-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H2ID77j2WDvTNZSEuYybWol9YaHcLZUUYoC0rVE2+GkPeCDt2WP7fsRn3IcGnZVv ztLKOKryBtra9zEmDM8XZw== 0000912057-96-007390.txt : 19960501 0000912057-96-007390.hdr.sgml : 19960501 ACCESSION NUMBER: 0000912057-96-007390 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 27 FILED AS OF DATE: 19960430 EFFECTIVENESS DATE: 19960430 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: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-23166 FILM NUMBER: 96553319 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-05624 FILM NUMBER: 96553320 BUSINESS ADDRESS: STREET 1: 1221 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 6175578742 MAIL ADDRESS: STREET 1: 1221 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 485BPOS 1 485BPOS As filed with the Securities and Exchange Commission on April 30, 1996 File No. 33-23166 811-5624 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM N-1A REGISTRATION STATEMENT (NO. 33-23166) UNDER THE SECURITIES ACT OF 1933 Post-Effective Amendment No. 29 and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 30 --------------- MORGAN STANLEY INSTITUTIONAL FUND, INC. (Exact Name of Registrant as Specified in Charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of Principal Executive Office) Registrant's Telephone Number (800) 548-7786 Harold J. Schaaff, Jr., Esquire Morgan Stanley Asset Management Inc. 1221 Avenue of the Americas, New York, New York 10020 (Name and Address of Agent for Service) -------------- COPIES TO: Warren J. Olsen, Esquire Richard W. Grant, Esquire Morgan Stanley Asset Management Inc. Morgan, Lewis & Bockius LLP 1221 Avenue of the Americas 2000 One Logan Square New York, NY 10020 Philadelphia, PA 19103 -------------- IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX) /X/ IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B) / / ON MAY 1, 1996 PURSUANT TO PARAGRAPH (B) / / 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A) / / 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A) / / ON PURSUANT TO PARAGRAPH (A) OF RULE 485 ------------------------- ------------------ Registrant has elected to register an indefinite number of shares pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended. Registrant filed its Rule 24f-2 notice for the period ended December 31, 1995 on February 15, 1996. - -------------------------------------------------------------------------------- MORGAN STANLEY INSTITUTIONAL FUND, INC. CROSS REFERENCE SHEET PART A - INFORMATION REQUIRED IN A PROSPECTUS Form N-1A Location in Prospectus for the Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed ITEM NUMBER SECURITIES, HIGH YIELD, MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS Item 1. Cover Page -- Cover Page Item 2. Synopsis-- Fund Expenses (Estimated for Mortgage-Backed Securities Portfolio) Item 3. Condensed Financial Information -- Financial Highlights (for the Fixed Income, Global Fixed Income, Municipal Bond, High Yield, Money Market and Municipal Money Market Portfolios only); Performance Information Item 4. General Description of Registrant -- Prospectus Summary; Investment Objective and Policies; Additional Investment Information; Investment Limitations; General Information Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund; Portfolio Transactions Item 5A. Management's Discussion of Fund Performance** Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption of Shares; Shareholder Services; Valuation of Shares; Dividends and Capital Gains Distributions; Taxes; General Information Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover Page; Purchase of Shares; Shareholder Services; Valuation of Shares Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares; Shareholder Services Item 9. Pending Legal Proceedings -- * Form N-1A ITEM NUMBER LOCATION IN PROSPECTUS FOR THE SMALL CAP VALUE EQUITY, VALUE EQUITY AND BALANCED PORTFOLIOS Item 1. Cover Page -- Cover Page Item 2. Synopsis -- Fund Expenses Item 3. Condensed Financial Information -- Financial Highlights; Performance Information Item 4. General Description of Registrant -- Prospectus Summary; Investment Objective and Policies; Additional Investment Information; Investment Limitations; General Information Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund; Portfolio Transactions Item 5A. Management's Discussion of Fund Performance** Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption of Shares; Shareholder Services; Valuation of Shares; Dividends and Capital Gains Distributions; Taxes; General Information Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover Page; Purchase of Shares; Shareholder Services; Valuation of Shares Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares; Shareholder Services Item 9. Pending Legal Proceedings - ----------------------- * Omitted since the answer is negative or the Item is not applicable. ** Information required by Item 5A is contained in the 1995 Annual Report to Shareholders, except for the following portfolios which were not in operation at December 31, 1995: Mortgage-Backed Securities, China Growth, MicroCap and International Magnum Portfolios. Information required by Item 5A for the aforementioned portfolios will be contained in the next Report to Shareholders following commencement of operations. 2 N-1A ITEM NUMBER LOCATION IN PROSPECTUS FOR THE ACTIVE COUNTRY ALLOCATION PORTFOLIO Item 1. Cover Page -- Cover Page Item 2. Synopsis -- Fund Expenses Item 3. Condensed Financial Information -- Financial Highlights; Performance Information Item 4. General Description of Registrant -- Prospectus Summary; Investment Objective and Policies; Additional Investment Information; Investment Limitations; General Information Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund; Portfolio Transactions Item 5A. Management's Discussion of Fund Performance** Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption of Shares; Shareholder Services; Valuation of Shares; Dividends and Capital Gains Distributions; Taxes; General Information Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover Page; Purchase of Shares; Shareholder Services; Valuation of Shares Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares; Shareholder Services Item 9. Pending Legal Proceedings -- * Form N-1A ITEM NUMBER LOCATION IN PROSPECTUS FOR GOLD PORTFOLIO Item 1. Cover Page -- Cover Page Item 2. Synopsis -- Fund Expenses Item 3. Condensed Financial Information -- Financial Highlights; Performance Information Item 4. General Description of Registrant -- Prospectus Summary; Investment Objective and Policies; Additional Investment Information; Investment Limitations; General Information Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund; Portfolio Transactions Item 5A. Management's Discussion of Fund Performance** Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption of Shares; Shareholder Services; Valuation of Shares; Dividends and Capital Gains Distributions; Taxes; General Information Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover Page; Purchase of Shares; Shareholder Services; Valuation of Shares Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares; Shareholder Services Item 9. Pending Legal Proceedings--* - ------------------------- * Omitted since the answer is negative or the Item is not applicable. ** Information required by Item 5A is contained in the 1995 Annual Report to Shareholders, except for the following portfolios which were not in operation at December 31, 1995: Mortgage-Backed Securities, China Growth, MicroCap and International Magnum Portfolios. Information required by Item 5A for the aforementioned portfolios will be contained in the next Report to Shareholders following commencement of operations. 3 FORM N-1A LOCATION IN PROSPECTUS FOR THE GLOBAL EQUITY, INTERNATIONAL EQUITY, INTERNATIONAL SMALL CAP, ASIAN ITEM NUMBER EQUITY, EUROPEAN EQUITY, JAPANESE EQUITY AND LATIN AMERICAN PORTFOLIOS Item 1. Cover Page -- Cover Page Item 2. Synopsis -- Fund Expenses Item 3. Condensed Financial Information -- Financial Highlights (for the Global Equity, International Equity, International Small Cap, Asian Equity, European Equity, Japanese Equity and Latin American Portfolios only); Performance Information Item 4. General Description of Registrant -- Prospectus Summary; Investment Objective and Policies; Additional Investment Information; Investment Limitations; General Information Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund; Portfolio Transactions Item 5A. Management's Discussion of Fund Performance** Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption of Shares; Shareholder Services; Valuation of Shares; Dividends and Capital Gains Distributions; Taxes; General Information Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover Page; Purchase of Shares; Shareholder Services; Valuation of Shares Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares; Shareholder Services Item 9. Pending Legal Proceedings -- * Form N-1A ITEM NUMBER LOCATION IN PROSPECTUS FOR THE EMERGING MARKETS AND EMERGING MARKETS DEBT PORTFOLIOS Item 1. Cover Page -- Cover Page Item 2. Synopsis -- Fund Expenses Item 3. Condensed Financial Information -- Financial Highlights; Performance Information Item 4. General Description of Registrant -- Prospectus Summary; Investment Objective and Policies; Additional Investment Information; Investment Limitations; General Information Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund; Portfolio Transactions Item 5A. Management's Discussion of Fund Performance** Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption of Shares; Shareholder Services; Valuation of Shares; Dividends and Capital Gains Distributions; Taxes; General Information Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover Page; Purchase of Shares; Shareholder Services; Valuation of Shares Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares; Shareholder Services Item 9. Pending Legal Proceedings -- * - ------------------------ * Omitted since the answer is negative or the Item is not applicable. ** Information required by Item 5A is contained in the 1995 Annual Report to Shareholders, except for the following portfolios which were not in operation at December 31, 1995: Mortgage-Backed Securities, China Growth, MicroCap and International Magnum Portfolios. Information required by Item 5A for the aforementioned portfolios will be contained in the next Report to Shareholders following commencement of operations. 4 Form N-1A ITEM NUMBER LOCATION IN PROSPECTUS FOR THE CHINA GROWTH PORTFOLIO Item 1. Cover Page -- Cover Page Item 2. Synopsis -- Fund Expenses (Estimated) Item 3. Condensed Financial Information -- Performance Information Item 4. General Description of Registrant -- Prospectus Summary; Investment Objective and Policies; Additional Investment Information; Investment Limitations; General Information Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund; Portfolio Transactions Item 5A. Management's Discussion of Fund Performance** Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption of Shares; Shareholder Services; Valuation of Shares; Dividends and Capital Gains Distributions; Taxes; General Information Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover Page; Purchase of Shares; Shareholder Services; Valuation of Shares Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares; Shareholder Services Item 9. Pending Legal Proceedings -- * Form N-1A ITEM NUMBER LOCATION IN PROSPECTUS FOR THE EQUITY GROWTH, EMERGING GROWTH, MICROCAP AND AGGRESSIVE EQUITY PORTFOLIOS Item 1. Cover Page -- Cover Page Item 2. Synopsis -- Fund Expenses (Estimated for the MicroCap and Aggressive Equity Portfolios) Item 3. Condensed Financial Information -- Financial Highlights (for the Equity Growth, Emerging Growth and Aggressive Equity Portfolios only); Performance Information Item 4. General Description of Registrant -- Prospectus Summary; Investment Objective and Policies; Additional Investment Information; Investment Limitations; General Information Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund; Portfolio Transactions Item 5A. Management's Discussion of Fund Performance** Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption of Shares; Shareholder Services; Valuation of Shares; Dividends and Capital Gains Distributions; Taxes; General Information Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover Page; Purchase of Shares; Shareholder Services; Valuation of Shares Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares; Shareholder Services Item 9. Pending Legal Proceedings -- * - ------------------------- * Omitted since the answer is negative or the Item is not applicable. ** Information required by Item 5A is contained in the 1995 Annual Report to Shareholders, except for the following portfolios which were not in operation at December 31, 1995: Mortgage-Backed Securities, China Growth, MicroCap and International Magnum Portfolios. Information required by Item 5A for the aforementioned portfolios will be contained in the next Report to Shareholders following commencement of operations. 5 Form N-1A ITEM NUMBER LOCATION IN PROSPECTUS FOR THE U.S. REAL ESTATE PORTFOLIO Item 1. Cover Page -- Cover Page Item 2. Synopsis -- Fund Expenses Item 3. Condensed Financial Information -- Financial Highlights; Performance Information Item 4. General Description of Registrant -- Prospectus Summary; Investment Objective and Policies; Additional Investment Information; Investment Limitations; General Information Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund; Portfolio Transactions Item 5A. Management's Discussion of Fund Performance** Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption of Shares; Shareholder Services; Valuation of Shares; Dividends and Capital Gains Distributions; Taxes; General Information Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover Page; Purchase of Shares; Shareholder Services; Valuation of Shares Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares; Shareholder Services Item 9. Pending Legal Proceedings -- * Form N-1A ITEM NUMBER LOCATION IN PROSPECTUS FOR THE INTERNATIONAL MAGNUM PORTFOLIO Item 1. Cover Page -- Cover Page Item 2. Synopsis -- Fund Expenses (Estimated) Item 3. Condensed Financial Information -- Performance Information Item 4. General Description of Registrant -- Prospectus Summary; Investment Objective and Policies; Additional Investment Information; Investment Limitations; General Information Item 5. Management of the Fund -- Prospectus Summary; Management of the Fund; Portfolio Transactions Item 5A. Management's Discussion of Fund Performance** Item 6. Capital Stock and Other Securities -- Purchase of Shares; Redemption of Shares; Shareholder Services; Valuation of Shares; Dividends and Capital Gains Distributions; Taxes; General Information Item 7. Purchase of Securities Being Offered -- Prospectus Summary; Cover Page; Purchase of Shares; Shareholder Services; Valuation of Shares Item 8. Redemption or Repurchase -- Prospectus Summary; Redemption of Shares; Shareholder Services Item 9. Pending Legal Proceedings -- * - ------------------------- * Omitted since the answer is negative or the Item is not applicable. ** Information required by Item 5A is contained in the 1995 Annual Report to Shareholders, except for the following portfolios which were not in operation at December 31, 1995: Mortgage-Backed Securities, China Growth, MicroCap and International Magnum Portfolios. Information required by Item 5A for the aforementioned portfolios will be contained in the next Report to Shareholders following commencement of operations. 6 PART B - INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION Form N-1A ITEM NUMBER LOCATION IN STATEMENT OF ADDITIONAL INFORMATION FOR THE FIXED INCOME, GLOBAL FIXED INCOME, MUNICIPAL BOND, MORTGAGE-BACKED SECURITIES, HIGH YIELD, MONEY MARKET, MUNICIPAL MONEY MARKET, SMALL CAP VALUE EQUITY, VALUE EQUITY, BALANCED, ACTIVE COUNTRY ALLOCATION, GOLD, GLOBAL EQUITY, INTERNATIONAL EQUITY, INTERNATIONAL MAGNUM, INTERNATIONAL SMALL CAP, ASIAN EQUITY, EUROPEAN EQUITY, JAPANESE EQUITY, LATIN AMERICAN, EMERGING MARKETS, EMERGING MARKETS DEBT, CHINA GROWTH, EQUITY GROWTH, EMERGING GROWTH, MICROCAP, AGGRESSIVE EQUITY AND U.S. REAL ESTATE PORTFOLIOS. Item 10. Cover Page -- Cover Page Item 11. Table of Contents -- Cover Page Item 12. General Information and History -- * Item 13. Investment Objective and Policies -- Investment Objectives and Policies; Investment Limitations Item 14. Management of the Fund -- Management of the Fund Item 15. Control Persons and Principal Holders of Securities -- Management of the Fund; General Information Item 16. Investment Advisory and Other Services -- Management of the Fund Item 17. Brokerage Allocation -- * Item 18. Capital Stock and Other Securities -- General Information Item 19. Purchase, Redemption and Pricing of Securities Being Offered -- Purchase of Shares; Redemption of Shares; Net Asset Value; General Information Item 20. Tax Status -- Federal Tax Treatment of Forward Currency and Futures Contracts Item 21. Underwriters -- * Item 22. Calculation of Performance Data -- Performance Information Item 23. Financial Statements -- Financial Statements PART C OTHER INFORMATION Part C contains the information required by the terms contained therein under the items set forth in the form. - ------------------------ * Omitted since the answer is negative or the Item is not applicable. 7 The Prospectus for the China Growth Portfolio, included as part of Post-Effective Amendment No. 25 to the Registration Statement on Form N1-A of Morgan Stanley Institutional Fund, Inc. (File No. 33-23166) filed with the Securities and Exchange Commission via EDGAR on August 1, 1995, is hereby incorporated by reference as if set forth in full herein. - -------------------------------------------------------------------------------- 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 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 or mutual fund, which offers redeemable shares in a series of diversified and non-diversified investment portfolios ("portfolios"). The Fund currently consists of twenty-eight portfolios representing a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. This prospectus (the "Prospectus") pertains to the Class A and the Class B shares of the Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed Securities and High Yield Portfolios (the "Non-Money Portfolios") and to the Class A shares of the Money Market and Municipal Money Market Portfolios (the "Money Portfolios") (collectively, the "Portfolios"). On January 2, 1996, the Non-Money Portfolios began offering two classes of shares, the Class A shares and the Class B shares, except for the Money Market, Municipal Money Market and International Small Cap Portfolios which only offer Class A shares. All shares of the Portfolios owned prior to January 2, 1996 were redesignated Class A shares on January 2, 1996. The Class A and Class B shares currently offered by the Non-Money Portfolios have different minimum investment requirements and fund expenses. 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 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 PORTFOLIO MAY 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 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 "Prospectus Summary" below. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY - -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Magnum, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and Municipal Bond 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, 1996, 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, 1996. FUND EXPENSES The following table illustrates the expenses and fees that a shareholder of the Portfolios indicated below will incur:
GLOBAL MORTGAGE- MUNICIPAL FIXED FIXED MUNICIPAL BACKED HIGH MONEY MONEY INCOME INCOME BOND SECURITIES YIELD MARKET MARKET SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - --------------------------------------------------- --------- --------- --------- --------- --------- --------- --------- Maximum Sales Load Imposed on Purchases Class A.......................................... None None None None None None None Class B.......................................... None None None None None N/A N/A Maximum Sales Load Imposed on Reinvested Dividends Class A.......................................... None None None None None None None Class B.......................................... None None None None None N/A N/A Deferred Sales Load Class A.......................................... None None None None None None None Class B.......................................... None None None None None N/A N/A Redemption Fees Class A.......................................... None None None None None None None Class B.......................................... None None None None None N/A N/A Exchange Fees Class A.......................................... None None None None None None None Class B.......................................... None None None None None None None
GLOBAL MORTGAGE- MUNICIPAL FIXED FIXED MUNICIPAL BACKED HIGH MONEY MONEY INCOME INCOME BOND SECURITIES YIELD MARKET MARKET ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - -------------------------------------------------- -------- -------- -------- -------- -------- -------- -------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fee (Net of Fee Waivers)*** Class A......................................... 0.21% 0.19% 0.07% 0.20% 0.42% 0.30%* 0.30%* Class B......................................... 0.21% 0.19% 0.07% 0.20% 0.42% N/A N/A 12b-1 Fees Class A......................................... None None None None None None None Class B......................................... 0.15%** 0.15%** 0.25% 0.25% 0.25% N/A N/A Other Expenses Class A......................................... 0.24% 0.31% 0.38% 0.25% 0.33% 0.21% 0.22% Class B......................................... 0.24% 0.31% 0.38% 0.25% 0.33% N/A N/A -------- -------- -------- -------- -------- -------- -------- Total Operating Expenses (Net of Fee Waivers)*** Class A......................................... 0.45% 0.50% 0.45% 0.45% 0.75% 0.51%* 0.52%* Class B......................................... 0.70% 0.65% 0.70% 0.70% 1.00% N/A N/A -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
- ------------------------------ *No fee waiver or expense reimbursement is in effect for this Portfolio. **The Distributor has agreed to waive 0.10% of the 0.25% distribution fee it is entitled to receive from this Portfolio. ***The Adviser has agreed to waive its management fees and/or reimburse each Portfolio, if necessary, if such fees would cause any of the total annual operating expenses of the Portfolios to exceed a specified percentage of their respective average daily net assets. Set forth below, for each Portfolio as applicable, are the management fees and total operating expenses absent such fee waivers and/or expense reimbursements as a percent of average daily net assets of the Class A shares of the Portfolios and Class B shares of the Non-Money Portfolios, respectively. 2
TOTAL OPERATING EXPENSES ABSENT FEE WAIVERS MANAGEMENT FEES ---------------------------- PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B+ - -------------------------------------------------------------- ----------------------- ------------- ------------- Fixed Income.................................................. 0.35% 0.59% 0.74% Global Fixed Income........................................... 0.40% 0.71% 0.86% Municipal Bond................................................ 0.35% 0.73% 0.98% Mortgage-Backed Securities.................................... 0.35% 0.60%+ 0.85% High Yield.................................................... 0.50% 0.83% 1.08% Money Market.................................................. 0.30% 0.51%++ N/A Municipal Money Market........................................ 0.30% 0.52%++ N/A
- ------------------------ + Estimated. ++ No fee waiver or expense reimbursement is in effect for this Portfolio. 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." The purpose of the table above is to assist the investor in understanding the various expenses that an investor in the Fund will bear directly or indirectly. The Class A fees and expenses for the Portfolios are based on actual figures for the fiscal year ended December 31, 1995. The Class A fees and expenses for the Mortgage-Backed Securities Portfolio are based on estimates and assume that the average daily net assets of the Class A shares of the Mortgage-Backed Securities Portfolio will be $50,000,000. The Class B fees and expenses of each Non-Money Portfolio are based on estimates, assuming that the average daily net assets of the Class B shares of each Non-Money Portfolio will be $50,000,000. "Other Expenses" include Board of Directors' fees and expenses, amortization of organizational costs, professional fees, filing fees, and costs for shareholders reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the equivalent of the maximum front-end sales charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). 3 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 3 5 10 YEAR YEARS YEARS YEARS ----- ----- ----- ----- Fixed Income Portfolio Class A............................. $ 5 $ 14 $ 25 $ 57 Class B............................. $ 6 $ 19 $ 33 $ 75 Global Fixed Income Class A............................. $ 5 $ 16 $ 28 $ 63 Class B............................. $ 7 $ 21 $ 36 $ 81 Municipal Bond Portfolio Class A............................. $ 5 $ 14 25 57 Class B............................. $ 7 $ 22 39 87 Mortgage-Backed Securities Portfolio Class A............................. $ 5 $ 14 * * Class B............................. $ 7 $ 22 * * High Yield Portfolio Class A............................. $ 8 $ 24 $ 42 $ 93 Class B............................. $ 10 $ 32 $ 55 $122 Money Market Portfolio Class A............................. $ 5 $ 16 $ 29 $ 64 Municipal Money Market Portfolio Class A............................. $ 5 $ 17 $ 29 $ 65
- ------------------------ * Because the Mortgage-Backed Securities Portfolio was 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 exceed the limit set by applicable state law. 4 FINANCIAL HIGHLIGHTS The following tables provides financial highlights for the Class A shares of the Fixed Income, Global Fixed Income, Municipal Bond, High Yield, Money Market and Municipal Money Market Portfolios for each of the periods presented. The audited financial highlights for the Class A shares for the fiscal year ended December 31, 1995 are part of the Fund's financial statements which appear in the Fund's December 31, 1995 Annual Report to Shareholders and which are included in the Fund's Statement of Additional Information. The Portfolios' financial highlights for each of the periods in the five years ended December 31, 1995 have been audited by Price Waterhouse LLP, whose unqualified report thereon is also included in the Statement of Additional Information. Additional performance information for the Class A shares of the Fixed Income, Global Fixed Income, Municipal Bond, High Yield, Money Market and Municipal Money Market Portfolios 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. Financial highlights are not available for the new Class B shares since they were not offered as of December 31, 1995. The Mortgage-Backed Securities Portfolio was not operational as of December 31, 1995. 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. 5 FIXED INCOME PORTFOLIO
MAY 15, TWO MONTHS 1991* TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1991 1992 1992 1993 1994 1995 ----------- ----------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD..... $ 10.00 $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82 ----------- ----------- ------------ ------------ ------------ ------------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)............ 0.22 0.69 0.10 0.54 0.59 0.72 Net Realized and Unrealized Gain/(Loss) on Investments........ 0.49 0.39 0.01 0.41 (0.92) 1.06 ----------- ----------- ------------ ------------ ------------ ------------ Total from Investment Operations............ 0.71 1.08 0.11 0.95 (0.33) 1.78 ----------- ----------- ------------ ------------ ------------ ------------ DISTRIBUTIONS Net Investment Income................ (0.16) (0.69) (0.10) (0.56) (0.53) (0.79) 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) (0.79) ----------- ----------- ------------ ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD.................. $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82 $ 10.81 ----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------ ------------ ------------ TOTAL RETURN............. 7.12% 10.61% 1.02% 9.07% (3.10)% 18.76% ----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------ ------------ ------------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)............. $ 72,326 $ 146,546 $ 154,210 $ 240,668 $ 209,331 $ 162,527 Ratio of Expenses to Average Net Assets (1)(2)........... 0.45%** 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% 6.85% Portfolio Turnover Rate.................... 48% 105% 15% 240% 388% 172%
- -------------------------- (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 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets................ 0.81%** 0.59% 0.75%** 0.60% 0.58% 0.59% Net Investment Income to Average Net Assets................ 6.93%** 6.45% 5.26%** 4.82% 5.60% 6.71%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 0.70% of the average daily net assets of the Class B shares. In the period ended October 31, 1991, the year ended October 31, 1992, the two month period ended December 31, 1992, the years ended December 31, 1993, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totalling $69,000, $165,000, $74,000, $307,000, $276,000, $142,000 and $247,000, respectively, for the Fixed Income Portfolio. * Commencement of Operations. ** Annualized. + Amount is less than $0.01 per share. 6 GLOBAL FIXED INCOME PORTFOLIO
MAY 1, TWO MONTHS 1991* TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1991 1992 1992 1993 1994 1995 ----------- ----------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD..... $ 10.00 $ 10.61 $ 11.41 $ 11.26 $ 11.68 $ 10.29 ----------- ----------- ------------ ------------ ------------ ------------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)............ 0.16 0.53 0.14 0.69 0.70 0.76 Net Realized and Unrealized Gain (Loss) on Investments........ 0.45 0.55 (0.29) 0.90 (1.38) 1.15 ----------- ----------- ------------ ------------ ------------ ------------ Total from Investment Operations............ 0.61 1.08 (0.15) 1.59 (0.68) 1.91 ----------- ----------- ------------ ------------ ------------ ------------ DISTRIBUTIONS Net Investment Income................ -- (0.27) -- (0.79) (0.40) (0.98) 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) (0.98) ----------- ----------- ------------ ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD.................. $ 10.61 $ 11.41 $ 11.26 $ 11.68 $ 10.29 $ 11.22 ----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------ ------------ ------------ TOTAL RETURN............. 6.10% 10.29% (1.31)% 15.34% (6.08)% 19.32% ----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------ ------------ ------------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)............. $ 28,236 $ 94,847 $ 92,897 $ 172,468 $ 130,675 $ 102,852 Ratio of Expenses to Average Net Assets (1)(2)........... 0.50%** 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% 6.79% Portfolio Turnover Rate.................... 20% 144% 9% 108% 171% 207%
- -------------------------- (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 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets................ 1.62%** 0.86% 0.90%** 0.70% 0.66% 0.71% Net Investment Income to Average Net Assets................ 6.12%** 6.56% 6.59%** 5.79% 6.18% 6.58%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 0.75% of the average daily net assets of the Class B shares. In the fiscal period ended October 31, 1991, the year ended October 31, 1992, the two months ended December 31, 1992, the years ended December 31, 1993, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totalling $67,000, $201,000, $64,000, $260,000, $238,000 and $204,000, respectively, for the Global Fixed Income Portfolio. * Commencement of Operations. ** Annualized. 7 MUNICIPAL BOND PORTFOLIO
PERIOD FROM JANUARY 18, 1995* TO DECEMBER 31, 1995 ------------ NET ASSET VALUE, BEGINNING OF PERIOD............................. $ 10.00 ------------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income.......................................... 0.44 Net Realized and Unrealized Gain on Investments................ 0.42 ------------ Total from Investment Operations............................... 0.86 ------------ DISTRIBUTIONS Net Investment Income.......................................... (0.45) In Excess of Net Investment Income............................. (0.00)+ Net Realized Gain.............................................. (0.04) ------------ Total Distributions............................................ (0.49) ------------ NET ASSET VALUE, END OF PERIOD................................... $ 10.37 ------------ ------------ TOTAL RETURN..................................................... 8.80% ------------ ------------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)............................ $ 45,869 Ratio of Expenses to Average Net Assets (1)(2)................... 0.45%** Ratio of Net Investment Income to Average Net Assets (1)(2)...... 4.61%** Portfolio Turnover Rate.......................................... 180%
- ------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income..................... $ 0.03 Ratios before expense limitation: Expenses to Average Net Assets................................. 0.73%** Net Investment Income to Average Net Assets.................... 4.33%**
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management fee calculated at an annual rate of 0.35% of the average daily net assets of the Municipal Bond 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 Class A shares and 0.70% of the average daily net assets of the Class B shares. In the period ended December 31, 1995, the Adviser waived management and/or reimbursed expenses totalling $119,000 for the Municipal Bond Portfolio. * Commencement of Operations. ** Annualized. + Amount is less than $0.01 per share. 8 HIGH YIELD PORTFOLIO
SEPTEMBER TWO MONTHS 28, 1992* ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO OCTOBER DECEMBER DECEMBER DECEMBER DECEMBER 31, 1992 31, 1992 31, 1993 31, 1994 31, 1995 ---------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD.... $ 10.00 $ 9.77 $ 9.95 $ 11.16 $ 9.55 ---------- ----------- ----------- ----------- ----------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)............. 0.08 0.14 0.90 0.97 1.14 Net Realized and Unrealized Gain/(Loss) on Investments........... (0.31) 0.19 1.21 (1.40) 0.97 ---------- ----------- ----------- ----------- ----------- Total from Investment Operations...... (0.23) 0.33 2.11 (0.43) 2.11 ---------- ----------- ----------- ----------- ----------- DISTRIBUTIONS Net Investment Income................. -- (0.15) (0.90) (0.97) (1.20) Net Realized Gain..................... -- -- -- (0.21) -- ---------- ----------- ----------- ----------- ----------- Total Distributions................... -- (0.15) (0.90) (1.18) (1.20) ---------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 9.77 $ 9.95 $ 11.16 $ 9.55 $ 10.46 ---------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- TOTAL RETURN (2.30)% 3.41% 22.11% (4.18)% 23.35% ---------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)... $16,950 $ 20,194 $ 74,500 $ 97,223 $ 62,245 Ratio of Expenses to Average Net Assets (1)(2)................................. 0.75%** 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% 11.09% Portfolio Turnover Rate................. 9% 24% 104% 74% 90%
- -------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income............................... $ 0.01 $ 0.01 $ 0.02 $ 0.001 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets........ 1.23%** 1.62%** 0.96% 0.76% 0.83% Net Investment Income to Average Net Assets............................... 9.41%** 8.09%** 8.49% 9.41% 11.01%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 1.00% of the average daily net assets of the Class B shares. In the period ended October 31, 1992, the two months ended December 31, 1992, and the years ended December 31, 1993, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totalling $22,000, $27,000, $82,000, $7,000 and $55,000, respectively, for the High Yield Portfolio. * Commencement of Operations. ** Annualized. 9 MONEY MARKET PORTFOLIO
NOVEMBER TWO MONTHS 15, 1988* YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO OCTOBER OCTOBER OCTOBER OCTOBER DECEMBER DECEMBER DECEMBER DECEMBER 31, 1989 31, 1990 31, 1991 31, 1992 31, 1992 31, 1993 31, 1994 31, 1995 ----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD............... $ 1.000 $ 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 0.027 0.040 0.054 ----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- DISTRIBUTIONS Net Investment Income............. (0.085) (0.079) (0.062) (0.039) (0.005) (0.027) (0.040) (0.054) In Excess of Net Investment Income............. -- -- -- -- -- 0.000+ -- -- ----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- Total Distributions...... (0.085) (0.079) (0.062) (0.039) (0.005) (0.027) (0.040) (0.054) ----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD............ $ 1.000 $ 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% 5.51% ----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)... $158,582 $516,182 $607,087 $612,968 $599,172 $657,163 $690,503 $836,693 Ratio of Expenses to Average Net Assets (1)(2)............... 0.55%** 0.55% 0.53% 0.52% 0.55%** 0.53% 0.49% 0.51% 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% 5.37% Portfolio Turnover Rate................. N/A 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 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 N/A Net Investment Income to Average Net Assets......... 8.71%** 7.85% N/A N/A 3.07%** 2.70% N/A N/A
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 0.55% of the average daily net assets of the Class A shares. The Adviser did not waive fees or reimburse expenses for the years ended October 31, 1991, October 31, 1992, December 31, 1994 and December 31, 1995. 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 management fees and /or reimbursed expenses totalling approximately $110,000, $75,000, $37,000 and $18,000, respectively, for the Money Market Portfolio. * Commencement of Operations. ** Annualized. + Amount if less than $0.001 per share. 10 MUNICIPAL MONEY MARKET PORTFOLIO
FEBRUARY TWO MONTHS 10, 1989* YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO OCTOBER OCTOBER OCTOBER OCTOBER DECEMBER DECEMBER DECEMBER DECEMBER 31, 1989 31, 1990 31, 1991 31, 1992 31, 1992 31, 1993 31, 1994 31, 1995 ----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD............... $ 1.000 $ 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 0.034 ----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- DISTRIBUTIONS Net Investment Income............. (0.046) (0.054) (0.043) (0.026) (0.004) (0.019) (0.020) (0.034) In Excess of Net Investment Income............. -- -- -- -- -- (0.000)+ -- -- ----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- Total Distributions...... (0.046) (0.054) (0.043) (0.026) (0.004) (0.019) (0.020) (0.034) ----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD............ $ 1.000 $ 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% 3.44% ----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)........ $ 38,540 $102,195 $166,953 $206,691 $208,866 $266,524 $359,444 $451,519 Ratio of Expenses to Average Net Assets (1)(2)............... 0.32%** 0.51% 0.56% 0.55% 0.57%** 0.54% 0.51% 0.52% 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% 3.38% Portfolio Turnover Rate................. N/A 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 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 N/A Net Investment Income to Average Net Assets......... 5.63%** 5.26% N/A N/A 2.21%** 1.87% N/A N/A
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 0.57% of the average daily net assets of the Class A shares. The Adviser did not waive fees or reimburse expenses for the years ended October 31, 1991, October 31, 1992, December 31, 1994 and December 31, 1995. 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 management fees and/or reimbursed expenses totalling approximately $75,000, $92,000, $36,000 and $46,000, respectively, for the Municipal Money Market Portfolio. * Commencement of Operations. ** Annualized. + Amount is less than $0.001 per share. 11 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-eight 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 offers Class A shares and, except the International Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class B shares. Each portfolio has its own investment objective and policies designed to meet its specific goals. The investment objective of each Portfolio described in this Prospectus is as follows: - 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 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 equity securities 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 equity securities 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. 12 - The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of emerging country issuers. - The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of European issuers. - The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities 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 equity securities of non-U.S. issuers. - The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers in accordance with EAFE country (as defined in "Investment Objectives and Policies" below) weightings determined by the Adviser. - The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers with equity market capitalizations of less than $1 billion. - 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 equity securities of small- to medium-sized corporations. - The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of medium and large capitalization companies. - The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small corporations. - The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued equity securities 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 equity securities 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 equity securities and fixed income securities. 13 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. 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, 1995 had approximately $57.4 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 Class A shares of each Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Class B shares, offered only by the Non-Money Portfolios, are offered at net asset value with no sales commission, but with a 12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the Class B shares' average daily net assets on an annualized basis. While each Money Portfolio expects to maintain a net asset value per share of $1.00, there can be no assurance that either Money Portfolio can maintain such net asset value per share. Share purchases may be made by sending investments directly to the Fund or through the Distributor. Shares in a Portfolio account opened prior to January 2, 1996 were designated Class A shares on January 2, 1996. For a Non-Money Portfolio account opened on or after January 2, 1996 (a "New Non-Money Account"), the minimum initial investment is $500,000 for Class A shares and $100,000 for Class B shares. The minimum initial investment for each Money Portfolio is $50,000. Certain exceptions to the foregoing minimums apply to (1) shares in a Non-Money Portfolio account opened prior to January 2, 1996 (each, a "Pre-1996 Non-Money Account") with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the Adviser and its affiliates; and (3) certain advisory or asset allocation accounts, such as Total Funds Management accounts, managed by Morgan Stanley or its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves the right in its sole discretion to determine which of such advisory or asset allocation accounts shall be Managed Accounts. For information regarding Managed Accounts please contact your Morgan Stanley account representative or the Fund at the telephone number provided on the cover of this Prospectus. Shares in a Pre-1996 Non-Money Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". See "Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from Class A to Class B Shares." 14 The minimum subsequent investment for each Portfolio account is $1,000 (except for automatic reinvestment of dividends and capital gains distributions for which there is no minimum). Such subsequent investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. See "Purchase of Shares -- Additional Investments." HOW TO REDEEM Class A shares or Class B shares of the Portfolios may be redeemed at any time, without cost, at the net asset value per share of shares of the applicable class next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. Certain redemptions may cause involuntary redemption or automatic conversion. Class A or Class B shares held in New Non-Money Accounts are subject to involuntary redemption if shareholder redemption(s) of such shares reduces the value of such account to less than $100,000 for a continuous 60-day period. Involuntary redemption does not apply to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B Accounts, regardless of the value of such accounts. Class A shares in a New Non-Money Account will convert to Class B shares if shareholder redemption(s) of such shares reduces the value of such account to less than $500,000 for a continuous 60-day period. Class B shares in a New Non-Money Account will convert to Class A shares if shareholder purchases of additional Class B shares or market activity cause the value of the Class B shares in the New Non-Money Account to increase to $500,000 or more. If a shareholder reduces its total investment in Class A shares of a Money Portfolio to less than $10,000, the investment may be subject to redemption. See "Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and "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 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 Portfolio, may invest in futures contracts and options on futures contracts. The Fixed Income, Global Fixed Income and High 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. 15 INVESTMENT OBJECTIVES AND POLICIES The investment objective of each Portfolio is 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 Ratings Group ("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. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. 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 16 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 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, S&P 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. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. 17 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, 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 (v) 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. 18 Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. 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. "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. 19 Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. 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 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. 20 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 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. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. 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 21 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. The table below provides a summary of ratings assigned by S&P to debt obligations in the High Yield Portfolio. These figures are dollar-weighted averages of month-end portfolio holdings during the fiscal year ended December 31, 1995, presented as a percentage of total investments. These percentages are historical and are not necessarily indicative of the quality of current or future portfolio holdings, which may vary.
S&P - ---------------- RATING AVERAGE - ------- ------- A 0.21% ------- BBB 0.03% ------- BB 18.50% ------- B 47.27% ------- CCC 7.27% ------- CC 1.07% ------- Unrated 21.03% -------
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. 22 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 Portfolio'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." 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. 23 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. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. 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 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 24 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. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. 25 ADDITIONAL INVESTMENT INFORMATION FOREIGN INVESTMENT. 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 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 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. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fixed Income, Global Fixed Income and High 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 -- 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 26 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. 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 Portfolio, 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. 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. 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 net 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 27 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. 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." 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." 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 28 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." 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 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. INVESTMENT LIMITATIONS As a diversified investment company, each Portfolio, except the Global Fixed Income 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 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 Portfolio is a non-diversified investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), which means the Global Fixed Income 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 Global Fixed Income 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. The Global Fixed Income Portfolio, however, intends 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 net 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) 29 of its total assets; (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 5% of the Portfolio's total assets would be invested in these 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 management 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.
MAXIMUM TOTAL OPERATING EXPENSES AFTER FEE WAIVERS MANAGEMENT FEE ---------------------------------------- PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B - -------------------------------------------- ------------------- ------------------- ------------------- Fixed Income 0.35% 0.45% 0.70% Global Fixed Income 0.40% 0.50% 0.75% Municipal Bond 0.35% 0.45% 0.70% Mortgage-Backed Securities 0.35% 0.45% 0.70% High Yield 0.50% 0.75% 1.00% Money Market 0.30% 0.55% N/A Municipal Money Market 0.30% 0.57% N/A
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, 1995, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $57.4 billion, including approximately $41.9 billion under active management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. 30 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 President with Irving Trust Company in the Trust Investment Division. Mr. Ackerman is a graduate of Monmouth College with a B.S. 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 B.S. in Business, Mr. Smith also received an M.B.A. -- 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. 31 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 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 Principal 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 B.A. 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 U.S. 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 B.S. degree in Engineering from University of Pennsylvania and an M.B.A. 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 an agreement between the Adviser and The Chase Manhattan Bank, N.A. ("Chase"), Chase provides certain administrative services to the Fund. In a merger completed on September 1, 1995, Chase succeeded to all of the rights and obligations under the U.S. Trust Administration Agreement between the Adviser and the United States Trust Company of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegated its administration responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service Company, which after the merger with Chase is a subsidiary of Chase and will continue to provide certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by CGFSC. The services provided under the 32 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. CGFSC'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. The Portfolios currently offer only the classes of shares offered by this Prospectus. The Portfolios may in the future offer one or more classes of shares with features, distribution expenses or other expenses that are different from those of the classes currently offered. The Fund has adopted a Plan of Distribution with respect to the Class B shares of each of the Non-Money Portfolios pursuant to Rule 12b-1 under the 1940 Act (each, a "Plan"). Under each Plan, the Distributor is entitled to receive from each of the Non-Money Portfolios a distribution fee, which is accrued daily and paid quarterly, of 0.25% of the Class B shares' average daily net assets on an annualized basis. The Distributor expects to reallocate most of its fee to its investment representatives. The Distributor may, in its discretion, voluntarily waive from time to time all or any portion of its distribution fee and each of the Distributor and the Adviser is free to make additional payments out of its own assets to promote the sale of Fund shares, including payments that compensate financial institutions for distribution services or shareholder services. The Plan is designed to compensate the Distributor for its services, not to reimburse the Distributor for its expenses, and the Distributor may retain any portion of the fee that it does not expend in fulfillment of its obligations to the Fund. 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 Class A and Class B shares of the Non-Money Portfolios and Class A shares of the Money Portfolios may be purchased, without sales commission, at the net asset value per share next determined after receipt of the purchase order by the Non-Money Portfolio and, in the case of the Money Portfolios, at the price next determined after Federal Funds are available to the Money Portfolio. See "Valuation of Shares." 33 MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES For an account for a Non-Money Portfolio opened on or after January 2, 1996 (a "New Non-Money Account"), the minimum initial investment and minimum account size are $500,000 for Class A shares and $100,000 for Class B shares. The minimum initial investment for each Money Portfolio is $50,000. Managed Accounts may purchase Class A shares without being subject to any minimum initial investment or minimum account size requirements for a Portfolio account. Officers of the Adviser and its affiliates are subject to the minimums for a Portfolio account, except they may purchase Class B shares subject to a minimum initial investment and minimum account size of $5,000 for a Portfolio account. If the value of a New Non-Money Account containing Class A shares falls below $500,000 (but remains at or above $100,000) because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $500,000 (but remains at or above $100,000) for a continuous 60-day period, the Class A shares in such account will convert to Class B shares and will be subject to the distribution fee and other features applicable to the Class B shares. The Fund, however, will not convert Class A shares to Class B shares based solely upon changes in the market that reduce the net asset value of shares. Under current tax law, conversions between share classes are not a taxable event to the shareholder. Shares in a Portfolio account opened prior to January 2, 1996 were designated Class A shares on January 2, 1996. Shares in a Non-Money Portfolio account opened prior to January 2, 1996 (each, a "Pre 1996 Non-Money Account") with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account") remain Class A shares regardless of account size thereafter. Except for shares in a Managed Account, shares in a Pre-1996 Non-Money Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") convert to Class B shares on March 1, 1996. Grandfathered Class A Accounts and Managed Accounts are not subject to conversion from Class A shares to Class B shares. Investors may also invest in the Fund by purchasing shares through a trust department, broker, dealer, agent, financial planner, financial services firm or investment adviser. An investor may be charged an additional service or transaction fee by that institution. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". The Fund reserves the right to modify or terminate the conversion features of the shares as stated above at any time upon 60-days' notice to shareholders. MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES If the value of a New Non-Money Account falls below $100,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $100,000 for a continuous 60-day period, the shares in such accounts are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. The Fund, however, will not redeem shares based solely upon changes in the market that reduce the net asset value of shares. For purposes of redemptions by the Fund, the foregoing minimum account size requirements do not apply to New Non-Money Accounts containing Class B shares held by officers of the Adviser or its affiliates. However, 34 if the value of such account held by an officer of the Adviser or its affiliates falls below $5,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $5,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed Accounts are not subject to involuntary redemption. If a shareholder reduces its total investment in Class A shares of a Money Portfolio to less than $10,000, the investment may be subject to redemption. The Fund reserves the right to modify or terminate the involuntary redemption features of the shares as stated above at any time upon 60 days' notice to shareholders. CONVERSION FROM CLASS B TO CLASS A SHARES If the value of Class B shares in a Non-Money Portfolio account increases, whether due to shareholder share purchases or market activity, to $500,000 or more, the Class B shares will convert to Class A shares. Under current tax law, such conversion is not a taxable event to the shareholder. Class A shares converted from Class B shares are subject to the same minimum account size requirements that are applicable to New Non-Money Accounts containing Class A shares, as stated above. The Fund reserves the right to modify or terminate this conversion feature at any time upon 60 days' notice to shareholders. INITIAL PURCHASES DIRECTLY FROM THE FUND The Fund's determination of an investor's eligibility to purchase shares of a given class will take precedence over the investor's selection of a class. Assuming the investor is eligible for the class, the Fund will select the most favorable class for the investor, if the investor has not done so. 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 Class A shares of each Non-Money Portfolio, $100,000 minimum for Class B shares of each Non-Money Portfolio, and $50,000 minimum for each Money Portfolio, 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. 35 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 class 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, the class selected and the account number assigned to you) as follows: Chase Manhattan Bank, N.A. One Manhattan Plaza New York, NY 10081-1000 ABA#021000021 DDA#910-2-733293 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (Portfolio name, your account number, your account name) Please call the Fund at 1-800-548-7786 prior to wiring funds. C. Complete the Account Registration Form and mail it to the address shown thereon. Purchase orders for shares of the Portfolio which are received prior to the regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed at the price computed on the date of receipt as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Federal Funds purchase orders will be accepted only on a day on which the Fund and Chase (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 Federal 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 36 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, portfolio name and the class selected 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. Additional investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. OTHER PURCHASE INFORMATION The purchase price of the Class A and Class B shares of each Non-Money 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 as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. 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. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends. The net asset value of Class B shares will generally be lower than the net asset value of Class A shares as a result of the distribution expense charged to Class B shares. It is expected, however, that the net asset value per share of the two classes will tend to converge immediately after the recording of dividends which will differ by approximately the amount of the distribution expense accrual differential between the classes. 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 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 37 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 the Distributor. EXCESSIVE TRADING Frequent trades involving either substantial portfolio 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 each Portfolio and each Portfolio's performance, the Fund may in its discretion bar a stockholder that engages in excessive trading of shares of any class 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 class of a portfolio of the Fund within any 120-day period. As an example, exchanging shares of portfolios of the Fund as follows amounts to excessive trading: exchanging Class A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class A shares of Portfolio B for Class A shares of Portfolio C and again exchanging Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day period. 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, such as TFM Accounts, managed or advised by MSAM and/or any of its affiliates. 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 Class A and Class B shares of each Non-Money Portfolio and Class A shares of each Money Portfolio at the next determined net asset value of shares of the applicable class. On days that both the NYSE and the Custodian Bank are open for business, the net asset value per share of the Fixed Income, Global 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 Non-Money Portfolio will redeem its Class A and Class B shares and each Money Portfolio will redeem its Class A 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 Chase Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913. 38 "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 class and 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 Chase Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts 01208-3913. 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 39 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. 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 FEATURES You may exchange shares that you own in a Portfolio for shares of any other available portfolio of the Fund (other than the International Equity Portfolio, which is closed to new investors). In exchanging for shares of a portfolio with more than one class, the class of shares you receive in the exchange will be determined in the same manner as any other purchase of shares and will not be based on the class of shares surrendered for the exchange. Consequently, the same minimum initial investment and minimum account size for determining the class of shares received in the exchange will apply. See "Purchase of Shares." Shares of the portfolios may be exchanged by mail or telephone. The privilege to exchange shares by telephone is automatic and 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. The exchange privilege may be modified or terminated by the Fund at any time upon 60 days' notice to shareholders. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name, class of shares and account number of your current Portfolio, the names of the portfolio(s) and class(es) of shares 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, class of shares and account number of the current portfolio, the name(s) of the portfolio(s) and class(es) of shares 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 class of the portfolios involved in the exchange of shares 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 40 written request must be received in good order before any transfer can be made. Transferring the registration of shares may affect the eligibility of your account for a given class of the Portfolios' shares and may result in involuntary conversion or redemption of your shares. See "Purchase of Shares" above. VALUATION OF SHARES The net asset value per share of a class of shares of each Non-Money Portfolio is determined by dividing the total market value of the Non-Money Portfolio's investments and other assets attributable to such class, less all liabilities attributable to such class, by the number of total outstanding shares of such a class of the Non-Money Portfolio. Net asset value is calculated separately for each class 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. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends for the class. Dividends will differ by approximately the amount of the distribution expense accrual differential among the classes. The net asset value of Class B shares will generally be lower than the net asset value of Class A shares as a result of the distribution expense charged to Class B shares. 41 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 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 for each class of the Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed Securities and High Yield Portfolios. In addition, from time to time the Fund may advertise "yield" for the Global Fixed Income, Municipal Bond, High 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 a class of 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 in the same class 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 and High 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. The performance figures for Class B shares will generally be lower than those for Class A shares because of the distribution fee charged to Class B shares. 42 DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS FIXED INCOME, GLOBAL FIXED INCOME, MUNICIPAL BOND, MORTGAGE-BACKED SECURITIES AND HIGH YIELD PORTFOLIOS All income dividends and capital gains distributions for a class of shares of each Non-Money Portfolio will automatically be reinvested in additional shares of such class 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 Non-Money Portfolio, except the Global Fixed Income Portfolio, expects to distribute substantially all of its net investment income in the form of monthly dividends and the Global Fixed Income Portfolio expects to distribute substantially all of its net investment income in the form of quarterly dividends. Net realized gains of each Non-Money Portfolio, if any, after reduction for any tax loss carryforwards will also be distributed annually. Confirmations of the purchases of shares of the Non-Money Portfolios 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 monthly 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 each Non-Money 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. Because of the distribution fee and any other expenses that may be attributable to the Class B shares, the net income attributable to and the dividends payable on Class B shares will be lower than the net income attributable to and the dividends payable on Class A shares. As a result, the net asset value per share of the classes of each Non-Money Portfolio will differ at times. Expenses of each Non-Money Portfolio allocated to a particular class of shares thereof will be borne on a pro rata basis by each outstanding share of that class. 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 Money Portfolio shall consist of interest earned, including any discount or premium ratably amortized to the date of maturity, minus estimated expenses of the Money Portfolio. Each Money 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 43 weekend). Dividends of each Money 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 each Money 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 Money 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 each Money 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 regard as necessary and appropriate, including the sale of instruments from a Money 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 certain 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 not qualify for the 70% dividends-received deduction for corporate shareholders. Each Portfolio will report annually to its shareholders the amount of dividend income qualifying for such treatment. 44 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, exchange or redemption of shares may result in taxable gain or loss to the selling, exchanging or 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, exchanged or sold 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. The conversion of Class A shares to Class B shares should not be a taxable event to the shareholder. 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. 45 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 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 46 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. GENERAL INFORMATION DESCRIPTION OF COMMON STOCK The Fund was organized as a Maryland corporation on June 16, 1988. The Articles of Incorporation, as amended and restated, permit the Fund to issue up to 34 billion 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. Subject to the notice period to shareholders with respect to shares held by shareholders, 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 common stock of each portfolio are currently classified into two classes, the Class A shares and Class B shares, except for the International Small Cap, Money Market and Municipal Money Market Portfolio, which only offer Class A shares. 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 47 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, the Adviser, 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 As of September 1, 1995, domestic securities and cash are held by Chase, which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians 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. MSTC may also hold certain domestic assets for the Fund. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Chase Global Funds Services 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. 48 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 contract 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. 49 STANDARD & POOR'S RATINGS GROUP 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. 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. 50
MORGAN STANLEY INSTITUTIONAL FUND, INC. FIXED INCOME, GLOBAL FIXED INCOME, MORTGAGE-BACKED SECURITIES, MUNICIPAL BOND, HIGH YIELD, MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS 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 Fill in where applicable for the Morgan Stanley Institutional Fund, please contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all items except signature, and mail to the Fund at the address above. - --------------------------------------------------------------------------------------------------------------- A) REGISTRATION 1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / First Name Initial Last Name 2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / (RIGHTS OF First Name Initial Last Name SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / PRESUMED UNLESS First Name Initial Last Name TENANCY IN COMMON IS INDICATED) - --------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / TRUSTS AND OTHERS Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Fund for additional documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / be required to set up account and to authorize transactions. Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED) / / TRUST __________________________________ / / OTHER (Specify) ____________________________ - --------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / / Please fill in completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / telephone number(s). Home Business Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / / / / United States / / Resident / /Non-Resident Alien: Citizen 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 NUMBER individual taxpayers, this is your law to provide us (as payer) with If the account is in Social Security Number. your correct taxpayer identification more than one name, TAXPAYER IDENTIFICATION NUMBER number. Accounts that have a missing CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect taxpayer identification PERSON WHOSE TAXPAYER OR number will be subject to backup IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on interest, IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / dividends, distributions and other A) ABOVE. If no name PART 2. BACKUP WITHHOLDING payments. If you have not provided us with is circled, the number / / Check this box if you are your correct taxpayer identification will be considered to be NOT subject to Backup number, you may be subject to that of the last name Withholding under the a $50 penalty imposed by the Internal listed. For Custodian provisions of Section Revenue Service. account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an (Uniform Gifts/Transfers Revenue Code. additional tax; the tax liability of to Minor Acts), give the persons subject to backup withholding Social Security Number will be reduced by the amount of tax of the minor. withheld. If withholding results in an overpayment of taxes, a refund may be obtained. You may be notified that you are subject to backup withholding under section 3406(a)(1)(C) of the Internal Revenue Code because you have underreported interest or dividends or you were required to but failed to file a return which would have included a reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - --------------------------------------------------------------------------------------------------------------- D) PORTFOLIO AND For Purchase of the following Portfolio(s): CLASS SELECTION Fixed Income Portfolio / / Class A Shares $____ / / Class B Shares $____ (Class A shares Global Fixed Income Portfolio / / Class A Shares $____ / / Class B Shares $____ minimum $500,000 Mortgage-Backed Securities Portfolio / / Class A Shares $____ / / Class B Shares $____ for each Portfolio Municipal Bond Portfolio / / Class A Shares $____ / / Class B Shares $____ and Class B shares High Yield Portfolio / / Class A Shares $____ / / Class B Shares $____ minimum $100,000 for Money Market Portfolio / / Class A Shares $____ each of the Fixed Municipal Money Market Portfolio / / Class A Shares $____ Income, Global Fixed Income, Municipal Bond, Total Initial Investment $_____________ Mortgage-Backed Securities and High Yield Portfolios. Minimum $50,000 for each of the Money Market and Municipal Money Market Portfolios.) Please indicate Portfolio, class and amount. - --------------------------------------------------------------------------------------------------------------- E) METHOD OF Payment by: INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--PORTFOLIO NAME) Please indicate portfolio, / / Exchange $_______________________ From ______________________________ / / / / / / / / / / /-/ / manner of Name of Portfolio Account No. payment. / / Account previously established by: / / Phone exchange / / Wire on ________________________________ / / / / / / / / / / / /-/ / Date Account No. (Check (Previously assigned by the Fund) Digit) - --------------------------------------------------------------------------------------------------------------- F) AUTHORIZATION OF AUTOMATIC I/we hereby authorize the Fund and Morgan Stanley Asset PURCHASE AND REDEMPTION Management Inc. to transfer from my/our account at Morgan (Available only for Money Stanley & Co. Inc. all free cash balances (that is, any cash Market and Municipal Money available on demand at the close of the previous day), which Market Portfolios) are held in such account and to invest such cash balances in the / / Money Market Portfolio or the / / Municipal Money Market Portfolio (check only one). ____________-________________________________ / / / / / / / / / / / - / / Account Title at Morgan Stanley & Co. Inc. Account Number Account Number - --------------------------------------------------------------------------------------------------------------- G) DISTRIBUTION Income dividends and capital gains distributions (if any) will OPTION be reinvested in additional shares unless 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 Name of COMMERCIAL Bank Bank Account No. Please select at time of to wire redemption proceeds to the (Not Savings Bank) initial application if you commercial bank indicated at right and/or wish to redeem shares by mail redemption proceeds to the name and ________________ telephone. A SIGNATURE address in which my/our fund account is Bank ABA No. GUARANTEE IS REQUIRED IF registered if such requests are believed BANK ACCOUNT IS NOT to be authentic. _________________________________________________ REGISTERED IDENTICALLY TO TELEPHONE REQUESTS FOR REDEMPTIONS OR EXCHANGES Name(s) in which your BANK Account is Established YOUR FUND ACCOUNT. WILL NOT BE HONORED UNLESS THE BOX IS CHECKED. THE FUND AND THE FUND'S TRANSFER AGENT WILL TELEPHONE REQUESTS FOR EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT _________________________________________________ REDEMPTIONS OR EXCHANGES INSTRUCTIONS COMMUNICATED BY TELEPHONE ARE Bank's Street Address WILL NOT BE HONORED GENUINE. THESE PROCEDURES INCLUDE REQUIRING UNLESS THE BOX AT RIGHT THE INVESTOR TO PROVIDE CERTAIN PERSONAL IS CHECKED. IDENTIFICATION INFORMATION AT THE TIME AN _________________________________________________ ACCOUNT IS OPENED AND PRIOR TO EFFECTING EACH City State Zip 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 In addition to the account _________________________________________________________________ statement sent to my/our Name registered address, I/we _________________________________________________________________ hereby authorize the fund to mail duplicate _________________________________________________________________ statements to the name and Address address provided at right. _________________________________________________________________ City State Zip Code - --------------------------------------------------------------------------------------------------------------- J) DEALER INFORMATION _______________________ _______________________________ ___________ Representative Name Representative No. Branch No. - --------------------------------------------------------------------------------------------------------------- K) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE. (X) (X) __________________________________ ______________________________________ 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................................ 12 Investment Objectives and Policies................ 16 Additional Investment Information................. 26 Investment Limitations............................ 29 Management of the Fund............................ 30 Purchase of Shares................................ 33 Redemption of Shares.............................. 38 Shareholder Services.............................. 40 Valuation of Shares............................... 41 Performance Information........................... 42 Dividends and Capital Gains Distributions......... 43 Taxes............................................. 44 Portfolio Transactions............................ 46 General Information............................... 47 Appendix A........................................ 49 Account Registration Form
FIXED INCOME PORTFOLIO GLOBAL FIXED INCOME PORTFOLIO MUNICIPAL BOND PORTFOLIO MORTGAGE-BACKED SECURITIES PORTFOLIO HIGH 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 - --------------------------------- - --------------------------------- - --------------------------------- - --------------------------------- - -------------------------------------------------------------------------------- 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, or mutual fund, which offers redeemable shares in a series of diversified and non-diversified investment portfolios ("portfolios"). The Fund currently consists of twenty-eight portfolios representing a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. This prospectus (the "Prospectus") pertains to the Class A and the Class B shares of the Small Cap Value Equity Portfolio, the Value Equity Portfolio and the Balanced Portfolio (the "Portfolios"). On January 2, 1996, the Portfolios began offering two classes of shares, the Class A shares and the Class B shares, except for the Money Market, Municipal Money Market and International Small Cap Portfolios which only offer Class A shares. All shares of the Portfolios owned prior to January 2, 1996 were redesignated Class A shares on January 2, 1996. The Class A and Class B shares currently offered by the Portfolios have different minimum investment requirements and fund expenses. 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 SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued equity securities of small- to medium-sized corporations. The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity securities 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 equity securities 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 Fund 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 and under "Prospectus Summary" below. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY - -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Magnum, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and Municipal Bond 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, 1996, 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, 1996. FUND EXPENSES The following table illustrates the expenses and fees that a shareholder of each Portfolio will incur:
SMALL CAP VALUE VALUE EQUITY BALANCED SHAREHOLDER TRANSACTION EXPENSES EQUITY PORTFOLIO PORTFOLIO PORTFOLIO - ----------------------------------------------------------- ----------------- ------------- ----------- Maximum Sales Load Imposed on Purchases Class A.................................................. None None None Class B.................................................. None None None Maximum Sales Load Imposed on Reinvested Dividends Class A.................................................. None None None Class B.................................................. None None None Deferred Sales Load Class A.................................................. None None None Class B.................................................. None None None Redemption Fees Class A.................................................. None None None Class B.................................................. None None None Exchange Fees Class A.................................................. None None None Class B.................................................. None None None
ANNUAL FUND OPERATING EXPENSES - ----------------------------------------------------------- SMALL CAP VALUE VALUE EQUITY BALANCED (AS A PERCENTAGE OF AVERAGE NET ASSETS) EQUITY PORTFOLIO PORTFOLIO PORTFOLIO ----------------- ------------- ----------- Management Fee (Net of Fee Waivers)* Class A.................................................. 0.64% 0.43% 0.18% Class B.................................................. 0.64% 0.43% 0.18% 12b-1 Fees Class A.................................................. None None None Class B.................................................. 0.25% 0.25% 0.25% Other Expenses Class A.................................................. 0.36% 0.27% 0.52% Class B.................................................. 0.36% 0.27% 0.52% ------ ------ ----------- Total Operating Expenses (Net of Fee Waivers)* Class A.................................................. 1.00% 0.70% 0.70% Class B.................................................. 1.25% 0.95% 0.95% ------ ------ ----------- ------ ------ -----------
- ------------------------ *The Adviser has agreed to waive its management fee and/or 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, for each Portfolio, are the management fees absent fee waivers and total operating expenses absent such fee waivers and/or reimbursements as a percent of the average daily net assets of the Class A shares and Class B shares, respectively. 2
TOTAL OPERATING EXPENSES ABSENT FEE WAIVERS MANAGEMENT FEE -------------------------- PORTFOLIO ABSENT FEE WAIVERS CLASS A CLASS B+ - -------------------------------------------------------------- --------------------- ------------ ------------ Small Cap Value Equity........................................ 0.85% 1.21% 1.46% Value Equity.................................................. 0.50% 0.77% 1.02% Balanced...................................................... 0.50% 1.02% 1.27%
- ------------------------------ + Estimated. As a result of these reductions, the Management Fees stated above are lower than the contractual fees stated under "Management of the Fund." The Adviser reserves the right to terminate any of its fee waivers and/or expense reimbursements at any time in its sole discretion. For further information on Fund expenses, see "Management of the Fund." The purpose of the table above is to assist the investor in understanding the various expenses that an investor in the Portfolios will bear directly or indirectly. The Class A expenses and fees for each Portfolio are based on actual figures for the fiscal year ended December 31, 1995. The Class B expenses and fees for the Portfolios are based on estimates, assuming that the average daily net assets of the Class B shares of each Portfolio will be $50,000,000. "Other Expenses" include Board of Directors' fees and expenses, amortization of organizational costs, filing fees, professional fees and costs for shareholder reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the equivalent of the maximum front-end sales charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). 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 Class A.......................................................... $ 10 $ 32 $ 55 $ 122 Class B.......................................................... 13 40 69 151 Value Equity Portfolio Class A.......................................................... 7 22 39 87 Class B.......................................................... 10 30 53 117 Balanced Portfolio Class A.......................................................... 7 22 39 87 Class B.......................................................... 10 30 53 117
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. 3 FINANCIAL HIGHLIGHTS The following tables provide financial highlights for the Class A shares for each of the Portfolios for the periods presented. The audited financial highlights for the Class A shares for the fiscal year ended December 31, 1995 are part of the Fund's financial statements which appear in the Fund's December 31, 1995 Annual Report to Shareholders which are included in the Fund's Statement of Additional Information. The Portfolio's financial highlights for each of the periods in the five years ended December 31, 1995 have been audited by Price Waterhouse LLP, whose unqualified report thereon is also included in the Statement of Additional Information. Additional performance information for the Class A shares 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. Financial Highlights are not available for the new Class B shares since they were not offered as of December 31, 1995. 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. 4 SMALL CAP VALUE EQUITY PORTFOLIO
DECEMBER 17, 1992* TO YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1992 1993 1994 1995 ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD.... $ 10.00 $ 10.14 $ 11.10 $ 10.80 ------ ------------ ------------ ------------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)(2).......... 0.01 0.24 0.28 0.30 Net Realized and Unrealized Gain/(Loss) on Investments........... 0.13 0.90 (0.01) 1.82 ------ ------------ ------------ ------------ Total from Investment Operations...... 0.14 1.14 0.27 2.12 ------ ------------ ------------ ------------ DISTRIBUTIONS Net Investment Income................. -- (0.18) (0.27) (0.38) Net Realized Gain..................... -- -- (0.30) (0.63) ------ ------------ ------------ ------------ TOTAL DISTRIBUTIONS..................... -- (0.18) (0.57) (1.01) ------ ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD.......... $ 10.14 $ 11.10 $ 10.80 $ 11.91 ------ ------------ ------------ ------------ ------ ------------ ------------ ------------ TOTAL RETURN............................ 1.40% 11.33% 2.53% 20.63% ------ ------------ ------------ ------------ ------ ------------ ------------ ------------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)... $ 5,974 $26,775 $40,033 $51,919 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).............. 1.64%** 2.56% 2.67% 2.60% Portfolio Turnover Rate................. 0% 29% 22% 36%
- ------------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income............................. $ 0.13 $ 0.06 $ 0.03 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets...... 23.14 %** 1.68 % 1.26 % 1.21 % Net Investment Income (Loss) to Average Net Assets................. (20.50 )%** 1.88 % 2.41 % 2.39 %
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 1.25% of the average daily net assets of the Class B shares. In the period ended December 31, 1992, the years ended December 31, 1993, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totalling $38,000, $123,000, $94,000 and $97,000, respectively, for the Small Cap Value Equity Portfolio. * Commencement of Operations. ** Annualized. 5 VALUE EQUITY PORTFOLIO
JANUARY 31, TWO MONTHS 1990* TO YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1990 1991 1992 1992 1993 1994 1995 ------------ ------------ ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD..... $ 10.00 $ 8.59 $ 10.24 $ 10.71 $ 11.31 $ 12.63 $ 11.50 ------------ ------------ ------------ ------------ ------------ ------------ ------------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)(2)......... 0.37 0.46 0.38 0.08 0.37 0.40 0.38 Net Realized and Unrealized Gain/(Loss) on investments........ (1.45) 1.67 0.48 0.52 1.31 (0.55) 3.30 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total from Investment Operations............ (1.08) 2.13 0.86 0.60 1.68 (0.15) 3.68 ------------ ------------ ------------ ------------ ------------ ------------ ------------ DISTRIBUTIONS Net Investment Income................ (0.33) (0.48) (0.39) -- (0.36) (0.40) (0.47) Net Realized Gain...... -- -- -- -- -- (0.58) (0.77) ------------ ------------ ------------ ------------ ------------ ------------ ------------ TOTAL DISTRIBUTIONS...... (0.33) (0.48) (0.39) -- (0.36) (0.98) (1.24) ------------ ------------ ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD.................. $ 8.59 $ 10.24 $ 10.71 $ 11.31 $ 12.63 $ 11.50 $ 13.94 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ TOTAL RETURN............. (11.05)% 25.34% 8.51% 5.60% 15.14% (1.29)% 33.69% ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)............. $18,178 $16,304 $25,013 $27,541 $54,598 $73,406 $147,365 Ratio of Expenses to Average Net Assets (1)(2)........... 0.70%** 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% 3.01% Portfolio Turnover Rate.................... 70% 90% 56% 9% 51% 33% 43%
- ------------------------------ (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 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets............ 0.88 ** 0.87 % 0.84 % 1.20 ** 0.95 % 0.80 % 0.77 % Net Investment Income to Average Net Assets.............. 5.28 ** 4.40 % 3.58 % 3.91 ** 2.98 % 3.27 % 2.94 %
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 0.95% of the average daily net assets of the Class B shares. In the period ended October 31, 1990, the years ended October 31, 1991 and 1992, the two months ended December 31, 1992, the years ended December 31, 1993, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totalling $26,000, $25,000, $27,000, $24,000, $106,000, $73,000 and $85,000, respectively, for the Value Equity Portfolio. * Commencement of Operations. ** Annualized. 6 BALANCED PORTFOLIO
FEBRUARY 20, TWO MONTHS 1990* TO YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1990 1991 1992 1992 1993 1994 1995 ------------ ------------ ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD..... $ 10.00 $ 9.62 $ 10.61 $ 11.00 $ 11.31 $ 11.13 $ 8.96 ------------ ------------ ------------ ------------ ------------ ------------ ------------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)(2)......... 0.40 0.59 0.58 0.10 0.44 0.42 0.39 Net Realized and Unrealized Gain (Loss) on Investments........ (0.46) 1.03 0.42 0.21 0.79 (0.64) 1.62 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total from Investment Operations............ (0.06) 1.62 1.00 0.31 1.23 (0.22) 2.01 ------------ ------------ ------------ ------------ ------------ ------------ ------------ DISTRIBUTIONS Net Investment Income................ (0.32) (0.63) (0.58) -- (0.41) (0.49) (0.50) In Excess of Net Investment Income..... -- -- -- -- (0.08) -- -- Net Realized Gain...... -- -- (0.03) -- (0.06) (1.46) (0.49) In Excess of Net Realized Gain......... -- -- -- -- (0.86) -- -- ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total Distributions.... (0.32) (0.63) (0.61) -- (1.41) (1.95) (0.99) ------------ ------------ ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD.................. $ 9.62 $ 10.61 $ 11.00 $ 11.31 $ 11.13 $ 8.96 $ 9.98 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ TOTAL RETURN............. (0.63)% 17.31% 9.57% 2.82% 12.09% (2.32)% 23.63% ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)............. $ 37,444 $ 51,334 $ 40,332 $ 39,984 $ 29,684 $ 18,492 $ 22,642 Ratio of Expenses to Average Net Assets (1)(2)........... 0.70%** 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% 4.10% Portfolio Turnover Rate.................... 19% 67% 40% 4% 136% 44% 26%
- ------------------------------ Effect of voluntary expense (1) limitation during the period: Per share benefit to net investment income............. $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.04 $ 0.03 $ 0.03 Ratios before expense limitation: Expenses to Average Net Assets........... 0.90%** 0.78% 0.79% 1.00%** 1.02% 0.95% 1.02% Net Investment Income to Average Net Assets............. 6.61%** 5.91% 5.12% 4.99%** 3.56% 3.88% 3.78%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 0.95% of the average daily net assets of the Class B shares. In the period ended October 31, 1990, the years ended October 31, 1991 and 1992, the two months ended December 31, 1992, the years ended December 31, 1993, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totalling $38,000, $39,000, $40,000, $20,000, $115,000, $60,000 and $68,000, respectively, for the Balanced Portfolio. * Commencement of Operations. ** Annualized. 7 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-eight 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, offers Class A shares and, except the International Small Cap, Money Market and Municipal Money Market Portfolios (the "Single Class Portfolios"), also offers Class B shares. Each portfolio has its own investment objective and policies designed to meet specific goals. The investment objective of each Portfolio described in this Prospectus is as follows: - The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued equity securities of small- to medium-sized corporations. - The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity securities 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 equity securities 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 equity securities 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 equity securities of Asian issuers. - The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in 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 equity securities of emerging country issuers. - The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of European issuers. - The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities 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 equity securities of non-United States issuers. 8 - The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers in accordance with EAFE country (as defined in "Investment Objectives and Policies" below) weightings determined by the Adviser. - The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-United States issuers with equity market capitalizations of less than $1 billion. - 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. - The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small- to medium-sized corporations. - The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing in growth-oriented equity securities of medium and large capitalization companies. - The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small corporations. - 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. 9 - 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. 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, 1995 had approximately $57.4 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." HOW TO INVEST Class A shares of each Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Class B shares of each Portfolio are offered at net asset value with no sales commission, but with a 12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the Class B shares' average daily net assets on an annualized basis. Share purchases may be made by sending investments directly to the Fund or through the Distributor. Shares in a Portfolio account opened prior to January 2, 1996 (each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996. For a Portfolio account opened on or after January 2, 1996 (a "New Account"), the minimum initial investment is $500,000 for Class A shares of each Portfolio and $100,000 for Class B shares of each Portfolio. Certain exceptions to the foregoing minimums apply to (1) shares in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the Adviser and its affiliates; and (3) certain advisory or asset allocation accounts, such as Total Funds Management accounts, managed by Morgan Stanley or its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves the right in its sole discretion to determine which of such advisory or asset allocation accounts shall be Managed Accounts. For information regarding Managed Accounts please contact your Morgan Stanley account representative or the Fund at the telephone number provided on the cover of this Prospectus. Shares in a Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". See "Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from Class A to Class B Shares." 10 The minimum subsequent investment for each Portfolio account is $1,000 (except for automatic reinvestment of dividends and capital gains distributions for which there is no minimum). Such subsequent investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. See "Purchase of Shares -- Additional Investments." HOW TO REDEEM Class A shares or Class B shares of each Portfolio may be redeemed at any time, without cost, at the net asset value per share of shares of the applicable class next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. Certain redemptions may cause involuntary redemption or automatic conversion. Class A or Class B shares held in New Accounts are subject to involuntary redemption if shareholder redemption(s) of such shares reduces the value of such account to less than $100,000 for a continuous 60-day period. Involuntary redemption does not apply to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B Accounts, regardless of the value of such accounts. Class A shares in a New Account will convert to Class B shares if shareholder redemption(s) of such shares reduces the value of such account to less than $500,000 for a continuous 60-day period. Class B shares in a New Account will convert to Class A shares if shareholder purchases of additional Class B shares or market activity cause the value of the Class B shares in the New Account to increase to $500,000 or more. See "Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and "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. 11 INVESTMENT OBJECTIVES AND POLICIES The investment objective of each Portfolio is 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 investment objective of the Small Cap Value Equity Portfolio is to provide high total return by investing in equity securities 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 equity securities of 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 equity securities of corporations which are generally smaller than the 500 largest corporations in the United States. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, 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 12 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 invests primarily in small- to medium-sized companies domiciled in the U.S. The portfolio may, on occasion, invest in equity securities 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." Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. THE VALUE EQUITY PORTFOLIO The investment objective of the Value Equity Portfolio is to achieve high total return (i.e., long-term growth of capital and high current income) by investing in equity securities 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 equity securities of large capitalization companies mainly domiciled in the United States. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, and 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 equity securities of issuers in any one industry. The Portfolio may invest up to 25% of its total assets in the equity securities of foreign issuers, including American Depositary Receipts. See "Additional Investment Information." Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. THE BALANCED PORTFOLIO The investment objective of the Balanced Portfolio is to achieve high total return while preserving capital by investing in a combination of undervalued equity securities and fixed income securities. The Portfolio seeks 13 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 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 equity securities, depending upon the Adviser's assessment of market conditions. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, and rights and warrants to purchase common stocks. 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 DEPOSITARY RECEIPTS. Each 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 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. FOREIGN INVESTMENT. 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 14 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 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. 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. 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. Each 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. 15 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. 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. Each 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." STOCK OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In order to remain fully invested, and to reduce transaction costs, each Portfolio 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 a Portfolio's overall transaction costs. The Portfolios will engage in futures and options transactions only for hedging purposes. Each 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 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. TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes in economic, financial or political conditions make it advisable a 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- 16 term and medium-term debt securities in which a 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. 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 and delayed delivery 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. 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 net 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; (iii) 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 17 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 Portfolio. 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 Portfolio's day-to-day investment decisions, arranges for the execution of portfolio transactions and generally manages each Portfolio's investments. The Adviser is entitled to receive from each Portfolio an annual management 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 OPERATING EXPENSES AFTER FEE WAIVERS MANAGEMENT ---------------------------- PORTFOLIO FEE CLASS A CLASS B - ------------------------------------ ------------- ------------- ------------- Small Cap Value Equity Portfolio 0.85% 1.00% 1.25% Value Equity Portfolio 0.50% 0.70% 0.95% Balanced Portfolio 0.50% 0.70% 0.95%
