifier 2 indicates a mid-range rating and the modifier 3 indicates that the issue ranks at the lower end of the rating category. A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa -- Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contact over any long period of time may be small. Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS: AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's to a debt obligation and indicate an extremely strong capacity to pay principal and interest. 41 AA -- Bonds rated AA have a very strong capacity to pay interest and repay principal and differ from the highest rated issues only to a small degree. A -- Bonds rated A have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher rated categories. BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than for debt in higher rated categories. BB, B, CCC, CC -- Debt rated BB, B, CCC and CC is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. C -- The rating C is reserved for income bonds on which no interest is being paid. D -- Debt rated D is in default, and payment of interest and/or repayment of principal is in arrears. 42 MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MA 02208-2798 NOTE: THIS REGISTRATION FORM SHOULD BE COMPLETED BY THOSE INVESTORS WITH EXISTING MORGAN STANLEY ACCOUNTS DESIRING TO INVEST FREE CASH BALANCES AUTOMATICALLY. - ------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - ------------------------------------------------------------------------------- ACCOUNT INFORMATION |If you need assistance in filling out this form for the Morgan Stanley Institutional Fund, please Fill in where |contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all applicable |items except signature, and mail to the Fund at the address above. - ----------------------------------------------------------------------------------------------------------------------------------- A) REGISTRATION | 1. INDIVIDUAL |1. ______________________________________________________________________________________________________ 2. JOINT TENANTS | First Name Initial Last Name (RIGHTS OF |2. ______________________________________________________________________________________________________ SURVIVORSHIP | First Name Initial Last Name PRESUMED UNLESS | ______________________________________________________________________________________________________ TENANCY IN COMMON | First Name Initial Last Name IS INDICATED) | - ----------------------------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, | TRUSTS AND OTHERS |3. ______________________________________________________________________________________________________ Please call the | ______________________________________________________________________________________________________ Fund for additional| ______________________________________________________________________________________________________ documents that may | Type of Registration: / /INCORPORATED / /UNINCORPORATED / /PARTNERSHIP / /UNIFORM GIFT/TRANSFER TO MINOR be required to set | ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR up account and to | PERMITTED) authorize | / /TRUST __________________________ / /OTHER (Specify) ________________________ transactions. | - ----------------------------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS | Please fill in |Street or P.O. Box_______________________________________________________________________________________ completely, |City______________________________________________________________State_______Zip_______________-________ including telephone |Home Telephone No.______-_______-_________________Business Telephone No._______-_______-_________________ number(s). |/ /United States Citizen / /Resident Alien / /Non-Resident Alien: Indicate Country of Residence _________ - ----------------------------------------------------------------------------------------------------------------------------------- C) TAXPAYER |PART 1. Enter your Taxpayer | IMPORTANT TAX INFORMATION IDENTIFICATION |Identification Number. For most |You (as a payee) are required by law to provide us (as payer) NUMBER |individual taxpayers, this is |with your correct taxpayer identification number. Accounts that If the account is in |your Social Security Number. |have a missing or incorrect taxpayer identification number will more than one name, | TAXPAYER IDENTIFICATION NUMBER |be subject to backup withholding at a 31% rate on interest, CIRCLE THE NAME OF THE|______-_________________________ |dividends distributions and other payments. If you have not PERSON WHOSE TAXPAYER | OR |provided us with your correct taxpayer identification number, you IDENTIFICATION NUMBER | SOCIAL SECURITY NUMBER |may be subject to a $50 penalty imposed by the Internal Revenue IS PROVIDED IN SECTION|________-_____________-_________ |Service. A) ABOVE. If no name | | is circled, the number|PART 2. BACKUP WITHHOLDING |Backup withholding is not an additional tax; the tax liability of will be considered to |/ / Check this box if you are NOT |persons subject to backup withholding will be reduced by the be that of the last |subject to Backup Withholding |amount of tax withheld. If withholding results in an overpayment name listed. For |under the provisions of Section |of taxes, a refund may be obtained. Custodian account of |3406(a)(1)(C) of the Internal | a minor (Uniform |Revenue Code. |You may be notified that you are subject to backup withholding Gifts/Transfers to | |under section 3406(a)(1)(C) of the Internal Revenue Code because Minors Acts), give the| |you have underreported interest or dividends or you were required Social Security Number| |to but failed to file a return which would have included a of the minor. | |reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO |NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - ----------------------------------------------------------------------------------------------------------------------------------- D) PORTFOLIO SELECTION | Minimum $500,000 for | each of Fixed | Income, Municipal |/ / Fixed Income Portfolio $__________________ / / Municipal Bond Portfolio $____________ Bond, Mortgage-Backed |/ / Global Fixed Income Portfolio $___________ / / High Yield Portfolio $________________ Securities and High |/ / Mortgage-Backed Securities Portfolio $____ / / Real Yield Portfolio $________________ Yield Portfolios. |/ / Money Market Portfolio $__________________ / / Municipal Money Market Portfolio $____ Minimum $50,000 for | each of Money Market | and Municipal Money | Market Portfolios. | Please indicate | Portfolio and amount. | - ----------------------------------------------------------------------------------------------------------------------------------- E) METHOD OF |Payment by: INVESTMENT |/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME) Please indicate | _________________________________-______ portfolio, manner of |/ / Exchange $____________________ From__________________________ Account No. payment. | Name of Portfolio |/ / Account previously established by: _________________________________-______ | / / Phone exchange / / Wire on ___________________ Account No. (Check Date (Previously assigned by the Fund) Digit) - ----------------------------------------------------------------------------------------------------------------------------------- F) AUTHORIZATION OF |I/we hereby authorize the Fund and Morgan Stanley Asset Management Inc. to transfer from my/our AUTOMATIC PURCHASE |account at Morgan Stanley & Co. Inc. all free cash balances (that is, any cash available on demand at AND REDEMPTION |the close of the previous day), which are held in such account and to invest such cash balances in the (Available only for |/ / Money Market Portfolio or the / / Municipal Money Market Portfolio (check only one). Money Market and | Municipal Money |__________________________________________ ___________________________________-_____ Market Portfolios) |Account Title at Morgan Stanley & Co. Inc. Account Number - ----------------------------------------------------------------------------------------------------------------------------------- G) DISTRIBUTION |Income dividends and capital gains distributions (if any) to be reinvested in additional shares unless OPTION |either box below is checked. |/ /Income dividends to be paid in cash, capital gains distributions (if any) in shares. |/ /Income dividends and capital gains distributions (if any) to be paid in cash. - ----------------------------------------------------------------------------------------------------------------------------------- H) TELEPHONE |/ /I/we hereby authorize the Fund and its| REDEMPTION | agents to honor any telephone requests|_______________________________________________ ___________ Please select at time | to wire redemption proceeds to the |Name of COMMERCIAL Bank (Not Savings Bank) Bank Account No. of initial | commercial bank indicated at right | application if you | and/or mail redemption proceeds to the| ____________ wish to redeem | name and address in which my/our fund | Bank ABA No. shares by telephone. | account is registered if such requests|____________________________________________________________ A SIGNATURE GUARANTEE | are believed to be authentic. | Name(s) in which your BANK Account is Established IS REQUIRED IF BANK | |____________________________________________________________ ACCOUNT IS NOT |TELEPHONE REQUESTS FOR REDEMPTIONS OR | Bank's Street Address REGISTERED |EXCHANGES WILL NOT BE HONORED UNLESS THE |____________________________________________________________ IDENTICALLY TO YOUR |BOX IS CHECKED. THE FUND AND THE FUND'S |City State Zip FUND ACCOUNT. |TRANSFER AGENT WILL EMPLOY REASONABLE | |PROCEDURES TO CONFIRM THAT INSTRUCTIONS | TELEPHONE REQUESTS |COMMUNICATED BY TELEPHONE ARE GENUINE. | FOR REDEMPTIONS OR |THESE PROCEDURES INCLUDE REQUIRING THE | EXCHANGES WILL NOT |INVESTOR TO PROVIDE CERTAIN PERSONAL | BE HONORED UNLESS |IDENTIFICATION INFORMATION AT THE TIME AN| THE BOX AT RIGHT IS |ACCOUNT IS OPENED AND PRIOR TO EFFECTING | CHECKED. |EACH TRANSACTION REQUESTED BY TELEPHONE. | |IN ADDITION, ALL TELEPHONE TRANSACTION | |REQUESTS WILL BE RECORDED AND INVESTORS | |MAY BE REQUIRED TO PROVIDE ADDITIONAL | |TELECOPIED WRITTEN INSTRUCTIONS OF | |TRANSACTION REQUESTS. NEITHER THE FUND | |NOR THE TRANSFER AGENT WILL BE | |RESPONSIBLE FOR ANY LOSS, LIABILITY, COST| |OR EXPENSE FOR FOLLOWING INSTRUCTIONS | |RECEIVED BY TELEPHONE THAT IT REASONABLY | |BELIEVES TO BE GENUINE. | - ----------------------------------------------------------------------------------------------------------------------------------- I) INTERESTED PARTY |___________________________________________________________________________________________________ OPTION | Name |___________________________________________________________________________________________________ In addition to the | account statement sent|___________________________________________________________________________________________________ to my/our registered | Address address, I/we hereby | authorize the fund |___________________________________________________________________________________________________ to mail duplicate | City State Zip Code statements to the | name and address | provided at right. | - ----------------------------------------------------------------------------------------------------------------------------------- J) DEALER |_______________________________________ ___________________________________ _______________________ INFORMATION |Representative Name Representative No. Branch No. - ----------------------------------------------------------------------------------------------------------------------------------- K) SIGNATURE OF |The undersigned certify(ies) that I/we have full authority and legal capacity to purchase and redeem ALL HOLDERS |shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley AND TAXPAYER |Institutional Fund, Inc. and agree to be bound by its terms. Under the penalties of perjury, I/we CERTIFICATION |certify that the information provided in Section C) above is true, correct and complete. | |(X) (X) SIGN HERE --> |------------------------------------------------ ----------------------------------------------------- |Signature Date Signature Date - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------- - ------------------------------------------- - ------------------------------------------- - ------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. -------------------------- TABLE OF CONTENTS PAGE ----- Fund Expenses..................................... 2 Financial Highlights.............................. 4 Prospectus Summary................................ 9 Investment Objectives and Policies................ 12 Additional Investment Information................. 22 Investment Limitations............................ 25 Management of the Fund............................ 26 Purchase of Shares................................ 29 Redemption of Shares.............................. 31 Shareholder Services.............................. 33 Valuation of Shares............................... 34 Performance Information........................... 35 Dividends and Capital Gains Distributions......... 35 Taxes............................................. 37 Portfolio Transactions............................ 38 General Information............................... 40 Appendix A........................................ 41 Account Registration Form
FIXED INCOME PORTFOLIO GLOBAL FIXED INCOME PORTFOLIO MUNICIPAL BOND PORTFOLIO MORTGAGE-BACKED SECURITIES PORTFOLIO HIGH YIELD PORTFOLIO REAL YIELD PORTFOLIO MONEY MARKET PORTFOLIO MUNICIPAL MONEY MARKET PORTFOLIO PORTFOLIOS OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. Common Stock ($.001 PAR VALUE) ------------- PROSPECTUS ------------- Investment Adviser Morgan Stanley Asset Management Inc. Distributor Morgan Stanley & Co. Incorporated MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MA 02208-2798 - ------------------------------------------------ - ------------------------------------------------ - ------------------------------------------------ - ------------------------------------------------ (This page has been left blank intentionally.) SUPPLEMENT DATED JUNE 30, 1995 TO PROSPECTUS DATED MAY 1, 1995 OF MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798 BOSTON, MASSACHUSETTS 02208-2798 ------------- The prospectus dated May 1, 1995 (the "Prospectus") of the Small Cap Value Equity, Value Equity and Balanced Portfolios of the Morgan Stanley Institutional Fund, Inc. (the "Fund") is hereby amended and supplemented by adding the following paragraph to page 20 before the paragraph with the heading "REDEMPTION OF SHARES": EXCESSIVE TRADING. Frequent trades involving either substantial fund assets or a substantial portion of your account or accounts controlled by you can disrupt management of a Portfolio and raise its expenses. Consequently, in the interest of all the stockholders of the Portfolio and the Portfolio's performance, the Fund may in its discretion bar a stockholder that engages in excessive trading of shares of a Portfolio from further purchases of shares of the Fund for an indefinite period. The Fund considers excessive trading to be more than one purchase and sale involving shares of the same Portfolio of the Fund within any 120-day period. For example, exchanging shares of Portfolios of the Fund as follows: exchanging shares of Portfolio A for shares of Portfolio B, then exchanging shares of Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C for shares of Portfolio B within a 120-day period amounts to excessive trading. Two types of transactions are exempt from these excessive trading restrictions: (1) trades exclusively between money market portfolios; and (2) trades done in connection with an asset allocation service managed or advised by MSAM and/or any of its affiliates. - -------------------------------------------------------------------------------- P R O S P E C T U S ---------------------------------------------------------------------- SMALL CAP VALUE EQUITY PORTFOLIO VALUE EQUITY PORTFOLIO BALANCED PORTFOLIO PORTFOLIOS OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798 FOR INFORMATION CALL 1-800-548-7786 ---------------- Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end management investment company with diversified and non-diversified series ("portfolios"). The Fund currently consists of twenty-seven portfolios offering a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. Shares of the Portfolios are offered with no sales charge or exchange or redemption fee (with the exception of one of the Portfolios). This Prospectus pertains to the Small Cap Value Equity Portfolio, the Value Equity Portfolio and the Balanced Portfolio (the "Portfolios"). The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued common stocks of small- to medium-sized corporations. The VALUE EQUITY PORTFOLIO seeks high total return by investing in common stocks which the Adviser believes to be undervalued relative to the stock market in general at the time of purchase. The BALANCED PORTFOLIO seeks high total return while preserving capital by investing in a combination of undervalued common stocks and fixed income securities. The Fund is designed to meet the investment needs of discerning investors who place a premium on quality and personal service. With Morgan Stanley Asset Management Inc. as Adviser and Administrator (the "Adviser" and the "Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley") as Distributor, the Fund makes available to institutional investors and high net worth individual investors a series of portfolios which benefit from the investment expertise and commitment to excellence associated with Morgan Stanley and its Affiliates. This Prospectus is designed to set forth concisely the information about the Value Equity Portfolio, the Balanced Portfolio and the Small Cap Value Equity Portfolio that a prospective investor should know before investing and it should be retained for future reference. The Fund also offers other Portfolios which are described in other prospectuses: The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity, U.S. Real Estate and Value Equity Portfolios; (iii) BALANCED -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities, Municipal Bond and Real Yield Portfolios; and (v) MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional information about the Fund is contained in a "Statement of Additional Information", dated May 1, 1995, which is incorporated herein by reference. The Statement of Additional Information and the Prospectuses pertaining to the other portfolios of the Fund are available upon request and without charge by writing or calling the Fund at the address and telephone number set forth above. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS MAY 1, 1995. FUND EXPENSES The following table illustrates all expenses and fees that a shareholder of each Portfolio will incur.
SMALL CAP VALUE VALUE EQUITY EQUITY BALANCED SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO - --------------------------------------------------------------- ------------- ----------- ----------- Maximum Sales Load Imposed on Purchases........................ None None None Maximum Sales Load Imposed on Reinvested Dividends............. None None None Deferred Sales Load............................................ None None None Redemption Fees................................................ None None None Exchange Fees.................................................. None None None SMALL CAP VALUE VALUE EQUITY EQUITY BALANCED ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO ------------------------------------ ------------- ----------- ----------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Investment Advisory Fee (Net of Fee Waivers)................... 0.59%* 0.40%* 0.25%* Administrative & Shareholder Account Costs..................... 0.15% 0.15% 0.15% 12b-1 Fees..................................................... None None None Custody Fees................................................... 0.07% 0.04% 0.07% Other Expenses................................................. 0.19% 0.11% 0.23% ------ ----------- ----------- Total Operating Expenses (Net of Fee Waivers).............. 1.00%* 0.70%* 0.70%* ------ ----------- ----------- ------ ----------- -----------
- -------------- *The Adviser has agreed to a reduction in the fees payable to it as Adviser and to reimburse each Portfolio, if necessary, if such fees would cause the total annual operating expenses of the Portfolios to exceed a specified percentage of their respective average daily net assets. Set forth below are the maximum total operating expenses after fee waivers and/or reimbursements and total operating expenses absent such fee waivers and/or reimbursements, each as a percent of average daily net assets.
MAXIMUM TOTAL OPERATING EXPENSES AFTER FEE TOTAL OPERATING EXPENSES PORTFOLIO WAIVERS ABSENT FEE WAIVERS - ---------------------------------------------- ------------------------- ------------------------- Small Cap Value Equity........................ 1.00% 1.26% Value Equity.................................. 0.70% 0.80% Balanced...................................... 0.70% 0.95%
As a result of these reductions, the Investment Advisory Fees stated above are lower than the contractual fees stated under "Management of the Fund." For further information on Fund expenses, see "Management of the Fund." The purpose of this table is to assist the investor in understanding the various expenses that an investor in the Portfolios will bear directly or indirectly. The expenses and fees are based on actual figures for the fiscal year ended December 31, 1994. "Other Expenses" include Directors' fees and expenses, amortization of organizational costs, filing fees, professional fees, and costs for reports to shareholders. 2 The following example illustrates the expenses that you would pay on a $1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at the end of each time period. As noted in the table above, the Portfolios charge no redemption fees of any kind. The following example is based on total operating expenses of the Portfolios after fee waivers.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- Small Cap Value Equity Portfolio................................. $ 10 $ 32 $ 55 $ 122 Value Equity Portfolio........................................... 7 22 39 87 Balanced Portfolio............................................... 7 22 39 87
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The Fund intends to comply with all state laws that restrict investment company expenses. Currently, the most restrictive state law requires that the aggregate annual expenses of an investment company shall not exceed two and one-half percent (2 1/2%) of the first $30 million of average net assets, two percent (2%) of the next $70 million of average net assets, and one and one-half percent (1 1/2%) of the remaining net assets of such investment company. The Adviser has agreed to a reduction in the amounts payable to it, and to reimburse any Portfolio, if necessary, if in any fiscal year the sum of the Portfolio's expenses exceeds the limit set by applicable state laws. FINANCIAL HIGHLIGHTS The following tables provide financial highlights for each of the respective periods presented for the Small Cap Value Equity, Value Equity and Balanced Portfolios, and are part of the Fund's financial statements which appear in the Fund's December 31, 1994 Annual Report to Shareholders and which are incorporated by reference into the Fund's Statement of Additional Information. The financial highlights for each of the periods presented have been audited by Price Waterhouse LLP, whose report thereon (which was unqualified) is also incorporated by reference into the Statement of Additional Information. Additional performance information is contained in the Annual Report. The Annual Report and the financial statements therein, along with the Statement of Additional Information, are available at no cost from the Fund at the address and telephone number noted on the cover page of this Prospectus. Subsequent to October 31, 1992 (the Fund's prior fiscal year end) the Fund changed its fiscal year end to December 31. The following information should be read in conjunction with the financial statements and notes thereto. 3 SMALL CAP VALUE EQUITY PORTFOLIO
DECEMBER 17, 1992* TO YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1992 1993 1994 --------------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD......................... $10.00 $10.14 $11.10 --------- --------- ------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1).................................. 0.01 0.24 0.28 Net Realized and Unrealized Gain/(Loss) on Investments..... 0.13 0.90 (0.01) --------- --------- ------- Total from Investment Operations......................... 0.14 1.14 0.27 --------- --------- ------- DISTRIBUTIONS Net Investment Income...................................... -- (0.18) (0.27) Net Realized Gain.......................................... -- -- (0.30) --------- --------- ------- Total Distributions...................................... -- (.018) (0.57) --------- --------- ------- NET ASSET VALUE, END OF PERIOD............................... $10.14 $11.10 $10.80 --------- --------- ------- --------- --------- ------- TOTAL RETURN................................................. 1.40% 11.33% 2.53% --------- --------- ------- --------- --------- ------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)........................ $5,974 $26,775 $40,033 Ratio of Expenses to Average Net Assets (1)(2)............... 1.00%** 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets (1)(2)...................................................... 1.64%** 2.56% 2.67% Portfolio Turnover Rate...................................... 0% 29% 22%
- ------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income................ $0.13 $0.06 $0.03 Ratios before expense limitation: Expenses to Average Net Assets............................ 23.14%** 1.68% 1.26% Net Investment Income (Loss) to Average Net Assets........ (20.50)%** 1.88% 2.41% (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.85% of the average daily net assets of the Small Cap Value Equity Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 1.00% of the average daily net assets of the Portfolio. In the period ended December 31, 1992 and the years ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expenses totalling $38,000, $123,000 and $94,000, respectively, for the Small Cap Value Equity Portfolio. * Commencement of Operations. ** Annualized.
4 VALUE EQUITY PORTFOLIO
JANUARY TWO MONTHS 31, 1990* YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED TO OCTOBER OCTOBER OCTOBER DECEMBER DECEMBER DECEMBER 31, 31, 31, 31, 31, 31, 1990 1991 1992 1992 1993 1994 ---------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD....................... $10.00 $8.59 $10.24 $10.71 $11.31 $12.63 -------- ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)... 0.37 0.46 0.38 0.08 0.37 0.40 Net Realized and Unrealized Gain/(Loss) on investments................ (1.45) 1.67 0.48 0.52 1.31 (0.55) --------- ------ ------ ------ ------- ------ Total from Investment Operations............... (1.08) 2.13 0.86 0.60 1.68 (0.15) --------- ------ ------ ------ ------- ------ DISTRIBUTIONS Net Investment Income....... (0.33) (0.48) (0.39) -- (0.36) (0.40) Net Realized Gain........... -- -- -- -- -- (0.58) --------- ------ ------ ------ ------- ------ Total Distributions....... (0.33) (0.48) (0.39) -- (0.36) (0.98) --------- ------ ------ ------ ------- ------ NET ASSET VALUE, END OF PERIOD....................... $8.59 $10.24 $10.71 $11.31 $12.63 $11.50 --------- ------ ------ ------ ------- ------ --------- ------ ------ ------ ------- ------ TOTAL RETURN.................. (11.05)% 25.34% 8.51% 5.60% 15.14% (1.29)% --------- ------ ------ ------ ------- ------ --------- ------ ------ ------ ------- ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).................. $18,178 $16,304 $25,013 $27,541 $54,598 $73,406 Ratio of Expenses to Average Net Assets (1)(2)............ 0.70%** 0.70% 0.70% 0.70%** 0.70% 0.70% Ratio of Net Investment Income to Average Net Assets (1)(2)....................... 5.46%** 4.57% 3.72% 4.41%** 3.23% 3.37% Portfolio Turnover Rate....... 70% 90% 56% 9% 51% 33%
- ------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income........ $0.01 $0.02 $0.01 $0.01 $0.03 $0.01 Ratios before expense limitation: Expenses to Average Net Assets................... 0.88%** 0.87% 0.84% 1.20%** 0.95% 0.80% Net Investment Income to Average Net Assets....... 5.28%** 4.40% 3.58% 3.91%** 2.98% 3.27% (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.50% of the average daily net assets of the Value Equity Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 0.70% of the average daily net assets of the Portfolio. In the period ended October 31, 1990, the years ended October 31, 1991 and 1992, the two months ended December 31, 1992 and the years ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expenses totalling $26,000, $25,000, $27,000, $24,000, $106,000 and $73,000, respectively, for the Value Equity Portfolio. * Commencement of Operations. ** Annualized.
5 BALANCED PORTFOLIO
FEBRUARY 20, 1990* YEAR ENDED YEAR ENDED TWO MONTHS ENDED YEAR ENDED YEAR ENDED TO OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1990 1991 1992 1992 1993 1994 ----------------- ----------- ----------- ------------------ ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD......................... $10.00 $9.62 $10.61 $11.00 $11.31 $11.13 --------- ------- -------- --------- -------- ------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)..... 0.40 0.59 0.58 0.10 0.44 0.42 Net Realized and Unrealized Gain (Loss) on Investments... (0.46) 1.03 0.42 0.21 0.79 (0.64) --------- ------- -------- --------- -------- ------- Total from Investment Operations................. (0.06) 1.62 1.00 0.31 1.23 (0.22) --------- ------- -------- --------- -------- ------- DISTRIBUTIONS Net Investment Income......... (0.32) (0.63) (0.58) -- (0.41) (0.49) In Excess of Net Investment Income....................... -- -- -- -- (0.08) -- Net Realized Gain............. -- -- (0.03) -- (0.06) (1.46) In Excess of Net Realized Gain......................... -- -- -- -- (0.86) -- --------- ------- -------- --------- -------- ------- Total Distributions......... (0.32) (0.63) (0.61) -- (1.41) (1.95) --------- ------- -------- --------- -------- ------- NET ASSET VALUE, END OF PERIOD......................... $9.62 $10.61 $11.00 $11.31 $11.13 $8.96 --------- ------- -------- --------- -------- ------- --------- ------- -------- --------- -------- ------- TOTAL RETURN.................... (0.63)% 17.31% 9.57% 2.82% 12.09% (2.32)% --------- ------- -------- --------- -------- ------- --------- ------- -------- --------- -------- ------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).................... $37,444 $51,334 $40,332 $39,984 $29,684 $18,492 Ratio of Expenses to Average Net Assets (1)(2).................. 0.70%** 0.70% 0.70% 0.70%** 0.70% 0.70% Ratio of Net Investment Income to Average Net Assets (1)(2)... 6.81%** 5.99% 5.21% 5.29%** 3.88% 4.13% Portfolio Turnover Rate......... 19% 67% 40% 4% 136% 44%
- ------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income........ $0.01 $0.01 $0.01 $0.01 $0.04 $0.03 Ratios before expense limitation: Expenses to Average Net Assets................... 0.90%** 0.78% 0.79% 1.00%** 1.02% 0.95% Net Investment Income to Average Net Assets....... 6.61%** 5.91% 5.12% 4.99%** 3.56% 3.88% (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.50% of the average daily net assets of the Balanced Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 0.70% of the average daily net assets of the Portfolio. In the period ended October 31, 1990, the years ended October 31, 1991 and 1992, the two months ended December 31, 1992 and the years ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expenses totalling $38,000, $39,000, $40,000, $20,000, $115,000 and $60,000, respectively, for the Balanced Portfolio. * Commencement of Operations. ** Annualized.
6 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-seven portfolios, offering institutional investors and high net worth individual investors a broad range of investment choices coupled with the advantages of a no-load mutual fund with Morgan Stanley and its affiliates providing customized services as Adviser, Administrator, Distributor and, in certain instances, Custodian. Each portfolio has its own investment objectives and policies designed to meet specific goals. This Prospectus pertains to the Small Cap Value Equity Portfolio, the Value Equity Portfolio and the Balanced Portfolio. -The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued common stocks of small- to medium-sized corporations. -The VALUE EQUITY PORTFOLIO seeks high total return by investing in common stocks which the Adviser believes to be undervalued relative to the stock market in general at the time of purchase. -The BALANCED PORTFOLIO seeks high total return while preserving capital by investing in a combination of undervalued common stocks and fixed income securities. The other portfolios of the Fund are described in other Prospectuses which may be obtained from the Fund at the address and phone number noted on the cover page of this Prospectus. The objectives of these other portfolios are listed below: GLOBAL AND INTERNATIONAL EQUITY: -The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital appreciation by investing in accordance with country weightings determined by the Adviser in common stocks of non-U.S. issuers which, in the aggregate, replicate broad country indices. -The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of Asian issuers. -The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in the equity securities of issuers in The People's Republic of China, Hong Kong and Taiwan. -The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of emerging country issuers. -The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of European issuers. -The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of issuers throughout the world, including United States issuers. -The GOLD PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of foreign and domestic issuers engaged in gold-related activities. -The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of non-United States issuers. -The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of non-United States issuers with equity market capitalizations of less than $500 million. -The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Japanese issuers. 7 -The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Latin American issuers and debt securities issued or guaranteed by Latin American governments or governmental entities. US EQUITY: -The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing primarily in corporate equity and equity-linked securities. -The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented common stocks of small- to medium-sized corporations. -The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing in growth-oriented common stocks of medium and large capitalization companies. -The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current income and long-term capital appreciation by investing primarily in equity securities of companies in the U.S. real estate industry, including real estate investment trusts. FIXED INCOME: -The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing primarily in debt securities of government, government-related and corporate issuers located in emerging countries. -The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent with the preservation of capital by investing in a diversified portfolio of fixed income securities. -The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate of return while preserving capital by investing in fixed income securities of issuers throughout the world, including U.S. issuers. -The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a diversified portfolio of high yield fixed income securities that offer a yield above that generally available on debt securities in the three highest rating categories of the recognized rating services. -The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level of current income as is consistent with the preservation of capital by investing primarily in a variety of investment-grade mortgage-backed securities. -The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current income consistent with the preservation of principal through investment primarily in municipal obligations, the interest on which is exempt from federal income tax. -The REAL YIELD PORTFOLIO seeks to produce an attractive real rate of return while preserving capital by investing in fixed income securities of issuers throughout the world, other than U.S. issuers. MONEY MARKET: -The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less. -The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less which are exempt from federal income tax. INVESTMENT MANAGEMENT Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan Stanley Group Inc., which, together with its affiliated asset management companies, at December 31, 1994 had approximately $48.7 billion in assets under management as an investment manager or as a fiduciary adviser, acts as investment adviser to the Fund and each of its Portfolios. See "Management of the Fund -- Investment Adviser" and "-- Administrator." 8 HOW TO INVEST Shares of each Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Share purchases may be made by sending investments directly to the Fund. The minimum initial investment is $500,000 for each Portfolio described in this Prospectus. The minimum for subsequent investments is $1,000 for each Portfolio (except for automatic reinvestment of dividends and capital gains distributions for which there are no minimums). The minimum investment levels may be waived for certain Morgan Stanley employees and customers at the discretion of the Adviser. See "Purchase of Shares." HOW TO REDEEM Shares of each Portfolio may be redeemed at any time, without cost, at the net asset value per share of the Portfolio next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. If a shareholder reduces its total investment in shares of any Portfolio to less than $500,000, the investment may be subject to redemption. See "Redemption of Shares." RISK FACTORS The investment policies of each of the Portfolios entail certain risks and considerations of which an investor should be aware. Each Portfolio may invest in securities of foreign issuers and forward foreign currency exchange contracts, which are subject to certain risks not typically associated with U.S. securities. Because the Small Cap Value Equity Portfolio seeks high long-term total return by investing primarily in small-to medium sized corporations which are more vulnerable to financial risks and other risks than larger corporations, investments may involve a higher degree of risk and price volatility than investments in the general equity markets. See "Investment Objectives and Policies" and "Additional Investment Information." In addition, each Portfolio may invest in repurchase agreements, lend its portfolio securities and purchase securities on a when-issued basis or delayed delivery basis and invest in forward foreign currency exchange contracts to hedge currency risk associated with investments in non-U.S. dollar-denominated securities. The Portfolios may also invest indirectly in securities through sponsored or unsponsored American Depositary Receipts. Each Portfolio may invest in short-term or medium-term debt securities or hold cash or cash equivalents for temporary defensive purposes. The Portfolios may also invest in stock options, stock futures contracts and options on stock futures contracts. Each of these investment strategies involves specific risks which are described under "Investment Objectives and Policies" and "Additional Investment Information" herein and under "Investment Objectives and Policies" in the Statement of Additional Information. 9 INVESTMENT OBJECTIVES AND POLICIES The investment objectives of each Portfolio are described below, together with the policies the Fund employs in its efforts to achieve these objectives. Each Portfolio's investment objective is a fundamental policy which may not be changed without the approval of a majority of the Portfolio's outstanding voting securities. There is no assurance that the Fund will attain its objectives. The investment policies described below are not fundamental policies and may be changed without shareholder approval. THE SMALL CAP VALUE EQUITY PORTFOLIO The Portfolio's investment objective is to provide high total return by investing in common stocks of small-to medium-sized corporations that the Adviser believes to be undervalued relative to the stock market in general at the time of purchase. The Portfolio invests primarily in corporations domiciled in the U.S. with equity market capitalizations that range generally from $70 million up to $1 billion, but may from time to time invest in similar size foreign corporations. Under normal circumstances, the Portfolio will invest at least 65% of the value of its total assets in corporations whose equity market capitalization is up to $1 billion. The Portfolio may invest up to 35% of the value of its total assets in corporations which are generally smaller than the 500 largest corporations in the United States. Common stocks for this purpose include common stocks and equivalents of any class or series, such as securities convertible into common stock and securities having common stock characteristics, such as rights and warrants to purchase common stocks, and similar equity interests, such as trusts or partnership interests. These investments may or may not carry voting rights. The Adviser invests with the philosophy that a diversified portfolio of undervalued, small- to medium-sized companies will provide high total return in the long run. Companies considered attractive will have the following characteristics: 1. The market prices of the stocks will be undervalued relative to the normal earning power of the companies; 2. Stock prices will be low relative to the intrinsic value of the companies' assets; 3. Stocks will most often have yields distinctly above the average of companies with similar capitalizations; and 4. Stocks will be of high quality, in the Adviser's judgment, as evaluated by the companies' balance sheets, income statements, franchises and product competitiveness. The thrust of this approach is to seek investments in stocks for which investor enthusiasm is currently low, as reflected in their valuation, but which have the financial and fundamental features, which, according to the Adviser's assessment, will allow the stocks to achieve a higher valuation. Value is achieved and exposure is reduced for the Portfolio when the investment community's perceptions improve and the stocks approach what the Adviser believes is fair valuation. The Adviser takes a long-term approach by placing a strong emphasis on its ability to identify attractive values. The Adviser does not intend to respond to short-term market fluctuations or to acquire securities for the 10 purpose of short-term trading. However, the Adviser may take advantage of short-term opportunities that are consistent with its objective of high total return. The Portfolio will maintain diversity among industries and does not expect to invest more than 25% of its total assets in the stocks of issuers in any one industry. The Portfolio primarily invests in small- to medium-sized companies domiciled in the U.S. The portfolio may, on occasion, invest in common stocks of foreign issuers that trade on a United States exchange or over-the-counter in the form of American Depositary Receipts or common stocks. See "Additional Investment Information." THE VALUE EQUITY PORTFOLIO The investment objective of the Portfolio is to achieve high total return (i.e., long-term growth of capital and high current income) by investing in common stocks that the Adviser believes to be undervalued relative to the stock market in general at the time of purchase. It seeks superior market cycle total returns, with an emphasis on strong relative performance in falling markets. The Portfolio invests primarily in the common stocks of large capitalization companies mainly domiciled in the U.S. For this purpose common stocks include common stocks and equivalents, such as securities convertible into common stocks and securities having common stock characteristics, such as rights and warrants to purchase common stocks. Under normal circumstances, the Portfolio will invest at least 65% of the value of its total assets in equity securities. The Adviser invests with the philosophy that a diversified portfolio of undervalued equity securities will outperform the market over the long term, as well as preserve principal in difficult market environments. Companies considered attractive will have the following characteristics: 1) stocks most often will have distinctly above average dividend yields, 2) the market prices of the stocks will be undervalued relative to the normal earning power of the company, 3) many stocks will sell at close to or below the replacement value of their assets and 4) most stocks' market prices will have underperformed the general market due to a lower level of investor expectations regarding the company outlook. The thrust of this approach is to seek investments where current investor enthusiasm is low, as reflected in their valuations. Exposure is reduced when the investment community's perceptions improve and the company approaches fair valuation. The Adviser takes a long-term investment approach by placing a strong emphasis on its ability to determine attractive values and does not try to determine short-term changes in the general market level. The Portfolio will maintain diversity among industries by not investing more than 25% of its total assets in the stocks of issuers in any one industry. The Portfolio may invest up to 25% of its total assets in the common stocks of foreign issuers, including American Depositary Receipts. See "Additional Investment Information." THE BALANCED PORTFOLIO The investment objective of the Portfolio is to achieve high total return while preserving capital by investing in a combination of undervalued common stocks and fixed income securities. The Portfolio seeks strong total returns in all market conditions, with a special emphasis on minimizing interim declines during falling equity markets. It primarily invests in large capitalization equity securities, intermediate-maturity bonds and cash equivalents. The Adviser uses a valuation-driven balanced portfolio philosophy which combines separate equity, fixed income and asset allocation strategies. The equity investment approach is the same one used for the Value Equity Portfolio. This produces a portfolio of stocks with low price-to-earnings and price-to-book ratios and high 11 dividend yields. The fixed income strategy values bonds using historical yield differentials. Short and intermediate government, corporate and mortgage bonds are used exclusively to implement the Portfolio's fixed income strategy. The asset allocation strategy shifts the stock/bond/cash equivalent mix relative to calculated risk and return levels. All three strategies use historical capital market behavior to reach conclusions. The Portfolio will typically maintain between 35% and 65% of its total assets invested in common stocks, depending upon the Adviser's assessment of market conditions. In overvalued equity markets, the common stock exposure will be at the low end of this range. It is expected that equity exposure will average approximately 55% over time. Fixed income securities in which the Portfolio may invest include U.S. Government securities, mortgage-backed securities, corporate bonds, bank obligations and other short-term money market instruments. The average maturity of the fixed income securities in the Portfolio will, under normal circumstances, be approximately five years, although this will vary with changing market conditions. Up to 25% of the Portfolio's total assets may be invested in the securities of foreign issuers. See "Additional Investment Information." ADDITIONAL INVESTMENT INFORMATION WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase securities on a when-issued or delayed delivery basis. In such transactions, instruments are bought with payment and delivery taking place in the future in order to secure what is considered to be an advantageous yield or price at the time of the transaction. Delivery of and payment for these securities may take as long as a month or more after the date of the purchase commitment, but will take place no more than 120 days after the trade date. Each Portfolio will maintain with the Custodian a separate account with a segregated portfolio of high-grade debt securities or cash in an amount at least equal to these commitments. The payment obligation and the interest rates that will be received are each fixed at the time a Portfolio enters into the commitment and no interest accrues to the Portfolio until settlement. Thus, it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. It is a current policy of each Portfolio not to enter into when-issued commitments exceeding, in the aggregate, 15% of the market value of the Portfolio's total assets less liabilities other than the obligations created by these commitments. REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements with brokers, dealers or banks that meet the credit guidelines established by the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a security from a seller that has agreed to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. The term of these agreements is usually from overnight to one week, and never exceeds one year. Repurchase agreements may be viewed as a fully collateralized loan of money by the Portfolio to the seller. The Portfolio always receives securities with a market value at least equal to the purchase price (including accrued interest) as collateral, and this value is maintained during the term of the agreement. If the seller defaults and the collateral value declines, the Portfolio might incur a loss. If bankruptcy proceedings are commenced with respect to the seller, the Portfolio's realization upon the collateral may be delayed or limited. The aggregate of certain repurchase agreements and certain other investments is limited as set forth under "Investment Limitations." 12 LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to brokers, dealers, domestic and foreign banks or other financial institutions for the purpose of increasing its net investment income. These loans must be secured continuously by cash or equivalent collateral, or by a letter of credit at least equal to the market value of the securities loaned plus accrued interest or income. There may be a risk of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. A Portfolio will not enter into securities loan transactions exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's total assets. Securities lending entails certain risks of delay in recovery or loss of rights in collateral in the event of the insolvency of the borrower. For more detailed information about securities lending see "Investment Objectives and Policies" in the Statement of Additional Information. DEPOSITARY RECEIPTS. The Portfolios are permitted to invest indirectly in securities of foreign companies through sponsored or unsponsored American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other types of Depositary Receipts (which, together with ADRs and GDRs, are hereinafter collectively referred to as "Depositary Receipts"), to the extent such Depositary Receipts are or become available. Depositary Receipts are not necessarily denominated in the same currency as the underlying securities. In addition, the issuers of the securities underlying unsponsored Depositary Receipts are not obligated to disclose material information in the U.S. and, therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the Depositary Receipts. ADRs are Depositary Receipts typically issued by a U.S. financial institution which evidence ownership interests in a security or pool of securities issued by a foreign issuer. GDRs and other types of Depositary Receipts are typically issued by foreign banks or trust companies, although they also may be issued by U.S. financial institutions, and evidence ownership interests in a security or pool of securities issued by either a foreign or a U.S. corporation. Generally, Depositary Receipts in registered form are designed for use in the U.S. securities market and Depositary Receipts in bearer form are designed for use in securities markets outside the U.S. For purposes of each Portfolio's investment policies, the Portfolio's investments in Depositary Receipts will be deemed to be investments in the underlying securities. STOCK OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In order to remain fully invested, and to reduce transaction costs, the Portfolios may utilize appropriate stock futures contracts and options to a limited extent. Because transaction costs associated with futures and options may be lower than the costs of investing in stocks directly, it is expected that the use of index futures and options to facilitate cash flows may reduce the Portfolios' overall transaction costs. The Portfolios will engage in futures and options transactions only for hedging purposes. A Portfolio may enter into futures contracts provided that not more than 5% of the Portfolio's total assets are required as deposit to secure obligations under such contracts. The primary risks associated with the use of futures and options are (i) imperfect correlation between the change in market value of the stocks held by the Portfolio and the prices of futures and options relating to the stocks purchased or sold by the Portfolio; and (ii) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures position which could have an adverse impact on the Portfolio's ability to hedge. In the opinion of the Board of Directors, the risk that the Portfolio will be unable to close out a futures position or options contract will be minimized by only entering into futures contracts or options 13 transactions traded on national exchanges and for which there appears to be a liquid secondary market. For more detailed information about futures transactions see "Investment Objectives and Policies" in the Statement of Additional Information. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each Portfolio may enter into forward foreign currency exchange contracts ("forward contracts") that provide for the purchase or sale of an amount of a specified foreign currency at a future date. Purposes for which such contracts may be used include protecting against a decline in a foreign currency against the U.S. dollar between the trade date and settlement date when the Portfolio purchases or sells non-U.S. dollar denominated securities, locking in the U.S. dollar value of dividends declared on securities held by the Portfolio and generally protecting the U.S. dollar value of securities held by a Portfolio against exchange rate fluctuation. Such contracts may also be used as a protective measure against the effects of fluctuating rates of currency exchange and exchange control regulations. While such forward contracts may limit losses to a Portfolio as a result of exchange rate fluctuation, they will also limit any gains that may otherwise have been realized. See "Investment Objectives and Policies -- Forward Foreign Currency Exchange Contracts" in the Statement of Additional Information. TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes in economic, financial or political conditions make it advisable the Portfolios may reduce their holdings in equity and other securities, for temporary defensive purposes, and the Portfolios may invest in certain short-term (less than twelve months to maturity) and medium-term (not greater than five years to maturity) debt securities or may hold cash. The short-term and medium-term debt securities in which the Portfolio may invest consist of (a) obligations of the U.S. or foreign country governments, their respective agencies or instrumentalities; (b) bank deposits and bank obligations (including certificates of deposit, time deposits and bankers' acceptances) of U.S. or foreign country banks denominated in any currency; (c) floating rate securities and other instruments denominated in any currency issued by international development agencies; (d) finance company and corporate commercial paper and other short-term corporate debt obligations of U.S. and foreign country corporations meeting the Portfolio's credit quality standards; and (e) repurchase agreements with banks and broker-dealers with respect to such securities. For temporary defensive purposes, the Portfolios intend to invest only in short-term and medium-term debt securities that the Adviser believes to be of high quality, i.e., subject to relatively low risk of loss of interest or principal. MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money market instruments, although the Portfolios intend to stay invested in securities satisfying their primary investment objective to the extent practical. Each Portfolio may make money market investments pending other investment or settlement for liquidity, or in adverse market conditions. The money market investments permitted for the Portfolios include: obligations of the United States Government and its agencies and instrumentalities; other debt securities; commercial paper including bank obligations; certificates of deposit (including Eurodollar certificates of deposit); and repurchase agreements. For more detailed information about these money market investments, see "Description of Securities and Ratings" in the Statement of Additional Information. FOREIGN INVESTMENT RISK FACTORS. Each Portfolio may invest in securities of foreign issuers. Investment in obligations of foreign issuers and in foreign branches of domestic banks involves somewhat different investment risks than those affecting obligations of U.S. issuers. There may be limited publicly available information with respect to foreign issuers, and foreign issuers are not generally subject to uniform accounting, 14 auditing and financial standards and requirements comparable to those applicable to U.S. companies. There may also be less government supervision and regulation of foreign securities exchanges, brokers and listed companies than in the U.S. Many foreign securities markets have substantially less volume than U.S. national securities exchanges, and securities of some foreign issuers are less liquid and more volatile than securities of comparable domestic issuers. Brokerage commissions and other transaction costs on foreign securities exchanges are generally higher than in the U.S. Dividends and interest paid by foreign issuers may be subject to withholding and other foreign taxes, which may decrease the net return on foreign investments as compared to dividends and interest paid to the Portfolios by domestic companies. It is not expected that a Portfolio or its shareholders would be able to claim a credit for U.S. tax purposes with respect to any such foreign taxes. See "Taxes." Additional risks include future political and economic developments, the possibility that a foreign jurisdiction might impose or change withholding taxes on income payable with respect to foreign securities, possible seizure, nationalization or expropriation of the foreign issuer or foreign deposits and the possible adoption of foreign governmental restrictions such as exchange controls. Such investments in securities of foreign issuers are frequently denominated in foreign currencies, and since the Portfolios may temporarily hold uninvested reserves in bank deposits in foreign currencies, the value of each Portfolio's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations, and the Portfolios may incur costs in connection with conversions between various currencies. INVESTMENT LIMITATIONS As a diversified investment company, each Portfolio is subject to the following limitations: (a) as to 75% of its total assets, a Portfolio may not invest more than 5% of its total assets in the securities of any one issuer, except obligations of the United States Government and its agencies and instrumentalities, and (b) a Portfolio may not own more than 10% of the outstanding voting securities of any one issuer. Each Portfolio also operates under certain investment restrictions that are deemed fundamental limitations and may be changed only with the approval of the holders of a majority of such Portfolio's outstanding shares. See "Investment Limitations" in the Statement of Additional Information. In addition, each Portfolio operates under certain non-fundamental investment limitations as described below and in the Statement of Additional Information. Each Portfolio may not (i) enter into repurchase agreements with more than seven days to maturity if, as a result, more than 10% of the market value of the Portfolio's total assets would be invested in such repurchase agreements and other investments for which market quotations are not readily available or which are otherwise illiquid; (ii) borrow money, except from banks for extraordinary or emergency purposes, and then only in amounts up to 10% of the value of the Portfolio's total assets, taken at cost at the time of borrowing, or purchase securities while borrowings exceed 5% of its total assets; or mortgage, pledge or hypothecate any assets except in connection with any such borrowing in amounts up to 10% of the value of the Portfolio's net assets at the time of borrowing; (iii) invest in fixed time deposits with a duration of over seven calendar days; or (iv) invest in fixed time deposits with a duration of from two business days to seven calendar days if more than 10% of the Portfolio's total assets would be invested in these deposits. 15 MANAGEMENT OF THE FUND INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment Adviser and Administrator of the Fund and each of the Portfolios. The Adviser provides investment advice and portfolio management services, pursuant to an Investment Advisory Agreement and, subject to the supervision of the Fund's Board of Directors, makes each of the Portfolio's day-to-day investment decisions, arranges for the execution of portfolio transactions and generally manages each of the Portfolio's investments. The Adviser is entitled to receive from each Portfolio an annual investment advisory fee, payable quarterly, equal to the percentage of average daily net assets set forth in the table below. However, the Adviser has agreed to a reduction in the fees payable to it and to reimburse the Portfolios, if necessary, if such fees would cause the total annual operating expenses of any Portfolio to exceed the respective percentage of average daily net assets set forth in the table below.
MAXIMUM TOTAL INVESTMENT OPERATING EXPENSES PORTFOLIO ADVISORY FEE AFTER FEE WAIVERS - ------------------------------------------------------------- ------------- --------------------- Small Cap Value Equity Portfolio............................. 0.85% 1.00% Value Equity Portfolio....................................... 0.50% 0.70% Balanced Portfolio........................................... 0.50% 0.70%
The Adviser, with principal offices at 1221 Avenue of the Americas, New York, New York 10020, conducts a worldwide portfolio management business, providing a broad range of portfolio management services to customers in the United States and abroad. At December 31, 1994, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $48.7 billion, including approximately $35.6 billion under active management and $13.1 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. PORTFOLIO MANAGERS Michael A. Crowe, Stephen C. Sexauer and Alford E. Zick, Jr. have primary responsibility for managing the Balanced Portfolio and the Value Equity Portfolio; Mr. Crowe has had such responsibility since September, 1992 and Mr. Sexauer and Mr. Zick have had such responsibility since the Portfolios' inception in February and January, 1990, respectively. Michael A. Crowe and Christian K. Stadlinger have had primary responsibility for managing the Small Cap Value Equity Portfolio and have had such responsibility since its inception in December, 1992. MICHAEL A. CROWE. Mr. Crowe is a Managing Director of Morgan Stanley and Chief Operating Officer of the Adviser's Chicago office, with overall responsibility for the Adviser's U.S. large-capitalization value equity, U.S. small-capitalization value equity, and value balanced products. His equity research responsibilities include the energy, bank, and financial diversified sectors. Previously, he had been Worldwide Director of Marketing for the Adviser; prior to that, he was a Portfolio Manager and Senior Business Development Officer of the Adviser's Chicago office. Before joining Morgan Stanley in 1986, Mr. Crowe was senior vice president and midwestern regional manager for Callan Associates, a large, privately-held investment management consulting firm. At Callan, he served as the consultant to some of the major public and private pension plans in the U.S. Prior to his tenure at Callan, Mr. Crowe was a vice president of Continental Illinois National Bank and a member of the trust investment committee, which set overall investment policy for the trust department. Mr. Crowe began his financial services career with Kidder Peabody & Co. and Blyth Eastman Dillon. He received his B.A. and his M.B.A. from Western Michigan University. 16 STEPHEN C. SEXAUER. Mr. Sexauer is a Principal of Morgan Stanley and is a member of the investment management team of the Adviser's Chicago affiliate as well as Vice President of the Adviser. In addition to portfolio management, his equity research responsibilities include aerospace, industrials, capital goods, transportation, and diversified financial companies. Mr. Sexauer joined the firm in July 1989 after three years as a Vice President at Salomon Brothers. Previously, he was with Merrill Lynch Economics and Wharton Econometrics. Mr. Sexauer received a B.S. in Economics from the University of Illinois and an M.B.A. in Economics and Statistics from the University of Chicago. CHRISTIAN K. STADLINGER. Mr. Stadlinger is a Vice President of the Adviser and manages the small-cap value equity product of the Adviser's Chicago affiliate. He became a member of the Adviser's Chicago large cap value portfolio management team, specializing in quantitative and fundamental research, upon completion of his doctoral dissertation at Northwestern University in April 1989. Mr. Stadlinger was the catalyst in the development of the Adviser's small-cap value product, and he continues to research and develop structured valuation techniques in the area of small cap investing. Mr. Stadlinger has a degree in Computer Science and Economics from the University of Vienna, a Ph.D. in Economics from Northwestern University, and is a Certified Financial Analyst. ALFORD E. ZICK, JR. Mr. Zick is a Principal of Morgan Stanley and is a member of the investment management team of the Adviser's Chicago affiliate. In addition to portfolio management, his equity research responsibilities include consumer staples, retail and insurance companies. He became a member of the Adviser's Chicago investment management team in August 1989, after an extensive career in asset management with Chicago Pacific Corporation, Staley Continental, Inc., and A.E. STALEY Manufacturing Company. Mr. Zick has a degree in accounting from the University of Illinois. ADMINISTRATOR. The Adviser also provides the Fund with administrative services pursuant to an Administration Agreement. The services provided under the Administration Agreement are subject to the supervision of the Officers and the Board of Directors of the Fund and include day-to-day administration of matters related to the corporate existence of the Fund, maintenance of its records, preparation of reports, supervision of the Fund's arrangements with its custodian, and assistance in the preparation of the Fund's registration statements under federal and state laws. The Administration Agreement also provides that the Administrator, through its agents, will provide the Fund dividend disbursing and transfer agent services. For its services under the Administration Agreement, the Fund pays the Adviser a monthly fee which, on an annual basis equals, 0.15% of the average daily net assets of each Portfolio. Under the U.S. Trust Administration Agreement between the Adviser and United States Trust Company of New York ("U.S. Trust"), U.S. Trust has agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegates its responsibilities to Mutual Funds Service Company ("MFSC"), a subsidiary of U.S. Trust that provides certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by MFSC. The services provided under the Administration Agreement and the U.S. Trust Administration Agreement are also subject to the supervision of the Board of Directors of the Fund. The Board of Directors of the Fund has approved the provision of services described above pursuant to the Administration Agreement and the U.S. Trust Administration Agreement as being in the best interests of the Fund. MFSC's business address is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information regarding the Administration Agreement or the U.S. Trust Administration Agreement, see "Management of the Fund" in the Statement of Additional Information. 17 DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation, the Board of Directors decides upon matters of general policy and reviews the actions of the Fund's Adviser, Administrator and Distributor. The Officers of the Fund conduct and supervise its daily business operations. DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the shares of the Fund. Under its Distribution Agreement with the Fund, Morgan Stanley sells shares of each Portfolio upon the terms and at the current offering price described in this Prospectus. Morgan Stanley is not obligated to sell any certain number of shares of any Portfolio and receives no compensation for its distribution services. EXPENSES. Each Portfolio is responsible for payment of certain other fees and expenses (including legal fees, accountants' fees, custodial fees and printing and mailing costs) specified in the Administration and Distribution Agreements. PURCHASE OF SHARES Shares of each Portfolio may be purchased without sales commission, at the net asset value per share next determined after receipt of the purchase order. See "Valuation of Shares." INITIAL INVESTMENTS 1) BY CHECK. An account may be opened by completing and signing an Account Registration Form and mailing it, together with a check ($500,000 minimum for each Portfolio, with certain exceptions for Morgan Stanley employees and select customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio name]," to: Morgan Stanley Institutional Fund, Inc. P.O. Box 2798 Boston, Massachusetts 02208-2798 Payment will be accepted only in U.S. dollars, unless prior approval for payment by other currencies is given by the Fund. The portfolio(s) to be purchased should be designated on the Account Registration Form. For purchases by check, the Fund is ordinarily credited with Federal Funds within one business day. Thus, your purchase of shares by check is ordinarily credited to your account at the net asset value per share of the relevant Portfolio determined on the next business day after receipt. 2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal Funds to the Fund's bank account. In order to ensure prompt receipt of your Federal Funds Wire, it is important that you follow these steps: A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your name, address, telephone number, Social Security or Tax Identification Number, the portfolio(s) selected, the amount being wired, and by which bank. We will then provide you with a Fund account number. (Investors with existing accounts should also notify the Fund prior to wiring funds.) 18 B. Instruct your bank to wire the specified amount to the Fund's Wire Concentration Bank Account (be sure to have your bank include the name of the portfolio(s) selected and the account number assigned to you): United States Trust Company of New York 114 West 47th Street New York, NY 10036 ABA #0210-0131-8 DDA #20-9310-3 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (portfolio name, your account number, your account name) Please call before wiring funds: 1-800-548-7786 C. Complete the Account Registration Form and mail it to the address shown thereon. Federal Funds purchase orders will be accepted only on a day on which the Fund and the United States Trust Company of New York (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring funds. 3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire" above must be followed in purchasing shares by bank wire. However, money transferred by bank wire may or may not be converted into Federal Funds the same day, depending on the time the money is received and the bank handling the wire. Prior to such conversion, an investor's money will not be invested. Your bank may charge a service fee for wiring funds. ADDITIONAL INVESTMENTS You may add to your account at any time (minimum additional investment $1,000 for each Portfolio, except for automatic reinvestment of dividends and capital gains distributions for which there are no minimums) by purchasing shares at net asset value by mailing a check to the Fund (payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio name]") at the above address or by wiring monies to the Custodian Bank as outlined above. It is very important that your account name and portfolio name be specified in the letter or wire to assure proper crediting to your account. In order to help to ensure that your wire orders are invested promptly, you are requested to notify one of the Fund's representatives (toll free 1-800-548-7786) prior to sending the wire. OTHER PURCHASE INFORMATION The purchase price of the shares of each portfolio is the net asset value next determined after the order is received. See "Valuation of Shares." An order received prior to the close of the New York Stock Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the price computed on the date of receipt; an order received after the close of the NYSE will be executed at the price computed on the next day the NYSE is open. In the interest of economy and convenience, and because of the operating procedures of the Fund, certificates representing shares of the Portfolios will not be issued. All shares purchased are confirmed to you and credited to your account on the Fund's books maintained by the Adviser or its agents. You will have the same rights and ownership with respect to such shares as if certificates had been issued. 19 To assure that checks are collected by the Fund, withdrawals of investments made by check are not presently permitted until payment for the purchase has been received, which may take up to eight business days after the date of purchase. As a condition of this offering, if a purchase is cancelled due to nonpayment or because your check does not clear, you will be responsible for any loss the Fund or its agents incur. If you are already a shareholder, the Fund may redeem shares from your account(s) to reimburse the Fund or its agents for any loss. In addition, you may be prohibited or restricted from making future investments in the Fund. Investors may also invest in the Fund by purchasing shares through registered broker-dealers. Broker-dealers who make purchases for their customers may charge a fee for such services. REDEMPTION OF SHARES You may withdraw all or any portion of the amount in your account by redeeming shares at any time. Please note that purchases made by check are not permitted to be redeemed until payment of the purchase has been collected, which may take up to eight business days after purchase. The Fund will redeem shares of each Portfolio at its next determined net asset value. On days that both the NYSE and the Custodian Bank are open for business, the net asset values per share of each of the Portfolios is determined at the close of trading of the NYSE (currently 4:00 p.m. Eastern Time). Shares of each Portfolio may be redeemed by mail or telephone. No charge is made for redemption. Any redemption proceeds may be more or less than the purchase price of your shares depending on, among other factors, the market value of the investment securities held by the Portfolio. BY MAIL Each Portfolio will redeem its shares at the net asset value determined on the date the request is received, if the request is received in "good order" before the regular close of the NYSE. Your request should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798, except that deliveries by overnight courier should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108. "Good order" means that the request to redeem shares must include the following documentation: (a) A letter of instruction or a stock assignment specifying the number of shares or dollar amount to be redeemed, signed by all registered owners of the shares in the exact names in which they are registered; (b) Any required signature guarantees (see "Further Redemption Information" below); and (c) Other supporting legal documents, if required, in the case of estates, trusts, guardianships, custodianships, corporations, pension and profit-sharing plans and other organizations. Shareholders who are uncertain of requirements for redemption should consult with a Morgan Stanley Institutional Fund representative. BY TELEPHONE Provided you have previously elected the Telephone Redemption Option on the Account Registration Form, you can request a redemption of your shares by calling the Fund and requesting the redemption proceeds be mailed to you or wired to your bank. Please contact one of Morgan Stanley Institutional Fund, Inc.'s representatives for further details. In times of drastic market conditions, the telephone redemption option may 20 be difficult to implement. If you experience difficulty in making a telephone redemption, your request may be made by mail or overnight courier, and will be implemented at the net asset value next determined after it is received. Redemption requests sent to the Fund through overnight courier must be sent to Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108. The Fund and the Fund's transfer agent (the "Transfer Agent") will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures include requiring the investor to provide certain personal identification information at the time an account is opened and prior to effecting each transaction requested by telephone. In addition, all telephone transaction requests will be recorded and investors may be required to provide additional telecopied written instructions regarding transaction requests. Neither the Fund nor the Transfer Agent will be responsible for any loss, liability, cost or expense for following instructions received by telephone that either of them reasonably believes to be genuine. To change the name of the commercial bank or account designated to receive redemption proceeds, a written request must be sent to the Fund at the address above. Requests to change the bank or account must be signed by each shareholder and each signature must be guaranteed. FURTHER REDEMPTION INFORMATION Normally the Fund will make payment for all shares redeemed under this procedure within one business day of receipt of the request, but in no event will payment be made more than seven days after receipt of a redemption request in good order. However, payments to investors redeeming shares which were purchased by check will not be made until payment for the purchase has been collected, which may take up to eight days after the date of purchase. The Fund may suspend the right of redemption or postpone the date upon which redemptions are effected at times when the NYSE is closed, or under any emergency circumstances as determined by the Securities and Exchange Commission (the "Commission"). If the Board of Directors determines that it would be detrimental to the best interests of the remaining shareholders of a Portfolio to make payment wholly or partly in cash, the Fund may pay the redemption proceeds in whole or in part by a distribution in-kind of securities held by a Portfolio in lieu of cash in conformity with applicable rules of the Commission. Distributions-in-kind will be made in readily marketable securities. Investors may incur brokerage charges on the sale of portfolio securities so received in payment of redemptions. Due to the relatively high cost of maintaining smaller accounts, the Fund reserves the right to redeem shares in any account invested in the Portfolios having a value of less than $500,000 (the net asset value of which will be promptly paid to the shareholder). The Fund, however, will not redeem shares based solely upon market reductions in net asset value. If at any time your total investment does not equal or exceed the stated minimum value, you may be notified of this fact and you will be allowed at least 60 days to make an additional investment before the redemption is processed. To protect your account, the Fund and its agents from fraud, signature guarantees are required for certain redemptions to verify the identity of the person who has authorized a redemption from your account. Please contact the Fund for further information. See "Redemption of Shares" in the Statement of Additional Information. 21 SHAREHOLDER SERVICES EXCHANGE PRIVILEGE You may exchange shares that you own in each Portfolio for shares of any other available portfolio(s) of the Fund (except for the International Equity Portfolio). The privilege to exchange shares by telephone is automatic. Shares of the Portfolios may be exchanged by mail or telephone. Before you make an exchange, you should read the prospectus of the portfolio(s) in which you seek to invest. Because an exchange transaction is treated as a redemption followed by a purchase, an exchange would be considered a taxable event. The exchange privilege is only available with respect to portfolios that are registered for sale in a shareholder's state of residence. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name and account number of your current Portfolio, the name of the portfolio(s) into which you intend to exchange shares, and the signatures of all registered account holders. Send the exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. BY TELEPHONE When exchanging shares by telephone, have ready the name and account number of the current Portfolio, the name of the portfolio(s) into which you intend to exchange shares, your Social Security number or Tax I.D. number, and your account address. Requests for telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at the close of business that same day based on the net asset value of each of the portfolios at the close of business. Requests received after 4:00 p.m. are processed the next business day based on the net asset value determined at the close of business on such day. For additional information regarding responsibility for the authenticity of telephoned instructions, see "Redemption of Shares -- By Telephone" above. TRANSFER OF REGISTRATION You may transfer the registration of any of your Fund shares to another person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. As in the case of redemptions, the written request must be received in good order before any transfer can be made. VALUATION OF SHARES The net asset value per share of each of the Portfolios is determined by dividing the total market value of the Portfolio's investments and other assets, less any liabilities, by the total number of outstanding shares of the Portfolio. Net asset value per share is determined as of the regular close of the NYSE on each day that the NYSE is open for business. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities listed on a U.S. securities exchange for which market quotations are available are valued at the last quoted sale price on the day the valuation is made. Securities listed on a foreign exchange are valued at their closing price. Unlisted securities and listed securities not traded on the valuation date for which market quotations are not readily available are valued at a price that is considered to best represent fair value within a range not exceeding of the current asked price nor less than the current bid price. The current bid and asked prices are determined based on the bid and asked prices quoted on such valuation date by reputable brokers. 22 Bonds and other fixed income securities are valued according to the broadest and most representative market, which will ordinarily be the over-the-counter market. Net asset value includes interest on fixed income securities, which is accrued daily. In addition, bonds and other fixed income securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. The prices provided by a pricing service are determined without regard to bid or last sale prices, but take into account institutional size trading in similar groups of securities and any developments related to the specific securities. Securities not priced in this manner are valued at the most recently quoted bid price, or, when securities exchange valuations are used, at the latest quoted sale price on the day of valuation. If there is no such reported sale, the latest quoted bid price will be used. Securities purchased with remaining maturities of 60 days or less are valued at amortized cost, if it approximates market value. In the event that amortized cost does not approximate market value, market prices as determined above will be used. The value of other assets and securities for which no quotations are readily available (including restricted securities and unlisted foreign securities) and those securities the prices for which it is inappropriate to determined in accordance with the above-stated procedures are determined in good faith at fair value using methods determined by the Board of Directors. For purposes of calculating net asset value per share, all assets and liabilities initially expressed in foreign currencies will be translated into U.S. dollars at the mean of the bid price and asked price of such currencies against the U.S. dollar last quoted by any major bank. PERFORMANCE INFORMATION The Fund may from time to time advertise total return of the Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a Portfolio would have earned over a specified period of time (such as one, five or ten years), assuming that all distributions and dividends by the Portfolio were reinvested on the reinvestment dates during the period. Total return does not take into account any federal or state income taxes that may be payable on dividends and distributions or upon redemption. The Fund may also include comparative performance information in advertising or marketing the Portfolios' shares. Such performance information may include data from Lipper Analytical Services, Inc., other industry publications, business periodicals, rating services and market indices. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions will automatically be reinvested in additional shares at net asset value, except that, upon written notice to the Fund or by checking off the appropriate box in the Distribution Option Section on the Account Registration Form, a shareholder may elect to receive income dividends and capital gains distributions in cash. Each Portfolio expects to distribute substantially all of its net investment income in the form of quarterly dividends. Net capital gains, if any, will also be distributed annually. Confirmations of the purchase of shares of the Portfolio through the automatic reinvestment of income dividends and capital gains distributions will be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of 1934, as amended, on the next quarterly client statement following such purchase of shares. Consequently, confirmations of such purchases will not be provided at the time of completion of such purchases as might otherwise be required by Rule 10b-10. 23 Undistributed net investment income is included in a Portfolio's net assets for the purpose of calculating net asset value per share. Therefore, on the "ex-dividend" date, the net asset value per share excludes the dividend (i.e., is reduced by the per share amount of the dividend). Dividends paid shortly after the purchase of shares by an investor, although in effect a return of capital, are taxable to shareholders subject to tax. TAXES The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial, or administrative action. No attempt has been made to present a detailed explanation of the federal, state, or local income tax treatment of a Portfolio or its shareholders. Accordingly, shareholders are urged to consult their tax advisors regarding specific questions as to federal, state and local income taxes. Each Portfolio is treated as a separate entity for federal income tax purposes and is not combined with the Fund's other portfolios. Each Portfolio intends to qualify for the special tax treatment afforded regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so that the Portfolio will be relieved of federal income tax on that part of its net investment income and net capital gain that is distributed to shareholders. Each Portfolio distributes substantially all of its net investment income (including, for this purpose, net short-term capital gain) to shareholders. Dividends from a Portfolio's net investment income are taxable to shareholders as ordinary income, whether received in cash or in additional shares. Such dividends paid by a Portfolio will generally qualify for the 70% dividends-received deduction for corporate shareholders to the extent of the aggregate qualifying dividend income received by the Portfolio from U.S. corporations. Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss) are taxable to shareholders as long-term capital gain, regardless of how long shareholders have held their shares. Each Portfolio sends reports annually to shareholders of the federal income tax status of all distributions made during the preceding year. Each Portfolio intends to make sufficient distributions or deemed distributions of its ordinary income and capital gain net income (the excess of short-term and long-term capital gains over short-term and long-term capital losses), including any available capital loss carry-forwards, prior to the end of each calendar year to avoid liability for federal excise tax. Dividends and other distributions declared by a Portfolio in October, November or December of any year and payable to shareholders of record on a date in such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if the distributions are paid by the Portfolio at any time during the following January. The sale or redemption of shares may result in taxable gain or loss to the redeeming shareholder, depending upon whether the fair market value of the redemption proceeds exceeds or is less than the shareholder's adjusted basis in the redeemed shares. If capital gain distributions have been made with respect to shares that are sold at a loss after being held for six months or less, then the loss is treated as a long-term capital loss to the extent of the capital gain distributions. 24 Shareholders are urged to consult with their tax advisors concerning the application of state and local income taxes to investments in a Portfolio, which may differ from the federal income tax consequences described above. THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO. PORTFOLIO TRANSACTIONS The Investment Advisory Agreement authorizes the Adviser to select the brokers or dealers that will execute the purchases and sales of investment securities for each of the Fund's Portfolios and directs the Adviser to use its best efforts to obtain the best available price and most favorable execution with respect to all transactions for the Portfolios. The Fund has authorized the Adviser to pay higher commissions in recognition of brokerage services which, in the opinion of the Adviser, are necessary for the achievement of better execution, provided the Adviser believes this to be in the best interest of the Fund. Since shares of the Portfolios are not marketed through intermediary brokers or dealers, it is not the Fund's practice to allocate brokerage or principal business on the basis of sales of shares which may be made through such firms. However, the Adviser may place portfolio orders with qualified broker-dealers who recommend the Fund's Portfolios or who act as agents in the purchase of shares of the Fund's Portfolios for their clients. In purchasing and selling securities for the Portfolios, it is the Fund's policy to seek to obtain quality execution at the most favorable prices, through responsible broker-dealers. In selecting broker-dealers to execute the securities transactions for the Portfolios, consideration will be given to such factors as the price of the security, the rate of the commission, the size and difficulty of the order, the reliability, integrity, financial condition, general execution and operational capabilities of competing broker-dealers, and the brokerage and research services which they provide to the Fund. Some securities considered for investment by a Portfolio may also be appropriate for other clients served by the Adviser. If a purchase or sale of securities consistent with the investment policies of a portfolio and one or more of these other clients served by the Adviser is considered at or about the same time, transactions in such securities will be allocated among the portfolios and such other clients in a manner deemed fair and reasonable by the Adviser. Although there is no specified formula for allocating such transactions, the various allocation methods used by the Adviser, and the results of such allocations, are subject to periodic review by the Fund's Board of Directors. Subject to the overriding objective of obtaining the best possible execution of orders, the Adviser may allocate a portion of the Portfolio's brokerage transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order for Morgan Stanley or its affiliates to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by Morgan Stanley or such affiliates must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. Furthermore, the Board of Directors of the Fund, including a majority of the 25 Directors who are not "interested persons," as defined in the Investment Company Act of 1940, as amended (the "1940 Act") have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Morgan Stanley or such affiliates be consistent with the foregoing standard. Portfolio securities will not be purchased from or through, or sold to or through, the Adviser or Morgan Stanley or any "affiliated persons," as defined in the 1940 Act, of Morgan Stanley when such entities are acting as principals, except to the extent permitted by law. Although none of the Portfolios intend to invest for short-term trading purposes, investment securities may be sold from time to time without regard to the length of time they have been held. For each Portfolio, it is anticipated that, under normal circumstances, the annual portfolio turnover rate will not exceed 100%. High portfolio turnover involves correspondingly greater transaction costs which will be borne directly by the respective Portfolio. In addition, high portfolio turnover may result in more capital gains which would be taxable to the shareholders of the respective Portfolio. The tables set forth in "Financial Highlights" present the Portfolios' historical turnover rates. GENERAL INFORMATION DESCRIPTION OF COMMON STOCK The Fund was organized as a Maryland corporation on June 16, 1988. The Articles of Incorporation permit the Fund to issue up to 15,000,000,000 shares of common stock, with $.001 par value per share. Pursuant to the Fund's By-Laws, the Board of Directors may increase the number of shares the Fund is authorized to issue without the approval of the shareholders of the Fund. The Board of Directors has the power to designate one or more classes of shares of common stock and to classify and reclassify any unissued shares with respect to such classes. The shares of each Portfolio, when issued, will be fully paid, nonassessable, fully transferable and redeemable at the option of the holder. The shares have no preference as to conversion, exchange, dividends, retirement or other features and have no pre-emptive rights. The shares of each Portfolio have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of Directors can elect 100% of the Directors if they choose to do so. Persons or organizations owning 25% or more of the outstanding shares of a Portfolio may be presumed to "control" (as that term is defined in the 1940 Act) the Portfolio. Under Maryland law, the Fund is not required to hold an annual meeting of its shareholders unless required to do so under the 1940 Act. REPORTS TO SHAREHOLDERS The transfer agent of the Fund will send to its shareholders annual and semiannual reports; the financial statements appearing in annual reports are audited by independent accountants. Monthly unaudited portfolio data are also available from the Fund upon request. In addition, Morgan Stanley Asset Management Inc. or its agent, as Transfer Agent, will send to each shareholder having an account directly with the Fund a monthly statement showing transactions in the account, the total number of shares owned, and any dividends or distributions paid. CUSTODIAN Domestic securities and cash are held by United States Trust Company of New York, New York, as the Fund's domestic custodian. Morgan Stanley Trust Company, Brooklyn, New York, acts as the Fund's custodian 26 for foreign assets held outside the United States and employs subcustodians who were approved by the Board of Directors of the Fund in accordance with regulations of the Securities and Exchange Commission for the purpose of providing custodial services for such assets. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the Fund. INDEPENDENT ACCOUNTANTS Price Waterhouse LLP serves as independent accountants for the Fund and audits its annual financial statements. LITIGATION The Fund is not involved in any litigation. 27 (This page has been left blank intentionally.) MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MA 02208-2798 - ------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - ------------------------------------------------------------------------------- ACCOUNT INFORMATION |If you need assistance in filling out this form for the Morgan Stanley Institutional Fund, please Fill in where |contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all applicable |items except signature, and mail to the Fund at the address above. - ----------------------------------------------------------------------------------------------------------------------------------- A) REGISTRATION | 1. INDIVIDUAL |1. ______________________________________________________________________________________________________ 2. JOINT TENANTS | First Name Initial Last Name (RIGHTS OF |2. ______________________________________________________________________________________________________ SURVIVORSHIP | First Name Initial Last Name PRESUMED UNLESS | ______________________________________________________________________________________________________ TENANCY IN COMMON | First Name Initial Last Name IS INDICATED) | - ----------------------------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, | TRUSTS AND OTHERS |3. ______________________________________________________________________________________________________ Please call the | ______________________________________________________________________________________________________ Fund for additional| ______________________________________________________________________________________________________ documents that may | Type of Registration: / /INCORPORATED / /UNINCORPORATED / /PARTNERSHIP / /UNIFORM GIFT/TRANSFER TO MINOR be required to set | ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR up account and to | PERMITTED) authorize | / /TRUST __________________________ / /OTHER (Specify) ________________________ transactions. | - ----------------------------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS | Please fill in |Street or P.O. Box_______________________________________________________________________________________ completely, |City______________________________________________________________State_______Zip_______________-________ including telephone |Home Telephone No.______-_______-_________________Business Telephone No._______-_______-_________________ number(s). |/ /United States Citizen / /Resident Alien / /Non-Resident Alien: Indicate Country of Residence _________ - ----------------------------------------------------------------------------------------------------------------------------------- C) TAXPAYER |PART 1. Enter your Taxpayer | IMPORTANT TAX INFORMATION IDENTIFICATION |Identification Number. For most |You (as a payee) are required by law to provide us (as payer) NUMBER |individual taxpayers, this is |with your correct Taxpayer Identification Number. Accounts that If the account is in |your Social Security Number. |have a missing or incorrect Taxpayer Identification Number will more than one name, | TAXPAYER IDENTIFICATION NUMBER |be subject to backup withholding at a 31% rate on CIRCLE THE NAME OF THE|______-_________________________ |dividends, distributions and other payments. If you have not PERSON WHOSE TAXPAYER | OR |provided us with your correct taxpayer identification number, you IDENTIFICATION NUMBER | SOCIAL SECURITY NUMBER |may be subject to a $50 penalty imposed by the Internal Revenue IS PROVIDED IN SECTION|________-_____________-_________ |Service. A) ABOVE. If no name | | is circled, the number|PART 2. BACKUP WITHHOLDING |Backup withholding is not an additional tax; the tax liability of will be considered to |/ / Check this box if you are NOT |persons subject to backup withholding will be reduced by the be that of the last |subject to Backup Withholding |amount of tax withheld. If withholding results in an overpayment name listed. For |under the provisions of Section |of taxes, a refund may be obtained. Custodian account of |3406(a)(1)(C) of the Internal | a minor (Uniform |Revenue Code. |You may be notified that you are subject to backup withholding Gift/Transfer to | |under Section 3406(a)(1)(C) of the Internal Revenue Code because Minor Act), give the | |you have underreported interest or dividends or you were required Social Security Number| |to but failed to file a return which would have included a of the minor. | |reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO |NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - ----------------------------------------------------------------------------------------------------------------------------------- D) PORTFOLIO SELECTION | Minimum $500,000 for | each portfolio. | Please indicate |/ / Small Cap Value Equity Portfolio $__________________ portfolio and amount. |/ / Value Equity Portfolio $____________________________ |/ / Balanced Portfolio $________________________________ | | | | - ----------------------------------------------------------------------------------------------------------------------------------- E) METHOD OF |Payment by: INVESTMENT |/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME) Please indicate | _________________________________-______ manner of |/ / Exchange $____________________ From__________________________ Account No. payment. | Name of Portfolio |/ / Account previously established by: _________________________________-______ | / / Phone exchange / / Wire on ___________________ Account No. (Check Date (Previously assigned by the Fund) Digit) - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION |Income dividends and capital gains distributions (if any) will be reinvested in additional shares unless OPTION |either box below is checked. |/ /Income dividends to be paid in cash, capital gains distributions (if any) in shares. |/ /Income dividends and capital gains distributions (if any) to be paid in cash. - ----------------------------------------------------------------------------------------------------------------------------------- G) TELEPHONE |/ /I/we hereby authorize the Fund and its| REDEMPTION | agents to honor any telephone requests|_______________________________________________ Please select at time | to wire redemption proceeds to the |Name of COMMERCIAL Bank (Not Savings Bank) of initial | commercial bank indicated at right | application if you | and/or mail redemption proceeds to the| ________________ _____________ wish to redeem | name and address in which my/our fund | Bank Account No. Bank ABA No. shares by telephone. | account is registered if such requests|____________________________________________________________ A SIGNATURE GUARANTEE | are believed to be authentic. | Name(s) in which your BANK Account is Established IS REQUIRED IF BANK | |____________________________________________________________ ACCOUNT IS NOT | | Bank's Street Address REGISTERED | |____________________________________________________________ IDENTICALLY TO YOUR |THE FUND AND THE FUND'S |City State Zip FUND ACCOUNT. |TRANSFER AGENT WILL EMPLOY REASONABLE | |PROCEDURES TO CONFIRM THAT INSTRUCTIONS | TELEPHONE REQUESTS |COMMUNICATED BY TELEPHONE ARE GENUINE. | FOR REDEMPTIONS |THESE PROCEDURES INCLUDE REQUIRING THE | WILL NOT BE |INVESTOR TO PROVIDE CERTAIN PERSONAL | HONORED UNLESS |IDENTIFICATION INFORMATION AT THE TIME AN| THE BOX IS |ACCOUNT IS OPENED AND PRIOR TO EFFECTING | CHECKED. |EACH TRANSACTION REQUESTED BY TELEPHONE. | |IN ADDITION, ALL TELEPHONE TRANSACTION | |REQUESTS WILL BE RECORDED AND INVESTORS | |MAY BE REQUIRED TO PROVIDE ADDITIONAL | |TELECOPYING WRITTEN INSTRUCTIONS OF | |TRANSACTION REQUESTS. NEITHER THE FUND | |NOR THE TRANSFER AGENT WILL BE | |RESPONSIBLE FOR ANY LOSS, LIABILITY, COST| |OR EXPENSES FOR FOLLOWING INSTRUCTIONS | |RECEIVED BY TELEPHONE THAT IT REASONABLY | |BELIEVES TO BE GENUINE. | - ----------------------------------------------------------------------------------------------------------------------------------- H) INTERESTED PARTY |___________________________________________________________________________________________________ OPTION | Name |___________________________________________________________________________________________________ In addition to the | account statement sent|___________________________________________________________________________________________________ to my/our registered | Address address, I/we hereby | authorize the fund |___________________________________________________________________________________________________ to mail duplicate | City State Zip Code statements to the | name and address | provided at right. | - ----------------------------------------------------------------------------------------------------------------------------------- I) DEALER |_______________________________________ ___________________________________ _______________________ INFORMATION |Representative Name Representative No. Branch No. - ----------------------------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF |The undersigned certify(ies) that I/we have full authority and legal capacity to purchase and redeem ALL HOLDERS |shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley AND TAXPAYER |Institutional Fund, Inc. and agree to be bound by its terms. CERTIFICATION | | |(X) (X) SIGN HERE --> |------------------------------------------------ ----------------------------------------------------- |Signature Date Signature Date |------------------------------------------------ ----------------------------------------------------- |Signature Date Signature Date - -----------------------------------------------------------------------------------------------------------------------------------
------------------------------------------- ------------------------------------------- ------------------------------------------- ------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. -------------------------- TABLE OF CONTENTS PAGE ----- Fund Expenses..................................... 2 Financial Highlights.............................. 3 Prospectus Summary................................ 7 Investment Objectives and Policies................ 10 Additional Investment Information................. 12 Investment Limitations............................ 15 Management of the Fund............................ 16 Purchase of Shares................................ 18 Redemption of Shares.............................. 20 Shareholder Services.............................. 22 Valuation of Shares............................... 22 Performance Information........................... 23 Dividends and Capital Gains Distributions......... 23 Taxes............................................. 24 Portfolio Transactions............................ 25 General Information............................... 26 Account Registration Form
SMALL CAP VALUE EQUITY PORTFOLIO VALUE EQUITY PORTFOLIO BALANCED PORTFOLIO PORTFOLIOS OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. Common Stock ($.001 PAR VALUE) ------------- PROSPECTUS ------------- Investment Adviser Morgan Stanley Asset Management Inc. Distributor Morgan Stanley & Co. Incorporated -------------------------------------------- -------------------------------------------- -------------------------------------------- -------------------------------------------- SUPPLEMENT DATED JUNE 30, 1995 TO PROSPECTUS DATED MAY 1, 1995 OF MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798 BOSTON, MASSACHUSETTS 02208-2798 ------------- The prospectus dated May 1, 1995 (the "Prospectus") of the Active Country Allocation Portfolio of the Morgan Stanley Institutional Fund, Inc. (the "Fund") is hereby amended and supplemented by adding the following paragraph to page 16 before the paragraph with the heading "REDEMPTION OF SHARES": EXCESSIVE TRADING. Frequent trades involving either substantial fund assets or a substantial portion of your account or accounts controlled by you can disrupt management of a Portfolio and raise its expenses. Consequently, in the interest of all the stockholders of the Portfolio and the Portfolio's performance, the Fund may in its discretion bar a stockholder that engages in excessive trading of shares of a Portfolio from further purchases of shares of the Fund for an indefinite period. The Fund considers excessive trading to be more than one purchase and sale involving shares of the same Portfolio of the Fund within any 120-day period. For example, exchanging shares of Portfolios of the Fund as follows: exchanging shares of Portfolio A for shares of Portfolio B, then exchanging shares of Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C for shares of Portfolio B within a 120-day period amounts to excessive trading. Two types of transactions are exempt from these excessive trading restrictions: (1) trades exclusively between money market portfolios; and (2) trades done in connection with an asset allocation service managed or advised by MSAM and/or any of its affiliates. - -------------------------------------------------------------------------------- P R O S P E C T U S ---------------------------------------------------------------------- ACTIVE COUNTRY ALLOCATION PORTFOLIO A PORTFOLIO OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798 FOR INFORMATION CALL 1-800-548-7786 --------------------------------------------- Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end management investment company with diversified and non-diversified series ("portfolios"). The Fund currently consists of twenty-seven Portfolios offering a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. Shares of the Portfolios are offered with no sales charge or exchange or redemption fee (with the exception of one of the portfolios). This Prospectus pertains to the Active Country Allocation Portfolio (the "Portfolio"). The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital appreciation by investing in accordance with country weightings determined by the Adviser in common stocks of non-U.S. issuers which, in the aggregate, replicate broad country indices. The Fund is designed to meet the investment needs of discerning investors who place a premium on quality and personal service. With Morgan Stanley Asset Management Inc. as Adviser and Administrator (the "Adviser" and the "Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley") as Distributor, the Fund makes available to institutional and high net worth individual investors a series of portfolios which benefit from the investment expertise and commitment to excellence associated with Morgan Stanley and its affiliates. This Prospectus is designed to set forth concisely the information about the Fund that a prospective investor should know before investing and it should be retained for future reference. The Fund offers additional portfolios which are described in other prospectuses and under the Prospectus Summary Section herein. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity, U.S. Real Estate and Value Equity Portfolios; (iii) BALANCED -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities, Municipal Bond and Real Yield Portfolios; and (v) MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional information about the Fund is contained in a "Statement of Additional Information," dated May 1, 1995, which is incorporated herein by reference. The Statement of Additional Information and the Prospectuses pertaining to the other portfolios of the Fund are available upon request and without charge by writing or calling the Fund at the address and telephone number set forth above. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS MAY 1, 1995. FUND EXPENSES The following table illustrates all expenses and fees that a shareholder of the Active Country Allocation Portfolio will incur:
SHAREHOLDER TRANSACTION EXPENSES - --------------------------------------------------------------------------- Maximum Sales Load Imposed on Purchases.................................... None Maximum Sales Load Imposed on Reinvested Dividends......................... None Deferred Sales Load........................................................ None Redemption Fees............................................................ None Exchange Fees.............................................................. None
ANNUAL FUND OPERATING EXPENSES - ------------------------------------------------------------ (AS A PERCENTAGE OF AVERAGE NET ASSETS) Investment Advisory Fee (Net of Fee Waiver)................. 0.45%* Administrative & Shareholder Account Costs.................. 0.15% 12b-1 Fees.................................................. None Custody Fees................................................ 0.09% Other Expenses.............................................. 0.11% ------ Total Operating Expenses (Net of Fee Waivers)........... 0.80%* ------ ------
- -------------- * The Adviser has agreed to a reduction in the fees payable to it as Adviser and to reimburse the Portfolio, if necessary, if such fees would cause the Portfolio's total annual operating expenses to exceed 0.80% of its average daily net assets. Absent fee waivers for the fiscal year ended December 31, 1994, the Portfolio's total operating expenses would have been 1.00% of the average daily net assets. As a result of this reduction, the Investment Advisory Fee stated above is lower than the contractual fee stated under "Management of the Fund." For further information on Fund expenses, see "Management of the Fund." The purpose of this table is to assist the investor in understanding the various expenses that an investor in the Portfolio will bear directly or indirectly. The expenses and fees for the Portfolio are based on actual figures for the fiscal year ended December 31, 1994. "Other Expenses" include Board of Directors' fees and expenses, amortization of organizational costs, filing fees, professional fees and costs for shareholder reports. The following example illustrates the expenses that you would pay on a $1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at the end of each time period. As noted in the table above, the Fund charges no redemption fees of any kind. The following example is based on the total operating expenses of the Portfolio after fee waivers.