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, 1995, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $57.4 billion, including approximately $41.9 billion under active management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. PORTFOLIO MANAGERS Stephen C. Sexauer and Alford E. Zick, Jr. have primary responsibility for managing the Balanced Portfolio and the Value Equity Portfolio; Mr. Sexauer and Mr. Zick have had such responsibility since the Portfolios' inception in February and January, 1990, respectively. Christian K. Stadlinger has had primary responsibility for managing the Small Cap Value Equity Portfolio and has had such responsibility since its inception in December, 1992. 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. 18 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 an agreement between the Adviser and The Chase Manhattan Bank, N.A. ("Chase"), Chase provides certain administrative services to the Fund. In a merger completed on September 1, 1995, Chase succeeded to all of the rights and obligations under the U.S. Trust Administration Agreement between the Adviser and the United States Trust Company of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegated its administration responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service Company which after the merger with Chase is a subsidiary of Chase and will continue to provide certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by CGFSC. 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. CGFSC'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. 19 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. Each Portfolio currently offers only the classes of shares offered by this Prospectus. Each Portfolio may in the future offer one or more classes of shares with features, distribution expenses or other expenses that are different from those of the classes currently offered. The Fund has adopted a Plan of Distribution with respect to the Class B shares of each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a "Plan"). Under each Plan, the Distributor is entitled to receive from each Portfolio a distribution fee, which is accrued daily and paid quarterly, of 0.25% of the average daily net assets of the Class B shares of each Portfolio on an annualized basis. The Distributor expects to reallocate most of its fee to its investment representatives. The Distributor may, in its discretion, voluntarily waive from time to time all or any portion of its distribution fee and each of the Distributor and the Adviser is free to make additional payments out of its own assets to promote the sale of Fund shares, including payments that compensate financial institutions for distribution services or shareholder services. Each Plan is designed to compensate the Distributor for its services, not to reimburse the Distributor for its expenses, and the Distributor may retain any portion of the fee that it does not expend in fulfillment of its obligations to the Fund. 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. 20 PURCHASE OF SHARES Class A and Class B 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 by the Portfolios. See "Valuation of Shares." MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES For a Portfolio opened on or after January 2, 1996 (a "New Account"), the minimum initial investment and minimum account size are $500,000 for Class A shares and $100,000 minimum for Class B shares. Managed Accounts may purchase Class A shares without being subject to a minimum initial investment or minimum account size requirements for a Portfolio account. Officers of the Adviser and its affiliates are subject to the minimums for a Portfolio account, except they may purchase Class B shares subject to a minimum initial investment and minimum account size of $5,000 for a Portfolio account. If the value of a New Account containing Class A shares falls below $500,000 (but remains at or above $100,000) because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $500,000 (but remains at or above $100,000) for a continuous 60-day period, the Class A shares in such account will convert to Class B shares and will be subject to the distribution fee and other features applicable to the Class B shares. The Fund, however, will not convert Class A shares to Class B shares based solely upon changes in the market that reduce the net asset value of shares. Under current tax law, conversions between share classes are not a taxable event to the shareholder. Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996 Account") were designated Class A shares on January 2, 1996. Shares in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account") remained Class A shares regardless of account size thereafter. Except for shares in a Managed Account, shares in a Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. Grandfathered Class A Accounts and Managed Accounts are not subject to conversion from Class A shares to Class B shares. Investors may also invest in the Fund by purchasing shares through a trust department, broker, dealer, agent, financial planner, financial services firm or investment adviser. An investor may be charged an additional service or transaction fee by that institution. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". The Fund reserves the right to modify or terminate the conversion features of the shares as stated above at any time upon 60-days' notice to shareholders. MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES If the value of a New Account falls below $100,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $100,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. The Fund, however, will not redeem shares based solely upon changes in the market that reduce the net asset value of shares. 21 For purposes of redemptions by the Fund, the foregoing minimum account size requirements do not apply to New Accounts containing Class B shares held by officers of the Adviser or its affiliates. However, if the value of such account held by an officer of the Adviser or its affiliates falls below $5,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains $5,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed Accounts are not subject to involuntary redemption. The Fund reserves the right to modify or terminate the involuntary redemption features of the shares as stated above at any time upon 60-days' notice to shareholders. CONVERSION FROM CLASS B TO CLASS A SHARES If the value of Class B shares in a Portfolio account increases, whether due to shareholder share purchases or market activity, to $500,000 or more, the Class B shares will convert to Class A shares. Under current tax law, such conversion is not a taxable event to the shareholder. Class A shares converted from Class B shares are subject to the same minimum account size requirements that are applicable to New Accounts containing Class A shares, as stated above. The Fund reserves the right to modify or terminate this conversion feature at any time upon 60-days' notice to shareholders. INITIAL PURCHASES DIRECTLY FROM THE FUND The Fund's determination of an investor's eligibility to purchase shares of a given class will take precedence over the investor's selection of a class. Assuming the investor is eligible for the class, the Fund will select the most favorable class for the investor, if the investor has not done so. 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 Class A shares of each Portfolio and $100,000 for Class B shares of 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. 22 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 class 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, the class selected and the account number assigned to you) as follows: Chase Manhattan Bank, N.A. One Manhattan Plaza New York, NY 10081-1000 ABA #021000021 DDA #910-2-733293 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (Portfolio name, your account number, your account name) Please call the Fund at 1-800-548-7786 prior to wiring funds. C. Complete and sign the Account Registration Form and mail it to the address shown thereon. Purchase orders for shares of the Portfolios which are received prior to the regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed at the price computed on the date of receipt as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Federal Funds purchase orders will be accepted only on a day on which the Fund and Chase (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring Federal 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, portfolio name and the class selected 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 23 invested promptly, you are requested to notify one of the Fund's representatives (toll free 1-800-548-7786) prior to sending the wire. Additional investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. OTHER PURCHASE INFORMATION The purchase price of the Class A and Class B 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 as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends. The net asset value of Class B shares will generally be lower than the net asset value of Class A shares as a result of the distribution expense charged to Class B shares. It is expected, however, that the net asset value per share of the two classes will tend to converge immediately after the recording of dividends which will differ by approximately the amount of the distribution expense accrual differential between the classes. 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 the Distributor. See "Purchase of Shares" in the Statement of Additional Information. EXCESSIVE TRADING Frequent trades involving either substantial portfolio 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 each Portfolio and each Portfolio's performance, the Fund may in its discretion bar a stockholder that engages in excessive trading of shares of any class 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 class of a portfolio of the Fund within any 120-day period. As an example, exchanging shares of portfolios of the Fund as follows amounts to excessive trading: exchanging Class A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class A shares of Portfolio B for Class A shares of Portfolio C and again exchanging Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day 24 period. 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, such as TFM Accounts, managed or advised by MSAM and/or any of its affiliates. 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 Class A shares or Class B shares of each Portfolio at the next determined net asset value of shares to their applicable class. 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 Class A shares or Class B 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 Chase Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913. "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 class and 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 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 Chase Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts 25 02108-3913. 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. 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 FEATURES 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, which is closed to new investors). In exchanging for shares of a portfolio with more than one class, the class of shares you receive in the exchange will be determined in the same manner as any other purchase of shares and will not be based on the class of shares surrendered for the exchange. Consequently, the same minimum initial investment and minimum account size for determining the class of shares received in the exchange will apply. See "Purchase of Shares." Shares of the portfolios may be exchanged by mail or telephone. The privilege to exchange shares by telephone is automatic and 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 26 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. The exchange privilege may be modified or terminated by the Fund at any time upon 60-days' notice to shareholders. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name, class of shares and account number of your current Portfolio, the names of the portfolio(s) and class(es) of shares 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, class of shares and account number of the current Portfolio, the name(s) of the portfolio(s) and class(es) of shares 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 class of the portfolios involved in the exchange of shares 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. Transferring the registration of shares may affect the eligibility of your account for a given class of a Portfolio's shares and may result in involuntary conversion or redemption of your shares. See "Purchase of Shares" above. VALUATION OF SHARES The net asset value per share of a class of shares of each of the Portfolios is determined by dividing the total market value of the Portfolio's investments and other assets attributable to such a class, less any liabilities attributable to such a class, by the total number of outstanding shares of such class of the Portfolio. Net asset value is calculated separately for each class 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 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 27 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 determine 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. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends for the class. Dividends will differ by approximately the amount of the distribution expense accrual differential among the classes. The net asset value of Class B shares will generally be lower than the net asset value of the Class A shares as a result of the distribution expense charged to Class B shares. PERFORMANCE INFORMATION The Fund may from time to time advertise total return for each class 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 class of 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 in the same class 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. The performance figures for Class B shares will generally be lower than those for Class A shares because of the distribution fee charged to Class B shares. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions for a class of shares will automatically be reinvested in additional shares of such class 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 realized gains, if any, after reduction for any available tax loss carryforwards will also be distributed annually. Confirmations of the purchase 28 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 monthly 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 tax. Because of the distribution fee and any other expenses that may be attributable to the Class B shares, the net income attributable to and the dividends payable on Class B shares will be lower than the net income attributable to and the dividends payable on Class A shares. As a result, the net asset value per share of the classes of the Portfolios will differ at times. Expenses of the Portfolios allocated to a particular class of shares thereof will be borne on a pro rata basis by each outstanding share of that class. TAXES The following summary of certain 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. 29 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, exchange or redemption of shares may result in taxable gain or loss to the sellling, exchanging or 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, exchanged or sold 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. The conversion of Class A shares to Class B shares should not be a taxable event to the shareholder. 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 30 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 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, as amended and restated, permit the Fund to issue up to 34 billion 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. Subject to the notice period to shareholders with respect to shares held by shareholders, 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 common stock of each portfolio are currently classified into two classes, the Class A shares and the Class B shares, except for the International Small Cap, Money Market and Municipal Money Market Portfolios, which only offer Class A shares. 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 31 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, the Adviser 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 As of September 1, 1995, domestic securities and cash are held by Chase, which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians 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. MSTC may also hold certain domestic assets for the Fund. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Chase Global Funds Services 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. SMALL CAP VALUE EQUITY, VALUE EQUITY AND BALANCED PORTFOLIOS P.O. BOX 2798, BOSTON, MA 02208-2798 - --------------------------------------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - --------------------------------------------------------------------------------------------------------------- ACCOUNT INFORMATION If you need assistance in filling out this form Fill in where applicable for the Morgan Stanley Institutional Fund, please contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all items except signature, and mail to the Fund at the address above. - --------------------------------------------------------------------------------------------------------------- A) REGISTRATION 1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / First Name Initial Last Name 2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / (RIGHTS OF First Name Initial Last Name SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / PRESUMED UNLESS First Name Initial Last Name TENANCY IN COMMON IS INDICATED) - --------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / TRUSTS AND OTHERS Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Fund for additional documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / be required to set up account and to authorize transactions. Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED) / / TRUST __________________________________ / / OTHER (Specify) ______________________________ - --------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / / Please fill in completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / / telephone number(s). Home Business Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / / / / United States / / Resident / /Non-Resident Alien: Citizen 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 NUMBER individual taxpayers, this is your law to provide us (as payer) with If the account is in Social Security Number. your correct Taxpayer Identification more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification PERSON WHOSE TAXPAYER OR Number will be subject to backup IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends, IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments. A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with is circled, the number / / Check this box if you are your correct taxpayer identification will be considered to be NOT subject to Backup number, you may be subject to that of the last name Withholding under the a $50 penalty imposed by the Internal listed. For Custodian provisions of Section Revenue Service. account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an (Uniform Gift/Transfer Revenue Code. additional tax; the tax liability of to Minor Act), give the persons subject to backup withholding Social Security Number will be reduced by the amount of tax of the minor. withheld. If withholding results in an overpayment of taxes, a refund may be obtained. You may be notified that you are subject to backup withholding under Section 3406(a)(1)(C) of the Internal Revenue Code because you have underreported interest or dividends or you were required to but failed to file a return which would have included a reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - --------------------------------------------------------------------------------------------------------------- D) PORTFOLIO AND For Purchase of the following Portfolio(s): CLASS SELECTION Small Cap Value Equity Portfolio / / Class A Shares $____ / / Class B Shares $____ (Class A shares Value Equity Portfolio / / Class A Shares $____ / / Class B Shares $____ minimum $500,000 Balanced Portfolio / / Class A Shares $____ / / Class B Shares $____ for each Portfolio Total Initial Investment $_____________ and Class B shares minimum $100,000 for each Portfolio). Please indicate Portfolio, class and 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________________ / / / / / / / / / / /-/ / payment. Name of Portfolio Account No. / / Account previously established by: / / Phone exchange / / Wire on___________________ / / / / / / / / / / / /-/ / Date Account No. (Check (Previously assigned by the Fund) Digit) - --------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION Income dividends and capital gains distributions (if any) will OPTION be reinvested in additional shares unless 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 Name of COMMERCIAL Bank Bank Account No. Please select at time of to wire redemption proceeds to the (Not Savings Bank) initial application if you commercial bank indicated at right and/or wish to redeem shares by mail redemption proceeds to the name and ________________ telephone. A SIGNATURE address in which my/our fund account is Bank ABA No. GUARANTEE IS REQUIRED IF registered if such requests are believed BANK ACCOUNT IS NOT to be authentic. _________________________________________________ REGISTERED IDENTICALLY TO The Fund and the Fund's Transfer Agent will Name(s) in which your BANK Account is Established YOUR FUND ACCOUNT. employ reasonable procedures to confirm that instructions communicated by telephone are _________________________________________________ TELEPHONE REQUESTS FOR genuine. These procedures include requiring Bank's Street Address REDEMPTIONS WILL NOT BE the investor to provide certain personal HONORED UNLESS THE BOX IS identification information at the time an _________________________________________________ CHECKED. account is opened and prior to effecting each City State Zip 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 expenses for following instructions received by telephone that it reasonably believes to be genuine. - --------------------------------------------------------------------------------------------------------------- H) INTERESTED PARTY OPTION In addition to the account _________________________________________________________________ statement sent to my/our Name registered address, I/we _________________________________________________________________ hereby authorize the fund to mail duplicate _________________________________________________________________ statements to the name and Address address provided at right. _________________________________________________________________ City State Zip Code - --------------------------------------------------------------------------------------------------------------- I) DEALER INFORMATION _______________________ _______________________________ ___________ Representative Name Representative No. Branch No. - --------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE. (X) (X) __________________________________ ______________________________________ 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 Financial Highlights.............................. 4 Prospectus Summary................................ 8 Investment Objectives and Policies................ 12 Additional Investment Information................. 14 Investment Limitations............................ 17 Management of the Fund............................ 18 Purchase of Shares................................ 21 Redemption of Shares.............................. 25 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
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 - --------------------------------- - --------------------------------- - --------------------------------- - --------------------------------- (This page has been left blank intentionally.) - -------------------------------------------------------------------------------- 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, or mutual fund, which offers redeemable shares in a series of diversified and non-diversified investment portfolios ("portfolios"). The Fund currently consists of twenty-eight portfolios representing a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. This prospectus (the "Prospectus") pertains to the Class A and the Class B shares of the Active Country Allocation Portfolio (the "Portfolio"). On January 2, 1996, the Portfolio began offering two classes of shares, the Class A shares and the Class B shares, except for the Money Market, Municipal Money Market and International Small Cap Portfolios which only offer Class A shares. All shares of the Portfolio owned prior to January 2, 1996 were redesignated Class A shares on January 2, 1996. The Class A and Class B shares currently offered by the Portfolio have different minimum investment requirements and fund expenses. 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 ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital appreciation by investing in accordance with country weightings determined by the Adviser in equity securities 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 "Prospectus Summary" below. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY - -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Magnum, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and Municipal Bond 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, 1996, 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, 1996. FUND EXPENSES The following table illustrates the expenses and fees that a shareholder of the Active Country Allocation Portfolio will incur:
SHAREHOLDER TRANSACTION EXPENSES - ------------------------------------------------------------------------------------------ Maximum Sales Load Imposed on Purchases Class A................................................................................. None Class B................................................................................. None Maximum Sales Load Imposed on Reinvested Dividends Class A................................................................................. None Class B................................................................................. None Deferred Sales Load Class A................................................................................. None Class B................................................................................. None Redemption Fees Class A................................................................................. None Class B................................................................................. None Exchange Fees Class A................................................................................. None Class B................................................................................. None
ANNUAL FUND OPERATING EXPENSES - ------------------------------------------------------------------------------------------ (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fee (Net of Fee Waiver)* Class A................................................................................. 0.27% Class B................................................................................. 0.27% 12b-1 Fees Class A................................................................................. None Class B................................................................................. 0.25% Other Expenses Class A................................................................................. 0.53% Class B................................................................................. 0.53% ----------- Total Operating Expenses (Net of Fee Waivers)* Class A................................................................................. 0.80% Class B................................................................................. 1.05% ----------- -----------
- ------------------------ *The Adviser has agreed to waive its management fees and/or to reimburse the Portfolio, if necessary, if such fees would cause the Portfolio's total annual operating expenses, as a percentage of average daily net assets, to exceed the percentages set forth in the table above. Absent the fee waiver, the management fee would be 0.65%. Absent the fee waiver and/or expense reimbursement, the Portfolio's total operating expenses would be 1.18% of the average daily net assets of the Class A shares and 1.43% of the average daily net assets of the Class B shares. As a result of this reduction, the Management Fee stated above is lower than the contractual fee stated under "Management of the Fund." The Adviser reserves the right to terminate any of its fee waivers and/or expense reimbursements at any time in its sole discretion. For further information on Fund expenses, see "Management of the Fund." 2 The purpose of the table above is to assist the investor in understanding the various expenses that an investor in the Portfolio will bear directly or indirectly. The Class A expenses and fees for the Portfolio are based on actual figures for the fiscal year ended December 31, 1995. The Class B expenses and fees for the Portfolio are based on estimates, assuming that the average daily net assets of the Class B shares of the Portfolio will be $50,000,000. "Other Expenses" include Board of Directors' fees and expenses, amortization of organizational costs, filing fees, professional fees and costs for shareholder reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the equivalent of the maximum front-end sales charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). 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 Class A.......................................................... $ 8 $ 26 $ 44 $ 99 Class B.......................................................... 11 33 58 128
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. 3 FINANCIAL HIGHLIGHTS The following table provides financial highlights for the Class A shares of the Portfolio for each of the periods presented. The audited financial highlights for the Class A shares for the fiscal year ended December 31, 1995 are part of the Fund's financial statements which appear in the Fund's December 31, 1995 Annual Report to Shareholders and which are included in the Fund's Statement of Additional Information. The Portfolio's financial highlights for each of the periods presented have been audited by Price Waterhouse LLP, whose unqualified report thereon is also included in the Statement of Additional Information. Additional performance information for the Class A shares 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. Financial highlights are not available for the new Class B shares since they were not offered as of December 31, 1995. 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. 4 ACTIVE COUNTRY ALLOCATION PORTFOLIO
JANUARY 17, 1992* TWO MONTHS TO OCTOBER ENDED 31, DECEMBER 31, YEARS ENDED DECEMBER 31, 1992 1992 1993 1994 1995 ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD............................ $ 10.00 $ 9.37 $ 9.59 $ 12.21 $ 11.65 ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)........ 0.11 0.02 0.13 0.19 0.17 Net Realized and Unrealized Gain/ (Loss) on Investments........... (0.74) 0.20 2.75 (0.25) 1.00 ------------- ------------- ------------- ------------- ------------- Total from Investment Operations...................... (0.63) 0.22 2.88 (0.06) 1.17 ------------- ------------- ------------- ------------- ------------- DISTRIBUTIONS Net Investment Income............ -- -- (0.09) (0.14) (0.25) In Excess of Net Investment Income.......................... -- -- (0.08) -- (0.10) Net Realized Gain................ -- -- -- (0.36) (0.84) In Excess of Net Realized Gain... -- -- (0.09) -- -- ------------- ------------- ------------- ------------- ------------- Total Distributions.............. -- -- (0.26) (0.50) (1.19) ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD..... $ 9.37 $ 9.59 $ 12.21 $ 11.65 $ 11.63 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- TOTAL RETURN....................... (6.30)% 2.35% 30.72% (0.52)% 10.57% ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)....................... $ 47,534 $ 50,234 $ 150,854 $ 182,977 $ 170,663 Ratio of Expenses to Average Net Assets (1)(2)..................... 0.88%** 0.80%** 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% 1.26% Portfolio Turnover Rate............ 62% 2% % 53 % 51 % 72 - ------------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income............ $ 0.03 $ 0.01 $ 0.05 $ 0.03 $ 0.05 Ratios before expense limitation: Expenses to Average Net Assets....................... 1.58%** 1.70%** 1.33% 1.00% 1.18% Net Investment Income to Average Net Assets........... 1.62%** 0.32%** 0.76% 1.23% 0.88%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 1.05% of the average daily net assets of the Class B shares. In the period ended October 31, 1992, the two months ended December 31, 1992, and the years ended December 31, 1993, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totalling $164,000, $72,000, $552,000, $367,000 and $618,000, respectively, for the Portfolio. * Commencement of Operations. ** Annualized. 5 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-eight 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 offers Class A shares and, except the International Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class B shares. Each portfolio has its own investment objective and policies designed to meet its specific goals. This Prospectus pertains to the Class A and Class B shares of 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 equity securities 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 equity securities 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 equity securities of emerging country issuers. -The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the equity securities of European issuers. -The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in the equity securities 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 equity securities of non-United States issuers. -The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers in accordance with EAFE country (as defined in "Investment Objectives and Policies" below) weightings determined by the Adviser. -The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in the equity securities of non-United States issuers with equity market capitalizations of less than $1 billion. -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 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 equity securities of small- to medium-sized corporations. -The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing in growth-oriented equity securities of medium and large capitalization companies. -The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small corporations. -The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued equity securities 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 equity securities 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 equity securities 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. 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. 7 -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, 1995 had approximately $57.4 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 Class A shares of the Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Class B shares of the Portfolio are offered at net asset value with no sales commission, but with a 12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the Class B shares' average daily net assets on an annualized basis. Share purchases may be made by sending investments directly to the Fund or through the Distributor. Shares in a Portfolio account opened prior to January 2, 1996 (each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996. For a Portfolio account opened on or after January 2, 1996 (a "New Account"), the minimum initial investment is $500,000 for Class A shares and $100,000 for Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the Adviser and its affiliates; and (3) certain advisory or asset allocation accounts, such as Total Funds Management accounts, managed by Morgan Stanley or its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves the right in its sole discretion to determine which of such advisory or asset allocation accounts shall be Managed Accounts. For information regarding Managed Accounts, please contact your Morgan Stanley account representative or the Fund at the telephone number provided on the cover of this Prospectus. Shares in a Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts." See "Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from Class A to Class B Shares." The minimum subsequent investment for a Portfolio account is $1,000 (except for automatic reinvestment of dividends and capital gains distributions for which there is no minimum). Such subsequent investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. See "Purchase of Shares -- Additional Investments." 8 HOW TO REDEEM Class A shares or Class B shares of the Portfolio may be redeemed at any time, without cost, at the net asset value per share of shares of the applicable class next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. Certain redemptions may cause involuntary redemption or automatic conversion. Class A or Class B shares held in New Accounts are subject to involuntary redemption if shareholder redemption(s) of such shares reduces the value of such account to less than $100,000 for a continuous 60-day period. Involuntary redemption does not apply to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B Accounts, regardless of the value of such accounts. Class A shares in a New Account will convert to Class B shares if shareholder redemption(s) of such shares reduces the value of such account to less than $500,000 for a continuous 60-day period. Class B shares in a New Account will automatically convert to Class A shares if shareholder purchases of additional Class B shares or market activity cause the value of the Class B shares in the New Account to increase to $500,000 or more. See "Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and "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 Objective 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. 9 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 equity securities 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. With respect to the Portfolio, 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 Portugal Brazil Philippines India South Africa Indonesia South Korea Malaysia Thailand Mexico 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 10 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 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 equity securities 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. With respect to the Portfolio, equity securities include common and preferred stock, convertible securities, and 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 Objective and Policies" in the Statement of Additional Information. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. 11 ADDITIONAL INVESTMENT INFORMATION FOREIGN INVESTMENT. 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 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. 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. 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. 12 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. 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 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 13 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 the 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 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. 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." 14 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. 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 net 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; (iii) 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. The Adviser is entitled to receive from the Active Country Allocation Portfolio an annual management fee, payable quarterly, equal to 0.65% of the average daily net assets of the Portfolio. 15 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. 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 Class A shares of the Portfolio and 1.05% of the average daily net assets of the Class B shares of the Portfolio. 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, 1995, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $57.4 billion, including approximately $41.9 billion under active management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. PORTFOLIO MANAGERS. BARTON M. BIGGS, MADHAV DHAR, FRANCINE J. BOVICH AND ANN D. THIVIERGE. Barton Biggs has been Chairman and a director of the Adviser since 1980 and a Managing Director of Morgan Stanley since 1975. He is also a director of Morgan Stanley Group Inc. and a director and officer of several registered investment companies to which the Adviser and certain of its affiliates provide investment advisory services. Mr. Biggs holds a B.A. from Yale University and an M.B.A. from New York University. 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 the portfolio manager of the Fund's Emerging Markets Portfolio, the Emerging Markets and Global Equity Allocation Funds of the Morgan Stanley Fund, Inc., and the Morgan Stanley Emerging Markets Fund, Inc. (a closed-end investment company listed on the New York Stock Exchange). Mr. Dhar is also a director of the Morgan Stanley Emerging Markets Fund, Inc. He holds a B.S. (honors) from St. Stephens College, Delhi University (India), and an M.B.A. from Carnegie-Mellon University. Francine Bovich joined the Adviser as a Principal in 1993. She is responsible for product development, portfolio management and communication of the Adviser's asset allocation strategy to institutional investor clients. Previously, Ms. Bovich was a Principal and Executive Vice President of Westwood Management Corp. ("Westwood"), a registered investment adviser. Before joining Westwood, she was a Managing Director of Citicorp Investment Management, Inc. (now Chancellor Capital Management), where she was responsible for the Institutional Investment Management group. Ms. Bovich began her investment career with Banker's Trust Company. She holds a B.A. in Economics from Connecticut College and an M.B.A. in Finance from New York University. Ann Thivierge is a Principal of the Adviser. She is a member of the Adviser's asset allocation committee, primarily representing the Total Fund Management team since its inception in 1991. Prior to joining the Adviser in 1986, she spent two years at Edgewood Management Company, a privately held investment management firm. Ms. Thivierge holds a B.A. in International Relations from James Madison College, Michigan State University, and an M.B.A. in Finance from New York University. 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 16 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 an agreement between the Adviser and The Chase Manhattan Bank, N.A. ("Chase"), Chase provides certain administrative services to the Fund. In a merger completed on September 1, 1995, Chase succeeded to all of the rights and obligations under the U.S. Trust Administration Agreement between the Adviser and the United States Trust Company of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegated its administration responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service Company, which after the merger with Chase is a subsidiary of Chase and will continue to provide certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by CGFSC. 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. CGFSC'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. LOCAL ADMINISTRATOR FOR THE PORTFOLIO. The 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 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 Fund. 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. 17 The Portfolio currently offers only the classes of shares offered by this Prospectus. The Portfolio may in the future offer one or more classes of shares with features, distribution expenses or other expenses that are different from those of the classes currently offered. The Fund has adopted a Plan of Distribution with respect to the Class B shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan, the Distributor is entitled to receive from the Portfolio a distribution fee, which is accrued daily and paid quarterly, of 0.25% of the Class B shares' average daily net assets on an annualized basis. The Distributor expects to reallocate most of its fee to its investment representatives. The Distributor may, in its discretion, voluntarily waive from time to time all or any portion of its distribution fee and each of the Distributor and the Adviser is free to make additional payments out of its own assets to promote the sale of Fund shares, including payments that compensate financial institutions for distribution services or shareholder services. The Plan is designed to compensate the Distributor for its services, not to reimburse the Distributor for its expenses, and the Distributor may retain any portion of the fee that it does not expend in fulfillment of its obligations to the Fund. 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 Class A and Class B 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 by the Portfolio. See "Valuation of Shares." MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES For an account for the Portfolio opened on or after January 2, 1996 (a "New Account"), the minimum initial investment and minimum account size are $500,000 for Class A shares and $100,000 for Class B shares. Managed Accounts may purchase Class A shares without being subject to such minimum initial investment or minimum account size requirements for a Portfolio account. Officers of the Adviser and its affiliates are subject to the minimums for a Portfolio account, except they may purchase Class B shares subject to a minimum initial investment and minimum account size of $5,000 for a Portfolio account. If the value of a New Account containing Class A shares falls below $500,000 (but remains at or above $100,000) because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $500,000 (but remains at or above $100,000) for a continuous 60-day period, the Class A shares in such account will convert to Class B shares and will be subject to the distribution fee and other features applicable to the Class B shares. The Fund, however, will not convert Class A shares to Class B shares based solely upon changes in the market that reduce the net asset value of shares. Under current tax law, conversions between share classes are not a taxable event to the shareholder. Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996 Account") were designated Class A shares on January 2, 1996. Shares in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account") remained Class A shares regardless of account size thereafter. Except 18 for shares in a Managed Account, shares in a Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. Grandfathered Class A Accounts and Managed Accounts are not subject to conversion from Class A shares to Class B shares. Investors may also invest in the Fund by purchasing shares through a trust department, broker, dealer, agent, financial planner, financial services firm or investment adviser. An investor may be charged an additional service or transaction fee by that institution. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts." Broker-dealers who make purchases for their customers may charge a fee for such services. The Fund reserves the right to modify or terminate the conversion features of the shares as stated above at any time upon 60-days' notice to shareholders. MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES If the value of a New Account falls below $100,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $100,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. The Fund, however, will not redeem shares based solely upon changes in the market that reduce the net asset value of shares. For purposes of redemptions by the Fund, the foregoing minimum account size requirements do not apply to New Accounts containing Class B shares held by officers of the Adviser or its affiliates. However, if the value of such account held by an officer of the Adviser or its affiliates falls below $5,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains $5,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed Accounts are not subject to involuntary redemption. The Fund reserves the right to modify or terminate the involuntary redemption features of the shares as stated above at any time upon 60-days' notice to shareholders. CONVERSION FROM CLASS B TO CLASS A SHARES If the value of Class B shares in a Portfolio account increases, whether due to shareholder share purchases or market activity, to $500,000 or more, the Class B shares will convert to Class A Shares. Under current tax law, such conversion is not a taxable event to the shareholder. Class A shares converted from Class B shares are subject to the same minimum account size requirements that are applicable to New Accounts containing Class A shares, as stated above. The Fund reserves the right to modify or terminate this conversion feature at any time upon 60-days' notice to shareholders. 19 INITIAL PURCHASES DIRECTLY FROM THE FUND The Fund's determination of an investor's eligibility to purchase shares of a given class will take precedence over the investor's selection of a class. Assuming the investor is eligible for the class, the Fund will select the most favorable class for the investor, if the investor has not done so. 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 Class A shares of the Portfolio and $100,000 for Class B shares of the 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 Class(es) of shares of the Portfolio 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. 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 class 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, the class selected and the account number assigned to you) as follows: Chase Manhattan Bank, N.A. One Manhattan Plaza New York, NY 10081-1000 ABA #021000021 DDA #910-2-733293 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (Portfolio name, your account number, your account name) Please call the Fund at 1-800-548-7786 prior to wiring funds. C. Complete and sign the Account Registration Form and mail it to the address shown thereon. 20 Purchase orders for shares of the Portfolio which are received prior to the regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed at the price computed on the date of receipt as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Federal Funds purchase orders will be accepted only on a day on which the Fund and Chase (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring Federal 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, the portfolio name and the class selected 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. Additional investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. OTHER PURCHASE INFORMATION The purchase price of the Class A and Class B 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 as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends. The net asset value of Class B shares will generally be lower than the net asset value of Class A shares as a result of the distribution expense charged to Class B shares. It is expected, however, that the net asset value per share of the two classes will tend to converge immediately after the recording of dividends which will differ by approximately the amount of the distribution expense accrual differential between the classes. 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. 21 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 the Distributor. EXCESSIVE TRADING Frequent trades involving either substantial portfolio 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 any class 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 class of a portfolio of the Fund within any 120-day period. As an example, exchanging shares of portfolios of the Fund as follows amounts to excessive trading: exchanging Class A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class A shares of Portfolio B for Class A shares of Portfolio C and again exchanging Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day period. 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, such as TFM Accounts, managed or advised by MSAM and/or any of its affiliates. 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 Class A shares or Class B shares of the Portfolio at the next determined net asset value of shares of the applicable class. 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. BY MAIL The Portfolio will redeem its Class A shares or Class B 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 Chase Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913. 22 "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 class and 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. 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 23 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. 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 FEATURES 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, which is closed to new investors). In exchanging for shares of a portfolio with more than one class, the class of shares you receive in the exchange will be determined in the same manner as any other purchase of shares and will not be based on the class of shares surrendered for the exchange. Consequently, the same minimum initial investment and minimum account size for determining the class of shares received in the exchange will apply. See "Purchase of Shares." Shares of the portfolios may be exchanged by mail or telephone. The privilege to exchange shares by telephone is automatic and 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. The exchange privilege may be modified or terminated by the Fund at any time upon 60-days' notice to shareholders. 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(s) of the portfolio(s) and class(es) of shares 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, class of shares and account number of the current portfolio, the names of the portfolio(s) and class(es) of shares 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 class of the portfolios involved in the exchange of shares 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. 24 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. Transferring the registration of shares may affect the eligibility of your account for a given class of the Portfolio's shares and may result in involuntary conversion or redemption of your shares. See "Purchase of Shares" above. VALUATION OF SHARES The net asset value per share of a class of shares of the Portfolio is determined by dividing the total market value of the Portfolio's investments and other assets attributable to such class, less any liabilities attributable to such class, by the total number of outstanding shares of such class of the Portfolio. Net asset value is calculated separately for each class 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. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends for the class. Dividends will differ by 25 approximately the amount of the distribution expense accrual differential among the classes. The net asset value of Class B shares will generally be lower than the net asset value of the Class A shares as a result of the distribution expense charged to Class B shares. PERFORMANCE INFORMATION The Fund may from time to time advertise total return for each class 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 a class of 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 in the same class 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. The performance figures for Class B shares will generally be lower than those for Class A shares because of the distribution fee charged to Class B shares. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions for a class of shares will automatically be reinvested in additional shares of such class 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 realized gains, if any, after reduction for any available tax loss carryforwards 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 monthly 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. Because of the distribution fee and any other expenses that may be attributable to the Class B shares, the net income attributable to and the dividends payable on Class B shares will be lower than the net income attributable to and the dividends payable on Class A shares. As a result, the net asset value per share of the classes of the Portfolio will differ at times. Expenses of the Portfolio allocated to a particular class of shares thereof will be borne on a pro rata basis by each outstanding share of that class. 26 TAXES The following summary of certain 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 not qualify for the 70% dividends-received deduction for corporate shareholders. The Portfolio will report annually to its shareholders the amount of dividend income qualifying for such treatment. 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, exchange or redemption of shares may result in taxable gain or loss to the selling, exchanging or 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, exchanged or sold 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. The conversion of Class A shares to Class B shares should not be a taxable event to the shareholder. 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. 27 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. 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 28 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, as amended and restated, permit the Fund to issue up to 34 billion 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. Subject to the notice period to shareholders with respect to shares held by shareholders, 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 common stock of each portfolio are currently classified into two classes, the Class A shares and the Class B shares, except for the International Small Cap, Money Market and Municipal Money Market Portfolios, which only offer Class A shares. The shares of the 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 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, the Adviser 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 As of September 1, 1995, domestic securities and cash are held by Chase, which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust 29 Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians 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. MSTC may also hold certain domestic assets for the Fund. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Chase Global Funds Services 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. 30
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 Fill in where applicable for the Morgan Stanley Institutional Fund, please contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all items except signature, and mail to the Fund at the address above. - --------------------------------------------------------------------------------------------------------------- A) REGISTRATION 1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / First Name Initial Last Name 2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / (RIGHTS OF First Name Initial Last Name SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / PRESUMED UNLESS First Name Initial Last Name TENANCY IN COMMON IS INDICATED) - --------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / TRUSTS AND OTHERS Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Fund for additional documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / be required to set up account and to authorize transactions. Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED) / / TRUST __________________________________ / / OTHER (Specify) ______________________________ - --------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / / Please fill in completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / / telephone number(s). Home Business Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / / / / United States / / Resident / /Non-Resident Alien: Citizen Alien Indicate Country of Residence _________ - --------------------------------------------------------------------------------------------------------------- C) TAXPAYER PART 1. Enter your Taxpayer C) IMPORTANT TAX INFORMATION IDENTIFICATION Identification Number. For most You (as a payee) are required by NUMBER individual taxpayers, this is your law to provide us (as payer) with If the account is in Social Security Number. your correct Taxpayer Identification more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification PERSON WHOSE TAXPAYER OR Number will be subject to backup IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends, IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments. A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with is circled, the number / / Check this box if you are your correct taxpayer identification will be considered to be NOT subject to Backup number, you may be subject to that of the last name Withholding under the a $50 penalty imposed by the Internal listed. For Custodian provisions of Section Revenue Service. account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an (Uniform Gift/Transfer Revenue Code. additional tax; the tax liability of to Minor Act), give the persons subject to backup withholding Social Security Number will be reduced by the amount of tax of the minor. withheld. If withholding results in an overpayment of taxes, a refund may be obtained. You may be notified that you are subject to backup withholding under Section 3406(a)(1)(C) of the Internal Revenue Code because you have underreported interest or dividends or you were required to but failed to file a return which would have included a reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - --------------------------------------------------------------------------------------------------------------- D) PORTFOLIO AND For Purchase of the following Portfolio(s): CLASS SELECTION Active Country Allocation Portfolio / / Class A Shares $____ / / Class B Shares $____ (Class A shares minimum $500,000 for each Portfolio Total Initial Investment $_____________ and Class B shares minimum $100,000 for each Portfolio). Please indicate class and 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________________ / / / / / / / / / / /-/ / payment. Name of Portfolio Account No. / / Account previously established by: / / Phone exchange / / Wire on___________________ / / / / / / / / / / / /-/ / Date Account No. (Check (Previously assigned by the Fund) Digit) - --------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION Income dividends and capital gains distributions (if any) will OPTION be reinvested in additional shares unless 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 Name of COMMERCIAL Bank Bank Account No. Please select at time of to wire redemption proceeds to the (Not Savings Bank) initial application if you commercial bank indicated at rightand/or wish to redeem shares by mail redemption proceeds to the name and ________________ telephone. A SIGNATURE address in which my/our fund account is Bank ABA No. GUARANTEE IS REQUIRED IF registered if such requests are believed BANK ACCOUNT IS NOT to be authentic. _________________________________________________ REGISTERED IDENTICALLY TO The Fund and the Fund's Transfer Agent will Name(s) in which your BANK Account is Established YOUR FUND ACCOUNT. employ reasonable procedures to confirm that instructions communicated by telephone are _________________________________________________ TELEPHONE REQUESTS FOR genuine. These procedures include requiring Bank's Street Address REDEMPTIONS WILL NOT BE the investor to provide certain personal HONORED UNLESS THE BOX IS identification information at the time an _________________________________________________ CHECKED. account is opened and prior to effecting each City State Zip 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 In addition to the account _________________________________________________________________ statement sent to my/our Name registered address, I/we _________________________________________________________________ hereby authorize the fund to mail duplicate _________________________________________________________________ statements to the name and Address address provided at right. _________________________________________________________________ City State Zip Code - --------------------------------------------------------------------------------------------------------------- I) DEALER INFORMATION _______________________ _______________________________ ___________ Representative Name Representative No. Branch No. - --------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE. (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 Financial Highlights.............................. 4 Prospectus Summary................................ 6 Investment Objective and Policies................. 10 Additional Investment Information................. 12 Investment Limitations............................ 15 Management of the Fund............................ 15 Purchase of Shares................................ 18 Redemption of Shares.............................. 22 Shareholder Services.............................. 24 Valuation of Shares............................... 25 Performance Information........................... 26 Dividends and Capital Gains Distributions......... 26 Taxes............................................. 27 Portfolio Transactions............................ 28 General Information............................... 29 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 - --------------------------------- - --------------------------------- - --------------------------------- - --------------------------------- - -------------------------------------------------------------------------------- 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, or mutual fund, which offers redeemable shares in a series of diversified and non-diversified investment portfolios ("portfolios"). The Fund currently consists of twenty-eight portfolios representing a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. This prospectus (the "Prospectus") pertains to the Class A and the Class B shares of the Gold Portfolio (the "Portfolio"). On January 2, 1996, the Portfolio began offering two classes of shares, the Class A shares and the Class B shares, except for the Money Market, Municipal Money Market and International Small Cap Portfolios which only offer Class A shares. All shares of the Portfolio owned prior to January 2, 1996 were redesignated Class A shares on January 2, 1996. The Class A and Class B shares currently offered by the Portfolio have different minimum investment requirements and fund expenses. 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 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 "Prospectus Summary" below. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY - -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Magnum, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and Municipal Bond 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, 1996, 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, 1996. FUND EXPENSES The following table illustrates the expenses and fees that a shareholder of the Gold Portfolio will incur:
SHAREHOLDER TRANSACTION EXPENSES - -------------------------------------------------------------------------------------------- Maximum Sales Load Imposed on Purchases Class A................................................................................... None Class B................................................................................... None Maximum Sales Load Imposed on Reinvested Dividends Class A................................................................................... None Class B................................................................................... None Deferred Sales Load Class A................................................................................... None Class B................................................................................... None Redemption Fees Class A................................................................................... None Class B................................................................................... None Exchange Fees Class A................................................................................... None Class B................................................................................... None ANNUAL FUND OPERATING EXPENSES - -------------------------------------------------------------------------------------------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fee (Net of Fee Waiver)* Class A................................................................................... 0.49% Class B................................................................................... 0.49% 12b-1 Fees Class A................................................................................... None Class B................................................................................... 0.25% Other Expenses Class A................................................................................... 0.76% Class B................................................................................... 0.76% --------- Total Operating Expenses (Net of Fee Waivers)* Class A................................................................................... 1.25% Class B................................................................................... 1.50% --------- ---------
- ------------------------------ *The Adviser has agreed to waive its management fees and/or to reimburse the Portfolio, if necessary, if such fees would cause the Portfolio's total annual operating expenses, as a percentage of average daily net assets, to exceed the percentages set forth in the table above. Absent the fee waiver, the management fee would be 1.00%. Absent the fee waiver and/or expense reimbursement, the Portfolio's total operating expenses would be 1.76% of the average daily net assets of the Class A shares and 2.01% of the average daily net assets of the Class B shares. As a result of this reduction, the Management Fee stated above is lower than the contractual fee stated under "Management of the Fund." The Adviser reserves the right to terminate any of its fee waivers and/or expense reimbursements at any time in its sole discretion. For further information on Fund expenses, see "Management of the Fund." The purpose of the table above is to assist the investor in understanding the various expenses that an investor in the Portfolio will bear directly or indirectly. The Class A expenses and fees for the Portfolio are based 2 on actual figures for the fiscal year ended December 31, 1995. The Class B expenses and fees for the Portfolio are based on estimates, assuming that the average daily net assets of the Class B shares of the Portfolio will be $50,000,000. "Other Expenses" include Board of Directors' fees and expenses, amortization of organizational costs, filing fees, professional fees and costs for shareholder reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the equivalent of the maximum front-end sales charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). 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 Class A.......................................................... $ 13 $ 40 $ 69 $ 151 Class B.......................................................... 15 47 82 179
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. 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 Class A shares of the Portfolio for each of the periods described. The audited financial highlights for the Class A shares for the fiscal year ended December 31, 1995 are part of the Fund's financial statements which appear in the Fund's December 31, 1995 Annual Report to Shareholders and which are included in the Fund's Statement of Additional Information. The Portfolio's financial highlights for each of the periods presented have been audited by Price Waterhouse LLP, whose unqualified report thereon is also included in the Statement of Additional Information. Additional performance information for the Class A shares 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. Financial highlights are not available for the new Class B shares since they were not offered as of December 31, 1995. The following information should be read in conjunction with the financial statements and notes thereto. 4 GOLD PORTFOLIO
PERIOD FROM FEBRUARY 1, 1994* TO YEAR ENDED DECEMBER 31, 1994 DECEMBER 31, 1995 --------------------- ----------------- NET ASSET VALUE, BEGINNING OF PERIOD.............. $ 10.00 $ 9.13 ------- ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income/(Loss) (1)................ 0.03 (0.07) Net Realized and Unrealized Gain/(Loss) on Investments.................................... (0.88) 1.22 ------- ------ Total from Investment Operations.............. (0.85) 1.15 ------- ------ DISTRIBUTIONS Net Investment Income........................... (0.02) (0.01) Net Realized Gain............................... -- (1.72) ------- ------ Total Distributions........................... (0.02) (1.73) ------- ------ NET ASSET VALUE, END OF PERIOD.................... $ 9.13 $ 8.55 ------- ------ ------- ------ TOTAL RETURN...................................... (8.49)% 13.21% ------- ------ ------- ------ RATIO AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)............. $30,243 $7,409 Ratio of Expenses to Average Net Assets (1)(2).... 1.25%** 1.25% Ratio of Net Investment Income/(Loss) to Average Net Assets (1)(2)................................ 0.41%** (0.31)% Portfolio Turnover Rate........................... 56% 47% - ------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income... $ 0.04 $ 0.11 Ratios before expense limitation: Expenses to Average Net Assets............... 1.72%** 1.76% Net Investment Loss to Average Net Assets.... (0.06)%** (0.82)%
(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 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 Class A shares and 1.50% of the average daily net assets of the Class B shares. In the periods ended December 31, 1994 and December 31, 1995, the Adviser waived advisory fees and/or reimbursed expenses totaling $55,000 and $55,000, respectively, for the Portfolio. * Commencement of Operations. ** Annualized. 5 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-eight 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 offers Class A shares and, except the International Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class B shares. Each portfolio has its own investment objective and policies designed to meet its specific goals. The investment objective of the Gold Portfolio is as follows: - 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 equity securities 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 equity securities 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 equity securities of emerging country issuers. - The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of European issuers. - The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of issuers throughout the world, including U.S. issuers. - The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers. - The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers in accordance with EAFE country (as defined in "Investment Objective and Policies" below) weightings determined by the Adviser. - The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers with equity market capitalizations of less than $1 billion. 6 - 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 equity securities of small-to-medium sized corporations. - The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing in growth-oriented equity securities of medium and large capitalization companies. - The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small corporations. - The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued equity securities 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 equity securities 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 equity securities 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. 7 - 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. 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 March 31, 1996 had approximately $57.4 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. Sun Valley Gold Company (the "Sub-Adviser"), which at March 31, 1996 had approximately $192 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 Class A shares of the Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Class B shares of the Portfolio are offered at net asset value with no sales commission, but with a 12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the Class B shares' average daily net assets on an annualized basis. Share purchases may be made by sending investments directly to the Fund or through the Distributor. Shares in a Portfolio account opened prior to January 2, 1996 (each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996. For a Portfolio account opened on or after January 2, 1996 (a "New Account"), the minimum initial investment is $500,000 for Class A shares and $100,000 for Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the Adviser and its affiliates; and (3) certain advisory or asset allocation accounts, such as Total Funds Management accounts, managed by Morgan Stanley or its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves the right in its sole discretion to determine which of such advisory or asset allocation accounts shall be Managed Accounts. For information regarding Managed Accounts, please contact your Morgan Stanley account representative or the Fund at the telephone number provided on the cover of this Prospectus. Shares in a Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment 8 advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". See "Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from Class A to Class B Shares." The minimum subsequent investment for a Portfolio account is $1,000 (except for automatic reinvestment of dividends and capital gains distributions for which there is no minimum). Such subsequent investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. See "Purchase of Shares -- Additional Investments." HOW TO REDEEM Class A shares or Class B shares of the Portfolio may be redeemed at any time, without cost, at the net asset value per share of shares of the applicable class next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. Certain redemptions may cause involuntary redemption or automatic conversion. Class A or Class B shares held in New Accounts are subject to involuntary redemption if shareholder redemption(s) of such shares reduces the value of such account to less than $100,000 for a continuous 60-day period. Involuntary redemption does not apply to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B Accounts, regardless of the value of such accounts. Class A shares in a New Account will convert to Class B shares if shareholder redemption(s) of such shares reduces the value of such account to less than $500,000 for a continuous 60-day period. Class B shares in a New Account will convert to Class A shares if shareholder purchases of additional Class B shares or market activity causes the value of the Class B shares in the New Account to increase to $500,000 or more. See "Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and "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 Objective 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. 9 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 it derives more than 50% of its income, or devotes 50% or more of its assets, to such activities. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, and rights and warrants to purchase common stocks. 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 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 10 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 a 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. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations. ADDITIONAL INVESTMENT 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 11 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. FOREIGN INVESTMENT. 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, 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. 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. 12 GOLD RELATED INVESTMENTS. 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. 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. 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. NON-PUBLICALY 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 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, 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 13 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. 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. 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 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." 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 14 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 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 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. 15 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. 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. 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 16 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. 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 net 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; (iii) 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 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. 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. 17 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 for Class A and Class B shares to exceed 1.25% and 1.50%, respectively, 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 for Class A and Class B shares do not exceed 1.25% and 1.50%, respectively, 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, 1995, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $57.4 billion, including approximately $41.9 billion under active management and $15.5 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 March 31, 1996, the Sub-Adviser managed investments totaling approximately $192 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 report, 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 an agreement between the Adviser and The Chase Manhattan Bank, N.A. ("Chase"), Chase provides certain administrative services to the Fund. In a merger completed on September 1, 1995, Chase succeeded to all of the rights and obligations under the U.S. Trust Administration Agreement between the Adviser and the United States Trust Company of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegated its administration responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service Company which after the merger with Chase is a subsidiary of Chase and will continue to provide certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by CGFSC. The services provided under the 18 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. CGFSC'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. The Portfolio currently offers only the classes of shares offered by this Prospectus. The Portfolio may in the future offer one or more classes of shares with features, distribution expenses or other expenses that are different from those of the classes currently offered. The Fund has adopted a Plan of Distribution with respect to the Class B shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan, the Distributor is entitled to receive from the Portfolio a distribution fee, which is accrued daily and paid quarterly, of 0.25% of the Class B shares' average daily net assets on an annualized basis. The Distributor expects to reallocate most of its fee to its investment representatives. The Distributor may, in its discretion, voluntarily waive from time to time all or any portion of its distribution fee and each of the Distributor and the Adviser is free to make additional payments out of its own assets to promote the sale of Fund shares, including payments that compensate financial institutions for distribution services or shareholder services. The plan is designed to compensate the Distributor for its services, not to reimburse the Distributor for its expenses, and the Distributor may retain any portion of the fee that it does not expend in fulfillment of its obligations to the Fund. 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. 19 PURCHASE OF SHARES Class A and Class B 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 by the Portfolio. See "Valuation of Shares." MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES For a Portfolio account opened on or after January 2, 1996 (a "New Account"), the minimum initial investment and minimum account size are $500,000 for Class A shares and $100,000 for Class B shares. Managed Accounts may purchase Class A shares without being subject to any minimum initial investment or minimum account size requirements for a Portfolio account. Officers of the Adviser and its affiliates are subject to the minimums for a Portfolio account, except they may purchase Class B shares subject to a minimum initial investment and minimum account size of $5,000 for a Portfolio account. If the value of a New Account containing Class A shares falls below $500,000 (but remains at or above $100,000) because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $500,000 (but remains at or above $100,000) for a continuous 60-day period, the Class A shares in such account will convert to Class B shares and will be subject to the distribution fee and other features applicable to the Class B shares. The Fund, however, will not convert Class A shares to Class B shares based solely upon changes in the market that reduce the net asset value of shares. Under current tax law, conversions between share classes are not a taxable event to the shareholder. Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996 Account") were designated Class A shares on January 2, 1996. Shares in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account") remained Class A shares regardless of account size thereafter. Except for shares in a Managed Account, shares in a Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. Grandfathered Class A Accounts and Managed Accounts are not subject to conversion from Class A shares to Class B shares. Investors may also invest in the Fund by purchasing shares through a trust department, broker, dealer, agent, financial planner, financial services firm or investment adviser. An investor may be charged an additional service or transaction fee by that institution. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". The Fund reserves the right to modify or terminate the conversion features of the shares as stated above at any time upon 60-days' notice to shareholders. MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES If the value of a New Account falls below $100,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $100,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. The Fund, however, will not redeem shares based solely upon changes in the market that reduce the net asset value of shares. 20 For purposes of redemptions by the Fund, the foregoing minimum account size requirements do not apply to New Accounts containing Class B shares held by officers of the Adviser or its affiliates. However, if the value of such account held by an officer of the Adviser or its affiliates falls below $5,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains $5,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed Accounts are not subject to involuntary redemption. The Fund reserves the right to modify or terminate the involuntary redemption features of the shares as stated above at any time upon 60-days' notice to shareholders. CONVERSION FROM CLASS B TO CLASS A SHARES If the value of Class B shares in a Portfolio account increases, whether due to shareholder share purchases or market activity, to $500,000 or more, the Class B shares will convert to Class A shares. Under current tax law, such conversion is not a taxable event to the shareholder. Class A shares converted from Class B shares are subject to the same minimum account size requirements that are applicable to New Accounts containing Class A shares, as stated above. The Fund reserves the right to modify or terminate this conversion feature at any time upon 60-days' notice to shareholders. INITIAL PURCHASES DIRECTLY FROM THE FUND The Fund's determination of an investor's eligibility to purchase shares of a given class will take precedence over the investor's selection of a class. Assuming the investor is eligible for the class, the Fund will select the most favorable class for the investor, if the investor has not done so. 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 Class A shares of the Portfolio and $100,000 for Class B shares of 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. The class(es) of shares of the Portfolio 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. 21 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 class 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, the class selected and the account number assigned to you) as follows: Chase Manhattan Bank, N.A. One Manhattan Plaza New York, NY 10081-1000 ABA #021000021 DDA #910-2-733293 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (Portfolio name, your account number, your account name) Please call the Fund at 1-800-548-7786 prior to wiring funds. C. Complete and sign the Account Registration Form and mail it to the address shown thereon. Purchase orders for shares of the Portfolio which are received prior to the regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed at the price computed on the date of receipt as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Federal Funds purchase orders will be accepted only on a day on which the Fund and Chase (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, the portfolio name and the class selected 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 22 requested to notify one of the Fund's representatives (toll free: 1-800-548-7786) prior to the wire date. Additional investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. OTHER PURCHASE INFORMATION The purchase price of the Class A and Class B 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 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 as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends. The net asset value of Class B shares will generally be lower than the net asset value of Class A shares as a result of the distribution expense charged to Class B shares. It is expected, however, that the net asset value per share of the two classes will tend to converge immediately after the recording of dividends which will differ by approximately the amount of the distribution expense accrual differential between the classes. 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 the Distributor. See "Purchase of Shares" in the Statement of Additional Information. EXCESSIVE TRADING Frequent trades involving either substantial portfolio 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 any class 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 class of a portfolio of the Fund within any 120-day period. As an example, exchanging shares of portfolios of the Fund as follows amounts to excessive trading: exchanging Class A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class A shares of Portfolio B for Class A shares of Portfolio C and again exchanging Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day 23 period. 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, such as TFM Accounts, managed or advised by MSAM and/or any of its affiliates. 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 Class A shares or Class B shares of the Portfolio at the next determined net asset value of shares of the applicable class. 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 Class A shares or Class B 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 Chase Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913. "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 class and 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 Chase Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913. 24 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. 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 FEATURES 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, which is closed to new investors). In exchanging for shares of a portfolio with more than one class, the class of shares you receive in the exchange will be determined in the same manner as any other purchase of shares and will not be based on the class of shares surrendered for the exchange. Consequently, the same minimum initial investment and minimum account size for determining the class of shares received in the exchange will apply. See "Purchase of Shares." Shares of the portfolios may be exchanged by mail or telephone. The privilege to exchange shares by telephone is automatic and 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 25 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. The exchange privilege may be modified or terminated by the Fund at any time upon 60-days' notice to shareholders. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name, class of shares and account number of your current Portfolio, the names of the portfolio(s) and class(es) of shares 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, class of shares and account number of the current portfolios, the name(s) of the portfolio(s) and class(es) of shares 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 class of the portfolio involved in the exchange of shares 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. Transferring the registration of shares may affect the eligibility of your account for a given class of the Portfolio's shares and may result in involuntary conversion or redemption of your shares. See "Purchase of Shares" above. VALUATION OF SHARES The net asset value per share of a class of shares of the Portfolio is determined by dividing the total market value of the Portfolio's investments and other assets attributable to such class, less any liabilities attributable to such class, by the total number of outstanding shares of such class of the Portfolio. Net asset value is calculated separately for each class 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 26 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. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends for the class. Dividends will differ by approximately the amount of the distribution expense accrual differential among the classes. The net asset value of Class B shares will generally be lower than the net asset value of the Class A shares as a result of the distribution expense charged to Class B shares. PERFORMANCE INFORMATION The Fund may from time to time advertise "total return" for each class 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 a class of 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 in the same class 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. The performance figures for Class B shares will generally be lower than those for Class A shares because of the distribution fee charged to Class B shares. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions for a class of shares will automatically be reinvested in additional shares of such class 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 quarterly dividends. Net realized gains, if any, after reduction for any available tax loss carryforwards 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 27 will be provided, pursuant to Rule 10b-10(b) under the Securities Exchange Act of 1934, as amended, on the next monthly 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. Because of the distribution fee and any other expenses that may be attributable to the Class B shares, the net income attributable to and the dividends payable on Class B shares will be lower than the net income attributable to and the dividends payable on Class A shares. As a result, the net asset value per share of the classes of the Portfolio will differ at times. Expenses of the Portfolio allocated to a particular class of shares thereof will be borne on a pro rata basis by each outstanding share of that class. TAXES The following summary of certain 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. 28 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, exchange or redemption of shares may result in taxable gain or loss to the selling, exchanging or 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, exchanged or sold 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. The conversion of Class A shares to Class B shares should not be a taxable event to the shareholder. 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 29 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 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, as amended and restated, permit the Fund to issue up to 34 billion 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. Subject to the notice period to shareholders with respect to shares held by shareholders, 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 30 respect to such classes. The shares of common stock of each portfolio are currently classified into two classes, the Class A shares and the Class B shares, except for the International Small Cap, Money Market and Municipal Money Market Portfolios, which only offer Class A shares. The shares of the 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 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, the Adviser 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 As of September 1, 1995 domestic securities and cash are held by Chase, which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company, Brooklyn, New York, ("MSTC"), an affiliate of the Adviser and the Distributor, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians 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. MSTC may also hold certain domestic assets for the Fund. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Chase Global Funds Services 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. 31
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 Fill in where applicable for the Morgan Stanley Institutional Fund, please contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all items except signature, and mail to the Fund at the address above. - --------------------------------------------------------------------------------------------------------------- A) REGISTRATION 1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / First Name Initial Last Name 2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / (RIGHTS OF First Name Initial Last Name SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / PRESUMED UNLESS First Name Initial Last Name TENANCY IN COMMON IS INDICATED) - --------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / TRUSTS AND OTHERS Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Fund for additional documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / be required to set up account and to authorize transactions. Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED) / / TRUST __________________________________ / / OTHER (Specify) ______________________________ - --------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / / Please fill in completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / / telephone number(s). Home Business Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / / / / United States / / Resident / /Non-Resident Alien: Citizen Alien Indicate Country of Residence _________ - --------------------------------------------------------------------------------------------------------------- C) TAXPAYER PART 1. Enter your Taxpayer C) IMPORTANT TAX INFORMATION IDENTIFICATION Identification Number. For most You (as a payee) are required by NUMBER individual taxpayers, this is your law to provide us (as payer) with If the account is in Social Security Number. your correct Taxpayer Identification more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification PERSON WHOSE TAXPAYER OR Number will be subject to backup IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends, IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments. A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with is circled, the number / / Check this box if you are your correct taxpayer identification will be considered to be NOT subject to Backup number, you may be subject to that of the last name Withholding under the a $50 penalty imposed by the Internal listed. For Custodian provisions of Section Revenue Service. account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an (Uniform Gift/Transfer Revenue Code. additional tax; the tax liability of to Minor Act), give the persons subject to backup withholding Social Security Number will be reduced by the amount of tax of the minor. withheld. If withholding results in an overpayment of taxes, a refund may be obtained. You may be notified that you are subject to backup withholding under Section 3406(a)(1)(C) of the Internal Revenue Code because you have underreported interest or dividends or you were required to but failed to file a return which would have included a reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - --------------------------------------------------------------------------------------------------------------- D) PORTFOLIO AND For Purchase of the following Portfolio: CLASS SELECTION Gold Portfolio / / Class A Shares $____ / / Class B Shares $____ (Class A shares minimum $500,000 for each Portfolio Total Initial Investment $_____________ and Class B shares minimum $100,000 for each Portfolio). Please indicate class and amount. - --------------------------------------------------------------------------------------------------------------- E) METHOD OF Payment by: INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--GOLD PORTFOLIO) Please indicate manner of / / Exchange $____________ From________________ / / / / / / / / / / /-/ / payment. Name of Portfolio Account No. / / Account previously established by: / / Phone exchange / / Wire on___________________ / / / / / / / / / / / /-/ / Date Account No. (Check (Previously assigned by the Fund) Digit) - --------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION Income dividends and capital gains distributions (if any) will OPTION be reinvested in additional shares unless 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 Name of COMMERCIAL Bank Bank Account No. Please select at time of to wire redemption proceeds to the (Not Savings Bank) initial application if you commercial bank indicated at rightand/or wish to redeem shares by mail redemption proceeds to the name and ________________ telephone. A SIGNATURE address in which my/our fund account is Bank ABA No. GUARANTEE IS REQUIRED IF registered if such requests are believed BANK ACCOUNT IS NOT to be authentic. _________________________________________________ REGISTERED IDENTICALLY TO The Fund and the Fund's Transfer Agent will Name(s) in which your BANK Account is Established YOUR FUND ACCOUNT. employ reasonable procedures to confirm that instructions communicated by telephone are _________________________________________________ TELEPHONE REQUESTS FOR genuine. These procedures include requiring Bank's Street Address REDEMPTIONS WILL NOT BE the investor to provide certain personal HONORED UNLESS THE BOX IS identification information at the time an _________________________________________________ CHECKED. account is opened and prior to effecting each City State Zip 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 In addition to the account _________________________________________________________________ statement sent to my/our Name registered address, I/we _________________________________________________________________ hereby authorize the fund to mail duplicate _________________________________________________________________ statements to the name and Address address provided at right. _________________________________________________________________ City State Zip Code - --------------------------------------------------------------------------------------------------------------- I) DEALER INFORMATION _______________________ _______________________________ ___________ Representative Name Representative No. Branch No. - --------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE. (X) (X) __________________________________ ______________________________________ 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................................ 6 Investment Objective and Policies................. 10 Additional Investment Information................. 11 Investment Limitations............................ 17 Management of the Fund............................ 17 Purchase of Shares................................ 20 Redemption of Shares.............................. 24 Shareholder Services.............................. 25 Valuation of Shares............................... 26 Performance Information........................... 27 Dividends and Capital Gains Distributions......... 27 Taxes............................................. 28 Portfolio Transactions............................ 29 General Information............................... 30 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 - --------------------------------- - --------------------------------- - --------------------------------- - --------------------------------- - -------------------------------------------------------------------------------- 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, or mutual fund, which offers redeemable shares in a series of diversified and non-diversified investment portfolios ("portfolios"). The Fund currently consists of twenty-eight portfolios representing a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. This prospectus (the "Prospectus") pertains to the Class A and the Class B shares of the Global Equity, International Equity, Asian Equity, European Equity, Japanese Equity and Latin American Portfolios (the "Multiclass Portfolios") and to the Class A Shares of the International Small Cap Portfolio (collectively, the "Portfolios"). On January 2, 1996, the Multiclass Portfolios began offering two classes of shares, the Class A shares and the Class B shares, except for the Money Market, Municipal Money Market and International Small Cap Portfolios which only offer Class A shares. All shares of the Portfolios owned prior to January 2, 1996 were redesignated Class A shares on January 2, 1996. The International Equity Portfolio is currently closed to new investors with the exception of certain Morgan Stanley customers. The Class A and Class B shares currently offered by the Portfolios have different minimum investment requirements and fund expenses. 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 GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of issuers throughout the world, including U.S. issuers. The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers. The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers with equity market capitalizations of less than $1 billion. The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Asian issuers. The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of European issuers. The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation through investment 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 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 "Prospectus Summary" below. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY - -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Magnum, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and Municipal Bond 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, 1996, 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, 1996. FUND EXPENSES The following table illustrates the expenses and fees that a shareholder of each Portfolio listed below will incur.
GLOBAL EQUITY INTERNATIONAL EQUITY INTERNATIONAL SMALL ASIAN EQUITY SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO CAP PORTFOLIO PORTFOLIO - --------------------------------------------- --------------- --------------------- ------------------- ----------------- Maximum Sales Load Imposed on Purchases Class A.................................... None None None* None Class B.................................... None None None* None Maximum Sales Load Imposed on Reinvested Dividends Class A.................................... None None None None Class B.................................... None None N/A None Deferred Sales Load Class A.................................... None None None None Class B.................................... None None N/A None Redemption Fees Class A.................................... None None 1.00%* None Class B.................................... None None 1.00%* None Exchange Fees Class A.................................... None None None None Class B.................................... None None N/A None EUROPEAN EQUITY JAPANESE EQUITY LATIN AMERICAN SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO - --------------------------------------------- --------------------- ------------------- ----------------- Maximum Sales Load Imposed on Purchases Class A..................................................... None None None Class B..................................................... None None None Maximum Sales Load Imposed on Reinvested Dividends Class A..................................................... None None None Class B..................................................... None None None Deferred Sales Load Class A..................................................... None None None Class B..................................................... None None None Redemption Fees Class A..................................................... None None None Class B..................................................... None None None Exchange Fees Class A..................................................... None None None Class B..................................................... 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 2 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.
INTERNATIONAL GLOBAL EQUITY EQUITY INTERNATIONAL SMALL ASIAN EQUITY ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO CAP PORTFOLIO PORTFOLIO - ------------------------------------------------ ------------- ------------------- ------------------- -------------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fee (Net of Fee Waivers)*** Class A....................................... 0.67% 0.77% 0.86% 0.62% Class B....................................... 0.67% 0.77% N/A 0.62% 12b-1 Fees Class A....................................... None None None None Class B....................................... 0.25% 0.25% N/A 0.25% Other Expenses Class A....................................... 0.33% 0.23% 0.29% 0.38% Class B....................................... 0.33% 0.23% N/A 0.38% ------------- ------- ------- -------------- Total Operating Expenses (Net of Fee Waivers)* Class A....................................... 1.00% 1.00% 1.15% 1.00% Class B....................................... 1.25% 1.25% N/A 1.25% ------------- ------- ------- -------------- ------------- ------- ------- -------------- EUROPEAN EQUITY JAPANESE EQUITY LATIN AMERICAN ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO - ------------------------------------------------ ------------------- ------------------- -------------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fee (Net of Fee Waivers)*** Class A...................................................... 0.55% 0.60% 0.00% Class B...................................................... 0.55% 0.60% 0.00% 12b-1 Fees Class A...................................................... None None None Class B...................................................... 0.25% 0.25% 0.25% Other Expenses Class A...................................................... 0.45% 0.40% 1.70%** Class B...................................................... 0.45% 0.40% 1.70%** ------- ------- -------------- Total Operating Expenses (Net of Fee Waivers) Class A...................................................... 1.00% 1.00% 1.70%** Class B...................................................... 1.25% 1.25% 1.95%** ------- ------- -------------- -------
- -------------------------- * "Other Expenses" for the Latin American Portfolio includes an annual fee of 0.125% of the Portfolios' average weekly net assets paid to local administrators required under Brazilian and Chilean law. See "Local Administrators for the Latin American Portfolio". ** Annualized. *** The Adviser has agreed to waive its management fees and/or reimburse each Portfolio, if necessary, if such fees would cause any of the total annual operating expenses of the Portfolios to exceed a specified percentage of their respective average daily net assets. Set forth 3 below, for each Portfolio as applicable, are the management fees and total operating expenses absent such fee waivers and/or expense reimbursements as a percent of average daily net assets of the Class A shares of the Portfolios and Class B Shares of the Multiclass Portfolios, respectively.
TOTAL OPERATING EXPENSES ABSENT FEE WAIVERS MANAGEMENT FEES ABSENT FEE -------------------------- PORTFOLIO WAIVERS CLASS A CLASS B+ - ---------------------------------------------------------------- ---------------- ------------ ------------ Global Equity................................................... 0.80% 1.13% 1.38% International Equity............................................ 0.80% 1.03% 1.28% International Small Cap......................................... 0.95% 1.24% N/A Asian Equity.................................................... 0.80% 1.18% 1.43% European Equity................................................. 0.80% 1.25% 1.50% Japanese Equity................................................. 0.80% 1.20% 1.45% Latin American.................................................. 1.10% 3.13%++ 3.38%++
- ------------------------------ + Estimated. ++ Annualized. 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 Management 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 the table is to assist the investor in understanding the various expenses that an investor in the Portfolios will bear directly or indirectly. The Class A expenses and fees for Portfolios are based on actual figures for the fiscal year ended December 31, 1995. The Class B expenses and fees for the Multiclass Portfolios are based on estimates assuming that the average daily net assets of the Class B shares of each Multiclass Portfolio will be $50,000,000. "Other Expenses" include Board of Directors' fees and expenses, amortization or organizational costs, filing fees, professional fees and costs for shareholder reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the equivalent of the maximum front-end sales charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). 4 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.
3 5 10 1 YEAR YEARS YEARS YEARS ------ ------ ------ ------- Global Equity Portfolio Class A.......................... $ 10 $ 32 $ 55 $ 122 Class B.......................... 13 40 69 151 International Equity Portfolio Class A.......................... 10 32 55 122 Class B.......................... 13 40 69 151 International Small Cap Portfolio Class A.......................... 32 57 85 163 Asian Equity Portfolio Class A.......................... 10 32 55 122 Class B.......................... 13 40 69 151 European Equity Portfolio Class A.......................... 10 32 55 122 Class B.......................... 13 40 69 151 Japanese Equity Portfolio Class A.......................... 10 32 55 122 Class B.......................... 13 40 69 151 Latin American Portfolio Class A.......................... 17 54 92 201 Class B.......................... 20 61 105 227
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. 5 FINANCIAL HIGHLIGHTS The following table provides financial highlights for the Class A shares of the Portfolios for each of the periods presented. The audited financial highlights for the Class A shares for the fiscal year ended December 31, 1995 are part of the Fund's financial statements which appear in the Fund's December 31, 1995 Annual Report to Shareholders and which are included in the Fund's Statement of Additional Information. The Portfolios' financial highlights for each of the periods in the five years ended December 31, 1995 have been audited by Price Waterhouse, LLP, whose unqualified report thereon is also included in the Statement of Additional Information. Additional performance information for the Class A shares 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. Financial highlights are not available for the new Class B shares since they were not offered as of December 31, 1995. 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. 6 GLOBAL EQUITY PORTFOLIO
JULY 15, TWO MONTHS 1992* TO ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1992 1992 1993 1994 1995 ----------- ------------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD............ $ 10.00 $ 9.35 $ 9.75 $ 13.87 $ 13.40 ----------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)(2).................. 0.02 0.01 0.08 0.08 0.18 Net Realized and Unrealized Gain/(Loss) on Investments.................................. (0.67) 0.39 4.18 0.79 2.26 ----------- ------------- ------------- ------------- ------------- Total from Investment Operations.............. (0.65) 0.40 4.26 0.87 2.44 ----------- ------------- ------------- ------------- ------------- DISTRIBUTIONS Net Investment Income......................... -- -- (0.02) (0.12) (0.22) In Excess of Net Investment Income............ -- -- (0.03) -- -- Net Realized Gain............................. -- -- (0.09) (1.22) (1.31) ----------- ------------- ------------- ------------- ------------- Total Distributions............................. -- -- (0.14) (1.34) (1.53) ----------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD.................. $ 9.35 $ 9.75 $ 13.87 $ 13.40 $ 14.31 ----------- ------------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- ------------- TOTAL RETURN.................................... (6.50)% 4.28% 44.24% 6.95% 18.66% ----------- ------------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)........... $ 11,257 $ 11,739 $ 19,918 $ 78,935 $ 91,675 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)..................................... 1.00%** 0.69%** 0.84% 0.87% 1.17% Portfolio Turnover Rate......................... 10% 5% 42% 12% 28%
- ------------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income........ $ 0.08 $ 0.02 $ 0.01 $ 0.02 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets.................... 5.22%** 2.49%** 1.66% 1.24% 1.13% Net Investment Income (Loss) to Average Net Assets..................................... (3.22)%** (0.80)%** 0.18% 0.63% 1.04%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 1.25% of the average daily net assets of the Class B shares. In the fiscal period ended October 31, 1992, the two months ended December 31, 1992, and the years ended December 31, 1993, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totalling $97,000, $28,000, $101,000, $126,000 and $109,000, respectively, for the Global Equity Portfolio. * Commencement of Operations. ** Annualized. 7 INTERNATIONAL EQUITY PORTFOLIO
TWO AUGUST 4, MONTHS YEAR 1989* TO YEAR YEAR YEAR ENDED ENDED OCTO- ENDED OCTO- ENDED OCTO- ENDED OCTO- DECEM- DECEM- BER 31, BER 31, BER 31, BER 31, BER 31, BER 31, 1989 1990 1991 1992 1992 1993 ----------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD............... $ 10.00 $ 9.72 $ 10.05 $ 10.52 $ 9.83 $ 9.98 ----------- ----------- ----------- ----------- ----------- ----------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income............................ 0.05 0.19 0.12 0.12 0.01 0.15 Net Realized and Unrealized Gain/(Loss) on Investments..................................... (0.33) 0.20 0.58 (0.59) 0.14 4.36 ----------- ----------- ----------- ----------- ----------- ----------- Total from Investment Operations................. (0.28) 0.39 0.70 (0.47) 0.15 4.51 ----------- ----------- ----------- ----------- ----------- ----------- DISTRIBUTIONS Net Investment Income............................ -- (0.06) (0.15) (0.17) -- (0.01) In Excess of Net Investment Income............... -- -- -- -- -- (0.13) Net Realized Gain................................ -- -- (0.08) (0.05) -- (0.26) ----------- ----------- ----------- ----------- ----------- ----------- Total Distributions................................ -- (0.06) (0.23) (0.22) -- (0.40) ----------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD..................... $ 9.72 $ 10.05 $ 10.52 $ 9.83 $ 9.98 $ 14.09 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- TOTAL RETURN....................................... (2.80)% 3.99% 7.17% (4.56)% 1.53% 46.50% ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).............. $ 7,811 $ 110,716 $ 283,776 $ 486,836 $ 510,727 $ 947,045 Ratio of Expenses to Average Net Assets (1)(2)..................................... 1.35%** 1.03% 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% Portfolio Turnover Rate............................ 0% 38% 22% 12% 5% 23% YEAR YEAR ENDED DECEM- ENDED DECEM- BER 31, BER 31, 1994 1995 ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD............... $ 14.09 $ 15.34 ------------ ------------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income............................ 0.16 0.16 Net Realized and Unrealized Gain/(Loss) on Investments..................................... 1.54 1.55 ------------ ------------ Total from Investment Operations................. 1.70 1.71 ------------ ------------ DISTRIBUTIONS Net Investment Income............................ (0.18) (0.06) In Excess of Net Investment Income............... -- -- Net Realized Gain................................ (0.27) (1.84) ------------ ------------ Total Distributions................................ (0.45) (1.90) ------------ ------------ NET ASSET VALUE, END OF PERIOD..................... $ 15.34 $ 15.15 ------------ ------------ ------------ ------------ TOTAL RETURN....................................... 12.39% 11.77% ------------ ------------ ------------ ------------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).............. $1,304,770 $1,598,503 Ratio of Expenses to Average Net Assets (1)(2)..................................... 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets (1)(2)..................................... 1.12% 1.38% Portfolio Turnover Rate............................ 16% 27%
- ------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income............................... $ 0.00+ $ 0.01 $ 0.01 $ 0.00+ $ 0.00+ $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets........ 2.58%** 1.24% 1.09% 1.02% 1.14%** 1.06% Net Investment Income to Average Net Assets............................... 1.11%** 3.30% 2.18% 1.44% 0.54%** 1.19%
(1) Effect of voluntary expense limitation d Per share benefit to net investment income............................... $ 0.004 $ 0.003 Ratios before expense limitation: Expenses to Average Net Assets........ 1.03% 1.03% Net Investment Income to Average Net Assets............................... 1.09% 1.35%
+ Per share benefit to net investment income is less than $0.0001. (2)Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 1.25% of the average daily net assets of the Class B shares. 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, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totaling $147,000, $78,000, $116,000, $405,000, $344,000 and $424,000, respectively, for the International Equity Portfolio. * Commencement of Operations. ** Annualized. 8 INTERNATIONAL SMALL CAP PORTFOLIO
DECEMBER 15, 1992* TO YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1992 1993+ 1994 1995 ------------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD......... $ 10.00 $ 10.09 $ 14.64 $ 15.15 ------ ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)(3)............... 0.01 0.09 0.14 0.24 Net Realized and Unrealized Gain on Investments (2)........................... 0.08 4.48 0.62 0.15 ------ ------------- ------------- ------------- Total from Investment Operations........... 0.09 4.57 0.76 0.39 ------ ------------- ------------- ------------- DISTRIBUTIONS Net Investment Income...................... -- 0.00 (0.03) (0.23) In Excess of Net Investment Income......... -- (0.02) -- -- Net Realized Gain.......................... -- -- (0.22) (0.37) Total Distributions.......................... -- (0.02) (0.25) (0.60) ------ ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD $ 10.09 $ 14.64 $ 15.15 $ 14.94 ------ ------------- ------------- ------------- ------ ------------- ------------- ------------- TOTAL RETURN................................. 0.90% 45.34% 5.25% 2.60% ------ ------------- ------------- ------------- ------ ------------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)........ $ 3,824 $ 52,834 $ 160,101 $ 198,669 Ratio of Expenses to Average Net Assets (1)(3)...................................... 1.15%** 1.15% 1.15% 1.15% Ratio of Net Investment Income to Average Net Assets (1)(3)................... 1.37%** 0.66% 1.18% 1.72% Portfolio Turnover Rate...................... 0% 14% 8% 24%
- ------------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income.................................. $ 0.16 $ 0.10 $ 0.02 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets........... 21.67%** 1.86% 1.29% 1.24% Net Investment Income/(Loss) to Average Net Assets.............................. (19.15)%** (0.05)% 1.04% 1.63%
(2) Includes 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 a management fee calculated at an annual rate of 0.95% of the average daily net assets of the Class A shares 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 1.15% of the average daily net assets of the Class A shares of the Portfolio. In the period ended December 31, 1992, and the years ended December 31, 1993, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totaling $32,000, $151,000, $174,000 and $181,000, 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. 9 ASIAN EQUITY PORTFOLIO
TWO JULY 1, YEAR MONTHS YEAR YEAR YEAR 1991, TO ENDED ENDED ENDED ENDED ENDED OCTOBER OCTOBER DECEMBER DECEMBER DECEMBER DECEMBER 31, 1991 31, 1992 31, 1992 31, 1993 31, 1994 31, 1995 --------- --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD......... $ 10.00 $ 9.67 $ 13.63 $ 13.11 $ 26.20 $ 21.54 --------- --------- --------- --------- --------- --------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)(2)............... 0.03 0.14 0.01 0.10 0.11 0.18 Net Realized and Unrealized Gain/(Loss) on Investments............................... (0.36) 3.86 (0.53) 13.38 (4.15) 1.11 --------- --------- --------- --------- --------- --------- Total from Investment Operations........... (0.33) 4.00 (0.52) 13.48 (4.04) 1.29 --------- --------- --------- --------- --------- --------- DISTRIBUTIONS Net Investment Income...................... -- (0.04) -- (0.01) (0.09) (0.34) In Excess of Net Investment Income......... -- -- -- (0.13) -- (0.00)+ Net Realized Gain.......................... -- -- -- (0.12) (0.53) (3.01) In Excess of Net Realized Gain............. -- -- -- (0.13) -- -- --------- --------- --------- --------- --------- --------- Total Distributions.......................... -- (0.04) -- (0.39) (0.62) (3.35) --------- --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD............... $ 9.67 $ 13.63 $ 13.11 $ 26.20 $ 21.54 $ 19.48 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- TOTAL RETURN................................. (3.30)% 41.50% (3.82)% 105.71% (15.81)% 6.87% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)........ $10,719 $41,017 $41,978 $287,136 $276,906 $314,884 Ratio of Expenses to Average Net Assets (1)(2)...................................... 1.00%** 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% 0.97% Portfolio Turnover Rate...................... 2% 33% 10% 18% 47% 42%
- ------------------------------ (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 $ 0.03 Ratios before expense limitation: Expenses to Average Net Assets........... 2.52%** 1.63% 2.02%** 1.38% 1.20% 1.18% Net Investment Income/(Loss) to Average Net Assets................. (0.39)%** 0.90% (0.41)%** 0.45% 0.32% 0.79%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 1.25% of the average daily net assets of the Class B shares. 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, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totaling $44,000, $167,000, $70,000, $477,000, $535,000 and $522,000, respectively, for the Asian Equity Portfolio. * Commencement of Operations. ** Annualized. + Amount is less than $0.01 per share. 10 EUROPEAN EQUITY PORTFOLIO
APRIL 2, 1993* TO YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1995 ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD......... $ 10.00 $ 12.91 $ 13.94 ------------- ------------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)(2)............... 0.08 0.08 0.14 Net Realized and Unrealized Gain on Investments............................... 2.83 1.29 1.37 ------------- ------------- ------------- Total from Investment Operations........... 2.91 1.37 1.51 ------------- ------------- ------------- DISTRIBUTIONS Net Investment Income...................... -- (0.09) (0.15) Net Realized Gain.......................... -- (0.25) (1.38) ------------- ------------- ------------- Total Distributions.......................... -- (0.34) (1.53) ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD............... $ 12.91 $ 13.94 $ 13.92 ------------- ------------- ------------- ------------- ------------- ------------- TOTAL RETURN................................. 29.10% 10.88% 11.85% ------------- ------------- ------------- ------------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)........ $ 12,681 $ 27,634 $ 69,583 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)............................... 1.23%** 0.87% 1.37% Portfolio Turnover Rate...................... 15% 79% 13%
- ------------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income.................................. $ 0.09 $ 0.06 $ 0.03 Ratios before expense limitation: Expenses to Average Net Assets........... 2.43%** 1.62% 1.25% Net Investment Income/(Loss) to Average Net Assets.............................. (0.21)%** 0.25% 1.12%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 1.25% of the average daily net assets of the Class B shares. In the fiscal period ended December 31, 1993, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totaling $88,000, $112,000 and $130,000, respectively, for the European Equity Portfolio. * Commencement of Operations. ** Annualized. 11 JAPANESE EQUITY PORTFOLIO
PERIOD FROM APRIL 25, 1994* TO YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD......... $ 10.00 $ 9.83 ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1)........... (0.01) 0.04 Net Realized and Unrealized Loss on Investments+.............................. (0.16) (0.40) ------------- ------------- Total from Investment Operations........... (0.17) (0.36) ------------- ------------- DISTRIBUTIONS In Excess of Net Investment Income......... -- (0.20) ------------- ------------- NET ASSET VALUE, END OF PERIOD............... $ 9.83 $ 9.27 ------------- ------------- ------------- ------------- TOTAL RETURN................................. (1.70)% (3.64)% ------------- ------------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)........ $ 50,332 $ 119,278 Ratio of Expenses to Average Net Assets (1)(2)...................................... 1.00%** 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1)(2)................... (0.10)%** 0.15% Portfolio Turnover Rate...................... 1% 52%
- ------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income.................................. $ 0.02 $ 0.06 Ratios before expense limitation: Expenses to Average Net Assets........... 1.27%** 1.20% Net Investment Loss to Average Net Assets.................................. (0.37)%** (0.05)%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 1.25% of the average daily net assets of the Class B shares. In the fiscal period ended December 31, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totaling $80,000 and $118,000, respectively, for the Japanese Equity Portfolio. * Commencement of Operations. ** Annualized. + The amount shown for the year ended December 31, 1995 for a share outstanding throughout the year does not accord with aggregate net gains on investments for the year because of the timing of sales and repurchases of the Portfolio shares in relation to fluctuating market value of the investments in the Portfolio. 12 LATIN AMERICAN PORTFOLIO
PERIOD FROM JANUARY 18, 1995* TO DECEMBER 31, 1995 ------------------- NET ASSET VALUE, BEGINNING OF PERIOD......... $ 10.00 ------- ------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1).................. 0.05 Net Realized and Unrealized Loss on Investments............................... (0.92) ------- Total from Investment Operations........... (0.87) ------- DISTRIBUTIONS Net Investment Income...................... (0.04) Return of Capital.......................... (0.03) ------- Total Distributions.......................... (0.07) ------- NET ASSET VALUE, END OF PERIOD............... $ 9.06 ------- ------- TOTAL RETURN................................. (8.68)% ------- ------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)........ $ 15,376 Ratio of Expenses to Average Net Assets (1)(2)...................................... 1.70%** Ratio of Net Investment Income to Average Net Assets (1)(2)............................... 0.62%** Portfolio Turnover Rate...................... 137%
- ------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income.................................. $ 0.09 Ratios before expense limitation: Expenses to Average Net Assets........... 3.13%** Net Investment Loss to Average Net Assets.................................. (0.48)%**
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management fee calculated at an annual rate of 1.10% of the average daily net assets of the Latin American 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 1.70% of the average daily net assets of the Class A shares and 1.95% of the average daily net assets of the Class B shares. In the fiscal period ended December 31, 1995, the Adviser waived management fees and/or reimbursed expenses totalling $146,000 for the Portfolio. * Commencement of Operations. ** Annualized. 13 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-eight 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 offers Class A shares and, except for the International Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class B shares. Each portfolio has its own investment objective and policies designed to meet its specific goals. The investment objective of each Portfolio described in this Prospectus is as follows: -The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of issuers throughout the world, including U.S. issuers. -The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers. -The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers with equity market capitalizations of less than $1 billion. -The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Asian issuers. -The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities 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 equity securities 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 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 equity securities of emerging country issuers. -The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers in accordance with EAFE country (as defined in "Investment Objective and Policies" below) weightings determined by the Adviser. 14 -The GOLD PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of foreign and domestic issuers engaged in gold-related activities. 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 equity securities of small- to medium-sized corporations. -The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing in growth-oriented equity securities of large capitalization companies. -The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small corporations. -The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued equity securities 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 equity securities 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 equity securities 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. 15 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, 1995 had approximately $57.4 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 Class A shares of each Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Class B shares, offered only by the Multiclass Portfolios, are offered at net asset value with no sales commission, but with a 12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the Class B shares' average daily net assets on an annualized basis. Share purchases may be made by sending investments directly to the Fund or through the Distributor. Shares in a Portfolio account opened prior to January 2, 1996 were designated Class A shares on January 2, 1996. For a Multiclass Portfolio account opened on or after January 2, 1996 (a "New Multiclass Account"), the minimum initial investment is $500,000 for Class A shares of each Multiclass Portfolio and $100,000 for Class B shares of each Multiclass Portfolio. The International Equity Portfolio is currently closed to new investors with the exception of certain Morgan Stanley customers. The minimum initial investment for Class A shares of the International Small Cap Portfolio is $500,000. Certain exceptions to the foregoing minimums apply to (1) shares in a Multiclass Portfolio account opened prior to January 2, 1996 (each, a "Pre-1996 Multiclass Account") with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the Adviser and its affiliates; and (3) certain advisory or asset allocation accounts, such as Total Funds Management accounts, managed by Morgan Stanley or its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves the right in its sole discretion to determine which of such advisory or asset allocation accounts shall be Managed Accounts. For information regarding Managed Accounts, please contact your Morgan Stanley account representative or the Fund at the telephone number provided on the cover of this Prospectus. Shares in a Pre-1996 Multiclass Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts." See "Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from Class A to Class B Shares." 16 The minimum subsequent investment for each Portfolio account is $1,000 (except for automatic reinvestment of dividends and capital gains distributions for which there is no minimum). Such subsequent investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. See "Purchase of Shares -- Additional Investments." HOW TO REDEEM Class A shares of each Portfolio or Class B shares of each Multiclass Portfolio may be redeemed at any time, without cost, at the net asset value per share of shares of the applicable class next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. Certain redemptions may cause involuntary redemption or automatic conversion. Class A or Class B shares held in New Multiclass Accounts are subject to involuntary redemption if shareholder redemption(s) of such shares reduces the value of such account to less than $100,000 for a continuous 60-day period. Involuntary redemption does not apply to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B Accounts, regardless of the value of such accounts. Class A shares in a New Multiclass Account will convert to Class B shares if shareholder redemption(s) of such shares reduces the value of such account to less than $500,000 for a continuous 60-day period. Class B shares in a New Multiclass Account will convert to Class A shares if shareholder purchases of additional Class B shares or market activity cause the value of the Class B shares in the New Multiclass Account to increase to $500,000 or more. If a shareholder reduces its total investment in Class A shares of the International Small Cap Portfolio to less than $500,000, the investment may be subject to redemption. See "Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and "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 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. 17 INVESTMENT OBJECTIVES AND POLICIES The investment objective of each Portfolio is 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 equity securities of issuers throughout the world, including U.S. issuers. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, and 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. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. 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 equity securities of non-U.S. issuers. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, and rights and warrants to purchase common stocks. At least 65% of the total assets of the Portfolio will be invested in such 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 18 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. 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 equity securities of companies domiciled in developed countries, but may also be made in equity securities of companies domiciled in developing countries as well. Although the Portfolio intends to invest primarily in equity securities listed on stock exchanges, it will also invest in equity 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 equity securities 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. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. 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 equity securities of non-U.S. issuers with equity market capitalizations of less than $1 billion. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, and rights and warrants to purchase common stocks. At least 65% of the total assets of the Portfolio will be invested in such equity securities under normal circumstances. 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. 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 equity securities 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 equity securities listed on stock exchanges, it may also invest in equity 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 19 circumstances, invest in equity securities 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. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. THE ASIAN EQUITY PORTFOLIO The investment objective of the Asian 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 equity securities which are traded on recognized stock exchanges of the countries in Asia described below and in equity securities 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 equity 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. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, and 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. 20 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 -- Foreign Investment." See also "Investment Objectives and Policies" in the Statement of Additional Information. Although the Portfolio intends to invest primarily in equity securities listed on stock exchanges, it will also invest in equity 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 "Statement of Additional Information -- Forward Foreign Currency Exchange Contracts" in this Prospectus. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. THE EUROPEAN EQUITY PORTFOLIO The investment objective of the European Equity Portfolio is to provide long-term capital appreciation. The Portfolio seeks to achieve this objective by investing primarily in equity securities 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 equity securities of issuers located in the smaller and emerging markets of Europe. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, and 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 equity securities listed on stock exchanges, it will also invest in equity 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 equity securities of companies domiciled in developed countries, but may also be made in equity securities of companies domiciled in developing countries as well. Although the Portfolio intends to invest primarily in 21 equity 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 equity securities 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. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. THE JAPANESE EQUITY PORTFOLIO The investment objective of the Japanese Equity Portfolio is to provide long-term capital appreciation. The Portfolio seeks to achieve this objective by investing primarily in equity securities of Japanese issuers. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, and rights and warrants to purchase common stocks. 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 Ratings Group ("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. 22 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. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. 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 23 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. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, rights and warrants to purchase common stocks, equity interests in trusts or partnerships, and American, Global or other types of Depositary Receipts. See "Additional Investment Information -- Depositary Receipts." 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. 24 Equity 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" below. 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 under "Additional Investment Information -- Temporary Investments" below. 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 -- Lower Rated Debt Securities." 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, purchase and write (sell) put and call options on securities, foreign currency and on foreign currency futures contracts, and 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 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, 25 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 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. Any remaining assets of the Portfolio not invested as described above may be invested in certain securities or obligations as set forth in "Additional Investment Information" below. ADDITIONAL INVESTMENT INFORMATION 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 26 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. 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. FOREIGN INVESTMENT. 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 27 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. 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. 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 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. 28 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. 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. 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. 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 29 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 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. 30 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 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 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 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, 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 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. 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 31 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 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. 32 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." 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. 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 33 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. 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 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 or delayed delivery securities 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. 34 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." 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 net 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 the Latin American Portfolio is not subject to such limits on borrowing and may borrow from banks and other entities in amounts not in excess of 33 1/3% of its total assets (including the amount borrowed) less liabilities; (iii) 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 management 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 35 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 ANNUAL OPERATING EXPENSES AFTER FEE MANAGEMENT WAIVERS ABSENT FEE --------------------- PORTFOLIO WAIVERS CLASS A CLASS B - ---------------------------------------- ----------- -------- -------- Global Equity 0.80% 1.00% 1.25% International Equity 0.80% 1.00% 1.25% International Small Cap 0.95% 1.15% N/A Asian Equity 0.80% 1.00% 1.25% European Equity 0.80% 1.00% 1.25% Japanese Equity 0.80% 1.00% 1.25% Latin American 1.10% 1.70% 1.95%
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, 1995, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $57.4 billion, including approximately $41.9 billion under active management and $15.5 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 is now a Principal of Morgan Stanley. 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. 36 ASIAN EQUITY PORTFOLIO -- EAN WAH CHIN. 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. 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 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 an agreement between the Adviser and The Chase Manhattan Bank, N.A. ("Chase"), Chase provides certain administrative services to the Fund. In a merger completed on September 1, 1995, Chase succeeded to all of the rights and obligations under the U.S. Trust Administration Agreement between the Adviser and the United States Trust Company of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegated its administration responsibilities to Chase Global Funds Services Company 37 ("CGFSC"), formerly known as Mutual Funds Service Company, which after the merger with Chase is a subsidiary of Chase and will continue to provide certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by CGFSC. 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. CGFSC'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. 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 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. The Portfolio is required under Colombian law to have a local administrator in Colombia. CitiTrust S.A. (the "Colombian Administrator"), a Colombian Trust Company, acts as the Portfolio's Colombian administrator pursuant to an agreement with the Portfolio (the "Colombian Agreement"). Under the Colombian Agreement, the Columbian Administrator performs various services for the Portfolio, including effecting all foreign exchange transactions related to the Portfolio's foreign capital with the Central Bank of Colombia, effecting all foreign 38 exchange transactions related to the Portfolio's investments in Colombia and obtaining all approvals required for the Portfolio to make remittances of income and capital gains and the repatriation of the Portfolio's investment pursuant to Colombian law. For its services, the Colombian Administrator is paid an annual fee of $1,000 plus .20% per transaction. The principal office of the Colombian Administrator is located at Sociedad Fiduciaria International S.A., 8-89, Piso 2, Santa Fe de Bogota, Colombia. The Colombian Agreement is terminable upon 30 days' notice by either party. The Colombian Administrator may be replaced only by an entity authorized to act as a joint manager of a managed portfolio of bonds and securities under Colombian 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. The Portfolios currently offer only the classes of shares offered by this Prospectus. The Portfolios may in the future offer one or more classes of shares with features, distribution expenses or other expenses that are different from those of the classes currently offered. The Fund has adopted a Plan of Distribution with respect to the Class B shares of each Multiclass Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a "Plan"). Under each Plan, the Distributor is entitled to receive from each Multiclass Portfolio a distribution fee, which is accrued daily and paid quarterly, of 0.25% of the Class B shares' average daily net assets on an annualized basis. The distributor expects to reallocate most of its fee to its investment representatives. The Distributor may, in its discretion, voluntarily waive from time to time all or any portion of its distribution fee and each of the Distributor and the Adviser is free to make additional payments out of its own assets to promote the sale of Fund shares, including payments that compensate financial institutions for distribution services or shareholder services. Each Plan is designed to compensate the Distributor for its services, not to reimburse the Distributor for its expenses, and the Distributor may retain any portion of the fee that it does not expend in fulfillment of its obligations to the Fund. 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. PURCHASE OF SHARES Class A shares of each Portfolio and Class B shares of each Multiclass Portfolio may be purchased, without sales commission, at the net asset value per share next determined after receipt of the purchase order by the Portfolio. See "Valuation of Shares." 39 MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES For a Multiclass Portfolio account opened on or after January 2, 1996 (a "New Multiclass Account"), the minimum initial investment and minimum account size are $500,000 for Class A shares of each Portfolio and $100,000 for Class B shares of each Multiclass Portfolio. The International Equity Portfolio is currently closed to new investors, with the exception of certain Morgan Stanley customers. The minimum initial investment for Class A shares of the International Small Cap Portfolio is $500,000. Managed Accounts may purchase Class A shares without being subject to such minimum initial investment or minimum account size requirements for a Portfolio account. Officers of the Adviser and its affiliates are subject to the minimums for a Portfolio account, except they may purchase Class B shares subject to a minimum initial investment and minimum account size of $5,000 for a Multiclass Portfolio account. If the value of a New Multiclass Account containing Class A shares falls below $500,000 (but remains at or above $100,000) because of shareholder redemption(s), the Fund will notify the shareholders, and if the account value remains below $500,000 (but remains at or above $100,000) for a continuous 60-day period, the Class A shares in such account will convert to Class B shares and will be subject to the distribution fee and other features applicable to the Class B shares. The Fund, however, will not convert Class A shares to Class B shares based solely upon changes in the market that reduce the net asset value of shares. Under current tax law, conversions between share classes are not a taxable event to the shareholder. Shares in a Portfolio account opened prior to January 2, 1996 were designated Class A shares on January 2, 1996. Shares in a Multiclass Portfolio account opened prior to January 2, 1996 (each, a "Pre-1996 Multiclass Account") with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account") remained Class A shares regardless of account size thereafter. Except for shares in a Managed Account, shares in a Pre-1996 Multiclass Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. Grandfathered Class A Accounts and Managed Accounts are not subject to conversion from Class A shares to Class B shares. Investors may also invest in the Fund by purchasing shares through a trust department, broker, dealer, agent, financial planner, financial services firm or investment adviser. An investor may be charged an additional service or transaction fee by that institution. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts." The Fund reserves the right to modify or terminate the conversion features of the shares as stated above at any time upon 60-days' notice to shareholders. MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES If the value of a New Multiclass Account falls below $100,000 because of shareholder redemptions(s), the Fund will notify the shareholder, and if the account value remains below $100,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. The Fund, however, will not redeem shares based solely upon changes in the market that reduce the net asset value of shares. 40 For purposes of redemptions by the Fund, the foregoing minimum account size requirements do not apply to New Multiclass Accounts containing Class B shares held by officers of the Adviser or its affiliates. However, if the value of such account held by an officer of the Adviser or its affiliates falls below $5,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $5,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed Accounts are not subject to involuntary redemption. If a shareholder reduces its total investment in Class A shares of the International Small Cap Portfolio to less than $500,000, the investment may be subject to redemption. The Fund reserves the right to modify or terminate the involuntary redemption features of the shares as stated above at any time upon 60-days' notice to shareholders. CONVERSION FROM CLASS B TO CLASS A SHARES If the value of Class B shares in a Multiclass Portfolio account increases, whether due to shareholder share purchases or market activity, to $500,000 or more, the Class B shares will convert to Class A shares. Under current tax law, such conversion is not a taxable event to the shareholder. Class A shares converted from Class B shares are subject to the same minimum account size requirements that are applicable to New Multiclass Accounts containing Class A shares, as stated above. The Fund reserves the right to modify or terminate this conversion feature at any time upon 60-days' notice to shareholders. INITIAL PURCHASES DIRECTLY FROM THE FUND The Fund's determination of an investor's eligibility to purchase shares of a given class will take precedence over the investor's selection of a class. Assuming the investor is eligible for the class, the Fund will select the most favorable class for the investor, if the investor has not done so. 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 Class A shares of each Portfolio and $100,000 minimum for Class B shares of each Multiclass 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. 41 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 class 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, the class selected, and the account number assigned to you) as follows: Chase Manhattan Bank, N.A. One Manhattan Plaza New York, NY 10081-1000 ABA #021000021 DDA #910-2-733293 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (Portfolio name, your account number, your account name) Please call the Funds at 1-800-548-7786 prior to wiring funds. C. Complete and sign the Account Registration Form and mail it to the address shown thereon. Purchase orders for shares of the Portfolios which are received prior to the regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed at the price computed on the date of receipt as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Federal Funds purchase orders will be accepted only on a day on which the Fund and Chase (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring Federal 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, the portfolio name and the class selected 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, 42 you are requested to notify one of the Fund's representatives (toll-free 1-800-548-7786) prior to the wire date. Additional investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. OTHER PURCHASE INFORMATION The purchase price of the Class A and Class B 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 as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends. The net asset value of Class B shares will generally be lower than the net asset value of Class A shares as a result of the distribution expense charged to Class B shares. It is expected, however, that the net asset value per share of the two classes will tend to converge immediately after the recording of dividends which will differ by approximately the amount of the distribution expense accrual differential between the classes. 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 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 the Distributor. EXCESSIVE TRADING Frequent trades involving either substantial portfolio 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 Portfolios and the Portfolios' performance, the Fund may in its discretion bar a stockholder that engages in excessive trading of shares of any class 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 class of a portfolio of the Fund within any 120-day period. As an example, exchanging shares of portfolios of the Fund as follows amounts to excessive trading: exchanging Class A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class A shares of Portfolio B for Class A shares of Portfolio C and again exchanging Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day 43 period. 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, such as TFM Accounts, managed or advised by MSAM and/or any of its affiliates. 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 Class A shares of each Portfolio or Class B shares of each Multiclass Portfolio at the next determined net asset value of shares of the applicable class. 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 Class A or Class B 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 Chase Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913. "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 class and 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. 44 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 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. 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 FEATURES You may exchange shares that you own in any Portfolio for shares of any other available portfolio(s) of the Fund (other than the International Equity Portfolio, which is closed to new investors). In exchanging for shares of a portfolio with more than one class, the class of shares you receive in the exchange will be determined in the same manner as any other purchase of shares and will not be based on the class of shares surrendered for the exchange. Consequently, the same minimum initial investment and minimum account size for determining the class of shares received in the exchange will apply. See "Purchase of Shares." Shares of the portfolios may be exchanged by mail or telephone. The privilege to exchange shares by telephone is automatic and made available 45 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. The exchange privilege may be modified or terminated by the Fund at any time upon 60-days' notice to shareholders. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name, class of shares and account number of your current Portfolio, the name(s) of the portfolio(s) and class(es) of shares 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, class of shares and account number of your current Portfolio, the name(s) 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 class(es) of the portfolios involved in the exchange of shares 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. Transferring the registration of shares may affect the eligibility of your account for a given class of the Portfolio's shares may result in involuntary conversion or redemption of your shares. See "Purchase of Shares" above. VALUATION OF SHARES The net asset value per share of a class of shares of each of the Portfolios is determined by dividing the total market value of the Portfolio's investments and other assets attributable to such class, less any liabilities attributable to such class, by the total number of outstanding shares of each class of the Portfolio. Net asset value is calculated separately for each class of the Portfolios. 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. 46 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 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. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends for the class. Dividends will differ by approximately the amount of the distribution expense accrual differential among the classes. The net asset value of Class B shares will generally be lower than the net asset value of the Class A shares as a result of the distribution expenses charged to Class B shares. PERFORMANCE INFORMATION The Fund may from time to time advertise the "total return" for each class 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 class of 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 in the same class 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. The performance figures for Class B shares will generally be lower than those for Class A shares because of the distribution fee charged to Class B shares. 47 DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions for a class of shares 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 realized gains, if any, after reduction for any available tax loss carryforwards 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 monthly 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. Because of the distribution fee and any other expenses that may be attributable to the Class B shares, the net income attributable to and the dividends payable on Class B shares will be lower than the net income attributable to and the dividends payable on Class A shares. As a result, the net asset value per share of the classes of the Portfolios will differ at times. Expenses of the Portfolios allocated to a particular class of shares thereof will be borne on a pro rata basis by each outstanding share of that class. TAXES The following summary of certain 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. 48 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, exchange or redemption of shares may result in taxable gain or loss to the selling, exchanging or redeeming shareholder, depending upon whether the fair market value of the sale, exchange or redemption proceeds exceeds or is less than the Shareholder's adjusted basis in the sold, exchanged or 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. The conversion of Class A shares to Class B shares should not be a taxable event to the shareholder. 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 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. 49 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 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, as amended and restated, permit the Fund to issue up to 34 billion 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. Subject to the notice period to shareholders with respect to shares held by shareholders, 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 50 respect to such classes. The shares of common stock of each Portfolio are currently classified into two classes, the Class A shares and the Class B shares, except for the International Small Cap, Money Market and Municipal Money Market Portfolios, which only offer Class A shares. 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 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. In addition, the Adviser 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 As of September 1, 1995, domestic securities and cash are held by Chase which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians 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. MSTC may also hold certain domestic assets for the Fund. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Chase Global Funds Services 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. 51
MORGAN STANLEY INSTITUTIONAL FUND, INC. GLOBAL EQUITY, INTERNATIONAL EQUITY, INTERNATIONAL SMALL CAP, ASIAN EQUITY, EUROPEAN EQUITY, JAPANESE EQUITY AND LATIN AMERICAN PORTFOLIOS P.O. BOX 2798, BOSTON, MA 02208-2798 - --------------------------------------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - --------------------------------------------------------------------------------------------------------------- ACCOUNT INFORMATION If you need assistance in filling out this form Fill in where applicable for the Morgan Stanley Institutional Fund, please contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all items except signature, and mail to the Fund at the address above. - --------------------------------------------------------------------------------------------------------------- A) REGISTRATION 1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / First Name Initial Last Name 2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / (RIGHTS OF First Name Initial Last Name SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / PRESUMED UNLESS First Name Initial Last Name TENANCY IN COMMON IS INDICATED) - --------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / TRUSTS AND OTHERS Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Fund for additional documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / be required to set up account and to authorize transactions. Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED) / / TRUST __________________________________ / / OTHER (Specify) ______________________________ - --------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / / Please fill in completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / / telephone number(s). Home Business Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / / / / United States / / Resident / /Non-Resident Alien: Citizen Alien Indicate Country of Residence _________ - --------------------------------------------------------------------------------------------------------------- C) TAXPAYER PART 1. Enter your Taxpayer C) IMPORTANT TAX INFORMATION IDENTIFICATION Identification Number. For most You (as a payee) are required by NUMBER individual taxpayers, this is your law to provide us (as payer) with If the account is in Social Security Number. your correct Taxpayer Identification more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification PERSON WHOSE TAXPAYER OR Number will be subject to backup IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends, IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments. A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with is circled, the number / / Check this box if you are your correct taxpayer identification will be considered to be NOT subject to Backup number, you may be subject to that of the last name Withholding under the a $50 penalty imposed by the Internal listed. For Custodian provisions of Section Revenue Service. account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an (Uniform Gifts/Transfers Revenue Code. additional tax; the tax liability of to Minor Acts), give the persons subject to backup withholding Social Security Number will be reduced by the amount of tax of the minor. withheld. If withholding results in an overpayment of taxes, a refund may be obtained. You may be notified that you are subject to backup withholding under Section 3406(a)(1)(C) of the Internal Revenue Code because you have underreported interest or dividends or you were required to but failed to file a return which would have included a reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - --------------------------------------------------------------------------------------------------------------- D) PORTFOLIO AND For Purchase of the following Portfolio(s): CLASS SECTION GLOBAL EQUITY PORTFOLIO / / Class A Shares $____ / / Class B Shares $____ (Class A shares INTERNATIONAL SMALL CAP PORTFOLIO / / Class A Shares $____ / / Class B Shares $____ minimum $500,000 EUROPEAN EQUITY PORTFOLIO / / Class A Shares $____ / / Class B Shares $____ for each Portfolio LATIN AMERICAN PORTFOLIO / / Class A Shares $____ / / Class B Shares $____ and Class B shares INTERNATIONAL EQUITY PORTFOLIO / / Class A Shares $____ / / Class B Shares $____ minimum $100,000 for ASIAN EQUITY PORTFOLIO / / Class A Shares $____ / / Class B Shares $____ the Global Equity, JAPANESE EQUITY PORTFOLIO / / Class A Shares $____ / / Class B Shares $____ International Equity, Total Initial Investment $_____________ Asian Equity, European Equity, Japenese Equity and Latin American Equity Portfolios). Please indicate Portfolio, class 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________________ / / / / / / / / / / /-/ / payment. Name of Portfolio Account No. / / Account previously established by: / / Phone exchange / / Wire on_____/ / / / / / / / / / / /-/ / Date Account No. (Check (Previously assigned by the Fund) Digit) - --------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION Income dividends and capital gains distributions (if any) to OPTION be reinvested in additional shares unless 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 REDEMPTION / / I/we hereby authorize the Fund and its ______________________ ________________ AND EXCHANGE OPTION agents to honor any telephone requests Name of COMMERCIAL Bank Bank Account No. Please select at time of to wire redemption proceeds to the (Not Savings Bank) initial application if you commercial bank indicated at right and/or ________________ wish to redeem shares or mail redemption proceeds to the name and Bank ABA No. exchange shares by telephone. address in which my/our fund account is A SIGNATURE GUARANTEE IS registered if such requests are believed REQUIRED IF BANK ACCOUNT IS to be authentic. _________________________________________________ NOT REGISTERED IDENTICALLY TO YOUR FUND ACCOUNT. THE FUND AND THE FUND'S TRANSFER AGENT WILL Name(s) in which your BANK Account is Established EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT INSTRUCTIONS COMMUNICATED BY TELEPHONE ARE _________________________________________________ TELEPHONE REQUESTS FOR GENUINE. THESE PROCEDURES INCLUDE REQUIRING Bank's Street Address REDEMPTIONS OR EXCHANGE THE INVESTOR TO PROVIDE CERTAIN PERSONAL WILL NOT BE HONORED UNLESS IDENTIFICATION INFORMATION AT THE TIME AN _________________________________________________ THE BOX IS CHECKED. ACCOUNT IS OPENED AND PRIOR TO EFFECTING EACH City State Zip 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 In addition to the account _________________________________________________________________ statement sent to my/our Name registered address, I/we _________________________________________________________________ hereby authorize the fund to mail duplicate _________________________________________________________________ statements to the name and Address address provided at right. _________________________________________________________________ City State Zip Code - --------------------------------------------------------------------------------------------------------------- I) DEALER INFORMATION _______________________ _______________________________ ___________ Representative Name Representative No. Branch No. - --------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF The undersigned certify that I/we have full authority and legal ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE. (X) (X) __________________________________ ______________________________________ 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 Financial Highlights.............................. 6 Prospectus Summary................................ 14 Investment Objectives and Policies................ 18 Additional Investment Information................. 26 Investment Limitations............................ 35 Management of the Fund............................ 35 Purchase of Shares................................ 40 Redemption of Shares.............................. 44 Shareholder Services.............................. 46 Valuation of Shares............................... 46 Performance Information........................... 47 Dividends and Capital Gains Distributions......... 48 Taxes............................................. 48 Portfolio Transactions............................ 50 General Information............................... 51 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 - --------------------------------------- - --------------------------------------- - --------------------------------------- - --------------------------------------- - -------------------------------------------------------------------------------- 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, or mutual fund, which offers redeemable shares in a series of diversified and non-diversified investment portfolios ("portfolios"). The Fund currently consists of twenty-eight portfolios representing a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. This prospectus (the "Prospectus") pertains to the Class A and the Class B shares of the Emerging Markets Portfolio and the Emerging Markets Debt Portfolio (the "Portfolios"). On January 2, 1996, the Portfolios began offering two classes of shares, the Class A shares and the Class B shares, except for the Money Market, Municipal Money Market and International Small Cap Portfolios which only offer Class A shares. All shares of the Portfolios owned prior to January 2, 1996 were redesignated Class A shares on January 2, 1996. The Class A and Class B shares currently offered by the Portfolios have different minimum investment requirements and fund expenses. 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 EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities 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 EMERGING MARKETS PORTFOLIO MAY INVEST IN EQUITY SECURITIES OF RUSSIAN COMPANIES. RUSSIA'S SYSTEM OF SHARE REGISTRATION AND CUSTODY INVOLVES CERTAIN RISKS OF LOSS THAT ARE NOT NORMALLY ASSOCIATED WITH INVESTMENTS IN OTHER SECURITIES MARKETS. SEE "ADDITIONAL INVESTMENT INFORMATION -- RUSSIAN SECURITIES TRANSACTIONS." 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, 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, MicroCap, 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 and Municipal Bond 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, 1996, 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, 1996. FUND EXPENSES The following table illustrates the 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 Class A..................................................................... None None Class B..................................................................... None None Maximum Sales Load Imposed on Reinvested Dividends Class A..................................................................... None None Class B..................................................................... None None Deferred Sales Load Class A..................................................................... None None Class B..................................................................... None None Redemption Fees Class A..................................................................... None None Class B..................................................................... None None Exchange Fees Class A..................................................................... None None Class B..................................................................... None None ANNUAL FUND OPERATING EXPENSES - ------------------------------------------------------------------------------ (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fee* Class A..................................................................... 1.25% 1.00% Class B..................................................................... 1.25% 1.00% 12b-1 Fees Class A..................................................................... None None Class B..................................................................... 0.25% 0.25% Other Expenses Class A..................................................................... 0.47% 0.75% Class B..................................................................... 0.47% 0.75% ----------- ----------- Total Operating Expenses* Class A..................................................................... 1.72% 1.75% Class B..................................................................... 1.97% 2.00% ----------- ----------- ----------- -----------
- ------------------------------ *The Adviser has agreed to waive its management fees and/or to reimburse the Portfolios, if necessary, if such fees would cause the Portfolios' total annual operating expenses, as a percentage of average daily net assets, to exceed 1.75% for the Class A shares and 2.00% for the Class B shares. The management fees are 1.25% for the Emerging Markets Portfolio and 1.00% for the Emerging Markets Debt Portfolio. The Adviser reserves the right to terminate any of its fee waivers and/or expense reimbursements at any time in its sole discretion. For further information on Fund expenses, see "Management of the Fund." 2 The purpose of the table above is to assist the investor in understanding the various expenses that an investor in the Portfolios will bear directly or indirectly. The Class A expenses and fees for the Portfolios are based on actual figures for the fiscal year ended December 31, 1995. The Class B expenses and fees for each Portfolio are based on estimates, assuming that the average daily net assets of the Class B shares of each Portfolio will be $50,000,000. "Other Expenses" include Board of Directors' fees and expenses, amortization of organizational costs, filing fees, professional fees and costs for shareholder reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the equivalent of the maximum front-end sales charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). 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 Class A.......................................................... $ 17 $ 54 $ 93 $ 203 Class B.......................................................... 20 62 106 230 Emerging Markets Debt Portfolio Class A.......................................................... 18 55 95 206 Class B.......................................................... 20 63 108 233
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 the Portfolios, if necessary, if in any fiscal year the sum of the Portfolio's expenses exceeds the limit set by applicable state laws. 3 FINANCIAL HIGHLIGHTS The following table provides financial highlights for the Class A shares for the Emerging Markets and Emerging Markets Debt Portfolios for each of the periods presented. The audited financial highlights for the Class A shares for the fiscal year ended December 31, 1995 are part of the Fund's financial statements which appear in the Fund's December 31, 1995 Annual Report to Shareholders and which are included in 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 included in the Statement of Additional Information. Additional performance information for the Class A shares of the Portfolios 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. Financial highlights are not available for the new Class B shares since they were not offered as of December 31, 1995. 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. 4 EMERGING MARKETS PORTFOLIO
TWO SEPTEMBER MONTHS YEAR YEAR 25, ENDED ENDED ENDED YEAR 1992* TO DECEMBER DECEMBER DECEMBER ENDED OCTOBER 31, 31, 31, DECEMBER 31, 1992 1992 1993 1994 31, 1995 --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD................. $ 10.00 $ 10.11 $ 10.22 $ 19.00 $ 16.30 --------- --------- --------- --------- --------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income/(Loss) (1)................... -- -- (0.01) (0.04) 0.08 Net Realized and Unrealized Gain/ (Loss) on Investments....................................... 0.11 0.11 8.79 (1.69) (2.05) --------- --------- --------- --------- --------- Total from Investment Operations................... 0.11 0.11 8.78 (1.73) (1.97) --------- --------- --------- --------- --------- DISTRIBUTIONS Net Investment Income.............................. -- -- -- -- (0.06) Net Realized Gain.................................. -- -- -- (0.97) (1.13) --------- --------- --------- --------- --------- Total Distributions................................ -- -- -- (0.97) (1.19) --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD....................... $ 10.11 $ 10.22 $ 19.00 $ 16.30 $ 13.14 --------- --------- --------- --------- --------- TOTAL RETURN......................................... 1.10% 1.09% 85.91% (9.63)% (12.77)% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)................ $28,806 $74,219 $735,352 $929,638 $876,591 Ratio of Expenses to Average Net Assets (1)(2)....................................... 1.75%** 1.75%** 1.75% 1.75% 1.72% Ratio of Net Investment Gain/(Loss) to Average Net Assets (1)(2)....................................... (0.53)%** (0.33)%** (0.06)% (0.26)% 0.60% Portfolio Turnover Rate.............................. 0% 2% 52% 32% 54% - ------------------------
(1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income........ $ 0.02 $ 0.00 $ 0.01 N/A N/A Ratios before expense limitation: Expenses to Average Net Assets.................... 4.82%** 2.48%** 1.79% N/A N/A Net Investment Gain/(Loss) to Average Net Assets..................................... (3.60)%** (1.06)%** (0.10)% N/A N/A
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 2.00% of the average net assets of the Class B shares. The Adviser did not waive fees or reimburse expenses for the years ended December 31, 1994 and 1995. 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. 5 EMERGING MARKETS DEBT PORTFOLIO
PERIOD FROM FEBRUARY 1, 1994* YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1994 1995 ----------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD............................................ $ 10.00 $ 8.59 -------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income......................................................... 0.50 1.36 Net Realized and Unrealized Gain/(Loss) on Investments........................ (1.91) 0.91 -------- ------------- Total from Investment Operations.............................................. (1.41) 2.27 -------- ------------- DISTRIBUTIONS Net Investment Income......................................................... -- (1.86) Net Realized Gain............................................................. (0.41) -------- ------------- Total Distributions......................................................... -- (2.27) -------- ------------- NET ASSET VALUE, END OF PERIOD.................................................. $ 8.59 $ 8.59 -------- ------------- -------- ------------- TOTAL RETURN.................................................................... (14.10)% 28.23% -------- ------------- -------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)........................................... $ 144,949 $ 181,878 Ratio of Expenses to Average Net Assets......................................... 1.49%** 1.75% Ratio of Net Investment Income to Average Net Assets............................ 9.97%** 14.70% Portfolio Turnover Rate......................................................... 273% 406% - ------------------------
* Commencement of Operations. ** Annualized. 6 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-eight 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 offers Class A shares and, except for the International Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class B shares. Each portfolio has its own investment objective and policies designed to meet its specific goals. The investment objective of each Portfolio described in this Prospectus is as follows: -The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities 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 equity securities 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 equity securities 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 equity securities of European issuers. -The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities 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 equity securities of non-U.S. issuers. -The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers in accordance with EAFE country (as defined in "Investment Objectives and Policies" below) weightings determined by the Adviser. -The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers with equity market capitalizations of under $1 billion. 7 -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 equity securities of small- to medium-sized corporations. -The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing in growth-oriented equity securities of medium and large capitalization companies. -The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small corporations. -The SMALL CAP VALUE EQUITY PORTFOLIO seeks long-term total return by investing in undervalued equity securities 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 equity securities 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 equity securities 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. 8 -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. 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, 1995 had approximately $57.4 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 Class A shares of each Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Class B shares of each Portfolio are offered at net asset value with no sales commission, but with a 12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the Class B shares' average daily net assets on an annualized basis. Share purchases may be made by sending investments directly to the Fund or through the Distributor. Shares in a Portfolio account opened prior to January 2, 1996 (each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996. For a Portfolio account opened on or after January 2, 1996 (a "New Account"), the minimum initial investment is $500,000 for Class A shares and $100,000 for Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the Adviser and its affiliates; and (3) certain advisory or asset allocation accounts, such as Total Funds Management accounts, managed by Morgan Stanley or its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves the right in its sole discretion to determine which of such advisory or asset allocation accounts shall be Managed Accounts. For information regarding Managed Accounts please contact your Morgan Stanley account representative or the Fund at the telephone number provided on the cover of this Prospectus. Shares in a Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planers, financial services firms or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts, used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". See "Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from Class A to Class B Shares." 9 The minimum subsequent investment for each Portfolio account is $1,000 (except for automatic reinvestment of dividends and capital gains distributions for which there is no minimum). Such subsequent investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. See "Purchase of Shares -- Additional Investments." HOW TO REDEEM Class A shares or Class B shares of each Portfolio may be redeemed at any time, without cost, at the net asset value per share of shares of the applicable class next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. Certain redemptions may cause involuntary redemption or conversion. Class A or Class B shares held in New Accounts are subject to involuntary redemption if shareholder redemption(s) of such shares reduces the value of such account to less than $100,000 for a continuous 60-day period. Involuntary redemption does not apply to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B Accounts, regardless of the value of such accounts. Class A shares in a New Account will convert to Class B shares if shareholder redemption(s) of such shares reduces the value of such account to less than $500,000 for a continuous 60-day period. Class B shares in a New Account will convert to Class A shares if shareholder purchases of additional Class B shares or market activity cause the value of the Class B shares in the New Account to increase to $500,000 or more. See "Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and "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. The Emerging Markets Portfolio may invest in equity securities of Russian companies. The registration, clearing and settlement of securities transactions in Russia are subject to significant risks not normally associated with securities transactions in the United States and other more developed markets. See "Additional Investment Information -- Russian Securities Transactions." 10 INVESTMENT OBJECTIVES AND POLICIES The investment objective of each Portfolio is 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 equity securities of emerging country issuers. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, 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. 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, 11 (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 equity securities, 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. As of the date of this prospectus, less than 5% of the Portfolio's total assets were invested in junk bonds. 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 12 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. 13 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 14 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 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 15 "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. 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 (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. 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. 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. FOREIGN INVESTMENT. 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. 16 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 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. 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 17 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. 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. 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 18 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. 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. MONEY MARKET INSTRUMENTS. Each Portfolio is 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. 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. 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 19 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. 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." 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." 20 RUSSIAN SECURITIES TRANSACTIONS. The Emerging Markets Portfolio may invest in equity securities of Russian companies. The registration, clearing and settlement of securities transactions in Russia are subject to significant risks not normally associated with securities transactions in the United States and other more developed markets. Ownership of shares in Russian companies is evidenced by entries in a company's share register (except where shares are held through depositories that meet the requirements of the 1940 Act) and the issuance of extracts from the register or, in certain limited cases, by formal share certificates. However, Russian share registers are frequently unreliable and the Portfolio could possibly lose its registration through oversight, negligence or fraud. Moreover, Russia lacks a centralized registry to record securities transactions and registrars located throughout Russia or the companies themselves maintain share registers. Registrars are under no obligation to provide extracts to potential purchasers in a timely manner or at all and are not necessarily subject to effective state supervision. In addition, while registrars are liable under law for losses resulting from their errors, it may be difficult for the Portfolio to enforce any rights it may have against the registrar or issuer of the securities in the event of loss of share registration. Although Russian companies with more than 1,000 shareholders are required by law to employ an independent company to maintain share registers, in practice, such companies have not always followed this law. Because of this lack of independence of registrars, management of a Russian company may be able to exert considerable influence over who can purchase and sell the company's shares by illegally instructing the registrar to refuse to record transactions on the share register. Furthermore, these practices may prevent the Portfolio from investing in the securities of certain Russian companies deemed suitable by the Adviser and could cause a delay in the sale of Russian securities by the Portfolio if the company deems a purchaser unsuitable, which may expose the Portfolio to potential loss on its investment. In light of the risks described above, the Board of Directors of the Portfolio has approved certain procedures concerning the Portfolio's investments in Russian securities. Among these procedures is a requirement that the Portfolio will not invest in the securities of a Russian company unless that issuer's registrar has entered into a contract with the Portfolio's sub-custodian containing certain protective conditions including, among other things, the sub-custodian's right to conduct regular share confirmations on behalf of the Portfolio. This requirement will likely have the effect of precluding investments in certain Russian companies that the Portfolio would otherwise make. SHORT SALES. The Emerging Markets Debt Portfolio may from time to time sell securities short without limitation. 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. 21 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. 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. 22 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 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. 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 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. 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). 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 23 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 or delayed delivery securities 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. 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" below and "Investment Limitations" in the Statement of Additional Information. 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 net 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, except the Emerging Markets Debt Portfolio is not subject to such limits on borrowing and may borrow from banks and other entities in amounts not in excess of 33 1/3% of its total assets (including the amount borrowed) less liabilities; (iii) 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. LOCAL ADMINISTRATOR FOR THE EMERGING MARKETS PORTFOLIO The Emerging Markets 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 24 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. The Emerging Markets Portfolio is required under Colombian law to have a local administrator in Colombia. CitiTrust S.A. (the "Colombian Administrator"), a Colombian Trust Company, acts as the Portfolio's Colombian administrator pursuant to an agreement with the Portfolio (the "Colombian Agreement"). Under the Colombian Agreement, the Colombian Administrator performs various services for the Portfolio, including effecting the registration of the Portfolio's foreign capital with the Central Bank of Colombia, effecting all foreign exchange transactions related to the Portfolio's investments in Colombia 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 Colombian law. For its services, the Colombian Administrator is paid an annual fee of $1000 plus .20% per transaction. The principal office of the Colombian Administrator is located at Sociedad Fiduciaria International S.A., 8-89, Piso 2, Santa Fe de Bogota, Colombia. The Colombian Agreement is terminable upon 30 days' notice by either party. The Colombian Administrator may be replaced only by an entity authorized to act as a joint manager of a managed portfolio of bonds and securities under Colombian law. 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 management 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 percentages of average daily net assets set forth in the table below.
MAXIMUM TOTAL ANNUAL OPERATING EXPENSES AFTER FEE WAIVERS MANAGEMENT ------------------------- PORTFOLIO FEE CLASS A CLASS B - ------------------------------ ----------- --------- --------- Emerging Markets Portfolio 1.25% 1.75% 2.00% Emerging Markets Debt Portfolio 1.00% 1.75% 2.00%
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, 1995, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $57.4 billion, including approximately $41.9 billion under active management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. 25 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. 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 an agreement between the Adviser and The Chase Manhattan Bank, N.A. ("Chase"), Chase provides certain administrative services to the Fund. In a merger completed on September 1, 1995, Chase succeeded to all of the rights and obligations under the U.S. Trust Administration Agreement between the Adviser and United States Trust Company of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegated its administration responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service Company, which after the merger with Chase is a subsidiary of Chase and will continue to provide certain administrative services to the Fund. The Adviser supervises and monitors administrative services provided by CGFSC. 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 26 Fund. CGFSC'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. The Portfolios currently offer only the classes of shares offered by this Prospectus. The Portfolio may in the future offer one or more classes of shares with features, distribution expenses or other expenses that are different from those of the classes currently offered. The Fund has adopted a Plan of Distribution with respect to the Class B shares for each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each a "Plan"). Under each Plan, the Distributor is entitled to receive from the Portfolios a distribution fee, which is accrued daily and paid quarterly, of 0.25% of the Class B shares' average daily net assets on an annualized basis. The Distributor expects to reallocate most of its fee to its investment representatives. The Distributor may, in its discretion, voluntarily waive from time to time all or any portion of its distribution fee and each of the Distributor and the Adviser is free to make additional payments out of its own assets to promote the sale of Fund shares, including payments that compensate financial institutions for distribution services or shareholder services. Each Plan is designed to compensate the Distributor for its services, not to reimburse the Distributor for its expenses, and the Distributor may retain any portion of the fee that it does not expend in fulfillment of its obligations to the Fund. 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 CGFSC. 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. PURCHASE OF SHARES Class A and Class B 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 by the Portfolio. See "Valuation of Shares." 27 MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES For an account for either Portfolio opened on or after January 2, 1996 (a "New Account"), the minimum initial investment and minimum account size are $500,000 for Class A shares and $100,000 for Class B shares. Managed Accounts may purchase Class A shares without being subject to any minimum initial investment or minimum account size requirements for a Portfolio account. Officers of the Adviser and its affiliates are subject to the minimums for a Portfolio account, except they may purchase Class B shares subject to a minimum initial investment and minimum account size of $5,000 for a Portfolio account. If the value of a New Account containing Class A shares falls below $500,000 (but remains at or above $100,000) because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $500,000 (but remains at or above $100,000) for a continuous 60-day period, the Class A shares in such account will convert to Class B shares and will be subject to the distribution fee and other features applicable to the Class B shares. The Fund, however, will not convert Class A shares to Class B shares based solely upon changes in the market that reduce the net asset value of shares. Under current tax law, conversions between share classes are not a taxable event to the shareholder. Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996 Account") were designated Class A shares on January 2, 1996. Shares in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account") remained Class A shares regardless of account size thereafter. Except for shares in a Managed Account, shares in a Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. Grandfathered Class A Accounts and Managed Accounts are not subject to conversion from Class A shares to Class B shares. Investors may also invest in the Fund by purchasing shares through a trust department, broker, dealer, agent, financial planner, financial services firm or investment adviser. An investor may be charged an additional service or transaction fee by that institution. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planers, financial services firms or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts, used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". The Fund reserves the right to modify or terminate the conversion features of the shares as stated above at any time upon 60-days' notice to shareholders. MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES If the value of a New Account falls below $100,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $100,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. The Fund, however, will not redeem shares based solely upon changes in the market that reduce the net asset value of shares. For purposes of redemptions by the Fund, the foregoing minimum account size requirements do not apply to New Accounts containing Class B shares held by officers of the Adviser or its affiliates. However, if the value of such account held by an officer of the Adviser or its affiliates falls below $5,000 because of shareholder 28 redemptions(s), the Fund will notify the shareholder, and if the account value remains $5,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed Accounts are not subject to involuntary redemption. The Fund reserves the right to modify or terminate the involuntary redemption features of the shares as stated above at any time upon 60-days' notice to shareholders. CONVERSION FROM CLASS B TO CLASS A SHARES If the value of Class B shares in a Portfolio account increases, whether due to shareholder share purchases or market activity, to $500,000 or more, the Class B shares will convert to Class A shares. Under current tax law, such conversion is not a taxable event to the shareholder. Class A shares converted from Class B shares are subject to the same minimum account size requirements that are applicable to New Accounts containing Class A shares, as stated above. The Fund reserves the right to modify or terminate this conversion feature at any time upon 60-days' notice to shareholders. INITIAL PURCHASES DIRECTLY FROM THE FUND The Fund's determination of an investor's eligibility to purchase shares of a given class will take precedence over the investor's selection of a class. Assuming the investor is eligible for the class, the Fund will select the most favorable class for the investor, if the investor has not done so. 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 Class A shares of each Portfolio and $100,000 for Class B shares of 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 each of the Portfolios 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 class 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, the class selected and the account number assigned to you) as follows: Chase Manhattan Bank, N.A. One Manhattan Plaza New York, NY 10081-1000 ABA#021000021 DDA# 910-2-733293 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (Portfolio name, your account number, your account name) Please call the Fund at 1-800-548-7786 prior to wiring funds. C. Complete and sign the Account Registration Form and mail it to the address shown thereon. Purchase orders for shares of each Portfolio which are received prior to the regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed at the price computed on the date of receipt as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Federal Funds purchase orders will be accepted only on a day on which the Fund and Chase (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring Federal 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. -- [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. Additional investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. OTHER PURCHASE INFORMATION The purchase price of the Class A and Class B shares of the Portfolios 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 30 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 as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends. The net asset value of Class B shares will generally be lower than the net asset value of Class A shares as a result of the distribution expense charged to Class B shares. It is expected, however, that the net asset value per share of the two classes will tend to converge immediately after the recording of dividends which will differ by approximately the amount of the distribution expense accrual differential between the classes. 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 the Distributor. EXCESSIVE TRADING Frequent trades involving either substantial portfolio 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 each Portfolio and the Portfolio's performance, the Fund may in its discretion bar a stockholder that engages in excessive trading of shares of any class 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 class of a portfolio of the Fund within any 120-day period. As an example, exchanging shares of portfolios of the Fund as follows amounts to excessive trading: exchanging Class A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class A shares of Portfolio B for Class A shares of Portfolio C and again exchanging Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day period. 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, such as TFM Accounts, managed or advised by MSAM and/or any of its affiliates. 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 Class A shares or Class B shares of each Portfolio at the next determined net asset value of shares of the applicable class. On days 31 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 (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 Class A or Class B 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 Chase Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913. "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 class and 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 Chase Global Funds Services 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. 32 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 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. 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 FEATURES You may exchange shares that you own in either Portfolio for shares of any other available portfolio of the Fund (other than the International Equity Portfolio, which is closed to new investors). In exchanging for shares of a portfolio with more than one class, the class of shares you receive in the exchange will be determined in the same manner as any other purchase of shares and will not be based on the class of shares surrendered for the exchange. Consequently, the same minimum initial investment and minimum account size for determining the class of shares received in the exchange will apply. See "Purchase of Shares." Shares of the portfolios may be exchanged by mail or telephone. The privilege to exchange shares by telephone is automatic and 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. The exchange privilege may be modified or terminated by the Fund at any time upon 60-days' notice to shareholders. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name, class of shares and account number of your current portfolio, the names of the portfolio(s) and class(es) of shares 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. 33 BY TELEPHONE When exchanging shares by telephone, have ready the name, class of shares and account number of your current portfolio, the name(s) of the portfolio(s) and class(es) of shares 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 class of each of the portfolios involved in the exchange of shares 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. Transferring the registration of shares may affect the eligibility of your account for a given class of each Portfolio's shares and may result in involuntary conversion or redemption of your shares. See "Purchase of Shares" above. VALUATION OF SHARES The net asset value per share of a class of shares of the Portfolios is determined by dividing the total market value of the Portfolio's investments and other assets attributable to such class, less any liabilities attributable to such class, by the total number of outstanding shares of such class of the Portfolio. Net asset value is calculated separately for each class 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. 34 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. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends for the class. Dividends will differ by approximately the amount of the distributions expense accrual differential among the classes. The net asset value of Class B shares will generally be lower than the net asset value of the Class A shares as a result of the distribution expense charged to Class B shares. PERFORMANCE INFORMATION The Fund may from time to time advertise the total return for each class 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 class of 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 in the same class 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. The performance figures for Class B shares will generally be lower than those for Class A shares because of the distribution fee charged to Class B shares. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions for a class of shares will automatically be reinvested in additional shares of such class 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 realized gains of each Portfolio, if any, after reduction for any tax loss carryforwards 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 monthly 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. 35 Because of the distribution fee and any other expenses that may be attributable to the Class B shares, the net income attributable to and the dividends payable on Class B shares will be lower than the net income attributable to and the dividends payable on Class A shares. As a result, the net asset value per share of the classes of each Portfolio will differ at times. Expenses of each Portfolio allocated to a particular class of shares thereof will be borne on a pro rata basis by each outstanding share of that class. TAXES The following summary of certain 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 generally will qualify for the 70% dividends-received deduction for corporate shareholders. 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, exchange or redemption of shares may result in taxable gain or loss to the selling, exchanging or 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 sold, exchanged or 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. 36 The conversion of Class A shares to Class B shares should not be a taxable event to the shareholder. 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. 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 37 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. GENERAL INFORMATION DESCRIPTION OF COMMON STOCK The Fund was organized as a Maryland corporation on June 16, 1988. The Articles of Incorporation, as amended and restated, permit the Fund to issue up to 34 billion 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. Subject to the notice period to shareholders with respect to shares held by the shareholders, 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 common stock of each portfolio are currently classified into two classes, the Class A shares and the Class B shares, except for the International Small Cap, Money Market and Municipal Money Market Portfolios, which only offer Class A shares. The shares of the Portfolios, 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) 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. 38 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, the Adviser, 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 As of September 1, 1995, domestic securities and cash are held by Chase, which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians 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. MSTC may also hold certain domestic assets for the Fund. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Chase Global Funds Services 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. 39
MORGAN STANLEY INSTITUTIONAL FUND, INC. EMERGING MARKETS AND EMERGING MARKETS DEBT PORTFOLIOS P.O. BOX 2798, BOSTON, MA 02208-2798 - --------------------------------------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - --------------------------------------------------------------------------------------------------------------- ACCOUNT INFORMATION If you need assistance in filling out this form Fill in where applicable for the Morgan Stanley Institutional Fund, please contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all items except signature, and mail to the Fund at the address above. - --------------------------------------------------------------------------------------------------------------- A) REGISTRATION 1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / First Name Initial Last Name 2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / (RIGHTS OF First Name Initial Last Name SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / PRESUMED UNLESS First Name Initial Last Name TENANCY IN COMMON IS INDICATED) - --------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / TRUSTS AND OTHERS Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Fund for additional documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / be required to set up account and to authorize transactions. Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED) / / TRUST __________________________________ / / OTHER (Specify) ______________________________ - --------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / / Please fill in completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / / telephone number(s). Home Business Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / / / / United States / / Resident / /Non-Resident Alien: Citizen Alien Indicate Country of Residence _________ - --------------------------------------------------------------------------------------------------------------- C) TAXPAYER PART 1. Enter your Taxpayer C) IMPORTANT TAX INFORMATION IDENTIFICATION Identification Number. For most You (as a payee) are required by NUMBER individual taxpayers, this is your law to provide us (as payer) with If the account is in Social Security Number. your correct Taxpayer Identification more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification PERSON WHOSE TAXPAYER OR Number will be subject to backup IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends, IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments. A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with is circled, the number / / Check this box if you are your correct taxpayer identification will be considered to be NOT subject to Backup number, you may be subject to that of the last name Withholding under the a $50 penalty imposed by the Internal listed. For Custodian provisions of Section Revenue Service. account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an (Uniform Gift/Transfer Revenue Code. additional tax; the tax liability of to Minor Act), give the persons subject to backup withholding Social Security Number will be reduced by the amount of tax of the minor. withheld. If withholding results in an overpayment of taxes, a refund may be obtained. You may be notified that you are subject to backup withholding under Section 3406(a)(1)(C) of the Internal Revenue Code because you have underreported interest or dividends or you were required to but failed to file a return which would have included a reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - --------------------------------------------------------------------------------------------------------------- D) PORTFOLIO AND For Purchase of the following Portfolio(s): CLASS SELECTION Emerging Markets Portfolio / / Class A Shares $____ / / Class B Shares $____ (Class A shares Emerging Markets Debt Portfolio / / Class A Shares $____ / / Class B Shares $____ minimum $500,000 for each Portfolio Total Initial Investment $_____________ and Class B shares minimum $100,000 for each Portfolio). Please indicate Portfolio, class and amount. - --------------------------------------------------------------------------------------------------------------- E) METHOD OF Payment by: INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--SMALL CAP VALUE EQUITY, VALUE EQUITY Please AND BALANCED PORTFOLIOS) indicate manner of / / Exchange $____________ From________________ / / / / / / / / / / /-/ / payment. Name of Portfolio Account No. / / Account previously established by: / / Phone exchange / / Wire on_____/ / / / / / / / / / / /-/ / Date Account No. (Check (Previously assigned by the Fund) Digit) - --------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION Income dividends and capital gains distributions (if any) will OPTION be reinvested in additional shares unless 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 Name of COMMERCIAL Bank Bank Account No. Please select at time of to wire redemption proceeds to the (Not Savings Bank) initial application if you commercial bank indicated at rightand/or wish to redeem shares by mail redemption proceeds to the name and ________________ telephone. A SIGNATURE address in which my/our fund account is Bank ABA No. GUARANTEE IS REQUIRED IF registered if such requests are believed BANK ACCOUNT IS NOT to be authentic. _________________________________________________ REGISTERED IDENTICALLY TO The Fund and the Fund's Transfer Agent will Name(s) in which your BANK Account is Established YOUR FUND ACCOUNT. employ reasonable procedures to confirm that instructions communicated by telephone are _________________________________________________ TELEPHONE REQUESTS FOR genuine. These procedures include requiring Bank's Street Address REDEMPTIONS WILL NOT BE the investor to provide certain personal HONORED UNLESS THE BOX IS identification information at the time an _________________________________________________ CHECKED. account is opened and prior to effecting each City State Zip 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 In addition to the account _________________________________________________________________ statement sent to my/our Name registered address, I/we _________________________________________________________________ hereby authorize the fund to mail duplicate _________________________________________________________________ statements to the name and Address address provided at right. _________________________________________________________________ City State Zip Code - --------------------------------------------------------------------------------------------------------------- I) DEALER INFORMATION _______________________ _______________________________ ___________ Representative Name Representative No. Branch No. - --------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE. (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 Financial Highlights.............................. 4 Prospectus Summary................................ 7 Investment Objectives and Policies................ 11 Additional Investment Information................. 15 Investment Limitations............................ 24 Management of the Fund............................ 25 Purchase of Shares................................ 27 Redemption of Shares.............................. 31 Shareholder Services.............................. 33 Valuation of Shares............................... 34 Performance Information........................... 35 Dividends and Capital Gains Distributions......... 35 Taxes............................................. 36 Portfolio Transactions............................ 37 General Information............................... 38 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 - --------------------------------- - --------------------------------- - --------------------------------- - --------------------------------- - -------------------------------------------------------------------------------- P R O S P E C T U S ------------------------------------------------------------------------- EQUITY GROWTH PORTFOLIO EMERGING GROWTH PORTFOLIO MICROCAP 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, or mutual fund, which offers redeemable shares in a series of diversified and non-diversified investment portfolios ("portfolios"). The Fund currently consists of twenty-eight portfolios representing a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. This prospectus (the "Prospectus") pertains to the Class A and the Class B shares of the Equity Growth, Emerging Growth, MicroCap and Aggressive Equity Portfolios (the "Portfolios"). On January 2, 1996, the Portfolios began offering two classes of shares, the Class A shares and the Class B shares, except for the Money Market, Municipal Money Market and International Small Cap Portfolios which only offer Class A Shares. All shares of the Portfolios owned prior to January 2, 1996 were redesignated Class A shares on January 2, 1996. The Class A and Class B shares currently offered by the Portfolios have different minimum investment requirements and fund expenses. 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 EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of medium and large capitalization corporations. The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small-to-medium sized corporations. The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small 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. INVESTORS SHOULD NOTE THAT EACH OF THE EQUITY GROWTH AND AGGRESSIVE EQUITY PORTFOLIOS MAY 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 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 "Prospectus Summary" below. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY - -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Magnum, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value Equity, Value Equity and U.S. Real Estate Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and Municipal Bond 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, 1996, 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, 1996. FUND EXPENSES The following table illustrates the expenses and fees that a shareholder of the Portfolios indicated below will incur:
EQUITY EMERGING AGGRESSIVE GROWTH GROWTH MICROCAP EQUITY SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - ------------------------------------------------------- ----------- ----------- ----------- ----------- Maximum Sales Load Imposed on Purchases Class A.............................................. None None None None Class B.............................................. None None None None Maximum Sales Load Imposed on Reinvested Dividends Class A.............................................. None None None None Class B.............................................. None None None None Deferred Sales Load Class A.............................................. None None None None Class B.............................................. None None None None Redemption Fees Class A.............................................. None None None None Class B.............................................. None None None None Exchange Fees Class A.............................................. None None None None Class B.............................................. None None None None
EQUITY EMERGING AGGRESSIVE GROWTH GROWTH MICROCAP EQUITY ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - ------------------------------------------------------- ----------- ----------- ----------- ----------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fee (Net of Fee Waivers)* Class A.............................................. 0.52% 0.99% 1.05%+ 0.21% Class B.............................................. 0.52% 0.99% 1.05%+ 0.21% 12b-1 Fees Class A.............................................. None None None None Class B.............................................. 0.25% 0.25% 0.25%+ 0.25% Other Expenses Class A.............................................. 0.28% 0.26% 0.45%+ 0.79% Class B.............................................. 0.28% 0.26% 0.45%+ 0.79% ----------- ----------- ----------- ----------- Total Operating Expenses (Net of Fee Waivers)* Class A.............................................. 0.80% 1.25% 1.50%+ 1.00% Class B.............................................. 1.05% 1.50% 1.75%+ 1.25% ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
- ------------------------ *The Adviser has agreed to waive its management fees and/or reimburse each Portfolio, if necessary, if such fees would cause any of the total annual operating expenses of the Portfolios to exceed a specified percentage of their respective average daily net assets. Set forth below, for each Portfolio, are the management fees and total operating expenses absent such fee waivers and/or expense reimbursements as a percent of average daily net assets of the Class A shares and Class B shares, respectively, of each Portfolio. 2
TOTAL OPERATING EXPENSES ABSENT FEE WAIVERS MANAGEMENT FEES ABSENT ---------------------- PORTFOLIO FEE WAIVERS CLASS A CLASS B+ - ----------------------------------------------------------- ------------------------- --------- ----------- Equity Growth.............................................. 0.60% 0.88% 1.13% Emerging Growth............................................ 1.00% 1.26% 1.51% MicroCap................................................... 1.25% 1.50%+ 1.75% Aggressive Equity.......................................... 0.80% 1.59% 1.84%
- ------------------------------ + Estimated. These reductions became or will become effective as of the inception of each Portfolio. As a result of these reductions, the Management 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 the table above is to assist the investor in understanding the various expenses that an investor in the Portfolios will bear directly or indirectly. The Class A expenses and fees for the Equity Growth and Emerging Growth Portfolios are based on actual figures for the fiscal year ended December 31, 1995. The Class A expenses and fees for the MicroCap Portfolio are based on estimates, assuming that the average daily net assets of the Class A shares of the MicroCap Portfolio will be $50,000,000. The Class B expenses and fees for each Portfolio are based on estimates, assuming that the average daily net assets of the Class B shares of each Portfolio will be $50,000,000. "Other Expenses" include Board of Directors' fees and expenses, amortization of organizational costs, filing fees, professional fees and costs for shareholder reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the equivalent of the maximum front-end charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). 3 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 Class A.......................................................... $ 8 $ 26 $ 44 $ 99 Class B.......................................................... 11 33 58 128 Emerging Growth Portfolio Class A.......................................................... 13 40 69 151 Class B.......................................................... 15 47 82 179 MicroCap Portfolio Class A.......................................................... 15 47 * * Class B.......................................................... 18 55 * * Aggressive Equity Portfolio Class A.......................................................... 10 32 55 122 Class B.......................................................... 13 40 69 151
- ------------------------------ * Because the MicroCap Portfolio has not yet commenced operations the Fund has not projected expenses beyond the 3-year period shown for the Portfolio. 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. 4 FINANCIAL HIGHLIGHTS The following table provides financial highlights for the Class A shares of the Equity Growth, Emerging Growth and Aggressive Equity Portfolios for each of the periods presented. The audited financial highlights for the Class A shares for the fiscal year ended December 31, 1995 are part of the Fund's financial statements which appear in the Fund's December 31, 1995 Annual Report to Shareholders and which are included in the Fund's Statement of Additional Information. The Portfolios' financial highlights for each of the periods in the five years ended December 31, 1995 have been audited by Price Waterhouse LLP, whose unqualified report thereon is also included in the Statement of Additional Information. Additional performance information for the Class A shares 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. Financial highlights are not available for the MicroCap Portfolio nor for the new Class B shares since they were not offered as of December 31, 1995. 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. 5 EQUITY GROWTH PORTFOLIO
APRIL 2, TWO MONTHS 1991* TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1991 1992 1992 1993 1994 1995 ----------- ----------- ------------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD............................. $ 10.00 $ 10.66 $ 11.44 $ 11.88 $ 12.14 $ 12.02 ----------- ----------- ------------- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)......... 0.05 0.16 0.03 0.22 0.17 0.22 Net Realized and Unrealized Gain on Investments................... 0.61 0.82 0.41 0.28 0.21 4.93 ----------- ----------- ------------- ------------- ------------- ------------- Total from Investment Operations....................... 0.66 0.98 0.44 0.50 0.38 5.15 ----------- ----------- ------------- ------------- ------------- ------------- DISTRIBUTIONS Net Investment Income............. -- (0.20) -- (0.23) (0.13) (0.28) In Excess of Net Investment Income........................... -- -- -- (0.01) -- -- Net Realized Gain................. -- -- -- -- (0.37) (2.75) ----------- ----------- ------------- ------------- ------------- ------------- Total Distributions............... -- (0.20) -- (0.24) (0.50) (3.03) ----------- ----------- ------------- ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD...... $ 10.66 $ 11.44 $ 11.88 $ 12.14 $ 12.02 $ 14.14 ----------- ----------- ------------- ------------- ------------- ------------- ----------- ----------- ------------- ------------- ------------- ------------- TOTAL RETURN........................ 6.60% 9.26% 3.85% 4.33% 3.26% 45.02% ----------- ----------- ------------- ------------- ------------- ------------- ----------- ----------- ------------- ------------- ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)........................ $ 18,139 $ 36,558 $ 45,985 $ 73,789 $ 97,259 $ 158,112 Ratio of Expenses to Average Net Assets (1)(2)...................... 0.80%** 0.80% 0.80%** 0.80% 0.80% 0.80% Ratio of Net Investment Income to Average Net Assets (1)(2).......... 2.34%** 1.73% 1.93%** 1.59% 1.44% 1.57% Portfolio Turnover Rate............. 3% 38% 1% 172% 146% 186% - ------------------------------ (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 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets........................ 1.37%** 1.01% 1.11%** 0.93% 0.89% 0.88% Net Investment Income to Average Net Assets............ 1.77%** 1.52% 1.62%** 1.46% 1.35% 1.49%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 1.05% of the average daily net assets of the Class B shares. In the period ended October 31, 1991, the year ended October 31, 1992, the two months ended December 31, 1992, the years ended December 31, 1993, 1994 and 1995, the Adviser waived management fees and/or reimbursed expenses totalling $23,000, $51,000, $22,000, $68,000, $83,000 and $105,000, respectively, for the Equity Growth Portfolio. * Commencement of Operations. ** Annualized. 6 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)(2)............ 1.26%** 1.25% 1.25% 1.25%** 1.25% 1.25% Ratio of Net Investment Income/ (Loss) to Average Net Assets (1)(2)................ 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)% YEAR ENDED DECEMBER 31, 1995 ------------- NET ASSET VALUE, BEGINNING OF PERIOD....................... $ 16.12 ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income/ (Loss) (1)................. (0.18) Net Realized and Unrealized Gain/(Loss) on Investments................ 5.55 ------------- Total from Investment Operations................. 5.37 ------------- DISTRIBUTIONS Net Investment Income....... -- ------------- NET ASSET VALUE, END OF PERIOD....................... $ 21.49 ------------- ------------- TOTAL RETURN.................. 33.31% ------------- ------------- RATIO AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands).................. $ 119,378 Ratio of Expenses to Average Net Assets (1)(2)............ 1.25% Ratio of Net Investment Income/ (Loss) to Average Net Assets (1)(2)................ (0.76)% Portfolio Turnover Rate....... 25% - ------------------------------ (1) Effect of voluntary expens Per share benefit to net investment income....... $ 0.003 Ratios before expense limitation: Expenses to Average Net Assets.................. 1.26% Net Investment Income (Loss) to Average Net Assets.................. (0.77)%
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management 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 Class A shares and 1.50% of the average daily net assets of the Class B shares. In the period ended October 31, 1990, the years ended October 31, 1991 and 1992, the two months ended December 31, 1992, the years ended December 31, 1993, 1994, and 1995 the Adviser waived management fees and/or reimbursed expenses totalling $28,000, $41,000, $31,000, $18,000, $51,000, $16,000 and $18,000, respectively, for the Emerging Growth Portfolio. * Commencement of Operations. ++ Per share amounts for the year ended October 31, 1991 are based on average outstanding shares. ** Annualized. 7 AGGRESSIVE EQUITY PORTFOLIO
PERIOD FROM MARCH 8, 1995* TO DECEMBER 31, 1995 ------------------ NET ASSET VALUE, BEGINNING OF PERIOD.......................................................... $ 10.00 ------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)................................................................... 0.15 Net Realized and Unrealized Gain on Investments............................................. 3.95 ------- Total from Investment Operations.......................................................... 4.10 ------- DISTRIBUTIONS Net Investment Income....................................................................... (0.15) Net Realized Gain........................................................................... (1.78) ------- Total Distributions......................................................................... (1.93) ------- NET ASSET VALUE, END OF PERIOD................................................................ $ 12.17 ------- ------- TOTAL RETURN.................................................................................. 41.25% ------- ------- RATIO AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)......................................................... $ 28,548 Ratio of Expenses to Average Net Assets (1)(2)................................................ 1.00%** Ratio of Net Investment Income to Average Net Assets (1)(2)................................... 1.64%** Portfolio Turnover Rate....................................................................... 309% - ------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income............................................... $ 0.06 Ratios before expense limitation: Expenses to Average Net Assets........................................................... 1.59%** Net Investment Income to Average Net Assets.............................................. 1.05%**
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management fee calculated at an annual rate of 0.80% of the average daily net assets of the Aggressive Equity Portfolio. The Adviser has agreed to waive a portion of this fee and/or reimburse expenses of the Aggressive Equity Portfolio to the extent that the total operating expenses of the Aggressive Equity Portfolio exceed 1.00% of the average daily net assets of the Class A Shares and 1.25% of the average daily net assets of the Class B Shares. In the period ended December 31, 1995, the Adviser waived management fees and/or reimbursed expenses totalling $96,000 for the Aggressive Equity Portfolio. * Commencement of Operations ** Annualized 8 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-eight 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 offers Class A shares and except the International Small Cap, Money Market and Municipal Money Market Portfolios, offers Class B shares. Each portfolio has its own investment objective and policies designed to meet its specific goals. The investment objective of each Portfolio described in this Prospectus is as follows: - The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of medium and large capitalization companies. - The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small- to medium-sized corporations. - The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small 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 equity securities 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 equity securities of Asian issuers. - The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in 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 equity securities of emerging country issuers. - The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of European issuers. - The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities 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 equity securities of non-U.S. issuers. 9 - The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers with equity market capitalizations of less than $1 billion. - 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 INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers in accordance with EAFE country (as defined in "Investment Objective and Policies" below) weightings determined by the Adviser. U.S. EQUITY: - The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued equity securities 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 equity securities 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 equity securities 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. 10 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, 1995 had approximately $57.4 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 Class A shares of each Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Class B shares of each Portfolio are offered at net asset value with no sales commission, but with a 12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the Class B shares' average daily net assets on an annualized basis. Share purchases may be made by sending investments directly to the Fund or through the Distributor. Shares in a Portfolio account opened prior to January 2, 1996 (each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996. For a Portfolio account opened on or after January 2, 1996 (a "New Account"), the minimum initial investment is $500,000 for Class A shares and $100,000 for Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the Adviser and its affiliates; and (3) certain advisory or asset allocation accounts, such as Total Funds Management accounts, managed by Morgan Stanley or its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves the right in its sole discretion to determine which of such advisory or asset allocation accounts shall be Managed Accounts. For information regarding Managed Accounts, please contact your Morgan Stanley account representative or the Fund at the telephone number provided on the cover of this Prospectus. Shares in a Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". See "Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from Class A to Class B Shares." 11 The minimum subsequent investment for each Portfolio account is $1,000 (except for automatic reinvestment of dividends and capital gains distributions for which there is no minimum). Such subsequent investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. See "Purchase of Shares -- Additional Investments." HOW TO REDEEM Class A shares or Class B shares of each Portfolio may be redeemed at any time, without cost, at the net asset value per share of shares of the applicable class next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. Certain redemptions may cause involuntary redemption or automatic conversion. Class A or Class B shares held in New Accounts are subject to involuntary redemption if shareholder redemption(s) of such shares reduces the value of such account to less than $100,000 for a continuous 60-day period. Involuntary redemption does not apply to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B Accounts, regardless of the value of such accounts. Class A shares in a New Account will convert to Class B shares if shareholder redemption(s) of such shares reduces the value of such account to less than $500,000 for a continuous 60-day period. Class B shares in a New Account will convert to Class A shares if shareholder purchases of additional Class B shares or market activity cause the value of Class B shares in the New Account to increase to $500,000 or more. See "Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and "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 and MicroCap Portfolios seek long-term capital appreciation by investing primarily in small- to medium-sized companies and small companies, respectively, both of which types of companies are more vulnerable to financial and other risks than larger, more established companies, investments in these Portfolios 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, MicroCap 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 Equity Growth and Aggressive Equity 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. 12 INVESTMENT OBJECTIVES AND POLICIES The investment objective of each Portfolio is 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 equity securities of medium and large capitalization U.S. corporations and, to a limited extent, as described below, foreign corporations. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, and 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 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 equity security 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 up to 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 Depositary Receipts. 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. 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 than to 13 purchase common stock. 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 may be invested in certain securities or obligations, including derivative securities, as 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 equity securities of small- to medium-sized domestic corporations and, to a limited extent as described below, 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. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, and rights and warrants to purchase common stocks, and any similar equity interest, such as trust or partnership interests. Such equity securities may not pay dividends or distributions 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. 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 up to 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 Depositary Receipts. See "Additional Investment Information" below. The Portfolio may enter into forward foreign currency exchange contracts which provide for the purchase or sale of foreign currencies in connection with the 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 than to purchase common stock. The Portfolio will not invest in debt securities that are not rated at least 14 investment grade by either Standard & Poor's Ratings Group 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 may be invested in certain securities or obligations, including derivative securities, that are set forth in "Additional Investment Information" below. THE MICROCAP PORTFOLIO The Portfolio's investment objective is to provide long-term capital appreciation by investing primarily in growth-oriented equity securities of small domestic corporations and, to a limited extent as described below, foreign corporations. The production of any current income is incidental to this objective. Such companies generally have, at time of purchase, annual gross revenues of $150 million or less or market capitalizations of $250 million or less. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, rights and warrants to purchase common stocks, and any similar equity interest, such as trust or partnership interests. Such equity securities may or may not pay dividends or distributions 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 equity securities, including securities purchased in initial public offerings, of small companies that are early in their life cycle, but which have the potential, in the Adviser's judgement, to achieve long-term capital appreciation. The Adviser uses its judgment and research capabilities to assess economic, industry, market and company developments to select investments in promising 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 equity security which in the Adviser's judgment provides above-average potential for capital appreciation. 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 up to 25% of its total assets at the time of purchase in securities of foreign companies. The Portfolio may invest in such securities of foreign issuers directly or in the form of Depositary Receipts. See "Additional Investment Information" below. The Portfolio may enter into forward foreign currency exchange contracts which provide for the purchase or sale of foreign currencies in connection with the 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. 15 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 than to purchase common stock. The Portfolio will not invest in debt securities that are not rated at least investment grade by either Standard & Poor's Ratings Group 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. See "Additional Investment Information". Any remaining assets may be invested in certain securities or obligations, including derivative securities, as 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. With respect to the Portfolio, equity and equity-linked securities include common and preferred stocks, convertible securities, rights and warrants to purchase common stocks, options, futures, and specialty securities, such as ELKS, LYONs, PERCS of U.S., and to a limited extent, as described below, 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 "Investment Limitations." 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 earnings results. The Adviser seeks companies which will deliver surprisingly strong earnings growth. Valuation is of secondary importance to the Adviser and is viewed in the context of prospects for sustainable earnings growth and the potential for positive earnings surprises in relation to 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. 16 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 may be invested in certain securities or obligations, including derivative securities, as set forth in "Additional Investment Information" below. ADDITIONAL INVESTMENT INFORMATION 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. 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%. 17 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. 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 18 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. FOREIGN INVESTMENT. 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. 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 19 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. 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. 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. NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES. The Equity Growth and Aggressive Equity Portfolios may invest in securities that are neither listed on a stock exchange nor traded over the counter. 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 such Portfolios 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, the 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. Securities that are not registered under the Securities Act of 1933, as amended, but that can be offered and sold to qualified institutional buyers under Rule 144A under that Act will not be included within the foregoing 15% restriction if the securities are determined to be liquid. 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 Rule 144A securities. Rule 144A securities may become illiquid if qualified institutional buyers are not interested in acquiring the securities. 20 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 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." 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 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. SMALL AND MEDIUM-SIZED COMPANIES. Because the Emerging Growth and MicroCap Portfolios seek long-term capital appreciation by investing primarily in small- to medium-sized companies and small companies, respectively, both of which types of companies are more vulnerable to financial and other risks than larger, more established companies, investments in these Portfolios 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. 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 21 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 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 22 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. 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. 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-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). 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 23 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. INVESTMENT LIMITATIONS Except for the MicroCap and Aggressive Equity Portfolios, each Portfolio is a diversified investment company and is therefore subject to the following fundamental 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 MicroCap and Aggressive Equity Portfolios are non-diversified portfolios under the 1940 Act, which means that the Portfolios are not limited by the 1940 Act in the proportion of their assets that may be invested in the obligations of a single issuer. Thus, the Portfolios may invest a greater proportion of their assets in the securities of a small number of issuers and as a result will be subject to greater risk with respect to their portfolio securities. However, the Portfolios intend to comply with diversification requirements imposed by the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as regulated investment companies. 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 net 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; (iii) 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 24 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 management 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 either Portfolio to exceed the respective percentage of average daily net assets set forth below.