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------- -------- -------- --------- Active Country Allocation Portfolio..... $ 8 $26 $44 $99
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The Fund intends to comply with all state laws that restrict investment company expenses. Currently, the most restrictive state law requires that the aggregate annual expenses of an investment company shall not exceed two and one-half percent (2 1/2%) of the first $30 million of average net assets, two percent (2%) of the next $70 million of average net assets, and one and one-half percent (1 1/2%) of the remaining net assets of such investment company. The Adviser has agreed to a reduction in the amounts payable to it, and to reimburse the Portfolio, if necessary, if in any fiscal year the sum of the Portfolio's expenses exceeds the limit set by applicable state law. 2 FINANCIAL HIGHLIGHTS The following table provides financial highlights for each of the periods presented, and is part of the Fund's financial statements which appear in the Fund's December 31, 1994 Annual Report to Shareholders and which are incorporated by reference into the Fund's Statement of Additional Information. The Portfolios' financial highlights for each of the periods presented have been audited by Price Waterhouse LLP, whose unqualified report thereon is also incorporated by reference into the Statement of Additional Information. Additional performance information is included in the Annual Report. The Annual Report and the financial statements therein, along with the Statement of Additional Information, are available at no cost from the Fund at the address and telephone number noted on the cover page of this Prospectus. Subsequent to October 31, 1992 (the Fund's prior fiscal year end) the Fund changed its fiscal year end to December 31. The following information should be read in conjunction with the financial statements and notes thereto.
ACTIVE COUNTRY ALLOCATION PORTFOLIO ----------------------------------------------------------------------------------------- JANUARY 17, 1992* TWO MONTHS ENDED YEAR ENDED YEAR ENDED TO OCTOBER 31, 1992 DECEMBER 31, 1992 DECEMBER 31, 1993 DECEMBER 31, 1994 -------------------- -------------------- -------------------- -------------------- NET ASSET VALUE, BEGINNING OF PERIOD....................... $ 10.00 $ 9.37 $ 9.59 $ 12.21 ------- ------- -------- -------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)... 0.11 0.02 0.13 0.19 Net Realized and Unrealized Gain/(Loss) on Investments................ (0.74) 0.20 2.75 (0.25) ------- ------- -------- -------- Total from Investment Operations............... (0.63) 0.22 2.88 (0.06) ------- ------- -------- -------- DISTRIBUTIONS Net Investment Income....... -- -- (0.09) (0.14) In Excess of Net Investment Income..................... -- -- (0.08) -- Net Realized Gain........... -- -- -- (0.36) In Excess of Net Realized Gain....................... -- -- (0.09) -- ------- ------- -------- -------- Total Distributions....... -- -- (0.26) (0.50) ------- ------- -------- -------- NET ASSET VALUE, END OF PERIOD....................... $ 9.37 $ 9.59 $ 12.21 $ 11.65 ------- ------- -------- -------- ------- ------- -------- -------- TOTAL RETURN.................. (6.30)% 2.35% 30.72% (0.52)% ------- ------- -------- -------- ------- ------- -------- -------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).................. $47,534 $50,234 $150,854 $182,977 Ratio of Expenses to Average Net Assets (1)(2)............ 0.88%** 0.80%** 0.80% 0.80% Ratio of Net Investment Income to Average Net Assets (1)(2)....................... 2.32%** 1.22%** 1.29% 1.43% Portfolio Turnover Rate....... 62% 2% 53% 51%
- ------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income..... $ 0.03 $ 0.01 $ 0.05 $ 0.03 Ratios before expense limitation: Expenses to Average Net Assets............ 1.58%** 1.70%** 1.33% 1.00% Net Investment Income to Average Net Assets.... 1.62%** 0.32%** 0.76% 1.23%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.65% of the average daily net assets of the Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 0.80% of the average daily net assets of the Portfolio. In the period ended October 31, 1992, the two months ended December 31, 1992 and the years ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expenses totalling $164,000, $72,000, $552,000 and $367,000, respectively, for the Portfolio. * Commencement of Operations. ** Annualized. 3 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-seven portfolios, offering institutional investors and high net worth individual investors a broad range of investment choices coupled with the advantages of a no-load mutual fund with Morgan Stanley and its affiliates providing customized services as Adviser, Administrator and Distributor. Each portfolio has its own investment objectives and policies designed to meet its specific goals. This prospectus pertains to the Active Country Allocation Portfolio. - The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital appreciation by investing in accordance with country weightings determined by the Adviser in common stocks of non-U.S. issuers which, in the aggregate, replicate broad country indices. The other portfolios of the Fund are described in other prospectuses which may be obtained from the Fund at the address and phone number noted on the cover page of this Prospectus. The objectives of these other Portfolios are listed below: GLOBAL AND INTERNATIONAL EQUITY: -The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of Asian issuers. -The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in the equity securities of issuers in The People's Republic of China, Hong Kong and Taiwan. -The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of emerging country issuers. -The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of European issuers. -The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of issuers throughout the world, including United States issuers. -The GOLD PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of foreign and domestic issuers engaged in gold-related activities. -The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of non-United States issuers. -The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of non-United States issuers with equity market capitalizations of less than $500 million. -The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Japanese issuers. -The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Latin American issuers and debt securities issued or guaranteed by Latin American governments or governmental entities. US EQUITY: -The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing primarily in corporate equity and equity-linked securities. 4 -The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented common stocks of small- to medium-sized corporations. -The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing in growth-oriented common stocks of medium and large capitalization companies. -The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued common stocks of small- to medium-sized companies. -The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current income and long-term capital appreciation by investing primarily in equity securities of companies in the U.S. real estate industry, including real estate investment trusts. -The VALUE EQUITY PORTFOLIO seeks high total return by investing in common stocks which the Adviser believes to be undervalued relative to the stock market in general at the time of purchase. EQUITY AND FIXED INCOME: -The BALANCED PORTFOLIO seeks high total return while preserving capital by investing in a combination of undervalued common stocks and fixed income securities. FIXED INCOME: -The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing primarily in debt securities of government, government-related and corporate issuers located in emerging countries. -The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent with the preservation of capital by investing in a diversified portfolio of fixed income securities. -The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate of return while preserving capital by investing in fixed income securities of issuers throughout the world, including United States issuers. -The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a diversified portfolio of high yield fixed income securities that offer a yield above that generally available on debt securities in the three highest rating categories of the recognized rating services. -The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level of current income as is consistent with the preservation of capital by investing primarily in a variety of investment-grade mortgage-backed securities. -The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current income consistent with the preservation of principal through investment primarily in municipal obligations, the interest on which is exempt from federal income tax. -The REAL YIELD PORTFOLIO seeks to produce an attractive real rate of return while preserving capital by investing in fixed income securities of issuers throughout the world, other than U.S. issuers. MONEY MARKET: -The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less. -The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt income and preserve capital while maintaining high levels of liquidity through investing in high-quality money market instruments with remaining maturities of one year or less which are exempt from federal income tax. 5 INVESTMENT MANAGEMENT Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan Stanley Group Inc., which, together with its affiliated asset management companies, at December 31, 1994 had approximately $48.7 billion in assets under management as an investment manager or as a fiduciary adviser, acts as investment adviser to the Fund and each of its portfolios. See "Management of the Fund -- Investment Adviser" and "Management of the Fund -- Administrator." HOW TO INVEST Shares of the Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Share purchases may be made by sending investments directly to the Fund. The minimum initial investment is $500,000 for the Portfolio. The minimum subsequent investment is $1,000 (except for automatic reinvestment of dividends and capital gains distributions for which there is no minimum). The minimum investment levels may be waived for certain Morgan Stanley employees and customers at the discretion of the Adviser. See "Purchase of Shares." HOW TO REDEEM Shares of the Portfolio may be redeemed at any time, without cost, at the net asset value per share of the Portfolio next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. If a shareholder reduces its total investment in shares of the Portfolio to less than $500,000, the investment may be subject to redemption. See "Redemption of Shares." RISK FACTORS The investment policies of the Portfolio entail certain risks and considerations of which an investor should be aware. The Portfolio will invest in securities of foreign issuers, including issuers in emerging countries, which are subject to certain risks not typically associated with domestic securities, including (1) restrictions on foreign investment and on repatriation of capital invested in foreign countries, (2) currency fluctuations, (3) the cost of converting foreign currency into U.S. dollars, (4) potential price volatility and lesser liquidity of shares traded on foreign country securities markets or lack of a secondary trading market for such securities and (5) political and economic risks, including the risk of nationalization or expropriation of assets and the risk of war. In addition, accounting, auditing, financial and other reporting standards in foreign countries are not equivalent to U.S. standards and therefore, disclosure of certain material information may not be made and less information may be available to investors investing in foreign countries than in the United States. There is also generally less governmental regulation of the securities industry in foreign countries than the United States. Moreover, it may be more difficult to obtain a judgment in a court outside the United States. See "Investment Objectives and Policies" and "Additional Investment Information." In addition, the Portfolio may invest in repurchase agreements, lend its portfolio securities, purchase securities on a when-issued basis and invest in forward foreign currency exchange contracts to hedge currency risk associated with investment in non-U.S. dollar denominated securities. Each of these investment strategies involves specific risks which are described under "Investment Objective and Policies" and "Additional Investment Information" herein and under "Investment Objectives and Policies" in the Statement of Additional Information. 6 INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Active Country Allocation Portfolio is described below, together with the policies the Fund employs in its efforts to achieve this objective. The Active Country Allocation Portfolio's investment objective is a fundamental policy which may not be changed without the approval of a majority of the Portfolio's outstanding voting securities. There is no assurance that the Fund will attain its objective. The investment policies described below are not fundamental policies and may be changed without shareholder approval. The investment objective of the Active Country Allocation Portfolio is to provide long-term capital appreciation by investing in accordance with country weightings determined by the Adviser in common stocks of non-U.S. issuers which, in the aggregate, replicate broad country indices. The Adviser utilizes a top-down approach in selecting investments for the Portfolio that emphasizes country selection and weighting rather than individual stock selection. This approach reflects the Adviser's philosophy that a diversified selection of securities representing exposure to world markets, based upon the economic outlook and current valuation levels for each country, is an effective way to maximize the return and minimize the risk associated with international investment. The Adviser determines country allocations for the Portfolio on an ongoing basis within policy ranges dictated by each country's market capitalization and liquidity. The Portfolio will invest in the industrialized countries throughout the world that comprise the Morgan Stanley Capital International EAFE (Europe, Australia and the Far East) Index. The Portfolio will also invest in emerging country equity securities. As used in this Prospectus, the term "emerging country" applies to any country which, in the opinion of the Adviser, is generally considered to be an emerging or developing country by the international financial community, including the International Bank for Reconstruction and Development (more commonly known as the World Bank) and the International Finance Corporation. There are currently over 130 countries which, in the opinion of the Adviser, are generally considered to be emerging or developing countries by the international financial community, approximately 40 of which currently have stock markets. These countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe. Currently, investing in many emerging countries is not feasible or may involve unacceptable political risks. The Portfolio will focus its investments on those emerging market countries in which it believes the economies are developing strongly and in which the markets are becoming more sophisticated. With respect to the portion of the Portfolio that is invested in emerging country equity securities, the Portfolio initially intends to invest primarily in some or all of the following countries: Argentina Brazil India Indonesia Malaysia Mexico Portugal Philippines South Korea South Africa Thailand Turkey As markets in other countries develop, the Portfolio expects to expand and further diversify the emerging countries in which it invests. The Portfolio does not intend to invest in any security in a country where the currency is not freely convertible to U.S. dollars, unless the Portfolio has obtained the necessary governmental licensing to convert such currency or other appropriately licensed or sanctioned contractual guarantee to protect such investment against loss of that currency's external value, or the Portfolio has a reasonable 7 expectation at the time the investment is made that such governmental licensing or other appropriately licensed or sanctioned guarantee would be obtained or that the currency in which the security is quoted would be freely convertible at the time of any proposed sale of the security by the Portfolio. An emerging country security is one issued by a company that, in the opinion of the Adviser, has one or more of the following characteristics: (i) its principal securities trading market is in an emerging country, (ii) alone or on a consolidated basis it derives 50% or more of its annual revenue from either goods produced, sales made or services performed in emerging countries; or (iii) it is organized under the laws of, and has a principal office in, an emerging country. The Adviser will base determinations as to eligibility on publicly available information and inquiries made to the companies. (See "Foreign Investment Risk Factors and Special Considerations" for a discussion of the nature of information publicly available for non-U.S. companies.) By analyzing a variety of macroeconomic and political factors, the Adviser develops fundamental projections on interest rates, currencies, corporate profits and economic growth for each country. These country projections are used then to determine what the Adviser believes to be a fair value for the stock market of each country. Discrepancies between actual value and fair value as determined by the Adviser provide an expected return for each stock market. The expected return is adjusted by currency return expectations derived from the Adviser's purchasing-power parity exchange rate model to arrive at an expected total return in U.S. dollars. The final country allocation decision is then arrived at by considering the expected total return in light of various country specific considerations such as market size, volatility, liquidity and country risk. Within a particular country, investments are made through the purchase of common stocks which, in aggregate, replicate a broad market index, which in most cases will be the Morgan Stanley Capital International index for the given country. The Adviser may overweight or underweight an industry segment of a particular index if it concludes this would be advantageous to the Portfolio. Common stocks purchased for the Portfolio include common stocks and equivalents, such as securities convertible into common stocks and securities having common stock characteristics, such as rights and warrants to purchase common stocks. Indexation of the Portfolio's stock selection reduces stock-specific risk through diversification and minimizes transaction costs, which can be substantial in foreign markets. Common stocks purchased for the Portfolio normally will be listed on a major stock exchange in the subject country. The Portfolio will not invest in the stocks of U.S. issuers. For a description of special considerations and certain risks associated with investments in foreign issuers, see "Additional Investment Information." The Portfolio may temporarily reduce its equity holdings in response to adverse market conditions and invest in domestic, Eurodollar and foreign short-term money market instruments for defensive purposes. See "Investment Objectives and Policies" in the Statement of Additional Information. 8 ADDITIONAL INVESTMENT INFORMATION WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase securities on a when-issued or delayed delivery basis. In such transactions, instruments are bought with payment and delivery taking place in the future in order to secure what is considered to be an advantageous yield or price at the time of the transaction. Delivery of and payment for these securities may take as long as a month or more after the date of the purchase commitment but will take place no more than 120 days after the trade date. The Portfolio will maintain with the Custodian a separate account with a segregated portfolio of high-grade debt securities or cash in an amount at least equal to these commitments. The payment obligation and the interest rates that will be received are each fixed at the time the Portfolio enters into the commitment and no interest accrues to the Portfolio until settlement. Thus, it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. It is a current policy of the Portfolio not to enter into when-issued commitments exceeding, in the aggregate, 15% of the market value of the Portfolio's total assets less liabilities other than the obligations created by these commitments. REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements with brokers, dealers or banks that meet the credit guidelines adopted by the Fund's Directors. In a repurchase agreement, the Portfolio buys a security from a seller that has agreed to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. The term of these agreements is usually from overnight to one week and never exceeds one year. Repurchase agreements may be viewed as a fully collateralized loan of money by the Portfolio to the seller. The Portfolio always receives securities with a market value at least equal to the purchase price (including accrued interest) as collateral and this value is maintained during the term of the agreement. If the seller defaults and the collateral value declines, the Portfolio might incur a loss. If bankruptcy proceedings are commenced with respect to the seller, the Portfolio's realization upon the collateral may be delayed or limited. The aggregate of certain repurchase agreements and certain other investments is limited as set forth under "Investment Limitations." LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities to brokers, dealers, domestic and foreign banks or other financial institutions for the purpose of increasing its net investment income. These loans must be secured continuously by cash or equivalent collateral or by a letter of credit at least equal to the market value of the securities loaned plus accrued interest or income. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. The Portfolio will not enter into securities loan transactions exceeding, in the aggregate, 33 1/3% of the market value of the Portfolio's total assets. For more detailed information about securities lending, see "Investment Objectives and Policies" in the Statement of Additional Information. OPTIONS AND FUTURES. The portfolio may write (i.e., sell) covered call options and covered put options on portfolio securities. By selling a covered call option, the Portfolio would become obligated during the term of the option to deliver the securities underlying the option should the option holder choose to exercise the option before the option's termination date. In return for the call it has written, the Portfolio will receive from the purchaser (or option holder) a premium which is the price of the option, less a commission charged by a broker. The Portfolio will keep the premium regardless of whether the option is exercised. By selling a covered put option, the Portfolio incurs an obligation to buy the security underlying the option from the purchaser of the put at the option's exercise price at any time during the option period, at the purchaser's election (certain options 9 written by the Portfolio will be exercisable by the purchaser only on a specific date). A call option is "covered" if the Portfolio owns the security underlying the option it has written or has an absolute or immediate right to acquire the security by holding a call option on such security, or maintains a sufficient amount of cash, cash equivalents or liquid securities to purchase the underlying security. Generally, a put option is "covered" if the Fund maintains cash, U.S. Government securities or other high grade debt obligations equal to the exercise price of the option, or if the Fund holds a put option on the same underlying security with a similar or higher exercise price. When the Portfolio writes covered call options, it augments its income by the premiums received and is thereby hedged to the extent of that amount against a decline in the price of the underlying securities. The premiums received will offset a portion of the potential loss incurred by the Portfolio if the securities underlying the options are ultimately sold by the Portfolio at a loss. However, during the option period, the Portfolio has, in return for the premium on the option, given up the opportunity for capital appreciation above the exercise price should the market price of the underlying security increase, but has retained the risk of loss should the price of the underlying security decline. The Portfolio will write covered put options to receive the premiums paid by purchasers (when the Adviser wishes to purchase the security underlying the option at a price lower than its current market price, in which case the Portfolio will write the covered put at an exercise price reflecting the lower purchase price sought) and to close out a long put option position. The Portfolio may also purchase put or call options on its portfolio securities. When the Portfolio purchases a call option it acquires the right to buy a designated security at a designated price (the "exercise price"), and when the Portfolio purchases a put option it acquires the right to sell a designated security at the exercise price, in each case on or before a specified date (the "termination date"), which is usually not more than nine months from the date the option is issued. The Portfolio may purchase call options to close out a covered call position or to protect against an increase in the price of a security it anticipates purchasing. The Portfolio may purchase put options on securities which it holds in its portfolio to protect itself against a decline in the value of the security. If the value of the underlying security were to fall below the exercise price of the put purchased in an amount greater than the premium paid for the option, the Portfolio would incur no additional loss. The Portfolio may also purchase put options to close out written put positions in a manner similar to call option closing purchase transactions. There are no other limits on the Portfolio's ability to purchase call and put options. The Portfolio may enter into futures contracts and options on futures contracts as a hedge against fluctuations in price of a security it holds or intends to acquire, but not for speculation or for achieving leverage. The Portfolio may also enter into futures transactions to remain fully invested and to reduce transaction costs. The Portfolio may enter into futures contracts and options on futures contracts provided that not more than 5% of the Portfolio's total assets at the time of entering into the contract or option is required as deposit to secure obligations under all such contracts and options, and provided that not more than 20% of the Portfolio's total assets in the aggregate is invested in options, futures contracts and options on futures contracts. The Portfolio may purchase and write call and put options on futures contracts that are traded on any international exchange, traded over the counter or which are synthetic options or futures or equity swaps, and enter into closing transactions with respect to such options to terminate an existing position. An option on a futures contract gives the purchaser the right (in return for the premium paid) to assume a position in the futures 10 contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the term of the option. The Portfolio will purchase and write options on futures contracts for identical purposes to those set forth above for the purchase of a futures contract (purchase of a call option or sale of a put option) and the sale of a futures contract (purchase of a put option or sale of a call option), or to close out a long or short position in futures contracts. The primary risks associated with the use of futures and options are (i) imperfect correlation between the change in market value of the stocks held by the Portfolio and the prices of futures and options relating to the stocks purchased or sold by the Portfolio; and (ii) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures position which could have an adverse impact on the Portfolio's ability to hedge. In the opinion of the Board of Directors, the risk that the Portfolio will be unable to close out a futures position or options contract will be minimized by only entering into futures contracts or options transactions for which there appears to be a liquid secondary market. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolio may enter into forward foreign currency exchange contracts, that provide for the purchase or sale of an amount of a specified foreign currency at a future date. Purposes for which such contracts may be used include protecting against a decline in a foreign currency against the U.S. dollar between the trade date and settlement date when the Portfolio purchases or sells securities, locking in the U.S. dollar value of dividends declared on securities held by the Portfolio and generally protecting the U.S. dollar value of securities held by the Portfolio against exchange rate fluctuation. Such contracts may also be used as a protective measure against the effects of fluctuating rates of currency exchange and exchange control regulations. While such forward contracts may limit losses to the Portfolio as a result of exchange rate fluctuation, they will also limit any gains that may otherwise have been realized. See "Investment Objectives and Policies -- Forward Foreign Currency Contracts" in the Statement of Additional Information. MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money market instruments, although the Portfolio intends to stay invested in securities satisfying its primary investment objective to the extent practical. The Portfolio may make money market investments pending other investment or settlement for liquidity, or in adverse market conditions. The money market investments permitted for the Portfolio include obligations of the United States Government and its agencies and instrumentalities; obligations of foreign sovereignties; other debt securities; commercial paper including bank obligations; certificates of deposit (including Eurodollar certificates of deposit); and repurchase agreements. For more detailed information about these money market investments, see "Description of Securities and Ratings" in the Statement of Additional Information. FOREIGN INVESTMENT RISKS FACTORS. Investment in obligations of foreign issuers and in foreign branches of domestic banks involves somewhat different investment risks than those affecting obligations of U.S. issuers. There may be limited publicly available information with respect to foreign issuers, and foreign issuers are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to domestic companies. There may also be less government supervision and regulation of foreign securities exchanges, brokers and listed companies than in the U.S. Many foreign securities markets have substantially less volume than U.S. national securities exchanges, and securities of some foreign issuers are less liquid and more volatile than securities of comparable U.S. issuers. Brokerage commissions and other transaction costs on foreign securities exchanges are generally higher than in the U.S. Dividends and interest paid by 11 foreign issuers may be subject to withholding and other foreign taxes, which may decrease the net return on foreign investments as compared to dividends and interest paid to the Portfolios by domestic companies. See "Taxes". Additional risks include future political and economic developments, the possibility that a foreign jurisdiction might impose or change withholding taxes on income payable with respect to foreign securities, possible seizure, nationalization or expropriation of the foreign issuer or foreign deposits, and the possible adoption of foreign governmental restrictions such as exchange controls. Such investments in securities of foreign issuers are frequently denominated in foreign currencies, and since the Portfolio may temporarily hold uninvested reserves in bank deposits in foreign currencies, the value of the Portfolio's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations, and the Portfolio may incur costs in connection with conversions between various currencies. INVESTMENT LIMITATIONS As a diversified investment company, the Portfolio is subject to the following limitations: (a) as to 75% of its total assets, the Portfolio may not invest more than 5% of its total assets in the securities of any one issuer, except obligations of the United States Government and its agencies and instrumentalities, and (b) the Portfolio may not own more than 10% of the outstanding voting securities of any one issuer. The Portfolio also operates under certain investment restrictions that are deemed fundamental limitations and may be changed only with the approval of the holders of a majority of the Portfolio's outstanding shares. See "Investment Limitations" in the Statement of Additional Information. In addition, the Portfolio operates under certain non-fundamental investment limitations as described below and in the Statement of Additional Information. The Portfolio may not (i) enter into repurchase agreements with more than seven days to maturity if, as a result, more than 10% of the market value of the Portfolio's total assets would be invested in such repurchase agreements and other investments for which market quotations are not readily available or which are otherwise illiquid; (ii) borrow money, except from banks for extraordinary or emergency purposes, and then only in amounts up to 10% of the value of the Portfolio's total assets, taken at cost at the time of borrowing; or purchase securities while borrowings exceed 5% of its total assets; or mortgage, pledge or hypothecate any assets except in connection with any such borrowing in amounts up to 10% of the value of the Portfolio's net assets at the time of borrowing; (iii) invest in fixed time deposits with a duration of over seven calendar days; or (iv) invest in fixed time deposits with a duration of from two business days to seven calendar days if more than 10% of the Portfolio's total assets would be invested in these deposits. 12 MANAGEMENT OF THE FUND INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment Adviser and Administrator of the Fund and each of its Portfolios. The Adviser provides investment advice and portfolio management services, pursuant to an Investment Advisory Agreement and, subject to the supervision of the Fund's Board of Directors, makes each of the Portfolio's day-to-day investment decisions, arranges for the execution of portfolio transactions and generally manages each of the Portfolio's investments. The Adviser is entitled to receive from the Active Country Allocation Portfolio an annual investment advisory fee, payable quarterly, equal to 0.65% of the average daily net assets of the Portfolio. The fees of the Portfolio, which involves international investments, are higher than those of most investment companies but comparable to those of investment companies with similar objectives. Effective October 9, 1992, the Adviser has agreed to a reduction in the fees payable to it and to reimburse the Portfolio, if necessary, if such fees would cause total annual operating expenses of the Portfolio to exceed 0.80% of the average daily net assets of the Portfolio. Prior to October 9, 1992, the maximum expense ratio for the Portfolio was 0.90% of average daily net assets. The Adviser, with principal offices at 1221 Avenue of the Americas, New York, New York 10020, conducts a worldwide portfolio management business, providing a broad range of portfolio management services to customers in the United States and abroad. At December 31, 1994, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $48.7 billion, including approximately $35.6 billion under active management and $13.1 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. PORTFOLIO MANAGER. Paul J. Jackson is a Principal of Morgan Stanley and a Portfolio Manager with the Adviser. He joined the Adviser in 1991 to manage the Active Country Allocation Portfolio, which he has managed since the inception. Mr. Jackson joined Morgan Stanley in 1986, concentrating on top-down analysis as an economist and quantitative analyst, first in the Corporate Finance Department and then in the Equity Research Department. In the Equity Research Department he was responsible for Morgan Stanley's global quantitative research effort. During this time, he authored the GLOBAL-QUANT publication. Formerly, Mr. Jackson worked at the U.K. Department of Energy focusing on macroeconomic analysis. Mr. Jackson has a first class honors degree in Economics from the London School of Economics and was awarded a Masters Degree in Economics from University College, Oxford. ADMINISTRATOR. The Adviser also provides the Fund with administrative services pursuant to an Administration Agreement. The services provided under the Administration Agreement are subject to the supervision of the Officers and the Board of Directors of the Fund and include day-to-day administration of matters related to the corporate existence of the Fund, maintenance of its records, preparation of reports, supervision of the Fund's arrangements with its custodian and assistance in the preparation of the Fund's registration statements under Federal and State laws. The Administration Agreement also provides that the Administrator, through its agents, will provide the Fund dividend disbursing and transfer agent services. For its services under the Administration Agreement, the Fund pays the Adviser a monthly fee which on an annual basis equals 0.15% of the average daily net assets of the Portfolio. 13 Under the U.S. Trust Administration Agreement between the Adviser and United States Trust Company of New York ("U.S. Trust"), U.S. Trust has agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegates its responsibilities to Mutual Funds Service Company ("MFSC"), a subsidiary of U.S. Trust, that provides certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by MFSC. The services provided under the Administration Agreement and the U.S. Trust Administration Agreement are also subject to the supervision of the Board of Directors of the Fund. The Board of Directors of the Fund has approved the provision of services described above pursuant to the Administration Agreement and the U.S. Trust Administration Agreement as being in the best interests of the Fund. MFSC's business address is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information regarding the Administration Agreement or the U.S. Trust Administration Agreement, see "Management of the Fund" in the Statement of Additional Information. DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation, the Board of Directors decides upon matters of general policy and review the actions of the Fund's Adviser, Administrator and Distributor. The Officers of the Fund conduct and supervise its daily business operations. DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the shares of the Portfolio. Under its Distribution Agreement with the Fund, Morgan Stanley sells shares of the Fund upon the terms and at the current offering price described in this Prospectus. Morgan Stanley is not obligated to sell any certain number of shares of the Fund and receives no compensation for its distribution services. EXPENSES. The Portfolio is responsible for payment of certain other fees and expenses (including legal fees, accountants' fees, custodial fees and printing and mailing costs) specified in the Administration and Distribution Agreements. PURCHASE OF SHARES Shares of the Portfolio may be purchased without sales commission, at the net asset value per share next determined after receipt of the purchase order. See "Valuation of Shares." INITIAL INVESTMENTS 1) BY CHECK. An account may be opened by completing and signing an Account Registration Form and mailing it, together with a check ($500,000 minimum for the Active Country Allocation Portfolio, with certain exceptions for Morgan Stanley employees and select customers) payable to "Morgan Stanley Institutional Fund, Inc. -- Active Country Allocation Portfolio", to: Morgan Stanley Institutional Fund, Inc. P.O. Box 2798 Boston, Massachusetts 02208-2798 Payment will be accepted only in U.S. dollars, unless prior approval for payment by other currencies is given by the Fund. The Portfolio(s) to be purchased should be designated on the Account Registration Form. For purchases by check, the Fund is ordinarily credited with Federal Funds within one business day. Thus your purchase of shares by check is ordinarily credited to your account at the net asset value per share of the Portfolio determined on the next business day after receipt. 14 2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal Funds to the Fund's bank account. In order to ensure prompt receipt of your Federal Funds Wire, it is important that you follow these steps: A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your name, address, telephone number, Social Security or Tax Identification Number, the portfolio(s) selected, the amount being wired, and by which bank. We will then provide you with a Fund account number. (Investors with existing accounts should also notify the Fund prior to wiring funds.) B. Instruct your bank to wire the specified amount to the Fund's Wire Concentration Bank Account (be sure to have your bank include the name of the portfolio(s) selected and the account number assigned to you): United States Trust Company of New York 114 West 47th Street New York, NY 10036 ABA #0210-0131-8 DDA #20-9310-3 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (portfolio name, your account number, your account name) Please call before wiring funds: 1-800-548-7786 C. Complete and sign the Account Registration Form and mail it to the address shown thereon. Federal Funds purchase orders will be accepted only on a day on which the Fund and United States Trust Company of New York (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring funds. 3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire" above must be followed in purchasing shares by bank wire. However, money transferred by bank wire may or may not be converted into Federal Funds the same day, depending on the time the money is received and the bank handling the wire. Prior to such conversion, an investor's money will not be invested and, therefore, will not be earning dividends. Your bank may charge a service fee for wiring funds. ADDITIONAL INVESTMENTS You may add to your account at any time (minimum additional investment $1,000, except for automatic reinvestment of dividends and capital gains distributions for which there are no minimums) by purchasing shares at net asset value by mailing a check to the Fund (payable to "Morgan Stanley Institutional Fund, Inc.-- Active Country Allocation Portfolio") at the above address or by wiring monies to the Custodian Bank as outlined above. It is very important that your account name and the portfolio name be specified in the letter or wire to assure proper crediting to your account. In order to ensure that your wire orders are invested promptly, you are requested to notify one of the Fund's representatives (toll-free 1-800-548-7786) prior to the wire date. OTHER PURCHASE INFORMATION The purchase price of the shares of the Portfolio is the net asset value next determined after the order is received. See "Valuation of Shares." An order received prior to the close of the New York Stock Exchange 15 ("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the price computed on the date of receipt; an order received after the close of the NYSE will be executed at the price computed on the next day the NYSE is open. In the interest of economy and convenience, and because of the operating procedures of the Fund, certificates representing shares of the Portfolio will not be issued. All shares purchased are confirmed to you and credited to your account on the Fund's books maintained by the Adviser or its agents. You will have the same rights and ownership with respect to such shares as if certificates had been issued. To assure that checks are collected by the Fund, withdrawals of investments made by check are not presently permitted until payment for the purchase has been received, which may take up to eight business days after the date of purchase. As a condition of this offering, if a purchase is cancelled due to nonpayment or because your check does not clear, you will be responsible for any loss the Fund or its agents incur. If you are already a shareholder, the Fund may redeem shares from your account(s) to reimburse the Fund or its agents for any loss. In addition, you may be prohibited or restricted from making future investments in the Fund. Investors may also invest in the Fund by purchasing shares through registered broker-dealers. Broker-dealers who make purchases for their customers may charge a fee for such services. See "Purchase of Shares" in the Statement of Additional Information. REDEMPTION OF SHARES You may withdraw all or any portion of the amount in your account by redeeming shares at any time. Please note that purchases made by check are not permitted to be redeemed until payment of the purchase has been collected, which may take up to eight business days after purchase. The Fund will redeem shares of the Portfolio at its next determined net asset value. On days that both the NYSE and the Custodian Bank are open for business, the net asset value per share of the Portfolio is determined at the close of trading of the NYSE (currently 4:00 p.m. Eastern Time). Shares of the Portfolio may be redeemed by mail or telephone. No charge is made for redemption. Any redemption proceeds may be more or less than the purchase price of your shares depending on, among other factors, the market value of the investment securities held by the Portfolio, except that deliveries by overnight courier should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108-3913. BY MAIL The Portfolio will redeem its shares at the net asset value determined on the date the request is received, if the request is received in "good order" before the regular close of the NYSE. Your request should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798, except that deliveries by overnight courier should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds Service Company, 73 Tremont St., Boston, Massachusetts 02108. "Good order" means that the request to redeem shares must include the following documentation: (a) A letter of instruction or a stock assignment specifying the number of shares or dollar amount to be redeemed, signed by all registered owners of the shares in the exact names in which they are registered; (b) Any required signature guarantees (see "Further Redemption Information" below); and 16 (c) Other supporting legal documents, if required, in the case of estates, trusts, guardianships, custodianships, corporations, pension and profit-sharing plans and other organizations. Shareholders who are uncertain of requirements for redemption should consult with a Morgan Stanley Institutional Fund representative. BY TELEPHONE Provided you have previously elected the Telephone Redemption Option on the Account Registration Form, you can request a redemption of your shares by calling the Fund and requesting the redemption proceeds be mailed to you or wired to your bank. Please contact one of Morgan Stanley Institutional Fund's representatives for further details. In times of drastic market conditions, the telephone redemption option may be difficult to implement. If you experience difficulty in making a telephone redemption, your request may be made by mail or overnight courier and will be implemented at the net asset value next determined after it is received. Redemption requests sent to the Fund through express mail must be mailed to the address of the Dividend Disbursing and Transfer Agent listed under "General Information." The Fund and the Fund's transfer agent (the "Transfer Agent") will employ reasonable procedures to confirm that the instructions communicated by telephone are genuine. These procedures include requiring the investor to provide certain personal identification information at the time an account is opened and prior to effecting each transaction requested by telephone. In addition, all telephone transaction requests will be recorded and investors may be required to provide additional telecopied written instructions regarding transaction requests. Neither the Fund nor the Transfer Agent will be responsible for any loss, liability, cost or expense for following instructions received by telephone that either of them reasonably believes to be genuine. To change the commercial bank or account designated to receive redemption proceeds, a written request must be sent to the Fund at the address above. Requests to change the bank or account must be signed by each shareholder and each signature must be guaranteed. FURTHER REDEMPTION INFORMATION Normally the Fund will make payment for all shares redeemed within one business day of receipt of the request, but in no event will payment be made more than seven days after receipt of a redemption request in good order. However, payments to investors redeeming shares which were purchased by check will not be made until payment for the purchase has been collected, which may take up to eight days after the date of purchase. The Fund may suspend the right of redemption or postpone the date upon which redemptions are effected at times when the NYSE is closed, or under any emergency circumstances as determined by the Securities and Exchange Commission (the "Commission"). If the Board of Directors determines that it would be detrimental to the best interests of the remaining shareholders of the Portfolio to make payment wholly or partly in cash, the Fund may pay the redemption proceeds in whole or in part by a distribution in-kind of securities held by the Portfolio in lieu of cash in conformity with applicable rules of the Commission. Distributions-in-Kind will be made in readily marketable securities. Investors may incur brokerage charges on the sale of portfolio securities so received in payment of redemptions. Due to the relatively high cost of maintaining smaller accounts, the Fund reserves the right to redeem shares in any account invested in the Portfolio having a value of less than $500,000 (the net asset value of which 17 will be promptly paid to the shareholder). The Fund, however, will not redeem shares based solely upon market reductions in net asset value. If at any time your total investment does not equal or exceed the stated minimum value, you may be notified of this fact and you will be allowed at least 60 days to make an additional investment before the redemption is processed. To protect your account, the Fund and its agents from fraud, signature guarantees are required for certain redemptions to verify the identity of the person who has authorized a redemption from your account. Please contact the Fund for further information. See "Redemption of Shares" in the Statement of Additional Information. SHAREHOLDER SERVICES EXCHANGE PRIVILEGE You may exchange shares that you own in the Portfolio for shares of any other available portfolio(s) of the Fund (except for the International Equity Portfolio). The privilege to exchange shares by telephone is automatic. Shares of the portfolios may be exchanged by mail or telephone. The privilege to exchange shares by telephone is made available without shareholder election. Before you make an exchange, you should read the Prospectus of the portfolio(s) in which you seek to invest. Because an exchange transaction is treated as a redemption followed by a purchase, an exchange would be considered a taxable event for shareholders subject to tax. The exchange privilege is only available with respect to portfolios that are registered for sale in a shareholder's state of residence. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name and account number of the Portfolio, the name of the portfolio(s) into which you intend to exchange shares, and the signatures of all registered account holders. Send the exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, MA 02208-2798. BY TELEPHONE When exchanging shares by telephone, have ready the name and account number of the current portfolio, the name of the portfolio(s) into which you intend to exchange shares, your Social Security number or Tax I.D. number, and your account address. Requests for telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at the close of business that same day based on the net asset value of each of the portfolios at the close of business. Requests received after 4:00 p.m. are processed the next business day based on the net asset value determined at the close of business on such day. For additional information regarding responsibility for the authenticity of telephoned instructions, see "Redemption of Shares -- By Telephone" above. TRANSFER OF REGISTRATION You may transfer the registration of any of your Fund shares to another person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. As in the case of redemptions, the written request must be received in good order before any transfer can be made. 18 VALUATION OF SHARES The net asset value per share of the Portfolio is determined by dividing the total market value of the Portfolio's investments and other assets, less any liabilities, by the total number of outstanding shares of the Portfolio. Net asset value per share is determined as of the close of the NYSE on each day that the NYSE is open for business. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities listed on a U.S. securities exchange for which market quotations are available are valued at the last quoted sale price on the day the valuation is made. Securities listed on a foreign exchange are valued at their closing price. Unlisted securities and listed securities not traded on the valuation date for which market quotations are readily available are valued at a price that is considered to best represent fair value within a range not exceeding the current asked price nor less than the current bid price. The current bid and asked prices are determined based on the bid and asked prices quoted on such valuation date by reputable brokers. Bonds and other fixed income securities are valued according to the broadest and most representative market, which will ordinarily be the over-the-counter market. Net asset value includes interest on fixed income securities, which is accrued daily. In addition, bonds and other fixed income securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. The prices provided by a pricing service are determined without regard to bid or last sale prices, but take into account institutional size trading in similar groups of securities and any developments related to the specific securities. Securities not priced in this manner are valued at the most recently quoted bid price, or when securities exchange valuations are used, at the latest quoted sale price on the day of valuation. If there is no such reported sale, the latest quoted bid price will be used. Securities purchased with remaining maturities of 60 days or less are valued at amortized cost, if it approximates market value. In the event that amortized cost does not approximate market value, market prices as determined above will be used. The value of other assets and securities for which no quotations are readily available (including restricted and unlisted foreign securities) and those securities for which it is inappropriate to determine prices in accordance with the above-stated procedure are determined in good faith at fair value using methods determined by the Board of Directors. For purposes of calculating net asset value per share, all assets and liabilities initially expressed in foreign currencies will be translated into U.S. dollars at the mean of the bid price and asked price of such currencies against the U.S. dollar last quoted by any major bank. PERFORMANCE INFORMATION The Fund may from time to time advertise total return of the Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in the Portfolio would have earned over a specified period of time (such as one, five or ten years), assuming that all distributions and dividends by the Portfolio were reinvested on the reinvestment dates during the period. Total return does not take into account any federal or state income taxes that may be payable on dividends and distributions or on redemption. The Fund may also include comparative performance information in advertising or marketing the Portfolio's shares. Such performance information may include data from Lipper Analytical Services, Inc., other industry publications, business periodicals, rating services and market indices. 19 DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions will automatically be reinvested in additional shares at net asset value, except that, upon written notice to the Fund or by checking off the appropriate box in the Distribution Option Section on the Account Registration Form, a shareholder may elect to receive income dividends and capital gains distributions in cash. The Portfolio expects to distribute substantially all of its net investment income in the form of annual dividends. Net capital gains, if any, will also be distributed annually. Confirmations of the purchase of shares of the Portfolio through the automatic reinvestment of income dividends and capital gains distributions will be provided, pursuant to Rule 10b-10 under the Securities Exchange Act of 1934, as amended, on the next quarterly client statement following such purchase of shares. Consequently, confirmations of such purchases will not be provided at the time of completion of such purchases as might otherwise be required by Rule 10b-10. Undistributed net investment income is included in the Portfolio's net assets for the purpose of calculating net asset value per share. Therefore, on the "ex-dividend" date, the net asset value per share excludes the dividend (i.e., is reduced by the per share amount of the dividend). Dividends paid shortly after the purchase of shares by an investor, although in effect a return of capital, are taxable to shareholders subject to income tax. TAXES GENERAL The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial, or administrative action. No attempt has been made to present a detailed explanation of the federal, state, or local income tax treatment of the Portfolio or its shareholders. Accordingly, shareholders are urged to consult their tax advisors regarding specific questions as to federal, state and local income taxes. The Portfolio is treated as a separate entity for federal income tax purposes and is not combined with the Fund's other portfolios. The Portfolio intends to qualify for the special tax treatment afforded regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so that the Portfolio will be relieved of federal income tax on that part of its net investment income and net capital gain that is distributed to shareholders. The Portfolio distributes substantially all of its net investment income (including, for this purpose, net short-term capital gain) to shareholders. Dividends from the Portfolio's net investment income are taxable to shareholders as ordinary income, whether received in cash or reinvested in additional shares. Such dividends paid by the Portfolio will generally qualify for the 70% dividends-received deduction for corporate shareholders only to the extent of the aggregate qualifying dividend income received by the Portfolio from U.S. corporations. The Portfolio will report annually to its shareholders the amount of dividend income qualifying for such treatment. 20 Distributions of net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses) are taxable to shareholders as long-term capital gains, regardless of how long the shareholder has held the Portfolio's shares. The Portfolio sends reports annually to shareholders of the federal income tax status of all distributions made during the preceding year. The Portfolio intends to make sufficient distributions or deemed distributions of its ordinary income and capital gain net income (the excess of short-term and long-term capital gains over short-term and long-term capital losses), including any available capital loss carryforwards, prior to the end of each calendar year to avoid liability for federal excise tax. Dividends and other distributions declared by the Portfolio in October, November or December of any year and payable to shareholders of record on a date in such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if the distributions are paid by the Portfolio at any time during the following January. The sale or redemption of shares may result in taxable gain or loss to the redeeming shareholder, depending upon whether the fair market value of the redemption proceeds exceeds or is less than the shareholder's adjusted basis in the redeemed shares. If capital gain distributions have been made with respect to shares that are sold at a loss after being held for six months or less, then the loss is treated as a long-term capital loss to the extent of the capital gain distributions. Shareholders are urged to consult with their tax advisers concerning the application of state and local income taxes to investments in the Portfolio, which may differ from the federal income tax consequences described above. Investment income received by the Portfolio from sources within foreign countries may be subject to foreign income taxes withheld at the source. To the extent that the Portfolio is liable for foreign income taxes so withheld, the Portfolio intends to operate so as to meet the requirements of the Code to pass through to the shareholders credit for foreign income taxes paid. Although the Portfolio intends to meet Code requirements to pass through credit for such taxes, there can be no assurance that the Portfolio will be able to do so. THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO. PORTFOLIO TRANSACTIONS The Investment Advisory Agreement authorizes the Adviser to select the brokers or dealers that will execute the purchases and sales of investment securities for the Portfolio and directs the Adviser to use its best efforts to obtain the best available price and most favorable execution with respect to all transactions for the Portfolio. The Fund has authorized the Adviser to pay higher commissions in recognition of brokerage services which, in the opinion of the Adviser, are necessary for the achievement of better execution, provided the Adviser believes this to be in the best interest of the Fund. 21 Since shares of the Portfolio are not marketed through intermediary brokers or dealers, it is not the Fund's practice to allocate brokerage or principal business on the basis of sales of shares which may be made through such firms. However, the Adviser may place portfolio orders with qualified broker-dealers who recommend the Fund's portfolios or who act as agents in the purchase of shares of the Fund's portfolios for their clients. In purchasing and selling securities for the Portfolio, it is the Fund's policy to seek to obtain quality execution at the most favorable prices, through responsible broker-dealers. In selecting broker-dealers to execute the securities transactions for the Portfolio, consideration will be given to such factors as the price of the security, the rate of the commission, the size and difficulty of the order, the reliability, integrity, financial condition, general execution and operational capabilities of competing broker-dealers, and the brokerage and research services which they provide to the Fund. Some securities considered for investment by the Portfolio may also be appropriate for other clients served by the Adviser. If purchase or sale of securities consistent with the investment policies of the Portfolio and one or more of these other clients served by the Adviser is considered at or about the same time, transactions in such securities will be allocated among the Portfolio and clients in a manner deemed fair and reasonable by the Adviser. Although there is no specified formula for allocating such transactions, the various allocation methods used by the Adviser, and the results of such allocations, are subject to periodic review by the Fund's Board of Directors. Subject to the overriding objective of obtaining the best possible execution of orders, the Adviser may allocate a portion of each portfolio's brokerage transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order for Morgan Stanley or its affiliates to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by Morgan Stanley or such affiliates must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. Furthermore, the Board of Directors of the Fund, including a majority of the Directors who are not "interested persons," have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Morgan Stanley or such affiliates are consistent with the foregoing standard. Portfolio securities will not be purchased from, or through, or sold to or through, the Adviser or Morgan Stanley or any "affiliated persons," as defined in the Investment Company Act of 1940, as amended (the "1940 Act"), of Morgan Stanley when such entities are acting as principals, except to the extent permitted by law. Although the Portfolio will not invest for short-term trading purposes, investment securities may be sold from time to time without regard to the length of time they have been held. It is anticipated that the annual turnover rate of the Portfolio will not exceed 100% in normal circumstances. GENERAL INFORMATION DESCRIPTION OF COMMON STOCK The Fund was organized as a Maryland corporation on June 16, 1988. The Articles of Incorporation permit the Fund to issue up to 15,000,000,000 shares of common stock, with $.001 par value per share. Pursuant to the Fund's By-Laws, the Board of Directors may increase the number of shares the Fund is authorized to issue 22 without the approval of the shareholders of the Fund. The Board of Directors has the power to designate one or more classes of shares of common stock and to classify and reclassify any unissued shares with respect to such classes. The shares of the Portfolio, when issued, will be fully paid, non-assessable, fully transferable and redeemable at the option of the holder. The shares have no preference as to conversion, exchange, dividends, retirement or other features and have no preemptive rights. The shares of the Portfolio have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of Directors can elect 100% of the Directors if they choose to do so. Persons or organizations owning 25% or more of the outstanding shares of a portfolio may be presumed to "control" (as that term is defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is not required to hold an annual meeting of its shareholders unless required to do so under the 1940 Act. REPORTS TO SHAREHOLDERS The Fund will send to its shareholders annual and semi-annual reports; the financial statements appearing in annual reports are audited by independent accountants. Monthly unaudited portfolio data is also available from the Fund upon request. In addition, Morgan Stanley Asset Management Inc., or its agent, as Transfer Agent, will send to each shareholder having an account directly with the Fund a monthly statement showing transactions in the account, the total number of shares owned, and any dividends or distributions paid. CUSTODIAN Domestic securities and cash are held by United States Trust Company of New York, New York, as the Fund's domestic custodian. Morgan Stanley Trust Company, Brooklyn, New York, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians who were approved by the Board of Directors of the Fund in accordance with regulations of the Securities and Exchange Commission for the purpose of providing custodial services for such assets. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the Fund. INDEPENDENT ACCOUNTANTS Price Waterhouse LLP serves as independent accountants for the Fund and audits its annual financial statements. LITIGATION The Fund is not involved in any litigation. 23 (This page has been left blank intentionally.) MORGAN STANLEY INSTITUTIONAL FUND, INC. -- ACTIVE COUNTRY ALLOCATION PORTFOLIO P.O. Box 2798, Boston, MA 02208-2798 - ------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - ------------------------------------------------------------------------------- ACCOUNT INFORMATION |If you need assistance in filling out this form for the Morgan Stanley Institutional Fund, please Fill in where |contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all applicable |items except signature, and mail to the Fund at the address above. - ----------------------------------------------------------------------------------------------------------------------------------- A) REGISTRATION | 1. INDIVIDUAL |1. ______________________________________________________________________________________________________ 2. JOINT TENANTS | First Name Initial Last Name (RIGHTS OF |2. ______________________________________________________________________________________________________ SURVIVORSHIP | First Name Initial Last Name PRESUMED UNLESS | ______________________________________________________________________________________________________ TENANCY IN COMMON | First Name Initial Last Name IS INDICATED) | - ----------------------------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, | TRUSTS AND OTHERS |3. ______________________________________________________________________________________________________ Please call the | ______________________________________________________________________________________________________ Fund for additional| ______________________________________________________________________________________________________ documents that may | Type of Registration: / /INCORPORATED / /UNINCORPORATED / /PARTNERSHIP / /UNIFORM GIFT/TRANSFER TO MINOR be required to set | ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR up account and to | PERMITTED) authorize | / /TRUST __________________________ / /OTHER (Specify) ________________________ transactions | - ----------------------------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS | Please fill in |Street or P.O. Box_______________________________________________________________________________________ completely, |City______________________________________________________________State_______Zip_______________-________ including telephone |Home Telephone No.______-_______-_________________Business Telephone No._______-_______-_________________ number(s). |/ /United States Citizen / /Resident Alien / /Non-Resident Alien: Indicate Country of Residence _________ - ----------------------------------------------------------------------------------------------------------------------------------- C) TAXPAYER |PART 1. Enter your Taxpayer | IMPORTANT TAX INFORMATION IDENTIFICATION |Identification Number. For most |You (as a payee) are required by law to provide us (as payer) NUMBER |individual taxpayers, this is |with your correct taxpayer identification number. Accounts that If the account is in |your Social Security Number. |have a missing or incorrect taxpayer identification number will more than one name, | TAXPAYER IDENTIFICATION NUMBER |be subject to backup withholding at a 31% rate on CIRCLE THE NAME OF THE|______-_________________________ |dividends, distributions and other payments. If you have not PERSON WHOSE TAXPAYER | OR |provided us with your correct taxpayer identification number, you IDENTIFICATION NUMBER | SOCIAL SECURITY NUMBER |may be subject to a $50 penalty imposed by the Internal Revenue IS PROVIDED IN SECTION|________-_____________-_________ |Service. A) ABOVE. If no name | | is circled, the number|PART 2. BACKUP WITHHOLDING |Backup withholding is not an additional tax; the tax liability of will be considered to |/ / Check this box if you are NOT |persons subject to backup withholding will be reduced by the be that of the last |subject to Backup Withholding |amount of tax withheld. If withholding results in an overpayment name listed. For |under the provisions of Section |of taxes, a refund may be obtained. Custodian account of |3406(a)(1)(C) of the Internal | a minor (Uniform |Revenue Code. |You may be notified that you are subject to backup withholding Gifts/Transfers to | |under Section 3406(a)(1)(C) of the Internal Revenue Code because Minors Acts), give the| |you have underreported interest or dividends or you were required Social Security Number| |to but failed to file a return which would have included a of the minor. | |reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO |NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - ----------------------------------------------------------------------------------------------------------------------------------- D) PORTFOLIO SELECTION | MINIMUM $500,000. | / /For purchase of $ __________ of the Active Country Allocation Portfolio PLEASE INDICATE | AMOUNT. | - ----------------------------------------------------------------------------------------------------------------------------------- E) METHOD OF |Payment by: INVESTMENT |/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--ACTIVE COUNTRY ALLOCATION | PORTFOLIO) Please indicate | _________________________________-______ manner of |/ / Exchange $____________________ From__________________________ Account Number payment. | Name of Portfolio |/ / Account previously established by: _________________________________-______ | / / Phone exchange / / Wire on ___________________ Account Number (Check Date (Previously assigned by the Fund) Digit) - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION |Income dividends and capital gains distributions (if any) will be reinvested in additional shares unless OPTION |either box below is checked. |/ /Income dividends to be paid in cash, capital gains distributions (if any) in shares. |/ /Income dividends and capital gains distributions (if any) to be paid in cash. - ----------------------------------------------------------------------------------------------------------------------------------- G) TELEPHONE |/ /I/we hereby authorize the Fund and its| REDEMPTION OPTION | agents to honor any telephone requests|_______________________________________ __________________ Please select at time | to wire redemption proceeds to the |Name of Commercial Bank Bank Account No. of initial | commercial bank indicated at right | (Not Savings Bank) application if you | and/or mail redemption proceeds to the| _________________ wish to redeem | name and address in which my/our fund | Bank ABA No. shares by telephone. | account is registered if such requests|____________________________________________________________ A SIGNATURE GUARANTEE | are believed to be authentic. | Name(s) in which your Bank Account is Established IS REQUIRED IF BANK | |____________________________________________________________ ACCOUNT IS NOT | | Bank's Street Address REGISTERED | |____________________________________________________________ IDENTICALLY TO YOUR |THE FUND AND THE FUND'S |City State Zip FUND ACCOUNT. |TRANSFER AGENT WILL EMPLOY REASONABLE | |PROCEDURES TO CONFIRM THAT INSTRUCTIONS | TELEPHONE REQUESTS |COMMUNICATED BY TELEPHONE ARE GENUINE. | FOR REDEMPTIONS OR |THESE PROCEDURES INCLUDE REQUIRING THE | EXCHANGES WILL NOT |INVESTOR TO PROVIDE CERTAIN PERSONAL | BE HONORED UNLESS |IDENTIFICATION INFORMATION AT THE TIME AN| THE APPLICABLE BOX |ACCOUNT IS OPENED AND PRIOR TO EFFECTING | IS CHECKED. |EACH TRANSACTION REQUESTED BY TELEPHONE. | |IN ADDITION, ALL TELEPHONE TRANSACTION | |REQUESTS WILL BE RECORDED AND INVESTORS | |MAY BE REQUIRED TO PROVIDE ADDITIONAL | |TELECOPIED WRITTEN INSTRUCTIONS OF | |TRANSACTION REQUESTS. NEITHER THE FUND | |NOR THE TRANSFER AGENT WILL BE | |RESPONSIBLE FOR ANY LOSS, LIABILITY, COST| |OR EXPENSE FOR FOLLOWING INSTRUCTIONS | |RECEIVED BY TELEPHONE THAT IT REASONABLY | |BELIEVES TO BE GENUINE. | - ----------------------------------------------------------------------------------------------------------------------------------- H) INTERESTED PARTY |___________________________________________________________________________________________________ OPTION | Name |___________________________________________________________________________________________________ In addition to the | account statement sent|___________________________________________________________________________________________________ to my/our registered | Address address, I/we hereby | authorize the fund |___________________________________________________________________________________________________ to mail duplicate | City State Zip Code statements to the | name and address | provided at right. | - ----------------------------------------------------------------------------------------------------------------------------------- I) DEALER |_______________________________________ ___________________________________ _______________________ INFORMATION | Representative Name Representative No. Branch No. - ----------------------------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF |The undersigned certify that I/we have full authority and legal capacity to purchase and redeem ALL HOLDERS |shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley AND TAXPAYER |Institutional Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF PERJURY, I/WE CERTIFICATION |CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE. | |(X) (X) Sign Here --> |------------------------------------------------ ----------------------------------------------------- |Signature Date Signature Date - -----------------------------------------------------------------------------------------------------------------------------------
(This page has been left blank intentionally.) ------------------------------------------- ------------------------------------------- ------------------------------------------- ------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. -------------------------- TABLE OF CONTENTS PAGE ----- Fund Expenses..................................... 2 Financial Highlights.............................. 3 Prospectus Summary................................ 4 Investment Objective and Policies................. 7 Additional Investment Information................. 9 Investment Limitations............................ 12 Management of the Fund............................ 13 Purchase of Shares................................ 14 Redemption of Shares.............................. 16 Shareholder Services.............................. 18 Valuation of Shares............................... 19 Performance Information........................... 19 Dividends and Capital Gains Distributions......... 20 Taxes............................................. 20 Portfolio Transactions............................ 21 General Information............................... 22 Account Registration Form
ACTIVE COUNTRY ALLOCATION PORTFOLIO A PORTFOLIO OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. COMMON STOCK ($.001 PAR VALUE) ------------- PROSPECTUS ------------- Investment Adviser Morgan Stanley Asset Management Inc. Distributor Morgan Stanley & Co. Incorporated ------------------------------------------- ------------------------------------------- ------------------------------------------- ------------------------------------------- SUPPLEMENT DATED JUNE 30, 1995 TO PROSPECTUS DATED MAY 1, 1995 OF MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798 BOSTON, MASSACHUSETTS 02208-2798 ------------- The prospectus dated May 1, 1995 (the "Prospectus") of the Gold Portfolio of the Morgan Stanley Institutional Fund, Inc. (the "Fund") is hereby amended and supplemented by adding the following paragraph to page 19 before the paragraph with the heading "REDEMPTION OF SHARES": EXCESSIVE TRADING. Frequent trades involving either substantial fund assets or a substantial portion of your account or accounts controlled by you can disrupt management of a Portfolio and raise its expenses. Consequently, in the interest of all the stockholders of the Portfolio and the Portfolio's performance, the Fund may in its discretion bar a stockholder that engages in excessive trading of shares of a Portfolio from further purchases of shares of the Fund for an indefinite period. The Fund considers excessive trading to be more than one purchase and sale involving shares of the same Portfolio of the Fund within any 120-day period. For example, exchanging shares of Portfolios of the Fund as follows: exchanging shares of Portfolio A for shares of Portfolio B, then exchanging shares of Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C for shares of Portfolio B within a 120-day period amounts to excessive trading. Two types of transactions are exempt from these excessive trading restrictions: (1) trades exclusively between money market portfolios; and (2) trades done in connection with an asset allocation service managed or advised by MSAM and/or any of its affiliates. - -------------------------------------------------------------------------------- P R O S P E C T U S ---------------------------------------------------------------------- GOLD PORTFOLIO A PORTFOLIO OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798 FOR INFORMATION CALL 1-800-548-7786 ---------------- Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end management investment company with diversified and non-diversified series ("portfolios"). The Fund currently consists of twenty-seven Portfolios offering a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. Shares of the Portfolios are offered with no sales charge or exchange or redemption fee (with the exception of one of the portfolios). This Prospectus sets forth information pertaining to the Gold Portfolio (the "Portfolio"). The GOLD PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in the equity securities of foreign and domestic issuers engaged in gold-related activities. INVESTORS SHOULD NOTE THAT THE PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES, AND IT MAY INVEST UP TO 20% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES THAT ARE RULE 144A SECURITIES. SEE "ADDITIONAL INVESTMENT INFORMATION -- NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES." INVESTMENTS IN EXCESS OF 5% OF THE PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE GREATER RISK, AND MAY INCREASE THE PORTFOLIO'S EXPENSES. The Fund is designed to meet the investment needs of discerning investors who place a premium on quality and personal service. With Morgan Stanley Asset Management Inc. as Adviser and Administrator (the "Adviser" and the "Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley") as Distributor, the Fund makes available to institutional investors and high net worth individual investors a series of portfolios which benefit from the investment expertise and commitment to excellence associated with Morgan Stanley and its affiliates. This Prospectus is designed to set forth concisely the information about the Fund that a prospective investor should know before investing and it should be retained for future reference. The Fund offers additional portfolios which are described in other prospectuses and under the Prospectus Summary section herein. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity, U.S. Real Estate and Value Equity Portfolios; (iii) BALANCED -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities, Municipal Bond and Real Yield Portfolios; and (v) MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional information about the Fund is contained in a "Statement of Additional Information," dated May 1, 1995, which is incorporated herein by reference. The Statement of Additional Information and the Prospectuses pertaining to the other portfolios of the Fund are available upon request and without charge by writing or calling the Fund at the address and telephone number set forth above. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS MAY 1, 1995. FUND EXPENSES The following table illustrates all expenses and fees that a shareholder of the Gold Portfolio will incur:
SHAREHOLDER TRANSACTION EXPENSES - -------------------------------------------------------------------------------------------- Maximum Sales Load Imposed on Purchases..................................................... None Maximum Sales Load Imposed on Reinvested Dividends.......................................... None Deferred Sales Load......................................................................... None Redemption Fees............................................................................. None Exchange Fees............................................................................... None ANNUAL FUND OPERATING EXPENSES - -------------------------------------------------------------------------------------------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Investment Advisory and Sub-Advisory Fees (Net of Fee Waiver)............................... 0.46%* Administrative & Shareholder Account Costs.................................................. 0.15% 12b-1 Fees.................................................................................. None Custody Fees................................................................................ 0.06% Other Expenses.............................................................................. 0.58% --------- Total Operating Expenses (Net of Fee Waiver)............................................ 1.25%* --------- --------- - -------------- *The Adviser has agreed to a reduction in the fees payable to it as Adviser and to reimburse the Portfolio, if necessary, if such fees would cause the total annual operating expenses of the Portfolio to exceed 1.25% of its average daily net assets. If the Adviser so waives or reimburses its fee, the Sub-Adviser has agreed to a proportionate waiver of its fee payable from the Adviser or reimbursement. See "Management of the Fund-Investment Adviser and Sub-Adviser." Absent this fee waiver, the Portfolio's total operating expenses would be estimated to be 1.79% of its average daily net assets. As a result of this reduction, the Investment Advisory Fee stated above is lower than the contractual fee stated under "Management of the Fund." For further information on Fund expenses, see "Management of the Fund."
The purpose of this table is to assist the investor in understanding the various expenses that an investor in the Portfolio will bear directly or indirectly. The expenses and fees for the Portfolio are based on actual figures for the fiscal period ended December 31, 1994. "Other Expenses" include Directors' fees and expenses, amortization of organizational costs, filing fees, professional fees, and costs for reports to shareholders. The following example illustrates the expenses that you would pay on a $1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at the end of each time period. As noted in the table above, the Portfolio charges no redemption fees of any kind. The example is based on total operating expenses of the Portfolio after fee waivers.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- Gold Portfolio................................................... $ 13 $ 40 $ 69 $ 151
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The Fund intends to comply with all state laws that restrict investment company expenses. Currently, the most restrictive state law requires that the aggregate annual expenses of an investment company shall not exceed 2 two and one-half percent (2 1/2)% of the first $30 million of average net assets, two percent (2)% of the next $70 million of average net assets, and one and one-half percent (1 1/2) of the remaining net assets of such investment company. The Adviser has agreed to a reduction in the amounts payable to it, and to reimburse the Portfolio, if necessary, if in any fiscal year the sum of the Portfolio's expenses exceeds the limit set by applicable state law. If the Adviser is required to so reduce its fee or reimburse the Portfolio, the Sub-Adviser has agreed to a proportionate waiver of its fee payable from the Adviser or reimbursement of expenses. 3 FINANCIAL HIGHLIGHTS The following table provides financial highlights for the Gold Portfolio for the period presented, and is part of the Fund's financial statements which appear in the Fund's December 31, 1994 Annual Report to Shareholders and which are incorporated by reference into the Fund's Statement of Additional Information. The financial highlights for the period presented has been audited by Price Waterhouse LLP, whose unqualified report thereon is also incorporated by reference into the Statement of Additional Information. Additional performance information for the foregoing Portfolio is contained in the Annual Report. The Annual Report and the financial statements therein, along with the Statement of Additional Information, are available at no cost from the Fund at the address and telephone number noted on the cover page of this Prospectus. The following information should be read in conjunction with the financial statements and notes thereto. GOLD PORTFOLIO
PERIOD FROM FEBRUARY 1, 1994* TO DECEMBER 31, 1994 ---------------- NET ASSET VALUE, BEGINNING OF PERIOD............................................................ $ 10.00 ------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)..................................................................... 0.03 Net Realized and Unrealized Loss on Investments............................................... (0.88) ------- Total from Investment Operations............................................................ (0.85) ------- DISTRIBUTIONS Net Investment Income......................................................................... (0.02) ------- NET ASSET VALUE, END OF PERIOD.................................................................. $ 9.13 ------- ------- TOTAL RETURN.................................................................................... (8.49)% ------- ------- RATIO AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)........................................................... $ 30,243 Ratio of Expenses to Average Net Assets (1)(2).................................................. 1.25%** Ratio of Net Investment Income to Average Net Assets (1)(2)..................................... 0.41%** Portfolio Turnover Rate......................................................................... 56% - -------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income............................................... $ 0.04 Ratios before expense limitation: Expenses to Average Net Assets........................................................... 1.72%** Net Investment Loss to Average Net Assets................................................ (0.06)%** (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 1.00% of the average daily net assets of the Gold Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 1.25% of the average daily net assets of the Portfolio. In the fiscal period ended December 31, 1994, the Adviser waived advisory fees and/or reimbursed expenses totaling $55,000 for the Gold Portfolio. * Commencement of Operations. ** Annualized.
4 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-seven portfolios, offering institutional investors and high net worth individual investors a broad range of investment choices coupled with the advantages of a no-load mutual fund with Morgan Stanley and its affiliates providing customized services as Adviser, Administrator and Distributor. Each portfolio has its own investment objectives and policies designed to meet its specific goals. This Prospectus pertains to the Gold Portfolio. -The GOLD PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in the equity securities of foreign and domestic issuers engaged in gold-related activities. The other portfolios of the Fund are described in other Prospectuses which may be obtained from the Fund at the address and telephone number noted on the cover page of this Prospectus. The objectives of these other portfolios are listed below: GLOBAL AND INTERNATIONAL EQUITY: -The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital appreciation by investing in accordance with country weightings determined by the Adviser in common stocks of non-U.S. issuers which, in the aggregate, replicate broad country indices. -The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of Asian issuers. -The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in the equity securities of issuers in The People's Republic of China, Hong Kong and Taiwan. -The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of emerging country issuers. -The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of European issuers. -The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of issuers throughout the world, including U.S. issuers. -The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of non-U.S. issuers. -The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of non-U.S. issuers with equity market capitalizations of less than $500 million. -The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Japanese issuers. -The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Latin American issuers and debt securities issued or guaranteed by Latin American governments or governmental entities. U.S. EQUITY: -The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing primarily in corporate equity and equity-linked securities. -The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented common stocks of small-to-medium sized corporations. 5 -The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing in growth-oriented common stocks of medium and large capitalization companies. -The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued common stocks of small-to-medium sized companies. -The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current income and long-term capital appreciation by investing primarily in equity securities of companies in the U.S. real estate industry, including real estate investment trusts. -The VALUE EQUITY PORTFOLIO seeks high total return by investing in common stocks which the Adviser believes to be undervalued relative to the stock market in general at the time of purchase. BALANCED: -The BALANCED PORTFOLIO seeks high total return while preserving capital by investing in a combination of undervalued common stocks and fixed income securities. FIXED INCOME: -The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing primarily in debt securities of government, government-related and corporate issuers in emerging countries. -The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent with the preservation of capital by investing in a diversified portfolio of fixed income securities. -The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate of return while preserving capital by investing in fixed income securities of issuers throughout the world, including U.S. issuers. -The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a diversified portfolio of high yield fixed income securities that offer a yield above that generally available on debt securities in the three highest rating categories of the recognized rating services. -The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level of current income as is consistent with the preservation of capital by investing primarily in a variety of investment-grade mortgage-backed securities. -The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current income consistent with preservation of principal through investment primarily in municipal obligations, the interest on which is exempt from federal income tax. -The REAL YIELD PORTFOLIO seeks to produce a high total return consistent with preservation of capital by investing in fixed income securities of issuers throughout the world, including U.S. issuers. MONEY MARKET: -The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less. -The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less which are exempt from federal income tax. INVESTMENT MANAGEMENT Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan Stanley Group Inc., which, together with its affiliated asset management companies, at December 31, 1994 had approximately $48.7 billion 6 in assets under management as an investment manager or as a fiduciary adviser, acts as investment adviser to the Fund and each of its portfolios. Sun Valley Gold Company (the "Sub-Adviser"), which at January 31, 1995 had approximately $150 million in assets under management, acts as sub-adviser to the Portfolio. See "Management of the Fund -- Investment Adviser and Sub-Adviser" and "Management of the Fund -- Administrator." HOW TO INVEST Shares of the Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Share purchases may be made by sending investments directly to the Fund. The minimum initial investment is $250,000 for the Portfolio. The minimum for subsequent investments is $1,000 (except for automatic reinvestment of dividends and capital gains distributions for which there are no minimums). The minimum investment levels may be waived for certain Morgan Stanley employees and customers at the discretion of the Adviser. See "Purchase of Shares." HOW TO REDEEM Shares of the Portfolio may be redeemed at any time, without cost, at the net asset value per share of the Portfolio next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. If a shareholder reduces its total investment in shares of the Portfolio to less than $250,000, the investment may be subject to redemption. See "Redemption of Shares." RISK FACTORS The investment policies of the Portfolio entail certain risks and considerations of which an investor should be aware. The Portfolio's investments may be subject to greater risk and market fluctuation than a fund that invests in securities representing a broader range of investment alternatives. Historically, stock prices of companies involved in precious metals-related industries have been volatile. In addition, prices of gold and other precious metals and minerals may fluctuate sharply over short periods of time due to various world-wide economic, financial and political factors. The Portfolio may also invest in securities of foreign issuers which are subject to certain risks not typically associated with domestic securities. See "Investment Objectives and Policies." In addition, the Portfolio may invest in repurchase agreements, lend its portfolio securities and purchase securities on a when-issued basis. The Portfolio may invest in forward foreign currency exchange contracts to hedge currency risk associated with investment in non-U.S. dollar denominated securities and may purchase and sell options and enter into futures transactions and options thereon for hedging purposes. The Portfolio may invest in short-term or medium-term debt securities or hold cash or cash equivalents for temporary defensive purposes. The Portfolio may also invest in securities that are neither listed on a stock exchange nor traded over-the-counter, including private placement securities. The Portfolio may also invest indirectly in securities through sponsored or unsponsored American Depositary Receipts. Each of these investment strategies involves specific risks which are described under "Investment Objectives and Policies" and "Additional Investment Information" herein and under "Investment Objective and Policies" in the Statement of Additional Information. 7 INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Gold Portfolio is long-term capital appreciation. The production of any current income is incidental to this objective. The Portfolio seeks to achieve its objective by investing primarily in the equity securities of foreign and domestic issuers principally engaged in gold-related activities. There can be no assurance that the Portfolio's investment objective will be achieved. The Portfolio's investment objective is a fundamental policy which may not be changed without the approval of a majority of the Portfolio's outstanding voting securities. Because the securities in which the Portfolio invests may involve risks not associated with more traditional investments, an investment in the Portfolio, by itself, should not be considered a balanced investment program. Under normal circumstances, the Portfolio will invest at least 70% of its total assets in equity securities of companies principally engaged in the exploration, mining, fabrication, processing, distribution or trading of gold (or, to a lesser degree, silver, platinum or other precious metals or minerals) or the financing, managing, controlling or operating of companies engaged in such activities. (Such activities and the activities of such related financing, managing, controlling or operating companies are referred to herein as "gold-related" or "precious-metals-related" activities.) For these purposes, a company will be considered to be principally engaged in such activities if its derives more than 50% of its income, or devotes 50% or more of its assets, to such activities. Equity securities in which the Portfolio may invest include common stocks, preferred stocks, convertible securities, securities convertible into common stock and securities having common stock characteristics, such as rights and warrants. The Portfolio will invest more than 25% of its total assets in securities of companies in the group of industries involved in gold-related or precious-metals-related activities, as described above, and may invest more than 25% of its total assets in one or more of the industries, such as mining, that are a part of such group of industries, as described above. Potential investors in the Portfolio should consider the possibly greater risk arising from the concentration of the Portfolio's investments in one such industry or the group of industries. Because most of the world's gold production is outside of the United States, the Portfolio expects that a significant portion of its assets may be invested in securities of foreign issuers. The percentage of assets invested in particular countries or regions will change from time to time in accordance with the judgment of Morgan Stanley Asset Management, Inc. (the "Adviser") and Sun Valley Gold Company (the "Sub-Adviser", and collectively with the Adviser, the "Advisers"), which may be based on, among other things, consideration of the political stability and economic outlook of these countries or regions. It is currently anticipated, however, that the Portfolio's assets will be principally invested in the equity securities of companies located in the United States, Canada and Australia, and the Portfolio's assets may be invested in equity securities of companies located in South Africa. The Portfolio expects to invest in foreign securities by buying the foreign securities themselves, but the Portfolio may also invest in American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") or similar securities that are convertible into securities of foreign issuers and that evidence ownership of the underlying foreign security when the Advisers believe that it is in the best interest of the Portfolio to do so. ADRs are dollar-denominated receipts that are generally issued by domestic banks or trust companies and which represent the deposit with the bank or trust company of a security of a foreign issuer. EDRs are European receipts evidencing a similar arrangement with a European bank. Generally, ADRs, in registered form, are 8 designed for use in the U.S. securities market and EDRs, in bearer form, are designed for use in the European securities market. ADRs may be sponsored or unsponsored. The issuers of the stock of unsponsored ADRs are not obligated to disclose material information in the United States and therefore, there may not be a correlation between such information and the market value of the ADR. In the event that ADRs or EDRs are not available for a particular security, the Portfolio may invest in that security, which may or may not be listed on a foreign securities exchange. The Portfolio may also invest up to 10% of its total assets in gold bullion. Bullion will only be bought from and sold to U.S. and foreign banks, regulated U.S. commodities exchanges, exchanges affiliated with a regulated U.S. stock exchange, and dealers who are members of, or affiliated with, a regulated U.S. commodities exchange, in accordance with applicable investment laws. Investors should note that bullion offers the potential for capital appreciation or depreciation, but unlike other investments does not generate income. In bullion transactions, the Portfolio may encounter higher custody costs and other costs (including shipping and insurance) than those costs that are normally associated with ownership of securities. The Fund may attempt to minimize the costs associated with the actual custody of bullion by the use of receipts or certificates representing ownership interests in bullion. The Advisers currently intend to use the Portfolio's investments in gold bullion as a short-term investment for portfolio management purposes. The Portfolio may also invest up to 30% of its assets in money market instruments under normal circumstances, although the Portfolio intends to stay invested in securities satisfying its primary investment objective to the extent practicable. Money market instruments include obligations of the U.S. Government and its agencies and instrumentalities, commercial paper including bank obligations, certificates of deposit (including Eurodollar certificates of deposit) and repurchase agreements. For temporary investment purposes, the Portfolio may invest up to all of its assets in such instruments. For hedging purposes only, the Portfolio may enter into forward foreign currency exchange transactions, covered call and put options (listed on an U.S. securities exchange or written in the over-the-counter market), futures contracts and options on futures. The Portfolio may also enter into repurchase agreements, purchase securities on a when-issued or delayed delivery basis and lend its portfolio securities. For more information on these practices, see "Additional Investment Information" below and "Investment Objectives and Policies" in the Statement of Additional Information. ADDITIONAL INVESTMENT INFORMATION REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements with brokers, dealers or banks that meet the credit guidelines of the Fund's Directors. In a repurchase agreement, the Portfolio buys a security from a seller that has agreed to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. The term of these agreements is usually from overnight to one week and never exceeds one year. Repurchase agreements may be viewed as a fully collateralized loan of money by the Portfolio to the seller. The Portfolio always receives securities with a market value at least equal to the purchase price (including accrued interest) as collateral, and this value is maintained during the term of the agreement. If the seller defaults and the collateral value declines, the Portfolio might incur a loss. If bankruptcy 9 proceedings are commenced with respect to the seller, the Portfolio's realization upon the collateral may be delayed or limited. The aggregate of certain repurchase agreements and certain other investments is limited as set forth under "Investment Limitations." LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend securities to brokers, dealers, domestic and foreign banks or other financial institutions for the purpose of increasing its net investment income. These loans must be secured continuously by cash or equivalent collateral, or by a letter of credit at least equal to the market value of the securities loaned plus accrued interest or income. There may be a risk of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. The Portfolio will not enter into securities loan transactions exceeding, in the aggregate, 33 1/3% of the market value of its total assets. For more detailed information about securities lending see "Investment Objectives and Policies" in the Statement of Additional Information. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase securities on a when-issued or delayed delivery basis. In such transactions, instruments are bought with payment and delivery taking place in the future in order to secure what is considered to be an advantageous yield or price at the time of the transaction. Delivery of and payment for these securities may take as long as a month or more after the date of the purchase commitment but will take place no more than 120 days after the trade date. The Portfolio will maintain with the Custodian a separate account with a segregated portfolio of high-grade equity securities or cash in an amount at least equal to these commitments. The payment obligation and the interest rates that will be received are each fixed at the time the Portfolio enters into the commitment and no interest accrues to the Portfolio until settlement. Thus, it is possible that the market value at the time of settlement could be higher or lower than the purchase price if, among other factors, the general level of interest rates has changed. It is a current policy of the Portfolio not to enter into when-issued commitments exceeding in the aggregate 15% of the market value of the Portfolio's total assets less liabilities, other than the obligations created by these commitments. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolio may enter into forward foreign currency exchange contracts that provide for the purchase or sale of an amount of a specified currency at a future date. Purposes for which such contracts may be used include protecting against a decline in a foreign currency against the U.S. dollar between the trade date and settlement date when the Portfolio purchases or sells non-U.S. dollar-denominated securities, locking in the U.S. dollar value of dividends and interest on securities held by the Portfolio and generally protecting the U.S. dollar value of securities held by the Portfolio against exchange rate fluctuation. Such contracts may also be used as a protective measure against the effects of fluctuating rates of currency exchange and exchange control regulations. While such forward contracts may limit losses to the Portfolio as a result of exchange rate fluctuation, they will also limit any gains that may otherwise have been realized. See "Investment Objectives and Policies -- Forward Currency Exchange Contracts" in the Statement of Additional Information. STOCK OPTIONS, STOCK FUTURES CONTRACTS AND OPTIONS ON STOCK FUTURES CONTRACTS. The Portfolio may write (i.e., sell) covered call options and covered put options on portfolio securities. By selling a covered call option, the Portfolio would become obligated during the terms of the option to deliver the securities underlying the option should the option holder choose to exercise the option before the option's termination date. In return for the call it has written, the Portfolio will receive from the purchaser (or option holder) a premium which is the 10 price of the option, less a commission charged by a broker. The Portfolio will keep the premium regardless of whether the option is exercised. By selling a covered put option, the Portfolio incurs an obligation to buy the security underlying the option from the purchaser of the put at the option's exercise price at any time during the option period, at the purchaser's election (certain options written by the Portfolio will be exercisable by the purchaser only on a specific date). A call option is "covered" if the Portfolio owns the security underlying the option it has written or has an absolute or immediate right to acquire the security by holding a call option on such security, or maintains a sufficient amount of cash, cash equivalents or liquid securities to purchase the underlying security. Generally, a put option is "covered" if the Portfolio maintains cash, U.S. Government securities or other high grade debt obligations equal to the exercise price of the option or if the Portfolio holds a put option on the same underlying security with a similar or higher exercise price. When the Portfolio writes covered call options, it augments its income by the premiums received, and is thereby hedged, to the extent of that amount, against a decline in the price of the underlying securities. The premiums received will offset a portion of the potential loss incurred by the Portfolio if the securities underlying the options are ultimately sold by the Portfolio at a loss. However, during the option period, the Portfolio has, in return for the premium on the option, given up the opportunity for capital appreciation above the exercise price should the market price of the underlying security increase, but has retained the risk of loss should the price of the underlying security decline. The Portfolio will write put options to receive the premiums paid by purchasers (when the Advisers wish to purchase the security underlying the option at a price lower than its current market price, in which case the Portfolio will write the covered put at an exercise price reflecting the lower purchase price sought) and to close out a long put option position. The Portfolio may also purchase put or call options on its portfolio securities. When the Portfolio purchases a call option it acquires the right to buy a designated security at a designated price (the "exercise price"), and when the Portfolio purchases a put option it acquires the right to sell a designated security at the exercise price, in each case on or before a specified date (the "termination date"), usually not more than nine months from the date the option is issued. The Portfolio may purchase call options to close out a covered call position or to protect against an increase in the price of a security it anticipates purchasing. The Portfolio may purchase put options on securities which it holds in its portfolio only to protect itself from a decline in the value of the security. If the value of the underlying security were to fall below the exercise price of the put purchased in an amount greater than the premium paid for the option, the Portfolio would incur no additional loss. The Portfolio may also purchase put options to close out written put positions in a manner similar to call option closing purchase transactions. There are no other limits on the Portfolio's ability to purchase call and put options. The Portfolio may enter into futures contracts and options on futures contracts as a hedge against fluctuations in price of a security it holds or intends to acquire, but not for speculation or for achieving leverage. The Portfolio may also enter into futures transactions to remain fully invested and to reduce transaction costs. The Portfolio may enter into futures contracts and options on futures contracts provided that not more than 5% of the Portfolio's total assets at the time of entering into the contract or option is required as deposit to secure obligations under such contracts and option, and provided that not more than 20% of the Portfolio's total assets in the aggregate is invested in options, futures contracts and options on futures contracts. 11 The Portfolio may purchase and write call and put options on futures contracts that are traded on a U.S. exchange, and enter into closing transactions with respect to such options to terminate an existing position. An option on a futures contract gives the purchaser the right (in return for the premium paid) to assume a position in future contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the term of the option. The Portfolio will purchase and write options on futures contracts for the purchase of a futures contract (purchase of a call option or sale of a put option) and for the sale of a futures contract (purchase of a put option or sale of a call option), or to close out a long or short position in future contracts for identical purposes to those set forth above. The primary risks associated with the use of option, futures and options on futures are (i) imperfect correlation between the change in market value of the stocks held by the Portfolio, and the prices of futures and options relating to the stocks purchased or sold by the Portfolio; and (ii) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures position which could have an adverse impact on the Portfolio's ability to hedge. In the opinion of the Board of Directors, the risk that the Portfolio will be unable to close out a futures position or options contract will be minimized by only entering into futures contracts or options transactions for which there appears to be a liquid secondary market. PRECIOUS METALS FORWARD AND FUTURES CONTRACTS. The Portfolio may enter into futures contracts on precious metals as a hedge against changes in the prices of precious metals held or intended to be acquired by the Portfolio, but not for speculation or for achieving leverage. The Portfolio's hedging activities may include purchases of futures contracts as an offset against the effect of anticipated increases in the price of a precious metal which the Portfolio intends to acquire or sales of futures contracts as an offset against the effect of anticipated declines in the price of precious metal which the Portfolio owns. The Portfolio may enter into precious metals forward contracts, which are similar to precious metals futures contracts in that they both provide for the purchase or sale of precious metals at an agreed price with delivery to take place at an agreed future time. However, unlike futures contracts, forward contracts are negotiated contracts which are primarily used in the dealer market. The Portfolio will use forward contracts for the same hedging purposes as those applicable to futures contracts, as described above. Precious metals futures and forward contract prices can be volatile and are influenced principally by changes in spot market prices, which in turn are affected by a variety of political and economic factors. While the correlation between changes in prices of futures and forward contracts and prices of the precious metals being hedged by such contracts has historically been very strong, the correlation may be imperfect at times, and even a well conceived hedge may be unsuccessful to some degree because of market behavior or unexpected precious metals price trends. For more detailed information about precious metals forward and futures transactions see "Investment Objectives and Policies" in the Statement of Additional Information. The Portfolio may also purchase and write covered call or put options on precious metals futures contracts. Such options would be purchased solely for hedging purposes. Call options might be purchased to hedge against an increase in the price of precious metals the Portfolio intends to acquire, and put options may be purchased to hedge against a decline in the price of precious metals owned by the Portfolio. As is the case with futures contracts, options on precious metals futures may facilitate the Portfolio's acquisition of precious metals or permit the Portfolio to defer disposition of precious metals for tax or other purposes. 12 TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes in economic, financial or political conditions make it advisable, the Portfolio may reduce its holdings in equity and other securities, for temporary defensive purposes, and the Portfolio may invest in certain short-term (less than twelve months to maturity) and medium-term (not greater than five years to maturity) debt securities or may hold cash. The short-term and medium-term debt securities in which the Portfolio may invest consist of (a) obligations of the United States or foreign country governments, their respective agencies or instrumentalities; (b) bank deposits and bank obligations (including certificates of deposit, time deposits and bankers' acceptances) of United States or foreign country banks denominated in any currency; (c) floating rate securities and other instruments denominated in any currency issued by international development agencies, (d) finance company and corporate commercial paper and other short-term corporate debt obligations of United States and foreign country corporations meeting the Portfolio's credit quality standards; and (e) repurchase agreements with banks and broker-dealers with respect to such securities. For temporary defensive purposes, the Portfolios intend to invest only in short-term and medium-term debt securities that the Adviser believes to be of high quality, i.e., subject to relatively low risk of loss of interest or principal. There is currently no rating system for debt securities in most foreign countries. MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money market instruments, although the Portfolio intends to stay invested in securities satisfying its primary investment objective to the extent practical. The Portfolio may make money market investments pending other investments or settlement for liquidity, or in adverse market conditions. The money market investments permitted for the Portfolio include obligations of the United States Government and its agencies and instrumentalities; obligations of foreign sovereignties; other debt securities; commercial paper including bank obligations; certificates of deposit (including Eurodollar certificates of deposit), and repurchase agreements. For more detailed information about these money market investments, see "Description of Securities and Ratings" in the Statement of Additional Information. DEPOSITARY RECEIPTS. The Portfolio is permitted to invest indirectly in securities of foreign companies through sponsored or unsponsored American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other types of Depositary Receipts (which, together with ADRs and GDRs, are hereinafter collectively referred to as "Depositary Receipts"), to the extent such Depositary Receipts are or become available. Depositary Receipts are not necessarily denominated in the same currency as the underlying securities. In addition, the issuers of the securities underlying unsponsored Depositary Receipts are not obligated to disclose material information in the U.S. and, therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the Depositary Receipts. ADRs are Depositary Receipts typically issued by a U.S. financial institution which evidence ownership interests in a security or pool or securities issued by a foreign issuer. GDRs and other types of Depositary Receipts are typically issued by foreign banks or trust companies, although they also may be issued by U.S. financial institutions, and evidence ownership interests in a security or pool of securities issued by either a foreign or a U.S. corporation. Generally, Depositary Receipts in registered form are designed for use in the U.S. securities market and Depositary Receipts in bearer form are designed for use in securities markets outside the U.S. For purposes of the Portfolio's investment policies, the Portfolio's investments in Depositary Receipts will be deemed to be investments in the underlying securities. 13 NON-PUBLICALLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES. The Portfolio may invest in securities that are neither listed on a stock exchange nor traded over-the-counter, including privately placed securities. As a result of the absence of a public trading market for these securities, they may be less liquid than publically traded securities. Although these securities may be resold in privately negotiated transactions, the prices realized from these sales could be less than those originally paid by the Portfolio, or less than what may be considered the fair value of such securities. The Portfolio may not invest more than 15% of its total assets in illiquid securities, including securities for which there is no readily available secondary market nor more than 10% of its total assets in securities that are restricted from sale to the public without registration ("Restricted Securities") under the Securities Act of 1933, as amended (the "1933 Act"). Nevertheless, subject to the foregoing limit on illiquid securities, the Portfolio may invest up to 20% of its total assets in Restricted Securities that can be offered and sold to qualified institutional buyers under Rule 144A under that Act ("144A Securities"). The Board of Directors has adopted guidelines and delegated to the Advisers, subject to the supervision of the Board of Directors, the daily function of determining and monitoring the liquidity of Rule 144A securities. Rule 144A securities may become illiquid if qualified institutional buyers are not interested in acquiring the securities. RISK FACTORS AND SPECIAL CONSIDERATIONS. The Portfolio intends to invest at least 70% of its total assets in securities of companies engaged in gold-related activities. As a result of this policy, which is a fundamental policy of the Portfolio, the Portfolio's investments may be subject to greater risk and market fluctuation than a fund that invests in securities representing a broader range of investment alternatives. Historically, stock prices of companies involved in precious metals-related industries have been volatile. Investment related to gold and other precious metals and minerals are considered speculative and are impacted by a variety of world-wide economics, financial and political factors. Prices of gold and other precious metals may fluctuate sharply over short periods of time due to changes in inflation or expectations regarding inflation in various countries, the availability of supplies of precious metals, changes in industrial and commercial demand, metal sales by governments, central banks or international agencies, investment speculation, monetary and other economic policies of various governments and government restrictions on private ownership of certain precious metals and minerals. FOREIGN INVESTMENT RISK FACTORS. Investment in securities of foreign issuers also involves somewhat different investment risks than those affecting U.S. investments. There may be limited publicly available information with respect to foreign issuers, and foreign issuers are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to domestic companies. There may also be less government supervision and regulation of foreign securities exchanges, brokers and listed companies than in the U.S. Many foreign securities markets have substantially less volume than U.S. national securities exchanges, and securities of some foreign issuers are less liquid and more volatile than securities of comparable domestic issuers. Brokerage commissions and other transaction costs on foreign securities exchanges are generally higher than in the U.S. Dividends and interest paid by foreign issuers may be subject to withholding and other foreign taxes, which may decrease the net return on foreign investments as compared to dividends and interest paid to the Portfolio by domestic companies. It is not expected that the Portfolio or its shareholders would be able to claim a credit for U.S. tax purposes with respect to any such foreign taxes. See "Taxes". Additional risks include future political and economic developments, the possibility that a foreign jurisdiction might impose or change withholding taxes on income payable with respect to foreign securities, 14 possible seizure, nationalization or expropriation of the foreign issuer or foreign deposits and the possible adoption of foreign governmental restrictions such as exchange controls. Current developments in South Africa have raised the threat of political instability and uncertainty concerning the impact of such instability on South Africa's economy and businesses. Accordingly, the risk of investing in securities of issuers in South Africa may be greater than the risk of investing in more stable foreign countries. Such investments in securities of foreign issuers are frequently denominated in foreign currencies and because the Portfolio may temporarily hold uninvested reserves in bank deposits in foreign currencies, the value of the Portfolio's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange control regulations, and the Portfolio may incur costs in connection with conversions between various currencies. INVESTMENT LIMITATIONS As a diversified investment company, the Gold Portfolio is subject to the following limitations: (a) as to 75% of its total assets, the Portfolio may not invest more than 5% of its total assets in the securities of any one issuer, except obligations of the U.S. Government and its agencies and instrumentalities, and (b) the Portfolio may not own more than 10% of the outstanding voting securities of any one issuer. The Portfolio also operates under certain investment restrictions that are deemed fundamental limitations and may be changed only with the approval of the holders of a majority of the Portfolio's outstanding shares. See "Investment Limitations" in the Statement of Additional Information. In addition, the Portfolio operates under certain non-fundamental investment limitations as described below and in the Statement of Additional Information. The Portfolio may not (i) enter into repurchase agreements with more than seven days to maturity if, as a result, more than 15% of the market value of the Portfolio's total assets would be invested in such repurchase agreements and other investments for which market quotations are not readily available or which are otherwise illiquid; (ii) borrow money, except from banks for extraordinary or emergency purposes, and then only in amounts up to 10% of the value of the Portfolio's total assets, taken at cost at the time of borrowing, or purchase securities while borrowings exceed 5% of its total assets; or mortgage, pledge or hypothecate any assets except in connection with any such borrowing in amounts up to 10% of the value of the Portfolio's net assets at the time of borrowing; (iii) invest in fixed time deposits with a duration of over seven calendar days; or (iv) invest in fixed time deposits with a duration of from two business days to seven calendar days if more than 10% of the Portfolio's total assets would be invested in these deposits. MANAGEMENT OF THE FUND INVESTMENT ADVISER AND SUB-ADVISER. Morgan Stanley Asset Management Inc. is the Investment Adviser and Administrator of the Fund and each of its portfolios. The Adviser provides investment advice and portfolio management services, pursuant to an Investment Advisory Agreement and, subject to the supervision of the Fund's Board of Directors, makes each of the Portfolio's day-to-day investment decisions, arranges for the execution of portfolio transactions and generally manages each of the portfolio's investments. With respect to the Portfolio, the Adviser has delegated these responsibilities, subject to its supervision, to the Sub-Adviser. The Adviser is entitled to receive from the Portfolio an annual investment advisory fee, payable quarterly, in an amount equal to 1.00% of the average daily net assets of the Portfolio. 15 Sun Valley Gold Company is sub-adviser of the Portfolio. Pursuant to a Sub-Advisory Agreement, and subject at all times to the supervision of the Adviser and the Board of Directors of the Fund, the Sub-Adviser provides investment advice and portfolio management services, makes the Portfolio's day-to-day investment decisions, arranges for the execution of portfolio transactions and generally manages the Portfolio's investments. The Sub-Adviser is entitled to receive from the Adviser an annual sub-advisory fee, payable quarterly, in an amount equal to 0.40% of the average daily net assets of the Portfolio. The Adviser has agreed to a reduction in the fees payable to it and to reimburse the Portfolio, if necessary, if such fees would cause the total annual operating expenses of the Portfolio to exceed 1.25% of its average daily net assets. The Sub-Adviser has agreed to a proportionate reduction in its fees from the Adviser if the Adviser is required to waive its fees or to reimburse the Portfolio so that the Portfolio's total operating expenses do not exceed 1.25% of its average daily net assets. The Adviser, with principal offices at 1221 Avenue of the Americas, New York, New York 10020, conducts a worldwide portfolio management business. It provides a broad range of portfolio management services to customers in the United States and abroad. At December 31, 1994, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $48.7 billion, including approximately $35.6 billion under active management and $13.1 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. The Sub-Adviser, with principal offices at 620 Sun Valley Road, Sun Valley, Idaho 83340, specializes in the management of gold-related investments. At January 31, 1995 the Sub-Adviser managed investments totaling approximately $150 million. PORTFOLIO MANAGER. Peter F. Palmedo, the President of the Sub-Adviser since its inception in January, 1992, has had primary portfolio management responsibility for the Portfolio since its inception. He has also served as President of Sun Valley Gold Trading, Inc., a registered broker-dealer, since its inception in January, 1992, and of Mad River Management since September, 1989. Prior thereto, Mr. Palmedo worked at Morgan Stanley in the institutional equity department and specialized in portfolio risk management, derivatives and the development and analysis of long-dated options, synthetic options and options embedded in securities. He received a BA in Business and Finance from Hampshire College in 1979. ADMINISTRATOR. The Adviser also provides the Fund with administrative services pursuant to an Administration Agreement. The services provided under the Administration Agreement are subject to the supervision of the Officers and the Board of Directors of the Fund and include day-to-day administration of matters related to the corporate existence of the Fund, maintenance of its records, preparation of reports, supervision of the Fund's arrangements with its custodian, and assistance in the preparation of the Fund's registration statements under federal and state laws. The Administration Agreement also provides that the Administrator, through its agents, will provide the Fund dividend disbursing and transfer agent services. For its services under the Administration Agreement, the Fund pays the Adviser a monthly fee which on an annual basis equals 0.15% of the average daily net assets of the Portfolio. Under the U.S. Trust Administration Agreement between the Adviser and United States Trust Company of New York ("U.S. Trust"), U.S. Trust has agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegates its responsibilities to 16 Mutual Funds Service Company ("MFSC"), a subsidiary of U.S. Trust that provides certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by MFSC. The services provided under the Administration Agreement and the U.S. Trust Administration Agreement are also subject to the supervision of the Board of Directors of the Fund. The Board of Directors of the Fund has approved the provision of services described above pursuant to the Administration Agreement and the U.S. Trust Administration Agreement as being in the best interest of the Fund. MFSC's business address is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information regarding the Administration Agreement or the U.S. Trust Administration Agreement, see "Management of the Fund" in the Statement of Additional Information. DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation, the Board of Directors decides upon matters of general policy and reviews the actions of the Fund's Adviser, Administrator and Distributor. The Officers of the Fund conduct and supervise its daily business operations. DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the shares of the Fund. Under its Distribution Agreement with the Fund, Morgan Stanley sells shares of the Portfolio upon the terms and at the current offering price described in this Prospectus. Morgan Stanley is not obligated to sell any certain number of shares of the Portfolio and receives no compensation for its distribution services. EXPENSES. The Portfolio is responsible for payment of certain other fees and expenses (including legal fees, accountant's fees, custodial fees, and printing and mailing costs) specified in the Administration and Distribution Agreements. PURCHASE OF SHARES Shares of the Portfolio may be purchased, without sales commission, at the net asset value per share next determined after receipt of the purchase order. See "Valuation of Shares." INITIAL INVESTMENTS 1) BY CHECK. An account may be opened by completing and signing an Account Registration Form, and mailing it, together with a check ($250,000 minimum for the Portfolio, with certain exceptions for Morgan Stanley employees and select customers) payable to "Morgan Stanley Institutional Fund, Inc. -- Gold Portfolio", to: Morgan Stanley Institutional Fund, Inc. P.O. Box 2798 Boston, Massachusetts 02208-2798 Payment will be accepted only in U.S. dollars, unless prior approval for payment by other currencies is given by the Fund. For purchases by check, the Fund is ordinarily credited with Federal Funds within one business day. Thus, your purchase of shares by check is ordinarily credited to your account at the net asset value per share of the Portfolio determined on the next business day after receipt. 17 2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal Funds to the Fund's bank account. In order to ensure prompt receipt of your Federal Funds Wire, it is important that you follow these steps: A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your name, address, telephone number, Social Security or Tax Identification Number, the Portfolio(s) selected, the amount being wired, and by which bank. We will then provide you with a Fund account number. (Investors with existing accounts should also notify the Fund prior to wiring funds.) B. Instruct your bank to wire the specified amount to the Fund's Wire Concentration Bank Account (be sure to have your bank include the name of the portfolio(s) selected and the account number assigned to you): United States Trust Company of New York 114 West 47th Street New York, NY 10036 ABA #0210-0131-8 DDA #20-9310-3 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (Portfolio name, your account number, your account name) Please call before wiring funds: 1-800-548-7786 C. Complete the Account Registration Form and mail it to the address shown thereon. Federal Funds purchase orders will be accepted only on a day on which the Fund and United States Trust Company of New York (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring funds. 3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire" above must be followed in purchasing shares by bank wire. However, money transferred by bank wire may or may not be converted into Federal Funds the same day, depending on the time the money is received and the bank handling the wire. Prior to such conversion, an investor's money will not be invested. Your bank may charge a service fee for wiring funds. ADDITIONAL INVESTMENTS You may add to your account at any time (minimum additional investment $1,000, except for automatic reinvestment of dividends and capital gains distributions for which there are no minimums) by purchasing shares at net asset value by mailing a check to the Fund (payable to "Morgan Stanley Institutional Fund, Inc.-Gold Portfolio") at the above address or by wiring monies to the Custodian Bank as outlined above. It is very important that your account name and the portfolio be specified in the letter or wire to ensure proper crediting to your account. In order to ensure that your wire orders are invested promptly, you are requested to notify one of the Fund's representatives (toll free: 1-800-548-7786) prior to the wire date. OTHER PURCHASE INFORMATION The purchase price of the shares of the Portfolio is the net asset value next determined after the order is received. See "Valuation of Shares." An order received prior to the regular close of the New York Stock 18 Exchange ("NYSE"), which is currently 4:00 p.m. (Eastern Time), will be executed at the price computed on the date of receipt; an order received after the regular close of the NYSE will be executed at the price computed on the next day the NYSE is open. In the interest of economy and convenience, and because of the operating procedures of the Fund, certificates representing shares of the Portfolio will not be issued. All shares purchased are confirmed to you and credited to your account on the Fund's books maintained by the Adviser or its agents. You will have the same rights and ownership with respect to such shares as if certificates had been issued. To ensure that checks are collected by the Fund, withdrawals of investments made by check are not presently permitted until payment for the purchase has been received, which may take up to eight business days after the date of purchase. As a condition of this offering, if a purchase is canceled due to nonpayment or because your check does not clear, you will be responsible for any loss the Fund or its agents incur. If you are already a shareholder, the Fund may redeem shares from your account(s) to reimburse the Fund or its agents for any loss. In addition, you may be prohibited or restricted from making future investments in the Fund. Investors may also invest in the Fund by purchasing shares through registered broker-dealers. Broker-dealers who make purchases for their customers may charge a fee for such services. REDEMPTION OF SHARES You may withdraw all or any portion of the amount in your account by redeeming shares at any time. Please note that purchases made by check are not permitted to be redeemed until payment of the purchase price has been collected, which may take up to eight business days after purchase. The Fund will redeem shares of the Portfolio at its next determined net asset value. On days that both the NYSE and the Custodian Bank are open for business, the net asset value per share of the Portfolio is determined at the regular close of trading of the NYSE (currently 4:00 p.m. Eastern Time). Shares of the Portfolio may be redeemed by mail or telephone. No charge is made for redemption. Any redemption proceeds may be more or less than the purchase price of your shares depending on, among other factors, the market value of the investment securities held by the Portfolio. BY MAIL The Portfolio will redeem its shares at the net asset value determined on the date the request is received, if the request is received in "good order" before the regular close of the NYSE. Your request should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798, except that deliveries by overnight courier should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108. "Good order" means that the request to redeem shares must include the following documentation: (a) A letter of instruction or a stock assignment specifying the number of shares or dollar amount to be redeemed, signed by all registered owners of the shares in the exact names in which they are registered; (b) Any required signature guarantees (see "Further Redemption Information" below); and (c) Other supporting legal documents, if required, in the case of estates, trusts, guardianships, custodianships, corporations, pension and profit-sharing plans and other organizations. 19 Shareholders who are uncertain of requirements for redemption should consult with a Morgan Stanley Institutional Fund representative. BY TELEPHONE Provided you have previously elected the Telephone Redemption Option on the Account Registration Form, you can request a redemption of your shares by calling the Fund and requesting the redemption proceeds be mailed to you or wired to your bank. Please contact one of Morgan Stanley Institutional Fund's representatives for further details. In times of drastic market conditions, the telephone redemption option may be difficult to implement. If you experience difficulty in making a telephone redemption, your request may be made by mail or overnight courier and will be implemented at the net asset value next determined after it is received. Redemption requests sent to the Fund through overnight courier must be sent to Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108. The Fund and the Fund's transfer agent (the "Transfer Agent") will employ reasonable procedures to confirm that the instructions communicated by telephone are genuine. These procedures include requiring the investor to provide certain personal identification information at the time an account is opened and prior to effecting each transaction requested by telephone. In addition, all telephone transaction requests will be recorded and investors may be required to provide additional telecopied written instructions regarding transaction requests. Neither the Fund nor the Transfer Agent will be responsible for any loss, liability, cost or expense for following instructions received by telephone that either of them reasonably believes to be genuine. To change the commercial bank or account designated to receive redemption proceeds, a written request must be sent to the Fund at the address above. Requests to change the bank or account must be signed by each shareholder and each signature must be guaranteed. FURTHER REDEMPTION INFORMATION Normally the Fund will make payment for all shares redeemed within one business day of receipt of the request, but in no event will payment be made more than seven days after receipt of a redemption request in good order. However, payments to investors redeeming shares which were purchased by check will not be made until payment for the purchase has been collected, which may take up to eight days after the date of purchase. The Fund may suspend the right of redemption or postpone the date upon which redemptions are effected at times when the NYSE is closed, or under any emergency circumstances as determined by the Securities and Exchange Commission (the "Commission"). If the Board of Directors determines that it would be detrimental to the best interests of the remaining shareholders of the Portfolio to make payment wholly or partly in cash, the Fund may pay the redemption proceeds in whole or in part by a distribution in-kind of securities held by the Portfolio in lieu of cash in conformity with applicable rules of the Commission. Distributions-in-kind will be made in readily marketable securities. Investors may incur brokerage charges on the sale of portfolio securities so received in payment of redemptions. Due to the relatively high cost of maintaining smaller accounts, the Fund reserves the right to redeem shares in any account in the Portfolio having a value of less than $250,000 (the net asset value of which will be promptly paid to the shareholder). The Fund, however, will not redeem Shares based solely upon market 20 reductions in net asset value. If at any time your total investment does not equal or exceed the stated minimum value, you may be notified of this fact and you will be allowed at least 60 days to make an additional investment before the redemption is processed. To protect your account, the Fund and its agents from fraud, signature guarantees are required for certain redemptions to verify the identity of the person who has authorized a redemption from your account. Please contact the Fund for further information. See "Redemption of Shares" in the Statement of Additional Information. SHAREHOLDER SERVICES EXCHANGE PRIVILEGE You may exchange shares that you own in the Portfolio for shares of any other available portfolio of the Fund (except for the International Equity Portfolio). The privilege to exchange shares by telephone is automatic. Shares of the Portfolios may be exchanged by mail or telephone. Before you make an exchange, you should read the prospectus of the portfolios in which you seek to invest. Because an exchange transaction is treated as a redemption followed by a purchase, an exchange would be considered a taxable event for shareholders subject to tax. The exchange privilege is only available with respect to portfolios that are registered for sale in a shareholder's state of residence. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name and account number of your current Portfolio, the name of the portfolio into which you intend to exchange shares, and the signatures of all registered account holders. Send the exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. BY TELEPHONE When exchanging shares by telephone, have ready the name and account number of the current portfolios, the name of the portfolios into which you intend to exchange shares, your Social Security number or Tax I.D. number, and your account address. Requests for telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at the close of business that same day based on the net asset value of each of the portfolios at the close of business. Requests received after 4:00 p.m. (Eastern Time) are processed the next business day based on the net asset value determined at the close of business on such day. For additional information regarding responsibility for the authenticity of telephoned instructions, see "Redemption of Shares By Telephone" above. TRANSFER OF REGISTRATION You may transfer the registration of any of your Fund shares to another person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. As in the case of redemptions, the written request must be received in good order before any transfer can be made. VALUATION OF SHARES The net asset value per share of the Portfolio is determined by dividing the total market value of the Portfolio's investments and other assets, less any liabilities, by the total number of outstanding shares of the 21 Portfolio. Net asset value per share is determined as of the regular close of the NYSE on each day that the NYSE is open for business. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities listed on a U.S. securities exchange for which market quotations are available are valued at the last quoted sale price on the day the valuation is made. Securities listed on a foreign exchange are valued at their closing price. Unlisted securities and listed securities not traded on the valuation date for which market quotations are not readily available are valued at a price within a range not exceeding the current asked price nor less than the current bid price. The current bid and asked prices are determined based on the bid and asked prices quoted on such valuation date by reputable brokers. Bonds and other fixed income securities are valued according to the broadest and most representative market, which will ordinarily be the over-the-counter market. Net asset value includes interest on fixed income securities, which is accrued daily. In addition, bonds and other fixed income securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. The prices provided by a pricing service are determined without regard to bid or last sale prices but take into account institutional size trading in similar groups of securities and any developments related to the specific securities. Securities not priced in this manner are valued at the most recently quoted bid price or, when securities exchange valuations are used, at the latest quoted sale price on the day of valuation. If there is no such reported sale, the latest quoted bid price will be used. Securities purchased with remaining maturities of 60 days or less are valued at amortized cost, if it approximates market value. In the event that amortized cost does not approximate market value, market prices as determined above will be used. The value of other assets and securities for which no quotations are readily available (including restricted and unlisted foreign securities) and those securities for which it is inappropriate to determine prices in accordance with the above-stated procedures are determined in good faith at fair value using methods determined by the Board of Directors. For purposes of calculating net asset value per share, all assets and liabilities initially expressed in foreign currencies will be translated into U.S. dollars at the mean of the bid price and asked price of such currencies against the U.S. dollar last quoted by any major bank. PERFORMANCE INFORMATION The Fund may from time to time advertise the "total return" of a portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a portfolio would have earned over a specified period of time (such as one, five or ten years) assuming that all distributions and dividends by the portfolio were reinvested on the reinvestment dates during the period. Total return does not take into account any federal or state income taxes that may be payable on dividend and distributions or upon redemption. The Fund may also include comparative performance information in advertising or marketing a portfolio's shares. Such performance information may include data from Lipper Analytical Services, Inc., other industry publications, business periodicals, rating services and market indices. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions will automatically be reinvested in additional shares at net asset value, except that, upon written notice to the Fund or by checking off the appropriate box in the 22 Distribution Option Section on the Account Registration Form, a shareholder may elect to receive income dividends and capital gains distributions in cash. The Portfolio expects to distribute substantially all of its net investment income in the form of quarterly dividends. Net capital gains, if any, will also be distributed annually. Confirmations of the purchase of shares of the Portfolio through the automatic reinvestment of income dividends and capital gains distributions will be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of 1934, as amended, on the next quarterly client statement following such purchase of shares. Consequently, confirmations of such purchases will not be provided at the time of completion of such purchases as might otherwise be required by Rule 10b-10. Undistributed net investment income is included in a portfolio's net assets for the purpose of calculating net asset value per share. Therefore, on the "ex-dividend" date, the net asset value per share excludes the dividend (i.e., is reduced by the per share amount of the dividend). Dividends paid shortly after the purchase of shares by an investor, although in effect a return of capital, are taxable to shareholders subject to income tax. TAXES The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial, or administrative action. No attempt has been made to present a detailed explanation of the federal, state, or local income tax treatment of the Portfolio or its shareholders. Accordingly, shareholders are urged to consult their tax advisors regarding specific questions as to federal, state and local income taxes. The Portfolio is treated as a separate entity for federal income tax purposes and is not combined with the Fund's other portfolios. The Portfolio intends to qualify for the special tax treatment afforded regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so that the Portfolio will be relieved of federal income tax on that part of its net investment income and net capital gain that is distributed to shareholders. The Portfolio distributes substantially all of its net investment income (including, for this purpose, net short-term capital gain) to shareholders. Dividends from the Portfolio's net investment income are taxable to shareholders as ordinary income, whether received in cash or in additional shares. Such dividends will generally qualify for the 70% dividends-received deduction for corporate shareholders only to the extent of the aggregate qualifying dividend income received by the Portfolio from U.S. corporations. The Portfolio will report annually to its shareholders the amount of dividend income qualifying for such treatment. Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss) are taxable to shareholders as long-term capital gain, regardless of how long shareholders have held their shares. The Portfolio sends reports annually to shareholders of the federal income tax status of all distributions made during the preceding year. The Portfolio intends to make sufficient distributions or deemed distributions of its ordinary income and capital gain net income (the excess of short-term and long-term capital gains over short-term and long-term capital losses), including any available capital loss carryforwards, prior to the end of each calendar year to avoid liability for federal excise tax. 23 Dividends and other distributions declared by the Portfolio in October, November or December of any year and payable to shareholders of record on a date in such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if the distributions are paid by the Portfolio at any time during the following January. The sale or redemption of shares may result in taxable gain or loss to the redeeming shareholder, depending upon whether the fair market value of the redemption proceeds exceeds or is less than the shareholder's adjusted basis in the redeemed shares. If capital gain distributions have been made with respect to shares that are sold at a loss after being held for six months or less, then the loss is treated as a long-term capital loss to the extent of the capital gain distributions. Shareholders are urged to consult with their tax advisors concerning the application of state and local income taxes to investments in the Portfolio, which may differ from the federal income tax consequences described above. Investment income received by the Portfolio from sources within foreign countries may be subject to foreign income taxes withheld at the source. To the extent that the Portfolio is liable for foreign income taxes so withheld, the Portfolio intends to operate so as to meet the requirements of the Code to pass through to the shareholders credit for foreign income taxes paid. Although the Portfolio intends to meet Code requirements to pass through credit for such taxes, there can be no assurance that the Portfolio will be able to do so. THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO. PORTFOLIO TRANSACTIONS The Sub-Advisory Agreement authorizes the Sub-Adviser, subject to the supervision of the Adviser, to select the brokers or dealers that will execute the purchases and sales of investment securities for the Portfolio and directs the Sub-Adviser to use its best efforts to obtain the best available price and most favorable execution with respect to all transactions for the Portfolio. The Fund has authorized the Sub-Adviser to pay higher commissions in recognition of brokerage services which, in the opinion of the Sub-Adviser, are necessary for the achievement of better execution, provided the Sub-Adviser, subject to the supervision of the Adviser believes this to be in the best interest of the Fund. Since shares of the Portfolio are not marketed through intermediary brokers or dealers, it is not the Fund's practice to allocate brokerage or principal business on the basis of sales of shares which may be made through such firms. However, the Sub-Adviser may place portfolio orders with qualified broker-dealers who recommend the Fund's Portfolios or who act as agents in the purchase of shares of the Portfolios for their clients. In purchasing and selling securities for the Portfolio, it is the Fund's policy to seek to obtain quality execution at the most favorable prices, through responsible broker-dealers. In selecting broker-dealers to execute the securities transactions for the Portfolio, consideration will be given to such factors as the price of the security, the rate of the commission, the size and difficulty of the order, the reliability, integrity, financial condition, general execution and operational capabilities of competing broker-dealers, and the brokerage and 24 research services which they provide to the Fund. Some securities considered for investment by the Portfolio may also be appropriate for other clients served by the Adviser or the Sub-Adviser. If purchase or sale of securities consistent with the investment policies of the Portfolio and one or more of these other clients served by the Adviser or Sub-Adviser is considered at or about the same time, transactions in such securities will be allocated among the Portfolio and such other clients in a manner deemed fair and reasonable by the Sub-Adviser, subject to the supervision of the Adviser. Although there is no specified formula for allocating such transactions, the various allocation methods used by the Sub-Adviser, and the results of such allocations, are subject to periodic review by the Fund's Board of Directors. Subject to the overriding objective of obtaining the best possible execution of orders, the Sub-Adviser, subject to the supervision of the Adviser, may allocate a portion of the Portfolio brokerage transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order for Morgan Stanley or its affiliates to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by Morgan Stanley or such affiliates must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. Furthermore, the Board of Directors of the Fund, including a majority of the Directors who are not "interested persons," as defined in the Investment Company Act of 1940, as amended (the "1940 Act"), have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Morgan Stanley or such affiliates are consistent with the foregoing standard. Portfolio securities will not be purchased from or through, or sold to or through, the Adviser, the Sub-Adviser or Morgan Stanley or any "affiliated persons," as defined in the 1940 Act, of Morgan Stanley when such entities are acting as principals, except to the extent permitted by law. Although the Portfolio will not invest for short-term trading purposes, investment securities may be sold from time to time without regard to the length of time they have been held. The Portfolio anticipates that, under normal circumstances, the annual portfolio turnover rate will not exceed 100%. High portfolio turnover involves correspondingly greater transaction costs which will be borne directly by the respective Portfolio. In addition, high portfolio turnover may result in more capital gains which would be taxable to the shareholders of the Portfolio. GENERAL INFORMATION DESCRIPTION OF COMMON STOCK The Fund was organized as a Maryland corporation on June 16, 1988. The Articles of Incorporation permit the Fund to issue up to 15,000,000,000 shares of common stock, with $.001 par value. Pursuant to the Fund's Articles of Incorporation, the Board of Directors may increase the number of shares the Fund is authorized to issue without the approval of the shareholders of the Fund. The Board of Directors has the power to designate one or more classes of shares of common stock and to classify and reclassify any unissued shares with respect to such classes. The shares of the Portfolio, when issued, will be fully paid, non- assessable, fully transferable and redeemable at the option of the holder. The shares have no preference as to conversion, exchange, dividends, retirement or other features and have no pre-emptive rights. The shares of the Portfolio have non-cumulative 25 voting rights, which means that the holders of more than 50% of the shares voting for the election of Directors can elect 100% of the Directors if they choose to do so. Persons or organizations owning 25% or more of the outstanding shares of a portfolio may be presumed to "control" (as that term is defined in the 1940 Act) the Portfolio. Under Maryland law, the Fund is not required to hold an annual meeting of its shareholders unless required to do so under the 1940 Act. REPORTS TO SHAREHOLDERS The Fund will send to its shareholders annual and semi-annual reports; the financial statements appearing in annual reports are audited by independent accountants. Monthly unaudited portfolio data is also available from the Fund upon request. In addition, Morgan Stanley Asset Management Inc. or its agent, as Transfer Agent, will send to each shareholder having an account directly with the Fund a monthly statement showing transactions in the account, the total number of shares owned, and any dividends or distributions paid. CUSTODIAN Domestic securities and cash are held by United States Trust Company of New York, New York, as the Fund's domestic custodian. Morgan Stanley Trust Company, Brooklyn, New York, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians who were approved by the Board of Directors of the Fund in accordance with regulations of the Commission for the purpose of providing custodial services for such assets. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT The Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the Fund. INDEPENDENT ACCOUNTANTS Price Waterhouse LLP serves as independent accountants for the Fund and audits its annual financial statements. LITIGATION The Fund is not involved in any litigation. 26 MORGAN STANLEY INSTITUTIONAL FUND, INC.--GOLD PORTFOLIO P.O. BOX 2798, BOSTON, MA 02208-2798 - ------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - ------------------------------------------------------------------------------- ACCOUNT INFORMATION |If you need assistance in filling out this form for the Morgan Stanley Institutional Fund, please Fill in where |contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all applicable |items except signature, and mail to the Fund at the address above. - ----------------------------------------------------------------------------------------------------------------------------------- A) REGISTRATION | 1. INDIVIDUAL |1. ______________________________________________________________________________________________________ 2. JOINT TENANTS | First Name Initial Last Name (RIGHTS OF |2. ______________________________________________________________________________________________________ SURVIVORSHIP | First Name Initial Last Name PRESUMED UNLESS | ______________________________________________________________________________________________________ TENANCY IN COMMON | First Name Initial Last Name IS INDICATED) | - ----------------------------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, | TRUSTS AND OTHERS |3. ______________________________________________________________________________________________________ Please call the | ______________________________________________________________________________________________________ Fund for additional| ______________________________________________________________________________________________________ documents that may | Type of Registration: / /INCORPORATED / /UNINCORPORATED / /PARTNERSHIP / /UNIFORM GIFT/TRANSFER TO MINOR be required to set | ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR up account and to | PERMITTED) authorize | / /TRUST __________________________ / /OTHER (Specify) ________________________ transactions. | - ----------------------------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS | Please fill in |Street or P.O. Box_______________________________________________________________________________________ completely, |City______________________________________________________________State_______Zip_______________-________ including telephone |Home Telephone No.______-_______-_________________Business Telephone No._______-_______-_________________ number(s). |/ /United States Citizen / /Resident Alien / /Non-Resident Alien: Indicate Country of Residence _________ - ----------------------------------------------------------------------------------------------------------------------------------- C) TAXPAYER |PART 1. Enter your Taxpayer | IMPORTANT TAX INFORMATION IDENTIFICATION |Identification Number. For most |You (as a payee) are required by law to provide us (as payer) NUMBER |individual taxpayers, this is |with your correct Taxpayer Identification Number. Accounts that If the account is in |your Social Security Number. |have a missing or incorrect Taxpayer Identification Number will more than one name, | TAXPAYER IDENTIFICATION NUMBER |be subject to backup withholding at a 31% rate on dividends, CIRCLE THE NAME OF THE|______-_________________________ |distributions and other payments. If you have not provided us PERSON WHOSE TAXPAYER | OR |with your correct taxpayer identification number, you may be subject IDENTIFICATION NUMBER | SOCIAL SECURITY NUMBER |to a $50 penalty imposed by the Internal Revenue Service. IS PROVIDED IN SECTION|________-_____________-_________ | A) ABOVE. If no name | | is circled, the number|PART 2. BACKUP WITHHOLDING |Backup withholding is not an additional tax; the tax liability of will be considered to |/ / Check this box if you are NOT |persons subject to backup withholding will be reduced by the be that of the last |subject to Backup Withholding |amount of tax withheld. If withholding results in an overpayment name listed. For |under the provisions of Section |of taxes, a refund may be obtained. Custodian account of |3406(a)(1)(C) of the Internal | a minor (Uniform |Revenue Code. |You may be notified that you are subject to backup withholding Gifts/Transfers to | |under Section 3406(a)(1)(C) of the Internal Revenue Code because Minors Acts), give the| |you have underreported interest or dividends or you were required Social Security Number| |to but failed to file a return which would have included a of the minor. | |reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO |NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - ----------------------------------------------------------------------------------------------------------------------------------- D) PORTFOLIO SELECTION | Minimum $250,000 for |/ / For the purchase of $___________of the Gold Portfolio the Gold Portfolio. | Please indicate | amount. | - ----------------------------------------------------------------------------------------------------------------------------------- E) METHOD OF |Payment by: INVESTMENT |/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--GOLD PORTFOLIO) Please indicate | _________________________________-______ manner of payment. |/ / Exchange $____________________ From__________________________ Account No. | Name of Portfolio |/ / Account previously established by: _________________________________-______ | / / Phone exchange / / Wire on ___________________ Account No. (Check Date (Previously assigned by the Fund) Digit) - ----------------------------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION |Income dividends and capital gains distributions (if any) will be reinvested in additional shares unless OPTION |either box below is checked. |/ /Income dividends to be paid in cash, capital gains distributions (if any) in shares. |/ /Income dividends and capital gains distributions (if any) to be paid in cash. - ----------------------------------------------------------------------------------------------------------------------------------- G) TELEPHONE |/ /I/we hereby authorize the Fund and its| REDEMPTION | agents to honor any telephone requests|__________________________________________ ________________ Please select at time | to wire redemption proceeds to the |Name of COMMERCIAL Bank (Not Savings Bank) Bank Account No. of initial | commercial bank indicated at right | application if you | and/or mail redemption proceeds to the| ____________ wish to redeem | name and address in which my/our fund | Bank ABA No. shares by telephone. | account is registered if such requests|____________________________________________________________ A SIGNATURE GUARANTEE | are believed to be authentic. | Name(s) in which your BANK Account is Established IS REQUIRED IF BANK | |____________________________________________________________ ACCOUNT IS NOT |THE FUND AND THE FUND'S TRANSFER AGENT | Bank's Street Address REGISTERED |WILL EMPLOY REASONABLE PROCEDURES TO |____________________________________________________________ IDENTICALLY TO YOUR |CONFIRM THAT INSTRUCTIONS COMMUNICATED |City State Zip FUND ACCOUNT. |BY TELEPHONE ARE GENUINE. THESE | |PROCEDURES INCLUDE REQUIRING THE | TELEPHONE REQUESTS |INVESTOR TO PROVIDE CERTAIN PERSONAL | FOR REDEMPTIONS |IDENTIFICATION INFORMATION AT THE TIME | WILL NOT BE HONORED |AN ACCOUNT IS OPENED AND PRIOR TO | UNLESS THE BOX |EFFECTING EACH TRANSACTION REQUESTED BY | IS CHECKED. |TELEPHONE. IN ADDITION, ALL TELEPHONE | |TRANSACTION REQUESTS WILL BE RECORDED | |AND INVESTORS MAY BE REQUIRED TO | |PROVIDE ADDITIONAL TELECOPIED WRITTEN | |INSTRUCTIONS OF TRANSACTION REQUESTS. | |NEITHER THE FUND NOR THE TRANSFER AGENT | |WILL BE RESPONSIBLE FOR ANY LOSS, | |LIABILITY, COST OR EXPENSE FOR | |FOLLOWING INSTRUCTIONS RECEIVED BY | |TELEPHONE THAT IT REASONABLY BELIEVES | |TO BE GENUINE. | - ----------------------------------------------------------------------------------------------------------------------------------- H) INTERESTED PARTY |___________________________________________________________________________________________________ OPTION | Name |___________________________________________________________________________________________________ In addition to the | account statement sent|___________________________________________________________________________________________________ to my/our registered | Address address, I/we hereby | authorize the fund |___________________________________________________________________________________________________ to mail duplicate | City State Zip Code statements to the | name and address | provided at right. | - ----------------------------------------------------------------------------------------------------------------------------------- I) DEALER |_______________________________________ ___________________________________ _______________________ INFORMATION |Representative Name Representative No. Branch No. - ----------------------------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF |The undersigned certify that I/we have full authority and legal capacity to purchase and redeem ALL HOLDERS |shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley AND TAXPAYER |Institutional Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF PERJURY, I/WE CERTIFICATION |CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE. | |(X) (X) SIGN HERE --> |------------------------------------------------ ----------------------------------------------------- |Signature Date Signature Date - -----------------------------------------------------------------------------------------------------------------------------------
(This page has been left blank intentionally.) - ------------------------------------------- - ------------------------------------------- - ------------------------------------------- - ------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. -------------------------- TABLE OF CONTENTS PAGE ----- Fund Expenses..................................... 2 Prospectus Summary................................ 5 Investment Objective and Policies................. 8 Additional Investment Information................. 9 Investment Limitations............................ 15 Management of the Fund............................ 15 Purchase of Shares................................ 17 Redemption of Shares.............................. 19 Shareholder Services.............................. 21 Valuation of Shares............................... 21 Performance Information........................... 22 Dividends and Capital Gains Distributions......... 22 Taxes............................................. 23 Portfolio Transactions............................ 24 General Information............................... 25 Account Registration Form
GOLD PORTFOLIO A PORTFOLIO OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. Common Stock ($.001 PAR VALUE) ------------- PROSPECTUS ------------- Investment Adviser Morgan Stanley Asset Management Inc. Sub-Adviser Sun Valley Gold Company Distributor Morgan Stanley & Co. Incorporated - ------------------------------------------- - ------------------------------------------- - ------------------------------------------- - ------------------------------------------- SUPPLEMENT DATED JUNE 30, 1995 TO PROSPECTUS DATED MAY 1, 1995 OF MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798 BOSTON, MASSACHUSETTS 02208-2798 ------------- The prospectus dated May 1, 1995 (the "Prospectus") of the Global Equity Portfolio, International Equity Portfolio, International Small Cap Portfolio, Asian Equity Portfolio, European Equity Portfolio, Japanese Equity Portfolio and Latin American Portfolio of the Morgan Stanley Institutional Fund, Inc. (the "Fund") is hereby amended and supplemented by adding the following paragraph to page 38 before the paragraph with the heading "REDEMPTION OF SHARES": EXCESSIVE TRADING. Frequent trades involving either substantial fund assets or a substantial portion of your account or accounts controlled by you can disrupt management of a Portfolio and raise its expenses. Consequently, in the interest of all the stockholders of the Portfolio and the Portfolio's performance, the Fund may in its discretion bar a stockholder that engages in excessive trading of shares of a Portfolio from further purchases of shares of the Fund for an indefinite period. The Fund considers excessive trading to be more than one purchase and sale involving shares of the same Portfolio of the Fund within any 120-day period. For example, exchanging shares of Portfolios of the Fund as follows: exchanging shares of Portfolio A for shares of Portfolio B, then exchanging shares of Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C for shares of Portfolio B within a 120-day period amounts to excessive trading. Two types of transactions are exempt from these excessive trading restrictions: (1) trades exclusively between money market portfolios; and (2) trades done in connection with an asset allocation service managed or advised by MSAM and/or any of its affiliates. - -------------------------------------------------------------------------------- P R O S P E C T U S ----------------------------------------------------------------------------- GLOBAL EQUITY PORTFOLIO INTERNATIONAL EQUITY PORTFOLIO INTERNATIONAL SMALL CAP PORTFOLIO ASIAN EQUITY PORTFOLIO EUROPEAN EQUITY PORTFOLIO JAPANESE EQUITY PORTFOLIO LATIN AMERICAN PORTFOLIO PORTFOLIOS OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798 FOR INFORMATION CALL 1-800-548-7786 ---------------- Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end management investment company with diversified and non-diversified series ("portfolios"). The Fund currently consists of twenty-seven portfolios offering a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. Shares of the portfolios are offered with no sales charge or exchange or redemption fee (with the exception of the International Small Cap Portfolio). The International Equity Portfolio is currently closed to new investors with the exception of certain Morgan Stanley customers. This Prospectus pertains to the following portfolios (the "Portfolios"): The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of issuers throughout the world, including U.S. issuers. The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of non-U.S. issuers. The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of non-U.S. issuers with equity market capitalizations of less than $500 million. The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of Asian issuers. The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the common stocks of European issuers. The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation through investment in the equity securities of Japanese issuers. The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Latin American issuers and in debt securities issued or guaranteed by Latin American governments or governmental entities. INVESTORS SHOULD NOTE THAT EACH PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES, AND THE INTERNATIONAL SMALL CAP AND LATIN AMERICAN PORTFOLIOS MAY INVEST UP TO 25% OF THEIR RESPECTIVE TOTAL ASSETS IN RESTRICTED SECURITIES THAT ARE RULE 144A SECURITIES. SEE "ADDITIONAL INVESTMENT INFORMATION -- NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES." INVESTMENTS IN RESTRICTED SECURITIES IN EXCESS OF 5% OF A PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE GREATER RISK AND MAY INCREASE THE PORTFOLIO'S EXPENSES. The Fund is designed to meet the investment needs of discerning investors who place a premium on quality and personal service. With Morgan Stanley Asset Management Inc. as Adviser and Administrator (the "Adviser" and the "Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley") as Distributor, the Fund makes available to institutional and high net worth individual investors a series of portfolios which benefit from the investment expertise and commitment to excellence associated with Morgan Stanley and its affiliates. This Prospectus is designed to set forth concisely the information about the Fund that a prospective investor should know before investing and it should be retained for future reference. The Fund offers additional portfolios which are described in other Prospectuses and under the Prospectus Summary section herein. Additional information about the Fund is contained in a "Statement of Additional Information" dated May 1, 1995. This information is incorporated herein by reference. The Statement of Additional Information and the Prospectuses pertaining to the other portfolios of the Fund are available upon request and without charge by writing or calling the Fund at the address and telephone number set forth above. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS MAY 1, 1995. FUND EXPENSES The following table illustrates all expenses and fees that a shareholder of each Portfolio listed below will incur.