MAXIMUM TOTAL OPERATING EXPENSES AFTER FEE WAIVER ------------------------ PORTFOLIO MANAGEMENT FEE CLASS A CLASS B - --------------------------------------------- ----------------- ----------- ----------- Equity Growth Portfolio 0.60% 0.80% 1.05% Emerging Growth Portfolio 1.00% 1.25% 1.50% MicroCap Portfolio 1.25% 1.50% 1.75% Aggressive Equity Portfolio 0.80% 1.00% 1.25%
The fees payable by the Emerging Growth, MicroCap and Aggressive Equity Portfolios are higher than the management 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, 1995, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $57.4 billion, including approximately $41.9 billion under active management and $15.5 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 Principal 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. 25 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 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. Mr. Sherva graduated from the University of Minnesota and received an M.A. from Wayne State University. He is also a Chartered Financial Analyst. MICROCAP PORTFOLIO -- DENNIS G. SHERVA. Information about Mr. Sherva is included under the Emerging Growth Portfolio above. AGGRESSIVE EQUITY PORTFOLIO -- KURT FEUERMAN. Information about Mr. Feuerman is included under the 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 an agreement between the Adviser and The Chase Manhattan Bank, N.A. ("Chase"), Chase provides certain administrative services to the Fund. In a merger completed on September 1, 1995, Chase succeeded to all of the rights and obligations under the U.S. Trust Administration Agreement between the Adviser and the United States Trust Company of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegated its administration responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service Company, which after the merger with Chase is a subsidiary of Chase and will continue to provide certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by CGFSC. 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. CGFSC'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. 26 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. The Portfolios currently offer only the classes of shares offered by this Prospectus. The Portfolios may in the future offer one or more classes of shares with features, distribution expenses or other expenses that are different from those of the classes currently offered. The Fund has adopted a Plan of Distribution with respect to the Class B shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan, the Distributor is entitled to receive from the Portfolios a distribution fee, which is accrued daily and paid quarterly, of 0.25% of the Class B shares' average daily net assets on an annualized basis. The Distributor expects to reallocate most of its fee to its investment representatives. The Distributor may, in its discretion, voluntarily waive from time to time all or any portion of its distribution fee and each of the Distributor and the Adviser if free to make additional payments out of its own assets to promote the sale of Fund shares, including payments that compensate financial institutions for distribution services or shareholder services. The Plan is designed to compensate the Distributor for its services, not to reimburse the Distributor for its expenses, and the Distributor may retain any portion of the fee that it does not expend in fulfillment of its obligations to the Fund. 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 Class A and Class B 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 by the Portfolio. See "Valuation of Shares." MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES For a Portfolio account opened on or after January 2, 1996 (a "New Account"), the minimum initial investment and minimum account size are $500,000 for Class A shares and $100,000 for Class B shares. Managed Accounts may purchase Class A shares without being subject to such minimum initial investment or minimum account size requirements for a Portfolio account. Officers of the Adviser and its affiliates are subject to the minimums for a Portfolio account, except they may purchase Class B shares subject to a minimum initial investment and minimum account size of $5,000 for a Portfolio account. If the value of a New Account containing Class A shares falls below $500,000 (but remains at or above $100,000) because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $500,000 (but remains at or above $100,000) for a continuous 60-day period, the Class A shares in such account will convert to Class B shares and will be subject to the distribution fee and other features 27 applicable to the Class B shares. The Fund, however, will not convert Class A shares to Class B shares based solely upon changes in the market that reduce the net asset value of shares. Under current tax law, conversions between share classes are not a taxable event to the shareholder. Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996 Account") were designated Class A shares on January 2, 1996. Shares in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account") remained Class A shares regardless of account size thereafter. Except for shares in a Managed Account, shares in a Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. Grandfathered Class A Accounts and Managed Accounts are not subject to conversion from Class A shares to Class B shares. Investors may also invest in the Fund by purchasing shares through a trust department, broker, dealer, agent, financial planner, financial services firm or investment adviser. An investor may be charged an additional service or transaction fee by that institution. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". The Fund reserves the right to modify or terminate the conversion features of the shares as stated above at any time upon 60-days' notice to shareholders. MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES If the value of a New Account falls below $100,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $100,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. The Fund, however, will not redeem shares based solely upon changes in the market that reduce the net asset value of shares. For purposes of redemptions by the Fund, the foregoing minimum account size requirements do not apply to New Accounts containing Class B shares held by officers of the Adviser or its affiliates. However, if the value of such account held by an officer of the Adviser or its affiliates falls below $5,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains $5,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed Accounts are not subject to involuntary redemption. The Fund reserves the right to modify or terminate the involuntary redemption features of the shares as stated above at any time upon 60-days' notice to shareholders. CONVERSION FROM CLASS B TO CLASS A SHARES If the value of Class B shares in a Portfolio account increases, whether due to shareholder share purchases or market activity, to $500,000 or more, the Class B shares will convert to Class A shares. Under current tax law, such conversion is not a taxable event to the shareholder. Class A shares converted from Class B shares are 28 subject to the same minimum account size requirements that are applicable to New Accounts containing Class A shares, as stated above. The Fund reserves the right to modify or terminate this conversion feature at any time upon 60-days' notice to shareholders. INITIAL PURCHASES DIRECTLY FROM THE FUND The Fund's determination of an investor's eligibility to purchase shares of a given class will take precedence over the investor's selection of a class. Assuming the investor is eligible for the class, the Fund will select the most favorable class for the investor, if the investor has not done so. 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 Class A shares of the Portfolios and $100,000 for Class B shares of the Portfolios, 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 Classes of shares of 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 each of the relevant Portfolios 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 class 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, the class selected and the account number assigned to you) as follows: Chase Manhattan Bank, N.A. One Manhattan Plaza New York, NY 10081-1000 ABA #021000021 DDA #91-02-733293 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (Portfolio name, your account number, your account name) Please call the Fund at 1-800-548-7786 prior to wiring funds. 29 C. Complete the Account Registration Form and mail it to the address shown thereon. Purchase orders for shares of the Portfolios which are received prior to the regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed at the price computed on the date of receipt as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Federal Funds purchase orders will be accepted only on a day on which the Fund and Chase (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring Federal 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. -- [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, the portfolio name and the class selected 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. Additional investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. OTHER PURCHASE INFORMATION The purchase price of the Class A and Class B 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 as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends. The net asset value of Class B shares will generally be lower than the net asset value of Class A shares as a result of the distribution expense charged to Class B shares. It is expected, however, that the net asset value per share of the two classes will tend to converge immediately after the recording of dividends which will differ by approximately the amount of the distribution expense accrual differential between the classes. 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. 30 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 the Distributor. EXCESSIVE TRADING Frequent trades involving either substantial portfolio 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 within any 120-day period. For example, exchanging shares of Portfolio A for shares of Portfolio B, then exchanging shares of Portfolio B for shares of Portfolio C of the Fund and again exchanging the 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. 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 Class A shares or Class B shares of a Portfolio at the next determined net asset value of shares of the applicable class. 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 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 Class A shares or Class B 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 Chase Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913. 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 class and 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. 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 32 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. 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 FEATURES You may exchange shares that you own in the Portfolios for shares of any other available portfolio of the Fund (other than the International Equity Portfolio, which is closed to new investors). In exchanging for shares of a portfolio with more than one class, the class of shares you receive in the exchange will be determined in the same manner as any other purchase of shares and will not be based on the class of shares surrendered for the exchange. Consequently, the same minimum initial investment and minimum account size for determining the class of shares received in the exchange will apply. See "Purchase of Shares." Shares of the portfolios may be exchanged by mail or telephone. The privilege to exchange shares by telephone is automatic and 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. The exchange privilege may be modified or terminated by the Fund at any time upon 60-days' notice to shareholders. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name, class of shares and account number of your current portfolio, the name of the portfolio(s) and the class(es) of shares 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, P.O. Box 2798, Boston, Massachusetts 02208-2798. BY TELEPHONE When exchanging shares by telephone, have ready the name, class of shares and account number of the current Portfolio, the name(s) of the portfolio(s) and class(es) of shares 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 class(es) 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 33 written request must be received in good order before any transfer can be made. Transferring the registration of shares may affect the eligibility of your account for a given class of a Portfolio's shares and may result in involuntary conversion or redemption of your shares. See "Purchase of Shares" above. VALUATION OF SHARES The net asset value per share of a class of shares of each of the Portfolios is determined by dividing the total market value of the Portfolio's investments and other assets attributable to such class, less any liabilities attributable to such class, by the total number of outstanding shares of such class of the Portfolio. Net asset value is calculated separately for each class of a 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 mean of the bid price and asked price of such currencies against the U.S. dollar as quoted by a major bank. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends for the class. Dividends will differ by approximately the amount of the distribution expense accrual differential among the classes. The net asset value of Class B shares will generally be lower than the net asset value of the Class A shares as a result of the distribution expense charged to Class B shares. 34 PERFORMANCE INFORMATION The Fund may from time to time advertise total return for each class 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 class of 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 in the same class 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. The performance figures for Class B shares will generally be lower than those for Class A shares because of the distribution fee charged to Class B shares. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions for a class of shares will be automatically reinvested in additional shares of such class 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 and the MicroCap Portfolios expect to distribute substantially all of their 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 realized gains for each Portfolio, if any, after reduction for any available tax loss carryforwards 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 monthly 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. Because of the distribution fee and any other expenses that may be attributable to the Class B shares, the net income attributable to and the dividends payable on Class B shares will be lower than the net income attributable to and the dividends payable on Class A shares. As a result, the net asset value per share of the classes of the Portfolios will differ at times. Expenses of the Portfolio allocated to a particular class of shares thereof will be borne on a pro rata basis by each outstanding share of that class. TAXES The following summary of certain federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial, or administrative action. 35 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 selling, exchanging or redeeming shareholder, depending upon whether the fair market value of the sale, exchange or redemption proceeds exceeds or is less than the shareholder's adjusted basis in the sold, exchanged or 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, 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. The conversion of Class A shares to Class B shares should not be a taxable event to the shareholder. 36 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 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 37 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, Emerging Growth and MicroCap 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, 1994 was 146%. 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, as amended and restated, permit the Fund to issue up to 34 billion 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. Subject to the notice period to shareholders with respect to shares held by the shareholders, 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 common stock of each portfolio are currently classified into two classes, the Class A shares and the Class B shares, except for the International Small Cap, Money Market and Municipal Money Market Portfolios, which only offer Class A shares. The shares of the Portfolios, 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 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. 38 In addition, the Adviser 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 As of September 1, 1995, domestic securities and cash are held by Chase, which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians 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. MSTC may also hold certain domestic assets for the Fund. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Chase Global Funds Services 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. 39
MORGAN STANLEY INSTITUTIONAL FUND, INC. EQUITY GROWTH, EMERGING GROWTH, MICROCAP AND AGGRESSIVE EQUITY PORTFOLIOS P.O. BOX 2798, BOSTON, MA 02208-2798 - --------------------------------------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - --------------------------------------------------------------------------------------------------------------- ACCOUNT INFORMATION If you need assistance in filling out this form Fill in where applicable for the Morgan Stanley Institutional Fund, please contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all items except signature, and mail to the Fund at the address above. - --------------------------------------------------------------------------------------------------------------- A) REGISTRATION 1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / First Name Initial Last Name 2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / (RIGHTS OF First Name Initial Last Name SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / PRESUMED UNLESS First Name Initial Last Name TENANCY IN COMMON IS INDICATED) - --------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / TRUSTS AND OTHERS Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Fund for additional documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / be required to set up account and to authorize transactions. Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED) / / TRUST __________________________________ / / OTHER (Specify) ______________________________ - --------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / / Please fill in completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / / telephone number(s). Home Business Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / / / / United States / / Resident / /Non-Resident Alien: Citizen Alien Indicate Country of Residence _________ - --------------------------------------------------------------------------------------------------------------- C) TAXPAYER PART 1. Enter your Taxpayer C) IMPORTANT TAX INFORMATION IDENTIFICATION Identification Number. For most You (as a payee) are required by NUMBER individual taxpayers, this is your law to provide us (as payer) with If the account is in Social Security Number. your correct Taxpayer Identification more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification PERSON WHOSE TAXPAYER OR Number will be subject to backup IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on the dividends, IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments. A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with is circled, the number / / Check this box if you are your correct taxpayer identification will be considered to be NOT subject to Backup number, you may be subject to that of the last name Withholding under the a $50 penalty imposed by the Internal listed. For Custodian provisions of Section Revenue Service. account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an (Uniform Gifts/Transfers Revenue Code. additional tax; the tax liability of to Minor Acts), give the persons subject to backup withholding Social Security Number will be reduced by the amount of tax of the minor. withheld. If withholding results in an overpayment of taxes, a refund may be obtained. You may be notified that you are subject to backup withholding under Section 3406(a)(1)(C) of the Internal Revenue Code because you have underreported interest or dividends or you were required to but failed to file a return which would have included a reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - --------------------------------------------------------------------------------------------------------------- D) PORTFOLIO AND For Purchase of the following Portfolio(s): CLASS SELECTION Equity Growth Portfolio / / Class A Shares $____ / / Class B Shares $____ (Class A shares Emerging Growth Portfolio / / Class A Shares $____ / / Class B Shares $____ minimum $500,000 MicroCap Portfolio / / Class A Shares $____ / / Class B Shares $____ for each Portfolio Aggressive Equity Portfolio / / Class A Shares $____ / / Class B Shares $____ and Class B shares minimum $100,000 for Total Initial Investment $_____________ each Portfolio). Please indicate Portfolio class and 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________________ / / / / / / / / / / /-/ / payment. Name of Portfolio Account No. / / Account previously established by: / / Phone exchange / / Wire on___________________ / / / / / / / / / / / /-/ / Date Account No. (Check (Previously assigned by the Fund) Digit) - --------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION Income dividends and capital gains distributions (if any) will OPTION be reinvested in additional shares unless 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 Name of COMMERCIAL Bank Bank Account No. Please select at time of to wire redemption proceeds to the (Not Savings Bank) initial application if you commercial bank indicated at right and/or wish to redeem shares by mail redemption proceeds to the name and ________________ telephone. A SIGNATURE address in which my/our fund account is Bank ABA No. GUARANTEE IS REQUIRED IF registered if such requests are believed BANK ACCOUNT IS NOT to be authentic. _________________________________________________ REGISTERED IDENTICALLY TO The Fund and the Fund's Transfer Agent will Name(s) in which your BANK Account is Established YOUR FUND ACCOUNT. employ reasonable procedures to confirm that instructions communicated by telephone are _________________________________________________ TELEPHONE REQUESTS FOR genuine. These procedures include requiring Bank's Street Address REDEMPTIONS WILL NOT BE the investor to provide certain personal HONORED UNLESS THE BOX IS identification information at the time an _________________________________________________ CHECKED. account is opened and prior to effecting each City State Zip 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 In addition to the account _________________________________________________________________ statement sent to my/our Name registered address, I/we _________________________________________________________________ hereby authorize the fund to mail duplicate _________________________________________________________________ statements to the name and Address address provided at right. _________________________________________________________________ City State Zip Code - --------------------------------------------------------------------------------------------------------------- I) DEALER INFORMATION _______________________ _______________________________ ___________ Representative Name Representative No. Branch No. - --------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF The undersigned certify that I/we have full authority and legal ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE. (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 Financial Highlights.............................. 5 Prospectus Summary................................ 9 Investment Objectives and Policies................ 13 Additional Investment Information................. 17 Investment Limitations............................ 24 Management of the Fund............................ 25 Purchase of Shares................................ 27 Redemption of Shares.............................. 31 Shareholder Services.............................. 33 Valuation of Shares............................... 34 Performance Information........................... 35 Dividends and Capital Gains Distributions......... 35 Taxes............................................. 36 Portfolio Transactions............................ 37 General Information............................... 38 Account Registration Form
EQUITY GROWTH PORTFOLIO EMERGING GROWTH PORTFOLIO MICROCAP 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 - --------------------------------- - --------------------------------- - --------------------------------- - --------------------------------- - -------------------------------------------------------------------------------- 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, or mutual fund, which offers redeemable shares in a series of diversified and non-diversified investment portfolios ("portfolios"). The Fund currently consists of twenty-eight portfolios representing a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. This prospectus (the "Prospectus") pertains to the Class A and the Class B shares of the U.S. Real Estate Portfolio (the "Portfolio"). On January 2, 1996, the Portfolio began offering two classes of shares: the Class A shares and the Class B shares, except for the Money Market, Municipal Money Market and International Small Cap Portfolios which only offer Class A shares. All shares of the Portfolio owned prior to January 2, 1996 were redesignated Class A shares on January 2, 1996. The Class A and Class B shares currently offered by the Portfolio have different minimum investment requirements and fund expenses. Shares of the portfolios are offered with no sales charge or exchange or redemption fee (with the exception of the International Small Cap Portfolio). 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 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 "Prospectus Summary" below. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY - -- Active Country Allocation, Asian Equity, Emerging Markets, European Equity, Global Equity, Gold, International Equity, International Magnum, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Emerging Growth, Equity Growth, Aggressive Equity, MicroCap, Small Cap Value Equity, Value Equity and U.S. Real Estate Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and Municipal Bond 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, 1996, 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, 1996. FUND EXPENSES The following table illustrates the expenses and fees that a shareholder of the Portfolio will incur:
SHAREHOLDER TRANSACTION EXPENSES - -------------------------------------------------- Maximum Sales Load Imposed on Purchases Class A......................................... None Class B......................................... None Maximum Sales Load Imposed on Reinvested Dividends Class A......................................... None Class B......................................... None Deferred Sales Load Class A......................................... None Class B......................................... None Redemption Fees Class A......................................... None Class B......................................... None Exchange Fees Class A......................................... None Class B......................................... None
ANNUAL FUND OPERATING EXPENSES - -------------------------------------------------- (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fee (Net of Fee Waiver)* Class A......................................... 0.47% Class B......................................... 0.47% 12b-1 Fees Class A......................................... None Class B......................................... 0.25% Other Expenses Class A......................................... 0.53% Class B......................................... 0.53% --------- Total Operating Expenses (Net of Fee Waivers)* Class A......................................... 1.00% Class B......................................... 1.25% --------- ---------
- ------------------------ *The Adviser has agreed to waive its management fees and/or to reimburse the Portfolio, if necessary, if such fees would cause the Portfolio's total annual operating expenses, as a percentage of average daily net assets, to exceed the percentages set forth in the table above. Absent the fee waiver, the management fee would be 0.80%. Absent the fee waiver and/or expense reimbursement, the Portfolio's total operating expenses would be 1.33% of the average daily net assets of the Class A shares and 1.58% of the average daily net assets of the Class B shares. As a result of this reduction, the Management Fee stated above is lower than the contractual fee stated under "Management of the Fund." The Adviser reserves the right to terminate any of its fee waivers and/or expense reimbursements at any time in its sole discretion. For further information on Fund expenses, see "Management of the Fund." 2 The purpose of the table above is to assist the investor in understanding the various expenses that an investor in the Portfolio will bear directly or indirectly. The Class A expenses and fees for the Portfolio based on actual figures for the period ended December 31, 1995. The Class B expenses and fees for the Portfolio are based on estimates, assuming that the average daily net assets of the Class B shares of the Portfolio will be $50,000,000. "Other Expenses" include Board of Directors' fees and expenses, amortization of organizational costs, filing fees, professional fees and costs for shareholder reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the equivalent of the maximum front-end sales charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). 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 ----------- ----------- ----------- ----------- U.S. Real Estate Portfolio Class A.......................................................... $ 10 $ 32 $ 55 $ 122 Class B.......................................................... $ 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 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 FINANCIAL HIGHLIGHTS The following table provides financial highlights for the Class A shares of the Portfolio for the period presented. The audited financial highlights for the Class A shares for the period ended December 31, 1995 are part of the Fund's financial statements which appear in the Fund's December 31, 1995 Annual Report to Shareholders and which is included in the Fund's Statement of Additional Information. The Portfolio's financial highlights for each of the periods presented have been audited by Price Waterhouse, LLP, whose unqualified report thereon is also included in the Statement of Additional Information. Additional performance information for the Class A shares 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. Financial highlights are not available for the new Class B shares since they were not offered as of December 31, 1995. The following information should be read in conjunction with the financial statements and notes thereto. 4 U.S. REAL ESTATE PORTFOLIO
PERIOD FROM FEBRUARY 24, 1995* TO DECEMBER 31, 1995 ------------- NET ASSET VALUE, BEGINNING OF PERIOD............................ $ 10.00 ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1)........ 0.26 Net Realized and Unrealized Gain on Investments.................. 1.84 ------------- Total from Investment Operations...................... 2.10 ------------- DISTRIBUTIONS Net Investment Income............ (0.24) Net Realized Gain................ (0.44) ------------- Total Distribution............. (0.68) ------------- NET ASSET VALUE, END OF PERIOD..... $ 11.42 ------------- ------------- TOTAL RETURN....................... 21.07% ------------- ------------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands)..................... $ 69,509 Ratio of Expenses to Average Net Assets (1)(2)................... 1.00%** Ratio of Net Investment Income to Average Net Assets (1)(2)....... 4.04%** Portfolio Turnover Rate.......... 158%
- ------------------------------ (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.................... 1.33%** Net Investment Income to Average Net Assets....... 3.71%**
(2) Under the terms of an Investment Advisory Agreement, the Adviser is entitled to receive a management fee calculated at an annual rate of 0.80% 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 1.00% of the average daily net assets of the Class A shares and 1.25% of the average daily net assets of the Class B shares. In the period ended December 31, 1995, the Adviser waived management fees and/or reimbursed expenses totalling $129,000, for the Portfolio. * Commencement of Operations. ** Annualized. 5 PROSPECTUS SUMMARY THE FUND The Fund consists of twenty-eight 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 offers Class A shares and, except the International Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class B shares. Each portfolio has its own investment objective and policies designed to meet specific goals. The investment objective of the U.S. Real Estate Portfolio is as follows: -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 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 equity securities 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 equity securities 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 equity securities of emerging country issuers. -The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of European issuers. -The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities 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 equity securities of non-U.S. issuers. -The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers in accordance with EAFE country (as defined in "Investment Objective and Policies" below) weightings determined by the Adviser. -The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers with equity market capitalizations of less than $1 billion. -The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Japanese issuers. 6 -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 EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of medium and large capitalization companies. -The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small- to medium-sized corporations. -The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small corporations. -The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued equity securities of small- to medium-sized companies. -The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity securities 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 equity securities 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 preservation of principal through investment primarily in municipal obligations, the interest on which is exempt from federal income tax. 7 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, 1995, together with its affiliated asset management companies, had approximately $57.4 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 Class A shares of the Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Class B shares of the Portfolio are offered at net asset value with no sales commission, but with a 12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25% of the Class B shares' average daily net assets on an annualized basis. Share purchases may be made by sending investments directly to the Fund or through the Distributor. Shares in a Portfolio account opened prior to January 2, 1996 (each, a "Pre-1996 Account") were designated Class A shares on January 2, 1996. For a Portfolio account opened on or after January 2, 1996 (a "New Account"), the minimum initial investment is $500,000 for Class A shares and $100,000 for Class B shares. Certain exceptions to the foregoing minimums apply to (1) shares in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account"); (2) Portfolio accounts held by officers of the Adviser and its affiliates; and (3) certain advisory or asset allocation accounts, such as Total Funds Management accounts, managed by Morgan Stanley or its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves the right in its sole discretion to determine which of such advisory or asset allocation accounts shall be Managed Accounts. For information regarding Managed Accounts please contact your Morgan Stanley account representative or the Fund at the telephone number provided on the cover of this Prospectus. Shares in a Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B Account") converted to Class B shares on March 1, 1996. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". See "Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from Class A to Class B Shares." The minimum subsequent investment for a Portfolio account is $1,000 (except for automatic reinvestment of dividends and capital gains distributions for which there is no minimum). Such subsequent investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. See "Purchase of Shares -- Additional Investments." 8 HOW TO REDEEM Class A shares or Class B shares of the Portfolio may be redeemed at any time, without cost, at the net asset value per share of shares of the applicable class next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. Certain redemptions may cause involuntary redemption or automatic conversion. Class A or Class B shares held in New Accounts are subject to involuntary redemption if shareholder redemption(s) of such shares reduces the value of such account to less than $100,000 for any continuous 60-day period. Involuntary redemption does not apply to Managed Accounts, Grandfathered Class A Accounts and Grandfathered Class B Accounts, regardless of the value of such accounts. Class A shares in a New Account will convert to Class B shares if shareholder redemption(s) of such shares reduces the value of such account to less than $500,000 for any continuous 60-day period. Class B shares in a New Account will convert to Class A shares if shareholder purchases of additional Class B shares or market activity cause the value of the Class B shares in the New Account to increase to $500,000 or more. See "Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and "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 it is expected that the Portfolio will 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 will 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." 9 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 10 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 certain securities or obligations, including derivative securities, as 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 it is expected that the Portfolio will invest a substantial portion of its assets in REITs, the Portfolio will 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 11 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 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. 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. 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 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 net 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. 12 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." 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. 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 13 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. 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. 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 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 14 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. 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. 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 net 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; (iv) 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; (v) invest in fixed time deposits with a duration of over seven calendar days; or (vi) 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. 15 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 the Portfolio an annual management 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 ANNUAL OPERATING MANAGEMENT EXPENSES AFTER FEE FEE WAIVERS ----------- ------------------------- PORTFOLIO CLASS A CLASS B - ------------------------------ --------- --------- U.S. Real Estate Portfolio 0.80% 1.00% 1.25%
The fee payable by the Portfolio is higher than the management 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, 1995, the Adviser, together with its affiliated asset management companies, managed investments totaling approximately $57.4 billion, including approximately $41.9 billion under active management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. PORTFOLIO MANAGER. -- RUSSELL C. PLATT. Mr. Platt joined Morgan Stanley in 1982 and currently is a Principal of the Firm. Russell Platt has primary responsibility for managing the real estate securities investment business for Morgan Stanley Asset Management ("MSAM") and serves as a member of the Investment Committee of The Morgan Stanley Real Estate Fund ("MSREF"). Previously, Mr. Platt served as a Director of MSREF, where he was involved in capital raising, acquisitions, oversight of investments and investor relations. MSREF 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 $3.5 billion as of December 1994. From 1991 to 1993, Mr. Platt was head of Morgan Stanley's Transaction Development Group, which was responsible for identifying and structuring real estate investment opportunities for the Firm and its clients worldwide. 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 portfolio, retail, office, hotel and apartment sales and financings. Mr. Platt graduated from Williams College in 1982 with a B.A. in Economics and received his M.B.A. from Harvard Business School in 1986. Mr. Platt is a member of the Board of Trustees of The National Multi 16 Housing Council and The Wharton Real Estate Center, and a member of The Urban Land Institute (International Council), the National Association of Real Estate Investment Trusts and the Pension Real Estate Association. THEODORE R. BIGMAN. Mr. Bigman joined Morgan Stanley Asset Management in 1995 as a Vice President. Together with Russell Platt, he is responsible for MSAM's real estate securities research. Prior to joining MSAM, he was a Director at CS First Boston, where he worked for eight years in the Real Estate Group. Since 1992, Mr. Bigman established and managed the REIT effort at CS First Boston, including primary responsibility for $2.5 billion of initial public offering by real estate investment trusts. Previously, Mr. Bigman had extensive real estate experience in a wide variety of transactions involving the financing and sale of both individual assets and portfolios of real estate assets as well as the acquisition and sale of several real estate companies. Mr. Bigman graduated from Brandeis University in 1983 with a B.A. in Economics and received his M.B.A. from Harvard University in 1987. He is a member of the National Association of Real Estate Investment Trusts and International Council of Shopping Centers. 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 an agreement between the Adviser and The Chase Manhattan Bank, N.A. ("Chase"), Chase provides certain administrative services to the Fund. In a merger completed on September 1, 1995, Chase succeeded to all of the rights and obligations under the U.S. Trust Administration Agreement between the Adviser and the United States Trust Company of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegated its administrative responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service Company, which after the merger with Chase is a subsidiary of Chase and will continue to provide certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by CGFSC. 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. CGFSC'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. 17 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. The Portfolio currently offers only the classes of shares offered by this Prospectus. The Portfolio may in the future offer one or more classes of shares with features, distribution expenses or other expenses that are different from those of the classes currently offered. The Fund has adopted a Plan of Distribution with respect to the Class B shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan, the Distributor is entitled to receive from the Portfolio a distribution fee, which is accrued daily and paid quarterly, of 0.25% of the Class B shares' average daily net assets on an annualized basis. The Distributor expects to reallocate most of its fee to its investment representatives. The Distributor may, in its discretion, voluntarily waive from time to time all or any portion of its distribution fee and each of the Distributor and the Adviser is free to make additional payments out of its own assets to promote the sale of Fund shares, including payments that compensate financial institutions for distribution services or shareholder services. The Plan is designed to compensate the Distributor for its services, not to reimburse the Distributor for its expenses, and the Distributor may retain any portion of the fee that it does not expend in fulfillment of its obligations to the Fund. 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 Class A and Class B 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 by the Portfolio. See "Valuation of Shares." MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES For an account for the Portfolio opened on or after January 2, 1996 (a "New Account"), the minimum initial investment and minimum account size are $500,000 for Class A shares and $100,000 for Class B shares. Managed Accounts may purchase Class A shares without being subject to any minimum initial investment or minimum account size requirements for a Portfolio account. Officers of the Adviser and its affiliates are subject to the minimums for a Portfolio account, except they may purchase Class B shares subject to a minimum initial investment and minimum account size of $5,000 for a Portfolio account. If the value of a New Account containing Class A shares falls below $500,000 (but remains at or above $100,000) because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $500,000 (but remains at or above $100,000) for a continuous 60-day period, the Class A shares in such account will convert to Class B shares and will be subject to the distribution fee and other features applicable to the Class B shares. The Fund, however, will not convert Class A shares to Class B shares based solely upon changes in the market that reduce the net asset value of shares. Under current tax law, conversions between share classes are not a taxable event to the shareholder. 18 Shares in a Portfolio account opened prior to January 2, 1996 (a "Pre-1996 Account") were designated Class A shares on January 2, 1996. Shares in a Pre-1996 Account with a value of $100,000 or more on March 1, 1996 (a "Grandfathered Class A Account") remain Class A shares regardless of account size thereafter. Except for shares in a Managed Account, shares in a Pre-1996 Account with a value of less than $100,000 on March 1, 1996 (a "Grandfathered Class B account") convert to Class B shares on March 1, 1996. Grandfathered Class A Accounts and Managed Accounts are not subject to conversion from Class A shares to Class B shares. Investors may also invest in the Fund by purchasing shares through a trust department, broker, dealer, agent, financial planner, financial services firm or investment adviser. An investor may be charged an additional service or transaction fee by that institution. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". The Fund reserves the right to modify or terminate the conversion features of the shares as stated above at any time upon 60-days' notice to shareholders. MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES If the value of a New Account falls below $100,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $100,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. The Fund, however, will not redeem shares based solely upon changes in the market that reduce the net asset value of shares. For purposes of redemptions by the Fund, the foregoing minimum account size requirements do not apply to New Accounts containing Class B shares held by officers of the Adviser or its affiliates. However, if the value of such account held by an officer of the Adviser or its affiliates falls below $5,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $5,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. Grandfathered Class A Accounts, Grandfathered Class B Accounts and Managed Accounts are not subject to involuntary redemption. The Fund reserves the right to modify or terminate the involuntary redemption features of the shares as stated above at any time upon 60-days' notice to shareholders. CONVERSION FROM CLASS B TO CLASS A SHARES If the value of Class B shares in a Portfolio account increases, whether due to shareholder share purchases or market activity, to $500,000 or more, the Class B shares will convert to Class A shares. Under current tax law, such conversion is not a taxable event to the shareholder. Class A shares converted from Class B shares are subject to the same minimum account size requirements that are applicable to New Accounts containing Class A shares, as stated above. The Fund reserves the right to modify or terminate this conversion feature at any time upon 60-days' notice to shareholders. 19 INITIAL PURCHASES DIRECTLY FROM THE FUND The Fund's determination of an investor's eligibility to purchase shares of a given class will take precedence over the investor's selection of a class. Assuming the investor is eligible for the class, the Fund will select the most favorable class for the investor, if the investor has not done so. 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 Class A shares of the Portfolio and $100,000 for Class B shares of 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 Payment will be accepted only in U.S. dollars, unless prior approval for payment by other currencies is given by the Fund. The class(es) of shares of the Portfolio 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. 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 class 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, the class selected, and the account number assigned to you) as follows: Chase Manhattan Bank, N.A. One Manhattan Plaza New York, NY 10081-1000 ABA #021000021 DDA #910-2-733293 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (Portfolio name, your account number, your account name) Please call the Fund at 1-800-548-7786 prior to wiring funds. C. Complete and sign the Account Registration Form and mail it to the address shown thereon. 20 Purchase orders for shares of the Portfolio which are received prior to the regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed at the price computed on the date of receipt as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Federal Funds purchase orders will be accepted only on a day on which the Fund and Chase (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring Federal 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, the portfolio name and the class selected 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. Additional investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. OTHER PURCHASE INFORMATION The purchase price of the Class A and Class B 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 as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends. The net asset value of Class B shares will generally be lower than the net asset value of Class A shares as a result of the distribution expense charged to Class B shares. It is expected, however, that the net asset value per share of the two classes will tend to converge immediately after the recording of dividends which will differ by approximately the amount of the distribution expense accrual differential between the classes. 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. 21 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 the Distributor. See "Purchase of Shares" in the Statement of Additional Information. EXCESSIVE TRADING Frequent trades involving either substantial portfolio 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 any class 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 class of a portfolio of the Fund within any 120-day period. As an example, exchanging shares of portfolios of the Fund as follows amounts to excessive trading: exchanging Class A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class A shares of Portfolio B for Class A shares of Portfolio C and again exchanging Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day period. 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, such as TFM Accounts, managed or advised by MSAM and/or any of its affiliates. 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 Class A shares or Class B shares of the Portfolio at the next determined net asset value of shares of the applicable class. 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 Class A shares or Class B 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 Chase Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts 02108-3913. 22 "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. 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 23 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. 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 FEATURES 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, which is closed to new investors). In exchanging for shares of a portfolio with more than one class, the class of shares you receive in the exchange will be determined in the same manner as any other purchase of shares and will not be based on the class of shares surrendered for the exchange. Consequently, the same minimum initial investment and minimum account size for determining the class of shares received in the exchange will apply. See "Purchase of Shares." Shares of the portfolios may be exchanged by mail or telephone. The privilege to exchange shares by telephone is automatic and 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. The exchange privilege may be modified or terminated by the Fund at any time upon 60-days' notice to shareholders. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name, class of shares and account number of your current portfolio, the names of the portfolio(s) and class(es) of shares 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, class of shares and account number of the current Portfolio, the names of the portfolio(s) and class(es) of shares 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 class of the Portfolios involved in the exchange of the shares 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 24 written request must be received in good order before any transfer can be made. Transferring the registration of shares may affect the eligibility of your account for a given class of the Portfolio's shares and may result in involuntary conversion or redemption of your shares. See "Purchase of Shares" above. VALUATION OF SHARES The net asset value per share of a class of shares of the Portfolio is determined by dividing the total market value of the Portfolio's investments and other assets attributable to such class, less any liabilities attributable to such class, by the total number of outstanding shares of such class of the Portfolio. Net asset value is calculated separately for each class 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. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends for the class. Dividends will differ by approximately the amount of the distribution expense accrual differential among the classes. The net asset value of Class B shares will generally be lower than the net asset value of the Class A shares as a result of the distribution expense charged to Class B shares. 25 PERFORMANCE INFORMATION The Fund may from time to time advertise total return for each class 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 a class of 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 in the same class 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. The performance figures for Class B shares will generally be lower than those for Class A shares because of the distribution fee charged to Class B shares. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions for a class of shares will be automatically reinvested in additional shares of such class 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 quarterly dividends beginning with a distribution at the end of the first calendar quarter of 1996. Net realized gains for the Portfolio, if any, after reduction for any tax loss carryforwards 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 monthly 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. Because of the distribution fee and any other expenses that may be attributable to the Class B shares, the net income attributable to and the dividends payable on Class B shares will be lower than the net income attributable to and the dividends payable on Class A shares. As a result, the net asset value per share of the classes of the Portfolio will differ at times. Expenses of the Portfolio allocated to a particular class of shares thereof will be borne on a pro rata basis by each outstanding share of that class. TAXES The following summary of certain federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial, or administrative action. 26 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 advisers 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. The Portfolio will report annually to its shareholders the amount of dividend income qualifying for the corporate dividend received deduction. 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. 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 selling, exchanging or redeeming shareholder, depending upon whether the fair market value of the sale, exchange or redemption proceeds exceeds or is less than the shareholder's adjusted basis in the redeemed, exchanged or sold 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. The conversion of Class A shares to Class B shares should not be a taxable event to the shareholder. 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. 27 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. 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. 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 28 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, as amended and restated, permit the Fund to issue up to 34 billion 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. Subject to the notice period to shareholders with respect to shares held by the shareholders, 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 common stock of each portfolio are currently classified into two classes, the Class A shares and the Class B shares, except for the International Small Cap, Money Market and Municipal Money Market Portfolios, which only offer Class A shares. The shares of the 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 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, the Adviser, 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. 29 CUSTODIAN As of September 1, 1995, domestic securities and cash are held by Chase, which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians 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. MSTC may also hold certain domestic assets for the Fund. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Chase Global Funds Services 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. 30
MORGAN STANLEY INSTITUTIONAL FUND, INC. U.S. REAL ESTATE PORTFOLIO P.O. BOX 2798, BOSTON, MA 02208-2798 - --------------------------------------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - --------------------------------------------------------------------------------------------------------------- ACCOUNT INFORMATION If you need assistance in filling out this form Fill in where applicable for the Morgan Stanley Institutional Fund, please contact your Morgan Stanley representative or call us toll free 1-(800)-548-7786. Please print all items except signature, and mail to the Fund at the address above. - --------------------------------------------------------------------------------------------------------------- A) REGISTRATION 1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / First Name Initial Last Name 2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / (RIGHTS OF First Name Initial Last Name SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / PRESUMED UNLESS First Name Initial Last Name TENANCY IN COMMON IS INDICATED) - --------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / TRUSTS AND OTHERS Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Fund for additional documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / be required to set up account and to authorize transactions. Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED) / / TRUST __________________________________ / / OTHER (Specify) ______________________________ - --------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / / Please fill in completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / / telephone number(s). Home Business Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / / / / United States / / Resident / /Non-Resident Alien: Citizen Alien Indicate Country of Residence _________ - --------------------------------------------------------------------------------------------------------------- C) TAXPAYER PART 1. Enter your Taxpayer C) IMPORTANT TAX INFORMATION IDENTIFICATION Identification Number. For most You (as a payee) are required by NUMBER individual taxpayers, this is your law to provide us (as payer) with If the account is in Social Security Number. your correct Taxpayer Identification more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification PERSON WHOSE TAXPAYER OR Number will be subject to backup IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends, IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments. A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with is circled, the number / / Check this box if you are your correct taxpayer identification will be considered to be NOT subject to Backup number, you may be subject to that of the last name Withholding under the a $50 penalty imposed by the Internal listed. For Custodian provisions of Section Revenue Service. account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an (Uniform Gift/Transfer Revenue Code. additional tax; the tax liability of to Minor Act), give the persons subject to backup withholding Social Security Number will be reduced by the amount of tax of the minor. withheld. If withholding results in an overpayment of taxes, a refund may be obtained. You may be notified that you are subject to backup withholding under Section 3406(a)(1)(C) of the Internal Revenue Code because you have underreported interest or dividends or you were required to but failed to file a return which would have included a reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - --------------------------------------------------------------------------------------------------------------- D) PORTFOLIO AND For Purchase of the following Portfolio: CLASS SELECTION U.S. Real Estate Portfolio / / Class A Shares $____ / / Class B Shares $____ (Class A shares minimum $500,000 for each Portfolio Total Initial Investment $_____________ and Class B shares minimum $100,000 for each Portfolio). Please indicate class and 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________________ / / / / / / / / / / /-/ / payment. Name of Portfolio Account No. / / Account previously established by: / / Phone exchange / / Wire on___________________ / / / / / / / / / / / /-/ / Date Account No. (Check (Previously assigned by the Fund) Digit) - --------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION Income dividends and capital gains distributions (if any) will OPTION be reinvested in additional shares unless 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 Name of COMMERCIAL Bank Bank Account No. Please select at time of to wire redemption proceeds to the (Not Savings Bank) initial application if you commercial bank indicated at rightand/or wish to redeem shares by mail redemption proceeds to the name and ________________ telephone. A SIGNATURE address in which my/our fund account is Bank ABA No. GUARANTEE IS REQUIRED IF registered if such requests are believed BANK ACCOUNT IS NOT to be authentic. _________________________________________________ REGISTERED IDENTICALLY TO The Fund and the Fund's Transfer Agent will Name(s) in which your BANK Account is Established YOUR FUND ACCOUNT. employ reasonable procedures to confirm that instructions communicated by telephone are _________________________________________________ TELEPHONE REQUESTS FOR genuine. These procedures include requiring Bank's Street Address REDEMPTIONS WILL NOT BE the investor to provide certain personal HONORED UNLESS THE BOX IS identification information at the time an _________________________________________________ CHECKED. account is opened and prior to effecting each City State Zip 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 In addition to the account _________________________________________________________________ statement sent to my/our Name registered address, I/we _________________________________________________________________ hereby authorize the fund to mail duplicate _________________________________________________________________ statements to the name and Address address provided at right. _________________________________________________________________ City State Zip Code - --------------------------------------------------------------------------------------------------------------- I) DEALER INFORMATION _______________________ _______________________________ ___________ Representative Name Representative No. Branch No. - --------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF The undersigned certify(ies) that I/we have full authority and legal ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional CERTIFICATION Fund, Inc. and agree to be bound by its terms. UNDER THE PENALTIES OF Sign Here > PERJURY, I/WE CERTIFY THAT THE INFORMATION PROVIDED IN SECTION C) ABOVE IS TRUE, CORRECT AND COMPLETE. (X) (X) __________________________________ ______________________________________ 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 Financial Highlights.............................. 4 Prospectus Summary................................ 6 Investment Objective and Policies................. 10 Additional Investment Information................. 12 Investment Limitations............................ 15 Management of the Fund............................ 16 Purchase of Shares................................ 18 Redemption of Shares.............................. 22 Shareholder Services.............................. 24 Valuation of Shares............................... 25 Performance Information........................... 26 Dividends and Capital Gains Distributions......... 26 Taxes............................................. 26 Portfolio Transactions............................ 28 General Information............................... 29 Account Registration Form
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 - --------------------------------------- - --------------------------------------- - --------------------------------------- - --------------------------------------- - -------------------------------------------------------------------------------- P R O S P E C T U S ---------------------------------------------------------------------- INTERNATIONAL MAGNUM 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, or mutual fund, which offers redeemable shares in a series of diversified and non-diversified investment portfolios ("portfolios"). The Fund currently consists of twenty-eight portfolios representing a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. This prospectus (the "Prospectus") pertains to the Class A and Class B shares of the International Magnum Portfolio (the "Portfolio"). The Class A and Class B shares currently offered by the Portfolio have different minimum investment requirements and fund expenses. 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 MAGNUM PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers in accordance with EAFE country (as defined in "Investment Objective and Policies" below) weightings determined by the Portfolio's investment adviser. INVESTORS SHOULD NOTE THAT THE PORTFOLIO MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN RESTRICTED SECURITIES, AND UP TO 25% 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 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 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 "Prospectus Summary" below. The Fund currently offers the following portfolios: (i) GLOBAL AND INTERNATIONAL EQUITY - -- Active Country Allocation, Asian Equity, Emerging-Markets, European Equity, Global Equity, Gold, International Equity, International Magnum, International Small Cap, Japanese Equity and Latin American Portfolios; (ii) U.S. EQUITY -- Aggressive Equity, Emerging Growth, Equity Growth, MicroCap, Small Cap Value Equity, U.S. Real Estate and Value Equity Portfolios; (iii) EQUITY AND FIXED INCOME -- Balanced Portfolio; (iv) FIXED INCOME -- Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield, Mortgage-Backed Securities and Municipal Bond 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, 1996, 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 ASSED 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, 1996. FUND EXPENSES The following table illustrates all expenses and fees that a shareholder of the International Magnum Portfolio will incur:
SHAREHOLDER TRANSACTION EXPENSES - ------------------------------------------------------------------------------------------ Maximum Sales Load Imposed on Purchases Class A................................................................................. None Class B................................................................................. None Maximum Sales Load Imposed on Reinvested Dividends Class A................................................................................. None Class B................................................................................. None Deferred Sales Load Class A................................................................................. None Class B................................................................................. None Redemption Fees Class A................................................................................. None Class B................................................................................. None Exchange Fees Class A................................................................................. None Class B................................................................................. None ANNUAL FUND OPERATING EXPENSES - ------------------------------------------------------------------------------------------ (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fee (Net of Fee Waiver)* Class A................................................................................. 0.48% Class B................................................................................. 0.48% 12b-1 Fees Class A................................................................................. None Class B................................................................................. 0.25% Other Expenses Class A................................................................................. 0.52% Class B................................................................................. 0.52% ----------- Total Operating Expenses (Net of Fee Waivers)* Class A................................................................................. 1.00% Class B................................................................................. 1.25% ----------- -----------
- ------------------------ * The Adviser has agreed to waive its advisory fees and/or to reimburse the Portfolio, if necessary, if such fees would cause the Portfolio's total annual operating expenses, as a percentage of average daily net assets, to exceed the percentages set forth in the table above. Absent the fee waiver, the investment advisory would be 0.80%. Absent the fee waiver and/or expense reimbursement, the Portfolio's total operating expenses are expected to be 1.32% of the average daily net assets of the Class A shares and 1.57% of the average daily net assets of the Class B shares. As a result of this reduction, the Management Fee stated above is lower than the contractual fee stated under "Management of the Fund." The Adviser reserves the right to terminate any of its fee waivers and/or expense reimbursements at any time in its sole discretion. For further information on Fund expenses, see "Management of the Fund." 2 The purpose of the table above is to assist the investor in understanding the various expenses that an investor in the Portfolio will bear directly or indirectly. The Class A and Class B expenses and fees for the Portfolio are based on estimates, assuming that the average daily net assets of the Class A shares and Class B shares will each be $50,000,000. "Other Expenses" include Board of Directors' fees and expenses, amortization of organizational costs, filing fees, professional fees and costs for shareholder reports. Due to the continuous nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the equivalent of the maximum front-end sales charges otherwise permitted by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). 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 ----------- ----------- --------- ----------- International Magnum Portfolio Class A.......................................................... $ 10 $ 32 $ * $ * Class B.......................................................... $ 13 $ 40 $ * $ *
- ------------------------ * Because the Portfolio has recently commenced operations, the Fund has not projected expenses for the Portfolio beyond the 3-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 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-eight 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 offers Class A shares and, except the International Small Cap, Money Market and Municipal Money Market Portfolios, also offers Class B shares. Each portfolio has its own investment objective and policies designed to meet its specific goals. This Prospectus pertains to the Class A and Class B shares of the International Magnum Portfolio. -The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers in accordance with EAFE country (as defined in "Investment Objective and Policies" below) weightings determined by the Adviser. 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 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 equity securities 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 equity securities of Asian issuers. -The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in 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 equity securities of emerging country issuers. -The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of European issuers. -The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities 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 equity securities of non-U.S. issuers. -The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers with equity market capitalizations of less than $1 billion. -The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Japanese issuers. 4 -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 equity securities of small- to medium-sized corporations. -The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing in growth-oriented equity securities of medium and large capitalization companies. -The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small corporations. -The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by investing in undervalued equity securities 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 equity securities 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 equity securities 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 the preservation of principal through investment primarily in municipal obligations, the interest on which is exempt from federal income tax. 5 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, 1995 had approximately $57.4 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 Class A shares of the Portfolio are offered directly to investors at net asset value with no sales commission or 12b-1 charges. Class B shares of the Portfolio are offered at net asset value with no sales commission, but with a 12b-1 fee, which is accrued daily and paid quarterly, equal to 0.25%, on an annualized basis, of the Class B shares' average daily net assets. Share purchases may be made by sending investments directly to the Fund or through the Distributor. The minimum initial investment for shares in a Portfolio account is $500,000 for Class A shares and $100,000 for Class B shares. Certain exceptions to the foregoing minimums apply to (1) Portfolio accounts held by officers of the Adviser and its affiliates and (2) certain advisory or asset allocation accounts, such as Total Funds Management accounts, managed by Morgan Stanley or its affiliates, including the Adviser ("Managed Accounts"). The Adviser reserves the right in its sole discretion to determine which of such advisory or asset allocation accounts shall be Managed Accounts. For information regarding Managed Accounts, please contact your Morgan Stanley account representative or the Fund at the telephone number provided on the cover of this Prospectus. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". See "Purchase of Shares -- Minimum Investment and Account Sizes; Conversion from Class A to Class B Shares." The minimum subsequent investment for a Portfolio account is $1,000 (except for automatic reinvestment of dividends and capital gains distributions for which there is no minimum). Such subsequent investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. See "Purchase of Shares -- Additional Investments." 6 HOW TO REDEEM Class A shares or Class B shares of the Portfolio may be redeemed at any time, without cost, at the net asset value per share of shares of the applicable class next determined after receipt of the redemption request. The redemption price may be more or less than the purchase price. Certain redemptions may cause involuntary redemption or automatic conversion. Class A or Class B shares held in a Portfolio account are subject to involuntary redemption if shareholder redemption(s) of such shares reduces the value of such account to less than $100,000 for a continuous 60-day period. Involuntary redemption does not apply to Managed Accounts, regardless of the value of such accounts. Class A shares in a Portfolio account will convert to Class B shares if shareholder redemption(s) of such shares reduces the value of such account to less than $500,000 for a continuous 60-day period. Class B shares in a Portfolio account will convert to Class A shares if shareholder purchases of additional Class B shares or market activity cause the value of the Class B shares in the Portfolio account to increase to $500,000 or more. See "Purchase of Shares -- Minimum Account Sizes and Involuntary Redemption of Shares" and "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 Objective 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. 7 INVESTMENT OBJECTIVE AND POLICIES The investment objective of the International Magnum 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 objective. 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 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 equity securities of non-U.S. issuers in accordance with the EAFE country (defined below) weightings determined by the Adviser. With respect to the Portfolio, equity securities include common and preferred stocks, convertible securities, and rights and warrants to purchase common stocks. The equity securities in which the Portfolio may invest may be denominated in any currency. The countries in which the Portfolio will invest are those comprising the Morgan Stanley Capital International EAFE Index (the "Index"), which includes Australia, Japan, New Zealand, most nations located in Western Europe and certain developed countries in Asia, such as Hong Kong and Singapore (each an "EAFE country," and collectively the "EAFE countries"). At least 65% of the total assets of the Portfolio will be invested in equity securities of issuers in at least three different EAFE countries under normal circumstances. By analyzing a variety of macroeconomic and political factors, the Adviser develops fundamental projections on comparative interest rates, currencies, corporate profits and economic growth among the various regions represented in the Index. These projections will be used to establish regional allocation strategies. Within these regional allocations, the Adviser then selects equity securities among issuers of a region. The Adviser's approach in selecting among equity securities within a region comprised of EAFE countries is oriented to individual stock selection and is value driven. The Adviser identifies those equity securities which it believes to be undervalued in relation to the issuer's assets, cash flow, earnings and revenues. In selecting investments, the Adviser utilizes the research of a number of sources, including Morgan Stanley Capital International, an affiliate of the Adviser located in Geneva, Switzerland. Portfolio holdings are regularly reviewed and subjected to fundamental analysis to determine whether they continue to conform to the Adviser's investment criteria. Equity securities which no longer conform to such investment criteria will be sold. Although the Portfolio intends to invest primarily in equity securities listed on a stock exchange in an EAFE country, the Portfolio may invest in equity securities that are traded over the counter or that are not admitted to listing on a stock exchange or dealt in a regulated market. As a result of the absence of a public trading market, such securities may pose liquidity risks. The Portfolio may also invest in private placements or initial public offerings in the form of oversubscriptions. Such investments generally entail short-term liquidity risks. See "Additional Investment Information -- Non-Publicly Traded Securities, Private Placements and Restricted Securities." The Portfolio may invest up to 10% of its total assets in (i) investment funds with investment objectives similar to that of the Portfolio and (ii) for temporary purposes, money market funds and pooled investment 8 vehicles. If the Portfolio invests in other investment funds, stockholders will bear not only their proportionate share of the expenses of the Portfolio (including operating expenses and fees of the Investment Adviser), but also will indirectly bear similar expenses of the underlying investment fund. Although the Portfolio anticipates being fully invested in equity securities of EAFE countries, the Portfolio may invest, under normal circumstances for cash management purposes, up to 35% of its total assets 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. In addition, for temporary defensive purposes during periods in which the Adviser believes changes in economic, financial or political conditions make it advisable, the Portfolio may invest up to 100% of its total assets in such short-term and medium-term debt securities or hold cash. The Portfolio will not invest in debt securities that are not rated at least investment grade by either Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P"). See "Additional Investment Information -- Debt Securities and Temporary Investments." 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. Any remaining assets of the Portfolio may be invested in certain securities and obligations, including derivative securities, as set forth in "Additional Investment Information" below. ADDITIONAL INVESTMENT INFORMATION DEBT SECURITIES AND TEMPORARY INVESTMENTS. The short-term and medium-term debt securities in which the Portfolio may invest consist of (a) obligations of governments, agencies or instrumentalities of any member state of the Organization for Economic Cooperation and Development ("OECD"), including the United States; (b) bank deposits and bank obligations (including certificates of deposit, time deposits and bankers' acceptances) of banks organized under the laws of any member state of the OECD, including the United States, denominated in any currency; (c) finance company and corporate commercial paper and other short-term corporate debt obligations of corporations organized under the laws of any member state of the OECD, including the United States, meeting the Portfolio's credit quality standards, provided that no more than 20% of the Portfolio's assets is invested in any one of such issuers. The short-term and medium-term debt securities in which the Portfolio may invest will be rated investment grade by recognized rating services such as Moody's or S&P (in the case of Moody's and S&P, meaning rated A or higher by either), or if unrated, will be determined to be of comparable quality by the Adviser. During periods in which the Adviser believes changes in economic, financial or political conditions make it advisable, for temporary defensive purposes the 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. DERIVATIVES. The Portfolio may invest in certain derivatives, which are financial products or instruments that derive their value from the value of an underlying asset, reference rate or index. The following are derivatives in which the Portfolio may invest: convertible securities, warrants, forward foreign currency exchange contracts, foreign currency futures contracts, stock options, stock index futures contracts and when- 9 issued and delayed delivery securities. See elsewhere in this "Additional Investment Information" section for descriptions of these various instruments, and see "Investment Objectives and Policies" for more information regarding any investment policies or limitations applicable to their use. FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign currency exchange rate risks, the Portfolio may enter into forward foreign currency exchange contracts ("forward contracts"), foreign currency futures contracts and options on such contracts, and purchase put or call options on foreign currencies. A forward contract involves an obligation to purchase or sell an amount of a specified currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. Forward contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks). Except when used for hedging, the Portfolio's custodian will place cash, U.S. government securities, or high-grade debt securities into a segregated account of the Portfolio in an amount equal to the value of the Portfolio's total assets committed to the consummation of forward 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 the Portfolio's commitments with respect to such contracts. See "Investment Objective and Policies -- Forward Foreign Currency Exchange Contracts" in the Statement of Additional Information. A foreign currency futures contract is a standardized contract for the future delivery of a specified amount of a foreign currency at a future date at a price set at the time of the contract. Foreign currency futures contracts traded in the U.S. are traded on regulated exchanges. Parties to a futures contract must make initial "margin" deposits to secure performance of the contract, which generally range from 2% to 5% of the contract price. There also are requirements to make "variation" margin deposits as the value of the futures contract fluctuates. The Portfolio may not enter into foreign currency futures contracts if the aggregate amount of initial margin deposits on the Portfolio's futures positions, including stock index futures contracts (which are discussed below), would exceed 5% of the value of the Portfolio's total assets. The Portfolio also will be required to segregate assets to cover its futures contracts obligations. At the maturity of a forward or futures contract, the Portfolio may either accept or make delivery of the currency specified in the contract or, prior to maturity, enter into a closing purchase transaction involving the purchase or sale of an offsetting contract. Closing purchase transactions with respect to forward contracts are usually effected with the currency trader who is a party to the original forward contract. Closing purchase transactions with respect to futures contracts are effected on an exchange. The Portfolio will only enter into such a forward or futures contract if it is expected that there will be a liquid market in which to close out such contract. There can, however, be no assurance that such a liquid market will exist in which to close a forward or futures contract, in which case the Portfolio may suffer a loss. 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 fluctuations. Such contracts will be used only as a protective measure against the effects of fluctuating rates of currency exchange and exchange control regulations. While such 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. 10 The 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. FOREIGN INVESTMENT. The Portfolio may invest in U.S. dollar-denominated securities of foreign issuers trading in U.S. markets and 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 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 Portfolio by U.S. 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, 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 Portfolio may temporarily hold uninvested reserves in bank deposits in foreign currencies. Therefore, 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 COMPANIES. Some foreign 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 foreign countries through investment companies which have been specifically authorized. The Portfolio may invest in these investment companies 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 companies, 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 companies. Certain of the investment companies 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 companies. If the Portfolio does elect to make an investment in such an investment company, it will only purchase the securities of such investment company in the secondary market. 11 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 Objective and Policies" 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 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 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, the 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, as amended (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. Investors should note that investments of 5% of the Portfolio's total assets in restricted securities may be considered a speculative activity and may involve greater risk and expense to the Portfolio. 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 12 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." STOCK OPTIONS AND INDEX FUTURES CONTRACTS. The Portfolio may utilize stock options and stock index futures contracts with respect to securities in which the Portfolio may invest in order to implement regional allocation strategies or to hedge a portion of the Portfolio's investments. The Portfolio will engage only in transactions in stock options and stock index futures contracts which are traded on a recognized securities or futures exchange. The Portfolio may write (i.e., sell) covered call options on portfolio securities 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. 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. 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. As a matter of operating policy, the value of the underlying securities on which stock options will be written at any one time will not exceed 5% of the Portfolio's total assets. The Portfolio may also write (i.e., sell) covered put options. 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. 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). 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 option 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 13 "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 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. 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. In the opinion of the Adviser, the risk that the 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. The Portfolio may purchase and sell stock index futures contracts. A stock index 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. The Portfolio may utilize stock index futures contracts in order to hedge against fluctuations in the price of a security it holds or intends to acquire, to remain fully invested and to reduce transaction costs, but not for speculation or for achieving leverage. The Portfolio may enter into stock index 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 stock index futures contracts. 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 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. 14 INVESTMENT LIMITATIONS The International Magnum Portfolio is a non-diversified investment company under the 1940 Act, which means that 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 respective portfolio securities. The Portfolio, however, intends to comply with the diversification requirements imposed by the Internal Revenue Code of 1986, as amended, for qualification as regulated investment companies. See "Taxes." 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 net 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; (iii) 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. The Adviser is entitled to receive from the International Magnum Portfolio an annual management fee, payable quarterly, equal to 0.80% 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. 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 1.00% of the average daily net assets of the Class A shares of the Portfolio and 1.25% of the average daily net assets of the Class B shares of the Portfolio. 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, including investment advisory services to several open-end investment companies and many closed-end investment companies. At December 31, 1995, the Adviser, together with 15 its affiliated asset management companies, managed investments totaling approximately $57.4 billion, including approximately $41.9 billion under active management and $15.5 billion as Named Fiduciary or Fiduciary Adviser. See "Management of the Fund" in the Statement of Additional Information. PORTFOLIO MANAGER. FRANCINE J. BOVICH. Francine Bovich joined the Adviser as a Principal in 1993. She is responsible for portfolio management and communication of the Adviser's asset allocation strategy to institutional investor clients. Previously, Ms. Bovich was a Principal and Executive Vice President of Westwood Management Corp. ("Westwood"), a registered investment adviser. Before joining Westwood, she was a Managing Director of Citicorp Investment Management, Inc. (now Chancellor Capital Management), where she was responsible for the Institutional Investment Management group. Ms. Bovich began her investment career with Banker's Trust Company. She holds a B.A. in Economics from Connecticut College and an M.B.A. in Finance from New York University. 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 an agreement between the Adviser and The Chase Manhattan Bank, N.A. ("Chase"), Chase provides certain administrative services to the Fund. In a merger completed on September 1, 1995, Chase succeeded to all of the rights and obligations under the U.S. Trust Administration Agreement between the Adviser and the United States Trust Company of New York ("U.S. Trust"), pursuant to which U.S. Trust had agreed to provide certain administrative services to the Fund. Pursuant to a delegation clause in the U.S. Trust Administration Agreement, U.S. Trust delegated its administration responsibilities to Chase Global Funds Services Company ("CGFSC"), formerly known as Mutual Funds Service Company, which after the merger with Chase is a subsidiary of Chase and will continue to provide certain administrative services to the Fund. The Adviser supervises and monitors such administrative services provided by CGFSC. 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. CGFSC'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. 16 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 Fund. The Portfolio currently offers only the classes of shares offered by this Prospectus. The Portfolio may in the future offer one or more classes of shares with features, distribution expenses or other expenses that are different from those of the classes currently offered. The Fund has adopted a Plan of Distribution with respect to the Class B shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the Plan, the Distributor is entitled to receive from the Portfolio a distribution fee, which is accrued daily and paid quarterly, of 0.25% of the Class B shares' average daily net assets on an annualized basis. The Distributor expects to reallocate most of its fee to its investment representatives. The Distributor may, in its discretion, voluntarily waive from time to time all or any portion of its distribution fee and each of the Distributor and the Adviser is free to make additional payments out of its own assets to promote the sale of Fund shares, including payments that compensate financial institutions for distribution services or shareholder services. The Plan is designed to compensate the Distributor for its services, not to reimburse the Distributor for its expenses, and the Distributor may retain any portion of the fee that it does not expend in fulfillment of its obligations to the Fund. 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 Class A and Class B 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 by the Portfolio. See "Valuation of Shares." MINIMUM INVESTMENT AND ACCOUNT SIZES; CONVERSION FROM CLASS A TO CLASS B SHARES For a Portfolio account, the minimum initial investment and minimum account size are $500,000 for Class A shares and $100,000 for Class B shares. Managed Accounts may purchase Class A shares without being subject to such minimum initial investment or minimum account size requirements for a Portfolio account. Officers of the Adviser and its affiliates are subject to the minimums for a Portfolio account, except they may purchase Class B shares subject to a minimum initial investment and minimum account size of $5,000 for a Portfolio account. If the value of a Portfolio account containing Class A shares falls below $500,000 (but remains at or above $100,000) because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $500,000 (but remains at or above $100,000) for a continuous 60-day period, the Class A shares in such account will convert to Class B shares and will be subject to the distribution fee and other features applicable to the Class B shares. The Fund, however, will not convert Class A shares to Class B shares based 17 solely upon changes in the market that reduce the net asset value of shares. Under current tax law, conversions between share classes are not a taxable event to the shareholder. Managed Accounts are not subject to conversion from Class A shares to Class B shares. Investors may also invest in the Fund by purchasing shares through a trust department, broker, dealer, agent, financial planner, financial services firm or investment adviser. An investor may be charged an additional service or transaction fee by that institution. The minimum investment levels may be waived at the discretion of the Adviser for (i) certain employees and customers of Morgan Stanley or its affiliates and certain trust departments, brokers, dealers, agents, financial planners, financial services firms, or investment advisers that have entered into an agreement with Morgan Stanley or its affiliates; and (ii) retirement and deferred compensation plans and trusts used to fund such plans, including, but not limited to, those defined in Section 401(a), 403(b) or 457 of the Internal Revenue Code of 1986, as amended, and "rabbi trusts". The Fund reserves the right to modify or terminate the conversion features of the shares as stated above at any time upon 60 days' notice to shareholders. MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTION OF SHARES If the value of a Portfolio account falls below $100,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains below $100,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. The Fund, however, will not redeem shares based solely upon changes in the market that reduce the net asset value of shares. For purposes of redemptions by the Fund, the foregoing minimum account size requirements do not apply to Portfolio accounts containing Class B shares held by officers of the Adviser or its affiliates. However, if the value of such account held by an officer of the Adviser or its affiliates falls below $5,000 because of shareholder redemption(s), the Fund will notify the shareholder, and if the account value remains $5,000 for a continuous 60-day period, the shares in such account are subject to redemption by the Fund and, if redeemed, the net asset value of such shares will be promptly paid to the shareholder. Managed Accounts are not subject to involuntary redemption. The Fund reserves the right to modify or terminate the involuntary redemption features of the shares as stated above at any time upon 60 days' notice to shareholders. CONVERSION FROM CLASS B TO CLASS A SHARES If the value of Class B shares in a Portfolio account increases, whether due to shareholder share purchases or market activity, to $500,000 or more, the Class B shares will convert to Class A shares. Under current tax law, such conversion is not a taxable event to the shareholder. Class A shares converted from Class B shares are subject to the same minimum account size requirements that are applicable to Portfolio accounts containing Class A shares, as stated above. The Fund reserves the right to modify or terminate this conversion feature at any time upon 60 days' notice to shareholders. INITIAL PURCHASES DIRECTLY FROM THE FUND The Fund's determination of an investor's eligibility to purchase shares of a given class will take precedence over the investor's selection of a class. Assuming the investor is eligible for the class, the Fund will select the most favorable class for the investor, if the investor has not done so. 18 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 Class A shares of the Portfolio and $100,000 for Class B shares of the Portfolio, with certain exceptions for Morgan Stanley employees and select customers) payable to "Morgan Stanley Institutional Fund, Inc. -- International Magnum 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 Class(es) of shares of the Portfolio 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. 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 class 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, the class selected and the account number assigned to you) as follows: Chase Manhattan Bank, N.A. One Manhattan Plaza New York, NY 10081-1000 ABA #021000021 DDA #910-2-733293 Attn: Morgan Stanley Institutional Fund, Inc. Ref: (Portfolio name, your account number, your account name) Please call the Fund at 1-800-548-7786 prior to wiring funds. C. Complete and sign the Account Registration Form and mail it to the address shown thereon. Purchase orders for shares of the Portfolio which are received prior to the regular close of the NYSE (currently 4:00 p.m. Eastern Time) will be executed at the price computed on the date of receipt as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. 19 Federal Funds purchase orders will be accepted only on a day on which the Fund and Chase (the "Custodian Bank") are open for business. Your bank may charge a service fee for wiring Federal 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. -- International Magnum Portfolio") at the above address or by wiring monies to the Custodian Bank as outlined above. It is very important that your account name, the portfolio name and the class selected 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. Additional investments will be applied to purchase additional shares in the same class held by a shareholder in a Portfolio account. OTHER PURCHASE INFORMATION The purchase price of the Class A and Class B 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 as long as the Transfer Agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends. The net asset value of Class B shares will generally be lower than the net asset value of Class A shares as a result of the distribution expense charged to Class B shares. It is expected, however, that the net asset value per share of the two classes will tend to converge immediately after the recording of dividends which will differ by approximately the amount of the distribution expense accrual differential between the classes. 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 20 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 the Distributor. EXCESSIVE TRADING Frequent trades involving either substantial portfolio 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 any class 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 class of a portfolio of the Fund within any 120-day period. As an example, exchanging shares of portfolios of the Fund as follows amounts to excessive trading: exchanging Class A shares of Portfolio A for Class A shares of Portfolio B, then exchanging Class A shares of Portfolio B for Class A shares of Portfolio C and again exchanging Class A shares of Portfolio C for Class A shares of Portfolio B within a 120-day period. 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, such as TFM Accounts, managed or advised by MSAM and/or any of its affiliates. 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 Class A shares or Class B shares of the Portfolio at the next determined net asset value of shares of the applicable class. 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. BY MAIL The Portfolio will redeem its Class A shares or Class B 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, MA 02208-2798, except that deliveries by overnight courier should be addressed to Morgan Stanley Institutional Fund, Inc., c/o Chase Global Funds Services Company, 73 Tremont Street, Boston, MA 02108-3913. "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 class and 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 21 (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. 22 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 FEATURES 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, which is closed to new investors). In exchanging for shares of a portfolio with more than one class, the class of shares you receive in the exchange will be determined in the same manner as any other purchase of shares and will not be based on the class of shares surrendered for the exchange. Consequently, the same minimum initial investment and minimum account size for determining the class of shares received in the exchange will apply. See "Purchase of Shares." Shares of the portfolios may be exchanged by mail or telephone. The privilege to exchange shares by telephone is automatic and 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. The exchange privilege may be modified or terminated by the Fund at any time upon 60 days' notice to shareholders. BY MAIL In order to exchange shares by mail, you should include in the exchange request the name, class of shares and account number of the Portfolio, the name(s) of the portfolio(s) and class(es) of shares 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, class of shares and account number of the Portfolio, the names of the portfolio(s) and class(es) of shares 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 class of the portfolios involved in the exchange of shares 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, MA 02208-2798. As in the case of redemptions, the written request must be received in good order before any transfer can be made. Transferring the registration of shares may affect the eligibility of your account for a given class of the Portfolio's shares and may result in involuntary conversion or redemption of your shares. See "Purchase of Shares" above. 23 VALUATION OF SHARES The net asset value per share of a class of shares of the Portfolio is determined by dividing the total market value of the Portfolio's investments and other assets attributable to such class, less any liabilities attributable to such class, by the total number of outstanding shares of such class of the Portfolio. Net asset value is calculated separately for each class 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 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. Although the legal rights of Class A and Class B shares will be identical, the different expenses borne by each class will result in different net asset values and dividends for the class. Dividends will differ by approximately the amount of the distribution expense accrual differential among the classes. The net asset value of Class B shares will generally be lower than the net asset value of the Class A shares as a result of the distribution expense charged to Class B shares. PERFORMANCE INFORMATION The Fund may from time to time advertise total return for each class 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 a class of 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 in the same class on the 24 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. The performance figures for Class B shares will generally be lower than those for Class A shares because of the distribution fee charged to Class B shares. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All income dividends and capital gains distributions for a class of shares will automatically be reinvested in additional shares of such class 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 realized gains, if any, after reduction for any available tax loss carryforwards 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 monthly 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. Because of the distribution fee and any other expenses that may be attributable to the Class B shares, the net income attributable to and the dividends payable on Class B shares will be lower than the net income attributable to and the dividends payable on Class A shares. As a result, the net asset value per share of the classes of the Portfolio will differ at times. Expenses of the Portfolio allocated to a particular class of shares thereof will be borne on a pro rata basis by each outstanding share of that class. TAXES The following summary of certain 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 advisers 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 25 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 not qualify for the 70% dividends-received deduction for corporate shareholders. The Portfolio will report annually to its shareholders the amount of dividend income qualifying for such treatment. 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, exchange or redemption of shares may result in taxable gain or loss to the selling, exchanging or redeeming shareholder, depending upon whether the fair market value of the sale, exchange or redemption proceeds exceeds or is less than the shareholder's adjusted basis in the redeemed, exchanged or sold 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. The conversion of Class A shares to Class B shares should not be a taxable event to the shareholder. 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. 26 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. 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," 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. 27 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 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, as amended and restated, permit the Fund to issue up to 34 billion 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. Subject to the notice period to shareholders with respect to shares held by shareholders, 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 common stock of each portfolio are currently classified into two classes, the Class A shares and the Class B shares, except for the International Small Cap, Money Market and Municipal Money Market Portfolios, which only offer Class A shares. The shares of the 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 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 the 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, the Adviser 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 As of September 1, 1995, domestic securities and cash are held by Chase, which replaced U.S. Trust as the Fund's domestic custodian. Chase is not an affiliate of the Adviser or the Distributor. Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an affiliate of the Adviser and the Distributor, acts as the Fund's custodian for foreign assets held outside the United States and employs subcustodians approved by the Board of Directors of the Fund in accordance with regulations of the Securities and Exchange Commission for the 28 purpose of providing custodial services for such assets. MSTC may also hold certain domestic assets for the Fund. For more information on the custodians, see "General Information -- Custody Arrangements" in the Statement of Additional Information. DIVIDEND DISBURSING AND TRANSFER AGENT Chase Global Funds Services 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. 29