INTERNATIONAL GLOBAL EQUITY INTERNATIONAL SMALL CAP ASIAN EQUITY SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO EQUITY PORTFOLIO PORTFOLIO PORTFOLIO - -------------------------------------------- ------------- ------------------ ----------------- ------------ Maximum Sales Load Imposed on Purchases..... None None None* None Maximum Sales Load Imposed on Reinvested Dividends.................................. None None None None Deferred Sales Load......................... None None None None Redemption Fees............................. None None 1.00%* None Exchange Fees............................... None None None None EUROPEAN EQUITY JAPANESE EQUITY LATIN AMERICAN SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO - -------------------------------------------- ------------- ------------------ ----------------- Maximum Sales Load Imposed on Purchases..... None None None Maximum Sales Load Imposed on Reinvested Dividends.................................. None None None Deferred Sales Load......................... None None None Redemption Fees............................. None None None Exchange Fees............................... None None None - ------------------ * Shareholders of the International Small Cap Portfolio are charged a 1.00% transaction fee, which is payable directly to the International Small Cap Portfolio, in connection with each purchase and redemption of shares of the Portfolio. The transaction fee is intended to allocate transaction costs associated with purchases and redemptions of shares of the Portfolio to investors actually making such purchases and redemptions rather than to the Portfolio's other shareholders. The 1.00% fee represents the Adviser's estimate of such transaction costs, which include the costs of acquiring and disposing of Portfolio securities. The transaction fee is not a sales charge or load, and is retained by the Portfolio. The fee does not apply to Portfolios of the Fund other than the International Small Cap Portfolio and is not charged in connection with the reinvestment of dividends or capital gain distributions. The fee will not be charged with respect to purchases and redemptions that do not result in actual transaction costs to the Portfolio. Examples of such transactions include offsetting purchases and redemptions by different shareholders occurring at the same time and in-kind purchases and redemptions.
2
GLOBAL EQUITY INTERNATIONAL EQUITY INTERNATIONAL SMALL ASIAN EQUITY ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO CAP PORTFOLIO PORTFOLIO - -------------------------------------------- --------------- --------------------- ------------------- ------------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Investment Advisory Fee (Net of Fee Waivers)................................... 0.56%* 0.77%* 0.80% * 0.60% * Administrative & Shareholder Account Costs.. 0.15% 0.15% 0.15% 0.15% 12b-1 Fees.................................. None None None None Custody Fees................................ 0.08% 0.04% 0.10% 0.19% Other Expenses.............................. 0.21% 0.04% 0.10% 0.06% ------ ------ ------ ------ Total Operating Expenses (Net of Fee Waivers)............................... 1.00%* 1.00%* 1.15%* 1.00%* ------ ------ ------ ------ ------ ------ ------ ------ EUROPEAN EQUITY JAPANESE EQUITY LATIN AMERICAN ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO - -------------------------------------------- --------------- --------------------- ------------------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Investment Advisory Fee (Net of Fee Waivers)....................... 0.19%* 0.54%* 1.10% * Administrative & Shareholder Account Costs.. 0.15% 0.15% 0.15% 12b-1 Fees.................................. None None None Custody Fees................................ 0.25% 0.07% 0.25% Other Expenses.............................. 0.41% 0.24% 0.20%** ------ ------ ------ Total Operating Expenses (Net of Fee Waivers)............................... 1.00%* 1.00%* 1.70%* ------ ------ ------ ------ ------ ------ - -------------- * The Adviser has agreed to a reduction in the fees payable to it as Adviser and to reimburse each of the Portfolios, if necessary, if such fees would cause any of such Portfolios' total annual operating expenses to exceed specified percentages of their respective average daily net assets. Set forth below are the maximum total operating expenses after fee waivers and/or reimbursements and the total operating expenses absent such fee waivers and/or reimbursements, each stated as a percent of average daily net assets. ** "Other Expenses" for the Latin American Portfolio includes an annual fee of 0.125% of the Portfolio's average weekly net assets paid to local administrators required under Brazilian and Chilean law. See "Local Administrators for the Latin American Portfolio."
MAXIMUM TOTAL TOTAL OPERATING OPERATING EXPENSES EXPENSES ABSENT FEE AFTER FEE WAIVERS (AS WAIVERS (AS A A PERCENT OF AVERAGE PERCENT OF AVERAGE PORTFOLIO DAILY NET ASSETS) DAILY NET ASSETS) - --------------------------------------------------------------------- ---------------------- ------------------- Global Equity........................................................ 1.00% 1.24% International Equity................................................. 1.00% 1.03% International Small Cap.............................................. 1.15% 1.31% Asian Equity......................................................... 1.00% 1.20% European Equity...................................................... 1.00% 1.61% Japanese Equity...................................................... 1.00% 1.26% Latin American....................................................... 1.70% 2.00%+ ------------------ + Estimated.
These reductions became effective as of the inception of each Portfolio, except with respect to the International Equity Portfolio, as to which the effective date was February 15, 1990. As a result of these reductions, the Investment Advisory Fees stated above are lower than the contractual fees stated under "Management of the Fund." For further information on Fund expenses, see "Management of the Fund." 3 The purpose of the foregoing table is to assist the investor in understanding the various expenses that an investor in the Fund will bear directly or indirectly. The expenses and fees for each Portfolio, except the Latin American Portfolio, are based on actual figures for the fiscal year ended December 31, 1994. The expenses and fees for the Latin American Portfolio are based on estimates that assume that the average daily net assets will be $50,000,000. "Other Expenses" include Board of Directors' fees and expenses, filing fees, professional fees, and the costs for reports to shareholders. The following example illustrates the expenses that you would pay on a $1,000 investment assuming (1) a 5% rate of return and (2) redemption at the end of each time period. As noted above, the only fee charged by the Fund upon purchase or redemption of Fund shares is the 1% transaction fee assessed on purchases and redemptions of shares of the International Small Cap Portfolio, which charges are reflected in this example. The example is based on total operating expenses of the Portfolios after fee waivers.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- Global Equity Portfolio........................................... $ 10 $ 32 $ 55 $ 122 International Equity Portfolio.................................... 10 32 55 122 International Small Cap Portfolio................................. 32 58 85 164 Asian Equity Portfolio............................................ 10 32 55 122 European Equity Portfolio......................................... 10 32 55 122 Japanese Equity Portfolio......................................... 10 32 55 122 Latin American Portfolio.......................................... 17 54 * * THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. - ------------------ * Because the Latin American Portfolio has recently become operational, the Fund has not projected expenses beyond the 3-year period shown.
The Fund intends to continue to comply with all state laws that restrict investment company expenses. Currently, the most restrictive state law requires that the aggregate annual expenses of an investment company shall not exceed two and one-half percent (2 1/2%) of the first $30 million of average net assets, two percent (2%) of the next $70 million of average net assets, and one and one-half percent (1 1/2%) of the remaining net assets of such investment company. The Adviser has agreed to a reduction in the amounts payable to it, and to reimburse any Portfolio, if necessary, if in any fiscal year the sum of the Portfolio's expenses exceeds the limit set by applicable state law. 4 FINANCIAL HIGHLIGHTS The following tables provide financial highlights for the Global Equity, International Equity, International Small Cap, Asian Equity, European Equity and Japanese Equity Portfolios for each of the periods presented, and are part of the Fund's financial statements which appear in the Fund's December 31, 1994 Annual Report to Shareholders and which are incorporated by reference into the Fund's Statement of Additional Information. The financial highlights for each of the periods presented have been audited by Price Waterhouse LLP, whose unqualified report thereon is also incorporated by reference into the Statement of Additional Information. Additional performance information for the foregoing Portfolios is contained in the Annual Report. The Annual Report and the financial statements therein, along with the Statement of Additional Information, are available at no cost from the Fund at the address and telephone number noted on the cover page of this Prospectus. The Latin American Portfolio was not operational as of December 31, 1994. Subsequent to October 31, 1992, the Fund's fiscal year end was changed to December 31. The following information should be read in conjunction with the financial statements and notes thereto. GLOBAL EQUITY PORTFOLIO
TWO MONTHS ENDED YEAR ENDED YEAR ENDED JULY 15, 1992* TO DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, 1992 1992 1993 1994 ----------------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD............... $ 10.00 $ 9.35 $ 9.75 $ 13.87 ------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)(2)..................... 0.02 0.01 0.08 0.08 Net Realized and Unrealized Gain (Loss) on Investments..................................... (0.67) 0.39 4.18 0.79 ------- ------------- ------------- ------------- Total from Investment Operations................... (0.65) 0.40 4.26 0.87 ------- ------------- ------------- ------------- DISTRIBUTIONS Net Investment Income............................ -- -- (0.02) (0.12) In Excess of Net Investment Income............... -- -- (0.03) -- Net Realized Gain................................ -- -- (0.09) (1.22) ------- ------------- ------------- ------------- Total Distributions................................ -- -- (0.14) (1.34) ------- ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD..................... $ 9.35 $ 9.75 $ 13.87 $ 13.40 ------- ------------- ------------- ------------- ------- ------------- ------------- ------------- TOTAL RETURN....................................... (6.50)% 4.28% 44.24% 6.95% ------- ------------- ------------- ------------- ------- ------------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).............. $11,257 $11,739 $19,918 $78,935 Ratio of Expenses to Average Net Assets (1)(2)..... 1.00%** 1.00%** 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets (1)(2)..................................... 1.00%** 0.69%** 0.84% 0.87% Portfolio Turnover Rate............................ 10% 5% 42% 12% - -------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income... $ 0.08 $ 0.02 $ 0.01 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets............... 5.22%** 2.49%** 1.66% 1.24% Net Investment Income (Loss) to Average Net Assets...................................... (3.22)%** (0.80)%** 0.18% 0.63% (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.80% of the average daily net assets of the Global Equity Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 1.00% of the average daily net assets of the Portfolio. In the fiscal period ended October 31, 1992, the two months ended December 31, 1992 and the years ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expense totalling $97,000, $28,000, $101,000 and $126,000, respectively, for the Global Equity Portfolio. * Commencement of Operations. ** Annualized.
5 INTERNATIONAL EQUITY PORTFOLIO
TWO MONTHS AUGUST 4, 1989* YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED TO OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1989 1990 1991 1992 1992 1993 1994 ---------------- ------------ ------------ ------------ -------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD................. $ 10.00 $ 9.72 $ 10.05 $ 10.52 $ 9.83 $ 9.98 $ 14.09 ------- ------------ ------------ ------------ ------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)(2).................. 0.05 0.19 0.12 0.12 0.01 0.15 0.16 Net Realized and Unrealized Gain (Loss) on Investments.......... (0.33) 0.20 0.58 (0.59) 0.14 4.36 1.54 ------- ------------ ------------ ------------ ------- ------------- ------------- Total from Investment Operations................ (0.28) 0.39 0.70 (0.47) 0.15 4.51 1.70 ------- ------------ ------------ ------------ ------- ------------- ------------- DISTRIBUTIONS Net Investment Income.... -- (0.06) (0.15) (0.17) -- (0.01) (0.18) In Excess of Net Investment Income....... -- -- -- -- -- (0.13) -- Net Realized Gain........ -- -- (0.08) (0.05) -- (0.26) (0.27) ------- ------------ ------------ ------------ ------- ------------- ------------- Total Distributions........ -- (0.06) (0.23) (0.22) -- (0.40) (0.45) ------- ------------ ------------ ------------ ------- ------------- ------------- NET ASSET VALUE, END OF PERIOD.................... $ 9.72 $ 10.05 $ 10.52 $ 9.83 $ 9.98 $ 14.09 $ 15.34 ------- ------------ ------------ ------------ ------- ------------- ------------- ------- ------------ ------------ ------------ ------- ------------- ------------- TOTAL RETURN............... (2.80)% 3.99% 7.17% (4.56)% 1.53% 46.50% 12.39% ------- ------------ ------------ ------------ ------- ------------- ------------- ------- ------------ ------------ ------------ ------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)............... $7,811 $110,716 $283,776 $486,836 $510,727 $947,045 $1,304,770 Ratio of Expenses to Average Net Assets (1)(2).................... 1.35%** 1.03% 1.00% 1.00% 1.00%** 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets (1)(2)............. 2.34% 3.51% 2.27% 1.46% 0.68%** 1.25% 1.12% Portfolio Turnover Rate.... 0% 38% 22% 12% 5% 23% 16% - -------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income....... $ 0.01 $ 0.01 $ 0.00 $ 0.00 $ 0.01 $ 0.004 Ratios before expense limitation: Expenses to Average Net Assets.................. 2.58%** 1.24% 1.09% 1.02% 1.14%** 1.06% 1.03% Net Investment Income to Average Net Assets...... 1.11%** 3.30% 2.18% 1.44% 0.54%** 1.19% 1.09% (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.80% of the average daily net assets of the International Equity Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 1.00% of the average daily net assets of the Portfolio. In the year ended October 31, 1991, the year ended October 31, 1992, the two months ended December 31, 1992 and the years ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expenses totaling $147,000, $78,000, $116,000, $405,000 and $344,000, respectively, for the International Equity Portfolio. * Commencement of Operations. ** Annualized.
6 INTERNATIONAL SMALL CAP PORTFOLIO
DECEMBER 15, 1992* YEAR ENDED YEAR ENDED TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1992 1993+ 1994 ------------------ -------------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD..................... $ 10.00 $10.09 $14.64 ------- ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)(3)........................... 0.01 0.09 0.14 Net Realized and Unrealized Gain on Investments (2).... 0.08 4.48 0.62 ------- ------ ------ Total from Investment Operations......................... 0.09 4.57 0.76 ------- ------ ------ DISTRIBUTIONS Net Investment Income.................................. -- -- (0.03) In Excess of Net Investment Income..................... -- (0.02) -- Net Realized Gain...................................... -- -- (0.22) ------- ------ ------ Total Distributions...................................... -- (0.02) (0.25) ------- ------ ------ NET ASSET VALUE, END OF PERIOD........................... $ 10.09 $14.64 $15.15 ------- ------ ------ ------- ------ ------ TOTAL RETURN............................................. 0.90% 45.34% 5.25% ------- ------ ------ ------- ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).................... $3,824 $52,834 $160,101 Ratio of Expenses to Average Net Assets (1)(3)........... 1.15%** 1.15% 1.15% Ratio of Net Investment Income to Average Net Assets (1)(3).................................................. 1.37%** 0.66% 1.18% Portfolio Turnover Rate.................................. 0% 14% 8% - ------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income........... $ 0.16 $ 0.10 $0.02 Ratios before expense limitation: Expenses to Average Net Assets....................... 21.67%** 1.86% 1.29% Net Investment Income (Loss) to Average Net Assets... (19.15)%** (0.05)% 1.04% (2) Reflects a 1% transaction fee on purchases and redemptions of capital shares. (3) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.95% of the average daily net assets of the International Small Cap Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 1.15% of the average daily net assets of the Portfolio. In the period ended December 31, 1992 and the years ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expenses totaling $32,000, $151,000 and $174,000, respectively, for the International Small Cap Portfolio. * Commencement of Operations. ** Annualized. + Per share amounts for the year ended December 31, 1993 are based on average outstanding shares.
7 ASIAN EQUITY PORTFOLIO
TWO MONTHS JULY 1, 1991, TO YEAR ENDED ENDED DECEMBER YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, 31, DECEMBER 31, DECEMBER 31, 1991 1992 1992 1993 1994 ---------------- ------------- -------------- -------------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD.. $10.00 $9.67 $13.63 $ 13.11 $ 26.20 ------ ------ ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)(2)........ 0.03 0.14 0.01 0.10 0.11 Net Realized and Unrealized Gain (Loss) on Investments.............. (0.36) 3.86 (0.53) 13.38 (4.15) ------ ------ ------- ------- ------- Total from Investment Operations...... (0.33) 4.00 (0.52) 13.48 (4.04) ------ ------ ------- ------- ------- DISTRIBUTIONS Net Investment Income............... -- (0.04) -- (0.01) (0.09) In Excess of Net Investment Income............................. -- -- -- (0.13) -- Net Realized Gain................... -- -- -- (0.12) (0.53) In Excess of Net Realized Gain...... -- -- -- (0.13) -- ------ ------ ------- ------- ------- Total Distributions................... -- (0.04) -- (0.39) (0.62) ------ ------ ------- ------- ------- NET ASSET VALUE, END OF PERIOD........ $ 9.67 $13.63 $ 13.11 $ 26.20 $ 21.54 ------ ------ ------- ------- ------- ------ ------ ------- ------- ------- TOTAL RETURN.......................... (3.30)% 41.50% (3.82)% 105.71% (15.81)% ------ ------ ------- ------- ------- ------ ------ ------- ------- ------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).......................... $10,719 $41,017 $41,978 $287,136 $276,906 Ratio of Expenses to Average Net Assets (1)(2)........................ 1.00%** 1.00% 1.00%** 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets (1)(2)............ 1.13%** 1.53% 0.61%** 0.83% 0.52% Portfolio Turnover Rate............... 2% 33% 10% 18% 47% - ------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income.............. $ 0.02 $0.06 $ 0.02 $ 0.05 $ 0.04 Ratios before expense limitation: Expenses to Average Net Assets.... 2.52%** 1.63% 2.02%** 1.38% 1.20% Net Investment Income (Loss) to Average Net Assets............. (0.39)%** 0.90% (0.41)%** 0.45% 0.32% (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.80% of the average daily net assets of the Asian Equity Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 1.00% of the average daily net assets of the Portfolio. In the fiscal period ended October 31, 1991, the year ended October 31, 1992, the two months ended December 31, 1992 and years ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expenses totaling $44,000, $167,000, $70,000, $477,000 and $535,000, respectively, for the Asian Equity Portfolio. * Commencement of Operations. ** Annualized.
8 EUROPEAN EQUITY PORTFOLIO
YEAR ENDED APRIL 2, 1993* TO DECEMBER 31, DECEMBER 31, 1993 1994 ----------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD............................................ $ 10.00 $ 12.91 ----------------- ------------- ----------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)(2).................................................. 0.08 0.08 Net Realized and Unrealized Gain on Investments............................... 2.83 1.29 ----------------- ------------- Total from Investment Operations................................................ 2.91 1.37 ----------------- ------------- DISTRIBUTIONS Net Investment Income......................................................... -- (0.09) Net Realized Gain............................................................. -- (0.25) ----------------- ------------- Total Distributions............................................................. -- (0.34) ----------------- ------------- NET ASSET VALUE, END OF PERIOD.................................................. $ 12.91 $ 13.94 ----------------- ------------- ----------------- ------------- TOTAL RETURN.................................................................... 29.10% 10.88% ----------------- ------------- ----------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)........................................... $12,681 $27,634 Ratio of Expenses to Average Net Assets (1)(2).................................. 1.00%** 1.00% Ratio of Net Investment Income to Average Net Assets (1)(2)..................... 1.23%** 0.87% Portfolio Turnover Rate......................................................... 15% 79% - ------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income........................... $ 0.09 $ 0.06 Ratios before expense limitation: Expenses to Average Net Assets....................................... 2.43%** 1.62% Net Investment Income (Loss) to Average Net Assets................... (0.21)%** 0.25% (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.80% of the average daily net assets of the European Equity Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 1.00% of the average daily net assets of the Portfolio. In the fiscal period ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expenses totaling $88,000 and $112,000, respectively, for the European Equity Portfolio. * Commencement of Operations. ** Annualized.
9 JAPANESE EQUITY PORTFOLIO
PERIOD FROM APRIL 25, 1994* TO DECEMBER 31, 1994 ------------- NET ASSET VALUE, BEGINNING OF PERIOD............................................................... $ 10.00 ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Loss (1).......................................................................... (0.01) Net Realized and Unrealized Loss on Investments.................................................. (0.16) ------------- Total from Investment Operations................................................................... (0.17) ------------- NET ASSET VALUE, END OF PERIOD..................................................................... $ 9.83 ------------- ------------- TOTAL RETURN....................................................................................... (1.70)% ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).............................................................. $ 50,332 Ratio of Expenses to Average Net Assets (1)(2)..................................................... 1.00%** Ratio of Net Investment Loss to Average Net Assets (1)(2).......................................... (0.10)%** Portfolio Turnover Rate............................................................................ 1% - ------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income.................................................... $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets................................................................ 1.27%** Net Investment Loss to Average Net Assets..................................................... (0.37)%** (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.80% of the average daily net assets of the Japanese Equity Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 1.00% of the average daily net assets of the Portfolio. In the fiscal period ended December 31, 1994, the Adviser waived advisory fees and/or reimbursed expenses totaling $80,000 for the Japanese Equity Portfolio. * Commencement of Operations. ** Annualized.
10 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-seven portfolios, offering institutional investors and high net worth individual investors a broad range of investment choices coupled with the advantages of a no-load mutual fund with Morgan Stanley and its affiliates providing customized services as Adviser, Administrator and Distributor. Each portfolio has its own investment objectives and policies designed to meet its specific goals. The investment objectives of each of the seven Portfolios described in this Prospectus are as follows: -The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of issuers throughout the world, including U.S. issuers. -The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of non-U.S. issuers. -The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of non-U.S. issuers with equity market capitalizations of less than $500 million. -The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of Asian issuers. -The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of European issuers. -The JAPANESE EQUITY PORTFOLIO seeks long term capital appreciation by investing primarily in equity securities of Japanese issuers. -The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Latin American issuers and debt securities issued or guaranteed by Latin American governments or governmental entities. The other portfolios of the Fund are described in other Prospectuses which may be obtained from the Fund at the address and phone number noted on the cover page of this Prospectus. The objectives of these other portfolios are listed below: GLOBAL AND INTERNATIONAL EQUITY: -The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital appreciation by investing in accordance with country weightings determined by the Adviser in common stocks of non-U.S. issuers which, in the aggregate, replicate broad country indices. -The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in the equity securities of issuers in The People's Republic of China, Hong Kong and Taiwan. -The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of emerging country issuers. -The GOLD PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of foreign and domestic issuers engaged in gold-related activities. 11 U.S. EQUITY: -THE AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing primarily in corporate equity and equity-linked securities. -The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented common stocks of small- to medium-sized corporations. -The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing in growth-oriented common stocks of large capitalization companies. -The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued common stocks of small- to medium-sized companies. -The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current income and long-term capital appreciation by investing primarily in equity securities of companies in the U.S. real estate industry, including real estate investment trusts. -The VALUE EQUITY PORTFOLIO seeks high total return by investing in common stocks which the Adviser believes to be undervalued relative to the stock market in general at the time of purchase. EQUITY AND FIXED INCOME: -The BALANCED PORTFOLIO seeks high total return while preserving capital by investing in a combination of undervalued common stocks and fixed income securities. FIXED INCOME: -The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing primarily in debt securities of government, government-related and corporate issuers located in emerging countries. -The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent with the preservation of capital by investing in a diversified portfolio of fixed income securities. -The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate of return while preserving capital by investing in fixed income securities of issuers throughout the world, including U.S. issuers. -The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a diversified portfolio of high yield fixed income securities that offer a yield above that generally available on debt securities in the three highest rating categories of the recognized rating services. -The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level of current income as is consistent with the preservation of capital by investing primarily in a variety of investment grade mortgage-backed securities. -The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current income consistent with preservation of principal through investment primarily in municipal obligations, the interest on which is exempt from federal income tax. 12 -The REAL YIELD PORTFOLIO seeks to produce a high total return consistent with the preservation of capital by investing in fixed income securities of issuers throughout the world, including U.S. issuers. MONEY MARKET: -The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less. -The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less which are exempt from federal income tax. INVESTMENT MANAGEMENT Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan Stanley Group Inc., which, together with its affiliated asset management companies, at December 31, 1994 had approximately $48.7' billion in assets under management as an investment manager or as a fiduciary adviser, acts as investment adviser to the Fund and each of its portfolios. See "Management of the Fund -- Investment Adviser" and "Management of the Fund -- Administrator." HOW TO INVEST Shares of each Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Purchases of shares of the International Small Cap Portfolio are subject to the 1% transaction fee described above under "Fund Expenses." Share purchases may be made by sending investments directly to the Fund. The minimum initial investment is $500,000 for each Portfolio described in this Prospectus. The minimum subsequent investment is $1,000 for each Portfolio (except for automatic reinvestment of dividends and capital gains distributions for which there is no minimum). The minimum investment levels may be waived for certain Morgan Stanley employees and customers at the discretion of the Adviser. The International Equity Portfolio is currently closed to new investors with the exception of certain Morgan Stanley customers. See "Purchase of Shares." HOW TO REDEEM Shares of each Portfolio may be redeemed at any time at the net asset value per share of the Portfolio next determined after receipt of the redemption request without the imposition of any redemption fees other than the 1% transaction fee described under "Fund Expenses" above. This transaction fee is assessed in connection with the redemption of shares of the International Small Cap Portfolio. The redemption price may be more or less than the purchase price. If a shareholder reduces its total investment in shares of any Portfolio to less than $500,000, the investment may be subject to redemption. See "Redemption of Shares." RISK FACTORS The investment policies of each of the Portfolios entail certain risks and considerations of which an investor should be aware. Each Portfolio will invest in securities of foreign issuers, which are subject to certain risks not typically associated with domestic securities. The Latin American Portfolio invests in securities of issuers located in developing countries and emerging markets. These securities may impose greater liquidity risks and 13 other risks not typically associated with investing in more established markets. The Latin American Portfolio may invest up to 20% of its total assets in lower rated debt securities ("junk bonds"), including sovereign debt, which securities are considered speculative with regard to the payment of interest and return of principal. See "Investment Objectives and Policies" and "Additional Investment Information." In addition, each Portfolio may invest in repurchase agreements, lend its portfolio securities, purchase securities on a when issued basis or delayed delivery basis and invest in forward foreign currency exchange contracts, and the Latin American Portfolio may invest in foreign currency exchange options to hedge currency risk associated with investment in non-U.S. dollar denominated securities. Each Portfolio may invest in short-term or medium-term debt securities or hold cash or cash equivalents for temporary defensive purposes. The International Small Cap Portfolio may invest in securities that are neither listed on a stock exchange nor traded over-the-counter, including private placement securities. The Global Equity, Japanese Equity, Latin American and Asian Equity Portfolios may also invest indirectly in securities through sponsored or unsponsored American Depositary Receipts. Each of these investment strategies involves specific risks which are described under "Investment Objectives and Policies" and "Additional Investment Information" herein and under "Investment Objectives and Policies" in the Statement of Additional Information. 14 INVESTMENT OBJECTIVES AND POLICIES The investment objectives of each Portfolio are described below, together with the policies the Fund employs in its efforts to achieve these objectives. Each Portfolio's investment objective is a fundamental policy which may not be changed without the approval of a majority of the Portfolio's outstanding voting securities. There is no assurance that the Fund will attain its objectives. The investment policies described below are not fundamental policies and may be changed without shareholder approval. THE GLOBAL EQUITY PORTFOLIO The Global Equity Portfolio seeks long-term capital appreciation by investing primarily in the common stocks of issuers throughout the world, including U.S. issuers. Common stocks for this purpose include common stocks and equivalents, such as securities convertible into common stocks and securities having common stock characteristics, such as rights and warrants to purchase common stocks. The Adviser expects that, under normal circumstances, at least 20% of the Portfolio's total assets will be invested in the common stocks of U.S. issuers. The remainder of the Portfolio will be invested in issuers located throughout the world, including those located in emerging markets. At least 65% of the total assets of the Portfolio will be invested in equity securities under normal circumstances. Securities in emerging markets may not be as liquid as those in developed markets and pose greater risks. Although the Portfolio intends to invest primarily in securities listed on stock exchanges, it will also invest in securities traded in over-the-counter markets. The Adviser's orientation to individual stock selection and value driven approach in selecting investments for the Portfolio are the same as those described for the International Equity Portfolio discussed below. The Portfolio may invest in American, Global or other types of Depositary Receipts. Although the Portfolio will not invest for short-term trading purposes, investment securities may be sold from time to time without regard to the length of time they have been held. It is anticipated that the annual turnover rate of the Portfolio will not exceed 100% under normal circumstances. THE INTERNATIONAL EQUITY PORTFOLIO The investment objective of the International Equity Portfolio is to provide long-term capital appreciation. The production of any current income is incidental to this objective. The Portfolio seeks to achieve its objective by investing primarily in the common stocks of non-U.S. issuers. Common stocks for this purpose include common stocks and equivalents, such as securities convertible into common stocks and securities having common stock characteristics, such as rights and warrants to purchase common stocks. At least 65% of the total assets of the Portfolio will be invested in equity securities under normal circumstances. The Adviser's approach in selecting investments for the Portfolio is oriented to individual stock selection, and is value driven. In selecting stocks for the Portfolio, the Adviser initially identifies those stocks which it believes to be undervalued in relation to the issuer's assets, cash flow, earnings and revenues, and then evaluates the future value of such stocks by running the results of an in-depth study of the issuer through a dividend discount model. The Adviser utilizes the research of a number of sources, including its affiliate in Geneva, Switzerland, Morgan Stanley Capital International, in identifying attractive securities, and applies a number of proprietary screening criteria to identify those securities it believes to be undervalued. Portfolio holdings are regularly reviewed and subjected to fundamental analysis to determine whether they continue to conform to the Adviser's value criteria. Securities which no longer conform to such value criteria are sold. 15 While the Portfolio is not subject to any specific geographic diversification requirements, it currently intends to diversify investments among countries to reduce currency risk. Investments will be made primarily in common stocks of companies domiciled in developed countries, but may also be made in the securities of companies domiciled in developing countries as well. Although the Portfolio intends to invest primarily in securities listed on stock exchanges, it will also invest in securities traded in over-the-counter markets. Securities of companies in developing countries may pose liquidity risks. The Portfolio will not, under normal circumstances, invest in the stocks of U.S. issuers. For a description of special considerations and certain risks associated with investments in foreign issuers, see "Additional Investment Information." The Portfolio may temporarily reduce its equity holdings for defensive purposes in response to adverse market conditions and invest in domestic, Eurodollar and foreign short-term money market instruments. See "Investment Objectives and Policies" in the Statement of Additional Information. Although the Portfolio will not invest for short-term trading purposes, investment securities may be sold from time to time without regard to the length of time they have been held. It is anticipated that the annual turnover rate of the Portfolio will not exceed 100% under normal circumstances. THE INTERNATIONAL SMALL CAP PORTFOLIO The investment objective of the International Small Cap Portfolio is to provide long-term capital appreciation. The production of any current income is incidental to this objective. The Portfolio seeks to achieve its objective by investing primarily in the common stocks of non-U.S. issuers with equity market capitalizations of less than $500 million. Common stocks for this purpose include common stocks and equivalents, such as securities convertible into common stocks and securities having common stock characteristics, such as rights and warrants to purchase common stocks. The Portfolio will invest a minimum of 80% of its total assets in companies with market capitalizations of less than $500 million and may invest up to an additional 20% of its total assets in companies with total market capitalizations up to a maximum of $1 billion, for which the actual market float as represented by the value of the securities that may be freely traded falls below $500 million. At least 65% of the total assets of the Portfolio will be invested in common stocks under normal circumstances. The Adviser's orientation to individual stock selection and value driven approach in selecting investments for the Portfolio are the same as those described for the International Equity Portfolio discussed above. While the Portfolio is not subject to any specific geographic diversification requirements, it currently intends to diversify investments among countries to reduce currency risk. Investments will be made primarily in common stocks of companies domiciled in developed countries, but limited investments may also be made in the securities of companies domiciled in developing countries as well, and will not normally exceed 5% of the total assets of the Portfolio. Although the Portfolio intends to invest primarily in securities listed on stock exchanges, it may also invest in securities traded in over-the-counter markets. Small capitalization securities involve greater issuer risk and the markets for such securities may be more volatile and less liquid. Securities of companies in developing countries may pose liquidity risks. The Portfolio will not, under normal circumstances, invest in the stocks of U.S. issuers. For a description of special considerations and certain risks associated with investments in foreign issuers, see "Additional Investment Information." The Portfolio may temporarily reduce its equity holdings for defensive purposes in response to adverse market conditions and invest in domestic, Eurodollar and foreign short-term money market instruments. See "Investment Objectives and Policies" in the Statement of Additional Information. 16 Although the Portfolio will not invest for short-term trading purposes, investment securities may be sold from time to time without regard to the length of time they have been held. It is anticipated that the annual turnover rate of the Portfolio will not exceed 100% under normal circumstances. THE ASIAN EQUITY PORTFOLIO The Asian Equity Portfolio seeks long-term capital appreciation through investment primarily in common stocks. The production of any current income is incidental to this objective. The Portfolio seeks to achieve its objective by investing primarily in common stocks which are traded on recognized stock exchanges of the countries in Asia described below and in common stocks of companies organized under the laws of an Asian country whose business is conducted principally in Asia. The Portfolio does not intend to invest in securities which are principally traded in markets in Japan or in companies organized under the laws of Japan. The Portfolio may also invest in American Depositary Receipts of Asian issuers that are traded on stock exchanges in the U.S. The Asian countries to be represented in the Portfolio, which include the following countries, have the more established markets in the region: Hong Kong, Singapore, Malaysia, Thailand, the Philippines and Indonesia. The Portfolio may also invest in common stocks traded on markets in Taiwan, South Korea, India, Pakistan, Sri Lanka and other developing markets that are open to foreign investment. There is no requirement that the Fund, at any given time, invest in any or all of the countries listed above or in any other Asian countries. The Fund has no set policy for allocating investments among the various Asian countries. Allocation of investments will depend on the relative attractiveness of the stocks of issuers in the respective countries. Government regulation and restrictions in many of the countries of interest may limit the amount, mode and extent of investment in companies of such countries. At least 65% of the total assets of the Portfolio will be invested in common stocks of Asian countries under normal circumstances. The remaining portion of the Fund will be kept in any combination of debt instruments, bills and bonds of governmental entities in Asia and the U.S., in notes, debentures, and bonds of companies in Asia and in money market instruments of the U.S. Common stocks for this purpose include common stocks and equivalents, such as securities convertible into common stocks and securities having common stock characteristics, such as rights and warrants to purchase common stocks. The Adviser's orientation to individual stock selection and value driven approach in selecting investments for the Portfolio are similar to those described for the International Equity Portfolio discussed above. The Adviser will analyze assets, revenues and earnings of an issuer. In selecting industries and particular issuers, the Adviser will evaluate costs of labor and raw materials, access to technology, export of products and government regulation. Although the Portfolio seeks to invest in larger companies, it may invest in medium and small companies that, in the Adviser's view, have potential for growth. The Portfolio's investments will include securities of issuers located in developing countries and traded in emerging markets. These securities pose greater liquidity risks and other risks than securities of companies located in developed countries and traded in more established markets. For a description of special considerations and certain risks associated with investment in foreign issuers, see "Additional Investment Information." See also "Investment Objectives and Policies" in the Statement of Additional Information. 17 Although the Portfolio intends to invest primarily in securities listed on stock exchanges, it will also invest in securities traded in over-the-counter markets. Securities traded in over-the-counter markets pose liquidity risks. The Portfolio may also invest in initial public offerings in the form of oversubscriptions or private placements. Such investments generally entail short-term liquidity risks. Although the Portfolio will not invest for short-term trading purposes, investment securities may be sold from time to time without regard to the length of time they have been held. It is anticipated that the annual turnover rate of the Portfolio will not exceed 100% under normal circumstances. Pending investment or settlement, and for liquidity purposes, the Portfolio may invest in domestic, Eurodollar and foreign short-term money market instruments. The Portfolio may also purchase such instruments to temporarily reduce its equity holdings for defensive purposes in response to adverse market conditions. Because of the lack of hedging facilities in the currency markets of Asia, no active currency hedging strategy is anticipated currently. Instead, each investment will be considered on a total currency adjusted basis with the U.S. dollar as a base currency. The Portfolio may engage in currency exchange contracts. See "Forward Foreign Currency Exchange Contracts" in this Prospectus. THE EUROPEAN EQUITY PORTFOLIO The European Equity Portfolio seeks long-term capital appreciation by investing primarily in the common stocks of European issuers, including those located in Germany, France, Switzerland, Belgium, Italy, Finland, Sweden, Denmark, Norway and the United Kingdom. Investments may also be made in the common stocks of issuers located in the smaller and emerging markets of Europe. Common stocks for this purpose include common stocks and equivalents, such as securities convertible into common stocks and securities having common stock characteristics, such as rights and warrants to purchase common stocks. At least 65% of the total assets of the Portfolio will be invested in equity securities of European issuers under normal circumstances. The Adviser's orientation to individual stock selection and value-driven approach in selecting investments for the Portfolio are the same as those described for the International Equity Portfolio discussed above. Securities in emerging markets may not be as liquid as those in developed markets and pose greater risks. Although the Portfolio intends to invest primarily in securities listed on stock exchanges, it will also invest in securities traded in over-the-counter markets. While the Portfolio is not subject to any specific geographic diversification requirements, it currently intends to diversify investments among countries to reduce currency risk. Investments may be made primarily in common stocks of companies domiciled in developed countries, but may also be made in the securities of companies domiciled in developing countries as well. Although the Portfolio intends to invest primarily in securities listed on stock exchanges, it will also invest in securities traded in over-the-counter markets. Securities of companies in developing countries may pose liquidity risks. The Portfolio will not, under normal circumstances, invest in the stocks of U.S. issuers. For a description of special considerations and certain risks associated with investments in foreign issuers, see "Additional Investment Information." The Portfolio may temporarily reduce its equity holdings for defensive purposes in response to adverse market conditions and invest in domestic, Eurodollar and foreign short-term money market instruments. See "Investment Objectives and Policies" in the Statement of Additional Information. 18 Although the Portfolio will not invest for short-term trading purposes, investment securities may be sold from time to time without regard to the length of time they have been held. It is anticipated that the annual turnover rate of the Portfolio will not exceed 100% under normal circumstances. THE JAPANESE EQUITY PORTFOLIO The Japanese Equity Portfolio seeks long-term capital appreciation by investing primarily in equity securities of Japanese issuers. Equity securities are defined as common and preferred stocks, debt securities convertible into common stock ("convertible debentures") and common stock purchase warrants. Under normal conditions, the Portfolio will invest at least 80% of its total assets in securities issued by entities that are organized under the laws of Japan, affiliates of Japanese companies (wherever organized or traded), and issuers not organized under the laws of Japan but deriving 50% or more of their revenues from Japan. These securities may include debt securities (issued by the Japanese government or by Japanese companies) when the Adviser believes that the potential for capital appreciation from investment in debt securities equals or exceeds that available from investment in equity securities. In making investment decisions, the Adviser will consider, among other factors, the size of the company, its financial condition, its marketing and technical strengths and its competitiveness in its industry. All debt securities in which the Portfolio may invest will be rated no lower than BBB by Standard & Poor's Corporation ("S&P"), Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Mikuni Inc. ("Mikuni") (a Japanese rating agency) or, if unrated, of comparable quality as determined by the Adviser. Securities rated BBB by S&P, Baa by Moody's or BBB by Mikuni have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments on such securities than would be the case with higher rated securities. The convertible securities in which the Portfolio may invest include bonds, notes, debentures, preferred stocks and other securities convertible into common stocks and may be fixed-income or zero coupon debt securities. Prior to their conversion, convertible securities may have characteristics similar to nonconvertible debt securities. The Portfolio currently intends to focus its investments in Japanese companies that have an active market for their shares and that the Adviser believes show a potential for better than average growth. The Portfolio anticipates that most equity securities of Japanese companies in which it invests, either directly or indirectly by means of American Depositary Receipts or convertible debentures, will be listed on securities exchanges in Japan. The Portfolio may also invest in equity securities of Japanese companies that are traded in an over-the-counter market. The Portfolio may also invest up to 20% of its total assets in cash or short-term government or other short-term prime obligations or repurchase agreements so that funds may be readily available for general corporate purposes, including the payment of dividends, redemptions and operating expenses, for investment in securities through exercise of rights or otherwise. For temporary defensive purposes, the Portfolio may invest some or all of its assets in cash or such short-term obligations. Although the Portfolio will not invest for short-term trading purposes, investment securities may be sold from time to time without regard to the length of time they have been held. It is anticipated that the annual portfolio turnover rate of the Portfolio will not exceed 100% under normal circumstances. 19 RISK FACTORS RELATING TO JAPANESE EQUITY PORTFOLIO. Investors should consider the following factors inherent in investment in Japan. TRADE ISSUES. Because of the concentration of Japanese exports in highly visible products such as automobiles, machine tools and semiconductors, and the large trade surpluses ensuing therefrom, Japan is in a difficult phase in its relation with its trading partners, particularly the U.S., where the trade imbalance is the greatest. Retaliatory action taken by such trading partners could affect the ability of Japanese companies to export goods to these countries, which could negatively impact the value of securities in the Portfolio. CURRENCY FACTORS. Over a long period of years, the yen has generally appreciated in relation to the dollar. The yen's appreciation would add to the returns of dollars invested through the Portfolio in Japan. A decline in the value of the yen would have the opposite effect, adversely affecting the value of the Portfolio in dollar terms. THE JAPANESE STOCK MARKET. Like other stock markets, the Japanese stock market can be volatile. A decline in the market may have an adverse effect on the availability of credit and on the value of the substantial stock holdings of Japanese companies in particular, Japanese banks, insurance companies and other financial institutions. A decline in the market may contribute to weakness in Japan's economy. The common stocks of many Japanese companies continue to trade at high price-earnings ratios even after the recent market decline. Differences in accounting methods make it difficult to compare the earnings of Japanese companies with those of companies in other countries, especially the U.S. In general, however, reported net income in Japan is understated relative to U.S. accounting standards. In addition, Japanese companies have tended historically to have higher growth rates than U.S. companies, and Japanese interest rates have generally been lower than in the U.S., both of which factors tend to result in lower discount rates and higher price-earnings ratios in Japan than in the U.S. THE LATIN AMERICAN PORTFOLIO The investment objective of the Latin American Portfolio is long-term capital appreciation. The Portfolio seeks to achieve this objective by investing primarily in equity securities (i) of companies organized in or for which the principal securities trading market is in Latin America, (ii) denominated in a Latin American currency issued by companies to finance operations in Latin America, or (iii) of companies that alone or on a consolidated basis derive 50% or more of their annual revenues from either goods produced, sales made or services performed in Latin America (collectively, "Latin American issuers") and by investing, from time to time, in debt securities issued or guaranteed by a Latin American government or governmental entity ("Sovereign Debt"). Income is not a consideration in selecting investments or an investment objective. Under normal conditions, substantially all, but not less than 80%, of the Portfolio's total assets are invested in equity securities of Latin American issuers and in Sovereign Debt. For purposes of this Prospectus, unless otherwise indicated, Latin America consists of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela. See "Additional Investment Information -- Foreign Investment Risk Factors" for a discussion of the nature of information publicly available for non-U.S. companies. An equity security is defined as common or preferred stocks (including convertible preferred stocks), bonds, notes or debentures convertible into common or preferred stock, stock purchase warrants or rights, equity interests in trusts or partnerships or American, Global or other types of Depositary Receipts. See "Additional Investment Information -- Depositary Receipts." 20 The Portfolio focuses its investments in listed equity securities in Argentina, Brazil, Chile and Mexico, the most developed capital markets in Latin America. The Portfolio expects, under normal market conditions, to have at least 55% of its total assets invested in listed equity securities of issuers in these four countries. In addition, the Portfolio actively invests in markets in other Latin American countries such as Colombia, Peru and Venezuela. The Portfolio is not limited in the extent to which it may invest in any Latin American country and intends to invest opportunistically as markets develop. The portion of the Portfolio's holdings in any Latin American country will vary from time to time, although the portion of the Portfolio's assets invested in Chile may tend to vary less than the portions invested in other Latin American countries because, with limited exceptions, capital invested in Chile currently cannot be repatriated for one year. See "Additional Investment Information -- Investment Procedures: Argentina, Brazil, Chile and Mexico" in the Statement of Additional Information. The governments of some Latin American countries have been engaged in programs of selling part or all of their stakes in government owned or controlled enterprises ("privatizations"). The Adviser believes that privatizations may offer investors opportunities for significant capital appreciation and intends to invest assets of the Portfolio in privatizations in appropriate circumstances. In certain Latin American countries, the ability of foreign entities, such as the Portfolio, to participate in privatizations may be limited by local law, or the terms on which the Portfolio may be permitted to participate may be less advantageous than those for local investors. There can be no assurance that Latin American governments will continue to sell companies currently owned or controlled by them or that any privatization programs in which the Portfolio participates will be successful. Several Latin American countries have adopted debt conversion programs, pursuant to which investors may use Sovereign Debt of a country, directly or indirectly, to make investments in local companies. The terms of the various programs vary from country to country although each program includes significant restrictions on the application of the proceeds received in the conversion and on the remittance of profits on the investment and of the invested capital. The Portfolio may participate in Latin American debt conversion programs. The Adviser will evaluate opportunities to enter into debt conversion transactions as they arise. Securities in which the Portfolio may invest include those that are neither listed on a stock exchange nor traded over-the-counter. As a result of the absence of a public trading market for these securities, they may be less liquid than publicly traded securities. See "Additional Investment Information -- Non-Publicly Traded Securities, Private Placements and Restricted Securities." To the extent that the Portfolio's assets are not invested in equity securities of Latin American issuers or in Sovereign Debt, the remainder of the assets may be invested in (i) debt securities of Latin American issuers, (ii) equity or debt securities of corporate or governmental issuers located in countries outside Latin America, and (iii) short-term and medium-term debt securities of the type described below under "Temporary Investments." The Portfolio's assets may be invested in debt securities when the Portfolio believes that, based upon factors such as relative interest rate levels and foreign exchange rates, such debt securities offer opportunities for long-term capital appreciation. It is likely that many of the debt securities in which the Portfolio will invest will be unrated. The Portfolio may invest up to 20% of its total assets in securities that are determined by the Adviser to be comparable to securities rated below investment grade by S&P or Moody's ("junk bonds"). Such lower-quality securities are regarded as being predominantly speculative and involve significant risks. See "Additional Investment Information -- Risk Factors Relating to Investing in Lower Rated Debt Securities." 21 The Portfolio's holdings of lower-quality debt securities will consist predominantly of Sovereign Debt, much of which trades at substantial discounts from face value and which may include Sovereign Debt comparable to securities rated as low as D by S&P or C by Moody's. The Portfolio may invest in Sovereign Debt to hold and trade in appropriate circumstances, as well as to use to participate in debt for equity conversion programs. The Portfolio will invest in Sovereign Debt only when the Portfolio believes such investments offer opportunities for long-term capital appreciation. Investment in Sovereign Debt involves a high degree of risk and such securities are generally considered to be speculative in nature. See "Additional Investment Information -- Sovereign Debt." For temporary defensive purposes, the Portfolio may invest less than 80% of its total assets in Latin American equity securities and Sovereign Debt, in which case the Portfolio may invest in other equity or debt securities or may invest in certain short-term (less than twelve months to maturity) and medium-term (not greater than five years to maturity) debt securities or hold cash. See "Additional Investment Information -- Temporary Investments." The Portfolio may enter into forward foreign currency exchange contracts and foreign currency futures contracts, may purchase and write (sell) put and call options on securities, foreign currency and on foreign currency futures contracts, and may enter into stock index and interest rate futures contracts and options thereon. See "Additional Investment Information." There currently are limited options and futures markets for Latin American currencies, securities and indexes, and the nature of the strategies adopted by the Adviser and the extent to which those strategies are used depends on the development of those markets. The Portfolio may also from time to time lend securities (but not in excess of 20% of its total assets) from its portfolio to brokers, dealers and financial institutions. See "Additional Investment Information -- Loans of Portfolio Securities." The Latin American Portfolio will not invest more than 25% of its total assets in one industry except and to the extent, and only for such period of time as, the Board of Directors determines in view of the considerations discussed below that it is appropriate and in the best interest of the Portfolio and its shareholders to invest more than 25% of the Portfolio's total assets in companies involved in the telecommunications industry or financial services industry, respectively. Since the securities markets of Latin American countries are emerging markets characterized by a relatively small number of issues, it is possible that one or more markets may on occasion be dominated by issues of companies engaged in these two industries. In addition, it is possible that government privatizations in certain Latin American countries, which currently represent a primary source of new issues in many Latin American markets and often represent attractive investment opportunities, will occur in these two industries. As a result, the Portfolio has adopted a policy under which it may invest more than 25% of its total assets in securities of issuers in such industries. The Portfolio would only take this action if the Board of Directors determines that the Latin American markets are dominated by securities of issuers in such industries and that, in light of the anticipated return, investment quality, availability and liquidity of the issues in such industries, the Portfolio's ability to achieve its investment objective would, in light of its investment policies and limitations, be materially adversely affected if the Portfolios were not able to invest greater than 25% of its total assets in such industries. In the event that the Board of Directors permits greater than 25% of the Portfolio's total assets to be invested in the telecommunications or financial services industry, the Portfolio may be exposed to increased investment risks peculiar to that industry. The Portfolio will notify its shareholders of any decision by 22 the Board of Directors to permit (or cease) investments of more than 25% of the Portfolio's total assets in the telecommunications or financial services industry. Such notice will, to the extent applicable, include a discussion of any increased investment risks peculiar to such industry to which the Portfolio may be exposed. The Portfolio intends to purchase and hold securities for long-term capital appreciation and does not expect to trade for short-term gain. Accordingly, it is anticipated that the annual portfolio turnover rate normally will not exceed 50%, although in any particular year, market conditions could result in portfolio activity at a greater or lesser rate than anticipated. The rate of portfolio turnover will not be a limiting factor when the Portfolio deems it appropriate to purchase or sell securities. However, the U.S. federal tax requirement that the Portfolio derive less than 30% of its gross income from the sale or disposition of securities held less than three months may limit the Portfolio's ability to dispose of its securities. ADDITIONAL INVESTMENT INFORMATION REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements with brokers, dealers or banks that meet the credit guidelines established by the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a security from a seller that has agreed to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. The term of these agreements is usually from overnight to one week and never exceeds one year. Repurchase agreements may be viewed as a fully collateralized loan of money by the Portfolio to the seller. The Portfolio always receives securities with a market value at least equal to the purchase price (including accrued interest) as collateral, and this value is maintained during the term of the agreement. If the seller defaults and the collateral value declines, the Portfolio might incur a loss. If bankruptcy proceedings are commenced with respect to the seller, the Portfolio's realization upon the collateral may be delayed or limited. The aggregate of certain repurchase agreements and certain other investments is limited as set forth under "Investment Limitations." LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to brokers, dealers, domestic and foreign banks or other financial institutions for the purpose of increasing its net investment income. These loans must be secured continuously by cash or equivalent collateral or by a letter of credit at least equal to the market value of the securities loaned plus accrued interest or income. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. A Portfolio will not enter into securities loan transactions exceeding in the aggregate 33 1/3% of the market value of the Portfolio's total assets (exceeding in the aggregate 20% of such value with respect to the Latin American Portfolio). For more detailed information about securities lending, see "Investment Objectives and Policies" in the Statement of Additional Information. TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes in economic, financial or political conditions make it advisable, for temporary defensive purposes the Latin American Portfolio may reduce its holdings in equity and other securities and may invest in certain short-term (less than twelve months to maturity) and medium-term (not greater than five years to maturity) debt securities or may hold cash. The short-term and medium-term debt securities in which the Portfolio may invest consist of (a) obligations of the United States or emerging country governments (Latin American governments), their respective agencies or instrumentalities; (b) bank deposits and bank obligations (including certificates of deposit, time deposits and bankers' acceptances) of United States or emerging country banks (Latin American banks) denominated in any currency; (c) floating rate securities and other instruments denominated in any currency issued by international 23 development agencies; (d) finance company and corporate commercial paper and other short-term corporate debt obligations of United States and emerging country corporations (Latin American corporations) meeting the Portfolio's credit quality standards; and (e) repurchase agreements with banks and broker-dealers with respect to such securities. See "Additional Investment Information -- Repurchase Agreements." For temporary defensive purposes, the Portfolio intends to invest only in short-term and medium-term debt securities that the Adviser believes to be of high quality, i.e., subject to relatively low risk of loss of interest or principal (there is currently no rating system for debt securities in most emerging countries, including most Latin American countries.) WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio of the Fund may purchase securities on a when-issued or delayed delivery basis. In such transactions, instruments are bought with payment and delivery taking place in the future in order to secure what is considered to be an advantageous yield or price at the time of the transaction. Delivery of and payment for these securities may take as long as a month or more after the date of the purchase commitment but will take place no more than 120 days after the trade date. Each Portfolio will maintain with the Custodian a separate account with a segregated portfolio of high-grade debt securities or equity securities or cash in an amount at least equal to these commitments. The payment obligation and the interest rates that will be received are each fixed at the time a Portfolio enters into the commitment and no interest accrues to the Portfolio until settlement. Thus, it is possible that the market value at the time of settlement could be higher or lower than the purchase price if, among other factors, the general level of interest rates has changed. It is a current policy of each Portfolio not to enter into when-issued commitments exceeding in the aggregate 15% of the market value of the Portfolio's total assets less liabilities, other than the obligations created by these commitments. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each Portfolio may enter into forward foreign currency exchange contracts ("forward contracts") that provide for the purchase of or sale of an amount of a specified currency at a future date. Purposes for which such contracts may be used include protecting against a decline in a foreign currency against the U.S. dollar between the trade date and settlement date when a Portfolio purchases or sells securities, locking in the U.S. dollar value of dividends declared on securities held by a Portfolio and generally protecting the U.S. dollar value of securities held by a Portfolio against exchange rate fluctuations. Such contracts may also be used as a protective measure against the effects of fluctuating rates of currency exchange and exchange control regulations. While such forward contracts may limit losses to a Portfolio as a result of exchange rate fluctuation, they will also limit any gains that may otherwise have been realized. The Latin American Portfolio may also enter into foreign currency futures contracts. See "Investment Objectives and Policies -- Forward Currency Exchange Contracts" in the Statement of Additional Information. Except in circumstances where segregated accounts are not required by the 1940 Act and the rules adopted thereunder, the Portfolio's Custodian will place cash, U.S. government securities, or high-grade debt securities into a segregated account of a Portfolio in an amount equal to the value of such Portfolio's total assets committed to the consummation of forward foreign currency exchange contracts. If the value of the securities placed in the segregated account declines, additional cash or securities will be placed in the account on a daily basis so that the value of the account will be at least equal to the amount of such Portfolio's commitments with respect to such contracts. See "Investment Objectives and Policies -- Forward Foreign Currency Exchange Contracts" in the Statement of Additional Information. MONEY MARKET INSTRUMENTS. The Portfolios are permitted to invest in money market instruments, although each Portfolio intends to stay invested in securities satisfying their primary investment objective to the 24 extent practical. Each Portfolio may make money market investments pending other investment or settlement for liquidity, or in adverse market conditions. The money market investments permitted for the Portfolios include obligations of the U.S. Government and its agencies and instrumentalities, obligations of foreign sovereignties, other debt securities, commercial paper including bank obligations, certificates of deposit (including Eurodollar certificates of deposit) and repurchase agreements. For more detailed information about these money market investments, see "Description of Securities and Ratings" in the Statement of Additional Information. DEPOSITARY RECEIPTS. The Asian Equity, Global Equity, Latin American and Japanese Equity Portfolios may invest in American Depositary Receipts ("ADRs") and the Global Equity and Latin American Portfolios may also invest in other Depositary Receipts, including Global Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs") and other Depositary Receipts (which, together with ADRs, GDRs and EDRs, are hereinafter collectively referred to as "Depositary Receipts"), to the extent that such Depositary Receipts become available. ADRs are securities, typically issued by a U.S. financial institution (a "depositary"), that evidence ownership interests in a security or a pool of securities issued by a foreign issuer (the "underlying issuer") and deposited with the depositary. ADRs include American Depositary Shares and New York Shares and may be "sponsored" or "unsponsored." Sponsored ADRs are established jointly by a depositary and the underlying issuer, whereas unsponsored ADRs may be established by a depositary without participation by the underlying issuer. GDRs, EDRs and other types of Depositary Receipts are typically issued by foreign depositaries, although they may also be issued by U.S. depositaries, and evidence ownership interests in a security or pool of securities issued by either a foreign or a U.S. corporation. Generally, Depositary Receipts in registered form are designed for use in the U.S. securities market and Depositary Receipts in bearer form are designed for use in securities markets outside the United States. The Portfolio may invest in sponsored and unsponsored Depositary Receipts. For purposes of the Portfolio's investment policies, the Portfolio's investments in Depositary Receipts will be deemed to be investments in the underlying securities. NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES. The International Small Cap Portfolio and the Latin American Portfolio may invest in securities that are neither listed on a stock exchange nor traded over-the-counter, including privately placed securities. Such unlisted equity securities may involve a higher degree of business and financial risk that can result in substantial losses. As a result of the absence of a public trading market for these securities, they may be less liquid than publicly traded securities. Although these securities may be resold in privately negotiated transactions, the prices realized from these sales could be less than those originally paid by the Portfolio or less than what may be considered the fair value of such securities. Further, more companies whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements which might be applicable if their securities were publicly traded. If such securities are required to be registered under the securities laws of one or more jurisdictions before being resold, the Portfolio may be required to bear the expenses of registration. As a general matter, each Portfolio may not invest more than 15% of its total assets in illiquid securities, including securities for which there is no readily available secondary market nor more than 10% of its total assets in securities that are restricted from sale to the public without registration ("Restricted Securities") under the Securities Act of 1933, as amended (the "1933 Act"). Nevertheless, to the extent it can do so consistent with the foregoing limits, each Portfolio may invest up to 25% of its total assets in Restricted Securities that can be offered and sold to qualified institutional buyers under Rule 144A under that Act ("144A Securities"). The Board of Directors has adopted guidelines and delegated to the Adviser, subject to the supervision of the Board of Directors, the daily 25 function of determining and monitoring the liquidity of 144A securities. Rule 144A securities may become illiquid if qualified institutional buyers are not interested in acquiring the securities. Investors should note that investments of 5% of a Portfolio's total assets may be considered a speculative activity and may involve greater risk and expense to the Portfolio. BORROWING AND OTHER FORMS OF LEVERAGE. The Latin American Portfolio is authorized to borrow money from banks and other entities in an amount equal to up to 33 1/3% of its total assets (including the amount borrowed) less all liabilities and indebtedness other than the borrowing, and may use the proceeds of the borrowing for investment purposes or to pay dividends. Borrowing creates leverage which is a speculative characteristic. Although the Portfolio is authorized to borrow, it will do so only when the Adviser believes that borrowing will benefit the Portfolio after taking into account considerations such as the costs of borrowing and the likely investment returns on securities purchased with borrowed monies. Borrowing by the Portfolio will create the opportunity for increased net income but, at the same time, will involve special risk considerations. Leveraging resulting from borrowing will magnify declines as well as increases in the Portfolio's net asset value per share and net yield. The Portfolio expects that all of its borrowing will be made on a secured basis. The Portfolio's Custodian will either segregate the assets securing the borrowing for the benefit of the lenders or arrangements will be made with a suitable sub-custodian. If assets used to secure the borrowing decrease in value, the Portfolio may be required to pledge additional collateral to the lender in the form of cash or securities to avoid liquidation of those assets. SOVEREIGN DEBT. The Latin American Portfolio's holdings of lower-quality debt securities will consist predominantly of Sovereign Debt, much of which trades at substantial discounts from face value. The Portfolio may invest in Sovereign Debt of emerging market countries to hold and trade in appropriate circumstances and to participate in debt to equity conversion programs. Investment in Sovereign Debt involves a high degree of risk and such securities are generally considered speculative in nature. The issuer or governmental authorities that control the repayment of Sovereign Debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A sovereign debtor's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy towards the International Monetary Fund (the "IMF") and the political constraints to which a sovereign debtor may be subject. Sovereign debtors may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a sovereign debtor's implementation of economic reforms and/or economic performance and the timely service of such debtor's obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties' commitments to lend funds to the sovereign debtor, which may further impair such debtor's ability or willingness to timely service its debts. In certain instances, the Portfolio may invest in Sovereign Debt that is in default as to payments of principal and/or interest. To the extent the Portfolio is holding any non-performing Sovereign Debt, it may incur additional expenses in connection with any restructuring of the issuer's obligations or in otherwise enforcing its rights thereunder. 26 INVESTMENT FUNDS. Some emerging countries have laws and regulations that currently preclude direct foreign investment in the securities of their companies. However, indirect foreign investment in the securities of companies listed and traded on the stock exchanges in these countries is permitted by certain emerging countries through investment funds which have been specifically authorized. The Latin American Portfolio may invest in these investment funds subject to the provisions of the Investment Company Act of 1940, as amended (the "1940 Act"), and other applicable laws as discussed below under "Investment Restrictions." If the Portfolio invests in such investment funds, the Portfolio's shareholders will bear not only their proportionate share of the expenses of the Portfolio (including operating expenses and the fees of the Adviser), but also will indirectly bear similar expenses of the underlying investment funds. Certain of the investment funds referred to in the preceding paragraph are advised by the Adviser. The Portfolio may, to the extent permitted under the 1940 Act and other applicable law, invest in these investment funds. If the Portfolio does elect to make an investment in such an investment fund, it will only purchase the securities of such investment fund in the secondary market. OPTIONS TRANSACTIONS. The Latin American Portfolio may seek to increase its return or may hedge all or a portion of its portfolio investments through options with respect to securities in which the Portfolio may invest. The Portfolio will engage in transactions in such options which are traded on a recognized securities or futures exchange and in over-the-counter options where the option counterparty has a minimum net worth of $20 million. There currently are limited options markets in emerging countries, including Latin American countries and the nature of the strategies adopted by the Adviser and the extent to which those strategies are used will depend on the development of such option markets. The Latin American Portfolio may write (i.e., sell) covered call options which give the purchaser the right to buy the underlying security covered by the option from the Portfolio at the stated exercise price. A "covered" call option means that so long as the Portfolio is obligated as the writer of the option, it will own (i) the underlying securities subject to the option, or (ii) securities convertible or exchangeable without the payment of any consideration into the securities subject to the option. As a matter of operating policy, the value of the underlying securities on which options will be written at any one time will not exceed 5% of the total assets of the Portfolio. In addition, as a matter of operating policy, the Portfolio will neither purchase or write put options on securities nor purchase call options on securities (except in connection with closing purchase transactions). The Latin American Portfolio will receive a premium from writing call options, which increases the Portfolio's return on the underlying security in the event the option expires unexercised or is closed out at a profit. By writing a call, the Portfolio will limit its opportunity to profit from an increase in the market value of the underlying security above the exercise price of the option for as long as the Portfolio's obligation as writer of the option continues. Thus, in some periods the Portfolio will receive less total return and in other periods greater total return from writing covered call options than it would have received from its underlying securities had it not written call options. The Latin American Portfolio may also write (i.e., sell) covered put options. By selling a covered put option, the Portfolio incurs an obligation to buy the security underlying the option from the purchaser of the put at the option's exercise price at any time during the option period, at the purchaser's election (certain options written by the Portfolio will be exercisable by the purchaser only on a specific date). Generally, a put option is "covered" if the Portfolio maintains cash, U.S. Government securities or other high grade debt obligations equal to the 27 exercise price of the option or if the Portfolio holds a put option on the same underlying security with a similar or higher exercise price. The Portfolio may sell put options to receive the premiums paid by purchasers and to close out a long put option position. In addition, when the Adviser wishes to purchase a security at a price lower than its current market price, the Portfolio may write a covered put at an exercise price reflecting the lower purchase price sought. The Portfolio may also purchase put or call options on individual securities or baskets of securities. When the Portfolio purchases a call option it acquires the right to buy a designated security at a designated price (the "exercise price"), and when the Portfolio purchases a put option it acquires the right to sell a designated security at the exercise price, in each case on or before a specified date (the "termination date"), usually not more than nine months from the date the option is issued. The Portfolio may purchase call options to close out a covered call position or to protect against an increase in the price of a security it anticipates purchasing. The Portfolio may purchase put options on securities which it holds in its portfolio only to protect against an increase in the price of a security it anticipates purchasing. The Portfolio may purchase put options on securities which it holds in its portfolio only to protect itself against a decline in the value of the security. If the value of the underlying security were to fall below the exercise price of the put purchased in an amount greater than the premium paid for the option, the Portfolio would incur no additional loss. The Portfolio may also purchase put options to close out written put positions in a manner similar to call option closing purchase transactions. There are no other limits on the Portfolio's ability to purchase call and put options. The primary risks associated with the use of options are (i) imperfect correlation between the change in market value of the securities held by the Portfolio and the prices of options relating to the securities purchased or sold by the Portfolio; and (ii) possible lack of a liquid secondary market for an option. Options that are not traded on an exchange (OTC options) are often considered illiquid and may be difficult to value. In the opinion of the Adviser, the risk that that Portfolio will be unable to close out an options contract will be minimized by only entering into options transactions for which there appears to be a liquid secondary market. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS In order to remain fully invested, and to reduce transaction costs, the Latin American Portfolio may utilize appropriate securities index futures contracts, options on securities index futures contracts, appropriate interest rate futures contracts and options on interest rate futures contracts to a limited extent. Because transactions costs associated with futures and options may be lower than the costs of investing in securities directly, it is expected that the use of index futures and options to facilitate cash flows may reduce a Portfolio's overall transactions costs. The Portfolio may sell indexed financial futures contracts in anticipation of or during a market decline to attempt to offset the decrease in market value of securities in its portfolio that might otherwise result. When the Portfolio is not fully invested and the Adviser anticipates a significant market advance, it may purchase stock index futures in order to gain rapid market exposure that may in part or entirely offset increases in the cost of securities that it intends to purchase. In a substantial majority of these transactions, the Portfolio will purchase such securities upon termination of the futures position but under unusual market conditions, a futures position may be terminated without the corresponding purchase of securities. The Portfolio will engage in futures and options transactions only for hedging purposes. The Portfolio will engage only in transactions in securities index futures contracts, interest rate futures contracts and options thereon which are traded on a recognized securities or futures exchange. There currently 28 are limited securities index futures, interest rate futures and options on such futures markets in many countries, particularly emerging countries such as Latin American countries, and the nature of the strategies adopted by the Adviser and the extent to which those strategies are used will depend on the development of such markets. The Portfolio may enter into futures contracts and options thereon provided that not more than 5% of the Portfolio's total assets are required as deposit to secure obligations under such contracts, and provided further that not more than 20% of the Portfolio's total assets, in the aggregate are invested in futures contracts and options transactions. The primary risks associated with the use of futures and options are (i) imperfect correlation between the change in market value of the stocks held by the Portfolio and the prices of futures and options relating to the stocks purchased or sold by the Portfolio, and (ii) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures position which could have an adverse impact on the Portfolio's ability to hedge. The risk of loss in trading on futures contracts in some strategies can be substantial, due both to the low margin deposits required and the extremely high degree of leverage involved in futures pricing. Gains and losses on futures and options depend on the Adviser's ability to predict correctly the direction of stock prices, interest rates, and other economic factors. In the opinion of the Directors, the risk that the Portfolio will be unable to close out a futures position or options contract will be minimized by only entering into futures contracts or options transactions for which there appears to be a liquid secondary market. For more detailed information about futures transactions see "Investment Objectives and Policies" in the Statement of Additional Information. SHORT SALES The Latin American Portfolio may from time to time sell securities short without limitation, although initially the Portfolio does not intend to sell securities short. A short sale is a transaction in which the Portfolio would sell securities it does not own (but has borrowed) in anticipation of a decline in the market price of securities. When the Portfolio makes a short sale, the proceeds it receives from the sale will be held on behalf of a broker until the Portfolio replaces the borrowed securities. To deliver the securities to the buyer, the Portfolio will need to arrange through a broker to borrow the securities and, in so doing, the Portfolio will become obligated to replace the securities borrowed at their market price at the time of replacement, whatever that price may be. The Portfolio may have to pay a premium to borrow the securities and must pay any dividends or interest payable on the securities until they are replaced. The Portfolio's obligation to replace the securities borrowed in connection with a short sale will be secured by collateral deposited with the broker that consists of cash, U.S. Government Securities or other liquid, high grade debt obligations. In addition, the Portfolio will place in a segregated account with its Custodian an amount of cash, U.S. Government Securities or other liquid high grade debt obligations equal to the difference, if any, between (1) the market value of the securities sold at the time they were sold short and (2) any cash, U.S. Government Securities or other liquid high grade debt obligations deposited as collateral with the broker in connection with the short sale (not including the proceeds of the short sale). Short sales by the Portfolio involve certain risks and special considerations. Possible losses from short sales differ from losses that could be incurred from a purchase of a security, because losses from short sales may be unlimited, whereas losses from purchases can equal only the total amount invested. 29 FOREIGN INVESTMENT RISKS FACTORS. Investment in securities of foreign issuers and in foreign branches of domestic banks involves somewhat different investment risks than those affecting securities of U.S. domestic issuers. There may be limited publicly available information with respect to foreign issuers, and foreign issuers are not generally subject to uniform accounting, auditing and financial and other reporting standards and requirements comparable to those applicable to U.S. companies. There may also be less government supervision and regulation of foreign securities exchanges, brokers and listed companies than in the U.S. Many foreign securities markets have substantially less volume than U.S. national securities exchanges, and securities of some foreign issuers are less liquid and more volatile than securities of comparable domestic issuers. Brokerage commissions and other transaction costs on foreign securities exchanges are generally higher than in the U.S. Dividends and interest paid by foreign issuers may be subject to withholding and other foreign taxes, which may decrease the net return on foreign investments as compared to dividends and interest paid to the Portfolios by U.S. companies, and it is not expected that a Portfolio or its shareholders would be able to claim a credit for U.S. tax purposes with respect to any such foreign taxes. See "Taxes." Additional risks include future political and economic developments, the possibility that a foreign jurisdiction might impose or change withholding taxes on income payable with respect to foreign securities, possible seizure, nationalization or expropriation of the foreign issuer or foreign deposits and the possible adoption of foreign governmental restrictions such as exchange controls. Many of the emerging or developing countries may have less stable political environments than more developed countries. Also, it may be more difficult to obtain a judgment in a court outside the United States. Investments in securities of foreign issuers are frequently denominated in foreign currencies, and the Portfolios may temporarily hold uninvested reserves in bank deposits in foreign currencies. Therefore, the value of each Portfolio's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations, and the Portfolios may incur costs in connection with conversions between various currencies. RISK FACTORS RELATING TO INVESTING IN LOWER RATED DEBT SECURITIES The Latin American Portfolio may invest in lower rated or unrated debt securities, commonly referred to as "junk bonds." In addition, the emerging country debt securities in which the Portfolio may invest are subject to risk and will not be required to meet a minimum rating standard and may not be rated. Fixed income securities are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations (credit risk) and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (market risk). Lower rated or unrated securities are more likely to react to developments affecting market and credit risk than are more highly rated securities, which react primarily to movements in the general level of interest rates. The market values of fixed-income securities tend to vary inversely with the level of interest rates. Yields and market values of lower rated and unrated debt securities will fluctuate over time, reflecting not only changing interest rates but the market's perception of credit quality and the outlook for economic growth. When economic conditions appear to be deteriorating, medium to lower rated securities may decline in value due to heightened concern over credit quality, regardless of prevailing interest rates. Fluctuations in the value of the Portfolio's investments will be reflected in the Portfolio's net asset value per share. The Adviser considers both credit risk and market risk in 30 making investment decisions for the Portfolio. Investors should carefully consider the relative risks of investing in lower rated and unrated debt securities and understand that such securities are not generally meant for short-term investing. The U.S. corporate lower rated and unrated debt securities market is relatively new and its recent growth paralleled a long period of economic expansion and an increase in merger, acquisition and leveraged buyout activity. Adverse economic developments may disrupt the market for U.S. corporate lower rated and unrated debt securities and for emerging country debt securities. Such disruptions may severely affect the ability of issuers, especially highly leveraged issuers, to service their debt obligations or to repay their obligations upon maturity. In addition, the secondary market for lower rated and unrated debt securities, which is concentrated in relatively few market makers, may not be as liquid as the secondary market for more highly rated securities. As a result, the Adviser could find it more difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded. In addition there may be limited trading markets for debt securities of issuers located in emerging countries. Prices realized upon the sale of such lower rated or unrated securities, under these circumstances, may be less than the prices used in calculating the Portfolio's net asset value. Prices for lower rated and unrated debt securities may be affected by legislative and regulatory developments. These laws could adversely affect the Portfolio's net asset value and investment practices, the secondary market for lower rated and unrated debt securities, the financial condition of issuers of such securities and the value of outstanding lower rated and unrated debt securities. For example, U.S. federal legislation requiring the divestiture by federally insured savings and loan associations of their investments in lower rated and unrated debt securities and limiting the deductibility of interest by certain corporate issuers of lower rated and unrated debt securities adversely affected the market in recent years. Lower rated or unrated debt obligations also present risks based on payment expectations. If an issuer calls the obligations for redemption, the Portfolio may have to replace the security with a lower yielding security, resulting in a decreased return for investors. If the Portfolio experiences unexpected net redemptions, it may be forced to sell its higher rated securities, resulting in a decline in the overall credit quality of the Portfolio's investment portfolio and increasing the exposure of the Portfolio to the risks of lower rated and unrated debt securities. INVESTMENT LIMITATIONS Each Portfolio except the Latin American Portfolio is a diversified investment company under the 1940 Act and is therefore subject to the following limitations: (a) as to 75% of its total assets, a Portfolio may not invest more than 5% of its total assets in the securities of any one issuer, except obligations of the U.S. Government and its agencies and instrumentalities, and (b) a Portfolio may not own more than 10% of the outstanding voting securities of any one issuer. The Latin American Portfolio is a non-diversified investment company under the 1940 Act, which means that the Latin American Portfolio is not limited by the 1940 Act in the proportion of its total assets that may be invested in the obligations of a single issuer. Thus, the Latin American Portfolio may invest a greater proportion of its total assets in the securities of a smaller number of issuers and, as a result, will be subject to greater risk with respect to their respective portfolio securities. The Latin American Portfolio, however, intends to comply with the diversification requirements imposed by the Internal Revenue Code of 1986, as amended, for qualification as a regulated investment company. See "Taxes." 31 Each Portfolio also operates under certain investment restrictions that are deemed fundamental limitations and may be changed only with the approval of the holders of a majority of such Portfolio's outstanding shares. See "Investment Limitations" in the Statement of Additional Information. In addition, each Portfolio operates under certain non-fundamental investment limitations as described below and in the Statement of Additional Information. Each Portfolio may not (i) enter into repurchase agreements with more than seven days to maturity if, as a result, more than 15% of the market value of the Portfolio's total assets would be invested in these agreements and other investments for which market quotations are not readily available or which are otherwise illiquid; (ii) borrow money, except from banks for extraordinary or emergency purposes and then only in amounts up to 10% of the value of the Portfolio's total assets, taken at cost at the time of borrowing, or purchase securities while borrowings exceed 5% of its total assets, except for the Latin American Portfolio; (iii) or mortgage, pledge or hypothecate any assets except in connection with any such borrowing in amounts up to 10% of the value of the Portfolio's net assets at the time of borrowing; (iv) invest in fixed time deposits with a duration of over seven calendar days; or (v) invest in fixed time deposits with a duration of from two business days to seven calendar days if more than 10% of the Portfolio's total assets would be invested in these deposits. MANAGEMENT OF THE FUND INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment Adviser and Administrator of the Fund and each of its portfolios. The Adviser provides investment advice and portfolio management services, pursuant to an Investment Advisory Agreement and, subject to the supervision of the Fund's Board of Directors, makes each of the Portfolio's day-to-day investment decisions, arranges for the execution of portfolio transactions and generally manages each of the Portfolio's investments. Set forth below as an annual percentage of average daily net assets are the advisory fees payable to the Adviser quarterly by each Portfolio pursuant to the terms of the Investment Advisory Agreement. The fees of each of the Portfolios, which involve international investments, are higher than those of most investment companies because they involve international investments but the Adviser believes the fees are comparable to those of investment companies with similar objectives. The Adviser has agreed to a reduction in the fees payable to it and to reimburse the Portfolios, if necessary, if such fees would cause total annual operating expenses of the Portfolios to exceed the maximums set forth in the table below.
MAXIMUM TOTAL ADVISORY ANNUAL OPERATING FEE ABSENT EXPENSES (AFTER PORTFOLIO WAIVERS FEE WAIVERS) - -------------------------- ------------- ------------------- Global Equity 0.80% 1.00% International Equity 0.80% 1.00% International Small Cap 0.95% 1.15% Asian Equity 0.80% 1.00% European Equity 0.80% 1.00% Japanese Equity 0.80% 1.00% Latin American 1.10% 1.70%
The Adviser, with principal offices at 1221 Avenue of the Americas, New York, New York 10020, conducts a worldwide portfolio management business, provides a broad range of portfolio management services to customers in the United States and abroad. At December 31, 1994, the Adviser, together with its affiliated asset 32 management companies, managed investments totaling approximately $48.7 billion, including approximately $35.6 billion under active management and $13.1 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. PORTFOLIO MANAGERS -- The following individuals have primary portfolio management responsibility for the Portfolios noted below: GLOBAL EQUITY PORTFOLIO -- FRANCES CAMPION. Frances Campion joined the Adviser in January 1990 as a Global Equity Fund Manager and became a Vice President of Morgan Stanley in 1992. Her responsibilities include day to day management of the Global Equity product. Prior to joining the Adviser, Ms. Campion was a U.S. equity analyst with Lombard Odler Limited where she had responsibility for the management of global portfolios. Ms. Campion has ten years global investment experience. She is a graduate of University of College, Dublin. INTERNATIONAL EQUITY PORTFOLIO -- DOMINIC CALDECOTT. Dominic Caldecott is a Managing Director and is responsible for research and stock selection in the Pacific Basin and has been primarily responsible for managing the Portfolio's assets since its inception. He has ten years professional experience, primarily in Tokyo, Hong Kong, and Seoul. Prior to joining Morgan Stanley, he worked with GT Management Group in Tokyo and Hong Kong, specializing in Pacific Basin investment management. He became a Vice President of Morgan Stanley in 1987, a principal in 1989, and a Managing Director in 1991. He is responsible for a number of Pacific Basin investment programs for clients of Morgan Stanley. Mr. Caldecott is a graduate of New College, Oxford, England. INTERNATIONAL SMALL CAP PORTFOLIO -- MARGARET NAYLOR. Margaret Naylor is a Principal of Morgan Stanley and works with Dominic Caldecott on Pacific Basin research and stock selection. She joined the Adviser in March 1987 and has been primarily responsible for managing the Portfolio's assets since December 1992. Prior to joining the Adviser she spent three years at the Trade Policy Research Centre, an independent research unit. Ms. Naylor is a graduate of the University of York. Ms. Naylor became a Vice President of Morgan Stanley in 1993. ASIAN EQUITY PORTFOLIO -- EAN WAH CHIN AND JAMES CHENG. Ean Wah Chin is a Managing Director of Morgan Stanley, and is responsible for the Adviser's regional Asia ex-Japan operations based in Singapore. She has been primarily responsible for managing the Portfolio's assets since its inception. Prior to joining Morgan Stanley in 1986, Ms. Chin spent eight years with the Monetary Authority of Singapore and the Government of Singapore Investment Corporation, where she was a portfolio manager of one of the largest portfolios in Asia. Ms. Chin was an ASEAN scholar educated at the University of Singapore. James Cheng joined the Adviser in 1988 as a portfolio manager for Asian markets and is a Vice President of Morgan Stanley. Mr. Cheng is currently responsible for investments in Hong Kong, China, Taiwan, and South Korea. He has been primarily responsible for managing the Portfolio's assets since its inception. Prior to joining Morgan Stanley, he was affiliated with American Express and with Arthur Andersen, where he spent three years as an auditor/consultant. Mr. Cheng holds an M.B.A. from the University of Michigan, Ann Arbor, Michigan. EUROPEAN EQUITY PORTFOLIO -- ROBERT SARGENT. Robert Sargent joined Morgan Stanley International in May, 1986, and transferred to the Adviser in June, 1987. Mr. Sargent is now a Principal of Morgan Stanley and has been primarily responsible for managing the Portfolio's assets since its inception. As the fund manager with 33 primary responsibility for continental European stock selection and portfolio management, Mr. Sargent is closely involved with the Adviser's fundamental research effort and company visiting program. He is a graduate of York University, Toronto, Canada. JAPANESE EQUITY PORTFOLIO -- DOMINIC CALDECOTT AND KUNIHIKO SUGIO. Information about Mr. Caldecott is included under International Equity Portfolio above. Mr. Caldecott is responsible for research and stock selection in the Pacific Basin and has been primarily responsible for managing the Portfolio's assets since its inception. Kunihiko Sugio joined the Adviser in December 1993 as a Vice President and manages dedicated Japanese equity portfolios. He has been primarily responsible for managing the Portfolio's assets since its inception. Prior to joining Morgan Stanley, he worked with Baring International Investment Management, Tokyo, where he was a Director and fund manager. He graduated from Wakayama Kokuritsu University. LATIN AMERICAN PORTFOLIO -- ROBERT L. MEYER. Robert Meyer joined the Adviser in 1989 and is now a Principal of Morgan Stanley, with primary responsibility for the Adviser's investments in all of Latin America and Israel. He has had primary responsibility for managing the Portfolio's assets since its inception. Robert is co-manager of the Latin American Discovery Fund, Inc. and worked previously in the U.S. equity group at the Adviser. He was born in Argentina and has a B.A. in Economics and Political Science from Yale College and a J.D. from Harvard Law School. ADMINISTRATOR. The Adviser also provides the Fund with administrative services pursuant to an Administration Agreement. The services provided under the Administration Agreement are subject to the supervision of the Officers and Board of Directors of the Fund and include day-to-day administration of matters related to the corporate existence of the Fund, maintenance of its records, preparation of reports, supervision of the Fund's arrangements with its custodian, assistance in the preparation of the Fund's registration statements under federal and state laws. The Administration Agreement also provides that the Administrator through its agents will provide the Fund dividend disbursing and transfer agent services. For its services under the Administration Agreement, the Fund pays the Adviser a monthly fee which on an annual basis equals 0.15% of the average daily net assets of each Portfolio. Under the United States Trust Administration Agreement between the Adviser and United States Trust Company of New York ("U.S. Trust"), U.S. Trust has agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegates its responsibilities to Mutual Funds Service Company ("MFSC"), a subsidiary of U.S. Trust that provides certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by MFSC. The services provided under the Administration Agreement and the U.S. Trust Administration Agreement are also subject to the supervision of the Board of Directors of the Fund. The Board of Directors of the Fund has approved the provision of services described above pursuant to the Administration Agreement and the U.S. Trust Administration Agreement as being in the best interests of the Fund. MFSC's business address is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information regarding the Administration Agreement, see "Management of the Fund" in the Statement of Additional Information. LOCAL ADMINISTRATORS FOR THE LATIN AMERICAN PORTFOLIO The Portfolio has entered into an administration agreement (the "Chilean Administration Agreement") with Bice Chileconsult Agente de Valores S.A. (the "Chilean Administrator"), a Chilean corporation, pursuant to which the Chilean Administrator acts as the Portfolio's legal representative in Chile. Under the Chilean 34 Administration Agreement, the Chilean Administrator performs various services for the Portfolio, including making and obtaining all exchange control filings and approvals required for the Portfolio to effect investment and other transactions in Chile and to remit moneys and other assets outside of Chile, obtaining from the relevant authorities in Chile all confirmations or consents relating to the tax status of the Portfolio and all tax rebates and other payments which may be due to the Portfolio, and performing all other administrative duties in Chile required by Chilean law or Chilean authorities through instructions or regulations to be performed. For its services, the Chilean Administrator is paid an annual fee by the Fund equal to the greater of 0.125% of the Portfolio's average weekly net assets invested in Chile or $20,000, paid monthly. Unless terminated by the Fund's Board of Directors upon 60 days' prior written notice, or by the Chilean Administration upon 90 days' prior written notice, the Chilean Administration Agreement will continue automatically from year to year. The Latin American Portfolio is required under Brazilian law to have a local administrator in Brazil. Unibanco-Uniao (the "Brazilian Administrator"), a Brazilian corporation, acts as the Portfolio's Brazilian administrator pursuant to an agreement with the Portfolio (the "Brazilian Administration Agreement"). Under the Brazilian Administration Agreement, the Brazilian Administrator performs various services for the Portfolio, including effecting the registration of the Portfolio's foreign capital with the Central Bank of Brazil, effecting all foreign exchange transactions related to the Portfolio's investments in Brazil and obtaining all approvals required for the Portfolio to make remittances of income and capital gains and for the repatriation of the Portfolio's investments pursuant to Brazilian law. For its services, the Brazilian Administrator is paid an annual fee equal to 0.125% of the Portfolio's average weekly net assets invested in Brazil, paid monthly. The principal office of the Brazilian Administrator is located at Avenida Eusebio Matoso, 891, Sao Paulo, S.P., Brazil. The Brazilian Administration Agreement is terminable upon six months' notice by either party; the Brazilian Administrator may be replaced only by an entity authorized to act as a joint manager of a managed portfolio of bonds and securities under Brazilian law. DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation, the Board of Directors decides upon matters of general policy and reviews the actions of the Fund's Adviser, Administrator and Distributor. The officers of the Fund conduct and supervise its daily business operations. DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the shares of the Fund. Under its Distribution Agreement with the Fund, Morgan Stanley sells shares of each Portfolio upon the terms and at the current offering price described in this Prospectus. Morgan Stanley is not obligated to sell any certain number of shares of any Portfolio and receives no compensation for its distribution services. EXPENSES. Each Portfolio is responsible for payment of certain other fees and expenses (including legal fees, accountant's fees, custodial fees and printing and mailing costs) specified in the Administration and Distribution Agreements. 35 PURCHASE OF SHARES Shares of each Portfolio may be purchased without sales commission, at the net asset value per share next determined after receipt of the purchase order. See "Valuation of Shares." Purchases of shares of the International Small Cap Portfolio are subject to the 1% transaction fee described under "Fund Expenses," above. The International Equity Portfolio is currently closed to new investors, with the exception of certain Morgan Stanley customers. For further information, see "Purchase of Shares" in the Statement of Additional Information. INITIAL INVESTMENTS 1) BY CHECK. An account may be opened by completing and signing an Account Registration Form and mailing it, together with a check ($500,000 minimum for each Portfolio, with certain exceptions for Morgan Stanley employees and select customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio name]", to: Morgan Stanley Institutional Fund, Inc. P.O. Box 2798 Boston, Massachusetts 02208-2798 Payment will be accepted only in United States dollars, unless prior approval for payment in other currencies is given by the Fund. The Portfolio(s) to be purchased should be designated on the Account Registration Form. For purchases by check, the Fund is ordinarily credited with Federal Funds within one business day. Thus your purchase of shares by check is ordinarily credited to your account at the net asset value per share of the relevant Portfolio determined on the next business day after receipt. 2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal Funds to the Fund's bank account. In order to ensure prompt receipt of your Federal Funds Wire, it is important that you follow these steps: A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your name, address, telephone number, Social Security or Tax Identification Number, the portfolio(s) selected, the amount being wired, and by which bank. We will then provide you with a Fund account number. (Investors with existing accounts should also notify the Fund prior to wiring funds.) B. Instruct your bank to wire the specified amount to the Fund's Wire Concentration Bank Account (be sure to have your bank include the name of the portfolio(s) selected and the account number assigned to you): United States Trust Company of New York 114 West 47th Street New York, NY 10036 ABA #0210-0131-8 DDA #20-9310-3 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (Portfolio name, your account number, your account name) Please call before wiring funds: 1-800-548-7786 36 C. Complete and sign the Account Registration Form and mail it to the address shown thereon. Federal Funds purchase orders will be accepted only on a day on which the Fund and United States Trust Company of New York (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring funds. 3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire" above must be followed in purchasing shares by bank wire. However, money transferred by bank wire may or may not be converted into Federal Funds the same day, depending on the time the money is received and the bank handling the wire. Prior to such conversion, an investor's money will not be invested and, therefore, will not be earning dividends. Your bank may charge a service fee for wiring funds. ADDITIONAL INVESTMENTS You may add to your account at any time (minimum additional investment $1,000 for each portfolio, except for automatic reinvestment of dividends and capital gains distributions for which there are no minimums) by purchasing shares at net asset value by mailing a check to the Fund (payable to "Morgan Stanley Institutional Fund -- [portfolio name]") at the above address or by wiring monies to the Custodian Bank as outlined above. It is very important that your account name and the portfolio(s) be specified in the letter or wire to assure proper crediting to your account. In order to ensure that your wire orders are invested promptly, you are requested to notify one of the Fund's representatives (toll-free 1-800-548-7786) prior to the wire date. OTHER PURCHASE INFORMATION The purchase price of the shares of each Portfolio of the Fund is the net asset value next determined after the order is received. See "Valuation of Shares." An order received prior to the regular close of the New York Stock Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the price computed on the date of receipt; an order received after the regular close of the NYSE will be executed at the price computed on the next day the NYSE is open. In the interest of economy and convenience, and because of the operating procedures of the Fund, certificates representing shares of the Portfolio(s) will not be issued. All shares purchased are confirmed to you and credited to your account on the Fund's books maintained by the Adviser or its agents. You will have the same rights and ownership with respect to such shares as if certificates had been issued. To assure that checks are collected by the Fund, withdrawals of investments made by check are not presently permitted until payment for the purchase has been received which may take up to eight business days after the date of purchase. As a condition of this offering, if a purchase is cancelled due to nonpayment or because your check does not clear, you will be responsible for any loss the Fund or its agents incur. If you are already a shareholder, the Fund may redeem shares from your account(s) to reimburse the Fund or its agents for any loss. In addition, you may be prohibited or restricted from making future investments in the Fund. Investors may also invest in the Fund by purchasing shares through registered broker-dealers. Broker-dealers who make purchases for their customers may charge a fee for such services. 37 REDEMPTION OF SHARES You may withdraw all or any portion of the amount in your account by redeeming shares at any time. Please note that purchases made by check are not permitted to be redeemed until payment of the purchase has been collected, which may take up to eight business days after purchase. The Fund will redeem shares of each Portfolio at its next determined net asset value. On days that both the NYSE and the Custodian Bank are open for business, the net asset values per share of each of the Portfolios are determined at the regular close of trading of the NYSE (currently 4:00 p.m. Eastern Time). Shares of each Portfolio may be redeemed by mail or telephone. No charge is made for redemptions, except for the imposition of the 1% transaction fee described under "Fund Expenses" above, which may be assessed in connection with redemptions of shares of the International Small Cap Portfolio. Any redemption proceeds may be more or less than the purchase price of your shares depending on, among other factors, the market value of the investment securities held by a Portfolio. BY MAIL Each Portfolio will redeem its shares at the net asset value determined on the date the request is received, if the request is received in "good order" before the regular close of the NYSE. Your request should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. "Good order" means that the request to redeem shares must include the following documentation: (a) A letter of instruction or a stock assignment specifying the number of shares or dollar amount to be redeemed, signed by all registered owners of the shares in the exact names in which they are registered; (b) Any required signature guarantees (see "Further Redemption Information" below); and (c) Other supporting legal documents, if required, in the case of estates, trusts, guardianships, custodianships, corporations, pension and profit sharing plans and other organizations. Shareholders who are uncertain of requirements for redemption should consult with a Morgan Stanley Institutional Fund representative. BY TELEPHONE Provided you have previously elected the Telephone Redemption Option on the Account Registration Form, you can request a redemption of your shares by calling the Fund and requesting the redemption proceeds be mailed to you or wired to your bank. Please contact one of Morgan Stanley Institutional Fund's representatives for further details. In times of drastic market conditions, the telephone redemption option may be difficult to implement. If you experience difficulty in making a telephone redemption, your request may be made by regular mail or express mail and it will be implemented at the net asset value next determined after it is received. Redemption requests sent to the Fund through express mail must be mailed to the address of the Dividend Disbursing and Transfer Agent listed under "General Information". The Fund and the Fund's transfer agent (the "Transfer Agent") will employ reasonable procedures to confirm that the instructions communicated by telephone are genuine. Redemption requests sent to the Fund through express mail must be mailed to the address of the Dividend Disbursing and Transfer Agent listed under "General Information". These procedures include requiring the investor to provide certain personal identification information at the time an account is opened and prior to effecting each transaction requested by telephone. In addition, all telephone transaction requests will be 38 recorded and investors may be required to provide additional telecopied written instructions regarding transaction requests. Neither the Fund nor the Transfer Agent will be responsible for any loss, liability, cost or expense for following instructions received by telephone that either of them reasonably believes to be genuine. To change the commercial bank or account designated to receive redemption proceeds, a written request must be sent to the Fund at the address above. Requests to change the bank or account must be signed by each shareholder and each signature must be guaranteed. FURTHER REDEMPTION INFORMATION Normally the Fund will make payment for all shares redeemed within one business day of receipt of the request, but in no event will payment be made more than seven days after receipt of a redemption request in good order. However, payments to investors redeeming shares which were purchased by check will not be made until payment for the purchase has been collected, which may take up to eight days after the date of purchase. The Fund may suspend the right of redemption or postpone the date upon which redemptions are effected at times when the NYSE is closed, or under any emergency circumstances as determined by the Securities and Exchange Commission (the "Commission"). If the Board of Directors determines that it would be detrimental to the best interests of the remaining shareholders of a Portfolio to make payment wholly or partly in cash, the Fund may pay the redemption proceeds in whole or in part by a distribution in-kind of securities held by a Portfolio in lieu of cash in conformity with applicable rules of the Commission. Distributions-in-kind will be made in readily marketable securities. Investors may incur brokerage charges on the sale of portfolio securities so received in payment of redemptions. Due to the relatively high cost of maintaining smaller accounts, the Fund reserves the right to redeem shares in any account invested in the Portfolios having a value of less than $500,000 (the net asset value of which will be promptly paid to the shareholder). The Fund, however, will not redeem shares based solely upon market reductions in net asset value. If at any time your total investment does not equal or exceed the stated minimum value, you may be notified of this fact and you will be allowed at least 60 days to make an additional investment before the redemption is processed. To protect your account, the Fund and its agents from fraud, signature guarantees are required for certain redemptions to verify the identity of the person who has authorized a redemption from your account. Please contact the Fund for further information. See "Redemption of Shares" in the Statement of Additional Information. SHAREHOLDER SERVICES EXCHANGE PRIVILEGE You may exchange shares that you own in any Portfolio for shares of any other available portfolio(s) of the Fund (except for the International Equity Portfolio). Shares of the Portfolios may be exchanged by mail or telephone. The privilege to exchange shares by telephone is made available without shareholder election. Before you make an exchange, you should read the prospectus of the new portfolio(s) in which you seek to invest. Because an exchange transaction is treated as a redemption followed by a purchase, an exchange would be considered a taxable event for shareholders subject to tax. The exchange privilege is only available with respect to portfolios that are registered for sale in a shareholder's state of residence. 39 BY MAIL In order to exchange shares by mail, you should include in the exchange request the name and account number of your current Portfolio, the name of the portfolio(s) into which you intend to exchange shares, and the signatures of all registered account holders. Send the exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. BY TELEPHONE When exchanging shares by telephone, have ready the name and account number of your current Portfolio, the name of the Portfolio into which you intend to exchange shares, your Social Security number or Tax I.D. number, and your account address. Requests for telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at the close of business that same day based on the net asset value of each of the Portfolios at the close of business. Requests received after 4:00 p.m. (Eastern Time) are processed the next business day based on the net asset value determined at the close of business on such day. For additional information regarding responsibility for the authenticity of telephoned instructions, see "Redemption of Shares -- By Telephone" above. TRANSFER OF REGISTRATION You may transfer the registration of any of your Fund shares to another person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. As in the case of redemptions, the written request must be received in good order before any transfer can be made. VALUATION OF SHARES The net asset value per share of each of the Portfolios is determined by dividing the total market value of the Portfolio's investments and other assets, less any liabilities, by the total number of outstanding shares of the Portfolio. Net asset value per share is determined as of the regular close of the NYSE on each day that the NYSE is open for business. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities listed on a U.S. securities exchange for which market quotations are available are valued at the last quoted sale price on the day the valuation is made. Securities listed on a foreign exchange are valued at their closing price. Unlisted securities and listed securities not traded on the valuation date for which market quotations are not readily available are valued at a price within a range not exceeding the current asked price nor less than the current bid price. The current bid and asked prices are determined based on the average bid and asked prices quoted on such valuation date by reputable brokers. Bonds and other fixed income securities are valued according to the broadest and most representative market, which will ordinarily be the over-the-counter market. Net asset value includes interest on fixed income securities, which is accrued daily. In addition, bonds and other fixed income securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. The prices provided by a pricing service are determined without regard to bid or last sale prices but take into account institutional size trading in similar groups of securities and any developments related to the specific securities. Securities not priced in this manner are valued at the most recently quoted bid price, or, when securities exchange valuations are used, at the latest quoted sale price on the day of valuation. If there is no 40 such reported sale, the latest quoted bid price will be used. Securities purchased with remaining maturities of 60 days or less are valued at amortized cost, if it approximates market value. In the event that amortized cost does not approximate market value, market prices as determined above will be used. The value of other assets and securities for which no quotations are readily available (including restricted and unlisted foreign securities) and those securities for which it is inappropriate to determine the prices in accordance with the above-stated procedures are determined in good faith at fair value using methods determined by the Board of Directors. For purposes of calculating net asset value per share, all assets and liabilities initially expressed in foreign currencies will be translated into U.S. dollars at the mean of the bid price and asked price for such currencies against the U.S. dollar last quoted by any major bank. PERFORMANCE INFORMATION The Fund may from time to time advertise the "total return" of a Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. Each of the Portfolios may advertise "total return" which shows what an investment in a Portfolio would have earned over a specified period of time (such as one, five or ten years) assuming that all distributions and dividends by the Portfolio were reinvested on the reinvestment dates during the period. Total return does not take into account any federal or state income taxes that may be payable on dividends and distributions or on redemption. The Fund may also include comparative performance information in advertising or marketing the Portfolios' shares, including data from Lipper Analytical Services, Inc., other industry publications, business periodicals, rating services and market indices. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions will automatically be reinvested in additional shares at net asset value, except that, upon written notice to the Fund or by checking off the appropriate box in the Distribution Option Section on the Account Registration Form, a shareholder may elect to receive income dividends and capital gains distributions in cash. Each Portfolio expects to distribute substantially all of its net investment income in the form of annual dividends. Confirmations of the purchase of shares of the Portfolio through the automatic reinvestment of income dividends and capital gains distributions will be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of 1934, as amended, on the next quarterly client statement following such purchase of shares. Consequently, confirmation of such purchases will not be provided at the time of completion of such purchases as might otherwise be required by Rule 10b-10. Net capital gains, if any, will be distributed annually. Undistributed net investment income is included in a Portfolio's net assets for the purpose of calculating net asset value per share. Therefore, on the "ex-dividend" date, the net asset value per share excludes the dividend (i.e., is reduced by the per share amount of the dividend). Dividends paid shortly after the purchase of shares by an investor, although in effect a return of capital, are taxable to shareholders subject to income tax. 41 TAXES The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial, or administrative action. No attempt has been made to present a detailed explanation of the federal, state, or local income tax treatment of the Portfolios or their shareholders. Accordingly, shareholders are urged to consult their tax advisers regarding specific questions as to federal, state and local income taxes. Each Portfolio is treated as a separate entity for federal income tax purposes and is not combined with the Fund's other Portfolios. Each Portfolio intends to qualify for the special tax treatment afforded regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so that the Portfolio will be relieved of federal income tax on that part of its net investment income and net capital gain that is distributed to shareholders. Each Portfolio distributes substantially all of its net investment income (including, for this purpose, net short-term capital gain) to shareholders. Dividends from a Portfolio's net investment income are taxable to shareholders as ordinary income, whether received in cash or in additional shares. Such dividends paid by a Portfolio will generally qualify for the 70% dividends-received deduction for corporate shareholders only to the extent of the aggregate qualifying dividend income received by the Portfolio from U.S. corporations. Each Portfolio will report annually to its shareholders the amount of dividend income qualifying for such treatment. Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss) are taxable to shareholders as long-term capital gain, regardless of how long shareholders have held their shares. Each Portfolio sends reports annually to its shareholders of the federal income tax status of all distributions made during the preceding year. Each Portfolio intends to make sufficient distributions or deemed distributions of its ordinary income and capital gain net income (the excess of short-term and long-term capital gains over short-term and long-term capital losses), including any available capital loss carryforwards, prior to the end of each calendar year to avoid liability for federal excise tax. Dividends and other distributions declared by a Portfolio in October, November or December of any year and payable to shareholders of record on a date in such month will be deemed to have been paid by the Portfolio and received by the shareholders in that year if the distributions are paid by the Portfolio at any time during the following January. The sale or redemption of shares may result in taxable gain or loss to the redeeming shareholder, depending upon whether the fair market value of the redemption proceeds exceeds or is less than the Shareholder's adjusted basis in the redeemed shares. If capital gain distributions have been made with respect to shares that are sold at a loss after being held for six months or less, then the loss is treated as a long-term capital loss to the extent of the capital gain distributions. Shareholders are urged to consult with their tax advisors concerning the application of state and local income taxes to investments in a Portfolio, which may differ from the federal income tax consequences described above. 42 Investment income received by a Portfolio from sources within foreign countries may be subject to foreign income taxes withheld at the source. To the extent that a Portfolio is liable for foreign income taxes so withheld, each Portfolio intends to operate so as to meet the requirements of the Code to pass through to the shareholders credit for foreign income taxes paid. Although each Portfolio intends to meet Code requirements to pass through credit for such taxes, there can be no assurance that each Portfolio will be able to do so. THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO. PORTFOLIO TRANSACTIONS The Investment Advisory Agreement authorizes the Adviser to select the brokers or dealers that will execute the purchases and sales of investment securities for each of the Fund's Portfolios and directs the Adviser to use its best efforts to obtain the best available price and most favorable execution with respect to all transactions for the Portfolios. The Fund has authorized the Adviser to pay higher commissions in recognition of brokerage services which, in the opinion of the Adviser, are necessary for the achievement of better execution, provided the Adviser believes this to be in the best interest of the Fund. Since shares of the Portfolios are not marketed through intermediary brokers or dealers, it is not the Fund's practice to allocate brokerage or principal business on the basis of sales of shares which may be made through such firms. However, the Adviser may place portfolio orders with qualified broker-dealers who recommend the Portfolios or who act as agents in the purchase of shares of the Portfolios for their clients. In purchasing and selling securities for a Portfolio, it is the Fund's policy to seek to obtain quality execution at the most favorable prices, through responsible broker-dealers. In selecting broker-dealers to execute the securities transactions for the Portfolios, consideration will be given to such factors as the price of the security, the rate of the commission, the size and difficulty of the order, the reliability, integrity, financial condition, general execution and operational capabilities of competing broker-dealers, and the brokerage and research services which they provide to the Fund. Some securities considered for investment by a Portfolio may also be appropriate for other clients served by the Adviser. If purchase or sale of securities consistent with the investment policies of a Portfolio and one or more of these other clients served by the Adviser is considered at or about the same time, transactions in such securities will be allocated among the Portfolio and such other clients in a manner deemed fair and reasonable by the Adviser. Although there is no specified formula for allocating such transactions, the various allocation methods used by the Adviser, and the results of such allocations, are subject to periodic review by the Fund's Board of Directors. Subject to the overriding objective of obtaining the best possible execution of orders, the Adviser may allocate a portion of the Fund's portfolio brokerage transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order for Morgan Stanley or its affiliates to effect any portfolio transactions for the Portfolios, the commissions, fees or other remuneration received by Morgan Stanley or such affiliates must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. Furthermore, the Board of Directors of the Fund, including a majority of those 43 Directors who are not "interested persons," as defined in the 1940 Act, have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Morgan Stanley or such affiliates are consistent with the foregoing standard. Portfolio securities will not be purchased from or through, or sold to or through, the Adviser or Morgan Stanley or any "affiliated persons," as defined in the 1940 Act, of Morgan Stanley when such entities are acting as principals, except to the extent permitted by law. GENERAL INFORMATION DESCRIPTION OF COMMON STOCK The Fund was organized as a Maryland corporation on June 16, 1988. The Articles of Incorporation permit the Fund to issue up to 15,000,000,000 shares of common stock, with $.001 par value per share. Pursuant to the Fund's Articles of Incorporation, the Board of Directors may increase the number of shares the Fund is authorized to issue without the approval of the shareholders of the Fund. The Board of Directors has the power to designate one or more classes of shares of common stock and to classify and reclassify any unissued shares with respect to such classes. The shares of each Portfolio, when issued, will be fully paid, non-assessable, fully transferable and redeemable at the option of the holder. The shares have no preference as to conversion, exchange, dividends, retirement or other features and have no pre-emptive rights. The shares of each Portfolio have non-cumulative rights, which means that the holders of more than 50% of the shares voting for the election of Directors can elect 100% of the Directors if they choose to do so. Persons or organizations owning 25% or more of the outstanding shares of a Portfolio may be presumed to "control" (as defined in the 1940 Act) such Portfolio. As of February 1, 1995, Robert College of Istanbul, Turkey was presumed to "control" the Global Equity Portfolio based solely on their ownership of 25% or more of the outstanding voting shares of such Portfolio. Under Maryland law, the Fund is not required to hold an annual meeting of its shareholders unless required to do so under the 1940 Act. REPORTS TO SHAREHOLDERS The Fund will send to its shareholders annual and semi-annual reports; the financial statements appearing in annual reports are audited by independent accountants. Monthly unaudited portfolio data is also available from the Fund upon request. In addition, Morgan Stanley Asset Management Inc., or its agent, as Transfer Agent, will send to each shareholder having an account directly with the Fund a monthly statement showing transactions in the account, the total number of shares owned, and any dividends or distributions paid. CUSTODIAN Domestic securities and cash are held by United States Trust Company of New York, New York, as the Fund's domestic custodian. Morgan Stanley Trust Company, Brooklyn, New York, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians who were approved by the Directors of the Fund in accordance with regulations of the Securities and Exchange Commission for the purpose of providing custodial services for such assets. For more information on the custodians see "General Information -- Custody Arrangements" in the Statement of Additional Information. 44 DIVIDEND DISBURSING AND TRANSFER AGENT Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the Fund. INDEPENDENT ACCOUNTANTS Price Waterhouse LLP serves as independent accountants for the Fund and audits its annual financial statements. LITIGATION The Fund is not involved in any litigation. 45 (This page has been left blank intentionally.) 46 MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MA 02208-2798 - ------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - ------------------------------------------------------------------------------- ACCOUNT INFORMATION |If you need assistance in filling out this form for the Morgan Stanley Institutional Fund, please Fill in where |contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all applicable |items except signature, and mail to the Fund at the address above. - ----------------------------------------------------------------------------------------------------------------------------------- A) REGISTRATION | 1. INDIVIDUAL |1. ______________________________________________________________________________________________________ 2. JOINT TENANTS | First Name Initial Last Name (RIGHTS OF |2. ______________________________________________________________________________________________________ SURVIVORSHIP | First Name Initial Last Name PRESUMED UNLESS | ______________________________________________________________________________________________________ TENANCY IN COMMON | First Name Initial Last Name IS INDICATED) | - ----------------------------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, | TRUSTS AND OTHERS |3. ______________________________________________________________________________________________________ Please call the | ______________________________________________________________________________________________________ Fund for additional| ______________________________________________________________________________________________________ documents that may | Type of Registration: / /INCORPORATED / /UNINCORPORATED / /PARTNERSHIP / /UNIFORM GIFT/TRANSFER TO MINOR be required to set | ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR up account and to | PERMITTED) authorize | / /TRUST __________________________ / /OTHER (Specify) ________________________ transactions. | - ----------------------------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS | Please fill in |Street or P.O. Box_______________________________________________________________________________________ completely, |City______________________________________________________________State_______Zip_______________-________ including telephone |Home Telephone No.______-_______-_________________Business Telephone No._______-_______-_________________ number(s). |/ /United States Citizen / /Resident Alien / /Non-Resident Alien: Indicate Country of Residence _________ - ----------------------------------------------------------------------------------------------------------------------------------- C) TAXPAYER |PART 1. Enter your Taxpayer | IMPORTANT TAX INFORMATION IDENTIFICATION |Identification Number. For most |You (as a payee) are required by law to provide us (as payer) NUMBER |individual taxpayers, this is |with your correct taxpayer identification number. Accounts that If the account is in |your Social Security Number. |have a missing or incorrect taxpayer identification number will more than one name, | TAXPAYER IDENTIFICATION NUMBER |be subject to backup withholding at a 31% rate on dividends, CIRCLE THE NAME OF THE|______-_________________________ |distributions and other payments. If you have not provided us PERSON WHOSE TAXPAYER | OR |with your correct taxpayer identification number, you may be subject IDENTIFICATION NUMBER | SOCIAL SECURITY NUMBER |to a $50 penalty imposed by the Internal Revenue Service. IS PROVIDED IN SECTION|________-_____________-_________ | A) ABOVE. If no name | | is circled, the number|PART 2. BACKUP WITHHOLDING |Backup withholding is not an additional tax; the tax liability of will be considered to |/ / Check this box if you are NOT |persons subject to backup withholding will be reduced by the be that of the last |subject to Backup Withholding |amount of tax withheld. If withholding results in an overpayment name listed. For |under the provisions of Section |of taxes, a refund may be obtained. Custodian account of |3406(a)(1)(C) of the Internal | a minor (Uniform |Revenue Code. |You may be notified that you are subject to backup withholding Gifts/Transfers to | |under Section 3406(a)(1)(C) of the Internal Revenue Code because Minors Acts), give the| |you have underreported interest or dividends or you were required Social Security Number| |to but failed to file a return which would have included a of the minor. | |reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO |NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - ----------------------------------------------------------------------------------------------------------------------------------- D) PORTFOLIO SELECTION | Minimum $500,000 for | each Portfolio. |For Purchase of the following Portfolios: Please indicate |/ / GLOBAL EQUITY $_____________________ / / INTERNATIONAL EQUITY $____________ Portfolio and amount. |/ / INTERNATIONAL SMALL CAP $___________ / / ASIAN EQUITY $________________ |/ / EUROPEAN EQUITY $___________________ / / JAPANESE EQUITY $________________ |/ / LATIN AMERICAN $____________________ - ----------------------------------------------------------------------------------------------------------------------------------- E) METHOD OF |Payment by: INVESTMENT |/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME) Please indicate | _________________________________-______ portfolio, manner of |/ / Exchange $____________________ From__________________________ Account No. payment. | Name of Portfolio |/ / Account previously established by: _________________________________-______ | / / Phone exchange / / Wire on ___________________ Account No. (Check Date (Previously assigned by the Fund) Digit) - ----------------------------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION |Income dividends and capital gains distributions (if any) to be reinvested in additional shares unless OPTION |either box below is checked. |/ /Income dividends to be paid in cash, capital gains distributions (if any) in shares. |/ /Income dividends and capital gains distributions (if any) to be paid in cash. - ----------------------------------------------------------------------------------------------------------------------------------- G) TELEPHONE |/ /I/we hereby authorize the Fund and its| REDEMPTION AND | agents to honor any telephone requests|__________________________________________ ________________ EXCHANGE OPTION | to wire redemption proceeds to the |Name of COMMERCIAL Bank (Not Savings Bank) Bank Account No. Please select at time | commercial bank indicated at right | of initial | and/or mail redemption proceeds to the| ____________ application if you | name and address in which my/our fund | Bank ABA No. wish to redeem | account is registered if such requests|____________________________________________________________ or exchange | are believed to be authentic. | Name(s) in which your BANK Account is Established shares by telephone. | |____________________________________________________________ A SIGNATURE GUARANTEE |THE FUND AND THE FUND'S TRANSFER AGENT | Bank's Street Address IS REQUIRED IF BANK |WILL EMPLOY REASONABLE PROCEDURES TO |____________________________________________________________ ACCOUNT IS NOT |CONFIRM THAT INSTRUCTIONS COMMUNICATED |City State Zip REGISTERED |BY TELEPHONE ARE GENUINE. THESE | IDENTICALLY TO YOUR |PROCEDURES INCLUDE REQUIRING THE | FUND ACCOUNT. |INVESTOR TO PROVIDE CERTAIN PERSONAL | TELEPHONE REQUESTS |IDENTIFICATION INFORMATION AT THE TIME | FOR REDEMPTIONS OR |AN ACCOUNT IS OPENED AND PRIOR TO | EXCHANGES WILL NOT |EFFECTING EACH TRANSACTION REQUESTED BY | BE HONORED UNLESS |TELEPHONE. IN ADDITION, ALL TELEPHONE | THE BOX IS CHECKED. |TRANSACTION REQUESTS WILL BE RECORDED | |AND INVESTORS MAY BE REQUIRED TO | |PROVIDE ADDITIONAL TELECOPIED WRITTEN | |INSTRUCTIONS OF TRANSACTION REQUESTS. | |NEITHER THE FUND NOR THE TRANSFER AGENT | |WILL BE RESPONSIBLE FOR ANY LOSS, | |LIABILITY, COST OR EXPENSE FOR | |FOLLOWING INSTRUCTIONS RECEIVED BY | |TELEPHONE THAT IT REASONABLY BELIEVES | |TO BE GENUINE. | - ----------------------------------------------------------------------------------------------------------------------------------- H) INTERESTED PARTY |___________________________________________________________________________________________________ OPTION | Name |___________________________________________________________________________________________________ In addition to the | account statement sent|___________________________________________________________________________________________________ to my/our registered | Address address, I/we hereby | authorize the fund |___________________________________________________________________________________________________ to mail duplicate | City State Zip Code statements to the | name and address | provided at right. | - ----------------------------------------------------------------------------------------------------------------------------------- I) DEALER |_______________________________________ ___________________________________ _______________________ INFORMATION |Representative Name Representative No. Branch No. - ----------------------------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF |The undersigned certify that I/we have full authority and legal capacity to purchase and redeem ALL HOLDERS |shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley AND TAXPAYER |Institutional Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF PERJURY, I/WE CERTIFICATION |CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE. | |(X) (X) SIGN HERE --> |------------------------------------------------ ----------------------------------------------------- |Signature Date Signature Date - -----------------------------------------------------------------------------------------------------------------------------------
------------------------------------------- ------------------------------------------- ------------------------------------------- ------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. -------------------------- TABLE OF CONTENTS PAGE ----- Fund Expenses..................................... 2 Financial Highlights.............................. 5 Prospectus Summary................................ 11 Investment Objectives and Policies................ 15 Additional Investment Information................. 23 Investment Limitations............................ 31 Management of the Fund............................ 32 Purchase of Shares................................ 36 Redemption of Shares.............................. 38 Shareholder Services.............................. 39 Valuation of Shares............................... 40 Performance Information........................... 41 Dividends and Capital Gains Distributions......... 41 Taxes............................................. 42 Portfolio Transactions............................ 43 General Information............................... 44 Account Registration Form
GLOBAL EQUITY PORTFOLIO INTERNATIONAL EQUITY PORTFOLIO INTERNATIONAL SMALL CAP PORTFOLIO ASIAN EQUITY PORTFOLIO EUROPEAN EQUITY PORTFOLIO JAPANESE EQUITY PORTFOLIO LATIN AMERICAN PORTFOLIO PORTFOLIOS OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. Common Stock ($.001 PAR VALUE) ------------- PROSPECTUS ------------- Investment Adviser Morgan Stanley Asset Management Inc. Distributor Morgan Stanley & Co. Incorporated MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MA 02208-2798 ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ SUPPLEMENT DATED JUNE 30, 1995 TO PROSPECTUS DATED MAY 1, 1995 OF MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798 BOSTON, MASSACHUSETTS 02208-2798 ------------- The prospectus dated May 1, 1995 (the "Prospectus") of the Emerging Markets and Emerging Markets Debt Portfolios of the Morgan Stanley Institutional Fund, Inc. (the "Fund") is hereby amended and supplemented by adding the following paragraph to page 25 before the paragraph with the heading "REDEMPTION OF SHARES": EXCESSIVE TRADING. Frequent trades involving either substantial fund assets or a substantial portion of your account or accounts controlled by you can disrupt management of a Portfolio and raise its expenses. Consequently, in the interest of all the stockholders of the Portfolio and the Portfolio's performance, the Fund may in its discretion bar a stockholder that engages in excessive trading of shares of a Portfolio from further purchases of shares of the Fund for an indefinite period. The Fund considers excessive trading to be more than one purchase and sale involving shares of the same Portfolio of the Fund within any 120-day period. For example, exchanging shares of Portfolios of the Fund as follows: exchanging shares of Portfolio A for shares of Portfolio B, then exchanging shares of Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C for shares of Portfolio B within a 120-day period amounts to excessive trading. Two types of transactions are exempt from these excessive trading restrictions: (1) trades exclusively between money market portfolios; and (2) trades done in connection with an asset allocation service managed or advised by MSAM and/or any of its affiliates. - -------------------------------------------------------------------------------- P R O S P E C T U S ---------------------------------------------------------------------- EMERGING MARKETS PORTFOLIO EMERGING MARKETS DEBT PORTFOLIO PORTFOLIOS OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798 FOR INFORMATION CALL 1-800-548-7786 ---------------- Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end management investment company with diversified and non-diversified series ("portfolios"). The Fund currently consists of twenty-seven portfolios offering a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. Shares of the portfolios are offered with no sales charge or exchange or redemption fee (with the exception of one of the portfolios). This Prospectus sets forth information pertaining to the Emerging Markets Portfolio and the Emerging Markets Debt Portfolio (the "Portfolios"). The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of emerging country issuers. The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing primarily in debt securities of government, government-related and corporate issuers located in emerging countries. Emerging markets securities are subject to special risks. See "Foreign Investment Risk Factors." INVESTORS SHOULD NOTE THAT EACH PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES AND UP TO 25% OF ITS NET ASSETS IN RESTRICTED SECURITIES THAT ARE RULE 144A SECURITIES. SEE "ADDITIONAL INVESTMENT INFORMATION - -- NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES." INVESTMENTS IN RESTRICTED SECURITIES IN EXCESS OF 5% OF A PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE GREATER RISK AND MAY INCREASE THE PORTFOLIO'S EXPENSES. The Fund is designed to meet the investment needs of discerning investors who place a premium on quality and personal service. With Morgan Stanley Asset Management Inc. as Adviser and Administrator (the "Adviser" and the "Administrator") and with Morgan Stanley & Co. Incorporated ("Morgan Stanley") as Distributor, the Fund makes available to institutional investors and high net worth individual investors a series of portfolios which benefit from the investment expertise and commitment to excellence associated with Morgan Stanley and its affiliates. This Prospectus is designed to set forth concisely the information about the Fund that a prospective investor should know before investing and it should be retained for future reference. The Fund offers additional Portfolios which are described in other prospectuses and under the Prospectus Summary section herein. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity, U.S. Real Estate and Value Equity Portfolios; (iii) BALANCED -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities, Municipal Bond and Real Yield Portfolios; and (v) MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional information about the Fund is contained in a "Statement of Additional Information," dated May 1, 1995, which is incorporated herein by reference. The Statement of Additional Information and the Prospectuses pertaining to the other portfolios of the Fund are available upon request and without charge by writing or calling the Fund at the address and telephone number set forth above. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS MAY 1, 1995. FUND EXPENSES The following table illustrates all expenses and fees that a shareholder of the Portfolios indicated below will incur:
EMERGING EMERGING MARKETS MARKETS DEBT SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO - ------------------------------------------------------------------------------ ----------- ----------- Maximum Sales Load Imposed on Purchases....................................... None None Maximum Sales Load Imposed on Reinvested Dividends............................ None None Deferred Sales Load........................................................... None None Redemption Fees............................................................... None None Exchange Fees................................................................. None None
EMERGING ANNUAL FUND OPERATING EXPENSES EMERGING MARKETS (AS A PERCENTAGE OF MARKETS DEBT AVERAGE NET ASSETS) PORTFOLIO PORTFOLIO ----------- ----------- Investment Advisory Fee (Net of Fee Waivers).................................. 1.25%* 1.00%* Administrative & Shareholder Account Costs.................................... 0.15% 0.15% 12b-1 Fees.................................................................... None None Custody Fees.................................................................. 0.20% 0.16% Other Expenses................................................................ 0.15% 0.18% ----------- ----------- Total Operating Expenses (Net of Fee Waivers)............................. 1.75%* 1.49%* ----------- ----------- ----------- ----------- - -------------- *The Adviser has agreed to a reduction in the fees payable to it as Adviser and to reimburse each Portfolio, if necessary, if such fees would cause the total annual operating expenses of the Emerging Markets or Emerging Markets Debt Portfolio to exceed 1.75% of its respective average daily net assets. For further information on Fund expenses, see "Management of the Fund."
The purpose of this table is to assist the investor in understanding the various expenses that an investor in the Portfolios will bear directly or indirectly. The fees and expenses for the Emerging Markets and Emerging Markets Debt Portfolios are based on the actual expenses of the Portfolio for the fiscal year ended December 31, 1994. "Other Expenses" include Board of Directors' fees and expenses, filing fees, professional fees and costs for shareholder reports. The following example illustrates the expenses that you would pay on a $1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at the end of each time period. As noted in the table above, the Portfolios charge no redemption fees of any kind. The following example is based on total operating expenses of the Portfolios after fee waivers.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- Emerging Markets Portfolio......................................... $ 17 $ 54 $ 93 $ 203 Emerging Markets Debt Portfolio.................................... $ 15 $ 47 $ 81 $ 178
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. 2 The Fund intends to continue to comply with all state laws that restrict investment company expenses. Currently, the most restrictive state law requires that the aggregate annual expenses of an investment company shall not exceed two and one-half percent (2 1/2%) of the first $30 million of average net assets, two percent (2%) of the next $70 million of average net assets, and one and one-half percent (1 1/2%) of the remaining net assets of such investment company. The Adviser has agreed to a reduction in the amounts payable to it, and to reimburse the Portfolios, if necessary, if in any fiscal year the sum of the Portfolio's expenses exceeds the limit set by applicable state laws. FINANCIAL HIGHLIGHTS The following tables provide financial highlights for the Emerging Markets and Emerging Markets Debt Portfolios for each of the periods presented, and are part of the Fund's financial statements which appear in the Fund's December 31, 1994 Annual Report to Shareholders and which are incorporated by reference into the Fund's Statement of Additional Information. The financial highlights for each of the periods presented have been audited by Price Waterhouse LLP, whose report thereon (which was unqualified) is also incorporated by reference into the Statement of Additional Information. Additional performance information for the Emerging Markets and Emerging Markets Debt Portfolios is contained in the Annual Report. The Annual Report and the financial statements therein, along with the Statement of Additional Information, are available at no cost from the Fund at the address and telephone number noted on the cover page of this Prospectus. Subsequent to October 31, 1992 the Fund changed its fiscal year end to December 31. The following information should be read in conjunction with the financial statements and notes thereto. 3 EMERGING MARKETS PORTFOLIO
TWO MONTHS ENDED YEAR ENDED YEAR ENDED SEPTEMBER 25, 1992* DECEMBER 31, DECEMBER 31, DECEMBER 31, TO OCTOBER 31, 1992 1992 1993+ 1994 --------------------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD.......... $ 10.00 $ 10.11 $ 10.22 $ 19.00 ------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Loss (1)..................... -- -- (0.01) (0.04) Net Realized and Unrealized Gain/ (Loss) on Investments................................ 0.11 0.11 8.79 (2.56) ------- ------------- ------------- ------------- Total from Investment Operations............ 0.11 0.11 8.78 (2.60) ------- ------------- ------------- ------------- DISTRIBUTIONS Net Realized Gain........................... -- -- -- (0.10) ------- ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD................ $ 10.11 $ 10.22 $ 19.00 $ 16.30 ------- ------------- ------------- ------------- ------- ------------- ------------- ------------- TOTAL RETURN.................................. 1.10% 1.09% 85.91% (9.63)% ------- ------------- ------------- ------------- ------- ------------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)......... $ 28,806 $ 74,219 $ 735,352 $ 929,638 Ratio of Expenses to Average Net Assets (1)(2)................................ 1.75%** 1.75%** 1.75% 1.75% Ratio of Net Investment Loss to Average Net Assets (1)(2).................... (0.53)%** (0.33)% ** (0.06)% (0.26)% Portfolio Turnover Rate....................... 0% 2% 52% 32% - ------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income................................... $ 0.02 $ 0.00 $ 0.01 N/A Ratios before expense limitation: Expenses to Average Net Assets............ 4.82 %** 2.48 %** 1.79 % N/A Net Investment Loss to Average Net Assets................................... (3.60) %** (1.06) %** (0.10)% N/A (2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 1.25% of the average daily net assets of the Emerging Markets Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Portfolio to the extent that the total operating expenses of the Portfolio exceed 1.75% of the average daily net assets of the Portfolio. The Adviser did not waive fees or reimburse expenses for the year ended December 31, 1994. In the period ended October 31, 1992, the two month period ended December 31, 1992 and the year ended December 31, 1993, the Adviser waived advisory fees and/or reimbursed expenses totalling $58,000, $50,000 and $122,000, respectively, for the Emerging Markets Portfolio. * Commencement of Operations. ** Annualized. + Per share amounts for the year ended December 31, 1993 are based on average outstanding shares.
4 EMERGING MARKETS DEBT PORTFOLIO
PERIOD FROM FEBRUARY 1, 1994* TO DECEMBER 31, 1994 ----------------- NET ASSET VALUE, BEGINNING OF PERIOD........................................................... $ 10.00 -------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income........................................................................ 0.50 Net Realized and Unrealized Loss on Investments.............................................. (1.91) -------- Total from Investment Operations............................................................. (1.41) -------- NET ASSET VALUE, END OF PERIOD................................................................. $ 8.59 -------- -------- TOTAL RETURN................................................................................... (14.10)% -------- -------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).......................................................... $ 144,949 Ratio of Expenses to Average Net Assets........................................................ 1.49%** Ratio of Net Investment Income to Average Net Assets........................................... 9.97%** Portfolio Turnover Rate........................................................................ 273% - -------------- * Commencement of Operations. ** Annualized.