MORGAN STANLEY INSTITUTIONAL FUND, INC. INTERNATIONAL MAGNUM PORTFOLIO P.O. BOX 2798, BOSTON, MA 02208-2798 - --------------------------------------------------------------------------------------------------------------- ACCOUNT REGISTRATION FORM - --------------------------------------------------------------------------------------------------------------- ACCOUNT INFORMATION If you need assistance in filling out this form Fill in where applicable for the Morgan Stanley Institutional Fund, please contact your Morgan Stanley representative or call us toll free 1 (800) 548-7786. Please print all items except signature, and mail to the Fund at the address above. - --------------------------------------------------------------------------------------------------------------- A) REGISTRATION 1. INDIVIDUAL 1. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / First Name Initial Last Name 2. JOINT TENANTS 2. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / (RIGHTS OF First Name Initial Last Name SURVIVORSHIP / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / PRESUMED UNLESS First Name Initial Last Name TENANCY IN COMMON IS INDICATED) - --------------------------------------------------------------------------------------------------------------- 3. CORPORATIONS, 3. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / TRUSTS AND OTHERS Please call the / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Fund for additional documents that may / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / be required to set up account and to authorize transactions Type of / / INCORPORATED / / UNINCORPORATED / / PARTNERSHIP / / UNIFORM GIFT/TRANSFER TO MINOR Registration: ASSOCIATION (ONLY ONE CUSTODIAN AND MINOR PERMITTED) / / TRUST __________________________________ / / OTHER (Specify) ______________________________ - --------------------------------------------------------------------------------------------------------------- B) MAILING ADDRESS Street or P.O. Box / / / / / / / / / / / / / / / / / / / / / / / / / / / / Please fill in completely, including City / / / / / / / / / / / / / State / / / Zip / / / / / /-/ / / / / / / / telephone number(s). Home Business Telephone No./ / / /-/ / / /-/ / / / / Telephone No./ / / /-/ / / /-/ / / / / / United States / / Resident / /Non-Resident Alien: Citizen 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 NUMBER individual taxpayers, this is your law to provide us (as payer) with If the account is in Social Security Number. your correct Taxpayer Identification more than one name, TAXPAYER IDENTIFICATION NUMBER Number. Accounts that have a missing CIRCLE THE NAME OF THE / / / /-/ / / / / / / / / or incorrect Taxpayer Identification PERSON WHOSE TAXPAYER OR Number will be subject to backup IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER withholding at a 31% rate on dividends, IS PROVIDED IN SECTION / / / /-/ / /-/ / / / / distributions and other payments. A) ABOVE. If no name PART 2. BACKUP WITHHOLDING If you have not provided us with is circled, the number / / Check this box if you are your correct taxpayer identification will be considered to be NOT subject to Backup number, you may be subject to that of the last name Withholding under the a $50 penalty imposed by the Internal listed. For Custodian provisions of Section Revenue Service. account of a minor 3406(a)(1)(C) of the Internal Backup withholding is not an (Uniform Gift/Transfer Revenue Code. additional tax; the tax liability of to Minor Act), give the persons subject to backup withholding Social Security Number will be reduced by the amount of tax of the minor. withheld. If withholding results in an overpayment of taxes, a refund may be obtained. You may be notified that you are subject to backup withholding under Section 3406(a)(1)(C) of the Internal Revenue Code because you have underreported interest or dividends or you were required to but failed to file a return which would have included a reportable interest or dividend payment. IF YOU HAVE NOT BEEN SO NOTIFIED, CHECK THE BOX IN PART 2 AT LEFT. - --------------------------------------------------------------------------------------------------------------- D) PORTFOLIO AND For Purchase of the following Portfolio: CLASS SELECTION International Magnum Portfolio / / Class A Share ____ / / Class B Shares ____ (Class A shares minimum $500,000 and Class B shares Total Initial Investment $_____________ minimum $100,000). Please indicate class and amount. - --------------------------------------------------------------------------------------------------------------- E) METHOD OF Payment by: INVESTMENT / / Check (MAKE CHECK PAYABLE TO MORGAN STANLEY INSTITUTIONAL FUND, INC.--INTERNATIONAL MAGNUM PORTFOLIO) Please indicate manner of / / Exchange $____________ From________________ / / / / / / / / / / /-/ / payment. Name of Portfolio Account No. / / Account previously established by: / / Phone exchange / / Wire on___________________ / / / / / / / / / / / /-/ / Date Account No. (Check (Previously assigned by the Fund) Digit) - --------------------------------------------------------------------------------------------------------------- F) DISTRIBUTION Income dividends and capital gains distributions (if any) will OPTION be reinvested in additional shares unless 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 Name of COMMERCIAL Bank Bank Account No. OPTION to wire redemption proceeds to the (Not Savings Bank) Please select at time of commercial bank indicated at right and/or initial application if you mail redemption proceeds to the name and ________________ wish to redeem shares by address in which my/our fund account is Bank ABA No. telephone. A SIGNATURE registered if such requests are believed GUARANTEE IS REQUIRED IF to be authentic. _________________________________________________ BANK ACCOUNT IS NOT The Fund and the Fund's D.S. Transfer Agent Name(s) in which your BANK Account is Established REGISTERED IDENTICALLY TO will employ reasonable procedures to confirm YOUR FUND ACCOUNT. that instructions communicated by telephone are _________________________________________________ genuine. These procedures include requiring Bank's Street Address TELEPHONE REQUESTS FOR the investor to provide certain personal REDEMPTIONS OR EXCHANGES identification information at the time an _________________________________________________ WILL NOT BE HONORED UNLESS account is opened and prior to effecting each City State Zip THE BOX IS CHECKED. 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 In addition to the account _________________________________________________________________ statement sent to my/our Name registered address, I/we _________________________________________________________________ hereby authorize the fund to mail duplicate _________________________________________________________________ statements to the name and Address address provided at right. _________________________________________________________________ City State Zip Code - --------------------------------------------------------------------------------------------------------------- I) DEALER INFORMATION _______________________ _______________________________ ___________ Representative Name Representative No. Branch No. - --------------------------------------------------------------------------------------------------------------- J) SIGNATURE OF The undersigned certify that I/we have full authority and legal ALL HOLDERS capacity to purchase and redeem shares of the Fund and affirm that I/we AND TAXPAYER have received a current Prospectus of the Morgan Stanley Institutional CERTIFICATION Fund, Inc. and agree to be bound by its terms. Sign Here > (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................. 8 Additional Investment Information................. 9 Investment Limitations............................ 15 Management of the Fund............................ 15 Purchase of Shares................................ 17 Redemption of Shares.............................. 21 Shareholder Services.............................. 23 Valuation of Shares............................... 24 Performance Information........................... 24 Dividends and Capital Gains Distributions......... 25 Taxes............................................. 25 Portfolio Transactions............................ 27 General Information............................... 28 Account Registration Form
INTERNATIONAL MAGNUM 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 MORGAN STANLEY INSTITUTIONAL FUND, INC. P.O. BOX 2798, BOSTON, MA 02208-2798 - --------------------------------------- - --------------------------------------- - --------------------------------------- - --------------------------------------- MORGAN STANLEY INSTITUTIONAL FUND, INC. STATEMENT OF ADDITIONAL INFORMATION 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-eight Portfolios offering a broad range of investment choices. The Fund is designed to provide clients with attractive alternatives for meeting their investment needs. Each Portfolio, except the Money Market, Municipal Money Market, International Small Cap and China Growth Portfolios, offers two classes of shares, the Class A shares and the Class B shares (each, a "Multiclass Portfolio"). Each Multiclass Portfolio, except the International Magnum Portfolio, offered one class of shares until January 2, 1996, when all shares of such Portfolios owned prior to January 2, 1996 were redesignated Class A shares. The Class A shares and the Class B shares currently offered by each Multiclass Portfolio have different minimum investment requirements and fund expenses. Shares of each Portfolio are offered with no sales charge or exchange or redemption fee (with the exception of the International Small Cap Portfolio). This Statement of Additional Information addresses information of the Fund applicable to each of the twenty- eight Portfolios. This Statement is not a prospectus but should be read in conjunction with the several prospectuses of the Fund's Portfolios (the "Prospectuses"). To obtain any of the Prospectuses, please call the Morgan Stanley Institutional Fund, Inc. Services Group at 1-800-548-7786. TABLE OF CONTENTS PAGE ---- Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . 2 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Special Tax Considerations Relating to Municipal Bond and Municipal Money Market Portfolios . . . . . . . . . . . . . . . . . . . 14 Special Tax Considerations Relating to Foreign Investments . . . . . . . . 15 Taxes and Foreign Shareholders . . . . . . . . . . . . . . . . . . . . . . 16 Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Investment Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Determining Maturities of Certain Instruments. . . . . . . . . . . . . . . 19 Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Net Asset Value for Money Market Portfolios. . . . . . . . . . . . . . . . 29 Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . 30 General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Description of Securities and Ratings. . . . . . . . . . . . . . . . . . . 37 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1996, RELATING TO: Prospectus for the International Magnum Portfolio, dated May 1, 1996 Prospectus for the U.S. Real Estate Portfolio, dated May 1, 1996 Prospectus for the Fixed Income Portfolio, Global Fixed Income Portfolio, Municipal Bond Portfolio, Mortgage-Backed Securities Portfolio, High Yield Portfolio, Money Market Portfolio and Municipal Money Market Portfolio, dated May 1, 1996 Prospectus for the Equity Growth Portfolio, Emerging Growth Portfolio, MicroCap Portfolio and Aggressive Equity Portfolio, dated May 1, 1996 Prospectus for the Small Cap Value Equity Portfolio, Value Equity Portfolio and Balanced Portfolio, dated May 1, 1996 Prospectus for the Global Equity Portfolio, International Equity Portfolio, International Small Cap Portfolio, Asian Equity Portfolio, European Equity Portfolio, Japanese Equity Portfolio and Latin American Portfolio, dated May 1, 1996 Prospectus for the Emerging Markets Portfolio and Emerging Markets Debt Portfolio, dated May 1, 1996 Prospectus for the Active Country Allocation Portfolio, dated May 1, 1996 Prospectus for the Gold Portfolio, dated May 1, 1996 Prospectus for the China Growth Portfolio, dated April 13, 1994 INVESTMENT OBJECTIVES AND POLICIES The following policies supplement the investment objectives and policies set forth in the Fund's Prospectuses: CURRENCY SWAPS The China Growth Portfolio may enter into currency swaps for hedging purposes and non-hedging purposes. Inasmuch as swaps are entered into for good faith hedging purposes and are offset by a segregated account as described below, the Portfolio believes that swaps do not constitute senior securities as defined in the 1940 Act and, accordingly, will not treat them as being subject to the Portfolio's borrowing restrictions. An amount of cash or liquid high grade debt securities (i.e., securities rated in one of the top three ratings categories by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P"), or, if unrated, deemed by the Adviser to be of comparable credit quality) having an aggregate net asset value at least equal to the gross payments which the Portfolio is obligated to make under the currency swap will be maintained in a segregated account by the Fund's Custodian. The Portfolio will not enter into any currency swap unless the credit quality of the unsecured senior debt or the claims-paying ability of the other party thereto is considered to be investment grade by the Adviser. If there is a default by the other party to such a transaction, the Portfolio will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments which are traded in the interbank market. EMERGING COUNTRY EQUITY AND DEBT SECURITIES GENERAL. Each of the Emerging Markets and Emerging Markets Debt Portfolio's definition of emerging country equity or debt securities includes securities of companies that may have characteristics and business relationships common to companies in a country or countries other than an emerging country. As a result, the value of the securities of such companies may reflect economic and market forces applicable to other countries, as well as to an emerging country. Morgan Stanley Asset Management Inc. (the "Adviser") believes, however, that investment in such companies will be appropriate because the Portfolio will invest only in those companies which, in its view, have sufficiently strong exposure to economic and market forces in an emerging country such that their value will tend to reflect developments in such emerging country to a greater extent than developments in another country or countries. For example, the Portfolio may invest in companies organized and located in countries other than an emerging country, including companies having their entire production facilities outside of an emerging country, when securities of such companies meet one or more elements of the Portfolio's definition of an emerging country equity or debt security and so long as the Adviser believes at the time of investment that the value of the company's securities will reflect principally conditions in such emerging country. The Emerging Markets Debt Portfolio is 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 value of debt securities held by the Portfolio generally will vary inversely to changes in prevailing interest rates. The Portfolio's investments in fixed-rated debt securities with longer terms to maturity are subject to greater volatility than the Portfolio's investments in shorter-term obligations. Debt obligations acquired at a discount are subject to greater fluctuations of market value in response to changing interest rates than debt obligations of comparable maturities which are not subject to such discount. Investments in emerging country government debt securities involve special risks. Certain emerging countries have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. The issuer or governmental authority that controls the repayment of an emerging country's debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. As a result of the foregoing, a government obligor may default on its obligations. If such an event occurs, the Portfolio may have limited legal recourse against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself, and the ability of the holder of foreign government debt securities to obtain recourse may be subject to the political climate in the relevant country. In addition, no assurance can be given that the holders of commercial bank debt will not contest payments to the holders of other foreign government debt obligations in the event of default under their commercial bank loan agreements. BRADY BONDS. The Emerging Markets Debt Portfolio may 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 restructuring under a plan introduced by former U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued only recently, and, accordingly, do not have a long payment history. They may be collateralized or uncollateralized and issued in various currencies (although most are U.S. dollar-denominated) and they are actively traded in the over- 2 the-counter secondary market. The Portfolio may purchase Brady Bonds either in the primary or secondary markets. The price and yield of Brady Bonds purchased in the secondary market will reflect the market conditions at the time of purchase, regardless of the stated face amount and the stated interest rate. With respect to Brady Bonds with no or limited collateralization, the Portfolio will rely for payment of interest and principal primarily on the willingness and ability of the issuing government to make payment in accordance with the terms of the bonds. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds, are generally collateralized in full as to principal due at maturity by U.S. Treasury zero coupon obligations which have the same maturity as the Brady Bonds. Interest payments on these Brady Bonds generally are collateralized by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of rolling interest payments or, in the case of floating rate bonds, initially is equal to at least one year's rolling interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to "value recovery payments" in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. Brady Bonds are often viewed as having three or four valuation components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at maturity (these uncollateralized amounts constitute the "residual risk"). In the event of a default with respect to collateralized Brady Bonds as a result of which the payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon obligations held as collateral for the payment of principal will not be distributed to investors, nor will such obligations be sold and the proceeds distributed. The collateral will be held to the scheduled maturity of the defaulted Brady Bonds by the collateral agent, at which time the face amount of the collateral will equal the principal payments which would have then been due on the Brady Bonds in the normal course. In addition, in light of the residual risk of the Brady Bonds and, among other factors, the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds, investments in Brady Bonds should be viewed as speculative. Brady Plan debt restructuring totalling approximately $73 billion have been implemented to date in Argentina, Bulgaria, Costa Rica, Ecuador, Mexico, Nigeria, the Philippines, Uruguay and Venezuela, with the largest proportion of Brady Bonds having been issued to date by Mexico and Venezuela. Brazil and Poland have announced plans to issue Brady Bonds aggregating approximately $52 billion, based on current estimates. There can be no assurance that the circumstances regarding the issuance of Brady Bonds by these countries will not change. STRUCTURED SECURITIES. The Emerging Markets Debt Portfolio may also invest a portion of its assets in interests 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 of payment of another class. Subordinated Structured Securities typically have higher yields and present greater risks than unsubordinated Structured Securities. Certain issuers of Structured Securities may be deemed to be "investment companies" as defined in the 1940 Act. As a result, the Portfolio's investment in these Structured Securities may be limited by restrictions contained in the 1940 Act. Structured Securities are typically sold in private placement transactions, and there currently is no active trading market for Structured Securities. LOAN PARTICIPATIONS AND ASSIGNMENTS. The Emerging Markets Debt Portfolio may also invest in fixed 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 participations in Loans ("Participations") and assignments of all or a portion of Loans ("Assignments") from third parties. The Portfolio's investment in Participations typically will result in the Portfolio having a contractual relationship only with the Lender and not with the borrower. 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 connection with purchasing Participations, the Portfolio generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loan, nor any rights of set-off against the borrower, and the Portfolio may not directly benefit from any collateral supporting the Loan in which it has purchased the Participation. As a result, the Portfolio may be subject to the credit risk of both the borrower and the Lender that is selling the Participation. 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 3 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, but 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 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. Because Assignments are arranged through private negotiations between potential assignees and potential assignors, however, 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. The assignability of certain sovereign debt obligations is restricted by the governing documentation as to the nature of the assignee such that the only way in which the Portfolio may acquire an interest in a loan is through a Participation and not an Assignment. The Portfolio may have difficulty disposing of Assignments and Participations because to do so it will have to assign such securities to a third party. 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 securities and calculating its net asset value. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The U.S. dollar value of the assets of the Global Equity, International Equity, International Small Cap, Asian Equity, European Equity, Japanese Equity, Latin American, International Magnum, Global Fixed Income, Active Country Allocation, China Growth, Emerging Markets, Emerging Markets Debt and Gold Portfolios and, to the extent they invest in securities denominated in foreign currencies, the assets of the Emerging Growth, MicroCap, Aggressive Equity, Small Cap Value Equity, Value Equity, Balanced, Fixed Income and High Yield Portfolios may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and the Portfolios may incur costs in connection with conversions between various currencies. The Portfolios will conduct their foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward contracts to purchase or sell foreign currencies. A forward currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for such trades. The Gold Portfolio may also enter into precious metals forward contracts. See "Precious Metals Forward and Futures Contracts and Options" below. The Portfolios may enter into forward foreign currency exchange contracts in several circumstances. When a Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, or when a Portfolio anticipates the receipt in a foreign currency of dividends or interest payments on a security which it holds, the Portfolio may desire to "lock-in" the U.S. dollar price of the security or the U.S. dollar equivalent of such dividend or interest payment, as the case may be. By entering into a forward contract for a fixed amount of dollars, for the purchase or sale of the amount of foreign currency involved in the underlying transactions, the Portfolio will be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payment is declared, and the date on which such payments are made or received. Additionally, when any of these Portfolios anticipates that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar, it may enter into a forward contract for a fixed amount of dollars, to sell the amount of foreign currency approximating the value of some or all of such Portfolio's securities denominated in such foreign currency. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible since the future value of securities in foreign currencies will change as a consequence of market movements in the value of these securities between the date on which the forward contract is entered into and the date it matures. The projection of short-term currency market movement is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. None of the Portfolios intend to enter into such forward contracts to protect the value of portfolio securities on a continuous basis. The Portfolios will not enter into such forward contracts or maintain a net exposure to such contracts where the consummation of the contracts would obligate such Portfolio to deliver an amount of foreign currency in excess of the value of such Portfolio's securities or other assets denominated in that currency. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the long-term investment decisions made with regard to overall diversification strategies. However, the management of the Fund believes that it 4 is important to have the flexibility to enter into such forward contracts when it determines that the best interests of the performance of each Portfolio will thereby be served. Except under circumstances where a segregated account is not required under the 1940 Act or the rules adopted thereunder, the Fund'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 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 equal to the amount of such Portfolio's commitments with respect to such contracts. The Portfolios generally will not enter into a forward contract with a term of greater than one year. At the maturity of a forward contract, a Portfolio may either sell the portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract with the same currency trader obligating it to purchase, on the same maturity date, the same amount of the foreign currency. It is impossible to forecast with absolute precision the market value of a particular portfolio security at the expiration of the contract. Accordingly, it may be necessary for a Portfolio to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency that such Portfolio is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. If a Portfolio retains the portfolio security and engages in an offsetting transaction, such Portfolio will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. Should forward prices decline during the period between a Portfolio entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, such Portfolio will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, such Portfolio would suffer a loss to the extent that the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. The Portfolios are not required to enter into such transactions with regard to their foreign currency-denominated securities. It also should be realized that this method of protecting the value of portfolio securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange which one can achieve at some future point in time. Additionally, although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time, they tend to limit any potential gain which might result should the value of such currency increase. FUTURES CONTRACTS The Equity Growth, Aggressive Equity, Value Equity, Balanced, Small Cap Value Equity, Active Country Allocation, Gold, Latin American, U.S. Real Estate, Emerging Markets, Emerging Markets Debt, International Magnum and China Growth Portfolios may enter into futures contracts and options on futures contracts for the purpose of remaining fully invested and reducing transactions costs. The Fixed Income, Municipal Bond, Mortgage-Backed Securities, High Yield, Money Market, Municipal Money Market, Active Country Allocation, Equity Growth, Aggressive Equity, Gold, Latin American, U.S. Real Estate, Emerging Markets, Emerging Markets Debt, International Magnum and China Growth Portfolios may also enter into futures contracts for hedging purposes. No Portfolio will enter into futures contracts or options thereon for speculative purposes. The Gold Portfolio may also enter into futures contracts and options thereon on precious metals. See "Precious Metals Forward and Futures Contracts and Options" below. The China Growth and Latin American Portfolios may also enter into futures and options thereon on stock and other securities indices and currencies. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. Futures contracts, which are standardized as to maturity date and underlying financial instrument, are traded on national futures exchanges. Futures exchanges and trading are regulated under the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a U.S. government agency. Although futures contracts by their terms call for actual delivery or acceptance of the underlying securities or currencies, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. Closing out an open futures position is done by taking an opposite position ("buying" a contract which has previously been "sold" or "selling" a contract previously "purchased") in an identical contract to terminate the position. Brokerage commissions are incurred when a futures contract is bought or sold. Futures contracts on securities indices or other indices do not require the physical delivery of securities, but merely provide for profits and losses resulting from changes in the market value of a contract to be credited or debited at the close of each trading 5 day to the respective accounts of the parties to the contract. On the contract's expiration date a final cash settlement occurs and the futures position is simply closed out. Changes in the market value of a particular futures contract reflect changes in the level of the index on which the futures contract is based. Futures traders are required to make a good faith margin deposit in cash or government securities with a broker or custodian to initiate and maintain open positions in futures contracts. A margin deposit is intended to assure completion of the contract (delivery or acceptance of the underlying security) if it is not terminated prior to the specified delivery date. Minimal initial margin requirements are established by the futures exchange and may be changed. Brokers may establish deposit requirements which are higher than the exchange minimums. Futures contracts are customarily purchased and sold for prices that may range upward from less than 5% of the value of the contract being traded. After a futures contract position is opened, the value of the contract is marked to market daily. If the futures contract price changes to the extent that the margin on deposit does not satisfy margin requirements, payment of an additional "variation" margin will be required. Conversely, a change in the contract value may reduce the required margin, resulting in a repayment of excess margin to the contract holder. Variation margin payments are made to and from the futures broker for as long as the contract remains open. The Portfolios expect to earn interest income on their margin deposits. With respect to each long position in a futures contract or option thereon, the underlying commodity value of such contract will always be covered by cash and cash equivalents set aside plus accrued profits held at the futures commission merchant. The Portfolios may purchase and write call and put options on futures contracts which are traded on a U.S. Exchange (and in the case of the China Growth and Latin American Portfolios, on any recognized securities or futures exchange to the extent permitted by the CFTC) 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 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. Upon exercise of the option, the delivery of the accumulated balance in the writer's futures margin account, which represents the amount by which the market price of the futures contract at the time of exercise exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. The Portfolios 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. Traders in futures contracts may be broadly classified as either "hedgers" or "speculators." Hedgers use the futures markets primarily to offset unfavorable changes in the value of securities otherwise held for investment purposes or expected to be acquired by them. Speculators are less inclined to own the underlying securities with futures contracts which they trade, and use futures contracts with the expectation of realizing profits from market fluctuations. The Portfolios intend to use futures contracts only for hedging purposes. Regulations of the CFTC applicable to the Portfolios require that all futures transactions constitute bona fide hedging transactions except that a Portfolio may engage in futures transactions that do not constitute bona fide hedging to the extent that not more than 5% of the liquidation value of a Portfolio's total assets are required as margin deposits or premiums for such transactions. The Portfolios will only sell futures contracts to protect securities owned against declines in price or purchase contracts to protect against an increase in the price of securities intended for purchase. As evidence of this hedging interest, the Portfolios expect that approximately 75% of their futures contracts will be "completed"; that is, equivalent amounts of related securities will have been purchased or are being purchased by the Portfolios upon sale of open futures contracts. Although techniques other than the sale and purchase of futures contracts could be used to control the Portfolios' exposure to market fluctuations, the use of futures contracts may be a more effective means of hedging this exposure. While the Portfolios will incur commission expenses in both opening and closing out futures positions, these costs are lower than transaction costs incurred in the purchase and sale of the underlying securities. RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. None of the Portfolios will enter into futures contract transactions to the extent that, immediately thereafter, the sum of its initial margin deposits on open contracts exceeds 5% of the market value of its total assets. In addition, none of the Portfolios will enter into futures contracts to the extent that its outstanding obligations to purchase securities under futures contracts and options on futures contracts (and in the case of the Active Country Allocation, Equity Growth, Gold, Latin American and China Growth Portfolios, under options, futures contracts and options on futures contracts) would exceed 20% of its respective total assets. 6 RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be closed out only on an exchange which provides a secondary market for such futures. However, there can be no assurance that a liquid secondary market will exist for any particular futures contracts at any specific time. Thus, it may not be possible to close a futures position. In the event of adverse price movements, the Portfolios would continue to be required to make daily cash payments to maintain their required margin. In such situations, if a Portfolio has insufficient cash, it may have to sell portfolio securities to meet its daily margin requirement at a time when it may be disadvantageous to do so. In addition, a Portfolio may be required to make delivery of the instruments underlying futures contracts it holds. The inability to close options and futures positions also could have an adverse impact on the Portfolio's ability to effectively hedge. The Portfolios will minimize the risk that they will be unable to close out a futures contract by only entering into futures which are traded on national futures exchanges and for which there appears to be a liquid secondary market. The risk of loss in trading 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. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss (as well as gain) to the investor. For example, if, at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit if the contract were closed out. Thus, a purchase or sale of a futures contract may result in losses in excess of the amount invested in the contract. However, because the Portfolios engage in futures strategies only for hedging purposes, the Adviser does not believe that the Portfolios are subject to the risks of loss frequently associated with futures transactions. A Portfolio would presumably have sustained comparable losses if, instead of the futures contract, it had invested in the underlying security or currency and sold it after the decline. Utilization of futures transactions by the Portfolios does involve the risk of imperfect or no correlation where the securities underlying futures contracts have different maturities than the portfolio securities or currencies being hedged. It is also possible that a Portfolio could both lose money on futures contracts and also experience a decline in value of its portfolio securities. There is also the risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a broker with whom the Portfolio has an open position in a futures contract or related option. Most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses. MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX The investment objective of the Active Country Allocation Portfolio and the International Magnum Portfolio is to provide long-term capital appreciation. The Active Country Allocation Portfolio seeks to achieve its objective by investing in equity securities of non-U.S. issuers which, in the aggregate, replicate broad country indices, in accordance with country weightings determined by the Adviser. The Adviser utilizes a top-down approach in selecting investments for the Active Country Allocation Portfolio that emphasizes country selection and weighting rather than individual stock selection. The Active Country Allocation Portfolio invests, INTER ALIA, in industrialized countries throughout the world that comprise the Morgan Stanley Capital International EAFE (Europe, Australia and the Far East) Index (the "EAFE Index"). The International Magnum Portfolio seeks to achieve its objective by investing primarily in equity securities of non-U.S. issuers in accordance with the EAFE country (defined below) weightings determined by the Adviser. After establishing regional allocation strategies, the Adviser then selects equity securities among issuers of a region. The International Magnum Portfolio invests in countries comprising the EAFE Index (each an "EAFE country"). The EAFE Index is one of seven International Indices, twenty National Indices and thirty-eight International Industry Indices making up the Morgan Stanley Capital International Indices. The Morgan Stanley Capital International EAFE Index is based on the share prices of 1,066 companies listed on the stock exchanges of Europe, Australia, New Zealand and the Far East. "Europe" includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, The Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom. "Far East" includes Japan, Hong Kong and Singapore/Malaysia. 7 OPTIONS TRANSACTIONS GENERAL INFORMATION. As stated in the applicable Prospectus, the Active Country Allocation, Emerging Markets, Emerging Markets Debt, Equity Growth, Aggressive Equity, Gold, Small Cap Value Equity, Value Equity, Balanced, Latin American, U.S. Real Estate, International Magnum and China Growth Portfolios may purchase and sell options on portfolio securities and the China Growth and Latin American Portfolios also may purchase and sell options on securities indices. Additional information with respect to option transactions is set forth below. Call and put options on equity securities are listed on various U.S. and foreign securities exchanges ("listed options") and are written in over-the-counter transactions ("OTC Options"). Listed options are issued or guaranteed by the exchange on which they trade or by a clearing corporation, such as Options Clearing Corporation ("OCC") in the United States. Ownership of a listed call option gives the fund the right to buy from the clearing corporation or exchange, the underlying security covered by the option at the state exercise price (the price per unit of the underlying security or currency) by filing an exercise notice prior to the expiration date of the option. The writer (seller) of the option would then have the obligation to sell to the clearing corporation or exchange, the underlying security or currency at that exercise price prior to the expiration date of the option, regardless of the current market price. Ownership of listed put option would give the Portfolio the right to sell the underlying security or currency to the clearing corporation or exchange at the state exercise price. Upon notice of exercise of the put option, the writer of the option would have the obligation to purchase the underlying security from the clearing corporation or exchange at the exercise price. OTC options are purchased from or sold (written) to dealers of financial institutions which have entered into direct agreements with the Portfolio. With OTC options, such variables as expiration date, exercise price and premium will be agreed upon between the Portfolio and the transactions dealer, without the intermediation of a third party such as a clearing corporation or exchange. If the transacting dealer fails to make or take delivery of the securities underlying an option it has written, in accordance with the terms of that option, the Portfolio would lose the premium paid for the option as well as any anticipated benefit of the transaction. COVERED CALL WRITING. Each of the Portfolios may write (i.e., sell) covered call options on portfolio securities. By doing so, 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 price of the option, less a commission charged by a broker. The Portfolio will keep the premium regardless of whether the option is exercised. 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. 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 and 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 size of premiums will fluctuate with varying market conditions. COVERED PUT WRITING. Each of the Portfolios may write covered put options on portfolio securities. By doing so, 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 listed and OTC 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 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. Each of the Portfolios will write put options to receive the premiums paid by purchasers; when the Adviser (and also the Sub-Adviser with respect to the Gold Portfolio) wishes to purchase the security underlying the option at a price lower than its current market price, in which case it will write the covered put at an exercise price reflecting the lower purchase price sought; and to close out long put option positions. PURCHASE OF PUT AND CALL OPTIONS. Each of the Portfolios may purchase listed or OTC put or call options on its portfolio securities in amounts exceeding no more than 5% of its total assets. When the Portfolio purchases a call option it acquires the right to purchase 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. 8 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 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. The amount the Portfolio pays to purchase an option is called a "premium", 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 must change and the change must be sufficient to cover the premium and commissions paid. A price change in the security underlying the option does not assure a profit since prices in the options market may not always reflect such a change. OPTIONS ON SECURITIES INDICES. The China Growth and Latin American Portfolios may purchase and write put and call options on securities indices and enter into related closing transactions in order to hedge against the risk of market price fluctuations or to increase income to the Portfolio. Call and put options on indices are similar to options on securities except that, rather than the right to purchase or sell particular securities at a specified price, options on an index give the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the underlying index is greater than (or less than, in the case of puts) the exercise price of the option. This amount of cash is equal to the difference between the closing price of the index and the exercise price of the option, expressed in dollars multiplied by a specified number. Thus, unlike options on individual securities, all settlements are in cash, and gain or loss depends on price movements in the particular market represented by the index generally (or in a particular industry or segment of the market) rather than the price movements in individual securities. All options written on indices must be covered. When the Portfolio writes an option on an index, it will establish a segregated account containing cash, U.S. government securities or other high quality liquid debt securities with its custodian in an amount at least equal to the market value of the option and will maintain the account while the option is open or will otherwise cover the transaction. The Portfolio may choose to terminate an option position by entering into a closing transaction. The ability of the Portfolio to enter into closing transactions depends upon the existence of a liquid secondary market for such transactions. OPTIONS ON CURRENCIES. The China Growth and Latin American Portfolios may purchase and write put and call options on foreign currencies (traded on U.S. and foreign exchanges or over-the-counter markets) to manage the Portfolio's exposure to changes in dollar exchange rates. Call options on foreign currency written by the Portfolio will be "covered," which means that the Portfolio will own an equal amount of the underlying foreign currency. With respect to put options on foreign currency written by the Portfolio, the Portfolio will establish a segregated account with the Fund's Custodian consisting of cash, U.S. government securities or other high quality liquid debt securities in an amount equal to the amount the Portfolio would be required to pay upon exercise of the put. PORTFOLIO TURNOVER The portfolio turnover rate for a year is the lesser of the value of the purchases or sales for the year divided by the average monthly market value of the Portfolio for the year, excluding U.S. Government securities and securities with maturities of one year or less. The portfolio turnover rate for a year is calculated by dividing the lesser of sales or the average monthly value of the Portfolio's portfolio purchases of portfolio securities during that year by securities, excluding money market instruments. The rate of portfolio turnover will not be a limiting factor when the Portfolio deems it appropriate to purchase or sell securities for the Portfolio. 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. See "Taxes." PRECIOUS METALS FORWARD AND FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS The Gold Portfolio may enter into futures contacts on precious ("precious metals futures") 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 ("anticipatory hedge") or sales of futures contracts as an offset against the effect of anticipated declines in the price of precious metal which the Portfolio owns ("hedge against an existing position"). 9 The Portfolio will enter into precious metals forward contracts which are similar to precious metals futures contracts, in that they 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. Unlike the futures contract market, which is regulated by the CFTC and by the regulations of the commodity exchanges, the forward contract market is unregulated. The Portfolio will use forward contracts for the same hedging purposes as those applicable to futures contracts, as described above. When the Portfolio enters into a forward contract it will establish with the custodian a segregated account consisting of cash, cash equivalents or bullion equal to the market value of the forward contract purchased. 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. In addition, expectations of changing market conditions may at times influence the prices of such futures and forward contracts, and changes in the cost of holding physical precious metals, including storage, insurance and interest expense, will also affect the relationship between spot and futures or forward prices. 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 at times be imperfect and even a well conceived hedge may be unsuccessful to some degree because of market behavior or unexpected precious metals price trends. To the extent that interest rates move in a direction opposite to that anticipated, the Portfolio may realize a loss on a futures transaction not offset by an increase in the value of portfolio securities. Moreover there is a possibility of a lack of a liquid secondary market for closing out a futures position or futures option. The success of any hedging technique depends upon the Adviser's and Sub-Adviser's accuracy in predicting the direction of a market. If these predictions are incorrect, the Portfolio may realize a loss. The Portfolio may also purchase (buy) and write (sell) covered call or put options on precious metals futures contracts. Such options would be purchased solely for hedging purposes similar to those applicable to the purchase and sale of futures contracts. 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. The Portfolio may not purchase options on precious metals and precious metals futures contracts if the premiums paid for all such options, together with margin deposits on precious metals future contracts, would exceed 5% of the Portfolio's total assets at the time the option is purchased. One of the risks which may arise in employing futures contracts to protect against the price volatility of the Portfolio's assets is that the price of precious metals subject to futures contracts (and thereby the futures contracts prices) may correlate imperfectly with the prices of such assets. A correlation may also be distorted by the fact that the futures market is dominated by short- term traders seeking to profit from the difference between a contract or security price objective and their cost of borrowed funds. Such distortions are generally minor and would diminish as the contract approached maturity. SECURITIES LENDING Each Portfolio may lend its investment securities to qualified institutional investors who need to borrow securities in order to complete certain transactions, such as covering short sales, avoiding failures to deliver securities or completing arbitrage operations. By lending its investment securities, a Portfolio attempts to increase its net investment income through the receipt of interest on the loan. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Portfolio. Each Portfolio may lend its investment securities to qualified brokers, dealers, domestic and foreign banks or other financial institutions, so long as the terms, structure and the aggregate amount of such loans are not inconsistent with the Investment Company Act of 1940, as amended (the "1940 Act"), or the Rules and Regulations or interpretations of the Securities and Exchange Commission (the "Commission") thereunder, which currently require that (a) the borrower pledge and maintain with the portfolio collateral consisting of cash, an irrevocable letter of credit issued by a domestic U.S. bank, or securities issued or guaranteed by the United States Government having a value at all times not less than 100% of the value of the securities loaned, (b) the borrower add to such collateral whenever the price of the securities loaned rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan be made subject to termination by the Portfolio at any time, and (d) the Portfolio receive reasonable interest on the loan (which may include the Portfolio investing any cash collateral in interest bearing short-term investments), any distributions on the loaned securities and any increase in their market value. 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. However, loans will only be made to borrowers deemed by the Advisor to be of good standing and when, in the judgment of the Advisor, the consideration which can be earned currently from such securities loans justifies the attendant risk. All relevant facts and circumstances, including the creditworthiness of the broker, dealer or institution, will be considered in making decisions with respect to the lending of securities, subject to review by the Board of Directors of the Fund. 10 At the present time, the staff of the Commission does not object if an investment company pays reasonable negotiated fees in connection with loaned securities, so long as such fees are set forth in a written contract and approved by the investment company's Board of Directors. In addition, voting rights may pass with the loaned securities, but if a material event will occur affecting an investment on loan, the loan must be called and the securities voted. SHORT SALES The Emerging Markets Debt, Latin American and Aggressive Equity Portfolios may from time to time sell securities short without limitation but consistent with applicable legal requirements, 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 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 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, if the short sale is not "against the box," the Portfolio will place in a segregated account with its custodian, or designated sub-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). Until it replaces the borrowed securities, the Portfolio will maintain the segregated account daily at a level so that (1) the amount deposited in the account plus the amount deposited with the broker (not including the proceeds from the short sale) will equal the current market value of the securities sold short and (2) the amount deposited in the account plus the amount deposited with the broker (not including the proceeds from the short sale) will not be less than the market value of the securities at the time they were sold short. 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. SPECIAL RISKS ASSOCIATED WITH FORWARD CONTRACTS, FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS THEREON AND OPTIONS ON FOREIGN CURRENCIES Transactions in forward contracts, as well as futures and options on foreign currencies, are subject to the risk of governmental actions affecting trading in or the prices of currencies underlying such contracts, which could restrict or eliminate trading and could have a substantial adverse effect on the value of positions held by the Portfolios permitted to engage in such hedging transactions. In addition, the value of such positions could be adversely affected by a number of other complex political and economic factors applicable to the countries issuing the underlying currencies. Furthermore, unlike trading in most other types of instruments, there is no systematic reporting of last sale information with respect to the foreign currencies underlying forward contracts, futures contracts and options. As a result, the available information on which a Portfolio's trading systems will be based may not be as complete as the comparable data on which such Portfolio makes investment and trading decisions in connection with securities and other transactions. Moreover, because the foreign currency market is a global, twenty-four hour market, events could occur on that market which will not be reflected in the forward, futures or options markets until the following day, thereby preventing a Portfolio from responding to such events in a timely manner. Settlements of over-the-counter forward contracts or of the exercise of foreign currency options generally must occur within the country issuing the underlying currency, which in turn requires parties to such contracts to accept or make delivery of such currencies in conformity with any United States or foreign restrictions and regulations regarding the maintenance of foreign banking relationships, fees, taxes or other charges. Unlike currency futures contracts and exchange-traded options, options on foreign currencies and forward contracts are not traded on contract markets regulated by the CFTC or (with the exception of certain foreign currency options) the Commission. In an over-the-counter trading environment, many of the protections associated with transactions on exchanges will not be available. 11 For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Moreover, an option writer could lose amounts substantially in excess of its initial investment due to the margin and collateral requirements associated with such option positions. Similarly, there is no limit on the amount of potential losses on forward contracts to which a Portfolio is a party. In addition, over-the-counter transactions can only be entered into with a financial institution willing to take the opposite side, as principal, of a Portfolio's position unless the institution acts as broker and is able to find another counterparty willing to enter into the transaction with such Portfolio. Where no such counterparty is available, it will not be possible to enter into a desired transaction. There also may be no liquid secondary market in the trading of over-the-counter contracts, and a Portfolio may be unable to close out options purchased or written, or forward contracts entered into, until their exercise, expiration or maturity. This in turn could limit a Portfolio's ability to realize profits or to reduce losses on open positions and could result in greater losses. Furthermore, over-the-counter transactions are not backed by the guarantee of an exchange's clearing corporation. A Portfolio will therefore be subject to the risk of default by, or the bankruptcy of, the financial institution serving as its counterparty. One or more of such institutions also may decide to discontinue its role as market-maker in a particular currency, thereby restricting a Portfolio's ability to enter into desired hedging transactions. A Portfolio will enter into over-the-counter transactions only with parties whose creditworthiness has been reviewed and found satisfactory by the Adviser. Over-the-counter options on foreign currencies, like exchange-traded commodity futures contracts and commodity option contracts, are within the exclusive regulatory jurisdiction of the CFTC. The CFTC currently permits the trading of such options, but only subject to a number of conditions regarding the commercial purpose of the purchaser of such options. The China Growth and Latin American Portfolios are not able to determine at this time whether or to what extent the CFTC may impose additional restrictions on the trading of over- the-counter options on foreign currencies at some point in the future, or the effect that any restrictions may have on the hedging strategies to be implemented by the Portfolio. Forward contracts and currency swaps are not presently subject to regulation by the CFTC, although the CFTC may in the future assert or be granted authority to regulate such instruments. In such event, a Portfolio's ability to utilize forward contracts and currency swaps in the manner set forth above and in the applicable Prospectus could be restricted. Options on foreign currencies traded on a national securities exchange are within the jurisdiction of the Commission, as are other securities traded on such exchanges. As a result, many of the protections provided to traders on organized exchanges will be available with respect to such transactions. In particular, all foreign currency options positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting a Portfolio to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements. The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of the availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effect of other political and economic events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in applicable foreign countries for this purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on the OCC or its clearing member, impose special procedures for exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise. TAXES The following is only a summary of certain additional federal tax considerations generally affecting the Fund and its shareholders that are not described in the Prospectuses. No attempt is made to present a detailed explanation of the federal, state or local tax treatment of the Fund or its shareholders, and the discussion here and in the Fund's Prospectuses is not intended as a substitute for careful tax planning. The following discussion of federal income tax consequences is based on the Internal Revenue Code of 1986, as amended (the "Code") and the regulations issued thereunder as in effect on the date of this Statement of Additional Information. New 12 legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein. Each Portfolio within the Fund is generally treated as a separate corporation for federal income tax purposes, and thus the provisions of the Code generally will be applied to each Portfolio separately, rather than to the Fund as a whole. Each Portfolio intends to qualify and elect to be treated for each taxable year as a regulated investment company ("RIC") under Subchapter M of the Code. Accordingly, each Portfolio must, among other things, (a) derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, and certain other related income, including, generally, certain gains from options, futures and forward contracts; (b) derive less than 30% of its gross income each taxable year from the sale or other disposition of the following items if held less than three months (A) stock or securities, (B) options, futures or forward contracts (other than options, futures or forward contracts on foreign currencies), and (C) foreign currencies (or options, futures, or forward contracts on foreign currencies) that are not directly related to the Portfolio's principal business of investing in stocks or securities (or options or futures with respect to stock or securities) (the "short-short test") and (c) diversify its holdings so that, at the end of each fiscal quarter of the Portfolio's taxable year, (i) at least 50% of the market value of the Portfolio's total assets is represented by cash and cash items, United States Government securities, securities of other RICs, and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Portfolio's total assets or 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities (other than United States Government securities or securities of other RICs) of any one issuer or two or more issuers which the Portfolio controls and which are engaged in the same, similar, or related trades or business. For purposes of the 90% of gross income requirement described above, foreign currency gains which are not directly related to a Portfolio's principal business of investing in stock or securities (or options or futures with respect to stock or securities) may be excluded from income that qualifies under the 90% requirement. In addition to the requirements described above, in order to qualify as a RIC, a Portfolio must distribute at least 90% of its net investment income (which generally includes dividends, taxable interest, and the excess of net short-term capital gains over net long-term capital losses less operating expenses) and at least 90% of its net tax-exempt interest income, if any, to shareholders. If a Portfolio meets all of the RIC requirements, it will not be subject to federal income tax on any of its net investment income or capital gains that it distributes to shareholders. If a Portfolio fails to qualify as a RIC for any year, all of its income will be subject to tax at corporate rates, and its distributions (including capital gains distributions) will be taxable as ordinary income dividends to its shareholders to the extent of the Portfolio's current and accumulated earnings and profits, and will be eligible for the corporate dividends received deduction for corporate shareholders. Each Portfolio will decide whether to distribute or to retain all or part of any net capital gains (the excess of net long-term capital gains over net short-term capital losses) in any year for reinvestment. If any such gains are retained, the Portfolio will pay federal income tax thereon, and, if the Portfolio makes an election, the shareholders will include such undistributed gains in their income, will increase their basis in Portfolio shares by 65% of the amount included in their income and will be able to claim their share of the tax paid by the Portfolio as a refundable credit against their federal income tax liability. A gain or loss realized by a shareholder on the sale, exchange or redemption of shares of a Portfolio held as a capital asset will be capital gain or loss, and such gain or loss will be long-term if the holding period for the shares exceeds one year, and otherwise will be short-term. Any loss realized on a sale, exchange or redemption of shares of a Portfolio will be disallowed to the extent the shares disposed of are replaced within the 61-day period beginning 30 days before and ending 30 days after the shares are disposed of. Any loss realized by a shareholder on the disposition of shares held 6 months or less is treated as a long-term capital loss to the extent of any distributions of net long-term capital gains received by the shareholder with respect to such shares or any inclusion of undistributed capital gain with respect to such shares. The conversion of Class A shares to Class B shares should not be a taxable event to the shareholder. Each Portfolio will generally be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute by the end of any calendar year at least 98% of its ordinary income for that year and 98% of its capital gain net income (the excess of short- and long-term capital gains over short- and long-term capital losses) for the one-year period ending on October 31 of that year, plus certain other amounts. 13 Each Portfolio is required by federal law to withhold 31% of reportable payments (which may include dividends, capital gains distributions, and redemptions) paid to shareholders who have not certified on the Account Registration Form or on a separate form supplied by the Portfolio, that the Social Security or Taxpayer Identification Number provided is correct and that the shareholder is exempt from backup withholding or is not currently subject to backup withholding. For certain transactions, each Portfolio is required for federal income tax purposes to recognize as gain or loss its net unrealized gains and losses on forward currency and futures contracts as of the end of each taxable year, as well as those actually realized during the year. In most cases, any such gain or loss recognized with respect to a regulated futures contract is considered to be 60% long-term capital gain or loss and 40% short-term capital gain or loss, without regard to the holding period of the contract. Realized gain or loss attributable to a foreign currency forward contract is treated as 100% ordinary income. Furthermore, foreign currency futures contracts which are intended to hedge against a change in the value of securities held by a Portfolio may affect the holding period of such securities and, consequently, the nature of the gain or loss on such securities upon disposition. As discussed above, in order for each Portfolio to continue to qualify for federal income tax treatment as a RIC, at least 90% of its gross income for a taxable year must be derived from certain qualifying income, including dividends, interest, income derived from loans of securities, and gains from the sale or other disposition of stock, securities or foreign currencies, or other related income, including gains from options, futures and forward contracts, derived with respect to its business of investing in stock, securities or currencies. Any net gain realized from the closing out of futures contracts will therefore generally be qualifying income for purposes of the 90% requirement. Qualification as a RIC also requires that less than 30% of a Portfolio's gross income be derived from the sale or other disposition of stock, securities, options, futures or forward contracts (including certain foreign currencies not directly related to the Fund's business of investing in stock or securities) held less than three months. In order to avoid realizing excessive gains on futures contracts held less than three months, the Portfolio may be required to defer the closing out of futures contracts beyond the time when it would otherwise be advantageous to do so. Short sales engaged in by a Portfolio may reduce the holding property held by a Portfolio which is substantially identical to the property sold short. This rule may make it more difficult for the Portfolio to satisfy the short- short test. This rule may also have the effect of converting capital gains recognized by the Portfolio from long-term to short-term as well as converting capital losses recognized by the Portfolio from short-term to long-term. SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS. In general, gains from foreign currencies and from foreign currency options, foreign currency futures and forward foreign exchange contracts relating to investments in stock, securities or foreign currencies are currently considered to be qualifying income for purposes of determining whether the Fund qualifies as a regulated investment company. It is currently unclear, however, who will be treated as the issuer of certain foreign currency instruments or how foreign currency options, futures, or forward foreign currency contracts will be valued for purposes of the regulated investment company diversification requirements applicable to the Fund. The Fund may request a private letter ruling from the Internal Revenue Service on some or all of these issues. Under Code Section 988, special rules are provided for certain transactions in a foreign currency other than the taxpayer's functional currency (i.e., unless certain special rules apply, currencies other than the U.S. dollar). In general, foreign currency gains or losses from forward contracts, from futures contracts that are not "regulated futures contracts", and from unlisted options will be treated as ordinary income or loss under Code Section 988. Also, certain foreign exchange gains or losses derived with respect to foreign fixed-income securities are also subject to Section 988 treatment. In general, therefore, Code Section 988 gains or losses will increase or decrease the amount of the Fund's investment company taxable income available to be distributed to shareholders as ordinary income, rather than increasing or decreasing the amount of the Fund's net capital gain. If the Fund invests in an entity which is classified as a "passive foreign investment company" ("PFIC") for U.S. tax purposes, the application of certain technical tax provisions applying to such companies could result in the imposition of federal income tax with respect to such investments at the Fund level which could not be eliminated by distributions to shareholders. The U.S. Treasury issued proposed regulation section 1.1291-8 which establishes a mark-to-market regime which allows investment companies investing in PFIC's to avoid most, if not all, of the difficulties posed by the PFIC rules. In any event, it is not anticipated that any taxes on the Fund with respect to investments in PFIC's would be significant. A Fund's investment in options, swaps and related transactions, futures contracts and forward contracts, options on futures contracts and stock indices and certain other securities, including transactions involving actual or deemed short sales or foreign exchange gains or losses are subject to many complex and special tax rules. For example, over-the-counter options on debt securities and equity options, including options on stock and on narrow-based stock indexes, will be subject to tax under Section 1234 of the Code, generally producing a long-term or short-term capital gain or loss upon exercise, lapse or closing out of the option or sale of the underlying stock or security. By contrast, a Fund's treatment of certain other options, futures and forward contracts entered into by a Fund is generally governed by Section 1256 of the Code. These "Section 1256" positions generally include listed options on debt securities, options on broad-based stock indexes, options on securities indexes, options on futures contracts, regulated futures contracts and certain foreign currency contracts and options thereon. A Section 1256 position held by a Fund will generally be marked-to-market (i.e. treated as if it were sold for fair market value) on the last business day of a Fund's fiscal year, and all gain or loss associated with fiscal year transactions and mark-to-market positions at fiscal year end (except certain currency gain or loss covered by Section 988 of the Code) will generally be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. The effect of Section 1256 mark-to-market rules may be to accelerate income or to convert what otherwise would have been long-term capital gains into short-term capital gains or short-term capital losses into long-term capital losses within a Fund. The acceleration of income on Section 1256 positions may require a Fund to accrue taxable income without the corresponding receipt of cash. In order to generate cash to satisfy the distribution requirements of the Code, a Fund may be required to dispose of portfolio securities that they otherwise would have continued to hold or to use cash flows from other sources such as the sale of Fund shares. In these ways, any or all of these rules may affect the amount, character and timing of income earned and in turn distributed to shareholders by a Fund. When a Fund holds options or contracts which substantially diminish their risk of loss with respect to other positions (as might occur in some hedging transactions), this combination of positions could be treated as a "straddle" for tax purposes, resulting in possible deferral of losses, adjustments in the holding periods of Fund securities and conversion of short-term capital losses into long-term capital losses. Certain tax elections exist for mixed straddles i.e., straddles comprised of at least one Section 1256 position and at least one non-Section 1256 position which may reduce or eliminate the operation of these straddle rules. SPECIAL TAX CONSIDERATIONS RELATING TO MUNICIPAL BOND AND MUNICIPAL MONEY MARKET PORTFOLIOS Each of the Municipal Bond Portfolio and the Municipal Money Market Portfolio will qualify to pay "exempt interest dividends" to its shareholders provided that, at the close of each quarter of its taxable year at least 50% of the value of its total assets consists of obligations the interest on which is exempt from federal income tax. Current federal tax law limits the types and volume of bonds qualifying for federal income tax exemption of interest, which may have an effect on the ability of these Portfolios to purchase sufficient amounts of tax-exempt securities to satisfy this requirement. Any loss on the sale or exchange of shares of the Municipal Bond Portfolio or the Municipal Money Market Portfolio held for six months or less will be disallowed to the extent of any exempt-interest dividends received by the selling shareholder with respect to such shares. As noted in the Prospectus for the Municipal Bond Portfolio and the Municipal Money Market Portfolio, exempt-interest dividends are excludable from a shareholder's gross income for regular Federal income tax purposes. Exempt- interest dividends may nevertheless be subject to the alternative minimum tax (the "Alternative Minimum Tax") imposed by Section 55 of the Code or the environmental tax (the "Environmental Tax") imposed by Section 59A of the Code. The Alternative Minimum Tax is imposed at the rate of up to 28% in the case of non-corporate taxpayers and at the rate of 20% in the case of corporate taxpayers, to the extent it exceeds the taxpayer's regular tax liability. The Environmental Tax is imposed at the rate of 0.12% and applies only to corporate taxpayers. The Alternative Minimum Tax and the Environmental Tax may be affected by the receipt of exempt-interest dividends in two circumstances. First, exempt-interest dividends derived from certain "private activity bonds" issued after August 7, 1986, will generally be an item of tax preference and therefore potentially subject to the Alternative Minimum Tax and the Environmental Tax. The Portfolios intend, when possible, to avoid investing in private activity bonds. Second, in the case of exempt-interest dividends received by corporate shareholders, all exempt-interest dividends, regardless of when the bonds from which they are derived were issued or whether they are derived from private activity bonds, will be included in the corporation's "adjusted current earnings," as defined in Section 56(g) of the Code, in calculating the corporation's alternative minimum taxable income for purposes of determining the Alternative Minimum Tax and the Environmental Tax. 14 The percentage of income that constitutes "exempt-interest dividends" will be determined for each year for the Municipal Bond Portfolio and the Municipal Money Market Portfolio and will be applied uniformly to all dividends declared with respect to the Portfolios during that year. This percentage may differ from the actual percentage for any particular day. Interest on indebtedness incurred or continued by shareholders to purchase or carry shares of the Municipal Bond Portfolio or the Municipal Money Market Portfolio will not be deductible for federal income tax purposes. The deduction otherwise allowable to property and casualty insurance companies for "losses incurred" will be reduced by an amount equal to a portion of exempt-interest dividends received or accrued during any taxable year. Foreign corporations engaged in a trade or business in the United States will be subject to a "branch profits tax" on their "dividend equivalent amount" for the taxable year, which will include exempt-interest dividends. Certain Subchapter S corporations may also be subject to taxes on their "passive investment income," which could include exempt-interest dividends. Up to 85% of the Social Security benefits or railroad retirement benefits received by an individual during any taxable year will be included in the gross income of such individual if the individual's "modified adjusted gross income" (which includes exempt-interest dividends) plus one-half of the Social Security benefits or railroad retirement benefits received by such individual during that taxable year exceeds the base amount described in Section 86 of the Code. Entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by industrial development bonds or private activity bonds should consult their tax advisors before purchasing shares of the Municipal Bond Portfolio or the Municipal Money Market Portfolio. "Substantial user" is defined generally for these purposes as including a "non- exempt person" who regularly uses in trade or business a part of a facility financed from the proceeds of such bonds. Issuers of bonds purchased by the Municipal Bond Portfolio (or the beneficiary of such bonds) may have made certain representations or covenants in connection with the issuance of such bonds to satisfy certain requirements of the Code that must be satisfied subsequent to the issuance of such bonds. Investors should be aware that exempt-interest dividends derived from such bonds may become subject to federal income taxation retroactively to the date thereof if such representations are determined to have been inaccurate or if the issuer of such bonds (or the beneficiary of such bonds) fails to comply with such covenants. SPECIAL TAX CONSIDERATIONS RELATING TO FOREIGN INVESTMENTS Gains or losses attributable to foreign currency contracts, or to fluctuations in exchange rates that occur between the time a Portfolio accrues interest or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time the Portfolio actually collects such receivables or pays such liabilities are treated as ordinary income or ordinary loss to the Portfolio. Similarly, gains or losses on disposition of debt securities denominated in a foreign currency attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security and the date of disposition also are treated as ordinary gain or loss to the Portfolio. These gains or losses increase or decrease the amount of a Portfolio's net investment income available to be distributed to its shareholders as ordinary income. It is expected that each Portfolio will be subject to foreign withholding taxes with respect to its dividend and interest income from foreign countries, and a Portfolio may be subject to foreign income taxes with respect to other income. So long as more than 50% in value of a Portfolio's total assets at the close of the taxable year consists of stock or securities of foreign corporations, the Portfolio may elect to treat certain foreign income taxes imposed on it for United States federal income tax purposes as paid directly by its shareholders. A Portfolio will make such an election only if it deems it to be in the best interest of its shareholders and will notify shareholders in writing each year if it makes an election and of the amount of foreign income taxes, if any, to be treated as paid by the shareholders. If a Portfolio makes the election, shareholders will be required to include in income their proportionate shares of the amount of foreign income taxes treated as imposed on the Portfolio and will be entitled to claim either a credit (subject to the limitations discussed below) or, if they itemize deductions, a deduction, for their shares of the foreign income taxes in computing their federal income tax liability. Shareholders who choose to utilize a credit (rather than a deduction) for foreign taxes will be subject to a number of complex limitations regarding the availability and utilization of the credit. Because of these limitations, shareholders may be unable to claim a credit for the full amount of their proportionate shares of the foreign income taxes paid by a Portfolio. Shareholders are urged to consult their tax advisors regarding the application of these rules to their particular circumstances. 15 TAXES AND FOREIGN SHAREHOLDERS Taxation of a shareholder who, as to the United States, is a nonresident alien individual, a foreign trust or estate, a foreign corporation, or a foreign partnership ("Foreign Shareholder") depends on whether the income from the Portfolio is "effectively connected" with a U.S. trade or business carried on by such shareholder. If the income from the Portfolio is not effectively connected with a U.S. trade or business carried on by a Foreign Shareholder, distributions of net investment income plus the excess of net short-term capital gains over net long-term capital losses will be subject to U.S. withholding tax at the rate of 30% (or such lower treaty rate as may be applicable) upon the gross amount of the dividend. Furthermore, Foreign Shareholders will generally be exempt from U.S. federal income tax on gains realized on the sale of shares of the Portfolio, distributions of net long-term capital gains, and amounts retained by the Fund which are designated as undistributed capital gains. If the income from the Portfolio is effectively connected with a U.S. trade or business carried on by a Foreign Shareholder, then distributions from the Portfolio and any gains realized upon the sale of shares of the Portfolio, will be subject to U.S. federal income tax at the rates applicable to U.S. citizens and residents or domestic corporations. The Portfolio may be required to withhold U.S. federal income tax on distributions that are otherwise exempt from withholding tax (or taxable at a reduced treaty rate) unless the Foreign Shareholder complies with Internal Revenue Service certification requirements. The tax consequences to a Foreign Shareholder entitled to claim the benefits of an applicable tax treaty may differ from those described here. Furthermore, Foreign Shareholders are strongly urged to consult their own tax advisors with respect to the particular tax consequences to them of an investment in a Portfolio, including the potential application of the provisions of the Foreign Investment in Real Estate Property Tax Act of 1980, as amended. PURCHASE OF SHARES The purchase price of the Class A shares of each Portfolio of the Fund, except the Money Market and Municipal Money Market Portfolios, and the Class B shares of each Multiclass Portfolio of the Fund is the net asset value next determined after the order is received. For each Portfolio of the Fund other then the Money Market or Municipal Market Portfolios, an order received prior to the regular close of the New York Stock Exchange (the "NYSE") will be executed at the price computed on the date of receipt; and 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 as long as the Fund's transfer agent receives payment by check or in Federal Funds prior to the regular close of the NYSE on such day. Shares of the Money Market and Municipal Money Market Portfolios may be purchased at the net asset value per share at the price next determined after Federal Funds are available to such Portfolios. Shares of the Fund may be purchased on any day the NYSE is open. The NYSE will be closed on the following days: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Each Portfolio reserves the right in its sole discretion (i) to suspend the offering of its shares, (ii) to reject purchase orders when in the judgment of management such rejection is in the best interest of the Fund, and (iii) to reduce or waive the minimum for initial and subsequent investments for certain fiduciary accounts such as employee benefit plans or under circumstances where certain economies can be achieved in sales of a Portfolio's shares. The International Equity Portfolio is currently limiting investments in the Portfolio to: (i) reinvested dividends and distributions by existing shareholders of the Portfolio; (ii) additional investments by existing shareholders of the Portfolio; (iii) investments by employees of Morgan Stanley; and (iv) investors who were in the process of becoming shareholders of the Portfolio at the time the Portfolio limited further investments. REDEMPTION OF SHARES Each Portfolio may suspend redemption privileges or postpone the date of payment (i) during any period that the NYSE is closed, or trading on the NYSE is restricted as determined by the Commission, (ii) during any period when an emergency exists as defined by the rules of the Commission as a result of which it is not reasonably practicable for a Portfolio to dispose of securities owned by it, or fairly to determine the value of its assets, and (iii) for such other periods as the Commission may permit. 16 No charge is made by any Portfolio for redemptions except for the 1% transaction fee assessed upon redemption of the International Small Cap Portfolio. Any redemption may be more or less than the shareholder's cost depending on the market value of the securities held by the Portfolio. To protect your account and the Fund from fraud, signature guarantees are required for certain redemptions. Signature guarantees enable the Fund to verify the identity of the person who has authorized a redemption from your account. Signature guarantees are required in connection with: (1) all redemptions, regardless of the amount involved, when the proceeds are to be paid to someone other than the registered owner(s) and/or registered address; and (2) share transfer requests. A guarantor must be a bank, a trust company, a member firm of a domestic stock exchange, or a foreign branch of any of the foregoing. Notaries public are not acceptable guarantors. The signature guarantees must appear either: (1) on the written request for redemption; (2) on a separate instrument for assignment ("stock power") which should specify the total number of shares to be redeemed; or (3) on all stock certificates tendered for redemption and, if shares held by the Fund are also being redeemed, on the letter or stock power. SHAREHOLDER SERVICES EXCHANGE FEATURES Shares of each Portfolio of the Fund may be exchanged for shares of any other available Portfolio (other than the International Equity Portfolio, which is closed to new investors). In exchanging for shares of a Portfolio with more than one class, the class of shares a shareholder receives in exchange will be determined in the same manner as any other purchase of shares and will not be based on the class of shares surrendered for the exchange. Consequently, the same minimum initial investment and minimum account size for determining the class of shares received in the exchange will apply. Any such exchange will be based on the respective net asset values of the shares involved. There is no sales commission or charge of any kind. Before making an exchange, a shareholder should consider the investment objectives of the Portfolio to be purchased. Exchange requests may be made either by mail or telephone. Exchange requests by mail should be sent to Morgan Stanley Institutional Fund, Inc., P.O. Box 2798, Boston, Massachusetts 02208-2798. Telephone exchanges will be accepted only if the certificates for the shares to be exchanged are held by the Fund for the account of the shareholder and the registration of the two accounts will be identical. Requests for exchanges received prior to 10:00 a.m. (Eastern Time) for the Municipal Money Market Portfolio, 11:00 a.m. (Eastern Time) for the Money Market Portfolio, and 4:00 p.m. (Eastern Time) for the remaining Portfolios will be processed as of the close of business on the same day. Requests received after these times will be processed on the next business day. Exchanges may be subject to limitations as to amounts or frequency, and to other restrictions established by the Board of Directors to assure that such exchanges do not disadvantage the Fund and its shareholders. For federal income tax purposes an exchange between Portfolios is a taxable event for shareholders subject to tax, and, accordingly, a gain or loss may be realized. The exchange privilege may be modified or terminated by the Fund at any time upon 60-days' notice to shareholders. TRANSFER OF SHARES Shareholders may transfer shares of the Fund's Portfolios to another person by making a written request to the Fund. The request should clearly identify the account and number of shares to be transferred, and include the signature of all registered owners and all stock certificates, if any, which are subject to the transfer. The signature on the letter of request, the stock certificate or any stock power must be guaranteed in the same manner as described under "Redemption of Shares." As in the case of redemptions, the written request must be received in good order before any transfer can be made. Transferring shares may affect the eligibility of an account for a given class of the Portfolio's shares and may result in involuntary conversion or redemption of such shares. 