5 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-seven portfolios, offering institutional investors and high net worth individual investors a broad range of investment choices coupled with the advantages of a no-load mutual fund with Morgan Stanley and its affiliates providing customized services as Adviser, Administrator and Distributor. Each portfolio has its own investment objectives and policies designed to meet its specific goals. This Prospectus pertains to the Emerging Markets Portfolio and the Emerging Markets Debt Portfolio. -The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of emerging country issuers. -The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing primarily in debt securities of government, government-related and corporate issuers located in emerging countries. The other portfolios of the Fund are described in other prospectuses which may be obtained from the Fund at the address and telephone number noted on the cover page of this Prospectus. The objectives of these other portfolios are listed below: GLOBAL AND INTERNATIONAL EQUITY: -The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital appreciation by investing in accordance with country weightings determined by the Adviser in common stocks of non-U.S. issuers which, in the aggregate, replicate broad country indices. -The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of Asian issuers. -The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in the equity securities of issuers in The People's Republic of China, Hong Kong and Taiwan. -The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of European issuers. -The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of issuers throughout the world, including U.S. issuers. -The GOLD PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of foreign and domestic issuers engaged in gold-related activities. -The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of non-U.S. issuers. -The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of non-U.S. issuers with equity market capitalizations of under $500 million. -The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Japanese issuers. -The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Latin American issuers and debt securities issued or guaranteed by Latin American governments or governmental entities. 6 U.S. EQUITY: -The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing primarily in corporate equity and equity-linked securities. -The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented common stocks of small- to medium-sized corporations. -The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing in growth-oriented common stocks of medium and large capitalization companies. -The SMALL CAP VALUE EQUITY PORTFOLIO seeks long-term total return by investing in undervalued common stocks of small- to medium-sized companies. -The U.S. REAL ESTATE PORTFOLIO seeks to provide above average current income and long-term capital appreciation by investing primarily in equity securities of companies in the U.S. real estate industry, including real estate investment trusts. -The VALUE EQUITY PORTFOLIO seeks high total return by investing in common stocks which the Adviser believes to be undervalued relative to the stock market in general at the time of purchase. BALANCED: -The BALANCED PORTFOLIO seeks high total return while preserving capital by investing in a combination of undervalued common stocks and fixed income securities. FIXED INCOME: -The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent with the preservation of capital by investing in a diversified portfolio of fixed income securities. -The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate of return while preserving capital by investing in fixed income securities of issuers throughout the world, including U.S. issuers. -The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a diversified portfolio of high yield fixed income securities that offer a yield above that generally available on debt securities in the three highest rating categories of the recognized rating services. -The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level of current income as is consistent with the preservation of capital by investing primarily in a variety of investment-grade mortgage-backed securities. -The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current income consistent with preservation of principal through investment primarily in municipal obligations, the interest on which is exempt from federal income tax. -The REAL YIELD PORTFOLIO seeks to produce a high total return consistent with preservation of capital by investing in fixed income securities of issuers throughout the world, including U.S. issuers. MONEY MARKET: -The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less. -The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less which are exempt from federal income tax. 7 INVESTMENT MANAGEMENT Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan Stanley Group Inc., which, together with its affiliated asset management companies, at December 31, 1994 had approximately $48.7 billion in assets under management as an investment manager or as a fiduciary adviser, acts as investment adviser to the Fund and each of its portfolios. See "Management of the Fund -- Investment Adviser" and "Management of the Fund -- Administrator." HOW TO INVEST Shares of each Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Share purchases may be made by sending investments directly to the Fund. The minimum initial investment is $500,000 for each Portfolio described in this Prospectus. The minimum for subsequent investments is $1,000 for each Portfolio (except for automatic reinvestment of dividends and capital gains distributions for which there are no minimums). The minimum investment levels may be waived for certain Morgan Stanley employees and customers at the discretion of the Adviser. See "Purchase of Shares." HOW TO REDEEM Shares of each Portfolio may be redeemed at any time, without cost, at the net asset value per share of the Portfolio next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. If a shareholder reduces its total investment in shares of any Portfolio to less than $500,000, the investment may be subject to redemption. See "Redemption of Shares." RISK FACTORS Investing in emerging country securities involves certain considerations not typically associated with investing in securities of U.S. companies, including (1) restrictions on foreign investment and on repatriation of capital invested in emerging countries, (2) currency fluctuations, (3) the cost of converting foreign currency into U.S. dollars, (4) potential price volatility and lesser liquidity of shares traded on emerging country securities markets or lack of a secondary trading market for such securities and (5) political and economic risks, including the risk of nationalization or expropriation of assets and the risk of war. In addition, accounting, auditing, financial and other reporting standards in emerging countries are not equivalent to U.S. standards and therefore, disclosure of certain material information may not be made and less information may be available to investors investing in emerging countries than in the U.S. There is also generally less governmental regulation of the securities industry in emerging countries than in the United States. Moreover, it may be more difficult to obtain a judgment in a court outside the U.S. See "Investment Objectives and Policies" and "Additional Investment Information." In addition, each Portfolio may invest in repurchase agreements, lend its portfolio securities and purchase securities on a when-issued basis. Each Portfolio may invest in foreign currency futures contracts and options to hedge currency risk associated with investment in non-U.S. dollar denominated securities. Each of these investment strategies involves specific risks which are described under "Investment Objectives and Policies" and "Additional Investment Information" herein and under "Investment Objectives and Policies" in the Statement of Additional Information. 8 INVESTMENT OBJECTIVES AND POLICIES The investment objectives of each Portfolio are described below, together with the policies the Fund employs in its efforts to achieve these objectives. There is no assurance that each Portfolio will attain its objective. Each Portfolio's investment objective is a fundamental policy which may not be changed without the approval of a majority of the Portfolio's outstanding voting securities. The investment policies described below are not fundamental policies and may be changed without shareholder approval. THE EMERGING MARKETS PORTFOLIO The investment objective of the Portfolio is to provide long-term capital appreciation by investing primarily in common stocks of emerging country issuers. For this purpose common stocks include common stocks and equivalents, such as securities convertible into common stocks and securities having common stock characteristics, such as rights and warrants to purchase common stocks. Under normal conditions, at least 65% of the Portfolio's total assets will be invested in emerging country equity securities. As used in this Prospectus, the term "emerging country" applies to any country which, in the opinion of the Adviser, is generally considered to be an emerging or developing country by the international financial community, which includes the International Bank for Reconstruction and Development (more commonly known as the World Bank) and the International Finance Corporation. There are currently over 130 countries which, in the opinion of the Adviser, are generally considered to be emerging or developing countries by the international financial community, approximately 40 of which currently have stock markets. These countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe. Currently, investing in many emerging countries is not feasible or may involve unacceptable political risks. The Portfolio will focus its investments on those emerging market countries in which it believes the economies are developing strongly and in which the markets are becoming more sophisticated. The Portfolio intends to invest primarily in some or all of the following countries: Argentina Botswana Brazil Chile China Colombia Greece Hong Kong Hungary India Indonesia Jamaica Jordan Kenya Malaysia Mexico Nigeria Pakistan Peru Philippines Poland Portugal Russia South Africa South Korea Sri Lanka Taiwan Thailand Turkey Venezuela Zimbabwe
As markets in other countries develop, the Portfolio expects to expand and further diversify the emerging countries in which it invests. The Portfolio does not intend to invest in any security in a country where the currency is not freely convertible to U.S. dollars, unless the Portfolio has obtained the necessary governmental licensing to convert such currency or other appropriately licensed or sanctioned contractual guarantees to protect such investment against loss of that currency's external value, or the Portfolio has a reasonable expectation at the time the investment is made that such governmental licensing or other appropriately licensed or sanctioned guarantees would be obtained or that the currency in which the security is quoted would be freely convertible at the time of any proposed sale of the security by the Portfolio. 9 An emerging country security is one issued by a company that, in the opinion of the Adviser, has one or more of the following characteristics: (i) its principal securities trading market is in an emerging country, (ii) alone, or on a consolidated basis, the company derives 50% or more of its annual revenue from either goods produced, sales made or services performed in emerging countries; or (iii) the company is organized under the laws of, and has a principal office in, an emerging country. The Adviser will base determinations as to eligibility on publicly available information and inquiries made to the companies. (See "Foreign Investment Risk Factors" for a discussion of the nature of information publicly available for non-U.S. companies.) To the extent that the Portfolio's assets are not invested in emerging country common stocks, the remainder of the assets may be invested in (i) debt securities denominated in the currency of an emerging country or issued or guaranteed by an emerging country company or the government of an emerging country, (ii) equity or debt securities of corporate or governmental issuers located in industrialized countries, and (iii) short-term and medium-term debt securities of the type described below under "Temporary Instruments." The Portfolio's assets may be invested in debt securities when the Portfolio believes that, based upon factors such as relative interest rate levels and foreign exchange rates, such debt securities offer opportunities for long-term capital appreciation. It is likely that many of the debt securities in which the Portfolio will invest will be unrated, and whether or not rated, such securities may have speculative characteristics. When deemed appropriate by the Adviser, the Portfolio may invest up to 10% of its total assets (measured at the time of the investment) in lower quality debt securities. Lower quality debt securities, also known as "junk bonds," are often considered to be speculative and involve greater risk of default or price changes due to changes in the issuer's creditworthiness. The market prices of these securities may fluctuate more than those of higher quality securities and may decline significantly in periods of general economic difficulty, which may follow periods of rising interest rates. Securities in the lowest quality category may present the risk of default, or may be in default. For temporary defensive purposes, the Portfolio may invest less than 65% of its total assets in emerging country equity securities, in which case the Portfolio may invest in other equity securities or may invest in debt securities of the kind described under "Temporary Investments" below. The Portfolio may invest indirectly in securities of emerging country issuers through sponsored or unsponsored American Depositary Receipts ("ADRs"). ADRs may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. In addition, the issuers of the stock of unsponsored ADRs are not obligated to disclose material information in the U.S. and, therefore, there may not be a correlation between such information and the market value of the ADR. THE EMERGING MARKETS DEBT PORTFOLIO The investment objective of the Portfolio is to seek high total return. In seeking to achieve this objective, the Portfolio will seek to invest at least 65% of its total assets in debt securities of government and government-related issuers located in emerging countries (including participations in loans between governments and financial institutions), and of entities organized to restructure outstanding debt of such issuers. In addition, the Portfolio may invest up to 35% of its total assets in debt securities of corporate issuers located in or organized under the laws of emerging countries. See "The Emerging Markets Portfolio" above for a definition of emerging countries. The Adviser intends to invest the Portfolio's assets in emerging country debt securities that provide a high level of current income, while at the same time holding the potential for capital appreciation if the perceived 10 creditworthiness of the issuer improves due to improving economic, financial, political, social or other conditions in the country in which the issuer is located. Currently, investing in many emerging country securities is not feasible or may involve unacceptable political risks. Initially, the Portfolio expects that its investments in emerging country debt securities will be made primarily in some or all of the following emerging countries: Algeria India Philippines Argentina Indonesia Poland Brazil Ivory Coast Portugal Bulgaria Jamaica Russia Chile Jordan Slovakia China Malaysia South Africa Colombia Mexico Thailand Costa Rica Morocco Trinidad & Tobago Czech Republic Nicaragua Tunisia Dominican Republic Nigeria Turkey Ecuador Pakistan Uruguay Egypt Panama Venezuela Greece Paraguay Zaire Hungary Peru
In selecting emerging country debt securities for investment by the Investment Fund, the Adviser will apply a market risk analysis contemplating assessment of factors such as liquidity, volatility, tax implications, interest rate sensitivity, counterparty risks and technical market considerations. Currently, investing in many emerging country securities is not feasible or may involve unacceptable political risks. As opportunities to invest in debt securities in other countries develop, the Portfolio expects to expand and further diversify the emerging countries in which it invests. While the Portfolio generally is not restricted in the portion of its assets which may be invested in a single country or region, it is anticipated that, under normal conditions, the Portfolio's assets will be invested in issuers in at least three countries. The Portfolio's investments in government, government-related and restructured debt securities will consist of (i) debt securities or obligations issued or guaranteed by governments, governmental agencies or instrumentalities and political subdivisions located in emerging countries (including participations in loans between governments and financial institutions), (ii) debt securities or obligations issued by government owned, controlled or sponsored entities located in emerging countries, and (iii) interests in issuers organized and operated for the purpose of restructuring the investment characteristics of instruments issued by any of the entities described above. Such type of restructuring involves the deposit with or purchase by an entity of specific instruments and the issuance by that entity of one or more classes of securities backed by, or representing interests in, the underlying instruments. Certain issuers of such structured securities may be deemed to be "investment companies" as defined in the Investment Company Act of 1940 (the "1940 Act"). As a result, the Portfolio's investment in such securities may be limited by certain investment restrictions contained in the 1940 Act. See "Additional Investment Information -- Structured Securities." The Portfolio's investments in debt securities of corporate issuers in emerging countries may include debt securities or obligations issued (i) by banks located in emerging countries or by branches of emerging country banks located outside the country or (ii) by companies organized under the laws of an emerging country. 11 Determinations as to eligibility will be made by the Adviser based on publicly available information and inquiries made to the issuer. (See "Foreign Investment Risk Factors" for a discussion of the nature of information publicly available for non-U.S. issuers.) The Portfolio may also invest in certain debt obligations customarily referred to as "Brady Bonds," which are created through the exchange of existing commercial bank loans to foreign entities for new obligations in connection with debt restructurings under a plan introduced by former U.S. Secretary of the Treasury Nicholas F. Brady. See "Investment Objectives and Policies -- Emerging Country Equity and Debt Securities" in the Statement of Additional Information for further information about Brady Bonds. Emerging country debt securities held by the Portfolio will take the form of bonds, notes, bills, debentures, convertible securities, warrants, bank debt obligations, short-term paper, mortgage and other asset-backed securities, loan participations, loan assignments and interests issued by entities organized and operated for the purpose of restructuring the investment characteristics of instruments issued by emerging country issuers. U.S. dollar-denominated emerging country debt securities held by the Portfolio will generally be listed but not traded on a securities exchange, and non-U.S. dollar-denominated securities held by the Portfolio may or may not be listed or traded on a securities exchange. Investments in emerging country debt securities entail special investment risks. See "Additional Investment Information -- Foreign Investment Risk Factors." The Portfolio will be subject to no restrictions on the maturities of the emerging country debt securities it holds; those maturities may range from overnight to 30 years. The Portfolio is not restricted in the portion of its assets which may be invested in securities denominated in a particular currency and a substantial portion of the Portfolio's assets may be invested in non-U.S. dollar-denominated securities. The portion of the Portfolio's assets invested in securities denominated in currencies other than the U.S. dollar will vary depending on market conditions. Although the Portfolio is permitted to engage in a wide variety of investment practices designed to hedge against currency exchange rate risks with respect to its holdings of non-U.S. dollar-denominated debt securities, the Portfolio may be limited in its ability to hedge against these risks. See "Additional Investment Information -- Forward Foreign Currency Exchange Contracts" and "Foreign Currency Futures Contracts and Options" in the Statement of Additional Information. In selecting particular emerging country debt securities for investment by the Portfolio, the Adviser will apply a market risk analysis contemplating assessment of factors such as liquidity, volatility, tax implications, interest rate sensitivity, counterparty risks and technical market considerations. Emerging country debt securities in which the Portfolio may invest will be subject to high risk and will not be required to meet a minimum rating standard and may not be rated for creditworthiness by any internationally recognized credit rating organization. The Portfolio's investments are expected to be rated in the lower and lowest rating categories of internationally recognized credit rating organizations or are expected to be unrated securities of comparable quality. These types of debt obligations are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with their terms and generally involve a greater risk of default and of volatility in price than securities in higher rating categories. Ratings of a non-U.S. debt instrument, to the extent that those ratings are undertaken, are related to evaluations of the country in which the issuer of the instrument is located. Ratings generally take into account the currency in which a non-U.S. debt instrument is denominated. Instruments issued by a foreign government in other than the local currency, for example, typically have a lower rating than local currency instruments due to the existence of an additional risk that the government will be unable to obtain the required foreign currency to service its foreign currency-denominated debt. In general, the 12 ratings of debt securities or obligations issued by a non-U.S. public or private entity will not be higher than the rating of the currency or the foreign currency debt of the central government of the country in which the issuer is located, regardless of the intrinsic creditworthiness of the issuer. The Portfolio is authorized to borrow up to 33 1/3% of its total assets (including the amount borrowed), less all liabilities and indebtedness other than the borrowing, for investment purposes to increase the opportunity for greater return and for payment of dividends. Such borrowings would constitute leverage, which is a speculative characteristic. Leveraging will magnify declines as well as increases in the net asset value of the Portfolio's shares and increases in the yield on the Portfolio's investments. See "Additional Investment Information -- Borrowing and Other Forms of Leverage." The Portfolio may also invest in zero coupon, pay-in-kind or deferred payment securities and in securities that may be collateralized by zero coupon securities (such as Brady Bonds). Zero coupon securities are securities that are sold at a discount to par value and on which interest payments are not made during the life of the security. Upon maturity, the holder is entitled to receive the par value of the security. While interest payments are not made on such securities, holders of such securities are deemed to have received annually "phantom income." Because the Portfolio will distribute its "phantom income" to shareholders, to the extent that shareholders elect to receive dividends in cash rather than reinvesting such dividends in additional shares, the Portfolio will have fewer assets with which to purchase income producing securities. The Portfolio accrues income with respect to these securities prior to the receipt of cash payments. Pay-in-kind securities are securities that have interest payable by delivery of additional securities. Upon maturity, the holder is entitled to receive the aggregate par value of the securities. Deferred payment securities are securities that remain zero coupon securities until a predetermined date, at which time the stated coupon rate becomes effective and interest becomes payable at regular intervals. Zero coupon, pay-in-kind and deferred payment securities may be subject to greater fluctuation in value and lesser liquidity in the event of adverse market conditions than comparably rated securities paying cash interest at regular interest payment periods. The Portfolio may also invest up to 5% of its total assets in mortgage-backed securities and in other asset-backed securities issued by non-governmental entities, such as banks and other financial institutions. Mortgage-backed securities include mortgage pass-through securities and collateralized mortgage obligations. Asset-backed securities are collateralized by such assets as automobile or credit card receivables and are securitized either in a pass-through structure or in a pay-through structure similar to a CMO. The Portfolio's investments in government, government-related and restructured debt instruments are subject to special risks, including the inability or unwillingness to repay principal and interest, requests to reschedule or restructure outstanding debt and requests to extend additional loan amounts. The Portfolio may have limited recourse in the event of default on such debt instruments. The Portfolio may invest in loans, assignments of loans and participations in loans. See "Additional Investment Information." ADDITIONAL INVESTMENT INFORMATION REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements with brokers, dealers or banks that meet the credit guidelines established by the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a security from a seller that has agreed to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. The term of these agreements is usually 13 from overnight to one week, and never exceeds one year. Repurchase agreements may be viewed as a fully collateralized loan of money by the Portfolio to the seller. The Portfolio always receives securities with a market value at least equal to the purchase price (including accrued interest) as collateral, and this value is maintained during the term of the agreement. If the seller defaults and the collateral value declines, the Portfolio might incur a loss. If bankruptcy proceedings are commenced with respect to the seller, the Portfolio's realization upon the collateral may be delayed or limited. The aggregate of certain repurchase agreements and certain other investments is limited as set forth under "Investment Limitations." REVERSE REPURCHASE AGREEMENTS. The Emerging Markets Debt Portfolio may enter into reverse repurchase agreements with brokers, dealers, domestic and foreign banks or other financial institutions. In a reverse repurchase agreement, the Portfolio sells a security and agrees to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. It may also be viewed as the borrowing of money by the Portfolio. The Portfolio's investment of the proceeds of a reverse repurchase agreement is the speculative factor known as leverage. The Portfolio may enter into a reverse repurchase agreement only if the interest income from investment of the proceeds is greater than the interest expense of the transaction and the proceeds are invested for a period no longer than the term of the agreement. The Portfolio will maintain with the Custodian a separate account with a segregated portfolio of cash, U.S. Government securities or other liquid high grade debt obligations in an amount at least equal to its purchase obligations under these agreements. If interest rates rise during a reverse repurchase agreement, it may adversely affect the Portfolio's ability to maintain a stable net asset value. The aggregate of these agreements is limited as set forth under "Investment Limitations." Reverse repurchase agreements are considered to be borrowings and are subject to the percentage limitations on borrowings set forth in "Investment Limitations." LOANS OF PORTFOLIO SECURITIES. The Portfolios may lend securities to brokers, dealers, domestic and foreign banks or other financial institutions for the purpose of increasing their net investment income. These loans must be secured continuously by cash or equivalent collateral, or by a letter of credit at least equal to the market value of the securities loaned plus accrued interest or income. There may be a risk of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. Each Portfolio will not enter into securities loan transactions exceeding in the aggregate, 33 1/3% of the market value of its total assets. For more detailed information about securities lending see "Investment Objectives and Policies" in the Statement of Additional Information. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase securities on a when-issued or delayed delivery basis. In such transactions, instruments are bought with payment and delivery taking place in the future in order to secure what is considered to be an advantageous yield or price at the time of the transaction. Each Portfolio will maintain with the Custodian a separate account with a segregated portfolio of high grade debt securities or equity securities or cash in an amount at least equal to these commitments. The payment obligation and the interest rates that will be received are each fixed at the time the Portfolio enters into the commitment and no interest accrues to the Portfolio until settlement. Thus, it is possible that the market value at the time of settlement could be higher or lower than the purchase price if, among other factors, the general level of interest rates has changed. It is a current policy of each Portfolio not to enter into when-issued commitments exceeding, in the aggregate, 15% of the market value of the Portfolio's total assets less liabilities, other than the obligations created by these commitments. 14 FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolios may enter into forward foreign currency exchange contracts that provide for the purchase or sale of an amount of a specified foreign currency at a future date. Purposes for which such contracts may be used include protecting against a decline in a foreign currency against the U.S. dollar between the trade date and settlement date when the Portfolio purchases or sells securities, locking in the U.S. dollar value of dividends declared on securities held by a Portfolio and generally protecting the U.S. dollar value of securities held by the Portfolio against exchange rate fluctuation. Such contracts may also be used as a protective measure against the effects of fluctuating rates of currency exchange and exchange control regulations. While such forward contracts may limit losses to the Portfolio as a result of exchange rate fluctuation, they will also limit any gains that may otherwise have been realized. See "Investment Objectives and Policies -- Forward Foreign Currency Exchange Contracts" in the Statement of Additional Information. As another means of reducing the risks associated with investing in securities denominated in foreign currencies, the Portfolios may enter into contracts for the future acquisition or delivery of foreign currencies and may purchase foreign currency options. These investment techniques are designed primarily to hedge against anticipated future changes in currency prices, that otherwise might adversely affect the value of the Portfolio's portfolio securities. A Portfolio will incur brokerage fees when it purchases or sells futures contracts or options, and it will be required to maintain margin deposits. As set forth below, futures contracts and options entail risks, but the Adviser believes that use of such contracts and options may benefit the Portfolio by diminishing currency risks. A Portfolio will not enter into any futures contract or option if immediately thereafter the value of all the foreign currencies underlying its futures contracts and foreign currency options would exceed 10% of the value of its total assets. In addition, a Portfolio may enter into a futures contract only if immediately thereafter not more than 5% of its total assets are required as deposit to secure obligations under such contracts. The primary risks associated with the use of futures and options are (i) failure to predict accurately the direction of currency movements and (ii) market risks (e.g., lack of liquidity or lack of correlation between the change in value of underlying currencies and that of the value of the Portfolio's futures or options contracts). The risk that a Portfolio will be unable to close out a futures position or options contract will be minimized by the Portfolio only entering into futures contracts or options transactions for which there appears to be a liquid secondary market. For more detailed information about futures transactions, see "Investment Objectives and Policies" in the Statement of Additional Information. The Emerging Markets Debt Portfolio may attempt to accomplish objectives similar to those described above with respect to forward and futures contracts for currency by means of purchasing put or call options on foreign currencies on exchanges. A put option gives the Portfolio the right to sell a currency at the exercise price until the expiration of the option. A call option gives the Portfolio the right to purchase a currency at the exercise price until the expiration of the option. The Portfolio's Custodian will place cash, U.S. government securities or high-grade debt securities into a segregated account of a Portfolio in an amount equal to the value of such Portfolio's total assets committed to the consummation of forward foreign currency exchange contracts. If the value of the securities placed in the segregated account declines, additional cash or securities will be placed in the account on a daily basis so that the value of the account will be at least equal to the amount of such Portfolio's commitments with respect to such contracts. See "Investment Objectives and Policies -- Forward Currency Exchange Contracts" in the Statement of Additional Information. 15 STOCK OPTION AND INDEX FUTURES CONTRACTS. Each Portfolio may seek to increase its return or may hedge all or a portion of its portfolio investments through stock options and stock index futures contracts with respect to securities in which the Portfolio may invest. There currently are limited options and stock index futures markets in emerging countries and the nature of the strategies adopted by the Adviser and the extent to which those strategies are used will depend on the development of stock option and stock index futures contracts by emerging country stock exchanges. Each Portfolio will only engage in transactions in stock options and stock index futures contracts which are traded on a recognized securities or futures exchange. The Emerging Markets Debt Portfolio may write (i.e., sell) covered call options on securities and loan participations and assignments held in its portfolio, which options give the purchaser the right to buy the underlying security, loan participation or assignment covered by the option from the Portfolio at the stated exercise price. A "covered" call option means that so long as the Portfolio is obligated as the writer of the option, it will own (i) the underlying security, loan participation or assignment subject to the option, or (ii) securities convertible or exchangeable without the payment of any consideration into the security, loan participation or assignment subject to the option. As a matter of operating policy, the aggregate value of the underlying securities, loan participations and assignments on which options will be written at any one time will not exceed 5% of the total assets of the Portfolio. In addition, as a matter of operating policy, the Portfolio may purchase put and call options on securities, loan participations or assignments. The Portfolio will receive a premium from writing call options, which increases the Portfolio's return on the underlying security, loan participation or assignment in the event the option expires unexercised or is closed out at a profit. By writing a call, the Portfolio will limit its opportunity to profit from an increase in the market value of the underlying security, loan participation or assignment above the exercise price of the option for as long as the Portfolio's obligation as writer of the option continues. Thus, in some periods the Portfolio will receive less total return and in other periods greater total return from writing covered call options than it would have received from its underlying securities, loan participations and assignments had it not written call options. The Portfolio pays a premium to purchase an option and the risk assumed by the Portfolio when it purchases an option is the loss of this premium. Because the price of an option tends to move with that of its underlying security, if the Portfolio is to make a profit, the price of the underlying security, loan participation or assignment must change and the change must be sufficient to cover the premiums and commissions paid. A price change in the security, loan participation or assignment underlying the option does not assure a profit because prices in the options markets may not always reflect such change. The Emerging Markets Debt Portfolio may purchase and sell indexed financial futures contracts. An indexed futures contract is an agreement to take or make delivery of an amount of cash equal to the difference between the value of the index at the beginning and at the end of the contract period. Successful use of indexed futures will be subject to the Adviser's ability to predict correctly movements in the direction of the relevant debt market. No assurance can be given that the Adviser's judgment in this respect will be correct. The Portfolio may sell indexed financial futures contracts in anticipation of or during a market decline to attempt to offset the decrease in market value of securities in its portfolio that might otherwise result. When the Portfolio is not fully invested in emerging country debt securities and anticipates a significant market advance, it may purchase indexed futures in order to gain rapid market exposure that may in part or entirely offset increases 16 in the cost of securities that it intends to purchase. In a substantial majority of these transactions, the Portfolio will purchase such securities upon termination of the futures position but, under unusual market conditions, a futures position may be terminated without the corresponding purchase of debt securities. LOAN PARTICIPATIONS AND ASSIGNMENTS. The Emerging Markets and Emerging Markets Debt Portfolios may invest in fixed rate and floating rate loans ("Loans") arranged through private negotiations between an issuer of sovereign debt obligations and one or more financial institutions ("Lenders"). The Portfolio's investments in Loans are expected in most instances to be in the form of participation in Loans ("Participations") and assignments of all or a portion of Loans ("Assignments") from third parties. The Portfolio will have the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In the event of the insolvency of the Lender selling a Participation, the Portfolio may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower. Certain Participations may be structured in a manner designed to avoid purchasers of Participations being subject to the credit risk of the Lender with respect to the Participation. Even under such a structure, in the event of the Lender's insolvency, the Lender's servicing of the Participation may be delayed and the assignability of the Participation may be impaired. The Portfolio will acquire Participations only if the Lender interpositioned between the Portfolio and the borrower is determined by the Adviser to be creditworthy. When the Portfolio purchases Assignments from Lenders it will acquire direct rights against the borrower on the Loan. However, because Assignments are arranged through private negotiations between potential assignees and potential assignors, the rights and obligations acquired by the Portfolio as the purchaser of an Assignment may differ from, and be more limited than, those held by the assigning Lender. Because there is no liquid market for such securities, the Portfolio anticipates that such securities could be sold only to a limited number of institutional investors. The lack of a liquid secondary market may have an adverse impact on the value of such securities and the Portfolio's ability to dispose of particular Assignments or Participations when necessary to meet the Portfolio's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the borrower. The lack of a liquid secondary market for Assignments and Participations also may make it more difficult for the Portfolio to assign a value to these securities for purposes of valuing the Portfolio's portfolio and calculating its net asset value. STRUCTURED SECURITIES. The Emerging Markets Debt Portfolio may invest a portion of its assets in entities organized and operated solely for the purpose of restructuring the investment characteristics of sovereign debt obligations. This type of restructuring involves the deposit with, or purchase by, an entity, such as a corporation or trust, of specified instruments (such as commercial bank loans or Brady Bonds) and the issuance by that entity of one or more classes of securities ("Structured Securities") backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued Structured Securities to create securities with different investment characteristics, such as varying maturities, payment priorities and interest rate provisions, and the extent of the payments made with respect to Structured Securities is dependent on the extent of the cash flow on the underlying instruments. Because Structured Securities of the type in which the Portfolio anticipates it will invest typically involve no credit enhancement, their credit risk generally will be equivalent to that of the underlying instruments. The Portfolio is permitted to invest in a class of Structured Securities that is either subordinated or unsubordinated to the right 17 of payment of another class. Subordinated Structured Securities typically have higher yields and present greater risks than unsubordinated Structured Securities. Structured Securities are typically sold in private placement transactions, and there currently is no active trading market for Structured Securities. SHORT SALES. The Emerging Markets Debt Portfolio may from time to time sell securities short without limitation, although initially the Portfolio does not intend to sell securities short. A short sale is a transaction in which the Investment Fund would sell securities it does not own (but has borrowed) in anticipation of a decline in the market price of the securities. When the Portfolio makes a short sale, the proceeds it receives from the sale will be held on behalf of a broker until the Portfolio replaces the borrowed securities. To deliver the securities to the buyer, the Portfolio will need to arrange through a broker to borrow the securities and, in so doing, the Investment Fund will become obligated to replace the securities borrowed at their market price at the time of replacement, whatever that price may be. The Portfolio may have to pay a premium to borrow the securities and must pay any dividends or interest payable on the securities until they are replaced. The Portfolio's obligation to replace the securities borrowed in connection with a short sale will be secured by collateral deposited with the broker that consists of cash, U.S. government securities or other liquid, high grade debt obligations. In addition, the Portfolio will place in a segregated account with its Custodian an amount of cash, U.S. government securities or other liquid high grade debt obligations equal to the difference, if any, between (1) the market value of the securities sold at the time they were sold short and (2) any cash, U.S. government securities or other liquid high grade debt obligations deposited as collateral with the broker in connection with the short sale (not including the proceeds of the short sale). Short sales by the Investment Fund involve certain risks and special considerations. Possible losses from short sales differ from losses that could be incurred from a purchase of a security, because losses from short sales may be unlimited, whereas losses from purchases can equal only the total amount invested. NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES. The Portfolios may invest in securities that are neither listed on a stock exchange nor traded over-the-counter, including privately placed securities. Investing in such unlisted emerging country equity securities, including investments in new and early stage companies, may involve a high degree of business and financial risk that can result in substantial losses. As a result of the absence of a public trading market for these securities, they may be less liquid than publicly traded securities. Although these securities may be resold in privately negotiated transactions, the prices realized from these sales could be less than those originally paid by the Portfolio, or less than what may be considered the fair value of such securities. Further, companies whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements which might be applicable if their securities were publicly traded. If such securities are required to be registered under the securities laws of one or more jurisdictions before being resold, the Portfolio may be required to bear the expenses of registration. As a general matter, each Portfolio may not invest more than 15% of its net assets in illiquid securities, including securities for which there is no readily available secondary market nor more than 10% of its total assets in securities that are restricted from sale to the public without registration ("Restricted Securities") under the Securities Act of 1933 (the "1933 Act"). Nevertheless, subject to the foregoing limit on illiquid securities, the Portfolio may invest up to 25% of its total assets in Restricted Securities that can be offered and sold to qualified institutional buyers under Rule 144A under that Act ("144A Securities"). The Board of Directors has adopted guidelines and delegated to the Adviser, subject to the supervision of the Board of Directors, the daily function of determining and monitoring the liquidity of 144A Securities. Rule 144A securities may become illiquid if qualified institutional buyers are not interested in acquiring the securities. 18 TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes in economic, financial or political conditions make it advisable, the Emerging Markets Portfolio may reduce its holdings in equity and other securities, and the Emerging Markets Debt Portfolio may reduce its holdings in emerging country debt securities, for temporary defensive purposes, and the Portfolios may invest in certain short-term (less than twelve months to maturity) and medium-term (not greater than five years to maturity) debt securities or may hold cash. The short-term and medium-term debt securities in which the Portfolio may invest consist of (a) obligations of the U.S. or emerging country governments, their respective agencies or instrumentalities; (b) bank deposits and bank obligations (including certificates of deposit, time deposits and bankers' acceptances) of U.S. or emerging country banks denominated in any currency; (c) floating rate securities and other instruments denominated in any currency issued by international development agencies; (d) finance company and corporate commercial paper and other short-term corporate debt obligations of United States and emerging country corporations meeting the Portfolio's credit quality standards; and (e) repurchase agreements with banks and broker-dealers with respect to such securities. For temporary defensive purposes, the Portfolios intend to invest only in short-term and medium-term debt securities that the Adviser believes to be of high quality, i.e., subject to relatively low risk of loss of interest or principal (there is currently no rating system for debt securities in most emerging countries). MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money market instruments, although each Portfolios intends to stay invested in securities satisfying its primary investment objective to the extent practical. The Portfolios may make money market investments pending other investment or settlement for liquidity, or in adverse market conditions. The money market investments permitted for the Portfolios include: obligations of the United States government and its agencies and instrumentalities; obligations of foreign sovereignties; other debt securities; commercial paper including bank obligations; certificates of deposit (including Eurodollar certificates of deposit); and repurchase agreements. For more detailed information about these money market investments, see "Description of Securities and Ratings" in the Statement of Additional Information. BORROWING AND OTHER FORMS OF LEVERAGE. The Emerging Markets Debt Portfolio is authorized to borrow money from banks and other entities in an amount equal to up to 33 1/3% of the Portfolio's total assets (less all liabilities and indebtedness other than the amount borrowed), less all liabilities and indebtedness other than the borrowing, and may use the proceeds of the borrowing for investment purposes or to pay dividends. Borrowings create leverage, which is a speculative characteristic. Although the Portfolio is authorized to borrow, it will do so only when the Adviser believes that borrowing will benefit the Portfolio after taking into account considerations such as the costs of the borrowing and the likely investment returns on the securities purchased with borrowed monies. The extent to which the Portfolio will borrow will depend upon the availability of credit. AMERICAN DEPOSITARY RECEIPTS. The Portfolios may on occasion invest in American Depositary Receipts ("ADRs"). ADRs are securities, typically issued by a U.S. financial institution (a "depositary"), that evidence ownership interests in a security or a pool of securities issued by a foreign issuer (the "underlying issuer") and deposited with the depositary. ADRs include American Depositary Shares and New York Shares and may be "sponsored" or "unsponsored." Sponsored ADRs are established jointly by a depositary and the underlying issuer, whereas unsponsored ADRs may be established by a depositary without participation by the underlying issuer. Holders of an unsponsored ADR generally bear all the costs associated with establishing the unsponsored ADR. The depositary of an unsponsored ADR is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through to the holders of the unsponsored ADR voting rights with respect to the deposited securities or pool of securities. The Portfolios may invest in sponsored and unsponsored ADRs. 19 FOREIGN INVESTMENT RISK FACTORS. Investment in obligations of foreign issuers and in foreign branches of domestic banks involves somewhat different investment risks than those affecting obligations of U.S. issuers. There may be limited publicly available information with respect to foreign issuers, and foreign issuers are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to U.S. companies. There may also be less government supervision and regulation of foreign securities exchanges, brokers and listed companies than in the U.S. Many foreign securities markets have substantially less volume than U.S. national securities exchanges, and securities of some foreign issuers are less liquid and more volatile than securities of comparable domestic issuers. Brokerage commissions and other transaction costs on foreign securities exchanges are generally higher than in the U.S. Dividends and interest paid by foreign issuers may be subject to withholding and other foreign taxes, which may decrease the net return on foreign investments as compared to dividends and interest paid by U.S. companies. Additional risks include future political and economic developments, the possibility that a foreign jurisdiction might impose or change withholding taxes on income payable with respect to foreign securities, and the possible adoption of foreign governmental restrictions such as exchange controls. Prior governmental approval for foreign investments may be required under certain circumstances in some emerging countries, and the extent of foreign investment in certain debt securities and domestic companies may be subject to limitation in other emerging countries. Foreign ownership limitations also may be imposed by the charters of individual companies in emerging countries to prevent, among other concerns, violation of foreign investment limitations. Repatriation of investment income, capital and the proceeds of sales by foreign investors may require governmental registration and/or approval in some emerging countries. The Portfolios could be adversely affected by delays in, or a refusal to grant, any required governmental registration or approval for such repatriation. Any investment subject to such repatriation controls will be considered illiquid if it appears reasonably likely that this process will take more than seven days. The economies of individual emerging countries may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital reinvestment, resource self-sufficiency and balance of payments position. Further, the economies of developing countries generally are heavily dependent upon international trade and, accordingly, have been, and may continue to be, adversely affected by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been, and may continue to be, adversely affected by economic conditions in the countries with which they trade. With respect to any emerging country, there is the possibility of nationalization, expropriation or confiscatory taxation, political changes, government regulation, social instability or diplomatic developments (including war) which could affect adversely the economies of such countries or the value of each Portfolio's investments in those countries. In addition, it may be difficult to obtain and enforce a judgment in a court outside of the U.S. Investments in securities of foreign issuers are frequently denominated in foreign currencies, and because each Portfolio may temporarily hold uninvested reserves in bank deposits in foreign currencies, the value of 20 each Portfolio's assets, as measured in U.S. dollars, may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations and the Portfolios may incur costs in connection with conversions between various currencies. INVESTMENT FUNDS. Some emerging countries have laws and regulations that currently preclude direct foreign investment in the securities of their companies. However, indirect foreign investment in the securities of companies listed and traded on the stock exchanges in these countries is permitted by certain emerging countries through investment funds which have been specifically authorized. The Portfolios may invest in these investment funds subject to the provisions of the 1940 Act, and other applicable laws as discussed below under "Investment Restrictions." If a Portfolio invests in such investment funds, the Portfolio's shareholders will bear not only their proportionate share of the expenses of the Portfolio (including operating expenses and the fees of the Adviser), but also will indirectly bear similar expenses of the underlying investment funds. Certain of the investment funds referred to in the preceding paragraph are advised by the Adviser. These Portfolios may, to the extent permitted under the 1940 Act and other applicable law, invest in these investment funds. If a Portfolio does elect to make an investment in such an investment fund, it will only purchase the securities of such investment fund in the secondary market. INVESTMENT LIMITATIONS Each Portfolio is a non-diversified portfolio under the 1940 Act, which means that the Portfolio is not limited by the 1940 Act in the proportion of its assets that may be invested in the obligations of a single issuer. Thus, each Portfolio may invest a greater proportion of its assets in the securities of a smaller number of issuers and, as a result, will be subject to greater risk with respect to its portfolio securities. However, each Portfolio intends to comply with the diversification requirements imposed by the Internal Revenue Code of 1986, as amended, for qualification as a regulated investment company. See "Taxes" and "Investment Restrictions." Each Portfolio operates under certain investment restrictions that are deemed fundamental limitations and may be changed only with the approval of the holders of a majority of the Portfolio's outstanding shares. See "Investment Limitations" in the Statement of Additional Information. In addition, each Portfolio operates under certain non-fundamental investment limitations as described below and in the Statement of Additional Information. Each Portfolio may not (i) enter into repurchase agreements with more than seven days to maturity if, as a result, more than 15% of the market value of the Portfolio's total assets would be invested in such repurchase agreements and other investments for which market quotations are not readily available or which are otherwise illiquid; (ii) borrow money, except from banks for extraordinary or emergency purposes, and then only in amounts up to 10% of the value of the Emerging Markets Portfolio's total assets and up to 33 1/3% (including reverse repurchase agreements) of the Emerging Markets Debt Portfolio's total assets less all liabilities and indebtedness other than the borrowing, taken at cost at the time of borrowing; or purchase securities while borrowings exceed 5% of its total assets; or mortgage, pledge or hypothecate any assets except in connection with any such borrowing in amounts up to 10% of the value of the Portfolio's net assets at the time of borrowing; (iii) invest in fixed time deposits with a duration of over seven calendar days; or (iv) invest in fixed time deposits with a duration of from two business days to seven calendar days if more than 10% of the Portfolio's total assets would be invested in these deposits. 21 MANAGEMENT OF THE FUND INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment Adviser and Administrator of the Fund and each of the Portfolios. The Adviser provides investment advice and portfolio management services, pursuant to an Investment Advisory Agreement and, subject to the supervision of the Fund's Board of Directors, makes each of the Portfolio's day-to-day investment decisions, arranges for the execution of portfolio transactions and generally manages each of the Portfolio's investments. The Adviser is entitled to receive from each Portfolio an annual investment advisory fee, payable quarterly, equal to the percentage of average daily net assets set forth in the table below. However, the Adviser has agreed to a reduction in the fees payable to it and to reimburse the Portfolio, if necessary, if such fees would cause the total annual operating expenses of either Portfolio to exceed the respective percentage of average daily net assets set forth in the table below.
INVESTMENT MAXIMUM TOTAL ADVISORY OPERATING EXPENSES PORTFOLIO FEE AFTER FEE WAIVERS - ------------------------------------ ------------- --------------------- Emerging Markets Portfolio 1.25% 1.75% Emerging Markets Debt Portfolio 1.00% 1.75%
The Adviser, with principal offices at 1221 Avenue of the Americas, New York, New York 10020, conducts a worldwide portfolio management business, providing a broad range of portfolio management services to customers in the United States and abroad. At December 31, 1994, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $48.7 billion, including approximately $35.6 billion under active management and $13.1 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. PORTFOLIO MANAGERS. The following individuals have primary responsibility for the Portfolio indicated below. EMERGING MARKETS PORTFOLIO -- MADHAV DHAR. Madhav Dhar is a Managing Director of Morgan Stanley. He joined the Adviser in 1984 to focus on global asset allocation and investment strategy and now heads the Adviser's emerging markets group and serves as the group's principal Portfolio Manager. Mr. Dhar also coordinates the Adviser's developing country funds effort and has been involved in the launching of the Adviser's country funds. He is a Director of the Morgan Stanley Emerging Markets Fund, Inc. (a closed-end investment company). He holds a B.S. (honors) from St. Stephens College, Delhi University (India), and an M.B.A. from Carnegie-Mellon University. Mr. Dhar has had primary responsibility for managing the Portfolio's assets since inception. EMERGING MARKETS DEBT PORTFOLIO -- PAUL GHAFFARI. Paul Ghaffari is a Principal of Morgan Stanley. He joined the Adviser in June 1993 as a Vice President and Portfolio Manager for the Morgan Stanley Emerging Markets Debt Fund (a closed-end investment company). Prior to joining the Adviser, Mr. Ghaffari was a Vice President in the Fixed Income Division of the Emerging Markets Sales and Trading Department at Morgan Stanley. From 1983 to 1992, he worked in LDC Sales and Trading Department and the Mortgage-Backed Securities Department at J.P. Morgan & Co. Inc. and worked in the Treasury Department at the Morgan Guaranty Trust Co. He holds a B.A. in International Relations from Pamona College and an M.S. in Foreign Service from Georgetown University. Mr. Ghaffari has had primary responsibility for managing the Portfolio's assets since inception. 22 ADMINISTRATOR. The Adviser also provides the Fund with administrative services pursuant to an Administration Agreement. The services provided under the Administration Agreement are subject to the supervision of the Officers and the Board of Directors of the Fund and include day-to-day administration of matters related to the corporate existence of the Fund, maintenance of its records, preparation of reports, supervision of the Fund's arrangements with its custodian, and assistance in the preparation of the Fund's registration statements under federal and state laws. The Administration Agreement also provides that the Administrator, through its agents, will provide the Fund dividend disbursing and transfer agent services. For its services under the Administration Agreement, the Fund pays the Adviser a monthly fee which on an annual basis equals 0.15% of the average daily net assets of each Portfolio. Under the U.S. Trust Administration Agreement between the Adviser and United States Trust Company of New York ("U.S. Trust"), U.S. Trust has agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegates its responsibilities to Mutual Funds Service Company ("MFSC"), a subsidiary of U.S. Trust, that provides certain administrative services to the Fund. The Adviser supervises and monitors administrative services provided by MFSC. The services provided under the Administration Agreement and the U.S. Trust Administration Agreement are also subject to the supervision of the Board of Directors of the Fund. The Board of Directors of the Fund has approved the provision of services described above pursuant to the Administration Agreement and the U.S. Trust Administration Agreement as being in the best interest of the Fund. MFSC's business address is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information regarding the Administration Agreement or the U.S. Trust Administration Agreement, see "Management of the Fund" in the Statement of Additional Information. DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation, the Board of Directors decides upon matters of general policy and reviews the actions of the Fund's Adviser, Administrator and Distributor. The Officers of the Fund conduct and supervise its daily business operations. DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the shares of the Fund. Under its Distribution Agreement with the Fund, Morgan Stanley sells shares of each Portfolio upon the terms and at the current offering price described in this Prospectus. Morgan Stanley is not obligated to sell any certain number of shares of any Portfolio and receives no compensation for its distribution services. PAYMENTS TO FINANCIAL INSTITUTIONS. The Adviser or its affiliates may compensate certain financial institutions for the continued investment of their customers' assets in the Emerging Markets Portfolio pursuant to the advice of such financial institutions. These payments will be made directly by the Adviser or its affiliates from their assets, and will not be made from the assets of the Fund or by the assessment of a sales charge on shares. Such financial institutions may also perform certain shareholder or recordkeeping services that would otherwise be performed by MFSC. The Adviser may elect to enter into a contract to pay the financial institutions for such services. EXPENSES. Each Portfolio is responsible for payment of certain other fees and expenses (including organizational costs, legal fees, accountant's fees, custodial fees, and printing and mailing costs) specified in the Administration and Distribution Agreements. 23 PURCHASE OF SHARES Shares of each Portfolio may be purchased, without sales commission, at the net asset value per share next determined after receipt of the purchase order. See "Valuation of Shares." INITIAL INVESTMENTS 1) BY CHECK. An account may be opened by completing and signing an Account Registration Form, and mailing it, together with a check ($500,000 minimum for each Portfolio, with certain exceptions for Morgan Stanley employees and select customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio name]", to: Morgan Stanley Institutional Fund, Inc. P.O. Box 2798 Boston, Massachusetts 02208-2798 Payment will be accepted only in U.S. dollars, unless prior approval for payment in other currencies is given by the Fund. For purchases by check, the Fund is ordinarily credited with Federal Funds within one business day. Thus your purchase of shares by check is ordinarily credited to your account at the net asset value per share of the relevant Portfolio determined on the next business day after receipt. 2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal Funds to the Fund's bank account. In order to ensure prompt receipt of your Federal Funds Wire, it is important that you follow these steps: A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your name, address, telephone number, Social Security or Tax Identification Number, the portfolio(s) selected, the amount being wired, and by which bank. We will then provide you with a Fund account number. (Investors with existing accounts should also notify the Fund prior to wiring funds.) B. Instruct your bank to wire the specified amount to the Fund's Wire Concentration Bank Account (be sure to have your bank include the name of the portfolio(s) selected and the account number assigned to you): United States Trust Company of New York 114 West 47th Street New York, NY 10036 ABA #0210-0131-8 DDA #20-9310-3 Attn.: Morgan Stanley Institutional Fund, Inc. Ref.: (portfolio name, your account number, your account name) Please call before wiring funds: 1-800-548-7786 C. Complete and sign the Account Registration Form and mail it to the address shown thereon. Federal Funds purchase orders will be accepted only on a day on which the Fund and United States Trust Company of New York (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring funds. 24 3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire" above must be followed in purchasing shares by bank wire. However, money transferred by bank wire may or may not be converted into Federal Funds the same day, depending on the time the money is received and the bank handling the wire. Prior to such conversion, an investor's money will not be invested. Your bank may charge a service fee for wiring funds. ADDITIONAL INVESTMENTS You may add to your account at any time (minimum additional investment $1,000, except for automatic reinvestment of dividends and capital gains distributions for which there are no minimums) by purchasing shares at net asset value by mailing a check to the Fund (payable to "Morgan Stanley Institutional Fund Inc. -- [portfolio name]") at the above address or by wiring monies to the Custodian Bank as outlined above. It is very important that your account name and portfolio be specified in the letter or wire to ensure proper crediting to your account. In order to ensure that your wire orders are invested promptly, you are requested to notify one of the Fund's representatives (toll free: 1-800-548-7786) prior to the wire date. OTHER PURCHASE INFORMATION The purchase price of the shares of each Portfolio is the net asset value next determined after the order is received. See "Valuation of Shares." An order received prior to the regular close of the New York Stock Exchange ("NYSE"), which is currently 4:00 p.m. (Eastern Time), will be executed at the price computed on the date of receipt; an order received after the regular close of the NYSE will be executed at the price computed on the next day the NYSE is open. In the interest of economy and convenience, and because of the operating procedures of the Fund, certificates representing shares of the Portfolios will not be issued. All shares purchased are confirmed to you and credited to your account on the Fund's books maintained by the Adviser or its agents. You will have the same rights and ownership with respect to such shares as if certificates had been issued. To ensure that checks are collected by the Fund, withdrawals of investments made by check are not presently permitted until payment for the purchase has been received, which may take up to eight business days after the date of purchase. As a condition of this offering, if a purchase is canceled due to nonpayment or because your check does not clear, you will be responsible for any loss the Fund or its agents incur. If you are already a shareholder, the Fund may redeem shares from your account(s) to reimburse the Fund or its agents for any loss. In addition, you may be prohibited or restricted from making future purchases in the Fund. Investors may also invest in the Fund by purchasing shares through registered broker-dealers. Broker-dealers who make purchases for their customers may charge a fee for such services. REDEMPTION OF SHARES You may withdraw all or any portion of the amount in your account by redeeming shares at any time. Please note that purchases made by check are not permitted to be redeemed until payment of the purchase has been collected, which may take up to eight business days after purchase. The Fund will redeem shares of a Portfolio at its next determined net asset value. On days that both the NYSE and the Custodian Bank are open for business, the net asset value per share of each of the Portfolios is determined at the regular close of trading of the NYSE 25 (currently 4:00 p.m. Eastern Time). Shares of the Portfolios may be redeemed by mail or telephone. No charge is made for redemption. Any redemption proceeds may be more or less than the purchase price of your shares depending on, among other factors, the market value of the investment securities held by the Portfolio. BY MAIL Each Portfolio will redeem its shares at the net asset value determined on the date the request is received, if the request is received in "good order" before the regular close of the NYSE. Your request should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798, except that deliveries by overnight courier should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108. "Good order" means that the request to redeem shares must include the following documentation: (a) A letter of instruction or a stock assignment specifying the number of shares or dollar amount to be redeemed, signed by all registered owners of the shares in the exact names in which they are registered; (b) Any required signature guarantees (see "Further Redemption Information" below); and (c) Other supporting legal documents, if required, in the case of estates, trusts, guardianships, custodianships, corporations, pension and profit sharing plans and other organizations. Shareholders who are uncertain of requirements for redemption should consult with a Morgan Stanley Institutional Fund representative. BY TELEPHONE Provided you have previously elected the Telephone Redemption Option on the Account Registration Form, you can request a redemption of your shares by calling the Fund and requesting the redemption proceeds be mailed to you or wired to your bank. Please contact one of Morgan Stanley Institutional Fund's representatives for further details. In times of drastic market conditions, the telephone redemption option may be difficult to implement. If you experience difficulty in making a telephone redemption, your request may be made by mail or overnight courier and will be implemented at the net asset value next determined after it is received. Redemption requests sent to the Fund through express mail must be sent to Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108. The Fund and the Fund's transfer agent (the "Transfer Agent") will employ reasonable procedures to confirm that the instructions communicated by telephone are genuine. These procedures include requiring the investor to provide certain personal identification information at the time an account is opened and prior to effecting each transaction requested by telephone. In addition, all telephone transaction requests will be recorded and investors may be required to provide additional telecopied written instructions regarding transaction requests. Neither the Fund nor the Transfer Agent will be responsible for any loss, liability, cost or expense for following instructions received by telephone that either of them reasonably believes to be genuine. To change the commercial bank or account designated to receive redemption proceeds, a written request must be sent to the Fund at the address above. Requests to change the bank or account must be signed by each shareholder and each signature must be guaranteed. 26 FURTHER REDEMPTION INFORMATION Normally the Fund will make payment for all shares redeemed within one business day of receipt of the request, but in no event will payment be made more than seven days after receipt of a redemption request in good order. However, payments to investors redeeming shares which were purchased by check will not be made until payment for the purchase has been collected, which may take up to eight days after the date of purchase. The Fund may suspend the right of redemption or postpone the date upon which redemptions are effected at times when the NYSE is closed, or under any emergency circumstances as determined by the Securities and Exchange Commission (the "Commission"). If the Board of Directors determines that it would be detrimental to the best interests of the remaining shareholders of a Portfolio to make payment wholly or partly in cash, the Fund may pay the redemption proceeds in whole or in part by a distribution in-kind of securities held by the Portfolio in lieu of cash in conformity with applicable rules of the Commission. Distributions-in-kind will be made in readily marketable securities. Investors may incur brokerage charges on the sale of portfolio securities so received in payment of redemptions. Due to the relatively high cost of maintaining smaller accounts, the Fund reserves the right to redeem shares in any account in each of the Portfolios having a value of less than $500,000, other than due to fluctuations in net asset value (the net asset value of which will be promptly paid to the shareholder). The Fund, however, will not redeem shares based solely upon market reductions in net asset value. If at any time your total investment does not equal or exceed the stated minimum value, you may be notified of this fact and you will be allowed at least 60 days to make an additional investment before the redemption is processed. To protect your account, the Fund and its agents from fraud, signature guarantees are required for certain redemptions to verify the identity of the person who has authorized a redemption from your account. Please contact the Fund for further information. See "Redemption of Shares" in the Statement of Additional Information. SHAREHOLDER SERVICES EXCHANGE PRIVILEGE You may exchange shares that you own in each Portfolio for shares of any other available portfolio(s) of the Fund (except for the International Equity Portfolio). The privilege to exchange shares by telephone is automatic. Shares of the Portfolios may be exchanged by mail or telephone. Before you make an exchange, you should read the prospectus of the portfolio(s) in which you seek to invest. Because an exchange transaction is treated as a redemption followed by a purchase, an exchange would be considered a taxable event for shareholders subject to tax. The exchange privilege is only available with respect to portfolios that are registered for sale in a shareholder's state of residence. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name and account number of your current portfolio, the name of the portfolio(s) into which you intend to exchange shares, and the signatures of all registered account holders. Send the exchange request to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. 27 BY TELEPHONE When exchanging shares by telephone, have ready the name and account number of your current portfolio, the name of the portfolio(s) into which you intend to exchange shares, your Social Security number or Tax I.D. number, and your account address. Requests for telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at the close of business that same day based on the net asset value of each of the portfolios at the close of business. Requests received after 4:00 p.m. (Eastern Time) are processed the next business day based on the net asset value determined at the close of business on such day. For additional information regarding responsibility for the authenticity of telephoned instructions, see "Redemption of Shares -- By Telephone" above. TRANSFER OF REGISTRATION You may transfer the registration of any of your Fund shares to another person by writing to Morgan Stanley Institutional Fund Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. As in the case of redemptions, the written request must be received in good order before any transfer can be made. VALUATION OF SHARES The net asset value per share of each of the Portfolios is determined by dividing the total market value of the Portfolio's investments and other assets, less any liabilities, by the total number of outstanding shares of the Portfolio. Net asset value per share is determined as of the regular close of the NYSE on each day that the NYSE is open for business. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities listed on a U.S. securities exchange for which market quotations are available are valued at the last quoted sale price on the day the valuation is made. Securities listed on a foreign exchange are valued at their closing price. Unlisted securities and listed securities not traded on the valuation date for which market quotations are not readily available are valued at a price within a range not exceeding the current asked price nor less than the current bid price. The current bid and asked prices are determined based on the bid and asked prices quoted on such valuation date by reputable brokers. Bonds and other fixed income securities are valued according to the broadest and most representative market, which will ordinarily be the over-the-counter market. Net asset value includes interest on fixed income securities, which is accrued daily. In addition, bonds and other fixed income securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. The prices provided by a pricing service are determined without regard to bid or last sale prices, but take into account institutional size trading in similar groups of securities and any developments related to the specific securities. Securities not priced in this manner are valued at the most recently quoted bid price, or when securities exchange valuations are used, at the latest quoted sale price on the day of valuation. If there is no such reported sale, the latest quoted bid price will be used. Securities purchased with remaining maturities of 60 days or less are valued at amortized cost, if it approximates market value. In the event that amortized cost does not approximate market value, market prices as determined above will be used. The value of other assets and securities for which no quotations are readily available (including restricted and unlisted foreign securities) and those securities for which it is inappropriate to determined prices in accordance with the above-stated procedures, are determined in good faith at fair value using methods determined by the Board of Directors. For purposes of calculating net asset value per share, all assets and liabilities initially expressed in foreign currencies will be translated into U.S. dollars at the mean of the bid price and asked price of such currencies against the U.S. dollar last quoted by any major bank. 28 PERFORMANCE INFORMATION The Fund may from time to time advertise the total return of the Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in the Portfolio would have earned over a specified period of time (such as one, five or ten years), assuming that all distributions and dividends by the Portfolio were reinvested on the reinvestment dates during the period. Total return does not take into account any federal or state income taxes that may be payable on dividends and distributions or upon redemption. The Fund may also include comparative performance information in advertising or marketing the Portfolio's shares, including data from Lipper Analytical Services, Inc., other industry publications, business periodicals, rating services and market indices. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions will automatically be reinvested in additional shares at net asset value, except that, upon written notice to the Fund or by checking off the appropriate box in the Distribution Option Section on the Account Registration Form, a shareholder may elect to receive income dividends and capital gains distributions in cash. Each Portfolio expects to distribute substantially all of its net investment income in the form of annual dividends. Net capital gains of each Portfolio, if any, will also be distributed annually. Confirmations of the purchase of shares of each Portfolio through the automatic reinvestment of income dividends and capital gains distributions will be provided, pursuant to Rule 10b-10(b) under The Securities Exchange Act of 1934, as amended, on the next quarterly client statement following such purchase of shares. Consequently, confirmations of such purchases will not be provided at the time of completion of such purchases as might otherwise be required by Rule 10b-10. Undistributed net investment income is included in each Portfolio's net assets for the purpose of calculating net asset value per share. Therefore, on the "ex-dividend" date, the net asset value per share excludes the dividend (I.E., is reduced by the per share amount of the dividend). Dividends paid shortly after the purchase of shares by an investor, although in effect a return of capital, are taxable to shareholders subject to income tax. TAXES The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial, or administrative action. No attempt has been made to present a detailed explanation of the federal, state, or local income tax treatment of a Portfolio or its shareholders. Accordingly, shareholders are urged to consult their tax advisors regarding specific questions as to federal, state and local income taxes. Each Portfolio is treated as a separate entity for federal income tax purposes and is not combined with the Fund's other portfolios. Each Portfolio intends to qualify for the special tax treatment afforded regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), so that the Portfolio will be relieved of federal income tax on that part of its net investment income and net capital gain that is distributed to shareholders. Each Portfolio distributes substantially all of its net investment income (including, for this purpose, net short-term capital gain) to shareholders. Dividends from a Portfolio's net investment income are taxable to 29 shareholders as ordinary income, whether received in cash or in additional shares. Such dividends paid by a Portfolio generally will qualify for the 70% dividends-received deduction for corporate shareholders only to the extent of the aggregate qualifying dividend income received by the Portfolio from U.S. corporations. Each Portfolio will report annually to its shareholders the amount of dividend income qualifying for such treatment. Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss) are taxable to shareholders as long-term capital gain, regardless of how long shareholders have held their shares. Each Portfolio sends reports annually to shareholders of the federal income tax status of all distributions made during the preceding year. Each Portfolio intends to make sufficient distributions or deemed distributions of its ordinary income and capital gain net income (the excess of short-term and long-term capital gains over short-term and long-term capital losses), including any available capital loss carryforwards, prior to the end of each calendar year to avoid liability for federal excise tax. Dividends and other distributions declared by a Portfolio in October, November or December of any year and payable to shareholders of record on a date in such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if the distributions are paid by the Portfolio at any time during the following January. The sale or redemption of shares may result in taxable gain or loss to the redeeming shareholder, depending upon whether the fair market value of the redemption proceeds exceeds or is less than the Shareholder's adjusted basis in the redeemed shares. If capital gain distributions have been made with respect to shares that are sold at a loss after being held for six months or less, then the loss is treated as a long-term capital loss to the extent of the capital gain distributions. Shareholders are urged to consult with their tax advisors concerning the application of state and local income taxes to investments in a Portfolio, which may differ from the federal income tax consequences described above. Investment income received by a Portfolio from sources within foreign countries may be subject to foreign income taxes withheld at the source. To the extent that a Portfolio is liable for foreign income taxes so withheld, each Portfolio intends to operate so as to meet the requirements of the Code to pass through to the shareholders credit for foreign income taxes paid. Although each Portfolio intends to meet Code requirements to pass through credit for such taxes, there can be no assurance that each Portfolio will be able to do so. THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO. PORTFOLIO TRANSACTIONS The Investment Advisory Agreement authorizes the Adviser to select the brokers or dealers that will execute the purchases and sales of investment securities for the Portfolios and directs the Adviser to use its best efforts to obtain the best available price and most favorable execution with respect to all transactions for the Portfolios. The Fund has authorized the Adviser to pay higher commissions in recognition of brokerage services which, in the opinion of the Adviser, are necessary for the achievement of better execution, provided the Adviser believes this to be in the best interest of the Fund. 30 Since shares of the Portfolios are not marketed through intermediary brokers or dealers, it is not the Fund's practice to allocate brokerage or principal business on the basis of sales of shares which may be made through such firms. However, the Adviser may place portfolio orders with qualified broker-dealers who recommend the Fund's portfolios or who act as agents in the purchase of shares of the Fund's portfolios for their clients. In purchasing and selling securities for the Portfolios, it is the Fund's policy to seek to obtain quality execution at the most favorable prices, through responsible broker-dealers. In selecting broker-dealers to execute the securities transactions for the Portfolios, consideration will be given to such factors as the price of the security, the rate of the commission, the size and difficulty of the order, the reliability, integrity, financial condition, general execution and operational capabilities of competing broker-dealers, and the brokerage and research services which they provide to the Fund. Some securities considered for investment by the Portfolios may also be appropriate for other clients served by the Adviser. If purchase or sale of securities consistent with the investment policies of the Portfolio and one or more of these other clients served by the Adviser is considered at or about the same time, transactions in such securities will be allocated among the Portfolios and such other clients in a manner deemed fair and reasonable by the Adviser. Although there is no specified formula for allocating such transactions, the various allocation methods used by the Adviser, and the results of such allocations, are subject to periodic review by the Fund's Board of Directors. Subject to the overriding objective of obtaining the best possible execution of orders, the Adviser may allocate a portion of the Portfolio brokerage transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order for Morgan Stanley or its affiliates to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by Morgan Stanley or such affiliates must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. Furthermore, the Board of Directors of the Fund, including a majority of those Directors who are not "interested persons," as defined in the Investment Company Act of 1940 (the "1940 Act") have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Morgan Stanley or such affiliates are consistent with the foregoing standard. Portfolio securities will not be purchased from or through, or sold to or through, the Adviser or Morgan Stanley or any "affiliated persons," as defined in the 1940 Act, of Morgan Stanley when such entities are acting as principals, except to the extent permitted by law. Although neither Portfolio will invest for short-term trading purposes, investment securities may be sold from time to time without regard to the length of time they have been held. The Emerging Markets Portfolio anticipates that, under normal circumstances, its annual portfolio turnover rate will not exceed 50%. The Emerging Markets Debt Portfolio anticipates that, under normal circumstances, its annual portfolio turnover rate will not exceed 100%. High portfolio turnover involves correspondingly greater transaction costs which will be borne directly by the respective Portfolio. In addition, high portfolio turnover may result in more capital gains which would be taxable to the shareholders of the respective Portfolio. The tables set forth in "Financial Highlights" present the Portfolio's historical turnover rates. 31 GENERAL INFORMATION DESCRIPTION OF COMMON STOCK The Fund was organized as a Maryland corporation on June 16,1988. The Articles of Incorporation permit the Fund to issue up to 15,000,000,000 shares of common stock, with $.001 par value per share. Pursuant to the Fund's Articles of Incorporation, the Board of Directors may increase the number of shares the Fund is authorized to issue without the approval of the shareholders of the Fund. The Board of Directors has the power to designate one or more classes of shares of common stock and to classify and reclassify any unissued shares with respect to such classes. The shares of the Portfolios, when issued, will be fully paid, non-assessable, fully transferable and redeemable at the option of the holder. The shares have no preference as to conversion, exchange, dividends, retirement or other features and have no pre-emptive rights. The shares of each Portfolio have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of Directors can elect 100% of the Directors if they choose to do so. Persons or organizations owning 25% or more of the outstanding shares of a Portfolio may be presumed to "control" (as that term is defined in the 1940 Act) that Portfolio. Under Maryland law, the Fund is not required to hold an annual meeting of its shareholders unless required to do so under the 1940 Act. REPORTS TO SHAREHOLDERS The Fund will send to its shareholders annual and semi-annual reports; the financial statements appearing in annual reports are audited by independent accountants. Monthly unaudited portfolio data is also available from the Fund upon request. In addition, Morgan Stanley Asset Management Inc., or its agent, as Transfer Agent, will send to each shareholder having an account directly with the Fund a monthly statement showing transactions in the account, the total number of shares owned, and any dividends or distributions paid. CUSTODIAN Domestic securities and cash are held by United States Trust Company of New York, New York, as the Fund's domestic custodian. Morgan Stanley Trust Company, Brooklyn, New York, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians who were approved by the Board of Directors of the Fund in accordance with regulations of the Securities and Exchange Commission for the purpose of providing custodial services for such assets. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the Fund. INDEPENDENT ACCOUNTANTS Price Waterhouse LLP serves as independent accountants for the Fund and audits its annual financial statements. LITIGATION The Fund is not involved in any litigation. 32 MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MA 02208-2798 - ------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - ------------------------------------------------------------------------------- ACCOUNT INFORMATION |If you need assistance in filling out this form for the Morgan Stanley Institutional Fund, please Fill in where |contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all applicable |items except signature, and mail to the Fund at the address above. - ----------------------------------------------------------------------------------------------------------------------------------- A) REGISTRATION | 1. INDIVIDUAL |1. ______________________________________________________________________________________________________ 2. JOINT TENANTS | First Name Initial Last Name (RIGHTS OF |2. ______________________________________________________________________________________________________ SURVIVORSHIP | First Name Initial Last Name PRESUMED UNLESS | ______________________________________________________________________________________________________ TENANCY IN COMMON | First Name Initial Last Name IS INDICATED) | - ----------------------------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, | TRUSTS AND OTHERS |3. ______________________________________________________________________________________________________ Please call the | ______________________________________________________________________________________________________ Fund for additional| ______________________________________________________________________________________________________ documents that may | Type of Registration: / /INCORPORATED / /UNINCORPORATED / /PARTNERSHIP / /UNIFORM GIFT/TRANSFER TO MINOR be required to set | ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR up account and to | PERMITTED) authorize | / /TRUST __________________________ / /OTHER (Specify) ________________________ transactions. | - ----------------------------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS | Please fill in |Street or P.O. Box_______________________________________________________________________________________ completely, |City______________________________________________________________State_______Zip_______________-________ including telephone |Home Telephone No.______-_______-_________________Business Telephone No._______-_______-_________________ number(s). |/ /United States Citizen / /Resident Alien / /Non-Resident Alien: Indicate Country of Residence _________ - ----------------------------------------------------------------------------------------------------------------------------------- C) TAXPAYER |PART 1. Enter your Taxpayer | IMPORTANT TAX INFORMATION IDENTIFICATION |Identification Number. For most |You (as a payee) are required by law to provide us (as payer) NUMBER |individual taxpayers, this is |with your correct Taxpayer Identification Number. Accounts that If the account is in |your Social Security Number. |have a missing or incorrect Taxpayer Identification Number will more than one name, | TAXPAYER IDENTIFICATION NUMBER |be subject to backup withholding at a 31% rate on interest, CIRCLE THE NAME OF THE|______-_________________________ |dividends distributions and other payments. If you have not PERSON WHOSE TAXPAYER | OR |provided us with your correct taxpayer identification number, you IDENTIFICATION NUMBER | SOCIAL SECURITY NUMBER |may be subject to a $50 penalty imposed by the Internal Revenue IS PROVIDED IN SECTION|________-_____________-_________ |Service. A) ABOVE. If no name | | is circled, the number|PART 2. BACKUP WITHHOLDING |Backup withholding is not an additional tax; the tax liability of will be considered to |/ / Check this box if you are NOT |persons subject to backup withholding will be reduced by the be that of the last |subject to Backup Withholding |amount of tax withheld. If withholding results in an overpayment name listed. For |under the provisions of Section |of taxes, a refund may be obtained. Custodian account of |3406(a)(1)(C) of the Internal | a minor (Uniform |Revenue Code. |You may be notified that you are subject to backup withholding Gifts/Transfers to | |under Section 3406(a)(1)(C) of the Internal Revenue Code because Minors Acts), give the| |you have underreported interest or dividends or you were required Social Security Number| |to but failed to file a return which would have included a of the minor. | |reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO |NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - ----------------------------------------------------------------------------------------------------------------------------------- D) PORTFOLIO SELECTION | Minimum $500,000 for |/ / Emerging Markets Portfolio $__________________ each portfolio. | Please indicate |/ / Emerging Markets Debt Portfolio $__________________ portfolio and amount | | - ----------------------------------------------------------------------------------------------------------------------------------- E) METHOD OF |Payment by: INVESTMENT |/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME) Please indicate | _________________________________-______ manner of payment. |/ / Exchange $____________________ From__________________________ Account No. | Name of Portfolio |/ / Account previously established by: _________________________________-______ | / / Phone exchange / / Wire on ___________________ Account No. (Check Date (Previously assigned by the Fund) Digit) - ----------------------------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION |Income dividends and capital gains distributions (if any) to be reinvested in additional shares unless OPTION |either box below is checked. |/ /Income dividends to be paid in cash, capital gains distributions (if any) in shares. |/ /Income dividends and capital gains distributions (if any) to be paid in cash. - ----------------------------------------------------------------------------------------------------------------------------------- G) TELEPHONE |/ /I/we hereby authorize the Fund and its| REDEMPTION | agents to honor any telephone requests|__________________________________________ ________________ Please select at time | to wire redemption proceeds to the |Name of COMMERCIAL Bank (Not Savings Bank) Bank Account No. of initial | commercial bank indicated at right | application if you | and/or mail redemption proceeds to the| ____________ wish to redeem | name and address in which my/our fund | Bank ABA No. shares by telephone. | account is registered if such requests|____________________________________________________________ A SIGNATURE GUARANTEE | are believed to be authentic. | Name(s) in which your BANK Account is Established IS REQUIRED IF BANK | |____________________________________________________________ ACCOUNT IS NOT |The Fund and the Fund's Transfer | Bank's Street Address REGISTERED |Agent will employ reasonable |____________________________________________________________ IDENTICALLY TO YOUR |procedures to confirm that |City State Zip FUND ACCOUNT. |instructions communicated by | |telephone are genuine. These | TELEPHONE REQUESTS |procedures include requiring the | FOR REDEMPTIONS OR |investor to provide certain personal | EXCHANGES WILL NOT |identification information at the | BE HONORED UNLESS |time an account is opened and prior | THE BOX IS CHECKED. |to effecting each transaction | |requested by telephone. In addition, | |all telephone transaction requests | |will be recorded and investors may be | |required to provide additional | |telecopied written instructions of | |transaction requests. Neither the | |Fund nor the Transfer Agent will be | |responsible for any loss, liability, | |cost or expense for following | |instructions received by telephone | |that it reasonably believes to be | |genuine. | - ----------------------------------------------------------------------------------------------------------------------------------- H) INTERESTED PARTY |___________________________________________________________________________________________________ OPTION | Name |___________________________________________________________________________________________________ In addition to the | account statement sent|___________________________________________________________________________________________________ to my/our registered | Address address, I/we hereby | authorize the fund |___________________________________________________________________________________________________ to mail duplicate | City State Zip Code statements to the | name and address | provided at right. | - ----------------------------------------------------------------------------------------------------------------------------------- I) DEALER |_______________________________________ ___________________________________ _______________________ INFORMATION |Representative Name Representative No. Branch No. - ----------------------------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF |The undersigned certify(ies) that I/we have full authority and legal capacity to purchase and redeem ALL HOLDERS |shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley AND TAXPAYER |Institutional Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF PERJURY, I/WE CERTIFICATION |CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE. | |(X) (X) SIGN HERE --> |------------------------------------------------ ----------------------------------------------------- |Signature Date Signature Date - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------- - ------------------------------------------- - ------------------------------------------- - ------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. -------------------------- TABLE OF CONTENTS PAGE ----- Fund Expenses..................................... 2 Financial Highlights.............................. 3 Prospectus Summary................................ 6 Investment Objectives and Policies................ 9 Additional Investment Information................. 13 Investment Limitations............................ 21 Management of the Fund............................ 22 Purchase of Shares................................ 24 Redemption of Shares.............................. 25 Shareholder Services.............................. 27 Valuation of Shares............................... 28 Performance Information........................... 29 Dividends and Capital Gains Distributions......... 29 Taxes............................................. 29 Portfolio Transactions............................ 30 General Information............................... 32 Account Registration Form
EMERGING MARKETS PORTFOLIO EMERGING MARKETS DEBT PORTFOLIO PORTFOLIOS OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. Common Stock ($.001 PAR VALUE) ------------- PROSPECTUS ------------- Investment Adviser Morgan Stanley Asset Management Inc. Distributor Morgan Stanley & Co. Incorporated - ------------------------------------------------ - ------------------------------------------------ - ------------------------------------------------ - ------------------------------------------------ SUPPLEMENT DATED JUNE 30, 1995 TO PROSPECTUS DATED MAY 1, 1995 OF MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798 BOSTON, MASSACHUSETTS 02208-2798 ------------- The prospectus dated May 1, 1995 (the "Prospectus") of the Equity Growth, Emerging Growth and Aggressive Equity Portfolios of the Morgan Stanley Institutional Fund, Inc. (the "Fund") is hereby amended and supplemented by adding the following paragraph to page 24 before the paragraph with the heading "REDEMPTION OF SHARES": EXCESSIVE TRADING. Frequent trades involving either substantial fund assets or a substantial portion of your account or accounts controlled by you can disrupt management of a Portfolio and raise its expenses. Consequently, in the interest of all the stockholders of the Portfolio and the Portfolio's performance, the Fund may in its discretion bar a stockholder that engages in excessive trading of shares of a Portfolio from further purchases of shares of the Fund for an indefinite period. The Fund considers excessive trading to be more than one purchase and sale involving shares of the same Portfolio of the Fund within any 120-day period. For example, exchanging shares of Portfolios of the Fund as follows: exchanging shares of Portfolio A for shares of Portfolio B, then exchanging shares of Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C for shares of Portfolio B within a 120-day period amounts to excessive trading. Two types of transactions are exempt from these excessive trading restrictions: (1) trades exclusively between money market portfolios; and (2) trades done in connection with an asset allocation service managed or advised by MSAM and/or any of its affiliates. - -------------------------------------------------------------------------------- P R O S P E C T U S ----------------------------------------------------------------------------- EQUITY GROWTH PORTFOLIO EMERGING GROWTH PORTFOLIO AGGRESSIVE EQUITY PORTFOLIO PORTFOLIOS OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798 FOR INFORMATION CALL 1-800-548-7786 ---------------- Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end management investment company with diversified and non-diversified series ("portfolios"). The Fund currently consists of twenty-seven portfolios offering a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. Shares of the portfolios are offered with no sales charge or exchange or redemption fee (with the exception of one of the portfolios). This Prospectus pertains to the Equity Growth, the Emerging Growth and the Aggressive Equity Portfolios (each, a "Portfolio," and collectively, the "Portfolios"). The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented common stocks of medium and large capitalization corporations. The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented common stocks of small-to-medium sized corporations. The AGGRESSIVE EQUITY PORTFOLIO is a non-diversified portfolio that seeks long-term capital appreciation by investing primarily in corporate equity and equity-linked securities. The Fund is designed to meet the investment needs of discerning investors who place a premium on quality and personal service. With Morgan Stanley Asset Management Inc. as Adviser and Administrator (the "Adviser" and the "Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley") as Distributor, the Fund makes available to institutional investors and high net worth individual investors a series of portfolios which benefit from the investment expertise and commitment to excellence associated with Morgan Stanley and its affiliates. This Prospectus is designed to set forth concisely the information about the Portfolios that a prospective investor should know before investing and it should be retained for future reference. The Fund offers additional portfolios which are described in other prospectuses and under the Prospectus Summary section herein. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, Small Cap Value Equity, Value Equity and U.S. Real Estate Portfolios; (iii) BALANCED -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities, Municipal Bond and Real Yield Portfolios; and (v) MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional information about the Fund is contained in a "Statement of Additional Information" dated May 1, 1995, which is incorporated herein by reference. The Statement of Additional Information and the Prospectuses pertaining to the other portfolios of the Fund are available upon request and without charge by writing or calling the Fund at the address and telephone number set forth above. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REP RESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS MAY 1, 1995. FUND EXPENSES The following table illustrates all expenses and fees that a shareholder of the Portfolios indicated below will incur:
EQUITY EMERGING AGGRESSIVE GROWTH GROWTH EQUITY SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO - ------------------------------------------------------------ ----------- ----------- ----------- Maximum Sales Load Imposed on Purchases..................... None None None Maximum Sales Load Imposed on Reinvested Dividends.......... None None None Deferred Sales Load......................................... None None None Redemption Fees............................................. None None None Exchange Fees............................................... None None None EQUITY EMERGING AGGRESSIVE GROWTH GROWTH EQUITY ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO - ------------------------------------------------------------ ----------- ----------- ----------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Investment Advisory Fee (Net of Fee Waivers)................ 0.51%* 0.99%* 0.67%*+ Administrative & Shareholder Account Costs.................. 0.15% 0.15% 0.15%+ 12b-1 Fees.................................................. None None None Custody Fees................................................ 0.04% 0.03% 0.03%+ Other Expenses.............................................. 0.10% 0.08% 0.15%+ ----------- ----------- ----------- Total Operating Expenses (Net of Fee Waivers)........... 0.80%* 1.25%* 1.00%*+ ----------- ----------- ----------- ----------- ----------- -----------
- -------------- *The Adviser has agreed to a reduction in the fees payable to it as Adviser and to reimburse the Portfolios, if necessary, if such fees would cause the total annual operating expenses as a percentage of average daily net assets to exceed (i) 0.80% for the Equity Growth Portfolio, (ii) 1.25% for the Emerging Growth Portfolio, or (iii) 1.00% for the Aggressive Equity Portfolio. Absent such fee waivers, total operating expenses as a percentage of each Portfolio's average daily net assets would have been (i) 0.89% for the Equity Growth Portfolio and (ii) 1.26% for the Emerging Growth Portfolio for the year ended December 31, 1994 and would be estimated to be 1.13% of the average daily net assets of the Aggressive Equity Portfolio. As a result of these reductions, the investment advisory fees stated above are lower than the contractual fees stated under "Management of the Fund." For further information on Fund expenses, see "Management of the Fund." +Estimated. The purpose of this table is to assist the investor in understanding the various expenses that an investor in the Fund will bear directly or indirectly. The fees and expenses for the Equity Growth and the Emerging Growth Portfolios are based on actual figures for the year ended December 31, 1994. The expenses and fees for the Aggressive Equity Portfolio are based on estimates that assume that the daily net assets for the first year will be approximately $35,000,000. "Other Expenses" include Board of Directors' fees and expenses, amortization of organization costs, filing fees, professional fees, and costs for shareholder reports. 2 The following example illustrates the expenses that you would pay on a $1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at the end of each time period. As noted in the table above, the Portfolios charge no redemption fees of any kind. The example is based on total operating expenses of the Portfolios after fee waivers.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- Equity Growth Portfolio............................................ $ 8 $ 26 $ 44 $ 99 Emerging Growth Portfolio.......................................... $ 13 $ 40 $ 69 $ 151 Aggressive Equity Portfolio........................................ $ 10 $ 32 * *
- -------------- *Because the Aggressive Equity Portfolio has recently become operational, the Fund has not projected expenses beyond the three-year period shown. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The Fund intends to comply with all state laws that restrict investment company expenses. Currently, the most restrictive state law requires that the aggregate annual expenses of an investment company shall not exceed two and one-half percent (2 1/2%) of the first $30 million of average net assets, two percent (2%) of the next $70 million of average net assets, and one and one-half percent (1 1/2%) of the remaining net assets of such investment company. The Adviser has agreed to a reduction in the amounts payable to it, and to reimburse the Portfolios, if necessary, if in any fiscal year the sum of the Portfolios' expenses exceeds the limit set by applicable state law. 3 FINANCIAL HIGHLIGHTS The following tables provide financial highlights for the Equity Growth and Emerging Growth Portfolios for each of the respective periods presented, and are part of the Fund's financial statements which appear in the Fund's December 31, 1994 Annual Report to Shareholders and which are incorporated by reference into the Fund's Statement of Additional Information. The Fund's financial highlights for each of the periods presented have been audited by Price Waterhouse LLP, whose unqualified report thereon is also incorporated by reference into the Statement of Additional Information. Additional performance information is contained in the Annual Report. The Annual Report and the financial statements therein and the Statement of Additional Information are available at no cost from the Fund at the address and telephone number noted on the cover page of this Prospectus. Financial Highlights are not available for the Aggressive Equity Portfolio since it was not operational as of December 31, 1994. Subsequent to October 31, 1992 the Fund changed its fiscal year end to December 31. The following information should be read in conjunction with the financial statements and notes thereto. 4 EQUITY GROWTH PORTFOLIO
APRIL 2, TWO MONTHS 1991* TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1991 1992 1992 1993 1994 ----------- ----------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD....... $ 10.00 $ 10.66 $ 11.44 $ 11.88 $ 12.14 ----------- ----------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)................ 0.05 0.16 0.03 0.22 0.17 Net Realized and Unrealized Gain on Investments............................. 0.61 0.82 0.41 0.28 0.21 ----------- ----------- ------------- ------------- ------------- Total from Investment Operations....... 0.66 0.98 0.44 0.50 0.38 ----------- ----------- ------------- ------------- ------------- DISTRIBUTIONS Net Investment Income.................... -- (0.20) -- (0.23) (0.13) In Excess of Net Investment Income....... -- -- -- (0.01) -- Net Realized Gain........................ -- -- -- -- (0.37) ----------- ----------- ------------- ------------- ------------- Total Distributions.................... -- (0.20) -- (0.24) (0.50) ----------- ----------- ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD............. $ 10.66 $ 11.44 $ 11.88 $ 12.14 $ 12.02 ----------- ----------- ------------- ------------- ------------- ----------- ----------- ------------- ------------- ------------- TOTAL RETURN............................... 6.60% 9.26% 3.85% 4.33% 3.26% ----------- ----------- ------------- ------------- ------------- ----------- ----------- ------------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).... $ 18,139 $ 36,558 $ 45,985 $ 73,789 $ 97,259 Ratio of Expenses to Average Net Assets (1)..................................... 0.80%** 0.80% 0.80%** 0.80% 0.80% Ratio of Net Investment Income to Average Net Assets (1).......................... 2.34%** 1.73% 1.93%** 1.59% 1.44% Portfolio Turnover Rate.................. 3% 38% 1% 172% 146% - ------------------------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income................................. $ 0.03 $ 0.02 $ 0.01 $ 0.02 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets......... 1.37%** 1.01% 1.11%** 0.93% 0.89% Net Investment Income to Average Net Assets................................ 1.77%** 1.52% 1.62%** 1.46% 1.35%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 0.60% of the average daily net assets of the Equity Growth Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Equity Growth Portfolio to the extent that the total operating expenses of the Equity Growth Portfolio exceed 0.80% of the average daily net assets of the Equity Growth Portfolio. In the period ended October 31, 1991, the year ended October 31, 1992, the two months ended December 31, 1992, and the years ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expenses totalling $23,000, $51,000, $22,000, $68,000, and $83,000, respectively, for the Equity Growth Portfolio. * Commencement of Operations. ** Annualized. 5 EMERGING GROWTH PORTFOLIO
NOVEMBER 1, TWO MONTHS 1989* TO YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1990 1991+ 1992 1992 1993 1994 ------------- ----------- ----------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD...................... $ 10.00 $ 9.03 $ 16.18 $ 14.97 $ 16.22 $ 16.22 ------------- ----------- ----------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income/ (Loss) (1)................ 0.08 -- (0.09) (0.01) (0.11) (0.09) Net Realized and Unrealized Gain/(Loss) on Investments............... (1.00) 7.19 (1.12) 1.26 0.11 (0.01) ------------- ----------- ----------- ------------- ------------- ------------- Total from Investment Operations.............. (0.92) 7.19 (1.21) 1.25 0.00 (0.10) ------------- ----------- ----------- ------------- ------------- ------------- DISTRIBUTIONS Net Investment Income...... (0.05) (0.04) -- -- -- -- ------------- ----------- ----------- ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD...................... $ 9.03 $ 16.18 $ 14.97 $ 16.22 $ 16.22 $ 16.12 ------------- ----------- ----------- ------------- ------------- ------------- ------------- ----------- ----------- ------------- ------------- ------------- TOTAL RETURN................. (9.27)% 79.84% (7.48)% 8.35% 0.00% (0.62)% RATIO AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)............... $ 11,261 $ 54,364 $ 80,156 $ 94,161 $ 103,621 $ 117,669 Ratio of Expenses to Average Net Assets (1).... 1.26%** 1.25% 1.25% 1.25%** 1.25% 1.25% Ratio of Net Investment Income/(Loss) to Average Net Assets (1)............ 0.64%** 0.00% (0.66)% (0.68)%** (0.77) % (0.61) % Portfolio Turnover Rate.... 19% 2% 17% 1% 25% 24% - ---------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income....... $ 0.01 $ 0.02 $ 0.01 $ 0.00 $ 0.01 $ 0.002 Ratios before expense limitation: Expenses to Average Net Assets.................. 1.64% 1.39% 1.29% 1.36%** 1.31% 1.26% Net Investment Income (Loss) to Average Net Assets... 0.24% (0.14)% (0.71)% (0.79)%** (0.83)% (0.62)%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive an investment advisory fee calculated at an annual rate of 1.00% of the average daily net assets of the Emerging Growth Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Emerging Growth Portfolio to the extent that the total operating expenses of the Emerging Growth Portfolio exceed 1.25% of the average daily net assets of the Emerging Growth Portfolio. In the period ended October 31, 1990, the years ended October 31, 1991 and 1992, the two months ended December 31, 1992, and the years ended December 31, 1993 and 1994, the Adviser waived advisory fees and/or reimbursed expenses totalling $28,000, $41,000, $31,000, $18,000, $51,000, and $16,000, respectively, for the Emerging Growth Portfolio. * Commencement of Operations. ** Annualized. + Per share amounts for the year ended October 31, 1991 are based on average outstanding shares. 6 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-seven portfolios, offering institutional investors and high net worth individual investors a broad range of investment choices coupled with the advantages of a no-load mutual fund with Morgan Stanley and its affiliates providing customized services as Adviser, Administrator and Distributor. Each portfolio has its own investment objectives and policies designed to meet specific goals. This Prospectus pertains to the Equity Growth, Emerging Growth and Aggressive Equity Portfolios. -The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented common stocks of medium and large capitalization companies. -The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented common stocks of small- to medium-sized corporations. -The AGGRESSIVE EQUITY PORTFOLIO is a non-diversified portfolio that seeks capital appreciation by investing primarily in corporate equity and equity-linked securities. The other portfolios of the Fund are described in other Prospectuses which may be obtained from the Fund at the address and phone number noted on the cover page of this Prospectus. The objectives of these other portfolios are listed below: GLOBAL AND INTERNATIONAL EQUITY: -The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital appreciation by investing in accordance with country weightings determined by the Adviser in common stocks of non-U.S. issuers which, in the aggregate, replicate broad country indices. -The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of Asian issuers. -The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in the equity securities of issuers in The People's Republic of China, Hong Kong and Taiwan. -The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of emerging country issuers. -The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of European issuers. -The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of issuers throughout the world, including U.S. issuers. -The GOLD PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of foreign and domestic issuers engaged in gold-related activities. -The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of non-U.S. issuers. -The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of non-U.S. issuers with equity market capitalizations of less than $500 million. -The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Japanese issuers. 7 -The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Latin American issuers and debt securities issued or guaranteed by Latin American governments or governmental entities. U.S. EQUITY: -The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued common stocks of small- to medium-sized companies. -The U. S. REAL ESTATE PORTFOLIO seeks to provide above average current income and long-term capital appreciation by investing primarily in equity securities of companies in the U.S. real estate industry, including real estate investment trusts. -The VALUE EQUITY PORTFOLIO seeks high total return by investing in common stocks which the Adviser believes to be undervalued relative to the stock market in general at the time of purchase. EQUITY AND FIXED INCOME: -The BALANCED PORTFOLIO seeks high total return while preserving capital by investing in a combination of undervalued common stocks and fixed income securities. FIXED INCOME: -The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing primarily in debt securities of government, government-related and corporate issuers located in emerging countries. -The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent with the preservation of capital by investing in a diversified portfolio of fixed income securities. -The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate of return while preserving capital by investing in fixed income securities of issuers throughout the world, including U.S. issuers. -The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a diversified portfolio of high yield fixed income securities that offer a yield above that generally available on debt securities in the three highest rating categories of the recognized rating services. -The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level of current income as is consistent with the preservation of capital by investing primarily in a variety of investment-grade mortgage-backed securities. -The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current income consistent with preservation of principal through investment primarily in municipal obligations, the interest on which is exempt from federal income tax. -The REAL YIELD PORTFOLIO seeks to produce a high total return consistent with preservation of capital by investing in fixed income securities of issuers throughout the world, including U.S. issuers. MONEY MARKET: -The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less. -The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less which are exempt from federal income tax. 8 INVESTMENT MANAGEMENT Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan Stanley Group Inc., which, together with its affiliated asset management companies, at December 31, 1994 had approximately $48.7 billion in assets under management as an investment manager or as a fiduciary adviser, acts as investment adviser to the Fund and each of its portfolios. See "Management of the Fund -- Investment Adviser" and "Management of the Fund -- Administrator." HOW TO INVEST Shares of each Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Share purchases may be made by sending investments directly to the Fund. The minimum initial investment is $500,000 for the Equity Growth Portfolio, $250,000 for the Emerging Growth Portfolio and $500,000 for the Aggressive Equity Portfolio. The minimum subsequent investment for each Portfolio is $1,000 (except for automatic reinvestment of dividends and capital gains distributions for which there are no minimums). The minimum investment levels may be waived for certain Morgan Stanley employees and customers at the discretion of the Adviser. See "Purchase of Shares." HOW TO REDEEM Shares of each Portfolio may be redeemed at any time, without cost, at the net asset value per share of the Portfolio next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. If a shareholder reduces its total investment in shares in the Equity Growth Portfolio to less than $500,000, the Emerging Growth Portfolio to less than $100,000, or the Aggressive Equity Portfolio to less than $500,000, the investment may be subject to redemption. See "Redemption of Shares." RISK FACTORS The investment policies of the Portfolios entail certain risks and considerations of which an investor should be aware. Because the Emerging Growth Portfolio seeks long-term capital appreciation by investing primarily in small- to medium-sized companies which are more vulnerable to financial and other risks than larger, more established companies, investments in that Portfolio may involve a higher degree of risk and price volatility than the general equity markets. The Aggressive Equity Portfolio may invest in small-to medium-sized companies to a lesser extent. The Equity Growth, Emerging Growth and Aggressive Equity Portfolios may invest in securities of foreign issuers, which are subject to certain risks not typically associated with domestic securities. See "Investment Objectives and Policies" and "Additional Investment Information." In addition, the Portfolios may invest in repurchase agreements, lend their portfolio securities and may purchase securities on a when-issued basis. The Portfolios may invest in covered call options and may also invest in stock options, stock futures contracts and options on stock futures contracts, and may invest in forward foreign currency exchange contracts to hedge currency risk associated with investment in non-U.S. dollar-denominated securities. The Aggressive Equity Portfolio may invest in convertible debentures and specialty equity-linked securities, such as PERCS, ELKS or LYONs, of U.S., and to a limited extent, foreign issuers, which may involve risks in addition to those associated with equity securities. The Aggressive Equity Portfolio is a non-diversified portfolio under the Investment Company Act of 1940, as amended (the "1940 Act") and therefore may invest a greater proportion of its assets in the securities of a smaller number of issuers and may, as a result, be subject to greater risk with respect to its portfolio securities. See "Investment Limitations." See "Additional Investment Information." Each of these investment strategies involves specific risks which are described under "Investment Objectives and Policies" and "Additional Investment Information" herein and under "Investment Objectives and Policies" in the Statement of Additional Information. 9 INVESTMENT OBJECTIVES AND POLICIES The investment objectives of each Portfolio are described below, together with the policies the Fund employs in its efforts to achieve these objectives. Each Portfolio's investment objective is a fundamental policy which may not be changed without the approval of a majority of the Portfolio's outstanding voting securities. There is no assurance that the Portfolios will attain their objectives. The investment policies described below are not fundamental policies and may be changed without shareholder approval. THE EQUITY GROWTH PORTFOLIO The Portfolio's investment objective is to provide long-term capital appreciation by investing primarily in growth-oriented common stocks of medium and large capitalization U.S. corporations and, to a limited extent, foreign corporations. Common stocks for this purpose consist of common stocks and equivalents, such as securities convertible into common stocks, and securities having common stock characteristics, such as rights and warrants to purchase common stocks. Under normal circumstances, the Portfolio will invest at least 65% of the value of its total assets in common stocks. The Adviser employs a flexible and eclectic investment process in pursuit of the Portfolio's investment objectives. In selecting stocks for the Portfolio, the Adviser concentrates on a universe of rapidly growing, high quality companies and lower, but accelerating, earnings growth situations. The Adviser's universe of potential investments generally comprises companies with market capitalizations of $750 million or more. The Portfolio is not restricted to investments in specific market sectors. The Adviser uses its research capabilities, analytical resources and judgment to assess economic, industry and market trends, as well as individual company developments, to select promising growth investments for the Portfolio. The Adviser concentrates on companies with strong, communicative managements and clearly defined strategies for growth. In addition, the Adviser rigorously assesses company developments, including changes in strategic direction, management focus and current and likely future earnings results. Valuation is important to the Adviser but is viewed in the context of prospects for sustainable earnings growth and the potential for positive earnings surprises vis-a-vis consensus expectations. The Portfolio is free to invest in any common stock that, in the Adviser's judgment, provides above average potential for capital appreciation. In selecting investments for the Portfolio, the Adviser emphasizes individual security selection. The Portfolio's investments will generally be diversified by number of issues but concentrated sector positions may result from the investment process. The Portfolio has a long-term investment perspective; however, the Adviser may take advantage of short-term opportunities that are consistent with the Portfolio's objective by selling recently purchased securities which have increased in value. The Portfolio may invest in common stock and convertible securities of domestic and foreign corporations. However, the Portfolio does not expect to invest more than 25% of its total assets at the time of purchase in securities of foreign companies. The Portfolio may invest in securities of foreign issuers directly or in the form of American Depositary Receipts ("ADRs"). Investors should recognize that investing in foreign companies involves certain special considerations which are not typically associated with investing in U.S. companies. See "Additional Investment Information" herein and "Investment Objectives and Policies -- Forward Foreign Currency Exchange Contracts" in the Statement of Additional Information. 10 The Portfolio may invest in convertible securities of domestic and, subject to the above restrictions, foreign issuers on occasions when, due to market conditions, it is more advantageous to purchase such securities rather than common stock. The convertible securities in which the Portfolio may invest include any debt securities or preferred stock which may be converted into common stock or which carry the right to purchase common stock. Convertible securities entitle the holder to exchange the securities for a specified number of shares of common stock, usually of the same company, at specified prices within a certain period of time and to receive interest or dividends until the holder elects to exercise the conversion privilege. Since the Portfolio invests in both common stocks and convertible securities, the risks of investing in the general equity markets may be tempered to a degree by the Portfolio's investments in convertible securities which are often not as volatile as common stock. Any remaining assets not invested as described above may be invested in securities or obligations, including derivative securities, that are set forth in "Additional Investment Information" below. THE EMERGING GROWTH PORTFOLIO The Portfolio's investment objective is to provide long-term capital appreciation by investing primarily in growth-oriented common stocks of small-to medium-sized domestic corporations and, to a limited extent, foreign corporations. The production of any current income is incidental to this objective. Such companies generally have annual gross revenues ranging from $10 million to $750 million. The common stocks in which the Portfolio may invest consist of the common stocks of any class or series of domestic or foreign corporations or any similar equity interest, such as trust or partnership interests. These investments may or may not pay dividends and may or may not carry voting rights. The Adviser employs a flexible investment program in pursuit of the Portfolio's investment objective. The Portfolio is not restricted to investments in specific market sectors. The Portfolio will invest in small- to medium-sized companies that are early in their life cycle, but which have the potential, in the Adviser's judgment, to become major enterprises. The Adviser uses its judgment and research capabilities to assess economic, industry, market and company developments to select investments in promising emerging growth companies that are expected to benefit from new technology or new products or services. In addition, the Adviser looks for special developments, such as research discoveries, changes in customer demand, rejuvenated management or basic changes in the economic environment. These situations are only illustrative of the types of investments the Portfolio may make. The Portfolio is free to invest in any common stock which in the Adviser's judgment provides above-average potential for capital appreciation. An important factor in the achievement of the Portfolio's investment objective will be the Adviser's ability to forecast market performance. The Portfolio intends to manage its investments actively to accomplish its investment objective. Since the Portfolio has a long-term investment perspective, the Adviser does not intend to respond to short-term market fluctuations or to acquire securities for the purpose of short-term trading; however, the Adviser may take advantage of short-term opportunities that are consistent with its objective. The Portfolio may invest in common stock and convertible securities of domestic corporations and of foreign corporations. However, the Portfolio does not expect to invest more than 25% of its total assets at the time of purchase in securities of foreign companies. The Portfolio may invest in securities of foreign issuers directly or in the form of American Depositary Receipts. The Portfolio may enter into forward foreign currency exchange contracts which provide for the purchase or sale of foreign currencies in connection with the 11 settlement of foreign securities transactions or to hedge the underlying currency exposure related to foreign investments. The Portfolio will not enter into these commitments for speculative purposes. Investors should recognize that investing in foreign companies involves certain special considerations which are not typically associated with investing in U.S. companies. See "Additional Investment Information" herein and "Investment Objectives and Policies -- Forward Currency Exchange Contracts" in the Statement of Additional Information. The Portfolio may also invest in convertible securities of domestic and, subject to the above restrictions, foreign issuers on occasions when, due to market conditions, it is more advantageous to purchase such securities rather than common stock. The convertible securities in which the Portfolio may invest include any debt securities or preferred stock which may be converted into common stock or which carry the right to purchase common stock. Convertible securities entitle the holder to exchange the securities for a specified number of shares of common stock, usually of the same company, at specified prices within a certain period of time and to receive interest or dividends until the holder elects to exercise the conversion privilege. The Portfolio will not invest in debt securities that are not rated at least investment grade by either Standard & Poor's Corporation or Moody's Investors Service, Inc. Since the Portfolio invests in both common stocks and convertible securities, the risks of investing in the general equity markets may be tempered to a degree by the Portfolio's investments in convertible securities, which are often not as volatile as equity securities. Any remaining assets not invested as described above may be invested in securities or obligations, including derivative securities, that are set forth in "Additional Investment Information" below. THE AGGRESSIVE EQUITY PORTFOLIO The Portfolio's investment objective is to provide capital appreciation by investing primarily in a non-diversified portfolio of corporate equity and equity-linked securities. Equity and equity-linked securities consist of common and preferred stocks and their equivalents, securities convertible into common stocks, securities having common stock characteristics, such as rights and warrants to purchase common stocks, options, futures, and specialty securities such as ELKS, LYONs, PERCS, etc. of U.S., and to a limited extent, foreign issuers. The Aggressive Equity Fund is a non-diversified portfolio and thus can be more heavily weighted in fewer stocks than the Equity Growth Portfolio, which is a diversified portfolio. See "Additional Investment Information." Under normal circumstances, the Portfolio will invest at least 65% of the value of its total assets in equity and equity-linked securities. The Adviser employs a flexible and eclectic investment process in pursuit of the Portfolio's investment objective. In selecting securities for the Portfolio, the Adviser concentrates on a universe of rapidly growing, high quality companies and lower, but accelerating, earnings growth situations. The Adviser's universe of potential investments generally comprises companies with market capitalizations of $500 million or more but smaller market capitalization securities may be purchased from time to time. The Portfolio is not restricted to investments in specific market sectors. The Adviser uses its research capabilities, analytical resources and judgment to assess economic, industry and market trends, as well as individual company developments, to select promising investments for the Portfolio. The Adviser concentrates on companies with strong, communicative managements and clearly defined strategies for growth. In addition, the Adviser rigorously assesses company developments, including changes in strategic direction, management focus and current and likely future earnings results. Valuation is important to the Adviser and is viewed in the context of prospects for sustainable 12 earnings growth and the potential for positive earnings surprises vis-a-vis consensus expectations. The Portfolio is free to invest in any equity or equity-linked security that, in the Adviser's judgment, provides above average potential for capital appreciation. The Portfolio may from time to time and consistent with applicable legal requirements sell securities short that it owns (i.e., "against the box") or borrows. See "Additional Investment Information". In selecting investments for the Portfolio, the Adviser emphasizes individual security selection. Overweighted sector positions and issuer positions may result from the investment process. See "Investment Limitations." The Portfolio has a long-term investment perspective; however, the Adviser may take advantage of short-term opportunities that are consistent with the Portfolio's objective by selling recently purchased securities which have increased in value. The Portfolio may invest in equity and equity-linked securities of domestic and foreign corporations. However, the Portfolio does not expect to invest more than 25% of its total assets at the time of purchase in securities of foreign companies. The Portfolio may invest in securities of foreign issuers directly or in the form of American Depositary Receipts ("ADRs"). Investors should recognize that investing in foreign companies involves certain special considerations which are not typically associated with investing in U.S. companies. See "Additional Investment Information" herein and "Investment Objectives and Policies -- Forward Foreign Currency Exchange Contracts" in the Statement of Additional Information. Any remaining assets not invested as described above may be invested in securities or obligations, including derivative securities, that are set forth in "Additional Investment Information" below. ADDITIONAL INVESTMENT INFORMATION WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolios may purchase securities on a when-issued or delayed delivery basis. In such transactions, instruments are bought with payment and delivery taking place in the future in order to secure what is considered to be an advantageous yield or price at the time of the transaction. Delivery of and payment for these securities may take as long as a month or more after the date of the purchase commitment, but will take place no more than 120 days after the trade date. The Portfolio will maintain with the Custodian a separate account with a segregated portfolio of high-grade debt securities or cash in an amount at least equal to these commitments. The payment obligation and the interest rates that will be received are each fixed at the time a Portfolio enters into the commitment and no interest accrues to the Portfolio until settlement. Thus, it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. It is a current policy of the Portfolios not to enter into when-issued commitments exceeding, in the aggregate, 15% of the Portfolio's net assets other than the obligations created by these commitments. REPURCHASE AGREEMENTS. The Portfolios may enter into repurchase agreements with brokers, dealers or banks that meet the credit guidelines established by the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a security from a seller that has agreed to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. The term of these agreements is usually from overnight to one week, and never exceeds one year. Repurchase agreements may be viewed as a fully collateralized loan of money by the Portfolio to the seller. The Portfolio always receives securities, with a market 13 value at least equal to the purchase price (including accrued interest) as collateral and this value is maintained during the term of the agreement. If the seller defaults and the collateral value declines, the Portfolio might incur a loss. If bankruptcy proceedings are commenced with respect to the seller, the Portfolio's realization upon the collateral may be delayed or limited. The aggregate of certain repurchase agreements and certain other investments is limited as set forth under "Investment Limitations." LOANS OF PORTFOLIO SECURITIES. The Portfolios may lend their securities to brokers, dealers, domestic and foreign banks or other financial institutions for the purpose of increasing its net investment income. These loans must be secured continuously by cash or equivalent collateral, or by a letter of credit at least equal to the market value of the securities loaned plus accrued interest or income. There may be a risk of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. A Portfolio will not enter into securities loan transactions exceeding, in the aggregate, 33 1/3% of the market value of its total assets. For more detailed information about securities lending, see "Investment Objectives and Policies" in the Statement of Additional Information. DEPOSITARY RECEIPTS. The Portfolios may invest indirectly in securities of foreign companies through sponsored or unsponsored American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other types of Depositary Receipts (which, together with ADRs and GDRs, are hereinafter collectively referred to as "Depositary Receipts"), to the extent such Depositary Receipts are or become available. Depositary Receipts are not necessarily denominated in the same currency as the underlying securities. In addition, the issuers of the securities underlying unsponsored Depositary Receipts are not obligated to disclose material information in the U.S. and, therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the Depositary Receipts. ADRs are Depositary Receipts typically issued by a U.S. financial institution which evidence ownership interests in a security or pool of securities issued by a foreign issuer. GDRs and other types of Depositary Receipts are typically issued by foreign banks or trust companies, although they also may be issued by U.S. financial institutions, and evidence ownership interests in a security or pool of securities issued by either a foreign or a U.S. corporation. Generally, Depositary Receipts in registered form are designed for use in the U.S. securities market and Depositary Receipts in bearer form are designed for use in securities markets outside the U.S. For purposes of a Portfolio's investment policies, the Portfolio's investments in Depositary Receipts will be deemed to be investments in the underlying securities. TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes in economic, financial or political conditions make it advisable, the Portfolios may reduce their holdings in equity and other securities for temporary defensive purposes and the Portfolios may invest in certain short-term (less than twelve months to maturity) and medium-term (not greater than five years to maturity) debt securities or may hold cash. The short-term and medium-term debt securities in which the Portfolio may invest consist of (a) obligations of the United States or foreign country governments, their respective agencies or instrumentalities; (b) bank deposits and bank obligations (including certificates of deposit, time deposits and bankers' acceptances) of United States or foreign country banks denominated in any currency; (c) floating rate securities and other instruments denominated in any currency issued by international development agencies; (d) finance company and corporate commercial paper and other short-term corporate debt obligations of United States and foreign country corporations meeting the Portfolio's credit quality standards; and (e) repurchase agreements with banks and broker-dealers with respect to such securities. For temporary defensive purposes, the Portfolios intend to invest only in short- 14 term and medium-term debt securities that the Adviser believes to be of high quality, i.e., subject to relatively low risk of loss of interest or principal (there is currently no rating system for debt securities to most foreign countries). MONEY MARKET INSTRUMENTS. Each Portfolio is permitted to invest in money market instruments, although the Portfolios intend to stay invested in securities satisfying their primary investment objective to the extent practical. Each Portfolio may make money market investments pending other investment or settlement for liquidity, or in adverse market conditions. The money market investments permitted for the Portfolios include obligations of the United States Government and its agencies and instrumentalities; other debt securities; commercial paper including bank obligations; certificates of deposit (including Eurodollar certificates of deposit); and repurchase agreements. For more detailed information about these money market investments, see "Description of Securities and Ratings" in the Statement of Additional Information. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Emerging Growth and Aggressive Equity Portfolios may enter into forward foreign currency exchange contracts ("forward contracts"), that provide for the purchase or sale of an amount of a specified foreign currency at a future date. Purposes for which such contracts may be used include protecting against a decline in a foreign currency against the U.S. dollar between the trade date and settlement date when the Portfolio purchases or sells non-U.S. dollar denominated securities, locking in the U.S. dollar value of dividends declared on securities held by the Portfolio and generally protecting the U.S. dollar value of securities held by the Portfolio against exchange rate fluctuation. Such contracts may also be used as a protective measure against the effects of fluctuating rates of currency exchange and exchange control regulations. While such forward contracts may limit losses to the Portfolio against exchange rate fluctuations, they will also limit any gains that may otherwise have been realized. Such forward contracts are derivative securities, in which the Portfolio may invest for hedging purposes. See "Investment Objectives and Policies -- Forward Currency Exchange Contracts" in the Statement of Additional Information. STOCK OPTIONS, FUTURES CONTRACTS AND OPTIONS IN FUTURES CONTRACTS. The Equity Growth and Aggressive Equity Portfolios may write (i.e., sell) covered call options on portfolio securities. The Equity Growth and Aggressive Equity Portfolios may write covered put options on portfolio securities. By selling a covered call option, the Portfolio would become obligated during the term of the option to deliver the securities underlying the option should the option holder choose to exercise the option before the option's termination date. In return for the call it has written, the Portfolio will receive from the purchaser (or option holder) a premium which is the price of the option, less a commission charged by a broker. The Portfolio will keep the premium regardless of whether the option is exercised. By selling a covered put option, the Portfolio incurs an obligation to buy the security underlying the option from the purchaser of the put at the option's exercise price at any time during the option period, at the purchaser's election (certain options written by the Portfolio will be exercisable by the purchaser only on a specific date). A call option is "covered" if the Portfolio owns the security underlying the option it has written or has an absolute or immediate right to acquire the security by holding a call option on such security, or maintains a sufficient amount of cash, cash equivalents or liquid securities to purchase the underlying security. Generally, a put option is "covered" if the Fund maintains cash, U.S. Government securities or other high grade debt obligations equal to the exercise price of the option, or if the Fund holds a put option on the same underlying security with a similar or higher exercise price. 15 When the Portfolio writes covered call options, it augments its income by the premiums received and is thereby hedged to the extent of that amount against a decline in the price of the underlying securities. The premiums received will offset a portion of the potential loss incurred by the Portfolio if the securities underlying the options are ultimately sold by the Portfolio at a loss. However, during the option period, the Portfolio has, in return for the premium on the option, given up the opportunity for capital appreciation above the exercise price should the market price of the underlying security increase, but has retained the risk of loss should the price of the underlying security decline. The Equity Growth and the Aggressive Equity Portfolios may write put options to receive the premiums paid by purchasers (when the Adviser wishes to purchase the security underlying the option at a price lower than its current market price, in which case the Portfolio will write the covered put at an exercise price reflecting the lower purchase price sought) and to close out a long put option position. The Equity Growth and the Aggressive Equity Portfolios may also purchase put options on their portfolio securities or call options. When the Portfolio purchases a call option it acquires the right to buy a designated security at a designated price (the "exercise price"), and when the Portfolio purchases a put option it acquires the right to sell a designated security at the exercise price, in each case on or before a specified date (the "termination date"), which is usually not more than nine months from the date the option is issued. The Portfolio may purchase call options to close out a covered call position or to protect against an increase in the price of a security it anticipates purchasing. The Portfolio may purchase put options on securities which it holds in its portfolio to protect itself against decline in the value of the security. If the value of the underlying security were to fall below the exercise price of the put purchased in an amount greater than the premium paid for the option, the Portfolio would incur no additional loss. The Portfolio may also purchase put options to close out written put positions in a manner similar to call option closing purchase transactions. There are no other limits on the Portfolio's ability to purchase call and put options. The Equity Growth and the Aggressive Equity Portfolios may enter into futures contracts and options on futures contracts to remain fully invested and to reduce transaction costs. The Portfolio may also enter into futures transactions as a hedge against fluctuations in the price of a security it holds or intends to acquire, but not for speculation or for achieving leverage. The Portfolio may enter into futures contracts and options on futures contracts provided that not more than 5% of the Portfolio's total assets at the time of entering into the contract or option is required as deposit to secure obligations under such contracts and options, and provided that not more than 20% of the Portfolio's total assets in the aggregate is invested in futures contracts and options on futures contracts (and in options in the case of the Equity Growth and the Aggressive Equity Portfolios). The Equity Growth and the Aggressive Equity Portfolios may purchase and write call and put options on futures contracts that are traded on any international exchange, traded over-the-counter or which are synthetic options or futures or equity swaps, and may enter into closing transactions with respect to such options to terminate an existing position. An option on a futures contract gives the purchaser the right (in return for the premium paid) to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the term of the option. The Portfolio will purchase and write options on futures contracts for identical purposes to those set forth above for the purchase of a futures contract (purchase of a call option or sale of a put option) and the sale of a futures contract (purchase of a put option or sale of a call option), or to close out a long or short position in future contracts. 16 RISKS ASSOCIATED WITH OPTIONS AND FUTURES. Options, futures and options on futures are derivative securities, in which the Portfolio may invest for hedging purposes, as well as to remain fully invested and to reduce transaction costs. Investing for the latter two purposes may be considered speculative. The primary risks associated with the use of options, futures and options on futures are (i) imperfect correlation between the change in market value of the stocks held by the Portfolio and the prices of futures and options relating to the stocks purchased or sold by the Portfolio; and (ii) possible lack of a liquid secondary market for an option or a futures contract and the resulting inability to close a futures position which could have an adverse impact on the Portfolio's ability to hedge. In the opinion of the Board of Directors, the risk that the Portfolio will be unable to close out a futures position or options contract will be minimized by only entering into futures contracts or options transactions for which there appears to be a liquid secondary market. FOREIGN INVESTMENT RISK FACTORS. The Portfolios may invest in U.S. dollar-denominated securities of foreign issuers trading in U.S. markets and the Emerging Growth and Aggressive Equity Portfolios may invest in non-U.S. dollar-denominated securities of foreign issuers. Investment in securities of foreign issuers and in foreign branches of domestic banks involves somewhat different investment risks than those affecting securities of U.S. domestic issuers. There may be limited publicly available information with respect to foreign issuers, and foreign issuers are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to U.S. companies. There may also be less government supervision and regulation of foreign securities exchanges, brokers and listed companies than in the U.S. Many foreign securities markets have substantially less volume than U.S. national securities exchanges, and securities of some foreign issuers are less liquid and more volatile than securities of comparable domestic issuers. Brokerage commissions and other transaction costs on foreign securities exchanges are generally higher than in the U.S. Dividends and interest paid by foreign issuers may be subject to withholding and other foreign taxes, which may decrease the net return on foreign investments as compared to dividends and interest paid to the Portfolio by domestic companies. It is not expected that a Portfolio or its shareholders would be able to claim a credit for U.S. tax purposes with respect to any such foreign taxes. See "Taxes." Additional risks include future political and economic developments, the possibility that a foreign jurisdiction might impose or change withholding taxes on income payable with respect to foreign securities, possible seizure, nationalization or expropriation of the foreign issuer or foreign deposits and the possible adoption of foreign governmental restrictions such as exchange controls. Investments in securities of foreign issuers are frequently denominated in foreign currencies and, since the Emerging Growth and Aggressive Equity Portfolios may also temporarily hold uninvested reserves in bank deposits in foreign currencies, the value of the Portfolios' assets measured in U.S. dollars may be affected favorably or unfavorably by changes in currency exchange rates and in exchange control regulations, and the Portfolios may incur costs in connection with conversions between various currencies. SHORT SALES The Aggressive Equity Portfolio may from time to time sell securities short consistent with applicable legal requirements. A short sale is a transaction in which the Portfolio would sell securities it either owns or has the right to acquire at no added cost (i.e., "against the box") or does not own (but has borrowed) in anticipation of a decline in the market price of the securities. When the Portfolio makes a short sale of borrowed securities, the proceeds it receives from the sale will be held on behalf of a broker until the Portfolio replaces the borrowed 17 securities. To deliver the securities to the buyer, the Portfolio will need to arrange through a broker to borrow the securities and, in so doing, the Portfolio will become obligated to replace the securities borrowed at their market price at the time of the replacement, whatever that price may be. The Portfolio may have to pay a premium to borrow the securities and must pay any dividends or interest payable on the securities until they are replaced. The Portfolio's obligation to replace the securities borrowed in connection with a short sale will be secured by collateral deposited with the broker that consists of cash, U.S. Government securities or other liquid, high grade debt obligations. In addition, if the short sale is not "against the box", the Portfolio will place in a segregated account with the Custodian an amount of cash, U.S. Government securities or other liquid, high grade debt obligations equal to the difference, if any, between (1) the market value of the securities sold at the time they were sold short and (2) any cash, U.S. Government securities or other liquid, high grade debt obligations deposited as collateral with the broker in connection with the short sale (not including the proceeds of the short sale). Short sales by the Portfolio involve certain risks and special considerations. Possible losses from short sales differ from losses that could be incurred from a purchase of a security, because losses from short sales may be unlimited, whereas losses from purchases can equal only the total amount invested. CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES The Portfolios may invest in securities such as convertible securities, preferred stock, warrants or other securities exchangeable under certain circumstances for shares of common stock. Warrants are instruments giving holders the right, but not the obligation, to buy shares of a company at a given price during a specified period. The Aggressive Equity Portfolio may invest in equity-linked securities, including, among others, PERCS, ELKS or LYONs, which are securities that are convertible into or the value of which is based upon the value of, equity securities upon certain terms and conditions. The amount received by an investor at maturity of such securities is not fixed but is based on the price of the underlying common stock. It is impossible to predict whether the price of the underlying common stock will rise or fall. Trading prices of the underlying common stock will be influenced by the issuer's operational results, by complex, interrelated political, economic, financial, or other factors affecting the capital markets, the stock exchanges on which the underlying common stock is traded and the market segment of which the issuer is a part. In addition, it is not possible to predict how equity-linked securities will trade in the secondary market, which is fairly developed and liquid. The market for such securities may be shallow, however, and high volume trades may be possible only with discounting. In addition to the foregoing risks, the return on such securities depends on the creditworthiness of the issuer of the securities, which may be the issuer of the underlying securities or a third party investment banker or other lender. The creditworthiness of such third party issuer of equity-linked securities may, and often does, exceed the creditworthiness of the issuer of the underlying securities. The advantage of using equity-linked securities over traditional equity and debt securities is that the former are income producing vehicles that may provide a higher income than the dividend income on the underlying equity securities while allowing some participation in the capital appreciation of the underlying equity securities. Another advantage of using equity-linked securities is that they may be used for hedging to reduce the risk of investing in the generally more volatile underlying equity securities. The following are three examples of equity-linked securities. The Portfolio may invest in the securities described below or other similar equity-linked securities. 18 PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS") technically are preferred stock with some characteristics of common stock. PERCS are mandatorily convertible into common stock after a period of time, usually three years, during which the investors' capital gains are capped, usually at 30%. Commonly, PERCS may be redeemed by the issuer at any time or if the issuer's common stock is trading at a specified price level or better. The redemption price starts at the beginning of the PERCS duration period at a price that is above the cap by the amount of the extra dividends the PERCS holder is entitled to receive relative to the common stock over the duration of the PERCS and declines to the cap price shortly before maturity of the PERCS. In exchange for having the cap on capital gains and giving the issuer the option to redeem the PERCS at any time or at the specified common stock price level, the Portfolio may be compensated with a substantially higher dividend yield than that on the underlying common stock. Investors, such as the Portfolio, that seek current income, find PERCS attractive because a PERCS provides a higher dividend income than that paid with respect to a company's common stock. ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt securities, in that the principal amount received at maturity is not fixed but is based on the price of the issuer's common stock. ELKS are debt securities commonly issued in fully registered form for a term of three years under an indenture trust. At maturity, the holder of ELKS will be entitled to receive a principal amount equal to the lesser of a cap amount, commonly in the range of 30% to 55% greater than the current price of the issuer's common stock, or the average closing price per share of the issuer's common stock, subject to adjustment as a result of certain dilution events, for the 10 trading days immediately prior to maturity. Unlike PERCS, ELKS are commonly not subject to redemption prior to maturity. ELKS usually bear interest during the three-year term at a substantially higher rate than the dividend yield on the underlying common stock. In exchange for having the cap on the return that might have been received as capital gains on the underlying common stock, the Portfolio may be compensated with the higher yield, contingent on how well the underlying common stock does. Investors, such as the Portfolio, that seek current income, find ELKS attractive because ELKS provide a higher dividend income than that paid with respect to a company's common stock. LYONS. Liquid Yield Option Notes ("LYONs") differ from ordinary debt securities, in that the amount received prior to maturity is not fixed but is based on the price of the issuer's common stock. LYONs are zero-coupon notes that sell at a large discount from face value. For an investment in LYONs, the Portfolio will not receive any interest payments until the notes mature, typically in 15 to 20 years, when the notes are redeemed at face, or par, value. The yield on LYONs, typically, is lower-than-market rate for debt securities of the same maturity, due in part to the fact that the LYONs are convertible into common stock of the issuer at any time at the option of the holder of the LYONs. Commonly, the LYONs are redeemable by the issuer at any time after an initial period or if the issuer's common stock is trading at a specified price level or better, or, at the option of the holder, upon certain fixed dates. The redemption price typically is the purchase price of the LYONs plus accrued original issue discount to the date of redemption, which amounts to the lower-than-market yield. The Portfolio will receive only the lower-than-market yield unless the underlying common stock increases in value at a substantial rate. LYONs are attractive to investors, like the Portfolio, when it appears that they will increase in value due to the rise in value of the underlying common stock. 19 INVESTMENT LIMITATIONS Except for the Aggressive Equity Portfolio, each Portfolio is a diversified investment company and is therefore subject to the following limitations: (a) as to 75% of its total assets, a Portfolio may not invest more than 5% of its total assets in the securities of any one issuer, except obligations of the U.S. Government and its agencies and instrumentalities, and (b) a Portfolio may not own more than 10% of the outstanding voting securities of any one issuer. The Aggressive Equity Portfolio is a non-diversified portfolio under the 1940 Act, which means that the Portfolio is not limited by the 1940 Act in the proportion of its assets that may be invested in the obligations of a single issuer. Thus, the Portfolio may invest a greater proportion of its assets in the securities of a small number of issuers and as a result will be subject to greater risk with respect to its Portfolio securities. However, the Portfolio intends to comply with diversification requirements imposed by the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated investment company. See "Investment Limitations" in the Statement of Additional Information. Each Portfolio also operates under certain investment restrictions that are deemed fundamental limitations and may be changed only with the approval of the holders of a majority of such Portfolio's outstanding shares. See "Investment Limitations" in the Statement of Additional Information. In addition, each Portfolio operates under certain non-fundamental investment limitations as described below and in the Statement of Additional Information. Each Portfolio may not: (i) enter into repurchase agreements with more than seven days to maturity if, as a result, more than 15% of the market value of the Portfolio's total assets would be invested in such repurchase agreements and other investments for which market quotations are not readily available or which are otherwise illiquid; (ii) borrow money, except from banks for extraordinary or emergency purposes, and then only in amounts up to 10% of the value of the Portfolio's total assets, taken at cost at the time of borrowing; or purchase securities while borrowings exceed 5% of its total assets; or mortgage, pledge or hypothecate any assets except in connection with any such borrowing in amounts up to 10% of the value of the Portfolio's net assets at the time of borrowing; (iii) invest in fixed time deposits with a duration of over seven calendar days; or (iv) invest in fixed time deposits with a duration of from two business days to seven calendar days if more than 10% of the Portfolio's total assets would be invested in these deposits. MANAGEMENT OF THE FUND INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment Adviser and Administrator of the Fund and each of its portfolios. The Adviser provides investment advice and portfolio management services pursuant to an Investment Advisory Agreement and, subject to the supervision of the Fund's Board of Directors, makes each of the Portfolio's day-to-day investment decisions, arranges for the execution of portfolio transactions and generally manages each of the Portfolio's investments. The Adviser is entitled to receive from each Portfolio an annual investment advisory fee, payable quarterly, equal to the percentage of average daily net 20 assets set forth in the table below. However, the Adviser has agreed to a reduction in the fees payable to it and to reimburse the Portfolios, if necessary, if such fees would cause the total annual operating expenses of either Portfolio to exceed the respective percentage of average daily net assets set forth below.
MAXIMUM TOTAL INVESTMENT OPERATING EXPENSES PORTFOLIO ADVISORY FEE AFTER FEE WAIVER - ----------------------------- ------------ ------------------ Equity Growth Portfolio 0.60% 0.80% Emerging Growth Portfolio 1.00% 1.25% Aggressive Equity Portfolio 0.80% 1.00%
The fees payable by the Emerging Growth and Aggressive Equity Portfolios are higher than the advisory fees paid by most investment companies, but the Adviser believes the fees are comparable to those of investment companies with similar investment objectives. The Adviser, with principal offices at 1221 Avenue of the Americas, New York, New York 10020, conducts a worldwide portfolio management business, providing a broad range of portfolio management services to customers in the United States and abroad. At December 31, 1994, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $48.7 billion, including approximately $35.6 billion under active management and $13.1 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. PORTFOLIO MANAGERS. The following persons have primary responsibility for managing the Portfolios indicated. EQUITY GROWTH PORTFOLIO -- KURT FEUERMAN AND MARGARET K. JOHNSON. Kurt Feuerman joined Morgan Stanley Asset Management in July 1993 as a Managing Director in the Institutional Equity Group. Previously Mr. Feuerman was a Managing Director of Morgan Stanley & Co., Incorporated's Research Department, where he was responsible for emerging growth stocks, gaming and restaurants. Before joining Morgan Stanley, Mr. Feuerman was a Managing Director of Drexel Burnham Lambert, where he had been an equity analyst since 1984. Over the years, he has been highly ranked in the Institutional Investor All American Research Poll in four separate categories: packaged food, tobacco, emerging growth and gaming. Mr. Feuerman earned an M.B.A. from Columbia University in 1982, an M.A. from Syracuse University in 1980, and a B.A. from McGill University in 1977. Margaret Johnson is a Vice President of the Adviser and a Portfolio Manager in the Institutional Equity Group. She joined the Adviser in 1984 and worked as an Analyst in the Marketing and Fiduciary Advisor areas. Ms. Johnson became an Equity Analyst in 1986 and a Portfolio Manager in 1989. Prior to joining Morgan Stanley, she worked for the New York City PBS affiliate, WNET, Channel 13. She holds a B.A. degree from Yale College and is a Chartered Financial Analyst. Mr. Feuerman and Ms. Johnson have had primary responsibility for managing the Portfolio's assets since July 1993 and April 1991, respectively. EMERGING GROWTH PORTFOLIO -- DENNIS G. SHERVA. Dennis Sherva is a Managing Director of Morgan Stanley & Co., Incorporated and head of emerging growth stock investments at the Adviser. He has had primary responsibility for managing the Portfolio's assets since November 1989. Prior to joining the Adviser in 1988, Mr. Sherva was Morgan Stanley's Director of Worldwide Research activities for five years and maintained direct responsibility for emerging growth stock strategy and analysis. As an analyst following emerging growth stocks for the past decade, he was rated number one in the small growth company category six times by Institutional 21 Investor magazine's All-America Research Team poll. Before joining Morgan Stanley in 1977, Mr. Sherva had twelve years of industrial and investment experience. He serves on the Board of Directors of Morgan Stanley Venture Capital Inc. and Morgan Stanley R&D Ventures, Inc. He is also a member of the Institutional Committee of the National Association of Securities Dealers. Mr. Sherva graduated from the University of Minnesota and received an M.A. from Wayne State University. He is also a Chartered Financial Analyst. AGGRESSIVE EQUITY PORTFOLIO -- KURT FEUERMAN. Information about Mr. Feuerman is included under Equity Growth Portfolio above. ADMINISTRATOR. The Adviser also provides the Fund with administrative services pursuant to an Administration Agreement. The services provided under the Administration Agreement are subject to the supervision of the Officers and the Board of Directors of the Fund and include day-to-day administration of matters related to the corporate existence of the Fund, maintenance of its records, preparation of reports, supervision of the Fund's arrangements with its custodian, and assistance in the preparation of the Fund's registration statements under Federal and State laws. The Administration Agreement also provides that the Administrator, through its agents, will provide to the Fund dividend disbursing and transfer agent services. For its services under the Administration Agreement, the Fund pays the Adviser a monthly fee which on an annual basis equals 0.15% of the average daily net assets of the Portfolio. Under the U.S. Trust Administration Agreement between the Adviser and United States Trust Company of New York ("U.S. Trust"), U.S. Trust has agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegates its responsibilities to the Mutual Funds Service Company ("MFSC"), a subsidiary of U.S. Trust, that provides certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by MFSC. The services provided under the Administration Agreement and the U.S. Trust Administration Agreement are also subject to the supervision of the Board of Directors of the Fund. The Board of Directors of the Fund has approved the provision of services described above pursuant to the Administration Agreement and the U.S. Trust Administration Agreement as being in the best interests of the Fund. MFSC's business address is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information regarding the Administration Agreement or the U.S. Trust Administration Agreement, see "Management of the Fund" in the Statement of Additional Information. DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation, the Board of Directors decides upon matters of general policy and reviews the actions of the Fund's Adviser, Administrator and Distributor. The Officers of the Fund conduct and supervise its daily business operations. DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the shares of the Fund. Under its Distribution Agreement with the Fund, Morgan Stanley sells shares of each Portfolio upon the terms and at the current offering price described in this Prospectus. Morgan Stanley is not obligated to sell any certain number of shares of any Portfolio and receives no compensation for its distribution services. EXPENSES. Each Portfolio is responsible for payment of certain other fees and expenses (including legal fees, accountants' fees, custodial fees, and printing and mailing costs) specified in the Administration and Distribution Agreements. 22 PURCHASE OF SHARES Shares of each Portfolio may be purchased without sales commission at the net asset value per share next determined after receipt of the purchase order. See "Valuation of Shares." INITIAL INVESTMENTS 1) BY CHECK. An account may be opened by completing and signing an Account Registration Form and mailing it, together with a check ($500,000 minimum for the Equity Growth Portfolio, $250,000 minimum for the Emerging Growth Portfolio and $500,000 for the Aggressive Equity Portfolio with certain exceptions for Morgan Stanley employees and select customers) payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio name]", to: Morgan Stanley Institutional Fund, Inc. P.O. Box 2798 Boston, Massachusetts 02208-2798 Payment will be accepted only in U.S. dollars, unless prior approval for payment by other currencies is given by the Fund. For purchases by check, the Fund is ordinarily credited with Federal Funds within one business day. Thus, your purchase of shares by check is ordinarily credited to your account at the net asset value per share of the relevant Portfolio determined on the next business day after receipt. 2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal Funds to the Fund's bank account. In order to ensure prompt receipt of your Federal Funds Wire, it is important that you follow these steps: A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your name, address, telephone number, Social Security or Tax Identification Number, the portfolio(s) selected, the amount being wired, and by which bank. We will then provide you with a Fund account number. (Investors with existing accounts should also notify the Fund prior to wiring funds.) B. Instruct your bank to wire the specified amount to the Fund's Wire Concentration Bank Account (be sure to have your bank include the name of the portfolio(s) selected and the account number assigned to you): United States Trust Company of New York 114 West 47th Street New York, NY 10036 ABA #0210-0131-8 DDA #20-9310-3 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (portfolio name, your account number, your account name) Please call before wiring funds: 1-800-548-7786 C. Complete the Account Registration Form and mail it to the address shown thereon. Federal Funds purchase orders will be accepted only on a day on which the Fund and United States Trust Company of New York (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring funds. 23 3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire" above must be followed in purchasing shares by bank wire. However, money transferred by bank wire may or may not be converted into Federal Funds the same day, depending on the time the money is received and the bank handling the wire. Prior to such conversion, an investor's money will not be invested. Your bank may charge a service fee for wiring funds. ADDITIONAL INVESTMENTS You may add to your account at any time (minimum additional investment $1,000 except for automatic reinvestment of dividends and capital gains distributions for which there are no minimums) by purchasing shares at net asset value by mailing a check to the Fund (payable to "Morgan Stanley Institutional Fund, Inc. -- [portfolio name]") at the above address or by wiring monies to the Custodian Bank as outlined above. It is very important that your account name and portfolio be specified in the letter or wire to assure proper crediting to your account. In order to insure that your wire orders are invested promptly, you are requested to notify one of the Fund's representatives (toll free: 1-800-548-7786) prior to the wire date. OTHER PURCHASE INFORMATION The purchase price of the shares of each Portfolio is the net asset value next determined after the order is received. See "Valuation of Shares." An order received prior to the close of the New York Stock Exchange ("NYSE"), which is currently 4:00 p.m. Eastern Time, will be executed at the price computed on the date of receipt; an order received after the close of the NYSE will be executed at the price computed on the next day the NYSE is open. In the interest of economy and convenience, and because of the operating procedures of the Fund, certificates representing shares of the Portfolios will not be issued. All shares purchased are confirmed to you and credited to your account on the Fund's books maintained by the Adviser or its agents. You will have the same rights and ownership with respect to such shares as if certificates had been issued. To ensure that checks are collected by the Fund, withdrawals of investments made by check are not presently permitted until payment for the purchase has been received, which may take up to eight business days after the date of purchase. As a condition of this offering, if a purchase is cancelled due to nonpayment or because your check does not clear, you will be responsible for any loss the Fund or its agents incur. If you are already a shareholder, the Fund may redeem shares from your account(s) to reimburse the Fund or its agents for any loss. In addition, you may be prohibited or restricted from making future investments in the Fund. Investors may also invest in the Fund by purchasing shares through registered broker-dealers. Broker-dealers who make purchases for their customers may charge a fee for such services. REDEMPTION OF SHARES You may withdraw all or any portion of the amount in your account by redeeming shares at any time. Please note that purchases made by check are not permitted to be redeemed until payment of the purchase price has been collected, which may take up to eight business days after purchase. The Fund will redeem shares of a Portfolio at its next determined net asset value. On days that both the NYSE and the Custodian Bank are open for business, the net asset value per share of each of the Portfolios is determined at the close of trading of the 24 NYSE (currently 4:00 p.m. Eastern Time). Shares of the Portfolios may be redeemed by mail or telephone. No charge is made for redemption. Any redemption may be more or less than the purchase price of your shares depending on, among other factors, the market value of the investment securities held by the Portfolios. BY MAIL Each Portfolio will redeem its shares at the net asset value determined on the date the request is received, if the request is received in "good order" before the regular close of the NYSE. Your request should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798, except that deliveries by overnight courier should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108. "Good order" means that the request to redeem shares must include the following documentation: (a) A letter of instruction or a stock assignment specifying the number of shares or dollar amount to be redeemed, signed by all registered owners of the shares in the exact names in which they are registered; (b) Any required signature guarantees (see "Further Redemption Information" below); and (c) Other supporting legal documents, if required, in the case of estates, trusts, guardianships, custodianships, corporations, pension and profit sharing plans and other organizations. Shareholders who are uncertain of requirements for redemption should consult with a Morgan Stanley Institutional Fund representative. BY TELEPHONE Provided you have previously elected the Telephone Redemption Option on the Account Registration Form, you can request a redemption of your shares by calling the Fund and requesting the redemption proceeds be mailed to you or wired to your bank. Please contact one of Morgan Stanley Institutional Fund's representatives for further details. In times of drastic market conditions, the telephone redemption option may be difficult to implement. If you experience difficulty in making a telephone redemption, your request may be made by mail or overnight courier and will be implemented at the net asset value next determined after it is received. Redemption requests sent to the Fund through express mail must be mailed to the address of the Dividend Disbursing and Transfer Agent listed under "General Information". The Fund and the Fund's transfer agent (the "Transfer Agent") will employ reasonable procedures to confirm that the instructions communicated by telephone are genuine. These procedures include requiring the investor to provide certain personal identification information at the time an account is opened and prior to effecting each transaction requested by telephone. In addition, all telephone transaction requests will be recorded and investors may be required to provide additional telecopied written instructions regarding transaction requests. Neither the Fund nor the Transfer Agent will be responsible for any loss, liability, cost or expense for following instructions received by telephone that either of them reasonably believes to be genuine. To change the commercial bank or account designated to receive redemption proceeds, a written request must be sent to the Fund at the address above. Requests to change the bank or account must be signed by each shareholder and each signature must be guaranteed. 25 FURTHER REDEMPTION INFORMATION Normally the Fund will make payment for all shares redeemed within one business day of receipt of the request, but in no event will payment be made more than seven days after receipt of a redemption request in good order. However, payments to investors redeeming shares which were purchased by check will not be made until payment for the purchase has been collected, which may take up to eight days after the date of purchase. The Fund may suspend the right of redemption or postpone the date upon which redemptions are effected at times when the NYSE is closed, or under any emergency circumstances as determined by the Securities and Exchange Commission (the "Commission"). If the Board of Directors determines that it would be detrimental to the best interests of the remaining shareholders of a Portfolio to make payment wholly or partly in cash, the Fund may pay the redemption proceeds in whole or in part by a distribution in-kind of securities held by the Portfolio in lieu of cash in conformity with applicable rules of the Commission. Distributions-in-kind will be made in readily marketable securities. Investors may incur brokerage charges on the sale of portfolio securities so received in payment of redemptions. Due to the relatively high cost of maintaining smaller accounts, the Fund reserves the right to redeem shares in any account invested in the Equity Growth Portfolio having a value of less than $500,000, in the Emerging Growth Portfolio having a value of less than $100,000 and in the Aggressive Equity Portfolio having a value of less than $500,000 (the net asset value of which will be promptly paid to the shareholder). The Fund, however, will not redeem shares based solely upon market reductions in net asset value. If at any time your total investment does not equal or exceed $500,000 in the Equity Growth Portfolio, $100,000 in the Emerging Growth Portfolio or $500,000 in the Aggressive Equity Portfolio you may be notified of this fact and you will be allowed at least 60 days to make an additional investment before the redemption is processed. To protect your account, the Fund and its agents from fraud, signature guarantees are required for certain redemptions to verify the identity of the person who has authorized a redemption from your account. Please contact the Fund for further information. See "Redemption of Shares" in the Statement of Additional Information. SHAREHOLDER SERVICES EXCHANGE PRIVILEGE You may exchange shares that you own in each Portfolio for shares of any other available Portfolio of the Fund (other than the International Equity Portfolio). The privilege to exchange shares by telephone is automatic. Shares of the Portfolios may be exchanged by mail or telephone. The privilege to exchange shares by telephone is made available without shareholder election. Before you make an exchange, you should read the prospectus of the new portfolio in which you seek to invest. Because an exchange transaction is treated as a redemption followed by a purchase, an exchange would be considered a taxable event for shareholders subject to tax. The exchange privilege is only available with respect to portfolios that are registered for sale in a shareholder's state of residence. 26 BY MAIL In order to exchange shares by mail, you should include in the exchange request the name and account number of your current portfolio, the name of the portfolio into which you intend to exchange shares, and the signatures of all registered account holders. Send the exchange request to Morgan Stanley Institutional Fund, P.O. Box 2798, Boston, Massachusetts 02208-2798. BY TELEPHONE When exchanging shares by telephone, have ready the name and account number of the current Portfolio, the name of the portfolio into which you intend to exchange shares, your Social Security number or Tax I.D. number, and your account address. Requests for telephone exchanges received prior to 4:00 p.m. (Eastern Time) are processed at the close of business that same day based on the net asset value of each of the Portfolios at the close of business. Requests received after 4:00 p.m. (Eastern Time) are processed the next business day based on the net asset value determined at the close of business on such day. For additional information regarding responsibility for the authenticity of telephoned instructions, see "Redemption of Shares -- By Telephone" above. TRANSFER OF REGISTRATION You may transfer the registration of any of your Fund shares to another person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. As in the case of redemptions, the written request must be received in good order before any transfer can be made. VALUATION OF SHARES The net asset value per share of each of the Portfolios is determined by dividing the total market value of the Portfolio's investments and other assets, less any liabilities, by the total number of outstanding shares of the Portfolio. Net asset value per share is determined as of the close of the NYSE on each day that the NYSE is open for business. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities listed on a U.S. securities exchange for which market quotations are available are valued at the last quoted sale price on the day the valuation is made. Securities listed on a foreign exchange are valued at their closing price. Unlisted securities and listed securities not traded on the valuation date for which market quotations are not readily available are valued at a price that is considered to best represent fair value within a range not in excess of the current asked price nor less than the current bid price. The current bid and asked prices are determined based on the bid and asked prices quoted on such valuation date by reputable brokers. Bonds and other fixed income securities are valued according to the broadest and most representative market, which will ordinarily be the over-the-counter market. Net asset value includes interest on fixed income securities, which is accrued daily. In addition, bonds and other fixed income securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. The prices provided by a pricing service are determined without regard to bid or last sale prices, but take into account institutional-size trading in similar groups of securities and any developments related to the specific securities. Securities not priced in this manner are valued at the most recently quoted sale price, or when securities exchange valuations are used, at the latest quoted bid price on the day of valuation. If there is no 27 such reported sale, the latest quoted bid price will be used. Securities purchased with remaining maturities of 60 days or less are valued at amortized cost, if it approximates market value. In the event that amortized cost does not approximate market value, market prices as determined above will be used. The value of other assets and securities for which no quotations are readily available (including restricted and unlisted foreign securities) and those securities for which it is inappropriate to determine prices in accordance with the above-stated procedures are determined in good faith at fair value using methods determined by the Board of Directors. For purposes of calculating net asset value per share, all assets and liabilities initially expressed in foreign currencies will be translated into U.S. dollars at the mean of the bid price and asked price of such currencies against the U.S. dollar as quoted by a major bank. PERFORMANCE INFORMATION The Fund may from time to time advertise total return of the Portfolios. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in a Portfolio would have earned over a specified period of time (such as one, five or ten years), assuming that all distributions and dividends by the Portfolio were reinvested on the reinvestment dates during the period. Total return does not take into account any federal or state income taxes that may be payable on dividends and distributions or upon redemption. The Fund may also include comparative performance information in advertising or marketing the Portfolio's shares, including data from Lipper Analytical Services, Inc., other industry publications, business periodicals, rating services and market indices. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions will be automatically reinvested in additional shares at net asset value, except that, upon written notice to the Fund or by checking off the appropriate box in the Distribution Option Section on the Account Registration Form, a shareholder may elect to receive income dividends and capital gains distributions in cash. The Emerging Growth Portfolio expects to distribute substantially all of its net investment income in the form of annual dividends and the Equity Growth and the Aggressive Equity Portfolios expect to distribute substantially all of their net investment income in the form of quarterly dividends. Net capital gains for each Portfolio, if any, will also be distributed annually. Confirmations of the purchase of shares of each Portfolio through the automatic reinvestment of income dividends and capital gains distributions will be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of 1934, as amended, on the next quarterly client statement following such purchase of shares. Consequently, confirmations of such purchases will not be provided at the time of completion of such purchases, as might otherwise be required by Rule 10b-10. Undistributed net investment income is included in each Portfolio's net assets for the purpose of calculating net asset value per share. Therefore, on the "ex-dividend" date, the net asset value per share excludes the dividend (i.e., is reduced by the per share amount of the dividend). Dividends paid shortly after the purchase of shares by an investor, although in effect a return of capital, are taxable to shareholders subject to income tax. 28 TAXES The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial, or administrative action. No attempt has been made to present a detailed explanation of the federal, state, or local income tax treatment of a Portfolio or its shareholders. Accordingly, shareholders are urged to consult their tax advisors regarding specific questions as to federal, state and local income taxes. Each Portfolio is treated as a separate entity for federal income tax purposes and is not combined with the Fund's other portfolios. It is each Portfolio's intent to continue to qualify for the special tax treatment afforded regulated investment companies under the Code, so that the Portfolio will continue to be relieved of federal income tax on that part of its net investment income and net capital gain that is distributed to shareholders. Each Portfolio distributes substantially all of its net investment income (including, for this purpose, the excess of net short-term capital gain over net long-term capital loss) to shareholders. Dividends from a Portfolio's net investment income are taxable to shareholders as ordinary income, whether received in cash or in additional shares. Such dividends paid by a Portfolio will generally qualify for the 70% dividends-received deduction for corporate shareholders to the extent of qualifying dividend income received by the Portfolio from U.S. corporations. Each Portfolio will report annually to its shareholders the amount of dividend income qualifying for such treatment. Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss) are taxable to shareholders as long-term capital gain, regardless of how long shareholders have held their shares. Each Portfolio sends reports annually to its shareholders of the federal income tax status of all distributions made during the preceding year. Each Portfolio intends to make sufficient distributions or deemed distributions of its ordinary income and capital gain net income (the excess of short-term and long-term capital gains over short-term and long-term capital losses), prior to the end of each calendar year to avoid liability for federal excise tax. Dividends and other distributions declared by a Portfolio in October, November or December of any year and payable to shareholders of record on a date in such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if the distributions are paid by the Portfolio at any time during the following January. The sale, redemption, or exchange of shares may result in taxable gain or loss to the redeeming shareholder, depending upon whether the fair market value of the redemption proceeds exceeds or is less than the shareholder's adjusted basis in the redeemed shares. Any such taxable gain or loss generally will be treated as long-term capital gain or loss if the shares have been held for more than one year and otherwise generally will be treated as short-term capital gain or loss. If capital gain distributions have been made with respect to shares that are sold at a loss after being held for six months or less, however, then the loss is treated as a long-term capital loss to the extent of the capital gain distributions. Investment income received by a Portfolio from sources within foreign countries may be subject to foreign income taxes withheld at the source. To the extent that a Portfolio is liable for foreign income taxes so withheld, 29 the Portfolio intends to operate so as to meet the requirements of the Code to pass through to the shareholders credit for foreign income taxes paid. Although each Portfolio intends to meet Code requirements to pass through credit for such taxes, there can be no assurance that each Portfolio will be able to do so. Shareholders are urged to consult with their tax advisors concerning the application of state and local income taxes to investments in a Portfolio, which may differ from the federal income tax consequences described above. THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO. PORTFOLIO TRANSACTIONS The Investment Advisory Agreement authorizes the Adviser to select the brokers or dealers that will execute the purchases and sales of investment securities for the Portfolios and directs the Adviser to use its best efforts to obtain the best available price and most favorable execution with respect to all transactions for the Portfolios. The Fund has authorized the Adviser to pay higher commissions in recognition of brokerage services which, in the opinion of the Adviser, are necessary for the achievement of better execution, provided the Adviser believes this to be in the best interest of the Fund. Since shares of the Portfolios are not marketed through intermediary brokers or dealers, it is not the Fund's practice to allocate brokerage or principal business on the basis of sales of shares which may be made through such firms. However, the Adviser may place portfolio orders with qualified broker-dealers who recommend the Fund's portfolios or who act as agents in the purchase of shares of the Fund's portfolios for their clients. In purchasing and selling securities for the Portfolios, it is the Fund's policy to seek to obtain quality execution at the most favorable prices through responsible broker-dealers. In selecting broker-dealers to execute the securities transactions for the Portfolios, consideration will be given to such factors as the price of the security, the rate of the commission, the size and difficulty of the order, the reliability, integrity, financial condition, general execution and operational capabilities of competing broker-dealers, and the brokerage and research services which they provide to the Fund. Some securities considered for investment by the Portfolios may also be appropriate for other clients served by the Adviser. If the purchase or sale of securities consistent with the investment policies of the Portfolios and one or more of these other clients served by the Adviser is considered at or about the same time, transactions in such securities will be allocated among the Portfolios and such other clients in a manner deemed fair and reasonable by the Adviser. Although there is no specified formula for allocating such transactions, the various allocation methods used by the Adviser, and the results of such allocations, are subject to periodic review by the Fund's Board of Directors. Subject to the overriding objective of obtaining the best possible execution of orders, the Adviser may allocate a portion of the Portfolio's brokerage transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order for Morgan Stanley or its affiliates to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by Morgan Stanley or such affiliates must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with 30 comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. Furthermore, the Board of Directors of the Fund, including a majority of those Directors who are not "interested persons," as defined in the 1940 Act, have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Morgan Stanley or such affiliates are consistent with the foregoing standard. Portfolio securities will not be purchased from or through, or sold to or through, the Adviser or Morgan Stanley or any "affiliated persons," as defined in the 1940 Act of Morgan Stanley when such entities are acting as principals, except to the extent permitted by law. Although none of the Portfolios will invest for short-term trading purposes, investment securities may be sold from time to time without regard to the length of time they have been held. For the Equity Growth and Emerging Growth Portfolios, it is anticipated that, under normal circumstances, the annual portfolio turnover rate will not exceed 100%. However, the annual portfolio turnover rate of the Equity Growth Portfolio for the fiscal year ended December 31, 1993 was 172%. For the Aggressive Equity Portfolio, the annual portfolio turnover rate is expected to exceed 100%. High portfolio turnover involves correspondingly greater transaction costs which will be borne directly by the respective Portfolio. In addition, high portfolio turnover may result in more capital gains which would be taxable to the shareholders of the respective Portfolio. The tables set forth in "Financial Highlights" present the Portfolios' historical turnover rates. GENERAL INFORMATION DESCRIPTION OF COMMON STOCK The Fund was organized as a Maryland corporation on June 16, 1988. The Articles of Incorporation permit the Fund to issue up to 15,000,000,000 shares of common stock, with $.001 par value per share. Pursuant to the Fund's Articles of Incorporation, the Board of Directors may increase the number of shares the Fund is authorized to issue without the approval of the shareholders of the Fund. The Board of Directors has the power to designate one or more classes of shares of common stock and to classify and reclassify any unissued shares with respect to such classes. The shares of the Portfolios, when issued, will be fully paid, non-assessable, fully transferable and redeemable at the option of the holder. The shares have no preference as to conversion, exchange, dividends, retirement or other features and have no pre-emptive rights. The shares of each portfolio have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of Directors can elect 100% of the Directors if they choose to do so. Persons or organizations owning 25% or more of the outstanding shares of a Portfolio may be presumed to "control" (as defined in the 1940 Act) such Portfolio. Under Maryland law, the Fund is not required to hold an annual meeting of its shareholders unless required to do so under the 1940 Act. REPORTS TO SHAREHOLDERS The Fund will send to its shareholders annual and semi-annual reports; the financial statements appearing in annual reports are audited by independent accountants. Monthly unaudited portfolio data is also available from the Fund upon request. 31 In addition, Morgan Stanley Asset Management Inc., or its agent, as Transfer Agent, will send to each shareholder having an account directly with the Fund a monthly statement showing transactions in the account, the total number of shares owned, and any dividends or distributions paid. CUSTODIAN Domestic securities and cash are held by United States Trust Company of New York, New York, as the Fund's domestic custodian. Morgan Stanley Trust Company, Brooklyn, New York, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians who were approved by the Board of Directors of the Fund in accordance with regulations of the Securities and Exchange Commission for the purpose of providing custodial services for such assets. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the Fund. INDEPENDENT ACCOUNTANTS Price Waterhouse LLP serves as independent accountants for the Fund and audits the annual financial statements of each portfolio. LITIGATION The Fund is not involved in any litigation. 32 MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MA 02208-2798 - ------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - ------------------------------------------------------------------------------- ACCOUNT INFORMATION |If you need assistance in filling out this form for the Morgan Stanley Institutional Fund, please Fill in where |contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all applicable |items except signature, and mail to the Fund at the address above. - ----------------------------------------------------------------------------------------------------------------------------------- A) REGISTRATION | 1. INDIVIDUAL |1. ______________________________________________________________________________________________________ 2. JOINT TENANTS | First Name Initial Last Name (RIGHTS OF |2. ______________________________________________________________________________________________________ SURVIVORSHIP | First Name Initial Last Name PRESUMED UNLESS | ______________________________________________________________________________________________________ TENANCY IN COMMON | First Name Initial Last Name IS INDICATED) | - ----------------------------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, | TRUSTS AND OTHERS |3. ______________________________________________________________________________________________________ Please call the | ______________________________________________________________________________________________________ Fund for additional| ______________________________________________________________________________________________________ documents that may | Type of Registration: / /INCORPORATED / /UNINCORPORATED / /PARTNERSHIP / /UNIFORM GIFT/TRANSFER TO MINOR be required to set | ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR up account and to | PERMITTED) authorize | / /TRUST __________________________ / /OTHER (Specify) ________________________ transactions. | - ----------------------------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS | Please fill in |Street or P.O. Box_______________________________________________________________________________________ completely, |City______________________________________________________________State_______Zip_______________-________ including telephone |Home Telephone No.______-_______-_________________Business Telephone No._______-_______-_________________ number(s). |/ /United States Citizen / /Resident Alien / /Non-Resident Alien: Indicate Country of Residence _________ - ----------------------------------------------------------------------------------------------------------------------------------- C) TAXPAYER |PART 1. Enter your Taxpayer | IMPORTANT TAX INFORMATION IDENTIFICATION |Identification Number. For most |You (as a payee) are required by law to provide us (as payer) NUMBER |individual taxpayers, this is |with your correct Taxpayer Identification Number. Accounts that If the account is in |your Social Security Number. |have a missing or incorrect Taxpayer Identification Number will more than one name, | TAXPAYER IDENTIFICATION NUMBER |be subject to backup withholding at a 31% rate on the CIRCLE THE NAME OF THE|______-_________________________ |dividends distributions and other payments. If you have not PERSON WHOSE TAXPAYER | OR |provided us with your correct taxpayer identification number, you IDENTIFICATION NUMBER | SOCIAL SECURITY NUMBER |may be subject to a $50 penalty imposed by the Internal Revenue IS PROVIDED IN SECTION|________-_____________-_________ |Service. A) ABOVE. If no name | | is circled, the number|PART 2. BACKUP WITHHOLDING |Backup withholding is not an additional tax; the tax liability of will be considered to |/ / Check this box if you are NOT |persons subject to backup withholding will be reduced by the be that of the last |subject to Backup Withholding |amount of tax withheld. If withholding results in an overpayment name listed. For |under the provisions of Section |of taxes, a refund may be obtained. Custodian account of |3406(a)(1)(C) of the Internal | a minor (Uniform |Revenue Code. |You may be notified that you are subject to backup withholding Gifts/Transfers to | |under section 3406(a)(1)(C) of the Internal Revenue Code because Minors Acts), give the| |you have underreported interest or dividends or you were required Social Security Number| |to but failed to file a return which would have included a of the minor. | |reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO |NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - ----------------------------------------------------------------------------------------------------------------------------------- D) PORTFOLIO SELECTION | Minimum $500,000 for | The Equity Growth | Portfolio. Minimum |/ / Equity Growth Portfolio $__________________ $250,000 for the |/ / Emerging Growth Portfolio $________________ Emerging Growth |/ / Aggressive Equity Portfolio $______________ Portfolio. Minimum | $500,000 for the | Aggressive Equity | Portfolio | Please indicate | amount. | - ----------------------------------------------------------------------------------------------------------------------------------- E) METHOD OF |Payment by: INVESTMENT |/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME) Please indicate | _________________________________-______ manner of |/ / Exchange $____________________ From__________________________ Account No. payment. | Name of Portfolio |/ / Account previously established by: _________________________________-______ | / / Phone exchange / / Wire on ___________________ Account No. (Check Date (Previously assigned by the Fund) Digit) - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION |Income dividends and capital gains distributions (if any) will be reinvested in additional shares unless OPTION |either box below is checked. |/ /Income dividends to be paid in cash, capital gains distributions (if any) in shares. |/ /Income dividends and capital gains distributions (if any) to be paid in cash. - ----------------------------------------------------------------------------------------------------------------------------------- G) TELEPHONE |/ /I/we hereby authorize the Fund and its| REDEMPTION | agents to honor any telephone requests|__________________________________________ ________________ Please select at time | to wire redemption proceeds to the |Name of COMMERCIAL Bank (Not Savings Bank) Bank Account No. of initial | commercial bank indicated at right | application if you | and/or mail redemption proceeds to the| ____________ wish to redeem | name and address in which my/our fund | Bank ABA No. shares by telephone. | account is registered if such requests|____________________________________________________________ A SIGNATURE GUARANTEE | are believed to be authentic. | Name(s) in which your BANK Account is Established IS REQUIRED IF BANK | |____________________________________________________________ ACCOUNT IS NOT | | Bank's Street Address REGISTERED | |____________________________________________________________ IDENTICALLY TO YOUR |THE FUND AND THE FUND'S |City State Zip FUND ACCOUNT. |TRANSFER AGENT WILL EMPLOY REASONABLE | |PROCEDURES TO CONFIRM THAT INSTRUCTIONS | TELEPHONE REQUESTS |COMMUNICATED BY TELEPHONE ARE GENUINE. | FOR REDEMPTIONS |THESE PROCEDURES INCLUDE REQUIRING THE | WILL NOT BE |INVESTOR TO PROVIDE CERTAIN PERSONAL | HONORED UNLESS |IDENTIFICATION INFORMATION AT THE TIME AN| THE BOX IS |ACCOUNT IS OPENED AND PRIOR TO EFFECTING | CHECKED. |EACH TRANSACTION REQUESTED BY TELEPHONE. | |IN ADDITION, ALL TELEPHONE TRANSACTION | |REQUESTS WILL BE RECORDED AND INVESTORS | |MAY BE REQUIRED TO PROVIDE ADDITIONAL | |TELECOPIED WRITTEN INSTRUCTIONS OF | |TRANSACTION REQUESTS. NEITHER THE FUND | |NOR THE TRANSFER AGENT WILL BE | |RESPONSIBLE FOR ANY LOSS, LIABILITY, COST| |OR EXPENSE FOR FOLLOWING INSTRUCTIONS | |RECEIVED BY TELEPHONE THAT IT REASONABLY | |BELIEVES TO BE GENUINE. | - ----------------------------------------------------------------------------------------------------------------------------------- H) INTERESTED PARTY |___________________________________________________________________________________________________ OPTION | Name |___________________________________________________________________________________________________ In addition to the | account statement sent|___________________________________________________________________________________________________ to my/our registered | Address address, I/we hereby | authorize the fund |___________________________________________________________________________________________________ to mail duplicate | City State Zip Code statements to the | name and address | provided at right. | - ----------------------------------------------------------------------------------------------------------------------------------- I) DEALER |_______________________________________ ___________________________________ _______________________ INFORMATION |Representative Name Representative No. Branch No. - ----------------------------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF |The undersigned certify that I/we have full authority and legal capacity to purchase and redeem ALL HOLDERS |shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley AND TAXPAYER |Institutional Fund, Inc. and agree to be bound by its terms. Under the penalties of perjury, I/we CERTIFICATION |certify that the information provided in Section C) above is true, correct and complete. | |(X) (X) SIGN HERE --> |------------------------------------------------ ----------------------------------------------------- |Signature Date Signature Date - -----------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. -------------------------- TABLE OF CONTENTS PAGE ----- Fund Expenses..................................... 2 Financial Highlights.............................. 4 Prospectus Summary................................ 7 Investment Objectives and Policies................ 10 Additional Investment Information................. 13 Investment Limitations............................ 20 Management of the Fund............................ 20 Purchase of Shares................................ 23 Redemption of Shares.............................. 24 Shareholder Services.............................. 26 Valuation of Shares............................... 27 Performance Information........................... 28 Dividends and Capital Gains Distributions......... 28 Taxes............................................. 29 Portfolio Transactions............................ 30 General Information............................... 31 Account Registration Form EQUITY GROWTH PORTFOLIO EMERGING GROWTH PORTFOLIO AGGRESSIVE EQUITY PORTFOLIO PORTFOLIOS OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. Common Stock ($.001 PAR VALUE) ------------- PROSPECTUS ------------- Investment Adviser Morgan Stanley Asset Management Inc. Distributor Morgan Stanley & Co. Incorporated MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MA 02208-2798 - -------------------------------------------------------------------------------- SUPPLEMENT DATED JUNE 30, 1995 TO PROSPECTUS DATED FEBRUARY 10, 1995 OF MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798 BOSTON, MASSACHUSETTS 02208-2798 ------------- The prospectus dated February 10, 1995 (the "Prospectus") of the U.S. Real Estate Portfolio of the Morgan Stanley Institutional Fund, Inc. (the "Fund") is hereby amended and supplemented by adding the following paragraph to page 16 before the paragraph with the heading "REDEMPTION OF SHARES": EXCESSIVE TRADING. Frequent trades involving either substantial fund assets or a substantial portion of your account or accounts controlled by you can disrupt management of a Portfolio and raise its expenses. Consequently, in the interest of all the stockholders of the Portfolio and the Portfolio's performance, the Fund may in its discretion bar a stockholder that engages in excessive trading of shares of a Portfolio from further purchases of shares of the Fund for an indefinite period. The Fund considers excessive trading to be more than one purchase and sale involving shares of the same Portfolio of the Fund within any 120-day period. For example, exchanging shares of Portfolios of the Fund as follows: exchanging shares of Portfolio A for shares of Portfolio B, then exchanging shares of Portfolio B for shares of Portfolio C and again exchanging shares of Portfolio C for shares of Portfolio B within a 120-day period amounts to excessive trading. Two types of transactions are exempt from these excessive trading restrictions: (1) trades exclusively between money market portfolios; and (2) trades done in connection with an asset allocation service managed or advised by MSAM and/or any of its affiliates. - -------------------------------------------------------------------------------- P R O S P E C T U S ---------------------------------------------------------------------- U.S. REAL ESTATE PORTFOLIO PORTFOLIO OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MASSACHUSETTS 02208-2798 FOR INFORMATION CALL 1-800-548-7786 ---------------- Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no-load, open-end management investment company with diversified and non-diversified series ("portfolios"). The Fund currently consists of twenty-seven portfolios offering a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. Shares of the portfolios are offered with no sales charge or exchange or redemption fee (with the exception of one of the portfolios). This Prospectus pertains to the U.S. Real Estate Portfolio (the "Portfolio"), which seeks above average current income and long-term capital appreciation by investing primarily in equity securities of companies in the U.S. real estate industry, including real estate investment trusts. INVESTORS SHOULD NOTE THAT THE PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES OTHER THAN RULE 144A SECURITIES AND NO MORE THAN 15% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES THAT ARE RULE 144A SECURITIES. SEE "ADDITIONAL INVESTMENT INFORMATION -- NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES." INVESTMENTS IN RESTRICTED SECURITIES IN EXCESS OF 5% OF A PORTFOLIO'S TOTAL ASSETS MAY BE CONSIDERED A SPECULATIVE ACTIVITY, MAY INVOLVE GREATER RISK AND MAY INCREASE THE PORTFOLIO'S EXPENSES. The Fund is designed to meet the investment needs of discerning investors who place a premium on quality and personal service. With Morgan Stanley Asset Management Inc. as Adviser and Administrator (the "Adviser" and the "Administrator"), and with Morgan Stanley & Co. Incorporated ("Morgan Stanley") as Distributor, the Fund makes available to institutional investors and high net worth individual investors a series of portfolios which benefit from the investment expertise and commitment to excellence associated with Morgan Stanley and its affiliates. This Prospectus is designed to set forth concisely the information about the Portfolios that a prospective investor should know before investing and it should be retained for future reference. The Fund offers additional portfolios which are described in other prospectuses and under the Prospectus Summary section herein. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY -- Active Country Allocation, Asian Equity, China Growth, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Small Cap and Japanese Equity Portfolios; (ii) U.S. EQUITY - -- Emerging Growth, Equity Growth, Aggressive Equity, Small Cap Value Equity, Value Equity and U.S. Real Estate Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced and Latin American Portfolios; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities, Municipal Bond and Real Yield Portfolios; and (v) MONEY MARKET -- Money Market and Municipal Money Market Portfolios. Additional information about the Fund is contained in a "Statement of Additional Information" dated April 13, 1994, as amended June 20, 1994, August 31, 1994, September 13, 1994 and February 10, 1995, which is incorporated herein by reference. The Statement of Additional Information and the Prospectuses pertaining to the other portfolios of the Fund are available upon request and without charge by writing or calling the Fund at the address and telephone number set forth above. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS FEBRUARY 10, 1995. FUND EXPENSES The following table illustrates all expenses and fees that a shareholder of the Portfolio will incur:
SHAREHOLDER TRANSACTION EXPENSES - -------------------------------------------------------------------------------------------- Maximum Sales Load Imposed on Purchases..................................................... None Maximum Sales Load Imposed on Reinvested Dividends.......................................... None Deferred Sales Load......................................................................... None Redemption Fees............................................................................. None Exchange Fees............................................................................... None ANNUAL FUND OPERATING EXPENSES - -------------------------------------------------------------------------------------------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Investment Advisory Fee (Net of Fee Waivers)................................................ 0.60%* Administrative & Shareholder Account Costs.................................................. 0.15% 12b-1 Fees.................................................................................. None Custody Fees................................................................................ 0.10% Other Expenses.............................................................................. 0.15% --------- Total Operating Expenses (Net of Fee Waivers)........................................... 1.00%* --------- ---------
- -------------- *The Adviser has agreed to a reduction in the fees payable to it as Adviser and to reimburse the Portfolios, if necessary, if such fees would cause the total annual operating expenses of the Portfolio to exceed 1.00% of its average daily net assets. Absent such fee waiver or expense reimbursement for the Portfolio the total operating expenses would be estimated to be 1.20% of such Portfolio's average daily net assets. As a result of these reductions, the Investment Advisory Fee stated above is lower than the contractual fee stated under "Management of the Fund." For further information on Fund expenses, see "Management of the Fund." The purpose of this table is to assist the investor in understanding the various expenses that an investor in the Fund will bear directly or indirectly. The expenses and fees for the Portfolio are based on estimates that assume that the average daily net assets will be approximately $50,000,000. "Other Expenses" include Board of Directors' fees and expenses, amortization of organization costs, filing fees, professional fees, and costs for shareholder reports. The following example illustrates the expenses that you would pay on a $1,000 investment assuming (1) a 5% annual rate of return and (2) redemption at the end of each time period. As noted in the table above, the Portfolio charges no redemption fees of any kind. The example is based on total operating expenses of the Portfolio after fee waivers.