17 INVESTMENT LIMITATIONS Each current Portfolio has adopted the following restrictions which are fundamental policies and may not be changed without the approval of the lesser of: (1) at least 67% of the voting securities of the Portfolio present at a meeting if the holders of more than 50% of the outstanding voting securities of the Portfolio are present or represented by proxy, or (2) more than 50% of the outstanding voting securities of the Portfolio. Each Portfolio of the Fund will not: (1) purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (except this shall not prevent the Portfolio from purchasing or selling options or futures contracts or from investing in securities or other instruments backed by physical commodities), and except that the Gold Portfolio may invest in gold bullion in accordance with its investment objectives and policies; (2) purchase or sell real estate, although it may purchase and sell securities of companies that deal in real estate and may purchase and sell securities that are secured by interests in real estate; (3) lend any security or make any other loan if, as a result, more than 33 1/3% of its total assets would be lent to other parties, but this limitation does not apply to purchases of debt securities or repurchase agreements; (4) except with respect to the Global Fixed Income, Emerging Markets, Emerging Markets Debt, China Growth, Latin American, MicroCap, Aggressive Equity, U.S. Real Estate Portfolios (i) purchase more than 10% of any class of the outstanding voting securities of any issuer and (ii) purchase securities of an issuer (except obligations of the U.S. Government and its agencies and instrumentalities) if as a result, with respect to 75% of its total assets, more than 5% of the Portfolio's total assets, at market value, would be invested in the securities of such issuer; (5) issue senior securities and will not borrow, except from banks and as a temporary measure for extraordinary or emergency purposes and then, in no event, in excess of 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings), except that each of the Emerging Markets Debt and Latin American Portfolios may borrow from banks and other entities in amount not in excess of 33 1/3% of its total assets (including the amount borrowed) less liabilities in accordance with its investment objectives and policies; (6) underwrite securities issued by others, except to the extent that the Portfolio may be considered an underwriter within the meaning of the 1933 Act in the disposition of restricted securities; (7) acquire any securities of companies within one industry if, as a result of such acquisition, more than 25% of the value of the Portfolio's total assets would be invested in securities of companies within such industry; provided, however, that there shall be no limitation on the purchase of obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, or (in the case of the Money Market Portfolio or the Municipal Money Market Portfolio) instruments issued by U.S. Banks, except that the Latin American Portfolio may invest more than 25% of its total assets in companies involved in the telecommunications industry or financial services industry, and except that the U.S. Real Estate Portfolio may invest more than 25% of its total assets in the U.S. real estate industry, respectively, as provided in their respective Prospectuses; and (8) write or acquire options or interests in oil, gas or other mineral exploration or development programs. In addition, each current Portfolio of the Fund has adopted non-fundamental investment limitations as stated below and in their respective Prospectuses. Such limitations may be changed without shareholder approval. Each current Portfolio of the Fund will not: (1) purchase on margin or sell short, except (i) that the Emerging Markets Debt, Latin American and Aggressive Equity Portfolios may from time to time sell securities short without limitation but consistent with applicable legal requirements as stated in its Prospectus, (ii) that each of the Active Country Allocation, Equity Growth, Gold, China Growth and Aggressive Equity Portfolios may enter into option transactions to the extent that not more than 5% of the Portfolio's total assets are required as deposits to secure obligations under options and not more than 20% of its total assets are invested in options, futures contracts and options on futures contracts at any time, and (iii) as specified above in Fundamental Restriction No. (1); (2) purchase or retain securities of an issuer if those Officers and Directors of the Fund or its investment adviser owning more than 1/2 of 1% of such securities together own more than 5% of such securities; 18 (3) pledge, mortgage, or hypothecate any of its assets to an extent greater than 10% of its total assets at fair market value; (4) invest for the purpose of exercising control over management of any company; (5) invest its assets in securities of any investment company, except by purchase in the open market involving only customary brokers' commissions or in connection with mergers, acquisitions of assets or consolidations and except as may otherwise be permitted by the 1940 Act; (6) invest more than 5% of its total assets in securities of companies which have (with predecessors) a record of less than three years' continuous operation; (7) purchase warrants if, by reason of such purchase, more than 5% of the value of the Portfolio's net assets (taken at market value) would be invested in warrants, valued at the lower of cost or market. Included within this amount, but not to exceed 2% of the value of the Portfolio's net assets, may be warrants that are not listed on a recognized stock exchange; (8) except for the U.S. Real Estate Portfolio, invest in real estate limited partnership interests, and the U.S. Real Estate Portfolio may not invest in such interests that are not publicly traded; (9) make loans except (i) by purchasing bonds, debentures or similar obligations (including repurchase agreements, subject to the limitations as described in the respective Prospectuses) that are publicly distributed, and (ii) by lending its portfolio securities to banks, brokers, dealers and other financial institutions so long as such loans are not inconsistent with the 1940 Act or the Rules and Regulations or interpretations of the Commission thereunder; (10) invest in oil, gas or other mineral leases; and (11) purchase puts, calls, straddles, spreads and any combination thereof if for any reason thereof the value of its aggregate investment in such classes of securities will exceed 5% of their respective total assets, except that each of the Active Country Allocation, Equity Growth, Gold, China Growth and Aggressive Equity Portfolios may enter into option transactions to the extent that not more than 5% of the Portfolio's total assets are required as deposits to secure obligations under options and not more than 20% of its total assets are invested in options, futures contracts and options on futures contracts at any time. The Balanced, Fixed Income and Value Equity Portfolios will only issue shares for securities or assets other than cash in a bona fide reorganization, statutory merger, or in other acquisitions of portfolio securities (except for municipal debt securities issued by state political subdivisions or their agencies or instrumentalities) which (i) meet their respective investment objectives; (ii) are acquired for investment and not for resale. Each of the Global Fixed Income, Emerging Markets, Emerging Markets Debt, China Growth, Latin American, Aggressive Equity and U.S. Real Estate Portfolios will diversify its holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the market value of the Portfolio's total assets is represented by cash (including cash items and receivables), U.S. Government securities, and other securities, with such other securities limited, in respect of any one issuer, for purposes of this calculation to an amount not greater than 5% of the value of the Portfolio's total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than U.S. Government securities). The percentage limitations contained in these restrictions apply at the time of purchase of securities. Future Portfolios of the Fund may adopt different limitations. DETERMINING MATURITIES OF CERTAIN INSTRUMENTS Generally, the maturity of a portfolio instrument shall be deemed to be the period remaining until the date noted on the face of the instrument as the date on which the principal amount must be paid, or in the case of an instrument called for redemption, the date on which the redemption payment must be made. However, instruments having variable or floating interest rates or demand features may be deemed to have remaining maturities as follows: (1) a Government Obligation with a variable rate of interest readjusted no less frequently than annually may be deemed to have a maturity equal to the period remaining until the next readjustment of the interest rate; (b) an instrument with a variable rate of interest, the principal amount of which is scheduled on the face of the 19 instrument to be paid in one year or less, may be deemed to have a maturity equal to the period remaining until the next readjustment of the interest rate; (c) an instrument with a variable rate of interest that is subject to a demand feature may be deemed to have a maturity equal to the longer of the period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand; (d) an instrument with a floating rate of interest that is subject to a demand feature may be deemed to have a maturity equal to the period remaining until the principal amount can be recovered through demand; and (e) a repurchase agreement may be deemed to have a maturity equal to the period remaining until the date on which the repurchase of the underlying securities is scheduled to occur, or where no date is specified, but the agreement is subject to demand, the notice period applicable to a demand for the repurchase of the securities. MANAGEMENT OF THE FUND OFFICERS AND DIRECTORS The Fund's officers, under the supervision of the Board of Directors, manage the day-to-day operations of the Fund. The Directors set broad policies for the Fund and choose its officers. Three Directors and all of the officers of the Fund are directors, officers or employees of the Fund's adviser, distributor or administrative services provider. Directors and officers of the Fund are also directors and officers of some or all of the other investment companies managed, administered, advised or distributed by Morgan Stanley Asset Management Inc. or its affiliates. The other Directors have no affiliation with the Fund's adviser, distributor or administrative services provider. A list of the Directors and officers of the Fund and a brief statement of their present positions and principal occupations during the past five years is set forth below: Name, Address Position Principal Occupation During and Age with Fund Past Five Years - ------------------- --------- --------------------------- Barton M. Biggs* Chairman and Chairman and Director of Morgan 1221 Avenue of the Director Stanley Asset Management Inc. and Americas Morgan Stanley Asset Management New York, NY 10020 Limited; Managing Director of Morgan (63) Stanley & Co., Inc.; Director of Morgan Stanley Group Inc.; Member of International Advisory Counsel of the Thailand Fund; Chairman and Director of The Brazilian Investment Fund, Inc., The Latin American Discovery Fund, Inc., The Malaysia Fund, Inc., Morgan Stanley Africa Investment Fund, Inc., Morgan Stanley Asia-Pacific Fund, Inc., Morgan Stanley Emerging Markets Debt Fund, Inc., Morgan Stanley Emerging Markets Fund, Inc., Morgan Stanley Fund Inc., Morgan Stanley Global Opportunity Bond Fund, Inc., Morgan Stanley High Yield Fund, Inc., Morgan Stanley India Investment Fund, Inc., Morgan Stanley Institutional Fund, Inc., The Pakistan Investment Fund, Inc., PCS Cash Fund, Inc., The Thai Fund, Inc. and The Turkish Investment Fund, Inc. 20 Name, Address Position Principal Occupation During and Age with Fund Past Five Years - ------------------- --------- --------------------------- Warren J. Olsen* Director and Principal of Morgan Stanley & Co., 1221 Avenue of the President Inc.; Principal of Morgan Stanley Americas Asset Management Inc.; President and New York, NY 10020 Director of The Brazilian Investment (39) Fund, Inc., The Latin American Discovery Fund, Inc., The Malaysia Fund, Inc., Morgan Stanley Africa Investment Fund, Inc., Morgan Stanley Asia-Pacific Fund, Inc., Morgan Stanley Emerging Markets Debt Fund, Inc., Morgan Stanley Emerging Markets Fund, Inc., Morgan Stanley Fund, Inc., Morgan Stanley Global Opportunity Bond Fund, Inc., Morgan Stanley High Yield Fund, Inc., Morgan Stanley India Investment Fund, Inc., Morgan Stanley Institutional Fund, Inc., The Pakistan Investment Fund, Inc., PCS Cash Fund, Inc., The Thai Fund, Inc., and The Turkish Investment Fund, Inc. John D. Barrett, II Director Chairman and Director of Barrett 521 Fifth Avenue Associates, Inc. (investment New York, NY 10135 counseling); Director of the Ashforth (60) Company (real estate); Director of the Morgan Stanley Fund, Inc., Morgan Stanley Institutional Fund, Inc. and PCS Cash Fund, Inc. Gerard E. Jones Director Partner in Richards & O'Neil LLP (law 43 Arch Street firm); Director of the Morgan Stanley Greenwich, CT 06830 Fund, Inc., Morgan Stanley (59) Institutional Fund, Inc. and PCS Cash Fund, Inc. Andrew McNally IV Director Chairman and Chief Executive Officer 8255 North Central of Rand McNally (publication); Park Avenue Director of Allendale Insurance Co., Skokie, IL 60076 Mercury Finance (consumer finance); (56) Zenith Electronics, Hubbell, Inc. (industrial electronics); Director of the Morgan Stanley Fund, Inc., Morgan Stanley Institutional Fund, Inc. and PCS Cash Fund, Inc. Samuel T. Reeves Director Chairman of the Board and CEO, 8211 North Pinacle L.L.C. (investment firm); Fresno Street Director, Pacific Gas and Electric Fresno, CA 93720 and PG&E Enterprises (utilities); (61) Director of the Morgan Stanley Fund, Inc., Morgan Stanley Institutional Fund, Inc. and PCS Cash Fund, Inc. 21 Name, Address Position Principal Occupation During and Age with Fund Past Five Years - ------------------- --------- --------------------------- Fergus Reid Director Chairman and Chief Executive Officer 85 Charles Colman Blvd of LumeLite Corporation (injection Pawling, NY 12564 molding firm); Trustee and Director (63) of Vista Mutual Fund Group; Director of the Morgan Stanley Fund, Inc., Morgan Stanley Institutional Fund, Inc. and PCS Cash Fund, Inc. Frederick O. Robertshaw Director Of Counsel, Bryan, Cave (law firm); 2800 North Central Avenue Previously associated with Copple, Phoenix, AZ 85004 Chamberlin & Boehm, P.C. and Rake, (62) Copple, Downey & Black, P.C. (law firms); Director of the Morgan Stanley Fund, Inc., Morgan Stanley Institutional Fund, Inc. and PCS Cash Fund, Inc. Frederick B. Whittemore* Director Advisory Director of Morgan Stanley & 1251 Avenue of the Co., Inc.; Vice-Chairman and Director Americas, 30th Flr. of The Brazilian Investment Fund, New York, NY 10020 Inc., The Latin American Discovery (65) Fund, Inc., The Malaysia Fund, Inc., Morgan Stanley Africa Investment Fund, Inc., Morgan Stanley Asia-Pacific Fund, Inc., Morgan Stanley Emerging Markets Debt Fund, Inc., Morgan Stanley Emerging Markets Fund, Inc., Morgan Stanley Fund, Inc., Morgan Stanley Global Opportunity Bond Fund, Inc., Morgan Stanley High Yield Fund,Inc., Morgan Stanley India Investment Fund, Inc., Morgan Stanley Institutional Fund, Inc., The Pakistan Investment Fund, Inc., PCS Cash Fund, Inc., The Thai Fund, Inc. and The Turkish Investment Fund, Inc. James W. Grisham* Vice President Principal of Morgan Stanley & Co., 1221 Avenue of the Inc.; Principal of Morgan Stanley Americas Asset Management Inc.; Vice President New York, NY 10020 of The Brazilian Investment Fund, (54) Inc., The Latin American Discovery Fund, Inc., The Malaysia Fund, Inc., Morgan Stanley Africa Investment Fund, Inc., Morgan Stanley Asia-Pacific Fund, Inc., Morgan Stanley Emerging Markets Debt Fund, Inc., Morgan Stanley Emerging Markets Fund, Inc., Morgan Stanley Fund, Inc., Morgan Stanley Global Opportunity Bond Fund, Inc., Morgan Stanley High Yield Fund, Inc., Morgan Stanley India Investment Fund, Inc., Morgan Stanley Institutional Fund, Inc., The Pakistan Investment Fund, Inc., PCS Cash Fund, Inc., The Thai Fund, Inc. and The Turkish Investment Fund, Inc. 22 Name, Address Position Principal Occupation During and Age with Fund Past Five Years - ------------------- --------- --------------------------- Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley & Co.; 1221 Avenue of the General Counsel and Secretary of Americas Morgan Stanley Asset Management Inc.; New York, NY 10020 Vice President of The Brazilian (35) Investment Fund, Inc., The Latin American Discovery Fund, Inc., The Malaysia Fund, Inc., Morgan Stanley Africa Investment Fund, Inc., Morgan Stanley Asia-Pacific Fund, Inc., Morgan Stanley Emerging Markets Debt Fund, Inc., Morgan Stanley Emerging Markets Fund, Inc., Morgan Stanley Fund, Inc., Morgan Stanley Global Opportunity Bond Fund, Inc., Morgan Stanley High Yield Fund, Inc., Morgan Stanley India Investment Fund, Inc., Morgan Stanley Institutional Fund, Inc., The Pakistan Investment Fund, Inc., PCS Cash Fund, Inc., The Thai Fund, Inc. and The Turkish Investment Fund, Inc. Joseph P. Stadler* Vice President Vice President of Morgan Stanley 1221 Avenue of the Asset Management Inc.; Previously Americas with Price Waterhouse LLP New York, NY 10020 (accounting); Vice President of The (41) Brazilian Investment Fund, Inc., The Latin American Discovery Fund, Inc., The Malaysia Fund, Inc., Morgan Stanley Africa Investment Fund, Inc., Morgan Stanley Asia-Pacific Fund, Inc., Morgan Stanley Emerging Markets Debt Fund, Inc., Morgan Stanley Emerging Markets Fund, Inc., Morgan Stanley Fund, Inc., Morgan Stanley Global Opportunity Bond Fund, Inc., Morgan Stanley High Yield Fund, Inc., Morgan Stanley India Investment Fund, Inc., Morgan Stanley Institutional Fund, Inc., The Pakistan Investment Fund, Inc., PCS Cash Fund, Inc., The Thai Fund, Inc. and The Turkish Investment Fund, Inc. 23 Name, Address Position Principal Occupation During and Age with Fund Past Five Years - ------------------- --------- --------------------------- Valerie Y. Lewis* Secretary Vice President of Morgan Stanley 1221 Avenue of the Asset Management Inc.; Previously Americas with Citicorp (banking); Secretary of New York, NY 10020 The Brazilian Investment Fund, Inc., (40) The Latin American Discovery Fund, Inc., The Malaysia Fund, Inc., Morgan Stanley Africa Investment Fund, Inc., Morgan Stanley Asia-Pacific Fund, Inc., Morgan Stanley Emerging Markets Debt Fund, Inc., Morgan Stanley Emerging Markets Fund, Inc., Morgan Stanley Fund, Inc., Morgan Stanley Global Opportunity Bond Fund, Inc., Morgan Stanley High Yield Fund, Inc., Morgan Stanley India Investment Fund, Inc., Morgan Stanley Institutional Fund, Inc., The Pakistan Investment Fund, Inc., PCS Cash Fund, Inc., The Thai Fund, Inc. and The Turkish Investment Fund, Inc. Karl O. Hartmann Assistant Senior Vice President, Secretary and 73 Tremont Street Secretary General Counsel of Chase Global Funds Boston, MA 02108-3913 Services Company; Previously, Leland, (41) O'Brien, Rubinstein Associates, Inc. (investments). James R. Rooney Treasurer Vice President, Chase Global Funds 73 Tremont Street Services Company; Director of Fund Boston, MA 02108-3913 Administration; Officer of various (37) investment companies managed by Morgan Stanley Asset Management Inc.; Previously with Scudder, Stevens & Clark, Inc. (investments) and Ernst & Young LLP (accounting); Treasurer of The Brazilian Investment Fund, Inc., The Latin American Discovery Fund, Inc., The Malaysia Fund, Inc., Morgan Stanley Africa Investment Fund, Inc., Morgan Stanley Asia-Pacific Fund, Inc., Morgan Stanley Emerging Markets Debt Fund, Inc., Morgan Stanley Emerging Markets Fund, Inc., Morgan Stanley Fund, Inc., Morgan Stanley Global Opportunity Bond Fund, Inc., Morgan Stanley High Yield Fund, Inc., Morgan Stanley India Investment Fund, Inc., Morgan Stanley Institutional Fund, Inc., The Pakistan Investment Fund, Inc., The Thai Fund, Inc. and The Turkish Investment Fund, Inc. 24 Name, Address Position Principal Occupation During and Age with Fund Past Five Years - ------------------- --------- --------------------------- Joanna Haigney Assistant Supervisor of Fund Administration and 73 Tremont Street Treasurer Compliance, Chase Global Funds Boston, MA 02108-3913 Services Company; Previously with (29) Coopers & Lybrand LLP; Assistant Treasurer of The Brazilian Investment Fund, Inc., The Latin American Discovery Fund, Inc., The Malaysia Fund, Inc., Morgan Stanley Africa Investment Fund, Inc., Morgan Stanley Asia-Pacific Fund, Inc., Morgan Stanley Emerging Markets Debt Fund, Inc., Morgan Stanley Emerging Markets Fund, Inc., Morgan Stanley Fund, Inc., Morgan Stanley Global Opportunity Bond Fund, Inc., Morgan Stanley High Yield Fund, Inc., Morgan Stanley India Investment Fund, Inc., Morgan Stanley Institutional Fund, Inc., The Pakistan Investment Fund, Inc., The Thai Fund, Inc. and The Turkish Investment Fund, Inc. - -------------- * "Interested Person" within the meaning of the 1940 Act. REMUNERATION OF DIRECTORS AND OFFICERS Effective June 28, 1995, the Open-end Fund Complex will pay each of the nine Directors who is not an "interested person" an annual aggregate fee of $55,000, plus out-of-pocket expenses. The Open-end Fund Complex will pay each of the members of the Fund's Audit Committee, which consists of the Fund's Directors who are not "interested persons," an additional annual aggregate fee of $10,000 for serving on such a committee. The allocation of such fees will be among the three funds in the Open-end Fund Complex in direct proportion to their respective average net assets. For the fiscal year December 31, 1995, the Fund paid approximately $244,000 in Directors' fees and expenses. Directors who are also officers or affiliated persons receive no remuneration for their services as Directors. The Fund's officers and employees are paid by the Adviser or its agents. As of March 31, 1996, to Fund management's knowledge, the Directors and officers of the Fund, as a group, owned more than 1% of the outstanding common stock of the following Portfolios of the Fund: 2.4% Active Country Allocation Portfolio - Class B shares; 1.7% Aggressive Equity Portfolio - Class B shares; 1.7% Asian Equity Portfolio - Class A shares; 1.8% Emerging Growth Portfolio -Class B shares; 1.0% Emerging Markets Portfolio - Class B shares; 2.0% Equity Growth Portfolio - Class B shares; 3.3% Gold Portfolio - Class B shares; 1.3% International Equity Portfolio - Class B shares and 4.8% Latin American Portfolio - Class A shares. The following table shows aggregate compensation paid to each of the Fund's Directors by the Fund and the Fund Complex, respectively, in the fiscal year ended December 31, 1995. 25 COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- (1) (2) (3) (4) (5) NAME OF AGGREGATE PENSION OR ESTIMATED TOTAL PERSON, COMPENSATION RETIREMENT ANNUAL COMPENSATION POSITION FROM BENEFITS ACCRUED BENEFITS FROM REGISTRANT REGISTRANT AS PART OF FUND UPON AND FUND COMPLEX EXPENSES RETIREMENT PAID TO DIRECTORS - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Barton M. Biggs, N/A N/A Director and Chairman of the Board Warren J. Olsen, N/A N/A Director and President John D. Barrett, II 14,085 26,405 Director Gerard E. Jones, 25,335 79,655 Director Andrew McNally, IV 11,916 32,834 Director Samuel T. Reeves, 11,916 14,303 Director Fergus Reid, 14,085 48,517 Director Frederick O. Robertshaw, 11,916 36,055 Director Frederick B. Whittemore, 12,150 41,429 Director John P. Britton*, 11,250 11,250 Director George R. Bunn*, 12,900 12,900 Director Peter E. deSvastich*, 11,250 25,225 Director
- -------------- * As of June 30, 1995, Mssrs. Britton, Bunn and deSvastich resigned from the Board of Directors. 26 INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") is a wholly-owned subsidiary of Morgan Stanley Group Inc. The principal offices of Morgan Stanley Group Inc. are located at 1221 Avenue of the Americas, New York, NY 10020. As compensation for advisory services for the fiscal years ended December 31, 1993, December 31, 1994 and December 31, 1995, the Adviser earned fees of approximately $17,539,000, $34,338,000 and $40,534,000, respectively, and from such fees voluntarily waived fees of $3,037,000, $2,640,000 and $3,526,000, respectively. For the fiscal years ended December 31, 1993, December 31, 1994 and December 31, 1995, the Fund paid brokerage commissions of approximately $5,827,000, $7,287,293 and $10,317,515, respectively. For the fiscal years ended December 31, 1993, December 31, 1994 and December 31, 1995, the Fund paid in the aggregate $797,000, $796,000 and $377,000, respectively, as brokerage commissions to Morgan Stanley & Co. Incorporated, an affiliated broker-dealer, which represented 13%, 11% and 4% of the total amount of brokerage commissions paid in each respective period. For the fiscal years ended December 31, 1993 , December 31, 1994 and December 31, 1995, the Fund paid administrative fees to MSAM of approximately $4,662,000, $4,458,000 and $5,238,000, respectively. The Sub-Adviser, Sun Valley Gold Company, with principal offices at 620 Sun Valley Road, Sun Valley, Idaho, serves as the investment sub-adviser of the Gold Portfolio, pursuant to a sub-advisory agreement among the Fund, the Adviser and the Sub-Adviser (the "Sub-Advisory Agreement"). The Adviser and the Sub- Adviser have entered into an indemnification agreement under which, generally, the Sub-Adviser has agreed to indemnify the Adviser and the Fund for claims or losses in connection with any failure by the Sub-Adviser to comply with its obligations under the Sub-Advisory Agreement or related agreements or any act or omission that amounts to negligence, misfeasance or bad faith, and the Adviser has agreed to indemnify the Sub-Adviser for claims or losses in connection with any failure by the Adviser to comply with its obligations under the Sub-Advisory Agreement or related agreements. As compensation for sub-advisory services for the fiscal years ended December 31, 1994 and December 31, 1995, the Sub-Adviser earned fees of approximately $76,000 and $73,000, respectively, and from such fees voluntarily waived fees of $36,000 and $37,000, respectively. For the fiscal years ended December 31, 1994 and December 31, 1995, the Fund paid $8,000 and $450, respectively, as brokerage commissions to Sun Valley. Pursuant to the MSAM Administration Agreement between the Adviser and the Fund, the Adviser provides Administrative 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 1% of the average daily net assets of each Portfolio. Under the Agreement between the Adviser and The Chase Manhattan Bank, N.A. ("Chase," successor in interest to United States Trust Company of New York), Chase Global Funds Services Company ("CGFSC," formerly Mutual Funds Service Company and now a Chase subsidiary) provides certain administrative services to the Fund. CGFSC provides operational and administrative services to investment companies with approximately $62 billion in assets and having approximately 187,286 shareholder accounts as of March 31, 1996. CGFSC's business address is 73 Tremont Street, Boston, Massachusetts 02108-3913. DISTRIBUTION OF FUND SHARES Morgan Stanley & Co. Incorporated (the "Distributor"), a wholly-owned subsidiary of Morgan Stanley Group Inc., serves as the Distributor of the Fund's shares pursuant to a Distribution Agreement for the Fund and a Plan of Distribution for the Class B shares of the Portfolios (except the International Small Cap Portfolio which does not have Class B shares) pursuant to Rule 12b-1 under the 1940 Act (each, a "Plan" and collectively, the "Plans"). Under each Plan the Distributor is entitled to receive from these Portfolios a distribution fee, which is accrued daily and paid quarterly, at an annual rate of up to 0.25% of the average daily net assets of the Class B shares of these Portfolios. The Distributor expects to allocate most of its fee to its investment representative and investment dealers, banks or financial service firms that provide distribution services ("Participating Dealer"). The actual amount of such compensation is agreed upon by the Fund's Board of Directors and by the Distributor. The Distributor may, in its discretion, voluntarily waive from time to time all or any portion of its distribution fee and the Distributor is free to make additional payments out of its own assets to promote the sale of Fund shares. The Plans obligate the Portfolios to accrue and pay to the Distributor the fee agreed to under its Distribution Agreement. The Plans do not obligate the Portfolios to reimburse the Distributor for the actual expenses the Distributor may incur in fulfilling its obligations under the Plans. Thus, under each Plan, even if the Distributor's actual expenses exceed the fee payable to it thereunder at any given time, the Portfolios will not be obligated to pay more than that fee. If the Distributor's actual expenses are less than the fee it receives, the Distributor will retain the full amount of the fee. The Plans for the Class B shares were most recently approved by the Fund's Board of Directors, including those directors who are not "interested persons" of the Fund as that term is defined in the 1940 Act and who have no direct or indirect financial interest in the operation of a Plan or in any agreements related thereto, on September 20, 1995. 27 The Class B shares commenced operations on January 2, 1996. Therefore, no Rule 12b-1 fees were paid to the Distributor for the fiscal year ended December 31, 1995. The Mortgage-Backed Securities, China Growth, MicroCap and International Magnum Portfolios were not in operation in the fiscal year ended December 31, 1995. CODE OF ETHICS The Board of Directors of the Fund has adopted a Code of Ethics under Rule 17j-1 of the 1940 Act which incorporates the Code of Ethics of the Adviser (together, the "Codes"). The Codes significantly restrict the personal investing activities of all employees of the Adviser and, as described below, impose additional, more onerous, restrictions on the Fund's investment personnel. The Codes require that all employees of the Adviser preclear any personal securities investment (with limited exceptions, such as government securities). The preclearance requirement and associated procedures are designed to identify any substantive prohibition or limitation applicable to the proposed investment. The substantive restrictions applicable to all employees of the Adviser include a ban on acquiring any securities in a "hot" initial public offering and a prohibition from profiting on short-term trading in securities. In addition, no employee may purchase or sell any security that at the time is being purchased or sold (as the case may be), or to the knowledge of the employee is being considered for purchase or sale, by any fund advised by the Adviser. Furthermore, the Codes provide for trading "blackout periods" that prohibit trading by investment personnel of the Fund within periods of trading by the Fund in the same (or equivalent) security. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES The names and addresses of the holders of 5% or more of the outstanding shares of any class of the Fund as of March 31, 1996 and the percentage of outstanding shares of such classes owned beneficially or of record by such shareholders as of such date are, to Fund management's knowledge, as follows: ACTIVE COUNTRY ALLOCATION PORTFOLIO: The Trustees of Columbia University in the City of New York, 475 Riverside Drive, Suite 401, New York, NY 10115, owned 15% of such Portfolio's total outstanding Class A shares. City of New York Deferred Compensation Plan, 40 Rector Street, 3rd Floor, New York, NY 10006, owned 16% of such Portfolio's total outstanding Class A shares. Oglebay Norton Company, 1100 Superior Avenue, Cleveland, OH 44114-2598, owned 11% of such Portfolio's total outstanding Class A shares. The Finn Foundation, Northern Trust Co., Master Trust Dept., P.O. Box 92984, Chicago, IL 60675, owned 7% of such Portfolio's total outstanding Class A shares. Strafe & Co., F/A/O/ in Thompson Consumer Electronics, 235 West Schrock Road, Westerville, OH 43081, owned 7% of such Portfolio's total outstanding Class A shares. Sahara Enterprises, Inc., 3 First National Plaza, Suite 2000, Chicago, IL 60602-4260, owned 6% of such Portfolio's total outstanding Class A shares. Jeffrey R. Holzschuh, 66 Sawmill Lane, Greenwich, CT 06830-4046, owned 14% of such Portfolio's total outstanding Class B shares. Benefit Administrators of America Inc., Attn: John Stephens, 626 Grand Avenue, Des Moines, IA 50309, owned 14% of such Portfolio's total outstanding Class B shares. David Johnson and Audrey E. Johnson, 405 East Winchester, Libertyville, IL 60048-1677, owned 10% of such Portfolio's total outstanding Class B shares. Mercury & Co., C/O Investors Bank & Trust Company, P.O. Box 1537 Top 57, Boston, MA 02205-1537, owned 8% of such Portfolio's total outstanding Class B shares. John P. and Janet K. Hanlon, 7 Stafford Place, Towaco, NJ 07082, owned 7% of such Portfolio's total outstanding Class B shares. 28 Michael and Maureen Cassedy, 1221 Jones Street, Apt. D1, San Francisco, CA 94109-4228, owned 7% of such Portfolio's total outstanding Class B shares. Guarantee & Trust Company, IRA R/O, 101 S. Spring Street, La Grange, IL 60525, owned 6% of such Portfolio's total outstanding Class B shares. AGGRESSIVE EQUITY PORTFOLIO: Valassis Enterprises - Equity C/O Franklin Enterprises, 520 Lake Cook Road, Suite 380, Deerfield, IL 60015, owned 15% of such Portfolio's total outstanding Class A shares. Kinghugh S.A., C/O Office of Directors, Chin Lan Building, 306 Tun Hwa Road, South Taipei, owned 10% of such Portfolio's total outstanding Class A shares. Hullbridge Investement Limited, The Tropic Isle Building, Wickahams Cay Tortola, British Virgin Islands, owned 8% of such Portfolio's total outstanding Class A shares. Guy L. Chazal, Morgan Stanley & Company, 1221 Avenue of the Americas - 33rd floor, New York, NY 10020, owned 8% of such Portfolio's total outstanding Class B shares. John S. Richardson, 100 Peachtree Way, Atlanta, GA 30305-3738, owned 7% of such Portfolio's total outstanding Class B shares. Caroline B. Case, 54 Tanglewylde Avenue, Bronxville, NY 10708, owned 7% of such Portfolio's total outstanding Class B shares. Peter Boer, 47 Country Road, Village of Golf, FL 33436-5604, owned 7% of such Portfolio's total outstanding Class B shares. Mr. James Fuld, Jr., 114 East 72nd Street, New York, NY 10021, owned 6% of such Portfolio's total outstanding Class B shares. Walter Kaye, 475 Park Avenue, new York, NY 10022-1902, owned 5% of such Portfolio's total outstanding Class B shares. ASIAN EQUITY PORTFOLIO: Association De Bienfaisance Et De Retraite Des Policiers De La Communaute Urbaine De Montreal, 480 Gilford Street, Montreal, Quebec H2J1N3, owned 8% of such Portfolio's total outstanding Class A shares. Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O.Box 92956, Chicago, IL 60675-2956, owned 5% of such Portfolio's total outstanding Class A shares. BALANCED PORTFOLIO: The American Roentgen Ray Society, 1891 Preston White Drive, Reston, VA 22091-5431, owned 27% of such Portfolio's total outstanding Class A shares. William Guthrie, IRA Rollover, 435 Sheridan Road, Winnetka, IL 60093-2626, owned 16% of such Portfolio's total outstanding Class B shares. EMERGING GROWTH PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 26% of such Portfolio's total outstanding Class A shares. Allendale Mutual Insurance Co., P.O. Box 7500, Johnston, RI 02919-0750, owned 10% of such Portfolio's total outstanding Class A shares. Mac & Co. A/C Benf 0741602, P.O. Box 3198, Pittsburgh, PA 15230, owned 8% of such Portfolio's total outstanding Class A shares. EMERGING MARKETS DEBT PORTFOLIO: Northwestern University, 633 Clark Street, Evanston, IL 60208-1122, owned 13% of such Portfolio's total outstanding Class A shares. Swarthmore College, 500 College Avenue, Swarthmore, PA 19081-1110, owned 7% of such Portfolio's total outstanding Class A shares. Eleanor S. Herkert, Trustee of the Eleanor S. Herkert Trust, 2000 Diana Drive Apt. 101, Lakeview West, Hallandale, FL 33009-4709, owned 6% of such Portfolio's total outstanding Class B shares. 29 Donald A. Moore, Jr., 160 E. 42 Street, New York, NY 10021, owned 5% of such Portfolio's total outstanding Class B shares. Delaware Charter Guarantee & Trust Company, IRA Rollover, 15 Garden Place, Brooklyn, NY 11204-4581, owned 5% of such Portfolio's total outstanding Class B shares. Paul and Lauren Ghaffari, 49 Grosset Road, Riverside, CT 06878, owned 5% of such Portfolio's total outstanding Class B shares. David Brooks Gendron, c/o CS First Boston - London, 55 East 52nd Street, New York, NY 10055, owned 5% of such Portfolio's total outstanding Class B shares. EMERGING MARKETS PORTFOLIO: Ministers & Missionaries Benefit Board of the American Baptist Churches, 475 Riverside Drive, New York, NY 10115, owned 10% of such Portfolio's total outstanding Class A shares. Ewing Marion Kauffman Foundation, 4900 Oak Street, Kansas City, MO 64112, owned 8% of such Portfolio's total outstanding Class A shares. EQUITY GROWTH PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675, owned 35% of such Portfolio's total outstanding Class A shares. Donald A. Moore Jr., 160 E. 42 Street, New York, NY 10021, owned 8% of such Portfolio's total outstanding Class B shares. EUROPEAN EQUITY PORTFOLIO: James P. Smith Jr., 552 Ponte Vedra Boulevard, Ponte Vedra, FL 32082-2316, owned 10% of such Portfolio's total outstanding Class B shares. Beatrice Synder, Trustee FBO Jay Synder 21484, 300 Winston Drive Apt. 1711, Cliff Side Park, NJ 07010-3222, owned 10% of such Portfolio's total outstanding Class B shares. Deborah Meredith, 1386 Pritchett Court, Los Altos, CA 94024-5713, owned 10% of such Portfolio's total outstanding Class B shares. Steven J. Wong, 20021 Marribrook Drive, Saratoga, CA 95070-5445, owned 10% of such Portfolio's total outstanding Class B shares. Benedikt Von Schroder & Kristin Von Schroder, Burnitz str. 67, 6000 Frankfurt 70, Germany, owned 9% of such Portfolio's total outstanding Class B shares. FIXED INCOME PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 22% of such Portfolio's total outstanding Class A shares. Brooks School, c/o Mr. Frank Marino, North Andover, MA 01845, owned 6% of such Portfolio's total outstanding Class A shares. Morgan Stanley Foundation, 1221 Avenue of the Americas, New York, NY 10020, owned 5% of such Portfolio's total outstanding Class A shares. John B. & Judy D. Morel, 28 Twelve Pines, The Woodlands, TX 77381, owned 9% of such Portfolio's total outstanding Class B shares. William M. Manger, Jr., 8 E. 81 Street, New York, NY 10028-0201, owned 5% of such Portfolio's total outstanding Class B shares. Harold J. Schaaff, IRA, 49 Old Orchard Lane, Ocean TWP, NJ 07712, owned 5% of such Portfolio's total outstanding Class B shares. Delaware Charter & Guarantee & Trust, IRA Rollover, 5813 East North Avenue, Kalamazoo, MI 49009, owned 5% of such Portfolio's total outstanding Class B shares. Michael J. and Patricia L. Berchtold, Morgan Stanley, 1251 Avenue of the Americas, Hong Kong Pouch, New York, NY 10020-1104, owned 5% of such Portfolio's total outstanding Class B shares. 30 GLOBAL EQUITY PORTFOLIO: Robert College of Istanbul Turkey C/O Morgan Stanley Asset Management, 25 Cabot Square, London, England E144QA, owned 49% of such Portfolio's total outstanding Class A shares. Gaz Metropolitan and Company Limited Partnership, 1717 Du Havre, Montreal, Canada H2K-2X3, owned 15% of such Portfolio's total outstanding Class A shares. JM Kaplan Fund, Inc., 880 Third Avenue 3rd floor, New York, NY 10022, owned 13% of such Portfolio's total outstanding Class A shares. Divtex and Company FBO, Pritchard Hubble and Herr C/O Texas Commerce Bank, P.O. Box 951405, Dallas, TX 75395, owned 9% of such Portfolio's total outstanding Class A shares. North American Trust Company, FBO Heller/Robert S. Venning, P.O. Box 84419, San Diego, CA 92138, owned 13% of such Portfolio's total outstanding Class B shares. Douglas E. Ebert Trust, Douglas E. Ebert, Trustee and Successor in Trust, 3470 Twin Oaks Court, W. Bloomfield, MI 48324-3249, owned 7% of such Portfolio's total outstanding Class B shares. John F. Raynolds III, 386 Park Avenue, South 18th Floor, New York, NY 10016, owned 6% of such Portfolio's total outstanding Class B shares. GLOBAL FIXED INCOME PORTFOLIO: Farm Credit Bank Retirement Plan, Columbia District American Industries Trust Company Trustee, 5700 NW Central Drive, 4th Floor, Houston, TX 77092, owned 15% of such Portfolio's total outstanding Class A shares. Northern Trust Company as Custodian FBO The Lund Foundation, P.O. Box 92956, Chicago, IL 60675, owned 11% of such Portfolio's total outstanding Class A shares. The Northern Trust Customer FBO Resort Condominiums International, P.O. Box 92956, Chicago, IL 60675-2956, owned 7% of such Portfolio's total outstanding Class A shares. Divtex and Co., FBO Pritchard Hubble and Herr, c/o Texas Commerce Bank, P.O. Box 951405, Dallas, TX 75395-1405, owned 6% of such Portfolio's total outstanding Class A shares. David Brooks Gendron, C/O CS First Boston - London, 55 East 52nd Street, New York, NY 10055, owned 11% of such Portfolio's total outstanding Class B shares. Marjorie S. Burggraf, FBO The Robert V. Burgraff Family Trust UTA DTD 11-5-86, 2378 E. Oakmont Drive, Idaho Falls, ID 83404-7720, owned 8% of such Portfolio's total outstanding Class B shares. Harold L. Tailisman, 837 New Hampshire Avenue, Washington, DC 20037-2305, owned 6% of such Portfolio's total outstanding Class B shares. Steven J. Wong, 20021 Marribrook Drive, Saratoga, CA 95070-5445, owned 5% of such Portfolio's total outstanding Class B shares. Alexander P. Hixon Jr., Anthony Hixon & Andrew R. Hixon Trustees FBO Hixon Family Char. Remainder, 70 S. Lake Avenue STE 1075, Pasadena, CA 91101-2206, owned 5% of such Portfolio's total outstanding Class B shares. Thomas E. Congden, 1776 Lincoln Street, Suite 1100, Denver, CO 80203-1080, owned 5% of such Portfolio's total outstanding Class B shares. GOLD PORTFOLIO: Stockton Trust Partnership, 7373 North Scottsdale Road, Scottsdale, AZ 85253, owned 49% of such Portfolio's total outstanding Class A shares. Judith L. Biggs, 390 Riversville Road, Greenwich, CT 06831-3200, owned 12% of such Portfolio's total outstanding Class A shares. Charlotte Beers, Ogilvy & Mather, 309 West 49th Street, New York, NY 10019-7316, owned 7% of such Portfolio's total outstanding Class A shares. 31 Trust U/A Sixth Will of Howard Ross, C/O James H. Ross, Rossrock Company, Inc., 150 East 52nd Street, New York, NY 10020, owned 5% of such Portfolio's total outstanding Class A shares. Kinghugh S.A., c/o Office of Directors, Chin Lan Building, 306 Tun Hwa Road, South Taipei, owned 5% of such Portfolio's total outstanding Class A shares. Sunil T. Wadhwani, 930 Osage Road, Pittsburgh, PA 15243, owned 47% of such Portfolio's total outstanding Class B shares. Gregory W. Neumann, 5 Mt. Austin Road, House B, The Peak, Hong Kong, owned 20% of such Portfolio's total outstanding Class B shares. Michael J. and Patricia L. Berchtold, Morgan Stanley, 1251 Avenue of the Americas, Hong Kong Pouch, New York, NY 10020-1104, owned 10% of such Portfolio's total outstanding Class B shares. Matthew and Deborah Carrara, 443 W. Eugnie Street, Apt. 3E, Chicago, IL 60614, owned 8% of such Portfolio's total outstanding Class B shares. Christian B. Malone, 750 Columbus Avenue, Apt. 8N, New York, NY 10025-6479, owned 7% of such Portfolio's total outstanding Class B shares. HIGH YIELD PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675-2956, owned 28% of such Portfolio's total outstanding Class A shares. Valassis Enterprises - Equity, c/o Franklin Enterprises, 520 Lake Cook Road, Suite 380, Deerfield, IL 60015, owned 19% of such Portfolio's total outstanding Class A shares. Morgan Stanley & Co. Pension Fund, c/o Northern Trust Company, 770 Broadway, New York, NY 10003, owned 6% of such Portfolio's total outstanding Class A shares. Austin Koenen, 360 Sunset Road, Pompton Plains, NJ 07444-1513, owned 15% of such Portfolio's total outstanding Class B shares. Arthur H. and Julia E. Maurer, 5349 Cedar Lake Road Apt. 12-33, Boynton Beach, FL 33437-3046, owned 7% of such Portfolio's total outstanding Class B shares. Eleanor S. Herkert, Trustee of the Eleanor S. Herkert Trust, 2000 Diana Drive, Apt. 101, Hallandale, FL 33009-4709, owned 7% of such Portfolio's total outstanding Class B shares. David J. Barrett, 320 E. 46th Street, Apt. 18-H, New York, NY 10017, owned 5% of such Portfolio's total outstanding Class B shares. INTERNATIONAL MAGNUM PORTFOLIO: Ameritas Life Insurance Corporation, P.O. Box 81889, Lincoln, NE 68501, owned 57% of such Portfolio's total outstanding Class A shares. Luanne C. Wells and Paul C. Heeschen Trustees, FBO Palm Trust, 450 Newport Center Drive, Newport Beach, CA 92660-7614, owned 43% of such Portfolio's total outstanding Class A shares. The Chase Manhattan Bank, NA, Custodian for the IRA of Toni Villasenor Brown, 335 Emerty Drive East, Stamford, CT 06902, owned 50% of such Portfolio's total outstanding Class B shares. The Chase Manhattan Bank, NA, Custodian for the IRA of Jeffrey Paul Brown, 335 Emery Drive East, Stamford, CT 06902, owned 50% of such Portfolio's total outstanding Class B shares. INTERNATIONAL SMALL CAP PORTFOLIO: The Short Brothers Pension Fund, P.O. Box 241, Airport Road, Belfast, N. Ireland, owned 11% of such Portfolio's total outstanding Class A shares. The Casey Family Program, 1300 Dexter Avenue, Suite 400, Seattle, WA 98109-3547, owned 8% of such Portfolio's total outstanding Class A shares. 32 Trustees of Boston College Attn: Paul Haran Associates Treasurer, St. Thomas More Hall 310, Chestnut Hill, MA 02167, owned 7% of such Portfolio's total outstanding Class A shares. General Mills, Inc. Master Trust: Pooled International Fund, One General Mills Blvd., Minneapolis, MN 55426, owned 7% of such Portfolio's total outstanding Class A shares. JAPANESE EQUITY PORTFOLIO: Sunil T. Wadhwani, 930 Osage Road, Pittsburgh, PA 15243, owned 7% of such Portfolio's total outstanding Class B shares. William H. Davidow, 85 Robles Drive, Woodside, CA 94062-2204, owned 6% of such Portfolio's total outstanding Class B shares. Eric Dunn, Investment Account, 1470 Arcadia Place, Palo Alto, CA 94303, owned 6% of such Portfolio's total outstanding Class B shares. LATIN AMERICAN PORTFOLIO: Chicago Methodist Episcopal Church Aid Society, C/O Gordon Worley, 4401 Gulf Shore Boulevard, Naples, FL 33940, owned 29% of such Portfolio's total outstanding Class B shares. Henri Dyner, 232 Truman Drive, Cresskill, NJ 07626, owned 29% of such Portfolio's total outstanding Class B shares. John P. Hanlon and Janet K. Hanlon, 7 Stafford Place, Towaco, NJ 07082, owned 10% of such Portfolio's total outstanding Class B shares. Lawrence B. Sorrel, 58 Taunton Road, Scarsdale, NY 10583, owned 8% of such Portfolio's total outstanding Class B shares. MUNICIPAL BOND PORTFOLIO: Daniel F. McDonald and Maria J. McDonald, 8550 Old Dominion Drive, McLean, VA 22102, owned 11% of such Portfolio's total outstanding Class A shares. Cushman Trust, C/O Cambrian Services, 1114 Avenue of the Americas, Suite 2702, New York, NY 10036, owned 5% of such Portfolio's total outstanding Class A shares. Arnold E. Bellowe and Jill I. Bellowe Trustees, 915 Park Lane, Montecito, CA 93108-1421, owned 5% of such Portfolio's total outstanding Class A shares. James A. Rutherford, C/O Wingset Inc., 15 South High Street, P.O. Box 166, New Albany, OH 43054-0166, owned 5% of such Portfolio's total outstanding Class A shares. James W. Grisham and Diana E. Grisham, 454 South Pleasant Avenue, Ridgewood, NJ 07450-5446, owned 100% of such Portfolio's total outstanding Class B shares. SMALL CAP VALUE EQUITY PORTFOLIO: Morgan Stanley & Co. Pension Fund, c/o Northern Trust Company, 770 Broadway Street, New York, NY 10003, owned 12% of such Portfolio's total outstanding Class A shares. Kinney Printing Co-Employees, Attn: Dolores M. Miklos, 4801 South Lawndale, Chicago, IL 60632-3018, owned 92% of such Portfolio's total outstanding Class B shares. George W. Gardner, Self Declaration of Trust, 70 E. Cedar, Chicago, IL 60611, owned 7% of such Portfolio's total outstanding Class B shares. Frank E. Hunt Trust, 8627 Madison Drive, Niles, IL 60648-2321, owned 6% of such Portfolio's total outstanding Class B shares. Michael E. Dee, C/O Morgan Stanley Mailroom, 1585 Broadway, New York, NY 10036-8293, owned 6% of such Portfolio's total outstanding Class B shares. U.S. REAL ESTATE PORTFOLIO: European Patent Organization Pension Reserve Fund, Erhardtstrasse 27, Munich, Germany 80331, owned 7% of such Portfolio's total outstanding Class A shares. 33 Morgan, Stanley & Co. Pension Fund, C/O Northern Trust Company, 770 Broadway, New York, NY 10003, owned 10% of such Portfolio's total outstanding Class A shares. Eleanor S. Herkert, Trustee of The Eleanor S. Herkert Trust, 2000 Diana Drive, Lakeview West, Hallandale, FL 33009-4709, owned 10% of such Portfolio's total outstanding Class B shares. Kansas Children's Service League, P.O. Box 517, Wichita, KS 67201, owned 8% of such Portfolio's total outstanding Class B shares. Donald A. Moore, Jr., 160 E. 72 Street, New York, NY 10021, owned 8% of such Portfolio's total outstanding Class B shares. VALUE EQUITY PORTFOLIO: Northern Trust Company Trustee, FBO Morgan Stanley Profit Sharing Plan, P.O. Box 92956, Chicago, IL 60675, owned 17% of such Portfolio's total outstanding Class A shares. Victoria B. McLaughlin, Upper Dogwood Lane, Rye, NY 10580, owned 8% of such Portfolio's total outstanding Class B shares. Delaware Charter Guarantee & Trust Company, C/F Nelaura O. Lewis, IRA Rollover, 78 Cedar Cliff Road, Riverside, CT 06878, owned 5% of such Portfolio's total outstanding Class B shares. NET ASSET VALUE FOR MONEY MARKET PORTFOLIOS The Money Market Portfolio and the Municipal Money Market Portfolio seek to maintain a stable net asset value per share of $1.00. These Portfolios use the amortized cost method of valuing their securities, which does not take into account unrealized gains or losses. The use of amortized cost and the maintenance of each Portfolio's per share net asset value at $1.00 is based on the Portfolio's election to operate under the provisions of Rule 2a-7 under the 1940 Act. As a condition of operating under that Rule, each of the Money Market Portfolios must maintain a dollar-weighted average portfolio maturity of 90 days or less, purchase only instruments having remaining maturities of 397 days or less, and invest only in securities which are of "eligible quality" as determined in accordance with regulations of the Commission. The Rule also requires that the Directors, as a particular responsibility within the overall duty of care owed to shareholders, establish procedures reasonably designed, taking into account current market conditions and each Portfolio's investment objectives, to stabilize the net asset value per share as computed for the purposes of sales and redemptions at $1.00. These procedures include periodic review, as the Directors deem appropriate and at such intervals as are reasonable in light of current market conditions, of the relationship between the amortized cost value per share and a net asset value per share based upon available indications of market value. In such review, investments for which market quotations are readily available are valued at the most recent bid price or quoted yield available for such securities or for securities of comparable maturity, quality and type as obtained from one or more of the major market makers for the securities to be valued. Other investments and assets are valued at fair value, as determined in good faith by the Directors. In the event of a deviation of over 1/2 of 1% between a Portfolio's net asset value based upon available market quotations or market equivalents and $1.00 per share based on amortized cost, the Directors will promptly consider what action, if any, should be taken. The Directors will also take such action as they deem appropriate to eliminate or to reduce to the extent reasonably practicable any material dilution or other unfair results which might arise from differences between the two. Such action may include redemption in kind, selling instruments prior to maturity to realize capital gains or losses or to shorten the average maturity, withholding dividends, paying distributions from capital or capital gains or utilizing a net asset value per share as determined by using available market quotations. There are various methods of valuing the assets and of paying dividends and distributions from a money market fund. Each of the Money Market and Municipal Money Market Portfolios values its assets at amortized cost while also monitoring the available market bid price, or yield equivalents. Since dividends from net investment income will be declared daily and paid monthly, the net asset value per share of each Portfolio will ordinarily remain at $1.00, but each Portfolio's daily dividends will vary in amount. Net realized gains, if any, will normally be declared and paid monthly. 34 PERFORMANCE INFORMATION The Fund may from time to time quote various performance figures to illustrate the Portfolios' past performance. Performance quotations by investment companies are subject to rules adopted by the Commission, which require the use of standardized performance quotations. In the case of total return, non-standardized performance quotations may be furnished by the Fund but must be accompanied by certain standardized performance information computed as required by the Commission. Current yield and average annual compounded total return quotations used by the Fund are based on the standardized methods of computing performance mandated by the Commission. An explanation of those and other methods used by the Fund to compute or express performance follows. TOTAL RETURN From time to time each Portfolio, except the Money Market and Municipal Money Market Portfolios, may advertise total return for each class of shares of the Portfolio. Total return figures are based on historical earnings and are not intended to indicate future performance. The average annual total return is determined by finding the average annual compounded rates of return over 1-, 5-, and 10-year periods (or over the life of the Portfolio) that would equate an initial hypothetical $1,000 investment to its ending redeemable value. The calculation assumes that all dividends and distributions are reinvested when paid. The quotation assumes the amount was completely redeemed at the end of each 1-, 5-, and 10-year period (or over the life of the Portfolio) and the deduction of all applicable Fund expenses on an annual basis. The average annual compounded rates of return (unless otherwise noted) for the Fund's Portfolios for the one year and five year periods ended December 31, 1995 and for the period from inception through December 31, 1995 are as follows:
Name of Portfolio Since Date and Date of Inception One Year Five Year of Inception --------------------- -------- --------- ------------ International Equity August 4, 1989. . . . . . . . 11.77% 14.24% 10.82% Emerging Growth November 1, 1989. . . . . . . 33.31 14.48 13.36 Value Equity January 31, 1990. . . . . . . 33.69 15.65 11.86 Balanced February 28, 1990 . . . . . . 23.63 11.45 10.31 Equity Growth April 2, 1991 . . . . . . . . 45.02 N/A 14.33 Name of Portfolio Since Date and Date of Inception One Year Five Year of Inception --------------------- -------- --------- ------------ Global Fixed Income May 1, 1991 . . . . . . . . . 19.32 N/A 8.95 Fixed Income May 15, 1991. . . . . . . . . 18.76 N/A 9.18 Asian Equity July 1, 1991. . . . . . . . . 6.87 N/A 21.85 35 Active Country Allocation January 17, 1992. . . . . . . 10.57 N/A 8.46 Global Equity July 15, 1992 . . . . . . . . 18.66 N/A 18.21 Emerging Markets September 25, 1992. . . . . . (12.77) N/A 13.16 High Yield September 28, 1992. . . . . . 23.35 N/A 12.28 International Small Cap December 15, 1992 . . . . . . 2.60 N/A 16.30 Small Cap Value Equity December 17, 1992 . . . . . . 20.63 N/A 11.61 European Equity April 2, 1993 . . . . . . . . 11.85 N/A 18.68 Emerging Markets Debt February 1, 1994. . . . . . . 28.23 N/A 5.18 Gold February 1, 1994. . . . . . . 13.21 N/A 1.87 Japanese Equity April 25, 1994. . . . . . . . (3.64) N/A (3.17) Latin American January 18, 1995. . . . . . . N/A N/A (8.68) Municipal Bond January 18, 1995. . . . . . . N/A N/A 8.80 U.S. Real Estate February 24, 1995 . . . . . . N/A N/A 21.07 Aggressive Equity March 8, 1995 . . . . . . . . N/A N/A 41.25 International Magnum March 15, 1996. . . . . . . . N/A N/A N/A
These figures were calculated according to the following formula: P(1 + T)to the nth power = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years 36 ERV = ending redeemable value of hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). CALCULATION OF YIELD FOR NON-MONEY MARKET PORTFOLIOS From time to time certain of the Fund's Portfolios may advertise yield. Current yield reflects the income per share earned by a Portfolio's investments. Current yield is determined by dividing the net investment income per share earned during a 30-day base period by the maximum offering price per share on the last day of the period and annualizing the result. Expenses accrued for the period include any fees charged to all shareholders during the base period. The respective yields for certain of the Fund's Portfolios for the 30-day period ended December 31, 1995 were as follows:
PORTFOLIO NAME 30-DAY YIELD -------------- ------------ Emerging Markets Debt . . . . . . . 15.67% Fixed Income. . . . . . . . . . . . 6.39% Global Fixed Income . . . . . . . . 5.91% High Yield. . . . . . . . . . . . . 10.65% Municipal Bond. . . . . . . . . . . 4.17%
These figures were obtained using the following formula: Yield = 2[( a - b + 1 )to the 6th power - 1] ------ cd where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive income distributions d = the maximum offering price per share on the last day of the period. CALCULATION OF YIELD FOR MONEY MARKET PORTFOLIOS The current yield of the Money Market and Municipal Money Market Portfolios is calculated daily on a base period return for a hypothetical account having a beginning balance of one share for a particular period of time (generally 7 days). The return is determined by dividing the net change (exclusive of any capital changes in such account) by its average net asset value for the period, and then multiplying it by 365/7 to determine the annualized current yield. The calculation of net change reflects the value of additional shares purchased with the dividends by the Portfolio, including dividends on both the original share and on such additional shares. The yields of the Money Market and Municipal Money Market Portfolios for the 7-day period ended Decmber 31, 1995 were 5.21% and 3.91%, respectively. An effective yield, which reflects the effects of compounding and represents an annualization of the current yield with all dividends reinvested, may also be calculated for each Portfolio by dividing the base period return by 7, adding 1 to the quotient, raising the sum to the 365th power, and subtracting 1 from the result. The effective yields of the Money Market and Municipal Money Market Portfolios for the 7-day period ended December 31, 1995 were 5.34% and 3.99%, respectively. 37 The yield of a Portfolio will fluctuate. The annualization of a week's dividend is not a representation by the Portfolio as to what an investment in the Portfolio will actually yield in the future. Actual yields will depend on such variables as investment quality, average maturity, the type of instruments the Portfolio invests in, changes in interest rates on instruments, changes in the expenses of the Fund and other factors. Yields are one basis investors may use to analyze the Portfolios of the Fund, and other investment vehicles; however, yields of other investment vehicles may not be comparable because of the factors set forth in the preceding sentence, differences in the time periods compared, and differences in the methods used in valuing portfolio instruments, computing net asset value and calculating yield. TAXABLE EQUIVALENT YIELD FOR THE MUNICIPAL BOND AND MUNICIPAL MONEY MARKET PORTFOLIO It is easy to calculate your own taxable equivalent yield if you know your tax bracket. The formula is: Tax Free Yield -------------------- 1 - Your Tax Bracket = Your Taxable Equivalent Yield For example, if you are in the 28% tax bracket and can earn a tax-free yield of 7.5%, the taxable equivalent yield would be 10.42%. The table below indicates the advantages of investments in Municipal Bonds for certain investors. Tax-exempt rates of interest payable on a Municipal Bond (shown at the top of each column) are equivalent to the taxable yields set forth opposite the respective income tax levels, based on income tax rates effective for the tax year 1995 under the Internal Revenue Code. There can, of course, be no guarantee that the Municipal Bond Portfolio or Municipal Money Market Portfolio will achieve a specific yield. Also, it is possible that some portion of the Portfolio's dividends may be subject to Federal income taxes. A substantial portion, if not all, of such dividends may be subject to state and local taxes. TAXABLE EQUIVALENT YIELD TABLE
Sample Level of Taxable Equivalent Rates Taxable Income Based on Tax-Exempt Yield of: -------------- ----------------------------- Federal Income Joint Single Tax Return Return Bracket 3% 4% 5% 6% 7% 8% 9% 10% 11% - ------ ------ ------- -- -- -- -- -- -- -- --- --- $0-39,000 $0-23,350 15.0% 3.5% 4.7% 5.9% 7.1% 8.2% 9.4% 10.6% 11.8% 12.9% 39,000-94,250 23,350-56,550 28.0 4.2 5.6 6.9 8.3 9.7 11.1 12.5 13.9 15.3 94,250-143,600 56,550-117,950 31.0 4.3 5.8 7.2 8.7 10.1 11.6 13.0 14.5 15.9 143,600-256,500 117,950-256,500 36.0 4.7 6.3 7.8 9.4 10.9 12.5 14.1 15.6 17.2 over 256,500 over 256,500 39.6 5.0 6.6 8.3 9.9 11.6 13.2 14.9 16.6 18.2
- ------- * Net amount subject to 1995 Federal Income Tax after deductions and exemptions, not indexed for 1995 income tax rates. The taxable equivalent yields for the Municipal Money Market and Municipal Bond Portfolios for the seven days ended December 31, 1995 assuming a Federal income tax rate of 39.6% (maximum rate), were 6.47% and 7.86%, respectively. The taxable equivalent effective yields for the Municipal Money Market and Municipal Bond Portfolios for the seven days ended December 31, 1995, assuming the same tax rate, were 6.61% and 8.05%, respectively. COMPARISONS To help investors better evaluate how an investment in a Portfolio of Morgan Stanley Institutional Fund, Inc. might satisfy their investment objective, advertisements regarding the Fund may discuss various measures of Fund performance as reported by various financial publications. Advertisements may also compare performance (as calculated above) to performance as reported by other investments, indices and averages. The following publications may be used: (a) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -- analyzes price, current yield, risk, total return and average rate of return (average annual compounded growth rate) over specified time periods for the mutual fund industry. 38 (b) Financial publications: Business Week, Changing Times, Financial World, Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global Investor, Investor's Daily, Lipper Analytical Services, Inc., Morningstar, Inc., New York Times, Personal Investor, Wall Street Journal and Weisenberger Investment Companies Service -- publications that rate fund performance over specified time periods. (c) Historical data supplied by the research departments of First Boston Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce, Fenner & Smith, Lehman Brothers and Bloomberg L.P. (d) Lipper -- Mutual Fund Performance Analysis and Lipper -- Fixed Income Fund Performance Analysis -- measures total return and average current yield for the mutual fund industry. Ranks individual mutual fund performance over specified time periods, assuming reinvestment of all distributions, exclusive of any applicable sales charges. (e) Mutual Fund Source Book, published by Morningstar, Inc. -- analyzes price, yield, risk and total return for equity funds. (f) Savings and Loan Historical Interest Rates -- as published in the U.S. Savings & Loan League Fact Book. (g) Stocks, Bonds, Bills and Inflation, published by Hobson Associates -- historical measure of yield, price and total return for common and small company stock, long-term government bonds, U.S. Treasury bills and inflation. The following indices and averages may also be used: (a) Composite Indices -- 70% Standard & Poor's 500 Stock Index and 30% NASDAQ Industrial Index; 35% Standard & Poor's 500 Stock Index and 65% Salomon Brothers High Grade Bond Index; and 65% Standard & Poor's 500 Stock Index and 35% Salomon Brothers High Grade Bond Index. (b) Consumer Price Index (or cost of Living Index), published by the U.S. Bureau of Labor Statistics -- a statistical measure of change, over time, in the price of goods and services in major expenditure groups. (c) Donoghue's Money Fund Average -- an average of all major money market fund yields, published weekly for 7 and 30-day yields. (d) Dow Jones Composite Average or its component averages -- an unmanaged index composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial Average), 15 utilities company stocks and 20 transportation stocks. Comparisons of performance assume reinvestment of dividends. (e) EMBI+ -- Expanding on the EMBI, which includes only Bradys, the EMBI+ includes a broader group of Brady Bonds, loans, Eurobonds and the U.S. Dollar local markets instruments. A more comprehensive benchmark than the EMBI, the EMBI+ covers 49 instruments from 14 countries. At $96 billion, its market cap is nearly 50% higher than the EMBI's. The EMBI+ is not, however, intended to replace the EMBI but rather to complement it. The EMBI continues to represent the most liquid, most easily traded segment of the market, including more of the assets that investors typically hold in their portfolios. Both of these indices are published daily. (f) First Boston High Yield Index -- generally includes over 180 issues with an average maturity range of seven to ten years with a minimum capitalization of $100 million. All issues are individually trader-priced monthly. (g) First Boston Upper/Middle Tier High Yield Index -- an unmanaged index of bonds rated B to BBB. (h) Goldman Sachs 100 Convertible Bond Index -- currently includes 67 bonds and 33 preferred. The original list of names was generated by screening for convertible issues of 100 million or greater in market capitalization. The index is priced monthly. (i) IFC Global Total Return Composite Index -- an unmanaged index of common stocks and includes 18 developing countries in Latin America, East and South Asia, Europe, the Middle East and Africa (net of dividends reinvested). 39 (j) Indata Balanced-Median Index -- an unmanaged index and includes an asset allocation of 7% cash, 39% bonds and 54% equity based on $37.8 billion in assets among 538 portfolios for the year ended December 31, 1995 (assumes dividends reinvested). (k) Indata Equity-Median Stock Index -- an unmanaged index which includes an average asset allocation of 5% cash and 95% equity based on $30.6 billion in assets among 562 portfolios for the year ended December 31, 1995. (l) J.P. Morgan Emerging Markets Bond Index -- a market-weighted index composed of all Brady bonds outstanding and includes Argentina, Brazil, Bulgaria, Mexico, Nigeria, the Philippines, Poland and Venezuela. (m) J.P. Morgan Traded Global Bond Index -- an unmanaged index of securities and includes Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, The Netherlands, Spain, Sweden, United Kingdom and the United States. (n) Lehman Brothers Aggregate Bond Index -- an unmanaged index made up of the Government/Corporate Index, the Mortgage Backed Securities Index and the Asset-Backed Securities Index. (o) Lehman Brothers LONG-TERM Treasury Bond -- composed of all bonds covered by the Lehman Brothers Treasury Bond Index with maturities of 10 years or greater. (p) The Lehman 7 Year Municipal Bond Index -- an unmanaged index which consists of investment grade bonds with maturities between 6-8 years rated BAA or better. All bonds have been taken from deals done within the last 5 years, with assets of $50 million or larger. (q) Lipper Capital Appreciation Index -- a composite of mutual funds managed for maximum capital gains. (r) Morgan Stanley Capital International Combined Far East Free ex-Japan Index -- a market-capitalization weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. Korea is included in the MSCI Combined Far East Free ex-Japan Index at 20% of its market capitalization. (s) Morgan Stanley Capital International EAFE Index -- an arithmetic, market value-weighted average of the performance of over 900 securities on the stock exchanges of countries in Europe, Australia and the Far East. (t) Morgan Stanley Capital International Emerging Markets Global Latin American Index -- an unmanaged, arithmetic market value weighted average of the performance of over 196 securities on the stock exchanges of Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela (Assumes reinvestment of dividends). (u) Morgan Stanley Capital International Europe Index -- an unmanaged index of common stocks and includes 14 countries throughout Europe. (v) Morgan Stanley Capital International Japan Index -- an unmanaged index of common stocks. (w) Morgan Stanley Capital International Latin America Index -- a broad-based market capitalization-weighted composite index covering at least 60% of markets in Mexico, Argentina, Brazil, Chile, Colombia, Peru and Venezuela (assumes dividends reinvested). (x) Morgan Stanley Capital International World Index -- an arithmetic, market value-weighted average of the performance of over 1,470 securities listed on the stock exchanges of countries in Europe, Australia, the Far East, Canada and the United States. (y) NASDAQ Composite Index -- an unmanaged index of common stocks. (z) NASDAQ Industrial Index -- a capitalization-weighted index composed of more than 3,000 domestic stocks taken from the following industry sectors: agriculture, mining, construction, manufacturing, electronic components, services and public administration enterprises. It is a value-weighted index calculated on price change only and does not include income. 40 (aa) National Association of Real Estate Investment Trusts ("NAREIT") Index -- an unmanaged market weighted index of tax qualified REITs (excluding healthcare REITs) listed on the New York Stock Exchange, American Stock Exchange and the NASDAQ National Market System including dividends. (bb) The New York Stock Exchange composite or component indices -- unmanaged indices of all industrial, utilities, transportation and finance company stocks listed on the New York Stock Exchange. (cc) Philadelphia Gold and Silver Index -- an unmanaged index comprised of seven leading companies involved in the mining of gold and silver. (dd) Russell 2500 Index -- comprised of the bottom 500 stocks in the Russell 1000 Index which represents the universe of stocks from which most active money managers typically select; and all the stocks in the Russell 2000 Index. The largest security in the index has a market capitalization of approximately 1.3 billion. (ee) Salomon Brothers GNMA Index -- includes pools of mortgages originated by private lenders and guaranteed by the mortgage pools of the Government National Association. (ff) Salomon Brothers High Grade Corporate Bond Index -- consists of publicly issued, non-convertible corporate bonds rated AA or AAA. It a is value-weighted, total return index, including approximately 800 issues with maturities of 12 years or greater. (gg) Salomon Brothers Broad Investment Grade Bond -- a market-weighted index that contains approximately 4700 individually priced investment grade corporate bonds rated BBB or better, U.S. Treasury/agency issues and mortgage pass-through securities. (hh) Standard & Poor's 500 Stock Index or its component indices -- unmanaged index composed of 400 industrial stocks, 40 financial stocks, 40 utilities company stocks and 20 transportation stocks. Comparisons of performance assume reinvestment of dividends. (ii) Standard & Poor's Small Cap 600 Index -- a capitalization- weighted index of 600 domestic stocks having market capitalizations which reside within the 50th and the 83rd percentiles of the market capitalization of the entire stock market, chosen for certain liquidity characteristics and for industry representation. (jj) Wilshire 5000 Equity Index or its component indices -- represents the return on the market value of all common equity securities for which daily pricing is available. Comparisons of performance assume reinvestment of dividends. In assessing such comparisons of performance an investor should keep in mind that the composition of the investments in the reported indices and averages is not identical to the composition of investments in the Fund's Portfolios, that the averages are generally unmanaged, and that the items included in the calculations of such averages may not be identical to the formula used by the Fund to calculate its futures. In addition, there can be no assurance that the Fund will continue this performance as compared to such other averages. GENERAL INFORMATION DESCRIPTION OF SHARES AND VOTING RIGHTS The Fund's Articles of Incorporation, as amended and restated, permit the Directors to issue shares 34 billion of common stock, par value $.001 per share, from an unlimited number of classes ("Portfolios") of shares. Currently the Fund consists of shares of twenty-eight Portfolios (China Growth, Mortgage- Backed Securities, MicroCap and International Magnum Portfolios are not currently offering shares). The shares of each Portfolio of the Fund are fully paid and nonassessable, and have no preference as to conversion, exchange, dividends, retirement or other features. The shares of each Portfolio of the Fund have no pre-emptive rights. The shares of the Fund have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election 41 of Directors can elect 100% of the Directors if they choose to do so. A shareholder is entitled to one vote for each full share held (and a fractional vote for each fractional share held), then standing in his name on the books of the Fund. DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS The Fund's policy is to distribute substantially all of each Portfolio's net investment income, if any. The Fund may also distribute any net realized capital gains in the amount and at the times that will avoid both income (including taxable gains) taxes on it and the imposition of the federal excise tax on income and capital gains (see discussion under "Taxes" in this Statement of Additional Information). However, the Fund may also choose to retain net realized capital gains and pay taxes on such gains. The amounts of any income dividends or capital gains distributions cannot be predicted. Any dividend or distribution paid shortly after the purchase of shares of a Portfolio by an investor may have the effect of reducing the per share net asset value of that Portfolio by the per share amount of the dividend or distribution. Furthermore, such dividends or distributions, although in effect a return of capital, are subject to income taxes for shareholders subject to tax as set forth herein and in the applicable Prospectus. As set forth in the Prospectuses, unless the shareholder elects otherwise in writing, all dividends and capital gains distributions for a class of shares are automatically received in additional shares of such class of that Portfolio of the Fund at net asset value (as of the business day following the record date). This automatic reinvestment of dividends and distributions will remain in effect until the Fund is notified by the shareholder in writing at least three days prior to the record date that either the Income Option (income dividends in cash and capital gains distributions in additional shares at net asset value) or the Cash Option (both income dividends and capital gains distributions in cash) has been elected. CUSTODY ARRANGEMENTS Chase serves as the Fund's domestic custodian. Chase is not affiliated with Morgan Stanley & Co. Incorporated. Morgan Stanley Trust Company, Brooklyn, NY, 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 Rule 17f-5 adopted by the Commission under the 1940 Act. Morgan Stanley Trust Company is an affiliate of Morgan Stanley & Co. Incorporated. In the selection of foreign subcustodians, the Directors consider a number of factors, including, but not limited to, the reliability and financial stability of the institution, the ability of the institution to provide efficiently the custodial services required for the Fund, and the reputation of the institution in the particular country or region. DESCRIPTION OF SECURITIES AND RATINGS I. DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS EXCERPTS FROM MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") DESCRIPTION OF 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 42 and principal payments or of maintenance of other terms of the contract 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. EXCERPTS FROM STANDARD & POOR'S RATINGS GROUP ("S&P") DESCRIPTION OF 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. 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. DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's ratings for state and municipal notes and other short-term obligations are designated Moody's Investment Grade ("MIG"). Symbols used are as follows: MIG-1 -- best quality, enjoying strong protection from established cash flows of funds for their servicing or from established broad-based access to the market for refinancing, or both; MIG-2 -- high quality with margins of protection ample although not so large as in the preceding group; MIG-3 - favorable quality, with all security elements accounted for but lacking the undeniable strength of the preceding grades. DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1") - -- Judged to be of the best quality. Their short-term debt obligations carry the smallest degree of investment risk. EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: S-1+ -- very strong capacity to pay principal and interest; SP-2 -- strong capacity to pay principal and interest. DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS: A-1+ -- this designation indicates the degree of safety regarding timely payment is overwhelming. A-1 -- this designation indicates the degree of safety regarding timely payment is very strong. II. DESCRIPTION OF U.S. GOVERNMENT SECURITIES The term "U.S. Government securities" refers to a variety of securities which are issued or guaranteed by the U.S. Government, and by various instrumentalities which have been established or sponsored by the U.S. Government. U.S. Treasury securities are backed by the "full faith and credit" of the United States. Securities issued or guaranteed by Federal agencies and U.S. Government sponsored instrumentalities may or may not be backed by the full faith and credit of the United States. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitment. Agencies which are backed by the full faith and credit of the United States include the Export-Import Bank, Farmers Home Administration, Federal Financing Bank, and others. Certain agencies and instrumentalities, such as the Government National Mortgage Associates, are, in effect, backed by the full faith and credit of the United States through provisions in their charters that they may make "indefinite and unlimited" drawings on the Treasury, if needed to service debt. Debt from certain other agencies and instrumentalities, including the Federal Home Loan Bank and Federal National Mortgage Association, are not guaranteed by the United States, but those institutions are protected by the discretionary authority for the U.S. Treasury to purchase certain amounts of their securities to assist the institution in meeting its debt obligations. However, the U.S. Treasury has no lawful obligation to assume the financial liabilities of these agencies or others. Finally, other agencies and instrumentalities, such as the Farm Credit System and the Federal Home Loan Mortgage Corporation, are federally chartered institutions under Government supervision, but their debt securities are backed only by the creditworthiness of those institutions, not the U.S. Government. 43 Some of the U.S. Government agencies that issue or guarantee securities include the Export-Import Bank of the United States, Farmers Home Administration, Federal Housing Administration, Maritime Administration, Small Business Administration, and the Tennessee Valley Authority. An instrumentality of the U.S. Government is a Government agency organized under Federal charter with Government supervision. Instrumentalities issuing or guaranteeing securities include, among others, Federal Home Loan Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal Immediate Credit Banks, and the Federal National Mortgage Association. III. DESCRIPTION OF MUNICIPAL BONDS Municipal Bonds generally include debt obligations issued by states and their political subdivisions, and duly constituted authorities and corporations, to obtain funds to construct, repair or improve various public facilities such as airports, bridges, highways, hospitals, housing, schools, streets and water and sewer works. Municipal Bonds may also be issued to refinance outstanding obligations as well as to obtain funds for general operating expenses and for loans to other public institutions and facilities. The two principal classifications of Municipal Bonds are "general obligation" and "revenue" or "special tax" bonds. General obligation bonds are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue or special tax bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other tax, but not from general tax revenues. The Municipal Bond Portfolio and the Municipal Money Market Portfolio may also invest in tax-exempt industrial development bonds, short-term municipal obligations, project notes, demand notes and tax-exempt commercial paper in accordance with the Portfolio's investment objectives and policies. Industrial revenue bonds (i.e., private activity bonds) in most cases are revenue bonds and generally do not have the pledge of the credit of the issuer. The payment of the principal and interest on such industrial revenue bonds is dependent solely on the ability of the user of the facilities financed by the bonds to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment. Short-term municipal obligations issued by states, cities, municipalities or municipal agencies include Tax Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and Short-Term Discount Notes. Project Notes are instruments guaranteed by the Department of Housing and Urban Development but issued by a state or local housing agency. While the issuing agency has the primary obligation on such Project notes, they are also secured by the full faith and credit of the United States. Note obligations with demand or put options may have a stated maturity in excess of one year, but allow any holder to demand payment of principal plus accrued interest upon a specified number of days' notice. Frequently, such obligations are secured by letters of credit or other credit support arrangements provided by banks. The issuer of such notes normally has a corresponding right, after a given period, to repay in its discretion the outstanding principal of the notes plus accrued interest upon a specific number of days' notice to the bondholders. The interest rate on a demand note may be based upon a known lending rate, such as a bank's prime rate, and be adjusted when such rate changes, or the interest rate on a demand note may be a market rate that is adjusted at specified intervals. The demand notes in which the Municipal Money Market Portfolio will invest are payable on not more than one year's notice. The yields of Municipal Bonds depend on, among other things, general money market conditions, conditions in the Municipal Bond market, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The ratings of Moody's and S&P represent their opinions of the quality of the Municipal Bonds. It should be emphasized that such ratings are general and are not absolute standards of quality. Consequently, Municipal Bonds with the same maturity, coupon and rating may have different yields, while Municipal Bonds of the same maturity and coupon, but with different ratings, may have the same yield. It will be the responsibility of the Adviser to appraise independently the fundamental quality of the bonds held by the Municipal Bond Portfolio and the Municipal Money Market Portfolio. Municipal Bonds are sometimes purchased on a "when issued" basis meaning the buyer has committed to purchasing certain specified securities at an agreed-upon price when they are issued. The period between commitment date and issuance date can be a month or more. It is possible that the securities will never be issued and the commitment canceled. From time to time proposals have been introduced before Congress to restrict or eliminate the Federal income tax exemption for interest on Municipal Bonds. Similar proposals may be introduced in the future. If any such proposal were enacted, it might restrict or eliminate the ability of either the Municipal Bond Portfolio or the Municipal Money Market Portfolio to achieve its investment objective. In that event, the Fund's Directors and officers would reevaluate its investment objective and policies and consider recommending to its shareholders changes in such objective and policies. 44 Similarly, from time to time proposals have been introduced before State and local legislatures to restrict or eliminate the State and local income tax exemption (to the extent such an exemption applies, which may not apply in all cases) for interest on Municipal Bonds. Similar proposals may be introduced in the future. If any such proposal were enacted, it might restrict or eliminate the ability of either of the Municipal Bond Portfolio or the Municipal Money Market Portfolio to achieve its investment objective. In that event, the Fund's Directors and officers would reevaluate the Portfolio's investment objective and policies and consider recommending to its shareholders changes in such objective and policies. IV. DESCRIPTION OF MORTGAGE-BACKED SECURITIES "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. Mortgage-backed securities include collateralized mortgage obligations ("CMOs"), pass-through securities issued or guaranteed by agencies or instrumentalities of the U.S. government or by private sector entities. COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations ("CMOs") are debt obligations or multiclass pass-through certificates issued by agencies or instrumentalities of the U.S. government or by private originators or investors in mortgage loans. They are backed by Mortgage Pass-Through Securities (discussed below) or whole loans (all such assets, the "Mortgage Assets") and are evidenced by a series of bonds or certificates issued in multiple classes or "tranches." The principal and interest on the underlying Mortgage Assets may be allocated among the several classes of a series of CMOs in many ways. CMOs may be issued by agencies or instrumentalities of the U.S. government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, investment banks and special purpose subsidiaries of the foregoing. CMOs that are issued by private sector entities and are backed by assets lacking a guarantee of an entity having the credit status of a governmental agency or instrumentality are generally structured with one or more types of credit enhancement as described below. An issuer of CMOs may elect to be treated, for federal income tax purposes, as a Real Estate Mortgage Investment Conduit (a "REMIC"). An issuer of CMOs issued after 1991 must elect to be treated as a REMIC or it will be taxable as a corporation under rules regarding taxable mortgage pools. In a CMO, a series of bonds or certificates are issued in multiple classes. Each class of CMOs, often referred to as a "tranche," may be issued with a specific fixed or floating coupon rate and has a stated maturity or final scheduled distribution date. Principal prepayments on the underlying Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final scheduled distribution dates. Interest is paid or accrues on CMOs on a monthly, quarterly or semi-annual basis. The principal of and interest on the Mortgage Assets may be allocated among the several classes of a CMO in many ways. The general goal in allocating cash flows on Mortgage Assets to the various classes of a CMO is to create certain tranches on which the expected cash flows have a higher degree of predictability than the underlying Mortgage Assets. As a general matter, the more predictable the cash flow is on a particular CMO tranche, the lower the anticipated yield will be on that tranche at the time of issuance relative to prevailing market yields on Assets. As part of the process of creating more predictable cash flows on certain tranches of a CMO, one or more tranches generally must be created that absorb most of the changes in the cash flows on the underlying Mortgage Assets. The yields on these tranches are generally higher than prevailing market yields on Mortgage-Backed Securities with similar average lives. Because of the uncertainty of the cash flows on these tranches, the market prices of and yields on these tranches are more volatile. Included within the category of CMOs are PAC Bonds. PAC Bonds are a type of CMO tranche or series designed to provide relatively predictable payments of principal provided that, among other things, the actual prepayment experience on the underlying mortgage loans falls within a predefined range. If the actual prepayment experience on the underlying mortgage loans is at a rate faster or slower than the predefined range or if deviations from other assumptions occur, principal payments on the PAC Bond may be earlier or later than predicted. The magnitude of the predefined range varies from one PAC Bond to another; a narrower range increases the risk that prepayments on the PAC Bond will be greater or smaller than predicted. Because of these features, PAC Bonds generally are less subject to the risks of prepayment than are other types of mortgage-backed securities. MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities in which the Mortgage-Backed Securities Portfolio may invest include pass-through securities issued or guaranteed by agencies or instrumentalities of the U.S. government or by private sector entities. Mortgage pass-through securities issued or guaranteed by private sector 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 described below. FNMA and FHLMC obligations are not backed by the full faith and credit of the U.S. government as GNMA certificates are, but FNMA and FHLMC securities are supported by the instrumentalities' right to borrow from the United States Treasury. Each of GNMA, FNMA and FHLMC guarantees timely distributions of interest to certificate holders. 45 Each of GNMA and FNMA also guarantees timely distributions of scheduled principal. FHLMC has in the past guaranteed only the ultimate collection of principal of the underlying mortgage loan; however, FHLMC now issued Mortgage- Backed Securities (FHLMC Gold Pcs) which also guarantee timely payment of monthly principal reductions. REFCORP obligations are backed, as to principal payments, by zero coupon U.S. Treasury bonds, and as to interest payment, ultimately by the U.S. Treasury. Obligations issued by such U.S. governmental agencies and instrumentalities are described more fully below. GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate instrumentality of the United States within the Department of Housing and Urban Development. The National Housing Act of 1934, as amended (the "Housing Act"), authorizes Ginnie Mae to guarantee the timely payment of the principal of and interest on certificates that are based on and backed by a pool of mortgage loans insured by the Federal Housing Administration under the Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the Department of Veterans Affairs under the Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by pools of other eligible mortgage loans. The Housing Act provides that the full faith and credit of the United States government is pledged to the payment of all amounts that may be required to be paid under any guaranty. In order to meet its obligations under such guaranty, Ginnie Mae is authorized to borrow from the United States Treasury with no limitations as to amount. Each Ginnie Mae Certificate will represent a pro rata interest in one or more of the following types of mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans on multi-family residential properties under construction; (vi) mortgage loans on completed multi-family projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to reduce the borrower's monthly payments during the early years of the mortgage loans ("buydown" mortgage loans); (viii) mortgage loans that provide for adjustments in payments based on periodical changes in interest rates or in other payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise specified above, will be fully-amortizing loans secured by first liens on one- to four-family housing units. FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act of 1938. The obligations of Fannie Mae are not backed by the full faith and credit of the United States government. Each Fannie Mae Certificate will represent a pro rata interest in one or more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage loans that are not insured or guaranteed by any governmental agency) of the following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate growing equity mortgage loans; (iii) fixed rate graduated payment mortgage loans; (iv) variable rate California mortgage loans; (v) other adjustable rate mortgage loans; and (vi) fixed rate and adjustable mortgage loans secured by multi-family projects. FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of the United States created pursuant to the Emergency Home Finance Act of 1970, as amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations solely of Freddie Mac and are not backed by the full faith and credit of the U.S. government. Freddie Mac Certificates represent a pro rata interest in a group of mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The mortgage loans underlying the Freddie Mac Certificates will consist of fixed rate or adjustable rate mortgage loans with original terms to maturity of between ten and thirty years, substantially all of which are secured by first liens on one- to four-family residential properties or multi-family projects. Each mortgage loan must meet the applicable standards set forth in the FHLMC Act. A Freddie Mac Certificate group may include whole loans, participation interests in whole loans and undivided interests in whole loans and participations comprising another Freddie Mac Certificate group. CREDIT ENHANCEMENT. Mortgage-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. To lessen the effect of failure by obligors on underlying assets to make payments, such securities may contain elements of credit support. Such credit support falls into two categories: (i) liquidity protection and (ii) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection generally refers to the provision of advances, typically by the entity administering the pool of assets, to ensure that the pass-through of payments due on the underlying pool occurs in a timely fashion. Protection against losses resulting from ultimate default enhances the likelihood of ultimate payment of the obligations on at least a portion of the assets in the pool. Such protection may be provided through guarantees, insurance policies or letters of credit obtained by the issuer or sponsor from third parties (referred to herein as "third party credit support"), through various means of structuring the transaction or through a combination of such approaches. The Mortgage-Backed Securities Portfolio will not pay any additional fees for such credit support, although the existence of credit support may increase the price the Portfolio pays for a security. 46 The ratings of mortgage-backed securities for which third-party credit enhancement provides liquidity protection or protection against losses from default are generally dependent upon the continued creditworthiness of the provider of the credit enhancement. The ratings of such securities could be subject to reduction in the event of deterioration in the creditworthiness of the credit enhancement provider even in cases where the delinquency and loss experience on the underlying pool of assets is better than expected. Examples of credit support arising out of the structure of the transaction include "senior-subordinated securities" (multiple class securities with one or more classes subordinate to other classes as to the payment of principal thereof and interest thereon, with defaults on the underlying assets being borne first by the holders of the most subordinated class), creation of "reserve funds" (where cash or investments, sometimes funded from a portion of the payments on the underlying assets, are held in reserve against future losses) and "over-collateralization" (where the scheduled payments on, or the principal amount of, the underlying assets exceed those required to make payment of the securities and pay any servicing or other fees). The degree of credit support provided for each security is generally based on historical information with respect to the level of credit risk associated with the underlying assets. Delinquency or loss in excess of that which is anticipated could adversely affect the return on an investment in such a security. V. FOREIGN INVESTMENTS The Active Country Allocation, International Equity, International Fixed Income, Global Equity, Global Fixed Income, Asian Equity, European Equity, Japanese Equity, International Small Cap, Latin American and China Growth Portfolios will invest, and the Emerging Growth, Emerging Markets, Emerging Markets Debt, Value Equity, Equity Growth, MicroCap, Balanced, Small Cap Value Equity, International Magnum, Fixed Income, High Yield and Gold Portfolios may invest, in securities of foreign issuers. Investors should recognize that investing in such foreign securities involves certain special considerations which are not typically associated with investing in U.S. issuers. For a description of the effect on the Portfolios of currency exchange rate fluctuation, see "Investment Objectives and Policies -- Forward Foreign Currency Exchange Contracts" above. As foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards and may have policies that are not comparable to those of domestic issuers, there may be less information available about certain foreign companies than about domestic issuers. Securities of some foreign issuers are generally less liquid and more volatile than securities of comparable domestic issuers. There is generally less government supervision and regulation of stock exchanges, brokers and listed issuers than in the U.S. In addition, with respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, or diplomatic developments which could affect U.S. investments in those countries. Foreign securities not listed on a recognized domestic or foreign exchange are regarded as not readily marketable and therefore such investments will be limited to 15% of a Portfolio's net asset value at the time of purchase. Although the Portfolios will endeavor to achieve the most favorable execution costs in their portfolio transactions, fixed commissions on many foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges. Certain foreign governments levy withholding or other taxes on dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion of foreign withholding taxes will reduce the income received from investments in such countries. Except in the case of the International Equity, Global Equity, European Equity, Japanese Equity, Asian Equity, Global Fixed Income, International Fixed Income, International Magnum, International Small Cap, Latin American and China Growth Portfolios, 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. However, these foreign withholding taxes may not have a significant impact on such Portfolios, because each Portfolio's investment objective is to seek long-term capital appreciation and any dividend or interest income should be considered incidental. FINANCIAL STATEMENTS The following are (i) the audited Financial Statements for the fiscal year ended December 31, 1995 and the Report of Price Waterhouse LLP, independent accountants, dated February 9, 1996 relating to the financial statements and financial highlights of each of the Portfolios except for the Mortgage-Backed Securities, China Growth, MicroCap and International Magnum Portfolios, which had not commenced operation as of December 31, 1995. 47 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE ACTIVE COUNTRY ALLOCATION PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (89.5%) AUSTRALIA (1.8%) 15,500 Amcor Ltd......................................... $ 109 8,800 Ampolex Ltd....................................... 19 14,600 Australian National Industries Ltd................ 11 24,900 Boral Ltd. (Bonus Shares Plan).................... 63 6,200 Brambles Industries Ltd........................... 69 46,670 Broken Hill Proprietary Co., Ltd.................. 659 16,100 Burns, Philip & Co., Ltd.......................... 36 7,981 Coca-Cola Amatil Ltd.............................. 64 32,918 Coles Myer Ltd.................................... 103 16,000 CRA Ltd........................................... 235 **+1,200 CRA Ltd. (Bonus Shares)........................... 17 25,100 CSR Ltd........................................... 82 47,400 Fosters Brewing Corp.............................. 78 +4,278 Goldfields Ltd.................................... 11 33,300 Goodman Fielder Ltd............................... 33 8,800 ICI Australia Ltd................................. 67 6,833 Lend Lease Corp., Ltd............................. 99 41,019 MIM Holdings Ltd.................................. 57 35,518 National Australia Bank Ltd....................... 319 8,200 Newcrest Mining Ltd............................... 34 47,600 News Corp., Ltd................................... 254 22,073 North Broken Hill Peko Ltd........................ 62 28,900 Pacific Dunlop Ltd................................ 68 24,200 Pioneer International Ltd......................... 62 7,700 Renison Goldfields Consolidated Ltd............... 38 15,400 Santos Ltd........................................ 45 18,400 Southcorp Holdings Ltd............................ 43 +11,900 TNT Ltd........................................... 16 26,000 Western Mining Corp. Holdings Ltd................. 167 43,900 Westpac Banking Corp.............................. 194 ---------- 3,114 ---------- BELGIUM (1.8%) 120 Bekaert S.A....................................... 99 200 Cimenteries CBR................................... 81 2,800 Delhaize Freres et Cie, 'Le Lion' S.A............. 116 2,400 Electrabel S.A.................................... 571 500 Electrabel S.A. (New)............................. 119 1,700 Fortis AG......................................... 207 108 Fortis AG VVPR (New).............................. 13 785 Generale de Banque S.A............................ 278 1,375 Gevaert Photo-Producten S.A....................... 85 299 Glaverbel S.A..................................... 32 50 Glaverbel S.A. VVPR (New)......................... -- 1,250 Groupe Bruxelles Lambert S.A...................... 173 700 Kredietbank S.A................................... 191 1,240 Petrofina S.A..................................... 380 675 Reunies Electrobel & Tractebel S.A................ 279 700 Royale Belge...................................... 140 450 Solvay et Cie S.A................................. 243 +1,350 Union Miniere S.A................................. 90 ---------- 3,097 ---------- BRAZIL (0.5%) 935,000 Cia Paulista de Forca E Luz....................... 45 2,211,000 Cia Siderurgica Nacional.......................... 46 VALUE SHARES (000) - ------------------------------------------------------------ 2,721,000 Eletrobras........................................ $ 736 425,000 Light Servicos de Eletricidade.................... 136 ---------- 963 ---------- FRANCE (3.5%) 600 Accor S.A......................................... 78 2,800 Alcatel Alsthom................................... 241 3,100 AXA S.A........................................... 209 3,800 Banque Nationale de Paris......................... 171 400 BIC Corp.......................................... 41 600 Bouygues.......................................... 60 450 Canal Plus........................................ 84 500 Carrefour Supermarch S.A.......................... 303 1,700 Casino............................................ 49 150 Chargeurs S.A..................................... 30 550 Cie Bancaire S.A.................................. 62 1,750 Cie de Saint Gobain............................... 194 3,400 Cie de Suez S.A................................... 140 2,500 Cie Financiere de Paribas S.A., Class A........... 137 2,300 Cie Generale des Eaux............................. 230 ***5,100 Elf Aquitaine..................................... 376 700 Eridania Beghin-Say S.A........................... 120 1,450 Groupe Danone..................................... 239 1,150 Havas S.A......................................... 91 2,265 Lafarge Coppee S.A................................ 146 1,300 L'Air Liquide..................................... 215 550 Legrand........................................... 85 1,300 L'Oreal........................................... 348 1,750 LVMH Moet Hennessy Louis Vuitton.................. 365 1,400 Lyonnaise des Eaux................................ 135 2,500 Michelin CGDE, Class B............................ 100 1,200 Pernod-Ricard..................................... 68 1,100 Peugeot S.A....................................... 145 400 Pinault-Printemps S.A............................. 80 350 Promodes.......................................... 82 6,000 Rhone-Poulenc S.A., Class A....................... 129 90 SAGEM............................................. 51 250 Saint Louis....................................... 66 ***2,090 Sanofi............................................ 134 2,700 Schneider S.A..................................... 92 588 Simco S.A......................................... 56 62 Simco S.A. RFD.................................... 5 100 Societe Eurafrance S.A............................ 34 1,700 Societe Generale.................................. 210 2,900 Thomson CSF....................................... 65 4,200 Total S.A., Class B............................... 284 5,800 Union des Assurances de Paris..................... 151 +5,300 Usinor Sacilor.................................... 69 ---------- 5,970 ---------- GERMANY (5.1%) 1,350 AGIV AG........................................... 29 550 Allianz AG........................................ 1,080 100 AMB Aachener & Muenchener Beteiligungs AG......... 72 100 Asko Deutsche Kaufhaus AG......................... 52 1,650 BASF AG........................................... 372 1,850 Bayer AG.......................................... 491