1 YEAR 3 YEARS ----------- ----------- U.S. Real Estate Portfolio........................................................... $ 10 $ 32
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The Fund intends to comply with all state laws that restrict investment company expenses. Currently, the most restrictive state law requires that the aggregate annual expenses of an investment company shall not exceed 2 two and one-half percent (2 1/2%) of the first $30 million of average net assets, two percent (2%) of the next $70 million of average net assets, and one and one-half percent (1 1/2%) of the remaining net assets of such investment company. The Adviser has agreed to a reduction in the amounts payable to it, and to reimburse the Portfolio, if necessary, if in any fiscal year the sum of the Portfolio's expenses exceeds the limit set by applicable state law. 3 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-seven portfolios, offering institutional investors and high net worth individual investors a broad range of investment choices coupled with the advantages of a no-load mutual fund with Morgan Stanley and its affiliates providing customized services as Adviser, Administrator and Distributor. Each portfolio has its own investment objectives and policies designed to meet specific goals. This Prospectus pertains to the U.S. Real Estate Portfolio (the "Portfolio"), a non-diversified portfolio which seeks above average current income and long-term capital appreciation by investing primarily in equity securities of companies in the U.S. real estate industry, including real estate investment trusts. The other portfolios of the Fund are described in other Prospectuses which may be obtained from the Fund at the address and phone number noted on the cover page of this Prospectus. The objectives of these other portfolios are listed below: GLOBAL AND INTERNATIONAL EQUITY: -The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital appreciation by investing in accordance with country weightings determined by the Adviser in common stocks of non-U.S. issuers which, in the aggregate, replicate broad country indices. -The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of Asian issuers. -The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in the equity securities of issuers in The People's Republic of China, Hong Kong and Taiwan. -The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of emerging country issuers. -The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of European issuers. -The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of issuers throughout the world, including U.S. issuers. -The GOLD PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of foreign and domestic issuers engaged in gold-related activities. -The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of non-U.S. issuers. -The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in common stocks of non-U.S. issuers with equity market capitalizations of less than $500 million. -The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Japanese issuers. US EQUITY: -The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing primarily in corporate equity and equity-linked securities. -The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented common stocks of medium and large capitalization companies. -The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented common stocks of small- to medium-sized corporations. 4 -The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued common stocks of small- to medium-sized companies. -The VALUE EQUITY PORTFOLIO seeks high total return by investing in common stocks which the Adviser believes to be undervalued relative to the stock market in general at the time of purchase. EQUITY AND FIXED INCOME: -The BALANCED PORTFOLIO seeks high total return while preserving capital by investing in a combination of undervalued common stocks and fixed income securities. -The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Latin American issuers and debt securities issued or guaranteed by Latin American governments or governmental entities. FIXED INCOME: -The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing primarily in debt securities of government, government-related and corporate issuers located in emerging countries. -The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent with the preservation of capital by investing in a diversified portfolio of fixed income securities. -The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate of return while preserving capital by investing in fixed income securities of issuers throughout the world, including U.S. issuers. -The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a diversified portfolio of high yield fixed income securities that offer a yield above that generally available on debt securities in the three highest rating categories of the recognized rating services. -The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level of current income as is consistent with the preservation of capital by investing primarily in a variety of investment-grade mortgage-backed securities. -The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current income consistent with preservation of principal through investment primarily in municipal obligations, the interest on which is exempt from federal income tax. -The REAL YIELD PORTFOLIO seeks to produce a high total return consistent with preservation of capital by investing in fixed income securities of issuers throughout the world, including U.S. issuers. MONEY MARKET: -The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less. -The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt income and preserve capital while maintaining high levels of liquidity through investing in high quality money market instruments with remaining maturities of one year or less which are exempt from federal income tax. INVESTMENT MANAGEMENT Morgan Stanley Asset Management Inc., a wholly owned subsidiary of Morgan Stanley Group Inc., which at December 31, 1994, together with its affiliated asset management companies, had approximately $48.7 billion in assets under management as an investment manager or as a fiduciary adviser, acts as investment adviser to the Fund and each of its portfolios. See "Management of the Fund -- Investment Adviser" and "Management of the Fund -- Administrator." 5 HOW TO INVEST Shares of each Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Share purchases may be made by sending investments directly to the Fund. The minimum initial investment for the Portfolio is $500,000. The minimum subsequent investment for the Portfolio is $1,000 (except for automatic reinvestment of dividends and capital gains distributions for which there are no minimum). The minimum investment levels may be waived for certain Morgan Stanley employees and customers at the discretion of the Adviser. See "Purchase of Shares." HOW TO REDEEM Shares of the Portfolio may be redeemed at any time, without cost, at the net asset value per share of the Portfolio next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. If a shareholder reduces its total investment in shares in the Portfolio to less than $500,000, the investment may be subject to redemption. See "Redemption of Shares." RISK FACTORS The investment policies of the Portfolio entail certain risks and considerations of which an investor should be aware. Because the Portfolio invests primarily in the securities of companies principally engaged in the real estate industry, its investments may be subject to the risks associated with the direct ownership of real estate. The Portfolio's share price and investment return fluctuate, and a shareholder's investment when redeemed may be worth more or less than his original cost. Because the Portfolio may invest a substantial portion of its assets in real estate investment trusts ("REITs"), the Portfolio may also be subject to certain risks associated with the direct investments of REITs. Because the Portfolio is a non-diversified portfolio, the Portfolio may invest a greater proportion of its assets in the securities of a smaller number of issuers and, as a result, will be subject to a greater risk with respect to its portfolio securities. See "Investment Objective and Policies -- Risk Factors." 6 INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Portfolio is described below, together with the policies the Fund employs in its efforts to achieve this objective. The Portfolio's investment objective is a fundamental policy which may not be changed without the approval of a majority of the Portfolio's outstanding voting securities. There is no assurance that the Portfolio will attain its objectives. The investment policies described below are not fundamental policies and may be changed without shareholder approval. The investment objective of the Portfolio is to provide above average current income and long-term capital appreciation by investing primarily in equity securities of companies in the U.S. real estate industry, including real estate investment trusts ("REITs"). Equity securities include common stocks, shares or units of beneficial interest of REITs, limited partnership interests in master limited partnerships, rights or warrants to purchase common stocks, securities convertible into common stocks, and preferred stock. Under normal circumstances, at least 65% of the Portfolio's total assets will be invested in income producing equity securities of companies principally engaged in the U.S. real estate industry. For purposes of the Portfolio's investment policies, a company is "principally engaged" in the real estate industry if (i) it derives at least 50% of its revenues or profits from the ownership, construction, management, financing or sale of residential, commercial or industrial real estate or (ii) it has at least 50% of the fair market value of its assets invested in residential, commercial or industrial real estate. Companies in the real estate industry may include among others: REITs, master limited partnerships that invest in interests in real estate, real estate operating companies, and companies with substantial real estate holdings, such as hotel companies, residential builders and land-rich companies. The Portfolio seeks to invest in equity securities of companies that provide a dividend yield that exceeds the composite dividend yield of securities comprising the Standard & Poor's Stock Price Index ("S&P 500"). A substantial portion of the Portfolio's total assets will be invested in securities of REITs. REITs pool investors' funds for investment primarily in income producing real estate or real estate related loans or interests. A REIT is not taxed on income distributed to its shareholders or unitholders if it complies with regulatory requirements relating to its organization, ownership, assets and income, and with a regulatory requirement that it distribute to its shareholders or unitholders at least 95% of its taxable income for each taxable year. Generally, REITs can be classified as Equity REITs, Mortgage REITs or Hybrid REITs. Equity REITs invest the majority of their assets directly in real property and derive their income primarily from rents and capital gains from appreciation realized through property sales. Equity REITs are further categorized according to the types of real estate securities they own, e.g., apartment properties, retail shopping centers, office and industrial properties, hotels, health-care facilities, manufactured housing and mixed-property types. Mortgage REITs invest the majority of their assets in real estate mortgages and derive their income primarily from interest payments. Hybrid REITs combine the characteristics of both Equity and Mortgage REITs. The Portfolio will invest primarily in Equity REITs. A shareholder in the Portfolio should realize that by investing in REITs indirectly through the Portfolio, he will bear not only his proportionate share of the expenses of the Portfolio, but also indirectly, the management expenses of underlying REITs. Under normal circumstances, the Portfolio may invest up to 35% of its total assets in debt securities issued or guaranteed by real estate companies or secured by real estate assets and rated, at time of purchase, in one of the four highest rating categories by a nationally recognized statistical rating organization ("NRSRO") or 7 determined by the Adviser to be of comparable quality at the time of purchase, high quality money market instruments, such as notes, certificates of deposit or bankers' acceptances issued by domestic or foreign insures, or high-grade debt securities, consisting of corporate debt securities and United States Government securities. Securities rated in the lowest category of investment grade securities have speculative characteristics. Investment grade securities are securities that are rated in one of the four highest rating categories by an NRSRO. Any remaining assets not invested as described above may be invested in securities or obligations, including derivative securities, that are set forth in "Additional Investment Information" below. The Portfolio may concentrate in the U.S. real estate industry, but may not invest more than 25% of its total assets in securities of companies in any one other industry (for these purposes the U.S. Government and its agencies and instrumentalities are not considered an industry). RISK FACTORS The investment policies of the Portfolio entail certain risks and considerations of which an investor should be aware. Because the Portfolio invests primarily in the securities of companies principally engaged in the real estate industry, its investments may be subject to the risks associated with the direct ownership of real estate. These risks include: the cyclical nature of real estate values, risks related to general and local economic conditions, overbuilding and increased competition, increases in property taxes and operating expenses, demographic trends and variations in rental income, changes in zoning laws, casualty or condemnation losses, environmental risks, regulatory limitations on rents, changes in neighborhood values, related party risks, changes in the appeal of properties to tenants, increases in interest rates and other real estate capital market influences. Generally, increases in interest rates will increase the costs of obtaining financing, which could directly and indirectly decrease the value of the Portfolio's investments. The Portfolio's share price and investment return fluctuate, and a shareholder's investment when redeemed may be worth more or less than his original cost. Because the Portfolio may invest a substantial portion of its assets in REITs, the Portfolio may also be subject to certain risks associated with the direct investments of REITs. REITs may be affected by changes in the value of their underlying properties and by defaults by borrowers or tenants. Mortgage REITs may be affected by the quality of the credit extended. Furthermore, REITs are dependent on specialized management skills. Some REITs may have limited diversification and may be subject to risks inherent in investments in a limited number of properties, in a narrow geographic area, or in a single property type. REITs depend generally on their ability to generate cash flow to make distributions to shareholders or unitholders, and may be subject to defaults by borrowers and to self-liquidations. In addition, the performance of a REIT may be affected by its failure to qualify for tax-free pass-through of income under the Internal Revenue Code of 1986, as amended (the "Code"), or its failure to maintain exemption from registration under the Investment Company Act of 1940, as amended (the "1940 Act"). Changes in prevailing interest rates may inversely affect the value of the debt securities in which the Portfolio will invest. Changes in the value of portfolio securities will not necessarily affect cash income derived from these securities but will affect a Portfolio's net asset value. Because the Portfolio is a non-diversified portfolio, the Portfolio is not limited by the 1940 Act in the proportion of its assets that may be invested in the obligations of a single issuer. Thus, the Portfolio may invest a greater proportion of its assets in the securities of a smaller number of issuers and, as a result, will be subject to a greater risk with respect to its portfolio securities. Any economic, political, or regulatory developments affecting 8 the value of the securities the Portfolio holds could have a greater impact on the total value of the Portfolio's holdings than would be the case if the Portfolio's securities were diversified among more issuers. The Portfolio, however, intends to comply with the diversification requirements imposed by the Code for qualification as a regulated investment company. See "Taxes" and "Investment Limitations." ADDITIONAL INVESTMENT INFORMATION WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase securities on a when-issued or delayed delivery basis. In such transactions, instruments are bought with payment and delivery taking place in the future in order to secure what is considered to be an advantageous yield or price at the time of the transaction. Delivery of and payment for these securities may take as long as a month or more after the date of the purchase commitment, but will take place no more than 120 days after the trade date. The Portfolio will maintain with the Custodian a separate account with a segregated portfolio of high-grade debt securities or cash in an amount at least equal to these commitments. The payment obligation and the interest rates that will be received are each fixed at the time the Portfolio enters into the commitment and no interest accrues to the Portfolio until settlement. Thus, it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. It is a current policy of the Portfolio not to enter into when-issued commitments exceeding, in the aggregate, 15% of the market value of the Portfolio's total assets less liabilities other than the obligations created by these commitments. REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements with brokers, dealers or banks that meet the credit guidelines established by the Fund's Board of Directors. In a repurchase agreement, the Portfolio buys a security from a seller that has agreed to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. The term of these agreements is usually from overnight to one week, and never exceeds one year. Repurchase agreements may be viewed as a fully collateralized loan of money by the Portfolio to the seller. The Portfolio always receives securities, with a market value at least equal to the purchase price (including accrued interest) as collateral and this value is maintained during the term of the agreement. If the seller defaults and the collateral value declines, the Portfolio might incur a loss. If bankruptcy proceedings are commenced with respect to the seller, the Portfolio's realization upon the collateral may be delayed or limited. The aggregate of certain repurchase agreements and certain other investments is limited as set forth under "Investment Limitations." LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend their securities to brokers, dealers, domestic and foreign banks or other financial institutions for the purpose of increasing its net investment income. These loans must be secured continuously by cash or equivalent collateral, or by a letter of credit at least equal to the market value of the securities loaned plus accrued interest or income. There may be a risk of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. A Portfolio will not enter into securities loan transactions exceeding, in the aggregate, 33 1/3% of the market value of its total assets. For more detailed information about securities lending, see "Investment Objectives and Policies" in the Statement of Additional Information. TEMPORARY INVESTMENTS. For temporary defensive purposes, when the Adviser determines that market conditions warrant, the Portfolio may invest up to 100% of its assets in money market instruments consisting of securities issued or guaranteed by the United States Government, its agencies or instrumentalities, repurchase 9 agreements, certificates of deposit and bankers' acceptances issued by banks or savings and loan associations having net assets of at least $500 million as of the end of their most recent fiscal year, high-grade commercial paper rated, at time of purchase, in the top two categories by a national rating agency or determined to be of comparable quality by the Adviser at the time of purchase and other long- and short-term debt instruments which are rated A or higher by Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's") at the time of purchase, and may hold a portion of its assets in cash. MONEY MARKET INSTRUMENTS. The Portfolio is permitted to invest in money market instruments, although the Portfolio intends to stay invested in securities satisfying its primary investment objective to the extent practical. The Portfolio may make money market investments pending other investment or settlement for liquidity, or in adverse market conditions. The money market investments permitted for the Portfolio include obligations of the United States Government and its agencies and instrumentalities, other debt securities, commercial paper including bank obligations, certificates of deposit, and repurchase agreements. For more detailed information about these money market investments, see "Description of Securities and Ratings" in the Statement of Additional Information. STOCK OPTIONS, FUTURES CONTRACTS AND OPTIONS IN FUTURES CONTRACTS. The Portfolio may write (i.e., sell) covered call options on portfolio securities. The Portfolio may write covered put options on portfolio securities. By selling a covered call option, the Portfolio would become obligated during the term of the option to deliver the securities underlying the option should the option holder choose to exercise the option before the option's termination date. In return for the call it has written, the Portfolio will receive from the purchaser (or option holder) a premium which is the price of the option, less a commission charged by a broker. The Portfolio will keep the premium regardless of whether the option is exercised. By selling a covered put option, the Portfolio incurs an obligation to buy the security underlying the option from the purchaser of the put at the option's exercise price at any time during the option period, at the purchaser's election (certain options written by the Portfolio will be exercisable by the purchaser only on a specific date). A call option is "covered" if the Portfolio owns the security underlying the option it has written or has an absolute or immediate right to acquire the security by holding a call option on such security, or maintains a sufficient amount of cash, cash equivalents or liquid securities to purchase the underlying security. Generally, a put option is "covered" if the Fund maintains cash, U.S. Government securities or other high grade debt obligations equal to the exercise price of the option, or if the Fund holds a put option on the same underlying security with a similar or higher exercise price. When the Portfolio writes covered call options, it augments its income by the premiums received and is thereby hedged to the extent of that amount against a decline in the price of the underlying securities. The premiums received will offset a portion of the potential loss incurred by the Portfolio if the securities underlying the options are ultimately sold by the Portfolio at a loss. However, during the option period, the Portfolio has, in return for the premium on the option, given up the opportunity for capital appreciation above the exercise price should the market price of the underlying security increase, but has retained the risk of loss should the price of the underlying security decline. The Portfolio will write put options to receive the premiums paid by purchasers (when the Adviser wishes to purchase the security underlying the option at a price lower than its current market price, in which case the Portfolio will write the covered put at an exercise price reflecting the lower purchase price sought) and to close out a long put option position. 10 The Portfolio may also purchase put options on its portfolio securities or call options. When the Portfolio purchases a call option it acquires the right to buy a designated security at a designated price (the "exercise price"), and when the Portfolio purchases a put option it acquires the right to sell a designated security at the exercise price, in each case on or before a specified date (the "termination date"), which is usually not more than nine months from the date the option is issued. The Portfolio may purchase call options to close out a covered call position or to protect against an increase in the price of a security it anticipates purchasing. The Portfolio may purchase put options on securities which it holds in its portfolio to protect itself against decline in the value of the security. If the value of the underlying security were to fall below the exercise price of the put purchased in an amount greater than the premium paid for the option, the Portfolio would incur no additional loss. The Portfolio may also purchase put options to close out written put positions in a manner similar to call option closing purchase transactions. There are no other limits on the Portfolio's ability to purchase call and put options. The Portfolio may enter into futures contracts and options on futures contracts to remain fully invested and to reduce transaction costs. The Portfolio may also enter into futures transactions as a hedge against fluctuations in the price of a security it holds or intends to acquire, but not for speculation or for achieving leverage. The Portfolio may enter into futures contracts and options on futures contracts provided that not more than 5% of the Portfolio's total assets at the time of entering into the contract or option is required as deposit to secure obligations under such contracts and options, and provided that not more than 20% of the Portfolio's total assets in the aggregate is invested in futures contracts and options on futures contracts. The Portfolio may purchase and write call and put options on futures contracts that are traded on any international exchange, traded over-the-counter or which are synthetic options or futures or equity swaps, and may enter into closing transactions with respect to such options to terminate an existing position. An option on a futures contract gives the purchaser the right (in return for the premium paid) to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the term of the option. The Portfolio will purchase and write options on futures contracts for identical purposes to those set forth above for the purchase of a futures contract (purchase of a call option or sale of a put option) and the sale of a futures contract (purchase of a put option or sale of a call option), or to close out a long or short position in future contracts. RISKS ASSOCIATED WITH OPTIONS AND FUTURES. Options, futures and options on futures are derivative securities, in which the Portfolio may invest for hedging purposes, as well as to remain fully invested and to reduce transaction costs. Investing for the latter two purposes may be considered speculative. The primary risks associated with the use of options, futures and options on futures are (i) imperfect correlation between the change in market value of the stocks held by the Portfolio and the prices of futures and options relating to the stocks purchased or sold by the Portfolio; and (ii) possible lack of a liquid secondary market for an option or a futures contract and the resulting inability to close a futures position which could have an adverse impact on the Portfolio's ability to hedge. In the opinion of the Board of Directors, the risk that the Portfolio will be unable to close out a futures position or options contract will be minimized by only entering into futures contracts or options transactions for which there appears to be a liquid secondary market. NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES. The Portfolio may invest in securities that are neither listed on a stock exchange nor traded over-the-counter, including privately placed securities. Such unlisted equity securities may involve a higher degree of business and financial risk that can result in substantial losses. As a result of the absence of a public trading market for these securities, they may 11 be less liquid than publicly traded securities. Although these securities may be resold in privately negotiated transactions, the prices realized from these sales could be less than those originally paid by the Portfolio or less than what may be considered the fair value of such securities. Furthermore, companies whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements which might be applicable if their securities were publicly traded. If such securities are required to be registered under the securities laws of one or more jurisdictions before being resold, the Portfolio may be required to bear the expenses of registration. The Portfolio may not invest more than 15% of its total assets in illiquid securities, including securities for which there is not readily available secondary market nor more than 10% of its total assets in securities that are restricted from sale to the public without registration ("Restricted Securities") under the Securities Act of 1933, as amended (the "1933 Act"). Nevertheless, subject to the foregoing limit on illiquid securities, the Portfolio may invest up to 15% of its total assets in Restricted Securities that can be offered and sold to qualified institutional buyers under Rule 144A under that Act ("144A Securities"). The Board of Directors has adopted guidelines and delegated to the Adviser, subject to the supervision of the Board of Directors, the daily function of determining and monitoring the liquidity of 144A Securities. 144A Securities may become illiquid if qualified institutional buyers are not interested in acquiring the securities. INVESTMENT LIMITATIONS As a non-diversified investment company, the Portfolio is not limited by the 1940 Act in the proportion of its total assets that may be invested in the obligations of a single issuer. Thus, the Portfolio may invest a greater proportion of its total assets in the securities of a smaller number of issuers and, as a result, will be subject to greater risk with respect to its portfolio securities. However, the Portfolio intends to comply with the diversification requirements imposed by the Internal Revenue Code of 1986, as amended, for qualification a regulated investment company. See "Investment Limitations" in the Statement of Additional Information. The Portfolio operates under certain investment restrictions that are deemed fundamental limitations and may be changed only with the approval of the holders of a majority of the Portfolio's outstanding shares. See "Investment Limitations" in the Statement of Additional Information. In addition, the Portfolio operates under certain non-fundamental investment limitations, as described below and in the Statement of Additional Information. The Portfolio may not: (i) enter into repurchase agreements with more than seven days to maturity if, as a result, more than 15% of the market value of the Portfolio's total assets would be invested in such repurchase agreements and other investments for which market quotations are not readily available or which are otherwise illiquid; (ii) invest more than 10% of its total assets in Restricted Securities, except that the Portfolio may invest up to 15% of its total assets in Restricted Securities that are 144A Securities, subject to the limitation on illiquid securities described above; (iii) borrow money, except from banks for extraordinary or emergency purposes, and then only in amounts up to 10% of the value of the Portfolio's total assets, taken at cost at the time of borrowing; or purchase securities while borrowings exceed 5% of its total assets; or mortgage, pledge or hypothecate any assets except in connection with any such borrowing in amounts up to 10% of the value of the Portfolio's total assets at the time of borrowing; (iv) invest in fixed time deposits with a duration of over seven calendar days; or (v) invest in fixed timed deposits with a duration of from two business days to seven calendar days if more than 10% of the Portfolio's total assets would be invested in these deposits. MANAGEMENT OF THE FUND INVESTMENT ADVISER. Morgan Stanley Asset Management Inc. is the Investment Adviser and Administrator of the Fund and each of its portfolios. The Adviser provides investment advice and portfolio management 12 services pursuant to an Investment Advisory Agreement and, subject to the supervision of the Fund's Board of Directors, makes the Portfolio's day-to-day investment decisions, arranges for the execution of portfolio transactions and generally manages the Portfolio's investments. The Adviser is entitled to receive from the Portfolio an annual investment advisory fee, payable quarterly, equal to the percentage of average daily net assets set forth in the table below. However, the Adviser has agreed to a reduction in the fees payable to it and to reimburse the Portfolio, if necessary, if such fees would cause the total annual operating expenses of the Portfolio to exceed the respective percentage of average daily net assets set forth below.
MAXIMUM TOTAL INVESTMENT OPERATING EXPENSES PORTFOLIO ADVISORY FEE AFTER FEE WAIVER - ------------------------------------------------------------ ------------- ------------------- U.S. Real Estate Portfolio.................................. 0.80% 1.00%
The fee payable by the Portfolio is higher than the advisory fee paid by most investment companies, but the Adviser believes the fee is comparable to those of investment companies with similar investment objectives. The Adviser, with principal offices at 1221 Avenue of the Americas, New York, New York 10020, conducts a worldwide portfolio management business, providing a broad range of portfolio management services to customers in the United States and abroad. At December 31, 1994, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $48.7 billion, including approximately $35.7 billion under active management and $13.1 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. PORTFOLIO MANAGER. Russell Platt has primary responsibility for managing the Portfolio. Mr. Platt joined the Adviser in 1994 as a Principal. In addition, Mr. Platt serves as a Director of the General Partner of The Morgan Stanley Real Estate Fund I ("MSREF I"), where he is involved in capital raising, acquisitions, oversight of investments and investor relations. MSREF I is a privately held limited partnership engaged in the acquisition of real estate assets, portfolios and real estate operating companies with gross assets of approximately $2.8 billion as of October, 1994. From 1991 to 1993, Mr. Platt was head of Morgan Stanley Realty's Transaction Development Group. As such, he was actively involved in Morgan Stanley's worldwide real estate business. These activities included corporate and lender restructurings, merger and acquisition advice and public debt and equity financings for Morgan Stanley Realty's real estate clients. As part of these responsibilities, Mr. Platt directed Morgan Stanley Realty's activities in Latin America and served as U.S. liaison for Morgan Stanley Realty's Japanese real estate clients. From 1990 to 1991, Mr. Platt was based in Morgan Stanley Realty's London office, where he was responsible for European transaction development. Prior to this, he had extensive transaction responsibilities involving specific portfolio, retail, office, hotel and apartment sales and financings. Mr. Platt joined Morgan Stanley's Investment Banking Division in 1982 and moved to Morgan Stanley Realty in 1983. He rejoined Morgan Stanley in 1986 after receiving his M.B.A from Harvard Business School. Mr. Platt graduated from Williams College in 1982 with a B.A. in Economics. ADMINISTRATOR. The Adviser also provides the Fund with administrative services pursuant to an Administration Agreement. The services provided under the Administration Agreement are subject to the supervision of the Officers and the Board of Directors of the Fund and include day-to-day administration of matters related to the corporate existence of the Fund, maintenance of its records, preparation of reports, supervision of the Fund's arrangements with its custodian, and assistance in the preparation of the Fund's registration statements under Federal and State laws. The Administration Agreement also provides that the Administrator, through its agents, 13 will provide to the Fund dividend disbursing and transfer agent services. For its services under the Administration Agreement, the Fund pays the Adviser a monthly fee which on an annual basis equals 0.15% of the average daily net assets of the Portfolio. Under the U.S. Trust Administration Agreement between the Adviser and United States Trust Company of New York ("U.S. Trust"), U.S. Trust has agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegates its responsibilities to the Mutual Funds Service Company ("MFSC"), a subsidiary of U.S. Trust, that provides certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by MFSC. The services provided under the Administration Agreement and the U.S. Trust Administration Agreement are also subject to the supervision of the Board of Directors of the Fund. The Board of Directors of the Fund has approved the provision of services described above pursuant to the Administration Agreement and the U.S. Trust Administration Agreement as being in the best interests of the Fund. MFSC's business address is 73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information regarding the Administration Agreement or the U.S. Trust Administration Agreement, see "Management of the Fund" in the Statement of Additional Information. DIRECTORS AND OFFICERS. Pursuant to the Fund's Articles of Incorporation, the Board of Directors decides upon matters of general policy and reviews the actions of the Fund's Adviser, Administrator and Distributor. The Officers of the Fund conduct and supervise its daily business operations. DISTRIBUTOR. Morgan Stanley serves as the exclusive Distributor of the shares of the Fund. Under its Distribution Agreement with the Fund, Morgan Stanley sells shares of the Portfolio upon the terms and at the current offering price described in this Prospectus. Morgan Stanley is not obligated to sell any certain number of shares of the Portfolio and receives no compensation for its distribution services. EXPENSES. The Portfolio is responsible for payment of certain other fees and expenses (including legal fees, accountants' fees, custodial fees, and printing and mailing costs) specified in the Administration and Distribution Agreements. PURCHASE OF SHARES Shares of each Portfolio may be purchased without sales commission at the net asset value per share next determined after receipt of the purchase order. See "Valuation of Shares." INITIAL INVESTMENTS 1) BY CHECK. An account may be opened by completing and signing an Account Registration Form and mailing it, together with a check ($500,000 minimum for the Portfolio with certain exceptions for Morgan Stanley employees and select customers) payable to "Morgan Stanley Institutional Fund, Inc. -- U.S. Real Estate Portfolio", to: Morgan Stanley Institutional Fund, Inc. P.O. Box 2798 Boston, Massachusetts 02208-2798 14 Payment will be accepted only in U.S. dollars, unless prior approval for payment by other currencies is given by the Fund. For purchases by check, the Fund is ordinarily credited with Federal Funds within one business day. Thus, your purchase of shares by check is ordinarily credited to your account at the net asset value per share of the Portfolio determined on the next business day after receipt. 2) BY FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal Funds to the Fund's bank account. In order to ensure prompt receipt of your Federal Funds Wire, it is important that you follow these steps: A. Telephone the Fund (toll free: 1-800-548-7786) and provide us with your name, address, telephone number, Social Security or Tax Identification Number, the portfolio(s) selected, the amount being wired, and by which bank. We will then provide you with a Fund account number. (Investors with existing accounts should also notify the Fund prior to wiring funds.) B. Instruct your bank to wire the specified amount to the Fund's Wire Concentration Bank Account (be sure to have your bank include the name of the portfolio(s) selected and the account number assigned to you): United States Trust Company of New York 114 West 47th Street New York, NY 10036 ABA #0210-0131-8 DDA #20-9310-3 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (portfolio name, your account number, your account name) Please call before wiring funds: 1-800-548-7786 C. Complete the Account Registration Form and mail it to the address shown thereon. Federal Funds purchase orders will be accepted only on a day on which the Fund and United States Trust Company of New York (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring funds. 3) BY BANK WIRE. The same procedure outlined under "By Federal Funds Wire" above must be followed in purchasing shares by bank wire. However, money transferred by bank wire may or may not be converted into Federal Funds the same day, depending on the time the money is received and the bank handling the wire. Prior to such conversion, an investor's money will not be invested. Your bank may charge a service fee for wiring funds. ADDITIONAL INVESTMENTS You may add to your account at any time (minimum additional investment $1,000 except for automatic reinvestment of dividends and capital gains distributions for which there are no minimums) by purchasing shares at net asset value by mailing a check to the Fund (payable to "Morgan Stanley Institutional Fund, Inc. -- U.S. Real Estate Portfolio" at the above address or by wiring monies to the Custodian Bank as outlined above. It is very important that your account name and portfolio be specified in the letter or wire to assure proper crediting to your account. In order to insure that your wire orders are invested promptly, you are requested to notify one of the Fund's representatives (toll free: 1-800-548-7786) prior to the wire date. 15 OTHER PURCHASE INFORMATION The purchase price of the shares of the Portfolio is the net asset value next determined after the order is received. See "Valuation of Shares." An order received prior to the close of the New York Stock Exchange ("NYSE"), which is currently 4:00 p.m. Eastern time, will be executed at the price computed on the date of receipt; an order received after the close of the NYSE will be executed at the price computed on the next day the NYSE is open. In the interest of economy and convenience, and because of the operating procedures of the Fund, certificates representing shares of the Portfolio will not be issued. All shares purchased are confirmed to you and credited to your account on the Fund's books maintained by the Adviser or its agents. You will have the same rights and ownership with respect to such shares as if certificates had been issued. To ensure that checks are collected by the Fund, withdrawals of investments made by check are not presently permitted until payment for the purchase has been received, which may take up to eight business days after the date of purchase. As a condition of this offering, if a purchase is cancelled due to nonpayment or because your check does not clear, you will be responsible for any loss the Fund or its agents incur. If you are already a shareholder, the Fund may redeem shares from your account(s) to reimburse the Fund or its agents for any loss. In addition, you may be prohibited or restricted from making future investments in the Fund. Investors may also invest in the Fund by purchasing shares through registered broker-dealers. Broker-dealers who make purchases for their customers may charge a fee for such services. REDEMPTION OF SHARES You may withdraw all or any portion of the amount in your account by redeeming shares at any time. Please note that purchases made by check are not permitted to be redeemed until payment of the purchase price has been collected, which may take up to eight business days after purchase. The Fund will redeem shares of the Portfolio at its next determined net asset value. On days that both the NYSE and the Custodian Bank are open for business, the net asset value per share of the Portfolio is determined at the close of trading of the NYSE (currently 4:00 p.m. Eastern time). Shares of the Portfolio may be redeemed by mail or telephone. No charge is made for redemption. Any redemption may be more or less than the purchase price of your shares depending on, among other factors, the market value of the investment securities held by the Portfolio. BY MAIL The Portfolio will redeem its shares at the net asset value determined on the date the request is received, if the request is received in "good order" before the regular close of the NYSE. Your request should be addressed to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798, except that deliveries by overnight courier should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108. "Good order" means that the request to redeem shares must include the following documentation: (a) A letter of instruction or a stock assignment specifying the number of shares or dollar amount to be redeemed, signed by all registered owners of the shares in the exact names in which they are registered; (b) Any required signature guarantees (see "Further Redemption Information" below); and 16 (c) Other supporting legal documents, if required, in the case of estates, trusts, guardianships, custodianships, corporations, pension and profit sharing plans and other organizations. Shareholders who are uncertain of requirements for redemption should consult with a Morgan Stanley Institutional Fund representative. BY TELEPHONE Provided you have previously elected the Telephone Redemption Option on the Account Registration Form, you can request a redemption of your shares by calling the Fund and requesting the redemption proceeds be mailed to you or wired to your bank. Please contact one of Morgan Stanley Institutional Fund's representatives for further details. In times of drastic market conditions, the telephone redemption option may be difficult to implement. If you experience difficulty in making a telephone redemption, your request may be made by mail or overnight courier and will be implemented at the net asset value next determined after it is received. Redemption requests sent to the Fund through express mail must be mailed to the address of the Dividend Disbursing and Transfer Agent listed under "General Information". The Fund and the Fund's transfer agent (the "Transfer Agent") will employ reasonable procedures to confirm that the instructions communicated by telephone are genuine. These procedures include requiring the investor to provide certain personal identification information at the time an account is opened and prior to effecting each transaction requested by telephone. In addition, all telephone transaction requests will be recorded and investors may be required to provide additional telecopied written instructions regarding transaction requests. Neither the Fund nor the Transfer Agent will be responsible for any loss, liability, cost or expense for following instructions received by telephone that either of them reasonably believes to be genuine. To change the commercial bank or account designated to receive redemption proceeds, a written request must be sent to the Fund at the address above. Requests to change the bank or account must be signed by each shareholder and each signature must be guaranteed. FURTHER REDEMPTION INFORMATION Normally the Fund will make payment for all shares redeemed within one business day of receipt of the request, but in no event will payment be made more than seven days after receipt of a redemption request in good order. However, payments to investors redeeming shares which were purchased by check will not be made until payment for the purchase has been collected, which may take up to eight days after the date of purchase. The Fund may suspend the right of redemption or postpone the date upon which redemptions are effected at times when the NYSE is closed, or under any emergency circumstances as determined by the Securities and Exchange Commission (the "Commission"). If the Board of Directors determines that it would be detrimental to the best interests of the remaining shareholders of the Portfolio to make payment wholly or partly in cash, the Fund may pay the redemption proceeds in whole or in part by a distribution in-kind of securities held by the Portfolio in lieu of cash in conformity with applicable rules of the Commission. Distributions-in-kind will be made in readily marketable securities. Investors may incur brokerage charges on the sale of portfolio securities so received in payment of redemptions. Due to the relatively high cost of maintaining smaller accounts, the Fund reserves the right to redeem shares in any account invested in the Portfolio having a value of less than $500,000 (the net asset value of which 17 will be promptly paid to the shareholder). The Fund, however, will not redeem shares based solely upon market reductions in net asset value. If at any time your total investment does not equal or exceed the stated minimum value in the Portfolio, you may be notified of this fact and you will be allowed at least 60 days to make an additional investment before the redemption is processed. To protect your account, the Fund and its agents from fraud, signature guarantees are required for certain redemptions to verify the identity of the person who has authorized a redemption from your account. Please contact the Fund for further information. See "Redemption of Shares" in the Statement of Additional Information. SHAREHOLDER SERVICES EXCHANGE PRIVILEGE You may exchange shares that you own in the Portfolio for shares of any other available portfolio of the Fund (other than the International Equity Portfolio). The privilege to exchange shares by telephone is automatic. Shares of the Portfolio may be exchanged by mail or telephone. The privilege to exchange shares by telephone is made available without shareholder election. Before you make an exchange, you should read the prospectus of the new portfolio in which you seek to invest. Because an exchange transaction is treated as a redemption followed by a purchase, an exchange would be considered a taxable event for shareholders subject to tax. The exchange privilege is only available with respect to portfolios that are registered for sale in a shareholder's state of residence. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name and account number of your current portfolio, the name of the portfolio into which you intend to exchange shares, and the signatures of all registered account holders. Send the exchange request to Morgan Stanley Institutional Fund, P.O. Box 2798, Boston, Massachusetts 02208-2798. BY TELEPHONE When exchanging shares by telephone, have ready the name and account number of the current Portfolio, the name of the portfolio into which you intend to exchange shares, your Social Security number or Tax I.D. number, and your account address. Requests for telephone exchanges received prior to 4:00 p.m. (Eastern time) are processed at the close of business that same day based on the net asset value of the Portfolio at the close of business. Requests received after 4:00 p.m. (Eastern time) are processed the next business day based on the net asset value determined at the close of business on such day. For additional information regarding responsibility for the authenticity of telephoned instructions, see "Redemption of Shares -- By Telephone" above. TRANSFER OF REGISTRATION You may transfer the registration of any of your Fund shares to another person by writing to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. As in the case of redemptions, the written request must be received in good order before any transfer can be made. 18 VALUATION OF SHARES The net asset value per share of the Portfolio is determined by dividing the total market value of the Portfolio's investments and other assets, less any liabilities, by the total number of outstanding shares of the Portfolio. Net asset value per share is determined as of the close of the NYSE on each day that the NYSE is open for business. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities listed on a U.S. securities exchange for which market quotations are available are valued at the last quoted sale price on the day the valuation is made. Securities listed on a foreign exchange are valued at their closing price. Unlisted securities and listed securities not traded on the valuation date for which market quotations are not readily available are valued at a price that is considered to best represent fair value within a range not in excess of the current asked price nor less than the current bid price. The current bid and asked prices are determined based on the bid and asked prices quoted on such valuation date by reputable brokers. Bonds and other fixed income securities are valued according to the broadest and most representative market, which will ordinarily be the over-the-counter market. Net asset value includes interest on fixed income securities, which is accrued daily. In addition, bonds and other fixed income securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. The prices provided by a pricing service are determined without regard to bid or last sale prices, but take into account institutional-size trading in similar groups of securities and any developments related to the specific securities. Securities not priced in this manner are valued at the most recently quoted sale price, or when securities exchange valuations are used, at the latest quoted bid price on the day of valuation. If there is no such reported sale, the latest quoted bid price will be used. Securities purchased with remaining maturities of 60 days or less are valued at amortized cost, if it approximates market value. In the event that amortized cost does not approximate market value, market prices as determined above will be used. The value of other assets and securities for which no quotations are readily available (including restricted and unlisted foreign securities) and those securities for which it is inappropriate to determine prices in accordance with the above-stated procedures are determined in good faith at fair value using methods determined by the Board of Directors. For purposes of calculating net asset value per share, all assets and liabilities initially expressed in foreign currencies will be translated into U.S. dollars at the bid price of such currencies against the U.S. dollar last quoted by any major bank. PERFORMANCE INFORMATION The Fund may from time to time advertise total return of the Portfolio. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "total return" shows what an investment in the Portfolio would have earned over a specified period of time (such as one, five or ten years), assuming that all distributions and dividends by the Portfolio were reinvested on the reinvestment dates during the period. Total return does not take into account any federal or state income taxes that may be payable on dividends and distributions or upon redemption. The Fund may also include comparative performance information in advertising or marketing the Portfolio's shares, including data from Lipper Analytical Services, Inc., other industry publications, business periodicals, rating services and market indices. 19 DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions will be automatically reinvested in additional shares at net asset value, except that, upon written notice to the Fund or by checking off the appropriate box in the Distribution Option Section on the Account Registration Form, a shareholder may elect to receive income dividends and capital gains distributions in cash. The Portfolio expects to distribute substantially all of its net investment income in the form of annual dividends. Net capital gains for the Portfolio, if any, will also be distributed annually. Confirmations of the purchase of shares of the Portfolio through the automatic reinvestment of income dividends and capital gains distributions will be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of 1934, as amended, on the next quarterly client statement following such purchase of shares. Consequently, confirmations of such purchases will not be provided at the time of completion of such purchases, as might otherwise be required by Rule 10b-10. Undistributed net investment income is included in the Portfolio's net assets for the purpose of calculating net asset value per share. Therefore, on the "ex-dividend" date, the net asset value per share excludes the dividend (i.e., is reduced by the per share amount of the dividend). Dividends paid shortly after the purchase of shares by an investor, although in effect a return of capital, are taxable to shareholders subject to income tax. TAXES The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial, or administrative action. No attempt has been made to present a detailed explanation of the federal, state, or local income tax treatment of the Portfolio or its shareholders. Accordingly, shareholders are urged to consult their tax advisors regarding specific questions as to federal, state and local income taxes. The Portfolio is treated as a separate entity for federal income tax purposes and is not combined with the Fund's other portfolios. It is the Portfolio's intent to continue to qualify for the special tax treatment afforded regulated investment companies under Subchapter M of the Code, so that the Portfolio will continue to be relieved of federal income tax on that part of its net investment income and net capital gain that is distributed to shareholders. The Portfolio distributes substantially all of its net investment income (including, for this purpose, the excess of net short-term capital gain over net long-term capital loss) to shareholders. Dividends from the Portfolio's net investment income are taxable to shareholders as ordinary income, whether received in cash or in additional shares. Such dividends paid by a Portfolio will generally qualify for the 70% dividends-received deduction for corporate shareholders to the extent of qualifying dividend income received by the Portfolio from U.S. corporations. The Portfolio will report annually to its shareholders the amount of dividend income qualifying for such treatment. Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss) are taxable to shareholders as long-term capital gain, regardless of how long shareholders have held their shares. The Portfolio sends reports annually to its shareholders of the federal income tax status of all distributions made during the preceding year. 20 The Portfolio intends to make sufficient distributions or deemed distributions of its ordinary income and capital gain net income (the excess of short-term and long-term capital gains over short-term and long-term capital losses) prior to the end of each calendar year to avoid liability for federal excise tax. Dividends and other distributions declared by the Portfolio in October, November or December of any year and payable to shareholders of record on a date in such month will be deemed to have been paid by the Portfolio and received by the shareholders on December 31 of that year if the distributions are paid by the Portfolio at any time during the following January. The sale, redemption or exchange of shares may result in taxable gain or loss to the redeeming shareholder, depending upon whether the fair market value of the redemption proceeds exceeds or is less than the shareholder's adjusted basis in the redeemed shares. Any such taxable gain or loss generally will be treated as long-term capital gain or loss if the shares have been held for more than one year and otherwise generally will be treated as short-term capital gain or loss. If capital gain distributions have been made with respect to shares that are sold at a loss after being held for six months or less, however, then the loss is treated as a long-term capital loss to the extent of the capital gain distributions. Investment income received by the Portfolio from sources within foreign countries may be subject to foreign income taxes withheld at the source. To the extent that the Portfolio is liable for foreign income taxes so withheld, the Portfolio intends to operate so as to meet the requirements of the Code to pass through to the shareholders credit for foreign income taxes paid. Although the Portfolio intends to meet Code requirements to pass through credit for such taxes, there can be no assurance that the Portfolio will be able to do so. Shareholders are urged to consult with their tax advisors concerning the application of state and local income taxes to investments in the Portfolio, which may differ from the federal income tax consequences described above. THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN A PORTFOLIO. PORTFOLIO TRANSACTIONS The Investment Advisory Agreement authorizes the Adviser to select the brokers or dealers that will execute the purchases and sales of investment securities for the Portfolio and directs the Adviser to use its best efforts to obtain the best available price and most favorable execution with respect to all transactions for the Portfolio. The Fund has authorized the Adviser to pay higher commissions in recognition of brokerage services which, in the opinion of the Adviser, are necessary for the achievement of better execution, provided the Adviser believes this to be in the best interest of the Fund. Since shares of the Portfolio are not marketed through intermediary brokers or dealers, it is not the Fund's practice to allocate brokerage or principal business on the basis of sales of shares which may be made through such firms. However, the Adviser may place portfolio orders with qualified broker-dealers who recommend the Portfolio or who act as agents in the purchase of shares of the Fund's portfolios for their clients. 21 In purchasing and selling securities for the Portfolio, it is the Fund's policy to seek to obtain quality execution at the most favorable prices through responsible broker-dealers. In selecting broker-dealers to execute the securities transactions for the Portfolio, consideration will be given to such factors as the price of the security, the rate of the commission, the size and difficulty of the order, the reliability, integrity, financial condition, general execution and operational capabilities of competing broker-dealers, and the brokerage and research services which they provide to the Fund. Some securities considered for investment by the Portfolio may also be appropriate for other clients served by the Adviser. If the purchase or sale of securities consistent with the investment policies of the Portfolio and one or more of these other clients served by the Adviser is considered at or about the same time, transactions in such securities will be allocated among the Portfolio and such other clients in a manner deemed fair and reasonable by the Adviser. Although there is no specified formula for allocating such transactions, the various allocation methods used by the Adviser, and the results of such allocations, are subject to periodic review by the Fund's Board of Directors. Subject to the overriding objective of obtaining the best possible execution of orders, the Adviser may allocate a portion of the Portfolio's brokerage transactions to Morgan Stanley or broker affiliates of Morgan Stanley. In order for Morgan Stanley or its affiliates to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by Morgan Stanley or such affiliates must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. Furthermore, the Board of Directors of the Fund, including a majority of those Directors who are not "interested persons," as defined in the 1940 Act, have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Morgan Stanley or such affiliates are consistent with the foregoing standard. Portfolio securities will not be purchased from or through, or sold to or through, the Adviser or Morgan Stanley or any "affiliated persons," as defined in the 1940 Act of Morgan Stanley when such entities are acting as principals, except to the extent permitted by law. Although the Portfolio will not invest for short-term trading purposes, investment securities may be sold from time to time without regard to the length of time they have been held. It is anticipated that under normal circumstances, the annual portfolio turnover rate will not exceed 100%. High portfolio turnover involves correspondingly greater transaction costs which will be borne directly by the respective Portfolio. In addition, high portfolio turnover may result in more capital gains which would be taxable to the shareholders of the Portfolio. GENERAL INFORMATION DESCRIPTION OF COMMON STOCK The Fund was organized as a Maryland corporation on June 16, 1988. The Articles of Incorporation permit the Fund to issue up to 14,000,000,000 shares of common stock, with $.001 par value per share. Pursuant to the Fund's Articles of Incorporation, the Board of Directors may increase the number of shares the Fund is authorized to issue without the approval of the shareholders of the Fund. The Board of Directors has the power to designate one or more classes of shares of common stock and to classify and reclassify any unissued shares with respect to such classes. 22 The shares of the Portfolio, when issued, will be fully paid, non-assessable, fully transferable and redeemable at the option of the holder. The shares have no preference as to conversion, exchange, dividends, retirement or other features and have no pre-emptive rights. The shares of the Portfolio have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of Directors can elect 100% of the Directors if they choose to do so. Persons or organizations owning 25% or more of the outstanding shares of the Portfolio may be presumed to "control" (as defined in the 1940 Act) the Portfolio. Under Maryland law, the Fund is not required to hold an annual meeting of its shareholders unless required to do so under the 1940 Act. REPORTS TO SHAREHOLDERS The Fund will send to its shareholders annual and semi-annual reports; the financial statements appearing in annual reports are audited by independent accountants. Monthly unaudited portfolio data is also available from the Fund upon request. In addition, Morgan Stanley Asset Management Inc., or its agent, as Transfer Agent, will send to each shareholder having an account directly with the Fund a monthly statement showing transactions in the account, the total number of shares owned, and any dividends or distributions paid. CUSTODIAN Domestic securities and cash are held by United States Trust Company of New York, New York, as the Fund's domestic custodian. Morgan Stanley Trust Company, Brooklyn, New York, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians who were approved by the Board of Directors of the Fund in accordance with regulations of the Securities and Exchange Commission for the purpose of providing custodial services for such assets. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Mutual Funds Service Company, 73 Tremont Street, Boston, Massachusetts 02108-3913, acts as Dividend Disbursing and Transfer Agent for the Fund. INDEPENDENT ACCOUNTANTS Price Waterhouse LLP serves as independent accountants for the Fund and audits the annual financial statements of each portfolio. LITIGATION The Fund is not involved in any litigation. 23 (This page has been left blank intentionally.) MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MA 02208-2798 - ------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - ------------------------------------------------------------------------------- ACCOUNT INFORMATION |If you need assistance in filling out this form for the Morgan Stanley Institutional Fund, please Fill in where |contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all applicable |items except signature, and mail to the Fund at the address above. - ----------------------------------------------------------------------------------------------------------------------------------- A) REGISTRATION | 1. INDIVIDUAL |1. ______________________________________________________________________________________________________ 2. JOINT TENANTS | First Name Initial Last Name (RIGHTS OF |2. ______________________________________________________________________________________________________ SURVIVORSHIP | First Name Initial Last Name PRESUMED UNLESS | ______________________________________________________________________________________________________ TENANCY IN COMMON | First Name Initial Last Name IS INDICATED) | - ----------------------------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, | TRUSTS AND OTHERS |3. ______________________________________________________________________________________________________ Please call the | ______________________________________________________________________________________________________ Fund for additional| ______________________________________________________________________________________________________ documents that may | Type of Registration: / /INCORPORATED / /UNINCORPORATED / /PARTNERSHIP / /UNIFORM GIFT/TRANSFER TO MINOR be required to set | ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR up account and to | PERMITTED) authorize | / /TRUST __________________________ / /OTHER (Specify) ________________________ transactions. | - ----------------------------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS | Please fill in |Street or P.O. Box_______________________________________________________________________________________ completely, |City______________________________________________________________State_______Zip_______________-________ including telephone |Home Telephone No.______-_______-_________________Business Telephone No._______-_______-_________________ number(s). |/ /United States Citizen / /Resident Alien / /Non-Resident Alien: Indicate Country of Residence _________ - ----------------------------------------------------------------------------------------------------------------------------------- C) TAXPAYER |PART 1. Enter your Taxpayer | IMPORTANT TAX INFORMATION IDENTIFICATION |Identification Number. For most |You (as a payee) are required by law to provide us (as payer) NUMBER |individual taxpayers, this is |with your correct Taxpayer Identification Number. Accounts that If the account is in |your Social Security Number. |have a missing or incorrect Taxpayer Identification Number will more than one name, | TAXPAYER IDENTIFICATION NUMBER |be subject to backup withholding at a 31% rate on CIRCLE THE NAME OF THE|______-_________________________ |dividends, distributions and other payments. If you have not PERSON WHOSE TAXPAYER | OR |provided us with your correct taxpayer identification number, you IDENTIFICATION NUMBER | SOCIAL SECURITY NUMBER |may be subject to a $50 penalty imposed by the Internal Revenue IS PROVIDED IN SECTION|________-_____________-_________ |Service. A) ABOVE. If no name | | is circled, the number|PART 2. BACKUP WITHHOLDING |Backup withholding is not an additional tax; the tax liability of will be considered to |/ / Check this box if you are NOT |persons subject to backup withholding will be reduced by the be that of the last |subject to Backup Withholding |amount of tax withheld. If withholding results in an overpayment name listed. For |under the provisions of Section |of taxes, a refund may be obtained. Custodian account of |3406(a)(1)(C) of the Internal | a minor (Uniform |Revenue Code. |You may be notified that you are subject to backup withholding Gifts/Transfers to | |under Section 3406(a)(1)(C) of the Internal Revenue Code because Minors Acts), give the| |you have underreported interest or dividends or you were required Social Security Number| |to but failed to file a return which would have included a of the minor. | |reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO |NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - ----------------------------------------------------------------------------------------------------------------------------------- D) PORTFOLIO SELECTION | Minimum $500,000 for |For Purchase of the following portfolio: the U.S. Real Estate | Portfolio. |/ / U.S. Real Estate Portfolio $____________ Please indicate | amount. | - ----------------------------------------------------------------------------------------------------------------------------------- E) METHOD OF |Payment by: INVESTMENT |/ / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--U.S. REAL ESTATE PORTFOLIO) Please indicate | _________________________________-______ manner of payment. |/ / Exchange $____________________ From__________________________ Account No. | Name of Portfolio |/ / Account previously established by: _________________________________-______ | / / Phone exchange / / Wire on ___________________ Account No. (Check Date (Previously assigned by the Fund) Digit) - ----------------------------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION |Income dividends and capital gains distributions (if any) to be reinvested in additional shares unless OPTION |either box below is checked. |/ /Income dividends to be paid in cash, capital gains distributions (if any) in shares. |/ /Income dividends and capital gains distributions (if any) to be paid in cash. - ----------------------------------------------------------------------------------------------------------------------------------- G) TELEPHONE |/ /I/we hereby authorize the Fund and its| REDEMPTION | agents to honor any telephone requests|__________________________________________ _______________ Please select at time | to wire redemption proceeds to the |Name of COMMERCIAL Bank (Not Savings Bank) Bank Account No. of initial | commercial bank indicated at right | application if you | and/or mail redemption proceeds to the| ____________ wish to redeem | name and address in which my/our fund | Bank ABA No. shares by telephone. | account is registered if such requests|____________________________________________________________ A SIGNATURE GUARANTEE | are believed to be authentic. | Name(s) in which your BANK Account is Established IS REQUIRED IF BANK | |____________________________________________________________ ACCOUNT IS NOT |THE FUND AND THE FUND'S TRANSFER AGENT | Bank's Street Address REGISTERED |WILL EMPLOY REASONABLE PROCEDURES TO |____________________________________________________________ IDENTICALLY TO YOUR |CONFIRM THAT INSTRUCTIONS COMMUNICATED |City State Zip FUND ACCOUNT. |BY TELEPHONE ARE GENUINE. THESE | |PROCEDURES INCLUDE REQUIRING THE | TELEPHONE REQUESTS |INVESTOR TO PROVIDE CERTAIN PERSONAL | FOR REDEMPTIONS |IDENTIFICATION INFORMATION AT THE TIME | WILL NOT BE HONORED |AN ACCOUNT IS OPENED AND PRIOR TO | UNLESS THE BOX |EFFECTING EACH TRANSACTION REQUESTED BY | IS CHECKED. |TELEPHONE. IN ADDITION, ALL TELEPHONE | |TRANSACTION REQUESTS WILL BE RECORDED | |AND INVESTORS MAY BE REQUIRED TO | |PROVIDE ADDITIONAL TELECOPIED WRITTEN | |INSTRUCTIONS OF TRANSACTION REQUESTS. | |NEITHER THE FUND NOR THE TRANSFER AGENT | |WILL BE RESPONSIBLE FOR ANY LOSS, | |LIABILITY, COST OR EXPENSE FOR | |FOLLOWING INSTRUCTIONS RECEIVED BY | |TELEPHONE THAT IT REASONABLY BELIEVES | |TO BE GENUINE. | - ----------------------------------------------------------------------------------------------------------------------------------- H) INTERESTED PARTY |___________________________________________________________________________________________________ OPTION | Name |___________________________________________________________________________________________________ In addition to the | account statement sent|___________________________________________________________________________________________________ to my/our registered | Address address, I/we hereby | authorize the fund |___________________________________________________________________________________________________ to mail duplicate | City State Zip Code statements to the | name and address | provided at right. | - ----------------------------------------------------------------------------------------------------------------------------------- I) DEALER |_______________________________________ ___________________________________ _______________________ INFORMATION |Representative Name Representative No. Branch No. - ----------------------------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF |The undersigned certify(ies) that I/we have full authority and legal capacity to purchase and redeem ALL HOLDERS |shares of the Fund and affirm that I/we have received a current Prospectus of the Morgan Stanley AND TAXPAYER |Institutional Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF PERJURY, I/WE CERTIFICATION |CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE. | |(X) (X) SIGN HERE --> |------------------------------------------------ ----------------------------------------------------- |Signature Date Signature Date | |(X) (X) |------------------------------------------------ ----------------------------------------------------- |Signature Date Signature Date - -----------------------------------------------------------------------------------------------------------------------------------
(This page has been left blank intentionally.) ------------------------------------------- ------------------------------------------- ------------------------------------------- ------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR THE DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. -------------------------- TABLE OF CONTENTS PAGE ----- Fund Expenses..................................... 2 Prospectus Summary................................ 4 Investment Objective and Policies................. 7 Additional Investment Information................. 9 Investment Limitations............................ 12 Management of the Fund............................ 12 Purchase of Shares................................ 14 Redemption of Shares.............................. 16 Shareholder Services.............................. 18 Valuation of Shares............................... 19 Performance Information........................... 19 Dividends and Capital Gains Distributions......... 20 Taxes............................................. 20 Portfolio Transactions............................ 21 General Information............................... 22 Account Registration Form......................... 25
U.S. REAL ESTATE PORTFOLIO PORTFOLIO OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. COMMON STOCK ($.001 PAR VALUE) ------------- PROSPECTUS ------------- Investment Adviser Morgan Stanley Asset Management Inc. Distributor Morgan Stanley & Co. Incorporated MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MA 02208-2798 ------------------------------------------- ------------------------------------------- ------------------------------------------- ------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----