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Active Country Allocation Portfolio 5 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ GERMANY (CONT.) 6,100 Bayerische Hypotheken und Wechsel Bank AG......... $ 154 6,250 Bayerische Vereinsbank AG......................... 187 100 Beiersdorf AG..................................... 69 100 Bilfinger & Berger AG............................. 38 150 Brau Und Brunnen AG............................... 23 +450 Bremer Vulkan Verbund AG.......................... 13 50 CKAG Colonia Konzern AG........................... 42 2,750 Continental AG.................................... 39 1,250 Daimler-Benz AG................................... 631 250 Degussa AG........................................ 84 12,300 Deutsche Bank AG.................................. 584 10,600 Dresdner Bank AG.................................. 284 150 Heidelberger Zement AG............................ 94 200 Hochtief AG....................................... 86 300 Karstadt AG....................................... 123 200 Kaufhof Holding AG................................ 61 +1,300 Kloeckner-Humboldt-Deutz AG....................... 8 250 Linde AG.......................................... 148 900 Lufthansa AG...................................... 125 250 MAN AG............................................ 69 1,000 Mannesmann AG..................................... 318 +4,300 Merck KGAA........................................ 175 +200 Muenchener Rueckver AG (Registered)............... 431 +9 Muenchener Rueckver AG RFD (New).................. 19 450 Preussag AG....................................... 127 850 RWE AG............................................ 309 1,550 SAP AG............................................ 240 1,800 Schering AG....................................... 120 1,450 Siemens AG........................................ 797 +850 Thyssen AG........................................ 155 12,450 Veba AG........................................... 533 550 Viag AG........................................... 227 700 Volkswagen AG..................................... 235 ---------- 8,644 ---------- HONG KONG (7.1%) +48,000 Applied International Holdings.................... 4 60,438 Bank of East Asia Ltd............................. 217 227,000 Cathay Pacific Airways Ltd........................ 346 170,000 Cheung Kong Holdings Ltd.......................... 1,036 153,000 China Light & Power Co., Ltd...................... 704 124,000 Chinese Estates Holdings.......................... 81 60,000 Dickson Concepts International Ltd................ 56 48,000 Giordano Holdings Ltd............................. 41 **96,000 Hang Lung Development Co.......................... 153 148,200 Hang Seng Bank Ltd................................ 1,327 14,800 Hong Kong Aircraft Engineering Co., Ltd........... 38 150,000 Hong Kong & China Gas Co., Ltd.................... 242 99,000 Hong Kong & Shanghai Hotel Ltd.................... 143 855,487 Hong Kong Telecommunications Ltd.................. 1,527 341,198 Hopewell Holdings Ltd............................. 196 278,000 Hutchison Whampoa Ltd............................. 1,693 80,000 Hysan Development Co., Ltd........................ 212 30,000 Johnson Electric Holdings Ltd..................... 54 45,000 Miramar Hotel & Investment Ltd.................... 95 VALUE SHARES (000) - ------------------------------------------------------------ 114,656 New World Development Co., Ltd.................... $ 500 110,000 Oriental Press Group Ltd.......................... 33 30,500 Peregrine Investment Holdings Ltd................. 39 84,340 Shangri-La Asia Ltd............................... 103 126,000 Shun Tak Holdings Ltd............................. 89 144,000 South China Morning Post Holdings................. 88 80,000 Stelux Holdings Ltd............................... 20 177,000 Sun Hung Kai Properties Ltd....................... 1,448 124,000 Swire Pacific Ltd., Class A....................... 962 33,000 Television Broadcasts Ltd......................... 118 168,000 Wharf Holdings Ltd................................ 560 11,800 Wing Lung Bank Ltd................................ 66 27,000 Winsor Industrial Corp............................ 23 ---------- 12,214 ---------- INDONESIA (2.2%) **212,000 Bank Dagang Nasional (Foreign).................... 174 **761,000 Barito Pacific Timber (Foreign)................... 557 **372,000 Gadjah Tunggal (Foreign).......................... 207 **212,000 Hanajaya Mandala Sampoerna (Foreign).............. 2,207 **248,000 Jakarta International Hotel & Development (Foreign)....................................... 304 **27,000 Matahari Putra Prima (Foreign).................... 48 +**17,000 Pan Brothers Tex (Foreign)........................ 4 **104,000 Sinar Mas Agro (Foreign).......................... 58 **95,000 United Tractors (Foreign)......................... 179 ---------- 3,738 ---------- ITALY (1.8%) 22,770 Assicurazioni Generali S.p.A...................... 551 45,000 Banca Commerciale Italiana........................ 96 14,000 Banco Ambrosiano Ven.............................. 38 5,000 Benetton Group S.p.A.............................. 60 3,000 Cartiere Burgo.................................... 15 65,500 Credito Italiano.................................. 76 18,000 Edison S.p.A...................................... 78 +2,000 Falck............................................. 5 89,000 Fiat S.p.A........................................ 289 22,000 Fiat S.p.A. Di Risp (NCS)......................... 39 12,500 Fidis............................................. 24 +6,000 Impregilo S.p.A................................... 5 17,400 Instituto Mobiliare Italiano...................... 110 22,000 Istituto Bancario San Paolo....................... 130 113,700 Istituto Nazionale delle Assicurazioni............ 151 3,250 Italcementi....................................... 8 7,250 Italcementi Di Risp............................... 43 19,000 Italgas........................................... 58 10,900 Magneti Marelli S.p.A............................. 13 14,500 Mediobanca S.p.A.................................. 100 +150,000 Montedison S.p.A.................................. 101 +20,000 Montedison S.p.A. Di Risp (NCS)................... 12 +106,250 Olivetti S.p.A.................................... 85 35,600 Parmalat Finanziaria S.p.A........................ 31 +45,000 Pirelli S.p.A..................................... 58 7,150 R.A.S. S.p.A...................................... 81 3,100 R.A.S. S.p.A Di Risp (NCS)........................ 19 6,000 Rinascente........................................ 36 +2,000 Saffa S.p.A....................................... 5
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Active Country Allocation Portfolio 6 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ ITALY (CONT.) 3,500 SAI............................................... $ 36 12,500 Saipem............................................ 29 3,000 Sasib............................................. 13 7,000 Sirti S.p.A....................................... 39 +20,000 SNIA BPD S.p.A.................................... 17 +183,700 Telecom Italia Mobile S.p.A....................... 323 180,000 Telecom Italia S.p.A.............................. 280 45,000 Telecom Italia S.p.A. Di Risp (NCS)............... 55 ---------- 3,109 ---------- JAPAN (41.9%) 4,000 Advantest Corp.................................... 205 44,000 Ajinomoto Co...................................... 490 22,000 Aoki Corp......................................... 92 3,000 Aoyama Trading Co................................. 96 89,000 Asahi Bank Ltd.................................... 1,121 22,000 Asahi Breweries Ltd............................... 260 66,000 Asahi Chemical Industry Co., Ltd.................. 505 66,000 Asahi Glass Co., Ltd.............................. 735 66,000 Bank of Tokyo..................................... 1,157 22,000 Bridgestone Co.................................... 350 62,000 Canon, Inc........................................ 1,123 34,000 Casio Computer Co................................. 333 36,000 Chiba Bank........................................ 324 9,000 Chiyoda Corp...................................... 89 22,000 Chugai Pharmaceuticals Co......................... 211 34,000 Citizen Watch Co., Ltd............................ 260 31,000 Daiei Inc......................................... 375 102,000 Dai-Ichi Kangyo Bank.............................. 2,006 22,000 Daikin Industries Ltd............................. 215 44,000 Dai Nippon Printing Co., Ltd...................... 746 +10,000 Daishowa Paper Manufacturing Co., Ltd............. 78 22,000 Daiwa House Industry.............................. 362 44,000 Daiwa Securities Co., Ltd......................... 673 15,000 Ebara Corp........................................ 220 10,300 Fanuc............................................. 446 100,000 Fuji Bank......................................... 2,208 32,000 Fuji Photo Film Ltd............................... 924 123,000 Fujitsu Ltd....................................... 1,370 36,000 Furukawa Electric Co.............................. 176 44,000 Hankyu Corp....................................... 241 22,000 Hazama Corp....................................... 94 175,000 Hitachi Ltd....................................... 1,763 57,000 Honda Motor Co.................................... 1,176 71,000 Industrial Bank of Japan.......................... 2,152 11,000 Ito-Yokado Co., Ltd............................... 678 +89,000 Japan Airlines Co................................. 591 56,000 Japan Energy Corp................................. 188 24,000 Joyo Bank......................................... 193 18,000 Jusco Co., Ltd.................................... 469 44,000 Kajima Corp....................................... 435 31,928 Kansai Electric Power Co.......................... 773 44,000 Kao Corp.......................................... 546 114,000 Kawasaki Steel Corp............................... 398 66,000 Kinki Nippon Railway.............................. 499 44,000 Kirin Brewery Co., Ltd............................ 520 +133,000 Kobe Steel Ltd.................................... 411 VALUE SHARES (000) - ------------------------------------------------------------ 94,000 Komatsu Ltd....................................... $ 774 66,000 Kubota Corp....................................... 425 44,000 Kumagai Gumi Co................................... 177 7,000 Kyocera Ltd....................................... 520 22,000 Kyowa Hakko Kogyo................................. 208 12,000 Kyushu Matsushita Electric........................ 207 17,000 Makita Corp....................................... 272 66,000 Marubeni Corp..................................... 357 20,000 Marui Co., Ltd.................................... 416 90,000 Matsushita Electric Industries Ltd................ 1,464 66,000 Mitsubishi Chemical Corp.......................... 321 62,000 Mitsubishi Corp................................... 763 78,000 Mitsubishi Electric Corp.......................... 561 48,000 Mitsubishi Estate Co., Ltd........................ 600 121,000 Mitsubishi Heavy Industries Ltd................... 964 45,000 Mitsubishi Materials Corp......................... 233 43,000 Mitsubishi Trust & Banking Co..................... 716 66,000 Mitsui & Co....................................... 579 +44,000 Mitsui Engineering & Shipbuilding................. 122 37,000 Mitsui Fudosan Co................................. 455 25,000 Mitsukoshi Ltd.................................... 235 5,000 Mochida Pharmaceutical............................ 69 23,000 Murata Manufacturing Co., Ltd..................... 846 91,000 NEC Corp.......................................... 1,111 44,000 New Oji Paper Co., Ltd............................ 398 22,000 NGK Insulators.................................... 219 22,000 Nippon Denso Co., Ltd............................. 411 44,000 Nippon Express Co., Ltd........................... 424 22,000 Nippon Fire & Marine Insurance Co................. 149 22,000 Nippon Light Metal................................ 126 22,000 Nippon Meat Packers, Inc.......................... 320 66,000 Nippon Oil Co..................................... 414 167,000 Nippon Steel Co................................... 573 66,000 Nippon Yusen...................................... 383 84,000 Nissan Motor Co................................... 645 +129,000 NKK Corp.......................................... 347 66,000 Nomura Securities Co.............................. 1,438 44,000 Odakyu Electric Railway........................... 300 30,000 Olympus Optical Co., Ltd.......................... 291 133,000 Osaka Gas Co...................................... 460 22,000 Penta-Ocean Construction.......................... 170 18,000 Pioneer Electric Corp............................. 329 111,000 Sakura Bank....................................... 1,408 22,000 Sankyo Co., Ltd................................... 494 66,000 Sanyo Electric Co., Ltd........................... 380 5,000 Secom Co.......................................... 348 5,300 Sega Enterprises.................................. 293 22,000 Sekisui House Co., Ltd............................ 281 12,000 Seven-Eleven Japan................................ 846 73,000 Sharp Corp........................................ 1,167 6,000 Shimano, Inc...................................... 106 32,000 Shimizu Corp...................................... 325 10,000 Shin-Etsu Chemical Co............................. 207 10,000 Shiseido Co., Ltd................................. 119 27,000 Shizuoka Bank..................................... 340 +44,000 Showa Denko....................................... 138 17,000 Sony Corp......................................... 1,019 111,000 Sumitomo Bank..................................... 2,354
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Active Country Allocation Portfolio 7 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ JAPAN (CONT.) 23,000 Sumitomo Cement................................... $ 107 89,000 Sumitomo Chemical Co.............................. 444 44,000 Sumitomo Corp..................................... 447 30,000 Sumitomo Electric................................. 360 9,000 Sumitomo Forestry Co., Ltd........................ 138 155,000 Sumitomo Metal Ind................................ 470 21,000 Sumitomo Metal & Mining........................... 189 44,000 Taisei Corp., Ltd................................. 294 44,000 Takeda Chemical................................... 724 7,000 TDK Corp.......................................... 357 44,000 Teijin Ltd........................................ 225 44,000 Tobu Railway Co................................... 275 21,925 Tohoku Electric Power............................. 529 69,000 Tokai Bank........................................ 962 66,000 Tokio Marine & Fire Insurance Co.................. 863 10,000 Tokyo Dome Corp................................... 171 43,952 Tokyo Electric Power Co........................... 1,175 8,000 Tokyo Electron Ltd................................ 310 117,000 Tokyo Gas Co...................................... 412 44,000 Tokyu Corp........................................ 311 31,000 Toppan Printing Co., Ltd.......................... 408 66,000 Toray Industries, Inc............................. 435 73,000 Toshiba Corp...................................... 572 22,000 Toto Ltd.......................................... 307 44,000 Toyoba Co......................................... 158 103,000 Toyota Motor Corp................................. 2,185 +44,000 Ube Industries Ltd................................ 166 44,000 Yamaichi Securities Co............................ 342 44,000 Yasuda Trust & Banking Co......................... 260 ---------- 71,490 ---------- MALAYSIA (1.6%) 5,000 AMMB Holdings Bhd................................. 57 41,000 Amsteel Corp. Bhd................................. 30 5,000 Aokam Perdana Bhd................................. 8 6,000 Commerce Asset Holding Bhd........................ 30 20,000 DCB Holdings Bhd.................................. 58 6,000 Edaran Otomobil Nasional Bhd...................... 45 28,000 Golden Hope Plantations Bhd....................... 47 5,000 Golden Plus Holdings Bhd.......................... 9 10,000 Guinness Anchor Bhd............................... 19 19,000 Highlands & Lowlands Bhd.......................... 31 4,000 Hong Leong Industries Bhd......................... 21 24,000 Hong Leong Properties Bhd......................... 25 7,000 Hume Industries (Malaysia) Bhd.................... 34 +21,000 Idris Hydraulic (Malaysia) Bhd.................... 25 22,000 IGB Corp. Bhd..................................... 20 28,000 IOI Corp. Bhd..................................... 27 15,000 Kedah Cement Bhd.................................. 26 5,000 Kian Joo Can Factory Bhd.......................... 21 12,000 Land & General Bhd................................ 26 12,000 Leader Universal Holdings Bhd..................... 27 28,000 Magnum Corp. Bhd.................................. 53 28,000 Malayan Banking Bhd............................... 236 40,000 Malayan United Industries Bhd..................... 32 18,000 Malaysian Airline System Bhd...................... 58 VALUE SHARES (000) - ------------------------------------------------------------ 25,000 Malaysian International Shipping Bhd (Foreign).... $ 65 15,000 Malaysian Mining Corp. Bhd........................ 22 3,000 Malaysian Oxygen Bhd.............................. 11 19,000 Malaysian Resources Corp. Bhd..................... 31 26,000 Metroplex Bhd..................................... 21 19,900 Mulpha International Bhd.......................... 20 20,000 Multi-Purpose Holdings Bhd........................ 29 4,000 Nestle (Malaysia) Bhd............................. 29 5,000 Oriental Holdings Bhd............................. 25 8,000 Perlis Plantations Bhd............................ 25 9,000 Petaling Garden Bhd............................... 10 15,000 Proton............................................ 53 25,000 Public Bank Bhd................................... 48 10,000 Rashid Hussain Bhd................................ 30 28,000 Resorts World Bhd................................. 150 9,000 R.J. Reynolds Bhd................................. 21 8,000 Rothmans of Pall Mall (Malaysia) Bhd.............. 66 11,000 Selangor Properties Bhd........................... 11 8,000 Shell Refining Co. (Malaysia) Bhd................. 23 53,000 Sime Darby Bhd.................................... 141 19,000 TA Enterprise Bhd................................. 23 22,000 Tan Chong Motor Holdings Bhd...................... 22 +18,000 Technology Resources Industries Bhd............... 53 51,000 Telekom Malaysia Bhd.............................. 398 79,700 Tenaga Nasional Bhd............................... 314 9,000 UMW Holdings Bhd.................................. 24 16,000 United Engineers Ltd. (Malaysia).................. 102 11,000 YTL Corp., Bhd.................................... 69 ---------- 2,801 ---------- NETHERLANDS (3.1%) 7,469 ABN Amro Holdings N.V............................. 340 1,850 Akzo Nobel N.V.................................... 214 15,600 Elsevier N.V...................................... 208 950 Heineken N.V...................................... 169 6,638 Internationale Nederlanden Groep N.V.............. 444 2,082 KLM Royal Dutch Airlines N.V...................... 73 750 Koninklijke Hoogovens N.V......................... 25 3,074 Koninklijke Ahold N.V............................. 126 2,500 Koninklijke KNP BT N.V............................ 64 21,194 Koninklijke PTT Nederland N.V..................... 770 550 Nedlloyd Groep N.V................................ 12 7,900 Philips Electronics N.V........................... 286 12,700 Royal Dutch Petroleum Co.......................... 1,774 700 Stork N.V......................................... 17 3,800 Unilever N.V...................................... 534 1,650 Wolters Kluwer N.V................................ 156 ---------- 5,212 ---------- SINGAPORE (2.8%) 23,000 Amcol Holdings Ltd................................ 63 62,000 City Developments Ltd............................. 451 18,000 Cycle & Carriage Ltd.............................. 179 65,000 DBS Land Ltd...................................... 220 32,000 Development Bank of Singapore Ltd. (Foreign)...... 398
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Active Country Allocation Portfolio 8 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ SINGAPORE (CONT.) 16,000 First Capital Corp. Ltd........................... $ 44 19,000 Fraser & Neave Ltd................................ 242 25,000 Hai Sun Hup Group Ltd............................. 17 33,000 Hotel Properties Ltd.............................. 51 15,000 Inchcape Bhd...................................... 48 9,000 Jurong Shipyard Ltd............................... 69 40,000 Keppel Corp., Ltd................................. 356 22,000 Natsteel Ltd...................................... 45 63,000 Neptune Orient Lines Ltd.......................... 71 47,000 Oversea-Chinese Banking Corp. (Foreign)........... 588 12,000 Overseas Union Enterprise Ltd..................... 61 25,000 Parkway Holdings Ltd.............................. 68 4,000 Robinson & Co. Ltd................................ 17 13,000 Shangri-La Hotel Ltd.............................. 51 59,000 Singapore Airlines Ltd. (Foreign)................. 551 16,800 Singapore Press Holdings (Foreign)................ 297 47,000 Straits Steamship Land Ltd........................ 159 31,000 Straits Trading Co., Ltd.......................... 73 125,000 United Industrial Corp. Ltd....................... 123 49,000 United Overseas Bank Ltd. (Foreign)............... 471 ---------- 4,713 ---------- SPAIN (2.5%) 610 Acerinox S.A...................................... 62 5,800 Argentaria S.A.................................... 239 10,233 Autopistas (ACESA)................................ 116 10,900 Banco Bilbao Vizcaya S.A.......................... 393 7,300 Banco Central Hispano Americano S.A............... 148 5,500 Banco de Santander S.A............................ 276 1,000 Corporacion Financiera Alba....................... 62 1,300 Corporacion Mapfre................................ 73 3,300 Dragados y Construccion S.A....................... 43 2,700 Ebro Agricolas S.A................................ 28 1,000 ENCE S.A.......................................... 16 12,200 Endesa S.A........................................ 691 +4,900 Ercros S.A........................................ 3 1,100 FASA Renault S.A.................................. 18 700 Fomento Construction y Contractas S.A............. 54 1,750 Gas Natural SDG S.A............................... 273 42,100 Iberdrola S.A..................................... 385 200 MetroVacesa....................................... 7 500 Portland Valderrivas S.A.......................... 32 14,100 Repsol S.A........................................ 462 1,800 Tabacalera S.A., Class A.......................... 68 44,200 Telefonica de Espana S.A.......................... 612 14,700 Union Electrica Fenosa S.A........................ 88 1,950 Uralita S.A....................................... 18 2,100 Vallehermoso S.A.................................. 39 1,200 Viscofan Envolturas Celulosicas S.A............... 14 390 Zardoya Otis S.A.................................. 43 ---------- 4,263 ---------- SWITZERLAND (3.3%) +75 Adia S.A.(Bearer)................................. 12 50 Alusuisse-Lonza Holdings Ltd. (Bearer)............ 40 100 Alusuisse-Lonza Holdings Ltd. (Registered)........ 79 VALUE SHARES (000) - ------------------------------------------------------------ 165 BBC Brown Boveri AG (Bearer)...................... $ 192 90 Ciba-Geigy AG (Bearer)............................ 79 450 Ciba-Geigy AG (Registered)........................ 396 2,275 CS Holding AG (Registered)........................ 233 10 Georg Fischer AG (Bearer)......................... 13 135 Holderbank AG (Bearer)............................ 104 100 Merkur Holding AG (Registered).................... 22 710 Nestle S.A. (Registered).......................... 785 30 Roche Holding AG (Bearer)......................... 420 130 Roche Holding AG (Registered)..................... 1,028 630 Sandoz AG (Registered)............................ 577 35 SGS Surveillance (Bearer)......................... 69 70 SMH AG (Bearer)................................... 42 300 SMH AG (Registered)............................... 39 70 Sulzer AG (Registered)............................ 40 +50 SwissAir (Registered)............................. 36 450 Swiss Bank Corp. (Bearer)......................... 184 700 Swiss Bank Corp. (Registered)..................... 143 300 Swiss Reinsurance (Registered).................... 349 390 Union Bank of Switzerland (Bearer)................ 423 430 Union Bank of Switzerland (Registered)............ 98 500 Zuerich Versicherung (Registered)................. 149 ---------- 5,552 ---------- THAILAND (2.6%) 21,500 Advanced Information Services Co., Ltd. (Foreign)....................................... 381 +32,400 Bangchak Petroleum Co., Ltd. (Foreign)............ 68 +107,300 Bangkok Metropolitan Bank Ltd..................... 102 11,900 Bank of Ayudhya Ltd. (Foreign).................... 67 11,800 CMIC Finance & Securities Co., Ltd................ 39 3,600 CP Feedmill Co., Ltd. (Foreign)................... 18 23,200 Dhana Siam Finance & Securities Co., Ltd.......... 133 27,400 General Finance & Securities Co., Ltd. (Foreign)....................................... 126 22,900 Italian Thai Development Co., Ltd. (Foreign)...... 260 20,700 Jasmine International Co., Ltd. (Foreign)......... 127 127,500 Krung Thai Bank Ltd. (Foreign).................... 526 19,600 National Finance & Securities Co. Ltd. (Foreign)....................................... 105 19,200 National Petrochemical............................ 49 +9,900 One Holding Co., Ltd. (Foreign)................... 25 16,900 Phatra Thanakit Co., Ltd. (Foreign)............... 145 +28,400 PTT Exploration & Production Co., Ltd (Foreign)... 298 +23,000 Quality House Public.............................. 100 +46,900 Sahaviriya Steel Industry (Foreign)............... 62 12,700 Shinawatra Computer Co., Ltd (Foreign)............ 313 +21,700 Shinawatra Satellite Co., Ltd. (Foreign).......... 35 3,600 Siam Cement Co., Ltd. (Foreign)................... 200 74,600 Siam City Bank Ltd. (Foreign)..................... 86 3,500 Siam City Cement Co., Ltd. (Foreign).............. 55 +204,100 TelecomAsia Corp., Ltd. (Foreign)................. 624 41,600 Thai Airways International Co., Ltd. (Foreign).... 78 26,500 Thai Military Bank Ltd. (Foreign)................. 107
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Active Country Allocation Portfolio 9 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ THAILAND (CONT.) 21,500 United Communications Industry (Foreign).......... $ 275 ---------- 4,404 ---------- UNITED KINGDOM (7.9%) 30,600 Abbey National plc................................ 302 22,900 Argyll Group plc.................................. 121 22,200 Arjo Wiggins Appleton plc......................... 57 15,600 Associated British Foods plc...................... 89 26,300 Barclays plc...................................... 302 16,600 Bass plc.......................................... 185 55,823 BAT Industries plc................................ 492 10,500 BICC plc.......................................... 45 19,400 Blue Circle Industries plc........................ 103 9,500 BOC Group plc..................................... 133 19,400 Boots Co. plc..................................... 176 13,100 BPB Industries plc................................ 61 7,800 British Aerospace plc............................. 97 18,100 British Airways plc............................... 131 81,900 British Gas plc................................... 323 93,400 British Petroleum Co. plc......................... 782 32,100 British Sky Broadcasting plc...................... 203 33,900 British Steel plc................................. 86 84,900 British Telecommunications plc.................... 467 65,700 BTR plc........................................... 336 4,484 Burmah Castrol plc................................ 65 39,403 Cable & Wireless plc.............................. 281 18,700 Cadbury Schweppes plc............................. 154 12,200 Caradon plc....................................... 37 13,300 Coats Viyella plc................................. 36 8,000 Commercial Union plc.............................. 78 7,800 Courtaulds plc.................................... 49 5,578 De La Rue Co. plc................................. 56 26,200 Forte plc......................................... 134 7,800 General Accident plc.............................. 79 59,400 General Electric plc.............................. 327 8,300 GKN plc........................................... 100 54,500 Glaxo Wellcome plc................................ 774 43,772 Grand Metropolitan plc............................ 315 18,900 Great Universal Stores plc........................ 201 25,869 Guardian Royal Exchange plc....................... 111 32,200 Guinness plc...................................... 237 93,700 Hanson plc........................................ 280 18,900 Harrisons & Crosfields plc........................ 47 36,600 HSBC Holdings plc................................. 558 13,300 Imperial Chemical Industries plc.................. 157 26,100 Ladbroke Group plc................................ 59 11,600 Land Securities plc............................... 111 16,600 Lasmo plc......................................... 45 58,947 Lloyds TSB Group plc.............................. 303 13,862 Lonrho plc........................................ 38 53,800 Marks and Spencer plc............................. 376 8,900 MEPC plc.......................................... 55 22,100 National Power plc................................ 154 10,000 North West Water Group plc........................ 96 16,100 Peninsular & Oriental Steam Navigation Co......... 119 VALUE SHARES (000) - ------------------------------------------------------------ 22,200 Pilkington plc.................................... $ 70 39,100 Prudential Corp. plc.............................. 252 8,300 Rank Organization plc............................. 60 12,200 Redland plc....................................... 74 10,500 Reed International plc............................ 160 29,200 Reuters Holdings plc.............................. 267 8,900 Rexam plc......................................... 49 7,100 RMC Group plc..................................... 109 14,400 Royal Bank of Scotland Group plc.................. 131 13,100 Royal Insurance Holdings plc...................... 78 22,700 RTZ Corp. plc..................................... 330 22,560 Sainsbury (J) plc................................. 138 4,500 Schroders plc..................................... 96 14,000 Scottish Power plc................................ 80 28,800 Sears plc......................................... 47 9,000 Sedgwick Group plc................................ 17 6,700 Slough Estates plc................................ 23 22,600 SmithKline Beecham plc, Class A................... 249 5,600 Southern Electric plc............................. 79 20,600 Tarmac plc........................................ 33 11,100 Taylor Woodrow plc................................ 20 29,300 Tesco plc......................................... 135 10,500 Thames Water plc.................................. 92 9,400 THORN EMI plc..................................... 221 7,800 TI Group plc...................................... 56 +20,000 Trafalgar House plc............................... 9 11,900 Unilever plc...................................... 244 55,700 Vodafone Group plc................................ 199 13,500 Zeneca Group plc.................................. 261 ---------- 13,502 ---------- TOTAL COMMON STOCKS (Cost $142,163)........................... 152,786 ---------- PREFERRED STOCKS (2.0%) AUSTRALIA (0.1%) 24,000 News Corp., Ltd................................... 112 ---------- BRAZIL (NON-VOTING STOCKS) (1.7%) 31,666 Aracruz Celelose S.A., Class B.................... 49 19,080,443 Banco Bradesco.................................... 167 +4,252,000 Banco do Brasil................................... 48 +1,871,000 Banco do Estado Sao Paulo......................... 10 249,663 Brahma............................................ 103 1,191,000 Ceval Alimentos S.A............................... 14 1,786,000 Cia Brasileira de Petroleo Ipiranga............... 15 4,035,500 Cia Energetica de Minas Gerais.................... 89 +102,000 Cia Energetica de Sao Paulo....................... 3 3,570,000 Cia Siderurgica de Tubarao........................ 58 2,636,000 Eletrobras, Class B............................... 713 32,500 Industrias Klabin de Papel e Celulose S.A......... 29 111,000 Investimentos Itau S.A............................ 61 357,000 Itaubanco......................................... 100 3,742,000 Petrobras......................................... 320 27,000 Sadia Concordia................................... 20 12,416,000 Telebras.......................................... 598 638,000 Telecomunicacoes de Sao Paulo..................... 94 56,980,000 Usiminas.......................................... 46
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Active Country Allocation Portfolio 10 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ BRAZIL (CONT.) 1,956,000 Vale Do Rio Doce.................................. $ 322 ---------- 2,859 ---------- GERMANY (0.2%) 500 RWE AG............................................ 139 1,050 SAP AG............................................ 159 ---------- 298 ---------- ITALY (0.0%) 27,000 Fiat S.p.A........................................ 49 ---------- TOTAL PREFERRED STOCKS (Cost $3,082).......................... 3,318 ---------- NO. OF RIGHTS - ---------- RIGHTS (0.0%) BRAZIL (0.0%) +**446,139 Banco Bradesco, expiring 2/96..................... 1 ---------- SPAIN (0.0%) +**4,900 Ercros, expiring 1/5/96........................... -- ---------- UNITED KINGDOM (0.0%) +7,425 Pilkington plc, expiring 1/8/96................... 23 ---------- TOTAL RIGHTS (Cost $18)....................................... 24 ---------- NO. OF WARRANTS - ---------- WARRANTS (0.0%) BELGIUM (0.0%) +347 Petrofina S.A., expiring 6/03/97.................. 5 ---------- HONG KONG (0.0%) +**4,400 Applied International Holdings, expiring 12/30/99........................................ -- ---------- ITALY (0.0%) +2,950 R.A.S. S.p.A, expiring 12/31/97................... 12 +1,550 R.A.S. S.p.A., Saving Shares, expiring 12/31/97... 3 ---------- 15 ---------- MALAYSIA (0.0%) **+2,400 Hong Leong Properties, expiring 10/00............. -- +***7,000 IOI Corp.......................................... 1 ---------- THAILAND (0.0%) +**3,050 CMIC Finance & Securities Co., Ltd., expiring 1999............................................ 1 +**6,400 National Finance & Securities Co. Ltd. expiring 11/15/99........................................ -- ---------- 1 ---------- UNITED KINGDOM (0.0%) +534 British Aerospace, expiring 11/15/00.............. 3 ---------- TOTAL WARRANTS (Cost $1)...................................... 25 ---------- NO. OF VALUE UNITS (000) - ------------------------------------------------------------ UNITS (0.2%) AUSTRALIA (0.0%) 20,821 General Property Trust............................ $ 37 22,888 Westfield Trust................................... 41 1,762 Westfield Trust (New)............................. 3 ---------- 81 ---------- UNITED KINGDOM (0.2%) 21,700 SmithKline Beecham plc............................ 237 ---------- TOTAL UNITS (Cost $270)....................................... 318 ---------- FACE AMOUNT (000) - ---------- CONVERTIBLE DEBENTURES (0.0%) FRANCE (0.0%) FRF 60 Sanofi 4.00%, 1/1/00.............................. 45 ---------- ITALY (0.0%) ITL 3,150 Saffa S.p.A. 9.25%, 1/1/01........................ 2 ---------- TOTAL CONVERTIBLE DEBENTURES (Cost $40)....................... 47 ---------- TOTAL FOREIGN SECURITIES (91.7%) (Cost $145,574)............................................... 156,518 ---------- SHORT-TERM INVESTMENT (2.2%) UNITED STATES (2.2%) REPURCHASE AGREEMENT (2.2%) $ 3,746 The Chase Manhattan Bank, N.A., 5.35%, dated 12/29/95, due 1/02/96, to be repurchased at $3,748, collateralized by $3,045 United States Treasury Bonds, 7.875%, due 2/15/21, valued at $3,821 (Cost $3,746)............................ 3,746 ---------- FOREIGN CURRENCY (0.2%) AUD 14 Australian Dollar................................. 10 BEF 623 Belgian Franc..................................... 21 GBP 17 British Pound..................................... 26 DEM 17 Deutsche Mark..................................... 12 FRF 61 French Franc...................................... 12 HKD 383 Hong Kong Dollar.................................. 50 IDR 2,251 Indonesian Rupiah................................. 1 JPY 4,508 Japanese Yen...................................... 44 MYR 16 Malaysian Ringgit................................. 6 NLG 68 Netherlands Guilder............................... 43 PTE 20,102 Portuguese Escudo................................. 134 SGD 31 Singapore Dollar.................................. 22 ESP 195 Spanish Peseta.................................... 2 CHF 3 Swiss Franc....................................... 3 THB 162 Thai Baht......................................... 6 ---------- TOTAL FOREIGN CURRENCY (Cost $391)............................ 392 ---------- TOTAL INVESTMENTS (94.1%) (Cost $149,711)..................... 160,656 ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Active Country Allocation Portfolio 11 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE ACTIVE COUNTRY ALLOCATION PORTFOLIO (CONT.) - -------------------------------------------------------------------------------- AMOUNT (000) - ---------------------------------------------------- OTHER ASSETS (6.0%) Net Unrealized Gain on Forward Foreign Currency Exchange Contracts......... $ 9,417 Receivable for Portfolio Shares Sold................ 524 Foreign Withholding Tax Reclaim Receivable......... 167 Dividends Receivable........ 164 Interest Receivable......... 2 Other....................... 14 $ 10,288 ---------- LIABILITIES (-0.1%) Investment Advisory Fees Payable.................... (77) Custodian Fees Payable...... (71) Payable for Portfolio Shares Redeemed................... (43) Administrative Fees Payable.................... (26) Payable for Investments Purchased.................. (23) Other Liabilties............ (41) (281) ---------- -------- NET ASSETS (100%)......................... $170,663 -------- -------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 14,672,976 outstanding $.001 par value shares (authorized 500,000,000 shares)..................... $11.63 -------- -------- FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: Under the terms of forward foreign currency exchange contracts open at December 31, 1995, the Portfolio is obligated to deliver or is to receive foreign currency in exchange for U.S. dollars as indicated below:
NET UNREALIZED CURRENCY TO IN EXCHANGE GAIN DELIVER VALUE SETTLEMENT FOR VALUE (LOSS) (000) (000) DATE (000) (000) (000) - ------------- -------- ---------- ------------- -------- -------- DEM 5,930 $ 4,136 1/04/96 U.S.$ 4,155 $ 4,155 $ 19 FRF 28,174 5,753 1/04/96 U.S.$ 5,670 5,670 (83) CHF 6,170 5,382 2/28/96 U.S.$ 5,100 5,100 (282) BEF 225,256 7,669 4/30/96 U.S.$ 8,000 8,000 331 DEM 6,458 4,525 4/30/96 U.S.$ 4,500 4,500 (25) JPY4,591,639 45,210 4/30/96 U.S.$ 54,440 54,440 9,230 U.S.$ 4,790 4,790 4/30/96 BEF 141,479 4,817 27 U.S.$ 7,378 7,378 4/30/96 JPY 606,988 5,977 (1,401) NLG 12,205 7,686 7/31/96 U.S.$ 8,000 8,000 314 U.S.$ 2,850 2,850 7/31/96 NLG 4,661 2,935 85 JPY 886,827 8,849 8/14/96 U.S.$ 9,630 9,630 781 JPY 310,447 3,104 8/30/96 U.S.$ 3,525 3,525 421 -------- -------- -------- $107,332 $116,749 $ 9,417 -------- -------- -------- -------- -------- --------
- ------------------------------------------------------------ + -- Non-income producing security ** -- Security is valued at fair value -- See Note A-1 *** -- Security is valued at cost -- See Note A-1 NCS -- Non Convertible Shares RFD -- Ranked for Dividends ITL -- Italian Lira - ------------------------------------------------ SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED) VALUE PERCENT OF INDUSTRY (000) NET ASSETS - -------------------------------------------------------- Capital Equipment............. $ 21,419 12.6% Consumer Goods................ 27,288 16.0 Energy........................ 16,779 9.8 Finance....................... 43,246 25.3 Gold Mines.................... 72 -- Materials..................... 18,501 10.8 Multi-Industry................ 7,106 4.2 Services...................... 22,107 13.0 ---------- --- $ 156,518 91.7% ---------- --- ---------- --- The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Active Country Allocation Portfolio 12 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE ASIAN EQUITY PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (91.0%) CHINA (1.2%) 979,440 China Merchants Shekou Port Services, Class B..... $ 355 +28,200 Jilin Chemical Co. Ltd. ADR....................... 606 5,505,000 Maanshan Iron & Steel Co., Class H................ 769 51,000 Shandong Huaneng Power Co., Ltd. ADR.............. 344 1,601,600 Shanghai Jinqiao, Class B......................... 599 +555,400 Shanghai Refrigerator Compressor, Class B......... 198 276,000 Shanghai Tyre & Rubber Co., Class B............... 57 4,265,000 Yizheng Chemical Fibre Co., Class H............... 960 ---------- 3,888 ---------- HONG KONG (26.7%) 2,316,000 Cheung Kong Holdings Ltd.......................... 14,107 358,000 China Light & Power Co., Ltd...................... 1,648 1,209,500 Citic Pacific Ltd................................. 4,137 6,294,000 C.P. Pokphand Co., Ltd............................ 2,523 11,712,000 Guangdong Investments Ltd......................... 7,043 1,056,000 Harbin Power Equipment Co......................... 155 765,500 Hong Kong Electric Holdings Ltd................... 2,510 673,320 Hong Kong & Shanghai Bank Holdings plc............ 10,188 5,088,600 Hong Kong Telecommunications Ltd.................. 9,081 3,812,000 Hopewell Holdings Ltd............................. 2,194 1,827,000 Hutchison Whampoa Ltd............................. 11,129 +1,605,000 New World Development Co., Ltd.................... 6,995 3,008 New World Infrastructure Ltd...................... 6 +1,835,100 Shenzen North Jainshe Motorcycle Co., Ltd., Class B............................................... 759 612,100 Sun Hung Kai Properties Ltd....................... 5,007 621,560 Swire Pacific Ltd., Class A....................... 4,823 906,000 Varitronix International Ltd...................... 1,681 ---------- 83,986 ---------- INDIA (0.8%) 38,000 Grasim Industries Ltd. GDR........................ 779 #51,000 Hindalco Industries Ltd. GDR...................... 1,734 ---------- 2,513 ---------- INDONESIA (5.3%) **583,000 Asiana Imi Industries (Foreign)................... 306 **294,000 Bank Bali (Foreign)............................... 579 **859,000 Barito Pacific Timber (Foreign)................... 629 +**691,000 Bimantara Citra (Foreign)......................... 574 **621,826 Charoen Pokphand (Foreign)........................ 1,265 **141,100 Hanajaya Mandala Sampoerna (Foreign).............. 1,469 **302,000 Indocement Tunggal (Foreign)...................... 1,013 **730,000 Indosat (Foreign)................................. 2,650 **351,600 Kalbe Farma (Foreign)............................. 1,192 **210,000 Keramika Indonesia Assosiasi (Foreign)............ 101 **1,400,000 Ometraco (Foreign)................................ 689 +**177,000 Polysindo Eka Perkasa (Foreign)................... 101 **315,000 Semen Gresik (Foreign)............................ 882 **2,750,400 Sona Topas Tourism (Foreign)...................... 782 VALUE SHARES (000) - ------------------------------------------------------------ **277,333 Sorini Corp. (Foreign)............................ $ 1,345 **210,500 Suba Indah (Foreign).............................. 140 +**1,170,500 Telekomunikasi Indonesia (Foreign)................ 1,536 **590,000 Ultra Jaya Milk (Foreign)......................... 284 **644,800 United Tractors (Foreign)......................... 1,213 ---------- 16,750 ---------- KOREA (3.3%) **53,900 Korea Electric Power (Foreign).................... 2,311 **1,500 Korea Mobile Telecom (Foreign).................... 1,657 61,600 Pohang Iron & Steel Co., Ltd. ADR................. 1,348 +21,953 Samsung Electronics (Foreign)..................... 3,990 +185 Samsung Electronics (Foreign) (New)............... 34 +44 Samsung Electronics GDR........................... 3 +#152 Samsung Electronics GDS........................... 15 +#771 Samsung Electronics GDS (Voting Shares)........... 74 +811 Samsung Electronics RFD (New)..................... 145 **44,460 Shinhan Bank (Foreign)............................ 976 ---------- 10,553 ---------- MALAYSIA (19.3%) 149,000 AMMB Holdings Bhd................................. 1,701 604,000 Bandar Raya Developments Bhd...................... 861 954,500 Genting Bhd....................................... 7,968 861,000 Land & General Holdings Bhd....................... 1,865 714,000 Magnum Corp. Bhd.................................. 1,349 1,191,500 Malayan Banking Bhd............................... 10,040 1,125,316 Malaysian International Shipping Bhd (Foreign).... 2,947 1,000 Malaysian Resources Corp. Bhd..................... 2 518,000 Petronas Gas Bhd.................................. 1,764 2,528,000 Renong Bhd........................................ 3,743 1,388,000 Resorts World Bhd................................. 7,433 650,000 Sime Darby Bhd.................................... 1,727 1,243,000 Tan & Tan Development Bhd......................... 1,062 +569,000 Technology Resources Industries Bhd............... 1,680 785,000 Telekom Malaysia Bhd.............................. 6,120 1,314,000 Tenaga Nasional Bhd............................... 5,173 264,000 Time Engineering Bhd.............................. 613 718,757 United Engineers Ltd. (Malaysia).................. 4,585 ---------- 60,633 ---------- PHILIPPINES (5.6%) 1,379,300 Ayala Corp., Class B.............................. 1,683 1,175,625 Ayala Land, Inc., Class B......................... 1,434 +2,062,100 C&P Homes, Inc.................................... 1,513 +1,791,000 DMCI Holdings, Inc................................ 642 +597,700 Fil-Estate Land Inc............................... 450 6,958,000 JG Summit Holding, Class B........................ 1,910 362,050 Manila Electric Co., Class B...................... 2,954 5,149,900 Petron Corp....................................... 2,651 18,125 Phillipine Long Distance Telephone Co., ADR....... 981 15,430 Philippine Long Distance Telephone Co., Class B... 838 +29,440 Philippine National Bank, Class B................. 326 317,200 San Miguel Corp., Class B......................... 1,082
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Asian Equity Portfolio 15 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE ASIAN EQUITY PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ PHILIPPINES (CONT.) +4,508,000 SM Prime Holdings, Inc., Class B.................. $ 1,289 ---------- 17,753 ---------- SINGAPORE (13.1%) 206,000 British-American Tobacco Co....................... 794 628,080 City Developments Ltd............................. 4,574 912,000 DBS Land Ltd...................................... 3,082 362,500 Development Bank of Singapore Ltd. (Foreign)...... 4,510 148,800 Fraser & Neave Ltd................................ 1,894 690,000 Keppel Corp., Ltd................................. 6,146 538,166 Oversea-Chinese Banking Corp. (Foreign)........... 6,734 263,000 Sembawang Corp.................................... 1,460 111,000 Singapore Airlines Ltd. (Foreign)................. 1,035 89,400 Singapore Press Holdings (Foreign)................ 1,580 1,472,000 Singapore Technologies Industrial Corp............ 3,330 507,000 Straits Steamship Land Ltd........................ 1,713 500,000 Straits Trading Co., Ltd.......................... 1,174 332,200 United Overseas Bank Ltd. (Foreign)............... 3,194 ---------- 41,220 ---------- TAIWAN (2.5%) 806,000 Acer, Inc......................................... 1,861 412,000 Advanced Semiconductor Engineering, Inc........... 997 904,000 Taiwan Semiconductor Manufacturing Co............. 2,832 905,000 United Micro Electronics Corp., Ltd............... 2,272 ---------- 7,962 ---------- THAILAND (13.2%) 84,000 Advanced Information Services Co., Ltd. (Foreign)....................................... 1,487 583,200 Bangkok Bank Ltd. (Foreign)....................... 7,085 679,900 Finance One Co., Ltd. (Foreign)................... 4,723 36,000 Land & House Co., Ltd. (Foreign).................. 592 +202,800 National Finance & Securities Co., Ltd. (Foreign)....................................... 1,087 266,600 Phatra Thanakit Co., Ltd. (Foreign)............... 2,286 84,100 Shinawatra Computer Co., Ltd (Foreign)............ 2,070 38,900 Siam Cement Co., Ltd. (Foreign)................... 2,157 344,100 Siam Commercial Bank (Foreign).................... 4,535 +1,450,500 TelecomAsia Corp. (Foreign)....................... 4,434 702,170 Thai Farmers Bank Ltd. (Foreign).................. 7,080 +320,000 Thai Telephone & Telecom (Foreign)................ 2,298 101,000 United Communications Industry (Foreign).......... 1,291 375,000 Wongpaitoon Footware Co., Ltd. (Foreign).......... 406 ---------- 41,531 ---------- TOTAL COMMON STOCKS (Cost $243,859)............................. 286,789 ---------- NO. OF VALUE WARRANTS (000)
- ------------------------------------------------------------ WARRANTS (0.0%) INDONESIA (0.0%) **+150,000 Ometraco, expiring 7/12/00 (Cost $0).............. $ -- ---------- TOTAL FOREIGN SECURITIES (91.0%) (Cost $243,859)................ 286,789 ----------
FACE AMOUNT (000) - ------------ SHORT-TERM INVESTMENT (8.3%) UNITED STATES REPURCHASE AGREEMENT (8.3%) $ 26,154 The Chase Manhattan Bank, N.A. 5.35%, dated 12/29/95 due 1/02/96, to be repurchased at $26,170, collateralized by $16,885 United States Treasury Bonds, 12.00%, due 8/15/13, valued at $26,678 (Cost $26,154).......................... 26,154 ---------- FOREIGN CURRENCY (0.3%) HKD 2,770 Hong Kong Dollar.................................. 358 IDR 810,970 Indonesian Rupiah................................. 355 MYR 1 Malaysian Ringgit................................. -- TWD 3,102 Taiwan Dollar..................................... 114 ---------- TOTAL FOREIGN CURRENCY (Cost $827).............................. 827 ---------- TOTAL INVESTMENTS (99.6%) (Cost $270,840)....................... 313,770 ----------
OTHER ASSETS (1.2%) Receivable for Investments Sold................. $ 2,182 Receivable for Portfolio Shares Sold............ 1,007 Dividends Receivable............................ 472 Foreign Withholding Tax Reclaim Receivable...... 23 Interest Receivable............................. 12 Other........................................... 23 3,719 ---------- LIABILITIES (-0.8%) Payable for Portfolio Shares Redeemed........... (1,025) Bank Overdraft.................................. (541) Payable for Investments Purchased............... (427) Investment Advisory Fees Payable................ (411) Custodian Fees Payable.......................... (112) Administrative Fees Payable..................... (41) Other Liabilities............................... (48) (2,605) ---------- ---------- NET ASSETS (100%)............................................. $ 314,884 ---------- ---------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 16,166,258 outstanding $.001 par value shares (authorized 500,000,000 shares)............................. $19.48 ---------- ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Asian Equity Portfolio 16 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE ASIAN EQUITY PORTFOLIO (CONT.) - -------------------------------------------------------------------------------- - ------------------------------------------------------------ + -- Non-income producing security ** -- Securities (totaling $21,694 or 6.9% of net assets at December 31, 1995) valued at fair value -- See Note A-1 # -- 144A Security -- Certain conditions for public sale may exist. ADR -- American Depositary Receipt GDR -- Global Depositary Receipt GDS -- Global Depositary Shares RFD -- Ranked for Dividends
- ------------------------------------------------------------ SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
VALUE PERCENT OF INDUSTRY (000) NET ASSETS - --------------------------------------------------------------- Capital Equipment.................... $ 27,807 8.8% Consumer Goods....................... 18,705 5.9 Energy............................... 19,356 6.2 Finance.............................. 118,063 37.5 Materials............................ 12,063 3.8 Multi-Industry....................... 25,827 8.2 Services............................. 64,968 20.6 --------- ----- $ 286,789 91.0% --------- ----- --------- -----
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Asian Equity Portfolio 17 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EMERGING MARKETS PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (84.1%) ARGENTINA (1.0%) +6 Acindar Industrial S.A., Class B................ $ -- #120,670 Capex S.A. ADR.................................. 1,765 67,858 Capex S.A., Class A............................. 495 431,533 Quilmes Industrial S.A.......................... 6,732 -------- 8,992 -------- BRAZIL (5.6%) 302,170,000 Cia Acos Especiais Itabira...................... 1,430 +124,935 Cia Brasileira ADR.............................. 1,249 #696 Cia Energetica de Minas Gerais ADR.............. 15 84,361 Cia Energetica de Minas Gerais GDR.............. 1,867 #+116,352,140 Cia Energetica de Sao Paulo..................... 2,634 49,544,000 Cia Paulista de Forca E Luz..................... 2,401 17,175,000 Eletrobras...................................... 4,648 #180,024 Rhodia-Ster ADS................................. 1,620 7,175,000 Servicos de Eletricidade........................ 2,296 139,692,000 Telebras........................................ 5,404 #512,169 Telebras ADR.................................... 24,264 5,175,000 Telecomunicacoes de Sao Paulo................... 748 #50 Usiminas ADR.................................... 1 -------- 48,577 -------- CHINA (1.6%) 750,000 Beiren Printing Machine, Class H................ 136 3,340,040 China Merchants Shekou Port Services, Class B... 1,209 3,720,000 Harbin Power Equipment Co. Ltd., Class H........ 548 +91,500 Jilin Chemical Co. Ltd. ADR..................... 1,967 2,658,500 Shanghai Diesel Engine Co., Ltd., Class B....... 984 +883,300 Shanghai Erfanji Co., Ltd., Class B............. 125 949,975 Shanghai Jin Jiang Tower Ltd., Class B.......... 268 3,673,680 Shanghai Jinqiao, Class B....................... 1,374 1,062,750 Shanghai Outer Gaoqiao Free Zone, Class B....... 389 903,800 Shanghai Phoenix Bicycle Ltd., Class B.......... 150 +1,114,130 Shanghai Refrigerator Compressor, Class B....... 397 986,000 Shanghai Tyre & Rubber Co., Class B............. 203 354,000 Shanghai Yaohua Pilkington Glass, Class B....... 312 3,126,400 Shenzhen Chiwan Wharf Holdings, Class B......... 1,177 +4,171,000 Shenzhen North Jianshe Motorcycle Co., Ltd., Class B....................................... 1,726 13,658,000 Yizheng Chemical Fibre Co., Class H............. 3,073 68,000 Zhuhai Lizhu Pharmaceutical Group, Inc., Class B............................................. 22 -------- 14,060 -------- VALUE SHARES (000) - ------------------------------------------------------------ COLOMBIA (0.7%) 17,130,000 Banco de Colombia............................... $ 6,207 -------- GREECE (2.8%) 413,369 Aegek........................................... 3,558 76,550 Alpha Credit Bank of Athens..................... 4,425 278,475 Delta Dairy..................................... 5,229 165,870 Ergo Bank....................................... 6,611 142,000 Hellenic Bottling Co............................ 4,644 -------- 24,467 -------- HONG KONG (9.9%) 1,597,000 Cheung Kong Holdings Ltd........................ 9,728 2,628,000 Citic Pacific Ltd............................... 8,989 14,327,000 C.P. Pokphand Co., Ltd.......................... 5,744 4,500,00 Florens Group Ltd............................... 2,939 65,800 Great Wall Electric Ltd. ADR.................... 242 11,431,000 Guangdong Investments Ltd....................... 6,874 2,686,200 Hong Kong Telecommunications Ltd................ 4,794 5,397,000 Hopewell Holdings Ltd........................... 3,106 2,049,000 Hutchison Whampoa Ltd........................... 12,481 3,478,000 New World Development Co., Ltd.................. 15,158 +162,400 Shandong Huaneng Power Co., Ltd., ADR........... 1,096 617,000 Sun Hung Kai Properties Ltd..................... 5,047 618,000 Swire Pacific Ltd., Class A..................... 4,795 2,819,000 Varitronix International Ltd.................... 5,232 1,554,000 Wai Kee Holdings Ltd............................ 195 2,646,000 Zhenhai Refining & Chemical Co., Ltd., Class H............................................. 496 -------- 86,916 -------- INDIA (8.7%) 230,000 American Dry Fruits............................. 235 550 Andhra Valley Power Supply, Class B............. 2 100,000 AP Rayon, Class B............................... 215 10,000 Apollo Tyres Ltd................................ 39 77,650 Aruna Sugars & Enterprises, Class B............. 59 9,815 Associated Cement Companies Ltd................. 800 86,400 BPL Ltd......................................... 182 +891,500 Balaji Foods & Feeds............................ 298 8,500 Ballapur Industries Ltd., Class B............... 45 9,065 Baroda Rayon Corp............................... 80 92,284 Bharat Forge Co., Ltd., Class A................. 358 3,300,000 Bharat Heavy Electricals........................ 8,258 374,600 Bharat Pipes & Fittings Ltd., Class B........... 128 +125,000 Bharat Pipes & Fittings Ltd. (New).............. 34 191,642 Carrier Aircon Ltd., Class B.................... 937 90,000 Cosmo Films Ltd................................. 266 305,000 Crompton Greaves................................ 1,735 25,900 DCL Polyesters Ltd.............................. 15 77,000 DCM Shriram Industries Ltd...................... 149 38,800 Delta Industries Ltd............................ 80 185,000 Essab India Ltd................................. 300
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Emerging Markets Portfolio 20 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EMERGING MARKETS PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ INDIA (CONT.) 50,000 Essel Packaging................................. $ 264 12,000 Federal Bank Ltd................................ 60 2,370 Flex Industries Ltd., Class B................... 11 +16,566 Flex Industries Ltd. (New)...................... 67 10,000 Fuller.......................................... 48 +557,338 Garware Plastics & Polyester, Class A........... 2,995 +712,500 Godrej Soaps Ltd................................ 1,378 1,013,500 Great Eastern Shipping Co....................... 1,391 203,100 Gujarat Ambuja Cements, Ltd..................... 1,568 101,950 Hero Honda, Class B............................. 664 104,277 Housing Development Finance Corp................ 8,021 *@+78,000 India Magnum Fund, (The) Class A (acquired 11/25/92-3/01/94, Cost $3,782)................ 3,510 @+55,194 India Magnum Fund, (The) Class B................ 2,484 644,625 India Organic Chemical Ltd...................... 633 +396,200 Indian Petrochemicals Corp. Ltd................. 1,392 +40,000 Indian Seamless Steel & Alloys.................. 9 +571,197 Indo Rama Synthetic, Class B.................... 570 100,000 Infosys Technology Ltd.......................... 1,160 155,100 ITC Agrotech, Class B........................... 280 +113,500 ITC Ltd......................................... 808 225 ITW Signode Ltd. (New).......................... 1 608,700 Jai Parabolic Springs Ltd....................... 476 5,292 JCT Ltd. GDR.................................... 35 +353,231 JK Synthetics Ltd............................... 246 78,500 Kiloskar Oil Engine, Class B.................... 279 550 Lakme Ltd., Class B............................. 4 150,000 Lakshmi Precision............................... 252 +145,000 Laser Lamp...................................... 73 748,800 Mahanagar Telephone Nigam....................... 3,130 96,484 Mahavir Spinning Mills Ltd...................... 307 +425,700 Maikaal Fibres.................................. 127 159,700 Mardia Chemicals Ltd............................ 238 10,000 Modi Xerox Ltd.................................. 50 @+8,275,200 Morgan Stanley Growth Fund...................... 1,412 @+19,389 Morgan Stanley India Investment Fund, Inc....... 177 73,631 MRF Ltd., Class B............................... 3,767 350 Mukand Iron & Steel Works, Class A.............. 2 6 Nahar Spinning Mills Ltd., Class B.............. -- 25,000 OM Sindoori Hotels Ltd.......................... 36 250,000 Patheja Forgings & Auto Parts, Class B.......... 540 +318,935 PCS Data Products Ltd., Class B................. 127 240,700 Philips India Ltd............................... 1,054 +135,500 Polar Latex..................................... 42 +232,700 Priyadarshini Cement Ltd., Class B.............. 142 8,200 Pudumjee........................................ 34 350,000 PVD Plastic Mouldings Inds. Ltd., Class B....... 181 850 Ranbaxy Laboratories Ltd., Class B.............. 16 152,250 Raymond Ltd..................................... 1,161 +200 Raymond Synthetics Ltd., Class B................ -- +3,770 Reliance Industries Ltd. GDS.................... 54 VALUE SHARES (000) - ------------------------------------------------------------ #73,581 Reliance Industries Ltd. GDS (New).............. $ 1,030 +25,350 Rossel Tea Ltd.................................. 144 +100,000 Saurashtra Cement & Chemicals, Class B.......... 176 29,500 SCICI Ltd....................................... 31 +50,000 Secals Ltd...................................... 84 +104,700 Sharp Industries Ltd............................ 41 397,500 Shipping Corp. of India......................... 350 25,000 Shree Vindhya Paper Mills....................... 57 125,636 Shree Vindhya Paper Mills (New)................. 288 125 S.K.F. Bearings Ltd............................. 9 +45,000 Sri Venkatesa Mills Ltd......................... 141 1,648,550 State Bank of India............................. 9,296 +400 Sundaram Finance, Class B....................... 2 725,950 Super Forgings & Steels......................... 537 272,280 Tata Engineering & Locomotive, Class A.......... 2,937 28,350 Tata Hydro Electric Power....................... 73 +2,180 Tata Power Co. Ltd.............................. 7 +320,000 Titagarh Steels Ltd............................. 312 600 T.P.I. India Ltd................................ 1 838 United Phosphorus Ltd. GDR...................... 17 165,500 Uniworth International Ltd., Class B............ 89 +1,566,000 Uttam Steels Ltd., Class A...................... 802 404 Videocon International Ltd., Class A............ 1 +149,100 Videsh Sanchar Nigam Ltd........................ 3,519 710,040 VXL Ltd......................................... 655 11,000 Vysya Bank...................................... 138 +5,000 Wartsila Diesel Ltd............................. 28 -------- 76,256 -------- INDONESIA (6.3%) **2,553,550 Bank Bali (Foreign)............................. 5,026 **1,703,500 Barito Pacific Timber (Foreign)................. 1,248 **+2,244,000 Bimantara Citra (Foreign)....................... 1,865 **3,359,598 Charoen Pokphand (Foreign)...................... 6,832 **168,000 Duta Pertiwi (Foreign).......................... 171 **425,500 Hanajaya Mandala Sampoerna (Foreign)............ 4,429 **1,147,000 Indocement Tunggal (Foreign).................... 3,850 **1,274,500 Indosat (Foreign)............................... 4,626 **808,100 Jembo Cable Co. (Foreign)....................... 521 **1,358,200 Kalbe Farma (Foreign)........................... 4,604 **481,000 Keramika Indonesia Assosiasi (Foreign).......... 231 **2,096,500 Polysindo Eka Perkasa (Foreign)................. 1,192 **1,058,500 Semen Gresik (Foreign).......................... 2,963 **4,336,200 Sona Topas Tourism (Foreign).................... 1,233 **1,220,000 Sorini Corp. (Foreign).......................... 5,923 **150,000 Suba Indah (Foreign)............................ 100 **+1,607,000 Telekomunikasi Indonesia (Foreign).............. 2,108 **1,467,600 Tempo Scan Pacific (Foreign).................... 3,979 **2,145,500 United Tractors (Foreign)....................... 4,035 -------- 54,936 --------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Emerging Markets Portfolio 21 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EMERGING MARKETS PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ ISRAEL (3.9%) 72,200 ELBIT........................................... $ 3,851 2,860 First International Bank of Israel, Class 1..... 335 25,122 First International Bank of Israel, Class 5..... 3,032 524,467 Israel Land Development......................... 1,517 80,819 Koor Industries................................. 8,023 543,520 Osem Investment................................. 3,250 +137,336 PEC Israel Economic Corp........................ 3,313 54,397 Scitex Ltd...................................... 741 164,365 Super Sol Ltd., Class B......................... 3,455 145,000 Teva Pharmaceutical Industries Ltd. ADR......... 6,724 -------- 34,241 -------- KOREA (2.2%) **7,890 Pohang Iron & Steel (Foreign)................... 557 71,480 Samsung Electronics (Foreign)................... 12,992 +814 Samsung Electronics (Foreign)(New).............. 148 +5,099 Samsung Electronics (New)....................... 920 **78,000 Shinhan Bank (Foreign).......................... 1,712 **30,436 Shinhan Bank RFD (Foreign)...................... 668 63,000 Yukong Ltd. (Foreign)........................... 2,176 -------- 19,173 -------- MALAYSIA (0.1%) 735,000 Bandar Raya Developments Bhd.................... 1,048 -------- MEXICO (8.7%) 155,060 Alfa S.A. de C.V., Class A...................... 1,993 513,912 Apasco S.A., Class A............................ 2,111 4,877,920 Banacci, Class B................................ 8,190 763,554 Banacci, Class L................................ 1,137 +864,977 Cemex S.A. de C.V. CPO ADR...................... 5,703 #2,582,660 Cemex S.A., Class A............................. 8,525 +1,752,000 Cifra S.A. de C.V., Class C..................... 1,776 91,810 Coca-Cola Femsa S.A. ADR........................ 1,699 326,469 Empresas ICA S.A. ADR........................... 3,346 4,533,550 FEMSA, Class B.................................. 10,216 #+152,640 Grupo Carso S.A. ADR............................ 1,628 #1,476,655 Grupo Financiero Bancomer ADR................... 8,583 +7,541,700 Grupo Financiero Bancomer, Class B.............. 2,107 +257,551 Grupo Financiero Bancomer, Class L.............. 67 181,955 Grupo Televisa S.A. ADR......................... 4,094 #+107,663 Hylsamex S.A. ADR............................... 2,315 177,488 Panamerican Beverages, Inc., Class A............ 5,680 225,390 Telefonos de Mexico S.A. ADR, Class L........... 7,184 -------- 76,354 -------- MOROCCO (1.7%) 20,000 BMCE............................................ 921 55,123 Groupe Ona...................................... 2,109 +188,100 SNI Maroc, series `V'........................... 9,218 58,221 Wafabank........................................ 2,509 -------- 14,757 -------- VALUE SHARES (000) - ------------------------------------------------------------ PAKISTAN (2.6%) 33,480 Adamjee Insurance Co., Ltd...................... $ 101 +142,649 Cherat Cement Ltd............................... 184 +1,814 Crescent Investment Bank........................ 1 +6,459 Crescent Textile Mills Ltd...................... 4 +1,049,500 Dewan Salman Fibre.............................. 2,531 2,288,000 D.G. Khan Cement Ltd............................ 2,006 3,017,900 Fauji Fertilizer................................ 4,520 1,880,600 Karachi Electric Supply Corp.................... 1,457 +94,273 Muslim Commercial Bank.......................... 101 +1,256,519 Nishat Mills Ltd................................ 1,074 358,020 Pakistan State Oil Co........................... 2,773 +42,200 Pakistan Telecommunications..................... 3,793 +27,900 Pakistan Telecommunications GDS................. 2,427 +1,800,960 Sui Northern Gas................................ 1,566 +298,000 Zahur Textile Mills............................. 24 -------- 22,562 -------- PERU (0.0%) 35 Cementos Lima S.A............................... -- -------- PHILIPPINES (5.5%) 4,235,962 Ayala Land, Inc., Class B....................... 5,168 +8,112,000 C&P Homes, Inc.................................. 5,953 +5,977,000 DMI Holdings, Inc............................... 2,142 16,698,330 JG Summit Holding, Class B...................... 4,584 818,588 Manila Electric Co., Class B.................... 6,679 12,893,816 Petron Corp..................................... 6,636 104,055 Philippine Long Distance Telephone Co., Class B............................................. 5,653 2,031,420 San Miguel Corp., Class B....................... 6,931 +15,618,168 SM Prime Holdings, Inc., Class B................ 4,466 -------- 48,212 -------- POLAND (0.8%) 20,000 Bre Bank........................................ 304 45,000 Debica.......................................... 679 ***+33,400 Eastbridge...................................... 2,245 137,620 Elektrim........................................ 466 +2,085,038 International UNP Holdings...................... 703 +373,740 Mostostal Exports, S.A.......................... 735 11,125 Wedel S.A....................................... 368 15,735 Zywiec.......................................... 1,085 -------- 6,585 -------- PORTUGAL (0.2%) 120,000 Filmes Lusomundo................................ 1,283 @+9,945 Portuguese Investment Fund Ltd. (The)........... 621 -------- 1,904 --------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Emerging Markets Portfolio 22 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EMERGING MARKETS PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ RUSSIA (4.0%) ***+462,150 Alliance Cellulose Ltd.......................... $ 9,295 ***+54,035 Alliance Cellulose Ltd., Class B................ 1,500 +130,000 Edinaya Enegertics.............................. 4 +503,500 Irkutskenergo................................... 2,492 +252,000 LUKoil Holding.................................. 1,153 +7,850,000 Moscow Energy................................... 2,080 +605,000 Rostelecom...................................... 2,829 ***+317,851 Russian Telecom Development Corp................ 3,179 ***+400,000 SFMT, Inc....................................... 4,000 ***+990 Storyfirst Communications, Inc., Class C........ 660 ***+2,640 Storyfirst Communications, Inc., Class D........ 1,980 ***+3,250 Storyfirst Communications, Inc., Class E........ 3,250 +88,909,000 Unified Energy System........................... 2,703 -------- 35,125 -------- SOUTH AFRICA (2.3%) 44,830 Anglo American Industrial Corp., Ltd............ 2,038 700,000 Bidvest......................................... 4,705 860,000 Gencor.......................................... 2,996 @224,490 Morgan Stanley Africa Investment Fund, Inc...... 2,890 972,084 Sasol Ltd....................................... 7,960 -------- 20,589 -------- TAIWAN (4.5%) +1,873,000 Acer, Inc....................................... 4,324 +909,000 Advanced Semiconductor Engineering, Inc.,....... 2,199 3,492,000 China Steel Corp................................ 2,790 100,000 Far East Textiles............................... 95 +1,117,986 Mosel Vitelic Ltd............................... 3,319 +2,027,999 Shinkong Synthetic Fiber........................ 1,754 +3,812,800 Taiwan Semiconductor Manufacturing Co........... 11,947 3,905,836 United Micro Electronics Corp., Ltd............. 9,805 +336,000 Walsin Lihwa Corp. GDR.......................... 3,368 -------- 39,601 -------- THAILAND (5.0%) 298,550 Advanced Information Services Co., Ltd. (Foreign)..................................... 5,286 785,400 Bangkok Bank Ltd. (Foreign)..................... 9,541 2,398,300 Finance One Co., Ltd. (Foreign)................. 16,661 144,600 Shinawatra Computer Co., Ltd. (Foreign)......... 3,559 257,400 Thai Farmers Bank Ltd........................... 1,757 727,100 Thai Farmers Bank Ltd. (Foreign)................ 7,332 -------- 44,136 -------- VALUE SHARES (000) - ------------------------------------------------------------ TURKEY (5.4%) 6,065,172 Aksa............................................ $ 1,867 2,868,000 Bagfas.......................................... 883 11,278,000 Borusan......................................... 2,269 +13,272,000 Bossa........................................... 948 +4,000,000 Demirbank TAS................................... 243 30,329,180 Ege Biracilik................................... 10,458 4,600,000 Ege Seramik..................................... 1,095 4,226,000 Erciyas Biracilik............................... 1,978 38,125,000 Eregli Demir.................................... 3,130 3,479,000 Guney Biracilik Ve Malt Sanayii................. 509 2,998,800 Migros.......................................... 2,290 85,761,000 Sabah........................................... 1,690 14,346,000 Sarkuysan....................................... 2,120 8,687,000 Tat Konserve Sanayli............................ 5,492 40,206,000 Tofas Turk Otomobil Fabrikasi................... 3,895 498,288 Tofas Turk Otomobil Fabrikasi GDR, Class E...... 249 28,340,000 Trakya Cam Sanayii.............................. 2,885 1,354,075 Turkas Petroculuk A.S........................... 239 #11,439,000 Turkiye Garanti Bankasi A.S..................... 958 220,482 Turkiye Garanti Bankasi ADR..................... 1,846 46,537,600 Yapi Ve Kredi Bankasi A.S....................... 1,911 -------- 46,955 -------- UNITED KINGDOM (0.3%) 915,713 Lonrho plc...................................... 2,502 -------- ZIMBABWE (0.3%) #+1,980,000 Trans Zambezi Industries Ltd.................... 2,871 +35,281 Trans Zambezi Industries Ltd., Class S.......... 51 -------- 2,922 -------- TOTAL COMMON STOCKS (Cost $790,607).............................. 737,077 -------- PREFERRED STOCKS (10.8%) BRAZIL (NON-VOTING STOCKS) (10.7%) **1,754,000,000 Banco Bradesco S.A.............................. 15,339 +467,646,000 Banco do Brasil................................. 5,293 **295,998,880 Banco Nacional S.A.............................. 609 40,268,030 Brahma.......................................... 16,574 620,000 Brasmotor S.A................................... 123 73,517,103 Cia Energetica de Minas Gerais.................. 1,626 16,959,000 Cia Paulista de Forca E Luz..................... 454 84,212,850 Eletrobras, Class B............................. 22,788 32,803,800 Itaubanco....................................... 9,147 37,930,101 Lojas Americanas S.A............................ 890 105,758 Lojas Americanas S.A. (Bonus Shares Plan)....... 15 44,869,333 Petrobras....................................... 3,831 12,500 Sadia Concordia................................. 9 175,858,000 Telebras........................................ 8,468 32,080,815 Telecomunicacoes de Sao Paulo................... 4,720 526,000,000 Usiminas........................................ 428 21,118,000 Vale Do Rio Doce................................ 3,477 -------- 93,791 --------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Emerging Markets Portfolio 23 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EMERGING MARKETS PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ GREECE (0.1%) 121,458 Aegek........................................... $ 666 -------- INDIA (0.0%) 2,700 Fabworth (India) Ltd............................ 2 -------- PORTUGAL (0.0%) 35,340 Filmes Lusomundo................................ 330 -------- TOTAL PREFERRED STOCKS (Cost $88,639)............................ 94,789 -------- NO. OF RIGHTS - --------------- RIGHTS (0.1%) BRAZIL (0.0%) **43,545 Banco Bradesco.................................. 113 -------- INDIA (0.1%) **+9,610 Baroda Rayon Corp............................... -- +6,000 Federal Bank Ltd................................ 5 +674 Flex Industries Ltd............................. -- **+155,100 ITC Agrotech.................................... -- **+2 Nahar Spinning.................................. -- +133,300 SCICI Ltd. (Bonus).............................. 139 +55,000 Vysya Bank...................................... 618 -------- 762 -------- PAKISTAN (0.0%) +686,400 D.G. Khan Cement................................ 241 +20,625 Dewan Salman.................................... -- -------- 241 -------- TOTAL RIGHTS (Cost $579)......................................... 1,116 -------- NO. OF WARRANTS - --------------- WARRANTS (1.0%) INDIA (0.1%) **+33,571 Bharat Forge Co., Ltd. (New).................... 130 **+27,383 Flex Industries Ltd., expiring 11/23/97......... 103 **+44,702 Garware Plastics & Polyesters, expiring 4/04/98....................................... 346 -------- 579 -------- INDONESIA (0.0%) +274,600 Bank Bali, expiring 8/29/00..................... 120 -------- POLAND (0.0%) **+1,014,000 International UNP Holdings...................... -- -------- RUSSIA (0.9%) +9,640 LUKoil Holding.................................. 7,712 -------- THAILAND (0.0%) **+10 Finance One Co., Ltd., expiring 3/15/99......... -- -------- TOTAL WARRANTS (Cost $10,050).................................... 8,411 -------- FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------------ CONVERTIBLE DEBENTURES (0.6%) COLOMBIA (0.5%) U.S.$ #5,615 Banco de Colombia 5.20%, 2/01/99................ $ 4,267 -------- INDIA (0.1%) INR **33,574 DCM Shriram Industries Ltd. 15.00%, 3/02/02..... 448 1,650 Indian Seamless Steel & Alloys 10.00%, 7/13/96....................................... 27 130 Tata Iron & Steel, 2.25%, 4/01/99............... 116 -------- 591 -------- TOTAL CONVERTIBLE DEBENTURES (Cost $6,122)....................... 4,858 -------- NON-CONVERTIBLE DEBENTURES (0.5%) INDIA (0.5%) 3,357 Bharat Forge Co., Ltd., 14.50%, 4/18/02......... 43 34,055 DCM Shriram Industries Ltd., 16.50%, 3/02/02.... 599 4,470 Garware Plastics & Polyester, 16.00%, 4/04/98... 127 1,467 Mahavir Spinning Mills Ltd., Series A, 15.40%, 3/22/00....................................... 40 50,000 Raymond Ltd., 16.00%, 1/05/02................... 1,422 70,000 Saurashtra Cement & Chemicals Ltd., 18.00%, 11/27/98...................................... 2,239 -------- TOTAL NON-CONVERTIBLE DEBENTURES (Cost $5,071)................... 4,470 -------- LOAN AGREEMENTS (1.2%) POLAND (0.0%) U.S.$ #54 Republic of Poland Interest Arrears PDI Bonds, 3.75%, 10/27/14............................... 35 -------- RUSSIA (1.2%) CHF ++11,910 Bank for Foreign Economic Affairs (Floating Rate)......................................... 3,485 U.S.$ ++21,003 Bank for Foreign Economic Affairs (Floating Rate)......................................... 7,167 -------- 10,652 -------- TOTAL LOAN AGREEMENTS (Cost $9,781).............................. 10,687 -------- TOTAL FOREIGN SECURITIES (98.3%) (Cost $910,849)................. 861,408 --------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Emerging Markets Portfolio 24 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EMERGING MARKETS PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
AMOUNT VALUE (000) (000) - ------------------------------------------------------------ FOREIGN CURRENCY (1.1%) ARP 213 Argentine Peso.................................... $ 213 BRC 1,000 Brazilian Real.................................... 1,029 COP 512,134 Colombian Peso.................................... 517 HKD 2,753 Hong Kong Dollar.................................. 356 HUF 59,707 Hungarian Forint.................................. 437 INR 186,311 Indian Rupee...................................... 5,298 MXP 452 Mexican Peso...................................... 59 MAD 1,419 Morrocan Dirham................................... 168 PKR 12,099 Pakistani Rupee................................... 354 PSS 2,126 Peruvian New Sol.................................. 920 PLZ 224 Polish Zloty...................................... 91 LKR 8,042 Sri Lankan Rupee.................................. 150 TWD 5,118 Taiwan Dollar..................................... 187 THB 3,262 Thai Baht......................................... 129 -------- TOTAL FOREIGN CURRENCY (Cost $10,194)............................ 9,908 -------- TOTAL INVESTMENTS (99.4%) (Cost $921,043)........................ 871,316 --------
OTHER ASSETS (2.9%) Receivable for Investments Sold................. $ 21,080 Dividends Receivable............................ 1,908 Receivable for Portfolio Shares Sold............ 1,139 Interest Receivable............................. 403 Foreign Withholding Tax Reclaim Receivable...... 112 Other........................................... 367 25,009 ------------- LIABILITIES (-2.3%) Payable for Investments Purchased............... (12,102) Investment Advisory Fees Payable................ (3,005) Payable for Portfolio Shares Redeemed........... (2,038) Bank Overdraft.................................. (1,487) Custodian Fees Payable.......................... (400) Deferred India Taxes............................ (308) Administrative Fees Payable..................... (119) Payable for India Stamp Duty Tax................ (101) Sub-Administrative Fees Payable................. (34) Net Unrealized Loss on Forward Foreign Currency Exchange Contracts............................ (10) Payable for India Taxes......................... (1) Other Liabilities............................... (129) (19,734) ------------- -------- NET ASSETS (100%)................................................ $876,591 -------- -------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 66,716,021 outstanding $.001 par value shares (authorized 500,000,000 shares)................................ $13.14 -------- --------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: Under the terms of forward foreign currency exchange contracts open at December 31, 1995, the Portfolio is obligated to deliver foreign currency in exchange for U.S. dollars as indicated below:
IN NET CURRENCY EXCHANGE UNREALIZED TO DELIVER VALUE SETTLEMENT FOR VALUE LOSS (000) (000) DATE (000) (000) (000) - ---------- --------- ----------- ----------- --------- ------------- HKD 2,722 $ 352 1/02/96 U.S.$352 $ 352 $ -- PSS 2,000 866 1/02/96 U.S.$856 856 (10) --------- --------- --- $ 1,218 $ 1,208 $ (10) --------- --------- --- --------- --------- ---
- ------------------------------------------------ + -- Non-income producing security ++ -- Non-income producing security -- in default * -- Restricted as to public resale. Total value of restricted securities at December 31, 1995, was $3,510 or 0.4% of net assets. (Total cost $3,782). ** -- Securities (totaling U.S.$74,961 or 8.6% of net assets at December 31, 1995) valued at fair value -- See Note A-1 *** -- Security is valued at cost -- See Note A-1 # -- 144A Securities -- Certain conditions for public sale may exist @ -- The fund is advised by an affiliate ADR -- American Depositary Receipt ADS -- American Depositary Shares CPO -- Certificate of Participation GDR -- Global Depositary Receipt GDS -- Global Depositary Shares RFD -- Ranked For Dividend CHF -- Swiss Franc
- ---------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
VALUE PERCENT OF INDUSTRY (000) NET ASSETS - ---------------------------------------------------------------- Capital Equipment..................... $ 86,196 9.8% Consumer Goods........................ 125,580 14.3 Energy................................ 116,660 13.3 Finance............................... 207,434 23.7 Loan Agreements....................... 10,687 1.2 Materials............................. 138,556 15.9 Multi-Industry........................ 76,846 8.8 Services.............................. 99,449 11.3 --------- ----- $ 861,408 98.3% --------- ----- --------- -----
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Emerging Markets Portfolio 25 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EUROPEAN EQUITY PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) ------------------------------------------------------------ COMMON STOCKS (94.8%) BELGIUM (2.9%) +9,000 Arbed S.A......................................... $ 1,019 11,000 Delhaize Freres et Cie, 'Le Lion' S.A............. 456 12,000 G.I.B. Holdings Ltd............................... 527 55 G.I.B. Holdings Ltd. VVPR (New)................... 2 -------- 2,004 -------- DENMARK (1.5%) 21,300 Unidanmark A/S, Class A (Registered).............. 1,054 -------- FINLAND (3.1%) 55,500 Amer-Yhtymae Oy, Class A.......................... 866 25,000 Huhtamaki Oy, Series 1............................ 604 +13,533 Merita, Ltd., Class A............................. 34 +10,500 Nokia AB Oy, Class A.............................. 413 20,000 Pohjola Insurance Co., Ltd., Class B.............. 257 -------- 2,174 -------- FRANCE (13.9%) 23,500 Banque Nationale de Paris......................... 1,060 1,700 Bongrain S.A...................................... 958 7,000 Cie de Saint Gobain............................... 775 +10,000 Credit Lyonnaise CDI.............................. 480 15,000 Elf Aquitaine..................................... 1,105 8,000 Eridania Beghin-Say S.A........................... 1,372 +21,405 Legris Industries S.A............................. 697 4,100 Labinal S.A....................................... 455 7,000 Peugeot S.A....................................... 923 45,452 Thomson CSF....................................... 1,013 12,000 Total S.A., Class B............................... 810 -------- 9,648 -------- GERMANY (11.9%) 6,000 BASF AG........................................... 1,352 5,000 Bayer AG.......................................... 1,328 +16,000 Bremer Vulkan Verbund AG.......................... 446 3,500 Commerzbank AG.................................... 831 2,200 Karstadt AG....................................... 902 2,500 Mannesmann AG..................................... 796 +3,700 Varta AG.......................................... 710 22,000 Veba AG........................................... 942 3,000 Volkswagen AG..................................... 1,006 -------- 8,313 -------- ITALY (6.7%) +518,000 Editoriale L'Expresso S.p.A....................... 897 +520,000 Impregilo S.p.A................................... 439 540,000 Olivetti S.p.A.................................... 433 200,700 Sogefi S.p.A...................................... 425 500,000 Stet Di Risp (NCS)................................ 1,020 205,500 Telecom Italia S.p.A.............................. 320 410,000 Telecom Italia S.p.A. Di Risp (NCS)............... 501 +242,200 Unicem Di Risp (NCS).............................. 614 -------- 4,649 -------- NETHERLANDS (11.7%) 29,674 ABN Amro Holdings N.V............................. 1,352 VALUE SHARES (000) ------------------------------------------------------------ 9,500 Akzo Nobel N.V.................................... $ 1,099 950 DSM N.V........................................... 78 7,599 Hollandsche Beton Groep N.V....................... 1,160 13,084 Internationale Nederlanden Groep N.V.............. 874 13,000 Koninklijke Bijenkorf Beheer N.V.................. 859 30,468 Koninklijke PTT Nederland N.V..................... 1,107 25,000 Koninklijke Van Ommeren N.V....................... 779 23,500 Philips Electronics N.V........................... 849 -------- 8,157 -------- NORWAY (1.9%) 200,000 Den Norske Bank A/S, Class A Free................. 524 5,113 Hafslund Nycomed, Class B......................... 130 53,000 Saga Petroleum A/S, Class B....................... 662 -------- 1,316 -------- PORTUGAL (0.2%) +@1,905 Portuguese Investment Fund........................ 119 -------- SPAIN (8.4%) +100,000 Asturiana del Zinc S.A............................ 793 17,000 Banco de Santander S.A............................ 854 11,518 Bodegas y Bebidas S.A............................. 294 +107,870 Grupo Duro Felguera S.A........................... 381 110,000 Iberdrola S.A..................................... 1,007 106,000 Sevillana de Electricidad S.A..................... 823 125,000 Telefonica Nacional de Espana S.A................. 1,731 -------- 5,883 -------- SWEDEN (3.0%) 1,700 Electrolux AB, Series B........................... 70 +50,000 Nordbanken AS..................................... 866 59,000 S.K.F. AB, Class B................................ 1,128 -------- 2,064 -------- SWITZERLAND (15.1%) +800 Ascom Holdings AG (Bearer)........................ 815 460 Bobst AG (Bearer)................................. 718 700 Ciba Geigy AG (Bearer)............................ 613 800 Ciba-Geigy AG (Registered)........................ 704 2,200 Forbo Holding AG (Registered)..................... 940 1,030 Hero Lenzburg AG (Bearer)......................... 509 1,400 Magazine Globus (Participating Certificates)...... 801 1,100 Nestle S.A. (Registered).......................... 1,217 +16,100 Oerlikon-Buehrle Holding AG (Registered).......... 1,312 1,000 Schweizerische Industrie-Gesellschaft Holdings (Registered).................................... 1,014 1,800 Sulzer AG (Participating Certificates)............ 960 +1,200 SwissAir (Registered)............................. 874 -------- 10,477 -------- UNITED KINGDOM (14.5%) +145,500 Asprey plc........................................ 565 140,000 Associated British Foods plc...................... 802 20,000 Bass plc.......................................... 223 200,000 BET plc........................................... 394
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- European Equity Portfolio 28 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EUROPEAN EQUITY PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) ------------------------------------------------------------ UNITED KINGDOM (CONT.) 70,000 BSM Group plc..................................... $ 168 32,800 Calor Group plc................................... 130 350,000 Christian Salvesen plc............................ 1,437 38,900 Courtaulds Textiles plc........................... 215 188,491 John Mowlem & Co. plc............................. 174 114,000 Kwik Save Group plc............................... 892 24,895 McAlpine (Alfred) plc............................. 57 101,075 Reckitt & Colman plc.............................. 1,119 298,566 Rolls-Royce plc................................... 876 202,527 Royal Insurance Holdings plc...................... 1,201 46,000 Sketchley plc..................................... 90 50,000 Tate & Lyle plc................................... 366 30,000 Unilever plc...................................... 616 300,000 WPP Group plc..................................... 764 -------- 10,089 -------- TOTAL COMMON STOCKS (Cost $63,242)............................ 65,947 -------- PREFERRED STOCKS (3.0%) GERMANY (3.0%) 2,500 RWE AG............................................ 698 3,000 Spar Handels AG................................... 644 3,200 Volkswagen AG..................................... 776 -------- TOTAL PREFERRED STOCKS (Cost $2,010).......................... 2,118 -------- TOTAL FOREIGN SECURITIES (97.8%) (Cost $65,252)............... 68,065 -------- FACE AMOUNT (000) - ---------- SHORT-TERM INVESTMENT (0.5%) REPURCHASE AGREEMENT (0.5%) $ 336 The Chase Manhattan Bank N.A., 5.35%, dated 12/29/95, due 1/02/96, to be repurchased at $336, collateralized by $250 United States Treasury Bonds 8.875%, due 8/15/17, valued at $342 (Cost $336)................................ 336 -------- FOREIGN CURRENCY (3.2%) GBP 227 British Pound..................................... 352 DEM 1,788 Deutsche Mark..................................... 1,248 FIM 949 Finnish Markka.................................... 218 ITL 751 Italian Lira...................................... -- NLG 121 Netherlands Guilder............................... 76 ESP 2 Spanish Peseta.................................... -- SEK 2,077 Swedish Krona..................................... 313 -------- TOTAL FOREIGN CURRENCY (Cost $2,199).......................... 2,207 -------- TOTAL INVESTMENTS (101.5%) (Cost $67,787)..................... 70,608 --------
AMOUNT (000) ----- OTHER ASSETS (0.4%) Receivable for Investments Sold................. $ 140 Dividends Receivable............................ 79 AMOUNT (000) ------------------------------------------------------------ Foreign Withholding Tax Reclaim Receivable...... $ 62 Net Unrealized Gain on Forward Foreign Currency Exchange Contracts............................. 20 Receivable for Portfolio Shares Sold............ 10 Other........................................... 2 $ 313 ----- LIABILITIES (-1.9%) Payable for Investments Purchased............... (710) Payable for Portfolio Shares Redeemed........... (457) Investment Advisory Fees Payable................ (112) Custodian Fees Payable.......................... (12) Administrative Fees Payable..................... (11) Other Liabilities............................... (36) (1,338) ----- -------- NET ASSETS (100%)............................................. $69,583 -------- -------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 4,999,857 outstanding $.001 par value shares (authorized 500,000,000 shares)............................. $13.92 -------- -------- ------------------------------------------------------------------------ FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: Under the terms of forward foreign currency exchange contracts open at December 31, 1995, the Portfolio is obligated to deliver foreign currency in exchange for U.S. dollars or foreign currency as indicated below:
IN NET CURRENCY EXCHANGE UNREALIZED TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS) (000) (000) DATE (000) (000) (000) - ---------- --------- ----------- ---------- --------- ------------- NLG 121 $ 75 1/02/96 U.S.$ 75 $ 75 $ -- ESP 9,556 79 1/03/96 DEM 113 79 -- CHF 2,750 2,422 6/10/96 U.S.$2,420 2,420 (2) DEM 3,000 2,107 6/10/96 U.S.$2,152 2,152 45 FRF 7,100 1,451 6/10/96 U.S.$1,422 1,422 (29) DEM 400 282 8/09/96 U.S.$ 288 288 6 --------- --------- --- $ 6,416 $ 6,436 $ 20 --------- --------- --- --------- --------- ---
- ------------------------------------------------------------ + -- Non-income producing security @ -- The fund is advised by an affiliate. CDI -- Certificate of Investment NCS -- Non Convertible Shares CHF -- Swiss Franc FRF -- French Franc
- ------------------------------------------------------------ SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED) VALUE PERCENT INDUSTRY (000) OF NET ASSETS - ----------------------------------------------------------------- Capital Equipment................... $ 11,080 15.9% Consumer Goods...................... 14,873 21.4 Energy.............................. 5,170 7.4 Finance............................. 9,945 14.3 Materials........................... 11,835 17.0 Multi-Industry...................... 2,559 3.7 Services............................ 12,603 18.1 --------- --- $ 68,065 97.8% --------- --- --------- ---
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- European Equity Portfolio 29 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE GLOBAL EQUITY PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (81.7%) AUSTRALIA (1.2%) 50,000 Brambles Industries Ltd........................... $ 557 120,000 Westpac Banking Corp.............................. 532 -------- 1,089 -------- CANADA (0.4%) 22,900 Hudson's Bay Co................................... 329 -------- FRANCE (5.0%) 10,300 Banque Nationale de Paris......................... 465 1,870 Bongrain S.A...................................... 1,054 +12,000 Credit Lyonnaise CDI.............................. 576 19,266 Elf Aquitaine..................................... 1,419 4,900 Labinal S.A....................................... 543 11,965 Valeo S.A......................................... 554 -------- 4,611 -------- GERMANY (6.6%) 5,200 BASF AG........................................... 1,171 3,822 Bayer AG.......................................... 1,015 3,600 Karstadt AG....................................... 1,476 3,000 Mannesmann AG..................................... 955 2,764 Sinn AG........................................... 520 +2,225 Varta AG.......................................... 427 10,100 Veba AG........................................... 433 260 Volkswagen AG..................................... 87 -------- 6,084 -------- IRELAND (2.9%) 757,742 Anglo Irish Bank Corp. plc........................ 728 73,900 Arnotts plc....................................... 385 470,000 Avonmore Foods plc, Class A....................... 956 229,312 Green Property plc................................ 617 -------- 2,686 -------- ITALY (2.0%) 500,000 Stet Di Risp (NCS)................................ 1,020 700,000 Telecom Italia S.p.A. Di Risp (NCS)............... 856 -------- 1,876 -------- JAPAN (9.7%) 160 East Japan Railway Co............................. 778 65,000 Fuji Photo Film Ltd............................... 1,876 24,000 Hitachi Ltd....................................... 242 110,000 Kao Corp.......................................... 1,364 155,000 Nichido Fire & Marine Insurance Co................ 1,246 18,000 Sony Corp......................................... 1,079 100,000 Sumitomo Rubber Industries........................ 835 5,000 TDK Corp.......................................... 255 40,000 Toyo Seikan Kaisha Ltd............................ 1,197 -------- 8,872 -------- NETHERLANDS (6.5%) 39,606 ABN Amro Holdings N.V............................. 1,804 2,101 Hollandsche Beton Groep N.V....................... 321 23,159 Internationale Nederlanden Groep N.V.............. 1,547 40,000 Koninklijke Van Ommeren N.V....................... 1,246 VALUE SHARES (000) - ------------------------------------------------------------ 15,160 Nedlloyd Groep N.V................................ $ 344 20,000 Philips Electronics N.V........................... 723 -------- 5,985 -------- SINGAPORE (0.7%) 220,000 Jardine Strategic Holdings, Inc................... 673 -------- SPAIN (2.6%) 89,500 Iberdrola S.A..................................... 819 112,300 Telefonica de Espana S.A.......................... 1,555 -------- 2,374 -------- SWITZERLAND (6.2%) +500 Ascom Holding AG (Bearer)......................... 509 800 Bobst AG (Bearer)................................. 1,248 1,800 Ciba-Geigy AG (Registered)........................ 1,584 1,400 Forbo Holding AG (Registered)..................... 599 1,400 Magazine Globus (Participating Certificates)...... 801 900 Schweizerische Industrie-Gesellschaft Holdings (Registered).................................... 913 -------- 5,654 -------- UNITED KINGDOM (5.8%) 28,500 Calor Group plc................................... 113 298,700 Christian Salvesen plc............................ 1,227 40,300 Forte plc......................................... 207 100,000 John Mowlem & Co. plc............................. 92 150,000 Kwik Save Group plc............................... 1,174 180,000 Matthews (Bernard) plc............................ 265 +**653,333 Pentos plc........................................ -- 102,115 Pilkington plc.................................... 320 73,902 Rolls-Royce plc................................... 218 46,400 Unilever plc...................................... 953 279,000 WPP Group plc..................................... 710 -------- 5,279 -------- UNITED STATES (32.1%) +89,000 Addington Resources, Inc.......................... 1,302 18,000 Aluminum Company of America....................... 952 +15,400 AMR Corp.......................................... 1,143 32,100 Bank of New York Co., Inc......................... 1,565 +50,500 Beazer Homes USA, Inc............................. 1,042 +128,000 Cadiz Land Co., Inc............................... 736 +*22,000 Cadiz Land Co., Inc. (acquired 4/17/94, Cost $88)............................................ 127 108,000 Comsat Corp....................................... 2,012 +40,000 Cray Research, Inc................................ 990 +80,000 Data General Corp................................. 1,100 +99,500 Egghead, Inc...................................... 640 50,000 Enhance Financial Services Group, Inc............. 1,331 45,000 Finova Group, Inc................................. 2,170 16,000 Gap, Inc.......................................... 671 2,000 General Motors Corp............................... 106 +134,200 GenRad, Inc....................................... 1,292 16,000 Georgia Pacific Corp.............................. 1,098 2,600 Houghton Mifflin Co............................... 112 +31,000 Kaiser Ventures, Inc.............................. 403
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Global Equity Portfolio 32 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE GLOBAL EQUITY PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ UNITED STATES (CONT.) 24,300 Lukens, Inc....................................... $ 699 13,000 MBIA, Inc......................................... 975 61,400 MCI Communications Corp........................... 1,604 23,300 Mellon Bank Corp.................................. 1,252 +31,300 Nexthealth Inc.................................... 98 18,600 Philip Morris Cos., Inc........................... 1,683 12,000 Prime Retail, Inc................................. 143 25,000 Sun Co., Inc...................................... 684 13,100 Tecumseh Products Co., Class A.................... 678 27,000 UST Corp.......................................... 392 +70,000 Waban, Inc........................................ 1,313 +107,000 WorldCorp, Inc.................................... 1,070 -------- 29,383 -------- TOTAL COMMON STOCKS (Cost $66,115)........................... 74,895 -------- PREFERRED STOCKS (0.8%) GERMANY (0.8%) 3,000 Volkswagen AG (Cost $647)......................... 728 -------- CONVERTIBLE PREFERRED SECURITY (0.0%) SINGAPORE (0.0%) +21,000 Jardine Strategic Holdings, Inc., IDR, 7.50%, 5/07/97, (Cost $ 21)............................ 23 --------
NO. OF RIGHTS - ----------- RIGHTS (0.1%) UNITED KINGDOM (0.1%) +25,528 Pilkington plc (Cost $61)......................... 79 -------- TOTAL FOREIGN & U.S. SECURITIES (82.6%) (Cost $66,844)......... 75,725 --------
FACE AMOUNT (000) - ----------- SHORT-TERM INVESTMENT (2.3%) REPURCHASE AGREEMENT (2.3%) $ 2,145 The Chase Manhattan Bank, N.A., 5.35%, dated 12/29/95 due 1/02/96, to be repurchased at $2,147, collateralized by $1,975 United States Treasury Bonds, 7.50%, due 11/15/01, valued at $2,190 (Cost $2,145)............................ 2,145 -------- FOREIGN CURRENCY (0.6%) GBP 4 British Pound..................................... 6 JPY 1,014 Japanese Yen...................................... 10 NLG 812 Netherlands Guilder............................... 506 ESP 2 Spanish Peseta.................................... -- SEK 1 Swedish Krona..................................... -- -------- TOTAL FOREIGN CURRENCY (Cost $519)............................. 522 -------- TOTAL INVESTMENTS (85.5%) (Cost $69,508)....................... 78,392 --------
AMOUNT (000) - ------------------------------------------------------------ OTHER ASSETS (14.9%) Receivable for Portfolio Shares Sold............ $10,259 Receivable for Investments Sold................. 3,158 Dividends Receivable............................ 135 Foreign Withholding Tax Reclaim Receivable...... 55 Interest Receivable............................. 1 Other........................................... 6 $13,614 ----------- LIABILITIES (-0.4%) Investment Advisory Fees Payable................ (141) Unrealized Loss on Forward Foreign Currency Exchange Contracts............................ (131) Custodian Fees Payable.......................... (12) Administrative Fees Payable..................... (12) Payable for Investments Purchased............... (2) Other Liabilities............................... (33) (331 ) ----------- -------- NET ASSETS (100%).............................................. $91,675 -------- --------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 6,408,275 outstanding $.001 par value shares (authorized 500,000,000 shares)....................... $14.31 -------- --------
- ------------------------------------------------ FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: Under the terms of forward foreign currency exchange contracts open at December 31, 1995, the Portfolio is obligated to deliver foreign currency in exchange for U.S. dollars as indicated below:
IN CURRENCY TO EXCHANGE UNREALIZED DELIVER VALUE SETTLEMENT FOR VALUE LOSS (000) (000) DATE (000) (000) (000) - ----------- --------- ----------- ---------- --------- ----------------- JPY 9,167 $ 89 1/04/96 U.S.$ 89 $ 89 $ -- NLG 10,090 6,305 2/23/96 U.S.$6,174 6,174 (131) --------- --------- ----- $ 6,394 $ 6,263 $ (131) --------- --------- ----- --------- --------- -----
- ------------------------------------------------------------ + -- Non-income producing security * -- Restricted as to public resale. Total value of restricted securities at December 31, 1995 was $127 or 0.1% of net assets. (Total cost $88) ** -- Security is valued at fair value -- See Note A-1 CDI -- Certificate of Investment IDR -- International Depositary Receipt NCS -- Non Convertible Shares
- ------------------------------------------------------------ SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED) VALUE PERCENT OF INDUSTRY (000) NET ASSETS - ----------------------------------------------------------------- Capital Equipment...................... $ 16,075 17.5% Consumer Goods......................... 11,364 12.4 Energy................................. 5,725 6.2 Finance................................ 16,017 17.5 Materials.............................. 7,645 8.3 Multi-Industry......................... 4,867 5.4 Services............................... 14,032 15.3 --------- --- $ 75,725 82.6% --------- --- --------- ---
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Global Equity Portfolio 33 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE GOLD PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (92.1%) AUSTRALIA (35.8%) +55,000 Acacia Resources Ltd. ............................ $ 99 +50,000 Delta Gold N.L. .................................. 121 260,000 Gold Mines of Kalgoorlie Ltd. .................... 242 +200,000 Great Central Mines N.L. ......................... 386 90,000 Newcrest Mining Ltd. ............................. 379 135,000 Plutonic Resources, Ltd. ......................... 642 275,000 Poseidon Gold Ltd. ............................... 548 +225,000 Wiluna Mines Ltd. ................................ 232 -------- 2,649 -------- CANADA (24.5%) +169,600 Bema Gold Corp. .................................. 339 +91,100 Bolivar Goldfields Ltd. .......................... 50 +9,000 Bre-X Minerals, Ltd. ............................. 349 +97,000 Dakota Mining Corp. .............................. 146 20,000 Glamis Gold Ltd. ................................. 125 11,400 Placer Dome, Inc. ................................ 275 +100,000 Royal Oak Mines, Inc. ............................ 356 +25,000 TVX Gold, Inc. ................................... 176 -------- 1,816 -------- SOUTH AFRICA (4.4%) 6,000 Driefontein Consolidated Ltd., ADR................ 74 14,000 Free State Consolidated Gold Mines Ltd. ADR....... 101 4,200 Kloof Gold Mining Co., Ltd. ADR................... 40 17,500 Vaal Reefs Exploration & Mining Co., Ltd. ADR..... 112 -------- 327 -------- UNITED STATES (27.4%) 7,000 Freeport McMoRan Copper & Gold, Inc., Class B..... 197 +30,000 Gold Reserve Corp. ............................... 169 23,000 Homestake Mining Co. ............................. 359 6,000 Newmont Mining Corp. ............................. 272 +25,000 Pegasus Gold, Inc. ............................... 347 20,000 Santa Fe Pacific Gold Corp. ...................... 243 +23,000 Stillwater Mining Co. ............................ 442 -------- 2,029 -------- TOTAL COMMON STOCKS (Cost $7,147).............................. 6,821 --------
NO. OF WARRANTS - ----------- WARRANTS (0.0%) UNITED STATES (0.0%) +25,000 Gold Reserve Corp., expiring 3/96 (Cost $0)....... 4 -------- FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------------ CONVERTIBLE BONDS (2.9%) UNITED STATES (2.9%) $ #250 Canyon Resources 6.00%, 6/01/98 (Cost $276)....... $ 212 -------- TOTAL FOREIGN & U.S. SECURITIES (95.0%) (Cost $7,423).......... 7,037 -------- SHORT-TERM INVESTMENT (3.9%) REPURCHASE AGREEMENT (3.9%) 287 The Chase Manhattan Bank, N.A., 5.35%, dated 12/29/95, due 1/2/96, to be repurchased at $287, collateralized by $265 United States Treasury Bonds, 7.50%, due 11/15/01, valued at $294 (Cost $287)........................................... 287 -------- TOTAL INVESTMENTS (98.9%) (Cost $7,710)........................ 7,324 --------
OTHER ASSETS (1.7%) Cash............................................ $ 1 Receivable for Investments Sold................. 106 Receivable from Investment Adviser.............. 16 Dividends Receivable............................ 2 Interest Receivable............................. 1 126 ----- LIABILITIES (-0.6%) Investment Sub-Advisory Fees Payable............ (7) Custodian Fees Payable.......................... (5) Administrative Fees Payable..................... (2) Other Liabilities............................... (27) (41) ----- -------- NET ASSETS (100%).............................................. $ 7,409 -------- -------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 866,575 outstanding $.001 par value shares (authorized 500,000,000 shares).............................. $8.55 -------- --------
- ------------------------------------------------------------ FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: Under the terms of forward foreign currency exchange contracts open at December 31, 1995, the Portfolio is obligated to deliver foreign currency in exchange for U.S. dollars as indicated below:
CURRENCY TO IN EXCHANGE UNREALIZED DELIVER FOR GAIN (LOSS) (000) VALUE (000) SETTLEMENT DATE (000) VALUE (000) (000) - --------------- ----- ---------------- ----------- ----- ------------- AUD 56 $ 42 1/02/96 U.S.$42 $ 42 $ --
- ------------------------------------------------ + -- Non-income producing security # -- 144A Security -- Certain conditions for public sale may exist. ADR -- American Depositary Receipt
- ------------------------------------------------ SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
VALUE PERCENT OF INDUSTRY (000) NET ASSETS - ----------------------------------------------------------------- Gold Mines............................. $ 7,037 95.0% --------- ----- --------- -----
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Gold Portfolio 36 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE INTERNATIONAL EQUITY PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) ------------------------------------------------------------ COMMON STOCKS (88.4%) AUSTRALIA (4.6%) 3,535,000 Brambles Industries Ltd........................... $ 39,411 5,069,000 CSR Ltd........................................... 16,502 +402,000 McPherson's Ltd................................... 57 3,934,882 Westpac Banking Corp.............................. 17,430 ---------- 73,400 ---------- BELGIUM (1.1%) +52,500 Arbed S.A......................................... 5,940 254,000 G.I.B. Holdings Ltd............................... 11,151 2,156 G.I.B. Holdings Ltd. (New)........................ 92 ---------- 17,183 ---------- DENMARK (1.8%) 88,000 Novo-Nordisk A/S, Class B......................... 12,036 350,000 Unidanmark A/S, Class A (Registered).............. 17,321 ---------- 29,357 ---------- FINLAND (1.2%) 350,000 Huhtamaki Oy, Series 1............................ 8,449 +168,467 Merita, Ltd., Class A............................. 426 215,000 Nokia AB Oy, Series A............................. 8,453 125,200 Pohjola Insurance Co., Ltd., Class B.............. 1,612 ---------- 18,940 ---------- FRANCE (7.2%) 249,500 Banque Nationale de Paris......................... 11,255 13,495 Bongrain S.A...................................... 7,606 133,000 Cie de Saint Gobain............................... 14,720 17,300 Cie Financiere de Paribas S.A., Class A........... 949 +153,050 Credit Lyonnaise CDI.............................. 7,345 246,975 Elf Aquitaine..................................... 18,197 119,100 Peugeot S.A....................................... 15,711 420,300 Thomson CSF S.A................................... 9,364 230,644 Total S.A., Class B............................... 15,565 324,045 Valeo S.A......................................... 15,008 ---------- 115,720 ---------- GERMANY (10.8%) 110,000 BASF AG........................................... 24,779 105,000 Bayer AG.......................................... 27,885 50,000 Commerzbank AG.................................... 11,873 28,750 Hoechst AG........................................ 7,820 85,500 Karstadt AG....................................... 35,061 73,125 Mannesmann AG..................................... 23,280 +24,900 Varta AG.......................................... 4,775 +580,000 Veba AG........................................... 24,836 37,500 Volkswagen AG..................................... 12,579 ---------- 172,888 ---------- HONG KONG (0.6%) **90,600 China Light & Power Co., Ltd...................... 410 5,375,500 Hong Kong Land Holdings Ltd....................... 9,945 ---------- 10,355 ---------- VALUE SHARES (000) ------------------------------------------------------------ ITALY (2.2%) +3,120,000 Olivetti Di Risp.................................. $ 2,501 +2,560,500 Olivetti Di Risp (NCS)............................ 1,301 +1,297,317 SME Meridonale.................................... 2,651 9,000,000 Stet Di Risp (NCS)................................ 18,360 4,720,000 Telecom Italia S.p.A.............................. 7,340 2,655,000 Telecom Italia S.p.A. Di Risp (NCS)............... 3,246 ---------- 35,399 ---------- JAPAN (24.1%) 1,050,000 Aisin Seiki Co., Ltd.............................. 13,831 1,000,000 Canon, Inc........................................ 18,111 115,000 Chudenko Corp..................................... 3,943 1,345,000 Daibiru Corp...................................... 15,241 1,465,000 Daicel Chemical Industry Ltd...................... 8,329 660,000 Daikin Industries Ltd............................. 6,456 1,037,000 Dainippon Ink & Chemical, Inc..................... 4,831 3,600 East Japan Railway Co............................. 17,503 2,150,000 Fuji Photo Film Ltd............................... 62,053 2,700,000 Hitachi Ltd....................................... 27,196 2,100,000 Kao Corp.......................................... 26,034 650,000 Kirin Brewery Co., Ltd............................ 7,680 1,700,000 Matsushita Electric Industries Ltd................ 27,661 81,000 Murata Manufacturing Co., Ltd..................... 2,981 2,400,000 Nichido Fire & Marine Insurance Co., Ltd.......... 19,293 1,836 Nippon Telegraph & Telephone Corp................. 14,848 221,000 Ryosan Co......................................... 6,079 350,000 Sony Corp......................................... 20,983 1,080,000 Stanley Electric Co............................... 6,485 1,450,000 Sumitomo Marine & Fire Insurance Co............... 11,909 3,000,000 Sumitomo Rubber Industries........................ 25,046 298,000 TDK Corp.......................................... 15,210 742,000 Toyo Seikan Kaisha Ltd............................ 22,206 37,150 Yurtec Corp....................................... 651 ---------- 384,560 ---------- NETHERLANDS (9.3%) 705,168 ABN Amro Holdings N.V............................. 32,123 112,500 Akzo Nobel N.V.................................... 13,012 81,059 Hollandsche Beton Groep N.V....................... 12,376 575,744 Internationale Nederlanden Groep N.V.............. 38,462 247,500 Koninklijke Bijenkorf Beheer N.V.................. 16,349 153,050 Nedlloyd Groep N.V................................ 3,472 773,000 Philips Electronics N.V........................... 27,938 39,415 Unilever N.V. (Certificate)....................... 5,539 ---------- 149,271 ---------- NEW ZEALAND (0.4%) 2,144,627 Fisher & Paykel Industries Ltd.................... 6,520 +**392,500 Smith City Group Ltd.............................. -- ---------- 6,520 ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- International Equity Portfolio 43 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE INTERNATIONAL EQUITY PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) ------------------------------------------------------------ NORWAY (1.4%) 3,180,000 Den Norske Bank A/S,.............................. $ 8,341 573,800 Hafslund Nycomed, Class B......................... 14,551 ---------- 22,892 ---------- SINGAPORE (2.1%) 9,950,000 Jardine Strategic Holdings, Inc................... 30,447 3,265,000 Neptune Orient Lines Ltd. (Foreign)............... 3,670 ---------- 34,117 ---------- SPAIN (3.8%) +297,500 Grupo Duro Felguera S.A........................... 1,050 2,345,000 Iberdrola S.A..................................... 21,459 2,710,000 Telefonica Nacional de Espana S.A................. 37,533 ---------- 60,042 ---------- SWEDEN (3.0%) 28,600 Electrolux AB, Series B........................... 1,174 +350,000 Nordbanken AB..................................... 6,062 2,400,000 Skandinaviska Enskilda Banken, Class A............ 19,881 660,600 S.K.F. AB, Class B................................ 12,636 511,300 Svenska Cellulosa AB, Class B..................... 7,931 ---------- 47,684 ---------- SWITZERLAND (5.9%) +2,605 Ascom Holdings AG (Bearer)........................ 2,654 25,008 Ciba-Geigy AG (Registered)........................ 22,005 16,000 Forbo Holding AG (Registered)..................... 6,838 33,000 Nestle S.A. (Registered).......................... 36,505 2,410 Schindler Holding AG (Participating Certificates)................................... 2,496 15,550 Sulzer AG (Participating Certificates)............ 8,291 12,500 Sulzer AG (Registered)............................ 7,152 +10,815 SwissAir (Registered)............................. 7,876 ---------- 93,817 ---------- UNITED KINGDOM (8.9%) 1,260,000 Associated British Foods plc...................... 7,218 1,360,104 Automated Security Holdings plc................... 570 4,905,000 Christian Salvesen plc............................ 20,142 1,487,721 Forte plc......................................... 7,634 2,524,100 Grand Metropolitan plc............................ 18,183 4,841,985 John Mowlem & Co. plc............................. 4,473 1,624,000 Kwik Save Group plc............................... 12,707 843,000 McAlpine (Alfred) plc............................. 1,937 +1,417,095 Pilkington plc.................................... 4,444 1,470,645 Reckitt & Colman plc.............................. 16,279 2,885,064 Rolls-Royce plc................................... 8,466 1,429,956 Royal Insurance Holdings plc...................... 8,480 755,000 Unilever plc...................................... 15,507 6,145,000 WPP Group plc..................................... 15,646 ---------- 141,686 ---------- TOTAL COMMON STOCKS (Cost $1,152,875).......................... 1,413,831 ---------- VALUE SHARES (000) ------------------------------------------------------------ PREFERRED STOCKS (3.7%) GERMANY (3.7%) +5,200 Fag Kugelficsher AG............................... $ 646 77,700 RWE AG............................................ 21,675 29,525 Spar Handels AG................................... 6,342 125,000 Volkswagen AG..................................... 30,319 ---------- TOTAL PREFERRED STOCKS (Cost $46,959).......................... 58,982 ---------- CONVERTIBLE PREFERRED SECURITIES (0.1%) HONG KONG (0.1%) 1,863,000 Jardine Strategic Holdings, Inc. IDR, 7.50%, 5/07/97......................................... 2,012 ---------- NETHERLANDS (0.0%) 1,506 ABN Amro Holdings N.V............................. 6 2,196 International Nederlanden Groep N.V............... 12 ---------- 18 ---------- TOTAL CONVERTIBLE PREFERRED SECURITIES (Cost $1,923)........... 2,030 ---------- NO. OF RIGHTS - ----------- RIGHTS (0.1%) UNITED KINGDOM (0.1%) +354,273 Pilkington plc (Cost $843)........................ 1,100 ---------- TOTAL FOREIGN SECURITIES (92.3%) (Cost $1,202,600)............. 1,475,943 ---------- FACE AMOUNT (000) - ----------- SHORT-TERM INVESTMENT (3.9%) REPURCHASE AGREEMENT (3.9%) $ 62,548 The Chase Manhattan Bank, N.A., 5.35%, dated 12/29/95, due 1/02/96, to be repurchased at $62,585, collateralized by $40,380 United States Treasury Bonds, 12.00%, due 8/15/13, valued at $63,800 (Cost $62,548).......................... 62,548 ---------- FOREIGN CURRENCY (3.4%) AUD 3 Australian Dollar.............................. 3 GBP 14,074 British Pound.................................. 21,850 DEM 14,857 Deutsche Mark.................................. 10,361 FIM 22,998 Finnish Markka................................. 5,288 HKD 3 Hong Kong Dollar............................... -- ITL 174 Italian Lira................................... -- JPY 1,595,171 Japanese Yen................................... 15,450 NLG 44 Netherlands Guilder............................ 27 ESP 19 Spanish Peseta................................. -- SEK 2,753 Swedish Krona.................................. 415 ---------- TOTAL FOREIGN CURRENCY (Cost $53,560).......................... 53,394 ---------- TOTAL INVESTMENTS (99.6%) (Cost $1,318,708).................... 1,591,885 ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- International Equity Portfolio 44 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE INTERNATIONAL EQUITY PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
AMOUNT (000) ------------------------------------------------------------ OTHER ASSETS (1.9%) Receivable for Portfolio Shares Sold............ $ 21,040 Net Unrealized Gain on Forward Foreign Currency Exchange Contracts............................ 3,637 Receivable for Investments Sold................. 2,910 Dividends Receivable............................ 1,499 Foreign Withholding Tax Reclaim Receivable...... 1,136 Interest Receivable............................. 28 Other........................................... 103 $ 30,353 ----------- LIABILITIES (-1.5%) Payable for Portfolio Shares Redeemed........... (10,574) Payable for Investments Purchased............... (9,689) Investment Advisory Fees Payable................ (2,986) Administrative Fees Payable..................... (203) Custodian Fees Payable.......................... (143) Other Liabilities............................... (113) (23,708) ----------- ---------- NET ASSETS (100%).............................................. $1,598,530 ---------- ----------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 105,547,323 outstanding $.001 par value shares (authorized 500,000,000 shares).............................. $15.15 ---------- ---------- FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: Under the terms of forward foreign currency exchange contracts open at December 31, 1995, the Portfolio is obligated to deliver or is to receive foreign currency in exchange for U.S. dollars or foreign currency as indicated below:
NET IN UNREALIZED CURRENCY EXCHANGE GAIN TO DELIVER VALUE SETTLEMENT FOR VALUE (LOSS) (000) (000) DATE (000) (000) (000) - ------------------ -------- ----------- ------------ -------- --------- FIM 1,602 $ 368 1/02/96 DEM 526 $ 366 $ (2) SGD 354 251 1/04/96 U.S.$ 251 251 -- U.S.$ 251 251 1/04/96 SGD 354 251 -- SGD 394 278 1/05/96 U.S.$ 278 278 -- DEM 95,500 66,730 3/01/96 U.S.$ 66,193 66,193 (537) DEM 40,000 28,160 8/09/96 U.S.$ 28,751 28,751 591 FRF 153,000 31,289 10/11/96 U.S.$ 30,551 30,551 (738) JPY 5,801,100 58,287 10/11/96 U.S.$ 61,000 61,000 2,713 NLG 118,000 74,654 11/14/96 U.S.$ 76,106 76,106 1,452 ESP 5,400,000 43,036 12/02/96 U.S.$ 42,584 42,584 (452) JPY 3,100,000 31,341 12/24/96 U.S.$ 31,951 31,951 610 -------- -------- --------- $334,645 $338,282 $ 3,637 -------- -------- --------- -------- -------- ---------
- ------------------------------------------------------------ + -- Non-income producing security ** -- Security is valued at fair value -- See Note A-1 CDI -- Certificate of Investment IDR -- International Depositary Receipt NCS -- Non Convertible Shares FRF -- French Franc SGD -- Singapore Dollar
- ------------------------------------------------------------ SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
VALUE PERCENT INDUSTRY (000) OF NET ASSETS - --------------------------------------------------------------- Capital Equipment................. $ 312,212 19.5% Consumer Goods.................... 385,335 24.1 Energy............................ 80,467 5.0 Finance........................... 224,994 14.1 Materials......................... 195,044 12.2 Multi-Industry.................... 61,125 3.8 Services.......................... 216,766 13.6 --------- --- $1,475,943 92.3% --------- --- --------- ---
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- International Equity Portfolio 45 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE INTERNATIONAL SMALL CAP PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) ------------------------------------------------------------ COMMON STOCKS (93.9%) AUSTRALIA (7.9%) 92,344 Arnotts Ltd....................................... $ 618 564,678 Auspine Ltd....................................... 1,645 +990,079 Bains Harding Ltd................................. 316 1,566,167 BRL Hardy Ltd..................................... 2,503 140,833 BRL Hardy Ltd. (New).............................. 225 1,100,000 Burswood Property Trust........................... 1,472 2,351,732 Country Road Ltd.................................. 3,059 2,186,801 E.R.G. Ltd........................................ 2,617 +467,800 McPherson's Ltd................................... 66 5,638,088 Parbury Ltd....................................... 2,179 1,721,500 Solution 6 Holdings Ltd........................... 1,024 ---------- 15,724 ---------- DENMARK (1.8%) +107,000 SYD-Sonderjylland Holdings........................ 3,466 ---------- FINLAND (2.7%) 125,000 Amer-Yhtymae Oy, Class A.......................... 1,951 180,000 Hartwall Oy, Class A.............................. 3,352 ---------- 5,303 ---------- FRANCE (8.2%) 72,000 Dauphin O.T.A..................................... 2,941 54,000 De Dietrich et Compagnie.......................... 2,371 31,150 Europeene de Propulsion S.A....................... 2,125 8,100 Galeries Layfayette............................... 1,975 +17,700 Legris Industries S.A............................. 576 24,500 Precision Mecaniques Labinal S.A.................. 2,717 91,756 Sediver S.A....................................... 3,560 ---------- 16,265 ---------- GERMANY (5.3%) 13,000 Duerr Beteiligungs AG............................. 3,889 10,688 Sinn AG........................................... 2,013 +20,000 Varta AG.......................................... 3,836 2,210 Vossloh AG........................................ 729 ---------- 10,467 ---------- HONG KONG (1.9%) 445,000 Jardine International Motor Holdings Ltd.......... 506 +5,200,000 Pico Far East Holdings Ltd........................ 666 780,000 Tungtex Holdings Co., Ltd......................... 80 5,862,000 Vitasoy International Holdings Ltd................ 2,502 ---------- 3,754 ---------- IRELAND (2.0%) 1,070,000 Avonmore Foods plc, Class A....................... 2,176 692,472 Green Property plc................................ 1,863 ---------- 4,039 ---------- ITALY (2.4%) +1,172,800 Editoriale L'Expresso S.p.A....................... 2,031 +754,000 Unicem Di Risp (NCS).............................. 1,913 81,000 Vincenzo Zucchi S.p.A............................. 408 212,500 Vincenzo Zucchi S.p.A. (NCS)...................... 468 ---------- 4,820 ---------- VALUE SHARES (000) ------------------------------------------------------------ JAPAN (12.7%) 15,000 Exedy Corp........................................ $ 238 231,000 Foster Electric Co., Ltd.......................... 1,425 +175,000 Hankyu Realty..................................... 1,422 707,000 Japan Oil Transportation.......................... 4,451 213,000 Japan Vilene Co., Ltd............................. 1,343 134,000 Kansei Corp....................................... 1,085 243,000 Kirin Beverage Corp............................... 3,272 124,000 Nifco, Inc........................................ 1,621 335,000 Nissan Fire & Insurance Co........................ 2,349 549,000 Toc Co............................................ 5,477 +327,000 Tokai Senko K.K................................... 1,302 170,000 Toyoda Gosei Co................................... 1,177 ---------- 25,162 ---------- NETHERLANDS (6.9%) +62,600 Ahrend Groep N.V.................................. 2,060 26,800 Hollandsche Beton Groep N.V....................... 4,092 28,885 Industriemij Welna N.V............................ 837 141,000 Koninklijke Van Ommeren N.V....................... 4,393 36,000 Konin Nijverdal -- Ten Carte N.V.................. 1,519 8,802 Polynorm N.V...................................... 751 ---------- 13,652 ---------- NEW ZEALAND (2.0%) 659,729 Fisher & Paykel Industries Ltd.................... 2,005 1,634,800 Whitcoulls Group Ltd.............................. 2,031 ---------- 4,036 ---------- NORWAY (0.8%) 11,500 Adelsten, Class B................................. 1,136 +228,020 Oceanor........................................... 522 ---------- 1,658 ---------- SPAIN (5.2%) +346,000 Asturiana del Zinc S.A............................ 2,744 92,840 Bodegas y Bebidas S.A............................. 2,373 92,770 Gas y Electricidad S.A............................ 5,193 ---------- 10,310 ---------- SWITZERLAND (16.9%) 3,715 Bobst AG (Bearer)................................. 5,797 4,965 Bucher Holdings AG (Bearer)....................... 2,841 9,800 Edipresse S.A. (Bearer)........................... 2,634 7,400 Elco Looser Holding AG (Registered)............... 3,015 3,400 Hero AG (Bearer).................................. 1,680 995 Kouni Reisen Holdings, Class B (Registered)....... 1,596 2,750 LEM Holdings AG................................... 970 7,035 Magazine Globus (Participating Certificates)...... 4,025 5,850 Porst Holding AG (Bearer)......................... 1,009 590 Schweizerische Industrie-Gesellschaft Holdings (Bearer)........................................ 1,233 4,400 Schweizerische Industrie-Gesellschaft Holdings (Registered).................................... 4,463 +4,250 Von Moos Holding AG (Bearer)...................... 350 +4,160 Zellweger Luwa AG (Bearer)........................ 4,057 ---------- 33,670 ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- International Small Cap Portfolio 48 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) ------------------------------------------------------------ UNITED KINGDOM (17.2%) 4,502,198 Anglo Irish Bank Corp. plc (British Pound Shares)......................................... $ 4,438 +559,500 Asprey plc........................................ 2,172 31,700 Bespak plc........................................ 155 +895,000 Blagden Industries plc............................ 1,987 584,000 Bluebird Toys plc................................. 2,919 1,266,800 BSM Group plc..................................... 3,048 214,300 Church & Co. plc.................................. 1,211 +**2,540,850 Donelon Tyson plc................................. -- 1,895,000 EFG plc........................................... 427 952,000 GEI International plc............................. 1,774 212,000 Hadleigh Industries Group plc..................... 599 2,340,000 Hobson plc........................................ 1,090 390,000 Hornby Group plc.................................. 951 223,000 International Business Communications (Holdings) plc............................................. 990 877,294 John Mowlem & Co. plc............................. 810 35,365,100 Kendell plc....................................... 549 206,335 Mallett plc....................................... 266 2,662,000 Matthews (Bernard) plc............................ 3,926 157,500 Oriflame International S.A........................ 995 +**2,659,393 Pentos plc........................................ -- 345,526 Perry Group plc................................... 783 1,600,000 Shandwick plc..................................... 907 72,000 Sketchley plc..................................... 141 800,000 The 600 Group plc................................. 1,950 275,000 Tibbett & Britten Group plc....................... 1,742 541,700 Waterman Partnership Holdings plc................. 336 ---------- 34,166 ---------- TOTAL COMMON STOCKS (Cost $193,194)............................. 186,492 ---------- PREFERRED STOCKS (3.8%) GERMANY (3.8%) 59,900 Berentzen-Gruppe AG............................... 1,901 1,800 Jil Sander AG..................................... 1,324 7,745 Shaerf AG......................................... 1,053 10,550 Spar Handels AG................................... 2,266 5,410 Wuerttembergische Metallwarenfabrik AG............ 1,098 ---------- TOTAL PREFERRED STOCKS (Cost $8,320)............................ 7,642 ---------- NO. OF WARRANTS - ------------ WARRANTS (0.0%) HONG KONG (0.0%) +452,000 Pico Far East Holdings Ltd., expiring 4/30/96..... 2 ---------- SWITZERLAND (0.0%) +4,600 Zellweger Luwa AG, expiring 5/21/97............... 44 ---------- TOTAL WARRANTS (Cost $68)....................................... 46 ---------- FACE AMOUNT VALUE (000) (000) ------------------------------------------------------------ CONVERTIBLE DEBENTURE (0.2%) ITALY (0.2%) ITL 518,000 Mediobanca S.p.A. 5.50%, 1/01/00 (Cost $329)..................................... $ 285 ---------- TOTAL FOREIGN SECURITIES (97.9%) (Cost $201,911)................ 194,465 ---------- SHORT-TERM INVESTMENT (0.2%) REPURCHASE AGREEMENT (0.2%) $ 337 The Chase Manhattan Bank, N.A., 5.35%, dated 12/29/95, due 1/02/96, to be repurchased at $337, collateralized by $337 United States Treasury Bonds, 8.875%, due 8/15/17, valued at $348 (Cost $337)................................ 337 ---------- FOREIGN CURRENCY (3.1%) AUD 145 Australian Dollar................................... 108 GBP 1,147 British Pound....................................... 1,781 DEM 6,156 Deutsche Mark....................................... 4,293 HKD 359 Hong Kong Dollar.................................... 46 JPY 9 Japanese Yen........................................ -- NZD 63 New Zealand Dollar.................................. 41 ---------- TOTAL FOREIGN CURRENCY (Cost $6,246)............................ 6,269 ---------- TOTAL INVESTMENTS (101.2%) (Cost $208,494)...................... 201,071 ----------
OTHER ASSETS (0.7%) Receivable for Investments Sold................. $ 820 Receivable for Portfolio Shares Sold............ 225 Dividends Receivable............................ 209 Foreign Withholding Tax Reclaim Receivable...... 199 Interest Receivable............................. 16 Other........................................... 12 1,481 ------------ LIABILITIES (-1.9%) Payable for Investments Purchased............... (1,492) Net Unrealized Loss on Forward Foreign Currency Exchange Contracts............................ (933) Payable for Portfolio Shares Redeemed........... (882) Investment Advisory Fees Payable................ (440) Custodian Fees Payable.......................... (31) Bank Overdraft.................................. (29) Administrative Fees Payable..................... (27) Other Liabilities............................... (49) (3,883) ------------ ---------- NET ASSETS (100%)............................................... $ 198,669 ---------- ---------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 13,299,989 outstanding $.001 par value shares (authorized 1,000,000,000 shares)......................................... $14.94 ---------- ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- International Small Cap Portfolio 49 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE INTERNATIONAL SMALL CAP PORTFOLIO (CONT.) - -------------------------------------------------------------------------------- FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: Under the terms of forward foreign currency exchange contracts open at December 31, 1995, the Portfolio is obligated to deliver or is to receive foreign currency in exchange for U.S. dollars or foreign currency as indicated below:
IN NET CURRENCY EXCHANGE UNREALIZED TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS) (000) (000) DATE (000) (000) (000) - ----------- --------- ---------- ------------ --------- ------------- AUD 388 $ 289 1/03/96 U.S.$ 289 $ 289 -- DEM 587 410 1/04/96 JPY 42,205 409 (1) CHF 8,750 7,636 3/04/96 U.S.$ 7,204 7,204 (432) DEM 10,300 7,198 3/04/96 U.S.$ 7,099 7,099 (99) ESP 675,000 5,521 3/04/96 U.S.$ 5,107 5,107 (414) JPY 798,840 8,026 10/11/96 U.S.$ 8,400 8,400 374 U.S.$ 8,400 8,400 10/11/96 JPY 800,100 8,039 (361) --------- --------- ----- $ 37,480 $ 36,547 $ (933) --------- --------- ----- --------- --------- -----
- ------------------------------------------------------------ + -- Non-income producing security ** -- Security is valued at fair value -- See Note A-1 NCS -- Non Convertible Shares CHF -- Swiss Franc ESP -- Spanish Peseta ITL -- Italian Lira
- ------------------------------------------------------------ SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
VALUE PERCENT OF INDUSTRY (000) NET ASSETS - ---------------------------------------------------------------- Capital Equipment..................... $ 47,307 23.8% Consumer Goods........................ 49,238 24.8 Energy................................ 7,937 4.0 Finance............................... 20,583 10.4 Materials............................. 20,257 10.2 Multi-Industry........................ 3,540 1.8 Services.............................. 45,603 22.9 --------- ----- $ 194,465 97.9% --------- ----- --------- -----
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- International Small Cap Portfolio 50 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE JAPANESE EQUITY PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (89.9%) CAPITAL EQUIPMENT (31.1%) 240,000 Amada Co., Ltd.................................... $ 2,371 132,000 Dai Nippon Printing Co., Ltd...................... 2,237 136,000 Daifuku........................................... 1,923 146,000 Daikin Industries Ltd............................. 1,428 77,000 Fuji Machine Manufacturing Co..................... 2,759 80,000 Kurita Water Industries........................... 2,131 39,000 Kyocera Ltd....................................... 2,897 90,000 Kyudenko Co., Ltd................................. 1,185 60,000 Matsui Construction............................... 467 80,000 Matsushita Communication Industries............... 1,860 360,000 Mitsubishi Heavy Industries Ltd................... 2,870 67,000 Nifco, Inc........................................ 876 80,000 Nippon Pillar Packing............................. 1,023 294,000 Obayashi Corp..................................... 2,335 240,000 Ricoh Co., Ltd.................................... 2,626 300,000 Taisei Corp., Ltd................................. 2,001 260,000 Teijin Seiki Co., Ltd............................. 1,334 62,000 Tokyo Electron Ltd................................ 2,402 60,000 Toshiba Engineering & Construction................ 494 320,000 Tsubakimoto Chain................................. 1,925 ---------- 37,144 ---------- CONSUMER GOODS (14.9%) 113,000 Canon, Inc........................................ 2,047 79,000 Fuji Photo Film Ltd............................... 2,280 131,000 Japan Vilene Co., Ltd............................. 826 37,000 Nintendo Corp., Ltd............................... 2,813 278,000 Nissan Motor Co................................... 2,135 71,000 Sankyo Co., Ltd................................... 1,595 37,000 Shimamura Co., Ltd................................ 1,430 230,000 Suzuki Motor Co., Ltd............................. 2,562 95,000 Yamanouchi Pharmaceutical Co...................... 2,042 ---------- 17,730 ---------- ELECTRICAL & ELECTRONICS (18.4%) 70,000 CMK............................................... 997 344,000 Hitachi Ltd....................................... 3,465 187,000 Matsushita Electric Industries Ltd................ 3,043 85,000 Mitsumi Electric Co., Ltd......................... 2,050 294,000 NEC Corp.......................................... 3,588 28,000 Sony Corp......................................... 1,679 235,000 Stanley Electric Co............................... 1,411 40,000 TDK Corp.......................................... 2,042 464,000 Toshiba Corp...................................... 3,636 ---------- 21,911 ---------- FINANCE (6.4%) 180,000 Daiwa Securities Co., Ltd......................... 2,754 77,000 Hitachi Credit Corp............................... 1,395 50,000 Nichido Fire & Marine Insurance Co., Ltd.......... 402 131,000 Nomura Securities Co.............................. 2,855 43,000 Sumitomo Corp. Leasing Ltd........................ 221 ---------- 7,627 ---------- MATERIALS (7.4%) 171,000 Asahi Tec Corp.................................... 1,136 298,000 Daicel Chemical Industry Ltd...................... 1,694 VALUE SHARES (000) - ------------------------------------------------------------ 226,000 Kaneka Corp....................................... $ 1,425 60,000 Kansei Corp....................................... 486 128,000 Okura Industrial Co., Ltd......................... 874 155,000 Sanwa Shutter..................................... 1,124 142,000 Sekisui Chemical Co............................... 2,091 ---------- 8,830 ---------- MULTI-INDUSTRY (1.5%) 40,100 FamilyMart........................................ 1,810 ---------- SERVICES (10.2%) 82,000 Daibiru Corp...................................... 930 190,000 Inabata & Co...................................... 1,343 117,000 Keihanshin Real Estate............................ 896 146,000 Mitsubishi Estate Co., Ltd........................ 1,824 100,000 Nippon Konpo Unyu Soko............................ 852 269 Nippon Telegraph & Telephone Corp................. 2,175 32,000 Nishio Rent All Co................................ 738 39,000 Sangetsu Co., Ltd................................. 982 35,000 Secom Co., Ltd.................................... 2,434 ---------- 12,174 ---------- TOTAL COMMON STOCKS (Cost $105,078)........................... 107,226 ---------- FACE AMOUNT (000) - ---------- SHORT-TERM INVESTMENT (7.2%) REPURCHASE AGREEMENT (7.2%) $ 8,601 The Chase Manhattan Bank, N.A., 5.35%, dated 12/29/95, due 1/02/96, to be repurchased at $8,606, collateralized by $5,665 United States Treasury Bonds, 11.75%, due 11/15/14, valued at $8,774 (Cost $8,601)............................ 8,601 ---------- FOREIGN CURRENCY (0.0%) JPY2,734 Japanese Yen (Cost $26)........................... 26 ---------- TOTAL INVESTMENTS (97.1%) (Cost $113,705)..................... 115,853 ----------
OTHER ASSETS (3.1%) Net Unrealized Gain on Forward Foreign Currency $ 3,571 Exchange Contracts............................. Receivable for Portfolio Shares Sold............ 67 Dividends Receivable............................ 20 Interest Receivable............................. 4 Other........................................... 4 3,666 ---------- LIABILITIES (-0.2%) Investment Advisory Fees Payable................ (165) Administrative Fees Payable..................... (15) Custodian Fees Payable.......................... (12) Bank Overdraft.................................. (6) Other Liabilities............................... (43) (241) ---------- ---------- NET ASSETS (100%)............................................. $ 119,278 ---------- ---------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 12,868,920 outstanding $.001 par value shares (authorized 500,000,000 shares)............................. $9.27 ---------- ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Japanese Equity Portfolio 53 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE JAPANESE EQUITY PORTFOLIO (CONT.) - -------------------------------------------------------------------------------- FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: Under the terms of forward foreign currency exchange contracts open at December 31, 1995, the Portfolio is obligated to deliver foreign currency in exchange for U.S. dollars as indicated below:
IN NET CURRENCY EXCHANGE UNREALIZED TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (000) (000) DATE (000) (000) (000) - ------------- --------- ----------- ----------- --------- ----------- JPY 1,649,900 $ 16,099 2/26/96 U.S.$17,500 $ 17,500 $ 1,401 JPY 2,064,876 20,162 2/29/96 U.S.$21,300 21,300 1,138 JPY 2,522,843 24,716 3/25/96 U.S.$25,500 25,500 784 JPY 1,350,000 13,332 5/22/96 U.S.$13,580 13,580 248 --------- --------- ----------- $ 74,309 $ 77,880 $ 3,571 --------- --------- ----------- --------- --------- -----------
- ------------------------------------------------------------ The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Japanese Equity Portfolio 54 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE LATIN AMERICAN PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (62.9%) ARGENTINA (10.3%) 4,030 Banco de Galicia Y Buenos Aires ADR............... $ 83 144,371 Banco del Suquia, Class B......................... 195 3,473 Banco Frances ADS................................. 93 #19,575 Capex S.A. ADR.................................... 286 8,659 Quilmes Industrial S.A............................ 135 3,950 Telecom Argentina S.A. ADR........................ 188 22,215 Telefonica de Argentina S.A. ADR.................. 606 ------- 1,586 ------- BRAZIL (20.2%) 19,488,000 Cia Acos Especiais Itabira........................ 92 +#13,445 Cia Brasileira ADR................................ 134 #1,224 Cia Energetica de Minas Gerais ADR................ 27 #6,842 Cia Energetica de Minas Gerais GDR................ 151 2,295,000 Eletrobras........................................ 621 #27,650 Eletrobras ADR.................................... 375 1,400 Electrobras ADR, Class B.......................... 19 +#3,930 Lojas Americanas S.A. ADR......................... 33 7,240,000 Refrigeracao Parana S.A........................... 13 #6,845 Rhodia-Ster ADS................................... 62 515,000 Servicos de Eletricidade.......................... 165 3,590,000 Telebras.......................................... 139 #25,320 Telebras ADR...................................... 1,200 538,500 Telecomunicacoes de Sao Paulo..................... 78 ------- 3,109 ------- COLOMBIA (0.5%) #15,330 Banco de Colombia GDR............................. 80 ------- MEXICO (31.9%) 79,160 Apasco S.A., Class A.............................. 325 213,980 Banacci, Class B.................................. 359 52,329 Banacci, Class L.................................. 78 +23,950 Cemex CPO ADR..................................... 158 149,248 Cemex S.A., Class A............................... 493 +143,000 Cifra S.A. de C.V., Class B....................... 149 24,160 Empresas ICA S.A. ADR............................. 248 299,100 FEMSA, Class B.................................... 674 +#7,210 Grupo Carso S.A. ADR.............................. 77 #118,585 Grupo Financiero Bancomer ADR..................... 689 13,270 Alfa S.A. de C.V., Class A........................ 171 15,070 Grupo Televisa S.A. ADR........................... 339 11,870 Kimberly Clark de Mexico S.A. de C.V., Class A.... 180 8,185 Panamerican Beverages, Inc., Class A.............. 262 21,945 Telefonos de Mexico S.A. ADR, Class L............. 699 ------- 4,901 ------- TOTAL COMMON STOCKS (Cost $9,082).................................... 9,676 ------- VALUE SHARES (000) - ------------------------------------------------------------ PREFERRED (NON-VOTING STOCKS) (32.7%) BRAZIL (32.7%) 65,136,249 Banco Bradesco S.A................................ $ 570 +19,913,000 Banco do Brasil................................... 225 **11,847,000 Banco Nacional S.A................................ 25 1,892,173 Brahma............................................ 779 +148,500 Centrais Eletricas de Santa Catarina, Class B..... 72 +4,811,000 Cia Energetica de Minas Gerais.................... 107 7,899,000 Cia Paulista de Forca E Luz....................... 211 3,566,000 Continental 2001.................................. 44 479,000 Coteminas......................................... 160 +189,211 Dixie Toga S.A.................................... 165 1,664,000 Eletrobras, Class B............................... 450 1,126,400 Itaubanco......................................... 314 151,000 Itausa Investimentos Itau S.A..................... 82 8,180,000 Lojas Renner...................................... 219 63,000 Multibras S.A..................................... 47 3,280,000 Petrobras......................................... 280 38,295,000 Refrigeracao Parana S.A........................... 76 15,109,000 Telebras.......................................... 728 551,000 Telecomunicacoes de Sao Paulo..................... 81 1,518,000 Vale Do Rio Doce.................................. 250 329,000 WEG S.A........................................... 135 ------- TOTAL PREFERRED (NON-VOTING STOCKS) (Cost $5,375).................... 5,020 ------- FACE AMOUNT (000) - ---------------- FIXED INCOME SECURITIES (4.8%) BONDS (2.1%) COLOMBIA (2.1%) $ #430 Banco de Colombia 5.20%, 2/01/99 (Cost $380)..................................... 327 ------- CONVERTIBLE DEBENTURES (2.7%) VENEZUELA (2.7%) 750 Republic of Venezuela Debt Conversion Bonds, Series DL, (Floating Rate), 6.563%, 12/18/07 (Cost $394)..................................... 413 ------- TOTAL FIXED INCOME SECURITIES (Cost $774)............................ 740 ------- NO. OF RIGHTS - ---------------- RIGHTS (0.0%) BRAZIL (0.0%) +**2,058,932 Banco Bradesco, expiring 1/31/96 (Cost $0)....................................... 3 ------- TOTAL FOREIGN SECURITIES (100.4%) (Cost $15,231)..................... 15,439 -------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Latin American Portfolio 58 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE LATIN AMERICAN PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
AMOUNT VALUE (000) (000) - ------------------------------------------------------------ FOREIGN CURRENCY (0.2%) ARP 7 Argentine Peso........................................ $ 7 BRC 4 Brazilian Real........................................ 4 MXP 155 Mexican Peso.......................................... 20 PSS 2 Peruvian New Sol...................................... 1 ------- TOTAL FOREIGN CURRENCY (Cost $32).................................... 32 ------- TOTAL INVESTMENTS (100.6%) (Cost $15,263)............................ 15,471 -------
OTHER ASSETS (4.1%) Receivable for Investments Sold........ $ 581 Dividends Receivable................... 42 Interest Receivable.................... 11 Other.................................. 1 635 --------- LIABILITIES (-4.7%) Bank Overdraft......................... (415) Payable for Portfolio Shares Redeemed.............................. (237) Custodian Fees Payable................. (29) Investment Advisory Fees Payable....... (7) Sub-Administrative Fees Payable........ (5) Administrative Fees Payable............ (4) Other Liabilities...................... (33) (730) --------- --------- NET ASSETS (100%)................................... $ 15,376 --------- --------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 1,697,153 outstanding $.001 par value shares (authorized 500,000,000 shares)...... $9.06 --------- ---------
- ------------------------------------------------ + -- Non-income producing security ** -- Security is valued at fair value -- See Note A-1 # -- 144A Security -- Certain conditions for public sale may exist. ADR -- American Depositary Receipt ADS -- American Depositary Shares GDR -- Global Depositary Receipt CPO -- Certificate of Participation Floating Rate -- Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on December 31, 1995. SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
VALUE PERCENT OF INDUSTRY (000) NET ASSETS - ----------------------------------------------------------------- Capital Equipment...................... $ 344 2.3% Consumer Goods......................... 2,512 16.3 Energy................................. 2,881 18.7 Finance................................ 3,124 20.3 Government............................. 413 2.7 Materials.............................. 1,719 11.2 Multi-Industry......................... 389 2.5 Services............................... 4,057 26.4 --------- ------- $ 15,439 100.4% --------- ------- --------- -------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Latin American Portfolio 59 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE AGGRESSIVE EQUITY PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (101.2%) CAPITAL GOODS/CONSTRUCTION (16.0%) AEROSPACE & DEFENSE (9.2%) 8,900 General Dynamics Corp............................. $ 526 10,200 McDonnell Douglas Corp............................ 938 12,300 United Technologies Corp.......................... 1,167 ---------- 2,631 ---------- BUILDING & CONSTRUCTION (2.8%) 18,400 American Standard Co.............................. 515 19,900 AMRE, Inc......................................... 291 ---------- 806 ---------- MACHINERY (4.0%) 16,300 Sundstrand Corp................................... 1,147 ---------- TOTAL CAPITAL GOODS/CONSTRUCTION............................ 4,584 ---------- CONSUMER CYCLICAL (14.4%) ENTERTAINMENT & LEISURE (2.4%) 4,700 Eastman Kodak Co.................................. 315 6,400 Walt Disney Co.................................... 378 ---------- 693 ---------- FOOD SERVICE & LODGING (5.0%) +17,300 HFS, Inc.......................................... 1,414 ---------- PUBLISHING (1.8%) 42,300 K-III Communications, Corp........................ 513 ---------- RETAIL-GENERAL (5.2%) +20,700 AutoZone, Inc..................................... 598 +25,200 General Nutrition Cos., Inc....................... 580 6,700 Home Depot, Inc................................... 321 ---------- 1,499 ---------- TOTAL CONSUMER CYCLICAL..................................... 4,119 ---------- CONSUMER STAPLES (30.8%) BEVERAGES & TOBACCO (2.9%) 15,000 Coca Cola Enterprises, Inc........................ 401 13,800 RJR Nabisco Holdings Corp......................... 426 ---------- 827 ---------- CIGARETTES (19.8%) 59,400 Philip Morris Cos., Inc........................... 5,376 8,400 UST, Inc.......................................... 280 ---------- 5,656 ---------- DRUGS (5.0%) 16,200 Pharmacia & Upjohn, Inc........................... 628 14,600 Schering-Plough Corp.............................. 799 ---------- 1,427 ---------- VALUE SHARES (000) - ------------------------------------------------------------ FOOD (3.1%) 12,000 Ralston Purina Group.............................. $ 749 2,700 Wrigley (William) Jr. Co.......................... 142 ---------- 891 ---------- TOTAL CONSUMER STAPLES...................................... 8,801 ---------- DIVERSIFIED (4.1%) 14,900 Loews Corp........................................ 1,168 ---------- FINANCE (26.0%) BANKING (15.0%) 6,700 Chase Manhattan Corp.............................. 406 9,300 First Interstate Bancorp.......................... 1,269 12,100 Wells Fargo & Co.................................. 2,614 ---------- 4,289 ---------- FINANCIAL SERVICES (11.0%) 31,800 American Express Co............................... 1,316 6,000 Dean Witter Discover & Co......................... 282 8,600 Federal National Mortgage Association............. 1,067 7,000 Student Loan Marketing Association................ 461 ---------- 3,126 ---------- TOTAL FINANCE............................................... 7,415 ---------- SERVICES (1.4%) TRANSPORTATION (1.4%) +26,600 Canadian National Railway......................... 399 ---------- TECHNOLOGY (8.5%) COMPUTERS (0.8%) +3,000 Intuit, Inc....................................... 234 ---------- ELECTRONICS (3.7%) +9,600 Applied Materials, Inc............................ 378 4,500 Intel Corp........................................ 255 9,300 Watkins-Johnson Co................................ 407 ---------- 1,040 ---------- OFFICE EQUIPMENT (4.0%) +5,500 Digital Equipment Corp............................ 352 8,500 International Business Machines Corp.............. 780 ---------- 1,132 ---------- TOTAL TECHNOLOGY............................................ 2,406 ---------- TOTAL COMMON STOCKS (Cost $27,097)............................ 28,892 ----------
FACE AMOUNT (000) - ---------- SHORT-TERM INVESTMENT (5.6%) U.S. GOVERNMENT AGENCY OBLIGATION (5.6%) $ 1,600 Federal National Mortgage Association Discount Note 5.50%, 1/22/96 (Cost $1,595)................................... 1,595 ---------- TOTAL INVESTMENTS (106.8%) (Cost $28,692)..................... 30,487 ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Aggressive Equity Portfolio 62 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE AGGRESSIVE EQUITY PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
AMOUNT (000) - ------------------------------------------------------------ OTHER ASSETS (12.0%) Receivable for Securities Sold Short............ $ 2,707 Receivable for Investments Sold................. 448 Receivable for Portfolio Shares Sold............ 210 Dividends Receivable............................ 62 Other........................................... 1 $ 3,428 ---------- LIABILITIES (-18.8%) Securities Sold Short, at Value (Proceeds $2,707)........................................ (2,642) Bank Overdraft.................................. (1,797) Payable for Investments Purchased............... (873) Investment Advisory Fees Payable................ (22) Administrative Fees Payable..................... (4) Custodian Fees Payable.......................... (3) Other Liabilities............................... (26) (5,367 ) ---------- ---------- NET ASSETS (100%)............................................. $ 28,548 ---------- ---------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 2,345,287 outstanding $.001 par value shares (authorized 500,000,000 shares)............................. $12.17 ---------- ----------
- ------------------------------------------------------------ + -- Non-income producing security
Interest rate disclosed for U.S. Government Agency discount note represents effective yields at December 31, 1995. - ------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ SECURITIES SOLD SHORT (NOTE A-9) 26,600 Canadian National Railway.................. $ 399 5,500 Digital Equipment Corp..................... 352 3,000 Intuit, Inc................................ 234 16,200 Pharmacia & Upjohn, Inc.................... 628 12,000 Ralston Purina Group....................... 749 8,400 UST, Inc................................... 280 --------- (Total Proceeds $2,707).................... $ 2,642 --------- ---------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Aggressive Equity Portfolio 63 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EMERGING GROWTH PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) ------------------------------------------------------------ COMMON STOCKS (97.3%) CONSUMER-CYCLICAL (19.4%) FOOD SERVICE & LODGING (6.8%) +37,700 Cheesecake Factory, Inc........................... $ 801 +45,000 HFS, Inc.......................................... 3,679 70,000 Promus Hotel Corp................................. 1,558 +111,600 Sonic Corp........................................ 2,064 ---------- 8,102 ---------- PRINTING & PUBLISHING (3.3%) 80,000 Lee Enterprises, Inc.............................. 1,840 +27,000 Scholastic Corp................................... 2,099 ---------- 3,939 ---------- RETAIL-GENERAL (9.3%) +70,000 Bed, Bath & Beyond, Inc........................... 2,704 +35,000 Central Tractor Farm & Country, Inc............... 359 +120,000 General Nutrition Cos., Inc....................... 2,760 +30,000 Kohl's Corp....................................... 1,575 +75,000 OfficeMax, Inc.................................... 1,678 +88,000 Sunglass Hut International, Inc................... 2,068 ---------- 11,144 ---------- TOTAL CONSUMER-CYCLICAL..................................... 23,185 ---------- CONSUMER-STAPLES (29.5%) DRUGS (6.1%) +60,000 Forest Laboratories, Inc.......................... 2,715 28,000 Genzyme Corp. -- General Division................. 1,736 +9,800 Immucor, Inc...................................... 91 +55,000 Scherer (R.P.) Corp............................... 2,702 ---------- 7,244 ---------- HEALTH CARE SUPPLIES & SERVICES (19.5%) 47,000 Arrow International, Inc.......................... 1,868 55,000 Ballard Medical Products.......................... 983 +120,000 Biomet, Inc....................................... 2,130 +50,000 Haemonetics Corp.................................. 887 +85,000 Health Management Systems, Inc.................... 3,273 +115,000 Healthsource, Inc................................. 4,140 +130,000 HEALTHSOUTH Rehabilitation Corp................... 3,786 +6,400 Mariner Health Group, Inc......................... 107 +75,000 Research Medical, Inc............................. 2,025 +40,000 Vencor, Inc....................................... 1,300 +112,500 Vivra, Inc........................................ 2,827 ---------- 23,326 ---------- HOSPITAL MANAGEMENT (1.5%) 36,000 American Oncology Resources, Inc.................. 1,750 ---------- MISCELLANEOUS (2.4%) +60,000 IDEXX Laboratories, Inc........................... 2,820 ---------- TOTAL CONSUMER-STAPLES...................................... 35,140 ---------- FINANCE (3.3%) INSURANCE (3.3%) 50,000 Mutual Risk Management Ltd........................ 2,288 VALUE SHARES (000) ------------------------------------------------------------ 45,000 NAC Re Corp....................................... $ 1,620 ---------- TOTAL FINANCE............................................... 3,908 ---------- MATERIALS (2.9%) MISCELLANEOUS (2.9%) +75,000 Viking Office Products, Inc....................... 3,487 ---------- SERVICES (14.7%) BUSINESS SERVICES (3.4%) 60,000 First Data Corp................................... 4,012 3,000 Sitel Corp........................................ 92 ---------- 4,104 ---------- PROFESSIONAL SERVICES (11.2%) +19,900 American Business Information, Inc................ 386 +44,900 American Medical Response, Inc.................... 1,459 75,000 Cintas Corp....................................... 3,338 60,000 CRA Managed Care, Inc............................. 1,313 +115,000 CUC International, Inc............................ 3,924 115,000 G & K Services, Inc., Class A..................... 2,932 ---------- 13,352 ---------- TRANSPORTATION (0.1%) 4,500 Midwest Express Holdings, Inc..................... 125 ---------- TOTAL SERVICES.............................................. 17,581 ---------- TECHNOLOGY (27.5%) ELECTRONICS (13.7%) +60,000 Electroglas, Inc.................................. 1,470 +39,900 Fusion Systems Corp............................... 1,117 +50,100 Level One Communications, Inc..................... 902 90,000 Linear Technology, Inc............................ 3,532 +70,000 Maxim Integrated Products, Inc.................... 2,678 +35,000 Microchip Technology, Inc......................... 1,278 70,000 Molex, Inc., Class A.............................. 2,144 +110,000 Xilinx, Inc....................................... 3,327 ---------- 16,448 ---------- OFFICE EQUIPMENT (12.9%) 8,600 Adobe Systems, Inc................................ 533 +75,000 BISYS Group, Inc.................................. 2,306 +75,000 Concord EFS Corp.................................. 3,094 +134,850 Informix Corp..................................... 4,045 +52,600 Progress Software Corp............................ 1,946 +125,000 SunGard Data Systems, Inc......................... 3,469 ---------- 15,393 ---------- TELECOMMUNICATIONS (0.9%) +50,000 Mobile Telecommunications Technologies Corp....... 1,063 ---------- TOTAL TECHNOLOGY............................................ 32,904 ---------- TOTAL COMMON STOCKS (Cost $63,267)............................ 116,205 ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Emerging Growth Portfolio 66 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EMERGING GROWTH PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
FACE AMOUNT VALUE (000) (000) ------------------------------------------------------------ SHORT-TERM INVESTMENT (2.6%) REPURCHASE AGREEMENT (2.6%) $ 3,053 The Chase Manhattan Bank, N.A., 5.35%, dated 12/29/95, due 1/02/96, to be repurchased at $3,055, collateralized by $2,570 United States Treasury Bonds, 7.625%, due 11/15/22, valued at $3,113 (Cost $3,053)............................ $ 3,053 ---------- TOTAL INVESTMENTS (99.9%) (Cost $66,320)...................... 119,258 ----------
OTHER ASSETS (0.5%) Cash............................................ $ 1 Receivable for Portfolio Shares Sold............ 318 Receivable for Investments Sold................. 190 Dividends Receivable............................ 27 Interest Receivable............................. 1 Other........................................... 10 547 ----- LIABILITIES (-0.4%) Investment Advisory Fees Payable................ (332) Payable for Portfolio Shares Redeemed........... (47) Administrative Fees Payable..................... (16) Custodian Fees Payable.......................... (4) Other Liabilities............................... (28) (427) ----- ---------- NET ASSETS (100%)............................................. $ 119,378 ---------- ----------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 5,554,674 outstanding $.001 par value shares (authorized 500,000,000 shares)............................. $21.49 ---------- ----------
- ------------------------------------------------------------ + -- Non-income producing security
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Emerging Growth Portfolio 67 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EQUITY GROWTH PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (94.2%) CAPITAL GOODS/CONSTRUCTION (8.5%) AEROSPACE & DEFENSE (6.6%) 17,500 Boeing Co......................................... $ 1,371 15,100 General Dynamics Corp............................. 893 +6,500 Litton Industries, Inc............................ 289 10,900 Lockheed Martin Corp.............................. 861 35,500 McDonnell Douglas Corp............................ 3,266 38,700 United Technologies Corp.......................... 3,672 ---------- 10,352 ---------- MACHINERY (1.9%) 43,000 Sundstrand Corp................................... 3,026 ---------- TOTAL CAPITAL GOODS/CONSTRUCTION............................ 13,378 ---------- CONSUMER-CYCLICAL (19.0%) AUTOMOTIVE (1.0%) 34,300 Goodyear Tire & Rubber Co......................... 1,556 ---------- BROADCAST-RADIO & TELEVISION (2.3%) +40,000 Infinity Broadcasting, Class A.................... 1,490 +52,400 New World Communications Group, Inc............... 917 +26,797 Viacom, Inc., Class B............................. 1,269 ---------- 3,676 ---------- ENTERTAINMENT & LEISURE (1.3%) +24,300 AMC Entertainment, Inc............................ 568 26,000 Walt Disney Co.................................... 1,534 ---------- 2,102 ---------- FOOD SERVICE & LODGING (3.0%) +28,000 Boston Chicken, Inc............................... 899 +34,300 HFS, Inc.......................................... 2,804 39,200 La Quinta Inns, Inc............................... 1,073 ---------- 4,776 ---------- GAMING & LODGING (0.1%) +10,100 Trump Hotels & Casino Resort...................... 217 ---------- HOUSEHOLD FURNISHINGS & APPLIANCES (2.0%) +78,700 American Standard Co.............................. 2,203 59,700 AMRE, Inc......................................... 873 ---------- 3,076 ---------- LEISURE RELATED (1.3%) 22,400 Eastman Kodak Co.................................. 1,501 +23,500 Toy Biz, Inc...................................... 511 ---------- 2,012 ---------- PUBLISHING (3.1%) 29,800 Gannett Co., Inc.................................. 1,829 +175,900 K-III Communications, Corp........................ 2,133 31,300 New York Times Co., Class A....................... 927 ---------- 4,889 ---------- VALUE SHARES (000) - ------------------------------------------------------------ RETAIL-GENERAL (4.9%) +60,700 AutoZone, Inc..................................... $ 1,753 +84,200 General Nutrition Cos., Inc....................... 1,937 32,000 Harcourt General, Inc............................. 1,340 31,300 Home Depot, Inc................................... 1,498 +17,600 PetSmart, Inc..................................... 546 14,100 Tandy Corp........................................ 585 ---------- 7,659 ---------- TOTAL CONSUMER-CYCLICAL..................................... 29,963 ---------- CONSUMER-STAPLES (20.9%) APPAREL & TEXTILES (0.5%) 7,400 NIKE, Inc., Class B............................... 515 11,200 Reebok International Ltd.......................... 316 ---------- 831 ---------- BEVERAGES & TOBACCO (11.7%) 68,600 Coca Cola Enterprises, Inc........................ 1,835 161,500 Philip Morris Cos., Inc........................... 14,616 66,600 RJR Nabisco Holdings Corp......................... 2,056 ---------- 18,507 ---------- DRUGS (3.3%) 15,500 American Home Products Corp....................... 1,504 28,900 Pfizer, Inc....................................... 1,821 35,700 Schering-Plough Corp.............................. 1,955 ---------- 5,280 ---------- FOOD (2.2%) 23,800 Interstate Bakeries Corp.......................... 532 12,600 Kellogg Co........................................ 973 9,100 Ralston Purina Group.............................. 568 25,400 Wrigley (William) Jr. Co.......................... 1,334 ---------- 3,407 ---------- HEALTH CARE SUPPLIES & SERVICES (3.2%) 17,800 Aetna Life & Casualty Co.......................... 1,232 33,000 Columbia/HCA Healthcare Corp...................... 1,675 13,600 United Healthcare Corp............................ 891 26,700 US Healthcare, Inc................................ 1,242 ---------- 5,040 ---------- TOTAL CONSUMER-STAPLES...................................... 33,065 ---------- DIVERSIFIED (3.4%) 48,900 Loews Corp........................................ 3,833 23,400 Textron, Inc...................................... 1,580 ---------- TOTAL DIVERSIFIED........................................... 5,413 ---------- FINANCE (23.1%) BANKING (10.1%) 22,100 Chase Manhattan Corp.............................. 1,340 32,000 Citicorp.......................................... 2,152 28,300 First Interstate Bancorp.......................... 3,863 23,800 Morgan (J.P.) & Co., Inc.......................... 1,910 31,200 Wells Fargo & Co.................................. 6,739 ---------- 16,004 ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Equity Growth Portfolio 70 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EQUITY GROWTH PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ FINANCIAL SERVICES (10.6%) 110,600 American Express Co............................... $ 4,576 12,400 CIGNA Corp........................................ 1,280 40,000 Dean Witter Discover & Co......................... 1,880 22,800 Federal Home Loan Mortgage Corp................... 1,904 19,400 Federal National Mortgage Association............. 2,408 26,000 Franklin Resources, Inc........................... 1,310 29,900 Household International, Inc...................... 1,768 24,000 Student Loan Marketing Association................ 1,581 ---------- 16,707 ---------- INSURANCE (2.4%) 31,300 Ace Ltd........................................... 1,244 38,900 Exel Ltd.......................................... 2,373 +9,500 GCR Holdings, Ltd................................. 211 ---------- 3,828 ---------- TOTAL FINANCE............................................... 36,539 ---------- MATERIALS (2.9%) CHEMICALS (2.9%) 26,400 Hercules, Inc..................................... 1,488 18,800 IMC Global, Inc................................... 769 9,100 Monsanto Co....................................... 1,115 15,600 Olin Corp......................................... 1,158 ---------- TOTAL MATERIALS............................................. 4,530 ---------- SERVICES (3.0%) BUSINESS SERVICES (1.0%) 22,600 First Data Corp................................... 1,511 ---------- PROFESSIONAL SERVICES (1.1%) +15,200 Bell & Howell Holding Co.......................... 426 +38,750 CUC International, Inc............................ 1,322 ---------- 1,748 ---------- TRANSPORTATION (0.9%) +10,800 AMR Corp.......................................... 802 +51,300 USAir Group, Inc.................................. 680 ---------- 1,482 ---------- TOTAL SERVICES.............................................. 4,741 ---------- TECHNOLOGY (13.4%) COMPUTERS (3.8%) +12,800 Cisco Systems, Inc................................ 955 18,900 Hewlett Packard Co................................ 1,583 26,700 International Business Machines Corp.............. 2,450 +23,200 Seagate Technology, Inc........................... 1,102 ---------- 6,090 ---------- ELECTRONICS (4.6%) +40,600 Applied Materials, Inc............................ 1,599 19,800 Intel Corp........................................ 1,124 +28,100 LSI Logic Corp.................................... 920 19,300 Motorola, Inc..................................... 1,100 15,400 Texas Instruments, Inc............................ 797 40,900 Watkins-Johnson Co................................ 1,789 ---------- 7,329 ---------- VALUE SHARES (000) - ------------------------------------------------------------ OFFICE EQUIPMENT (0.6%) 26,100 Reynolds & Reynolds, Class A...................... $ 1,015 ---------- SOFTWARE SERVICES (2.0%) +18,900 Microsoft Corp.................................... 1,658 +33,900 Oracle System Corp................................ 1,437 ---------- 3,095 ---------- TELECOMMUNICATIONS (2.4%) +26,400 AirTouch Communications, Inc...................... 746 23,700 American Telephone & Telegraph Corp............... 1,535 56,400 MCI Communications Corp........................... 1,473 ---------- 3,754 ---------- TOTAL TECHNOLOGY............................................ 21,283 ---------- TOTAL COMMON STOCKS (Cost $132,472)........................... 148,912 ---------- FACE AMOUNT (000) - ---------- SHORT-TERM INVESTMENT (6.2%) REPURCHASE AGREEMENT (6.2%) $ 9,800 Goldman Sachs & Co., 5.83%, dated 12/29/95, due 1/02/96, to be repurchased at $9,806, collateralized by $6,105 United States Treasury Bonds, 13.875%, due 5/15/11, valued at $10,006 (Cost $9,800)................................... 9,800 ---------- TOTAL INVESTMENTS (100.4%) (Cost $142,272).................... 158,712 ----------
OTHER ASSETS (2.3%) Receivable for Investments Sold................. $ 3,215 Dividends Receivable............................ 353 Receivable for Portfolio Shares Sold............ 65 Interest Receivable............................. 5 Other........................................... 9 3,647 ---------- LIABILITIES (-2.7%) Payable for Investments Purchased............... (2,782) Payable for Portfolio Shares Redeemed........... (1,176) Investment Advisory Fees Payable................ (224) Administrative Fees Payable..................... (22) Custodian Fees Payable.......................... (7) Other Liabilities............................... (36) (4,247) ---------- ---------- NET ASSETS (100%)............................................. $ 158,112 ---------- ---------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 11,182,044 outstanding $.001 par value shares (authorized 500,000,000 shares)............................. $14.14 ---------- ----------
- ------------------------------------------------------------ + -- Non-income producing security The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Equity Growth Portfolio 71 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE SMALL CAP VALUE EQUITY PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (95.7%) AEROSPACE (2.2%) 27,000 AAR Corp.......................................... $ 594 16,000 Thiokol Corp...................................... 542 300 United Industrial Corp............................ 2 ---------- 1,138 ---------- BANKING (9.5%) 17,450 First Security Corp. (Delaware)................... 672 24,000 Greenpoint Financial Corp......................... 642 15,600 Onbancorp, Inc.................................... 521 25,000 Peoples Heritage Financial Group, Inc............. 569 16,000 Standard Federal Bank............................. 630 29,000 Trustmark Corp.................................... 660 20,000 Union Planters Corp............................... 638 21,000 Washington Mutual, Inc............................ 606 ---------- 4,938 ---------- BUILDING (1.9%) 13,300 Ameron, Inc. (Delaware)........................... 500 38,800 Gilbert Associates, Inc., Class A................. 485 ---------- 985 ---------- CAPITAL GOODS (4.2%) 21,403 Binks Manufacturing Co............................ 503 33,200 Cascade Corp...................................... 465 21,600 Starrett (L.S.) Co., Class A...................... 559 12,200 Tecumseh Products Co., Class A.................... 631 ---------- 2,158 ---------- CHEMICALS (4.8%) 33,792 Aceto Corp........................................ 541 23,400 Dexter Corp....................................... 553 19,400 Learonal, Inc..................................... 446 29,800 Quaker Chemical Corp.............................. 402 18,000 Witco Corp........................................ 527 ---------- 2,469 ---------- COMMUNICATIONS (1.1%) 30,200 Comsat Corp....................................... 562 ---------- CONSUMER-DURABLES (3.9%) 26,200 Arvin Industries, Inc............................. 432 30,298 Knape & Vogt Manufacturing Co..................... 526 31,300 Oneida Ltd........................................ 552 25,100 Smith (A.O.) Corp., Class B....................... 521 ---------- 2,031 ---------- CONSUMER-RETAIL (4.1%) 31,800 CPI Corp.......................................... 509 25,500 Deb Shops, Inc.................................... 88 25,700 Guilford Mills, Inc............................... 523 23,000 Ross Stores, Inc. 440 14,100 Springs Industries, Inc., Class A................. 583 ---------- 2,143 ---------- VALUE SHARES (000) - ------------------------------------------------------------ CONSUMER-STAPLES (4.3%) 15,246 Block Drug Co., Inc., Class A..................... $ 530 30,400 Coors (Adolph), Inc., Class B..................... 673 27,900 International Multifoods Corp..................... 561 26,400 Nash Finch Co..................................... 482 ---------- 2,246 ---------- ENERGY (3.3%) 24,600 Ashland Coal, Inc................................. 526 21,000 Diamond Shamrock, Inc............................. 543 25,500 Ultramar Corp..................................... 657 ---------- 1,726 ---------- FINANCIAL-DIVERSIFIED (4.6%) 11,900 Finova Group, Inc................................. 574 10,100 GATX Corp......................................... 491 35,000 Manufactured Home Communities, Inc. REIT.......... 613 28,000 South West Property Trust REIT.................... 378 14,000 Wellsford Residential Property Trust REIT......... 322 ---------- 2,378 ---------- HEALTH CARE (6.7%) 30,000 Analogic Corp..................................... 555 14,500 Beckman Instruments, Inc.......................... 513 26,400 Bergen Brunswig Corp., Class A.................... 657 35,500 Bindley Western Industries........................ 604 49,700 Kinetic Concepts, Inc............................. 596 26,000 United Wisconsin Services, Inc.................... 572 ---------- 3,497 ---------- INDUSTRIAL (5.8%) 17,200 American Filtrona Corp............................ 576 13,400 Barnes Group, Inc................................. 482 50,700 GenCorp, Inc...................................... 621 44,500 Kaman Corp., Class A.............................. 495 34,900 Zero Corp. (Delaware)............................. 620 10,300 Zurn Industries, Inc.............................. 220 ---------- 3,014 ---------- INSURANCE (5.8%) 16,200 Argonaut Group, Inc............................... 526 25,000 Enhance Financial Services Group, Inc............. 666 19,500 Provident Companies, Inc.......................... 661 15,900 Selective Insurance Group, Inc.................... 564 19,950 USLife Corp....................................... 596 ---------- 3,013 ---------- METALS (2.1%) 35,700 Birmingham Steel Corp............................. 531 14,100 Cleveland-Cliffs Iron Co.......................... 578 ---------- 1,109 ---------- PAPER & PACKAGING (2.8%) 21,500 Ball Corp......................................... 591 13,900 Potlatch Corp..................................... 556 25,500 Sealright Co., Inc................................ 284 ---------- 1,431 ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Small Cap Value Equity Portfolio 75 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE SMALL CAP VALUE EQUITY PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ SERVICES (11.0%) 23,200 ABM Industries, Inc............................... $ 644 21,200 Angelica Corp..................................... 435 27,000 Bowne & Co........................................ 540 30,700 Cross (A.T.) Co., Class A......................... 464 38,000 Jackpot Enterprises, Inc.......................... 442 18,400 National Service Industries, Inc.................. 596 20,900 New England Business Services, Inc................ 455 24,400 Ogden Corp........................................ 521 55,400 Piccadilly Cafeterias, Inc........................ 526 41,500 Russ Berrie & Co., Inc............................ 524 25,000 Sbarro, Inc....................................... 537 ---------- 5,684 ---------- TECHNOLOGY (7.7%) 36,000 Augat, Inc........................................ 616 48,000 Core Industries, Inc.............................. 618 21,800 Cubic Corp........................................ 621 33,700 Gerber Scientific, Inc............................ 548 15,900 MTS Systems Corp.................................. 525 30,500 National Computer Systems, Inc.................... 576 36,000 Scitex Ltd........................................ 490 ---------- 3,994 ---------- TRANSPORTATION (2.5%) 22,000 Airborne Freight Corp............................. 586 19,800 Overseas Shipholding Group, Inc................... 376 28,000 SkyWest, Inc...................................... 360 ---------- 1,322 ---------- UTILITIES (7.4%) 19,700 Central Hudson Gas & Electric..................... 608 13,300 Commonwealth Energy Systems Cos................... 595 15,000 Eastern Enterprises............................... 529 25,900 Oneok, Inc........................................ 592 13,700 Orange & Rockland Utilities, Inc.................. 490 13,700 SJW Corp.......................................... 517 28,500 Washington Water Power Co......................... 499 ---------- 3,830 ---------- TOTAL COMMON STOCKS (Cost $44,714)............................ 49,668 ----------
FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------------ SHORT-TERM INVESTMENT (4.1%) REPURCHASE AGREEMENT (4.1%) $ 2,127 The Chase Manhattan Bank, N.A., 5.35%, dated 12/29/95, due 1/02/96, to be repurchased at $2,128, collateralized by $1,800 United States Treasury Bonds, 7.50%, due 11/15/24, valued at $2,171 (Cost $2,127)............................ $ 2,127 ---------- TOTAL INVESTMENTS (99.8%) (Cost $46,841)...................... 51,795 ----------
OTHER ASSETS (0.5%) Dividends Receivable............................ $ 126 Receivable for Investments Sold................. 121 Interest Receivable............................. 1 Other........................................... 4 252 ---------- LIABILITIES (-0.3%) Investment Advisory Fees Payable................ (91) Administrative Fees Payable..................... (7) Custodian Fees Payable.......................... (3) Payable for Portfolio Shares Redeemed........... (1) Other Liabilities............................... (26) (128) ---------- ---------- NET ASSETS (100%)............................................. $ 51,919 ---------- ---------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 4,357,807 outstanding $.001 par value shares (authorized 500,000,000 shares)............................. $11.91 ---------- ----------
- ------------------------------------------------------------ REIT -- Real Estate Investment Trust The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Small Cap Value Equity Portfolio 76 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE U.S. REAL ESTATE PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (96.0%) APARTMENT (18.6%) 47,300 Associated Estates Realty Corp. REIT.............. $ 1,017 123,800 Avalon Properties, Inc. REIT...................... 2,662 31,100 Camden Property Trust REIT........................ 742 125,900 Essex Property Trust, Inc. REIT................... 2,424 61,100 Evans Withycombe Residential, Inc. REIT........... 1,314 50,300 Paragon Group, Inc. REIT.......................... 874 9,700 South West Property Trust REIT.................... 131 135,000 Walden Residential Properties, Inc. REIT.......... 2,818 40,700 Wellsford Residential Property Trust REIT......... 936 ---------- 12,918 ---------- LAND (2.5%) +196,200 Atlantic Gulf Communities Corp.................... 1,324 +69,800 Catellus Development Corp......................... 419 ---------- 1,743 ---------- LODGING/LEISURE (17.8%) 40,000 Felcor Suite Hotels, Inc. REIT.................... 1,110 +220,500 Host Marriot Corp................................. 2,922 +207,500 John Q Hammons Hotels, Inc........................ 1,919 +246,600 Prime Hospitality Corp............................ 2,466 54,200 Red Lion Hotels, Inc.............................. 949 +117,600 Servico, Inc...................................... 1,235 +187,400 ShoLodge, Inc..................................... 1,780 ---------- 12,381 ---------- MANUFACTURED HOME (6.1%) 90,800 Manufactured Home Communities, Inc. REIT.......... 1,589 109,650 ROC Communities, Inc. REIT........................ 2,632 ---------- 4,221 ---------- OFFICE AND INDUSTRIAL (25.9%) INDUSTRIAL (1.7%) 53,700 First Industrial Realty Trust, Inc. REIT.......... 1,208 ---------- OFFICE (7.4%) 101,500 Beacon Properties Corp. REIT...................... 2,335 67,500 Carr Realty Corp. REIT............................ 1,645 6,900 Crescent Real Estate Equities, Inc. REIT.......... 235 106,100 Crocker Realty Trust, Inc. REIT................... 942 ---------- 5,157 ---------- OFFICE AND INDUSTRIAL (16.8%) 257,400 Bedford Property Investors, Inc. REIT............. 1,866 54,600 Duke Realty Investments, Inc. REIT................ 1,713 49,100 Highwoods Properties, Inc. REIT................... 1,387 160,700 Liberty Property Trust REIT....................... 3,335 60,600 Reckson Associates Realty Corp. REIT.............. 1,780 64,000 Spieker Properties, Inc. REIT..................... 1,608 ---------- 11,689 ---------- TOTAL OFFICE AND INDUSTRIAL................................. 18,054 ---------- SELF STORAGE (4.7%) 173,000 Public Storage, Inc. REIT......................... 3,287 ---------- VALUE SHARES (000) - ------------------------------------------------------------ SHOPPING CENTER (20.4%) FACTORY OUTLET CENTER (1.9%) 58,100 HGI Realty, Inc. REIT............................. $ 1,329 ---------- REGIONAL MALL (14.3%) 343,100 Crown American Realty Trust REIT.................. 2,702 235,000 DeBartolo Realty Corp. REIT....................... 3,055 222,900 Glimcher Realty Trust REIT........................ 3,845 13,600 Rouse Co.......................................... 277 3,700 Taubman Centers, Inc. REIT........................ 37 ---------- 9,916 ---------- SHOPPING CENTER (4.2%) 185,500 Alexander Haagen Properties, Inc. REIT............ 2,272 55,700 Burnham Pacific Property Trust REIT............... 536 6,800 Kranzco Realty Trust REIT......................... 100 ---------- 2,908 ---------- TOTAL SHOPPING CENTER....................................... 14,153 ---------- TOTAL COMMON STOCKS (Cost $62,861)............................ 66,757 ----------
FACE AMOUNT (000) - ---------- SHORT-TERM INVESTMENT (3.3%) REPURCHASE AGREEMENT (3.3%) $ 2,315 The Chase Manhattan Bank, N.A., 5.35%, dated 12/29/95, due 1/02/96, to be repurchased at $2,316, collateralized by $1,510 United States Treasury Bonds, 10.625%, due 8/15/15, valued at $2,363 (Cost $2,315)............................ 2,315 ---------- TOTAL INVESTMENTS (99.3%) (Cost $65,176)...................... 69,072 ----------
OTHER ASSETS (4.7%) Cash............................................ $ 1 Receivable for Investments Sold................. 2,649 Dividends Receivable............................ 588 Receivable for Portfolio Shares Sold............ 35 Interest Receivable............................. 1 Other........................................... 2 3,276 ---------- LIABILITIES (-4.0%) Payable for Investments Purchased............... (2,706) Investment Advisory Fees Payable................ (78) Administrative Fees Payable..................... (9) Custodian Fees Payable.......................... (6) Payable for Portfolio Shares Redeemed........... (3) Other Liabilities............................... (37) (2,839) ---------- ---------- NET ASSETS (100%)............................................. $ 69,509 ---------- ---------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 6,086,542 outstanding $.001 par value shares (authorized 500,000,000 shares)............................. $11.42 ---------- ----------
- ------------------------------------------------------------ + -- Non-income producing security REIT -- Real Estate Investment Trust The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- U.S. Real Estate Portfolio 80 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE VALUE EQUITY PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (98.1%) AEROSPACE (2.1%) 33,300 United Technologies Corp.......................... $ 3,159 ---------- BANKING (12.5%) 43,750 BankAmerica Corp.................................. 2,833 44,000 Bankers Trust (New York) Corp..................... 2,926 53,700 Chemical Banking Corp............................. 3,155 74,000 First of America Bank Corp........................ 3,283 58,550 Mellon Bank Corp.................................. 3,147 95,000 PNC Bank Corp..................................... 3,064 ---------- 18,408 ---------- CAPITAL GOODS (2.1%) 86,700 Deere & Co........................................ 3,056 ---------- CHEMICALS (4.0%) 41,275 Eastman Chemical Co............................... 2,585 27,100 Monsanto Co....................................... 3,320 ---------- 5,905 ---------- COMMUNICATIONS (6.6%) 60,200 NYNEX Corp........................................ 3,251 54,800 SBC Communications, Inc........................... 3,151 84,100 Sprint Corp....................................... 3,353 ---------- 9,755 ---------- CONSUMER-DURABLES (4.9%) 35,000 Chrysler Corp..................................... 1,938 86,800 Ford Motor Co..................................... 2,517 50,900 General Motors Corp............................... 2,692 ---------- 7,147 ---------- CONSUMER-RETAIL (6.8%) 61,800 J.C. Penney Co., Inc.............................. 2,943 194,700 Kmart Corp........................................ 1,411 167,800 TJX Companies, Inc................................ 3,167 189,500 Woolworth Corp.................................... 2,464 ---------- 9,985 ---------- CONSUMER-SERVICE & GROWTH (3.5%) 32,600 Eastman Kodak Co.................................. 2,184 138,900 Ogden Corp........................................ 2,969 ---------- 5,153 ---------- CONSUMER-STAPLES (5.4%) 68,100 American Brands, Inc.............................. 3,039 154,900 Fleming Cos., Inc................................. 3,195 51,500 Heinz (H.J.) Co................................... 1,706 ---------- 7,940 ---------- ENERGY (9.3%) 86,500 Ashland, Inc...................................... 3,038 33,000 Atlantic Richfield, Co............................ 3,655 21,600 Exxon Corp........................................ 1,731 16,050 Royal Dutch Petroleum Co.......................... 2,265 38,350 Texaco, Inc....................................... 3,011 ---------- 13,700 ---------- VALUE SHARES (000) - ------------------------------------------------------------ FINANCIAL-DIVERSIFIED (1.9%) 43,250 Student Loan Marketing Association................ $ 2,849 ---------- HEALTH CARE (3.9%) 81,900 Bausch & Lomb, Inc................................ 3,245 59,800 Baxter International, Inc......................... 2,504 ---------- 5,749 ---------- INDUSTRIAL (3.6%) 147,300 Hanson plc ADR.................................... 2,246 57,100 Rockwell International Corp....................... 3,019 ---------- 5,265 ---------- INSURANCE (6.6%) 90,900 American General Corp............................. 3,170 70,000 Lincoln National Corp............................. 3,763 51,000 St. Paul Cos., Inc................................ 2,837 ---------- 9,770 ---------- METALS (2.0%) 48,400 Phelps Dodge Corp................................. 3,013 ---------- PAPER & PACKAGING (5.9%) 121,600 Louisiana-Pacific Corp............................ 2,949 66,000 Weyerhauser Co.................................... 2,855 50,400 Willamette Industries, Inc........................ 2,835 ---------- 8,639 ---------- TECHNOLOGY (3.4%) 68,000 Apple Computer, Inc............................... 2,168 51,200 Harris Corp....................................... 2,796 ---------- 4,964 ---------- TRANSPORTATION (3.7%) +32,000 AMR Corp.......................................... 2,376 128,000 Ryder System, Inc................................. 3,168 ---------- 5,544 ---------- UTILITIES (9.9%) 106,700 General Public Utilities Corp..................... 3,628 92,500 NIPSCO Industries, Inc............................ 3,538 137,400 Pinnacle West Capital Corp........................ 3,950 85,800 Texas Utilities Co................................ 3,529 ---------- 14,645 ---------- TOTAL COMMON STOCKS (Cost $129,825)........................... 144,646 ----------
FACE AMOUNT (000) - ---------- SHORT-TERM INVESTMENT (1.6%) REPURCHASE AGREEMENT (1.6%) $ 2,342 The Chase Manhattan Bank, N.A., 5.35%, dated 12/29/95, due 1/02/96, to be repurchased at $2,343, collateralized by $1,905 United States Treasury Bonds, 7.875%, due 2/15/21, valued at $2,391 (Cost $2,342)............................ 2,342 ---------- TOTAL INVESTMENTS (99.7%) (Cost $132,167)..................... 146,988 ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Value Equity Portfolio 83 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE VALUE EQUITY PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
AMOUNT (000) - ------------------------------------------------------------ OTHER ASSETS (0.5%) Receivable for Investments Sold................. $ 326 Dividends Receivable............................ 324 Interest Receivable............................. 1 Other........................................... 8 $ 659 ---------- LIABILITIES (-0.2%) Investment Advisory Fees Payable................ (168) Payable for Portfolio Shares Redeemed........... (50) Administrative Fees Payable..................... (20) Custodian Fees Payable.......................... (5) Other Liabilities............................... (39) (282) ---------- ---------- NET ASSETS (100%)............................................. $ 147,365 ---------- ---------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 10,568,118 outstanding $.001 par value shares (authorized 500,000,000 shares)............................. $13.94 ---------- ----------
- ------------------------------------------------------------ + -- Non-income producing security ADR -- American Depositary Receipt The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Value Equity Portfolio 84 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE BALANCED PORTFOLIO - --------------------------------------------------------------------------------
VALUE SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (50.2%) AEROSPACE (1.0%) 2,300 United Technologies Corp.......................... $ 218 ---------- BANKING (6.5%) 3,700 BankAmerica Corp.................................. 240 3,400 Bankers Trust (New York) Corp..................... 226 4,300 Chemical Banking Corp............................. 252 6,100 First of America Bank Corp........................ 271 4,700 Mellon Bank Corp.................................. 252 7,400 PNC Bank Corp..................................... 239 ---------- 1,480 ---------- CAPITAL GOODS (1.1%) 6,900 Deere & Co........................................ 243 ---------- CHEMICALS (2.1%) 3,425 Eastman Chemical Co............................... 214 2,100 Monsanto Co....................................... 258 ---------- 472 ---------- COMMUNICATIONS (3.8%) 5,500 NYNEX Corp........................................ 297 5,000 SBC Communications, Inc........................... 288 7,200 Sprint Corp....................................... 287 ---------- 872 ---------- CONSUMER-DURABLES (2.4%) 2,100 Chrysler Corp..................................... 116 7,300 Ford Motor Co..................................... 212 4,300 General Motors Corp............................... 227 ---------- 555 ---------- CONSUMER-RETAIL (3.6%) 4,800 J.C. Penney Co., Inc.............................. 229 17,100 Kmart Corp........................................ 124 14,100 TJX Companies, Inc................................ 266 15,300 Woolworth Corp.................................... 199 ---------- 818 ---------- CONSUMER-SERVICE & GROWTH (1.6%) 2,400 Eastman Kodak Co.................................. 161 9,600 Ogden Corp........................................ 205 ---------- 366 ---------- CONSUMER-STAPLES (3.1%) 5,500 American Brands, Inc.............................. 245 13,700 Fleming Cos., Inc................................. 283 5,100 Heinz (H.J.) Co................................... 169 ---------- 697 ---------- VALUE SHARES (000) - ------------------------------------------------------------ ENERGY (4.5%) 6,600 Ashland, Inc...................................... $ 232 2,500 Atlantic Richfield Co............................. 277 1,400 Exxon Corp........................................ 112 1,250 Royal Dutch Petroleum Co.......................... 176 3,000 Texaco, Inc....................................... 236 ---------- 1,033 ---------- FINANCIAL-DIVERSIFIED (0.9%) 3,000 Student Loan Marketing Association................ 198 ---------- HEALTH CARE (2.0%) 6,500 Bausch & Lomb, Inc................................ 258 4,600 Baxter International, Inc......................... 192 ---------- 450 ---------- INDUSTRIAL (1.9%) 12,400 Hanson plc ADR.................................... 189 4,400 Rockwell International Corp....................... 233 ---------- 422 ---------- INSURANCE (3.0%) 5,900 American General Corp............................. 206 4,700 Lincoln National Corp............................. 252 3,800 St. Paul Cos., Inc................................ 211 ---------- 669 ---------- METALS (0.9%) 3,100 Phelps Dodge Corp................................. 193 ---------- PAPER & PACKAGING (3.0%) 9,500 Louisiana-Pacific Corp............................ 230 5,000 Weyerhauser Co.................................... 216 4,100 Willamette Industries, Inc........................ 231 ---------- 677 ---------- TECHNOLOGY (1.8%) 5,500 Apple Computer, Inc............................... 175 4,200 Harris Corp....................................... 230 ---------- 405 ---------- TRANSPORTATION (1.7%) +2,200 AMR Corp.......................................... 163 9,200 Ryder System, Inc................................. 228 ---------- 391 ---------- UTILITIES (5.3%) 9,100 General Public Utilities Corp..................... 309 7,500 NIPSCO Industries, Inc............................ 287 11,100 Pinnacle West Capital Corp........................ 319 7,050 Texas Utilities Co................................ 290 ---------- 1,205 ---------- TOTAL COMMON STOCKS (Cost $9,704)............................. 11,364 ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Balanced Portfolio 87 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE BALANCED PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------------ FIXED INCOME SECURITIES (44.5%) U.S. TREASURY NOTES (44.5%) $ 4,875 8.25%, 7/15/98.................................... $ 5,218 4,803 5.50%, 4/15/00.................................... 4,843 ---------- TOTAL FIXED INCOME SECURITIES (Cost $9,804)................... 10,061 ---------- SHORT-TERM INVESTMENT (4.4%) REPURCHASE AGREEMENT (4.4%) 1,006 The Chase Manhattan Bank, N.A., 5.35%, dated 12/29/95, due 1/02/96, to be repurchased at $1,007, collateralized by $765 United States Treasury Bonds, 10.75%, due 2/15/03, valued at $1,025 (Cost $1,006)............................ 1,006 ---------- TOTAL INVESTMENTS (99.1%) (Cost $20,514)...................... 22,431 ----------
OTHER ASSETS (1.2%) Interest Receivable............................. $ 243 Dividends Receivable............................ 24 Other........................................... 1 268 ----- LIABILITIES (-0.3%) Investment Advisory Fees Payable................ (15) Payable for Portfolio Shares Redeemed........... (13) Administrative Fees Payable..................... (4) Custodian Fees Payable.......................... (2) Other Liabilities............................... (23) (57) ----- ---------- NET ASSETS (100%)............................................. $ 22,642 ---------- ---------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 2,268,132 outstanding $.001 par value shares (authorized 500,000,000 shares)............................. $9.98 ---------- ----------
- ------------------------------------------------------------ + -- Non-income producing security ADR -- American Depositary Receipt The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Balanced Portfolio 88 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EMERGING MARKETS DEBT PORTFOLIO - --------------------------------------------------------------------------------
FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------------ DEBT INSTRUMENTS (90.6%) ALGERIA (3.4%) LOAN AGREEMENTS (3.4%) $ p###9,788 Algeria Refinanced Loan Agreements, Tranche A, (Floating Rate), 6.875%, 12/31/00............... $ 5,090 ~p###2,000 Algeria Refinanced Loan Agreements, Tranche A, (Floating Rate), 12/31/00 (Participation: Salomon Brothers)............................... 1,040 -------------- 6,130 -------------- ARGENTINA (25.9%) BONDS (25.9%) $ 3,000 Banco de Galicia 9.00%, 11/01/03.................. 2,629 7,000 Republic of Argentina BOCON, Series 1 DL, (Floating Rate), 3.188%, 4/01/01................ 6,072 5,200 Republic of Argentina Discount Bonds, (Floating Rate), 6.563%, 3/31/23.......................... 3,412 / /26,450 Republic of Argentina Par Bonds, Series L, 5.00%, 3/31/23......................................... 15,110 ++28,000 Republic of Argentina, Series L, "Euro", (Floating Rate), 6.813%, 3/31/05.......................... 19,950 -------------- 47,173 -------------- BRAZIL (13.5%) BONDS (13.5%) $ / /17,250 Federative Republic of Brazil Par Bond, Series Z-L, 4.25%, 4/15/24............................. 9,186 /\26,753 Federative Republic of Brazil, Series C, "Euro", (Floating Rate), PIK, 8.00%, 4/15/14............ 15,349 -------------- 24,535 -------------- BULGARIA (0.8%) BONDS (0.8%) $ 250 Bulgaria Front Loaded Interest Reduction Bond, Series A, (Floating Rate), 2.00%, 7/28/12....... 75 #2,983 Bulgaria Interest Arrears Bonds, (Floating Rate), 6.75%, 7/28/11.................................. 1,387 -------------- 1,462 -------------- ECUADOR (3.3%) BONDS (3.3%) $ 5,000 Republic of Ecuador Discount Bonds, "Euro", (Floating Rate), 6.813%, 2/28/25................ 2,534 #181 Republic of Ecuador Discount Bonds, (Floating Rate), 6.813%, 2/28/25.......................... 92 1,900 Republic of Ecuador IE Bonds, (Floating Rate), 6.50%, 12/21/04................................. 1,159 / /4,000 Republic of Ecuador Par Bond, "Euro", 3.00%, 3/01/25......................................... 1,460 2,043 Republic of Ecuador PDI Bonds, "Euro", (Floating Rate), PIK, 6.813%, 3/01/15..................... 684 -------------- 5,929 -------------- FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------------ MEXICO (7.8%) BONDS (7.8%) MXP 19,092 Banamex Pagare Discount Bond 4/03/97.............. $ 1,568 32,143 Banamex Pagare Discount Bond 10/09/97............. 2,293 $ 5,000 Mexican Discount Bond, Series A, (Floating Rate), 6.766%, 12/31/19, (Value Recovery Rights Attached)....................................... 3,613 5,000 Mexican Discount Bond, Series B, (Floating Rate), 6.766%, 12/31/19, (Value Recovery Rights Attached)....................................... 3,613 #4,200 Petroleos Mexicanos, 8.625%, 12/01/23............. 3,150 -------------- 14,237 -------------- MOROCCO (7.8%) LOAN AGREEMENTS (7.8%) $ ~21,000 Kingdom of Morocco Restructuring and Consolidating Agreement, Tranche A, (Floating Rate), 1/01/09 (Participation: Goldman Sachs, Lehman Brothers, Paribas, Salomon Brothers)...................... 14,254 -------------- NIGERIA (1.5%) BONDS (1.5%) $ 5,500 Nigeria Par Bonds, 6.25%, 11/15/20 (Warrants Attached)....................................... 2,709 -------------- PANAMA (5.9%) LOAN AGREEMENTS (5.9%) $ p###14,313 Republic of Panama Loans.......................... 10,735 -------------- POLAND (1.8%) NOTE (1.8%) $ ##3,121 Republic of Poland Note, Zero Coupon, 2/28/96..... 3,211 -------------- RUSSIA (15.4%) LOAN AGREEMENTS (15.4%) $ ++15,000 Bank for Foreign Economic Affairs, (Floating Rate)........................................... 5,119 DEM++86,500 Bank for Foreign Economic Affairs, (Floating Rate)........................................... 22,923 -------------- 28,042 -------------- VENEZUELA (3.5%) BONDS (3.5%) $ 11,500 Republic of Venezuela Debt Conversion Bonds, Series DL, (Floating Rate), 6.563%, 12/18/07.... 6,339 -------------- TOTAL DEBT INSTRUMENTS (Cost $152,483)............................. 164,756 -------------- SHORT TERM INVESTMENTS (8.7%) MEXICO (8.7%) BILLS (8.7%) MXP 20,000 Mexican Cetes, Zero Coupon, 1/18/96............... 2,535 21,716 Mexican Cetes, Zero Coupon, 2/08/96............... 2,683 7,298 Mexican Cetes, Zero Coupon, 2/22/96............... 887 19,994 Mexican Cetes, Zero Coupon, 7/18/96............... 2,079 41,820 Mexican Cetes, Zero Coupon, 8/08/96............... 4,260 35,000 Mexican Cetes, Zero Coupon, 9/26/96............... 3,404 -------------- TOTAL SHORT-TERM INVESTMENTS (Cost $20,430)........................ 15,848 -------------- TOTAL INVESTMENTS (99.3%) (Cost $172,913).......................... 180,604 --------------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Emerging Markets Debt Portfolio 92 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE EMERGING MARKETS DEBT PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
AMOUNT - ------------------------------------------------------------ (000) OTHER ASSETS (35.7%) Interest Receivable............................. $ 2,819 Receivable for Investments Sold................. 37,950 Collateral on Deposit with Broker............... 24,039 Receivable due from Broker...................... 5,000 Receivable for Portfolio Shares Sold............ 63 Other........................................... 12 $ 69,883 ----------- LIABILITIES (-35.0%) Securities Sold Short, at Value (Proceeds $ (26,242) $24,470)....................................... Payable for Investments Purchased............... (26,106) Payable for Reverse Repurchase Agreement........ (12,225) Bank Overdraft.................................. (2,755) Interest Payable on Securities Sold Short....... (692) Investment Advisory Fees Payable................ (443) Custodian Fees Payable.......................... (50) Administrative Fees Payable..................... (25) Payable for Portfolio Shares Redeemed........... (2) Other Liabilities............................... (69) (68,609) ----------- ----------- NET ASSETS (100%).............................................. $ 181,878 ----------- ----------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 21,172,632 outstanding $.001 par value shares (authorized 500,000,000 shares).............................. $8.59 ----------- -----------
- ------------------------------------------------------------ ) -- Security is expected to be received in connection with the restructuring of the Panama loan owned by the Portfolio. ++ -- Non-income producing security - in default ++ -- Denotes all or a portion of securities subject to repurchase under Reverse Repurchase Agreements as of December 31, 1995 -- See Note A-4 to Financial Statements. # -- 144A security -- certain conditions for public sale may exist. ## -- Securities redemption value is linked to the Republic of Poland Treasury Bill maturing 2/28/96 and to the value of the Polish Zloty and Deutsche Mark at maturity. ### -- Under restructuring at December 31, 1995 -- see Note A-8 to Financial Statements. *** -- Security is valued at cost. See Note A-1. / / -- Step Bond -- coupon rate increases in increments to maturity. Rate disclosed is as of December 31, 1995. Maturity date disclosed is the ultimate maturity. ~ -- Participation interests were acquired through the financial institutions indicated parenthetically. /\ -- 4.00% of 8.00% represents amount paid in cash. The remainder is payment-in-kind. Cash payment rate increases in increments to maturity. p -- Issuer is making partial interest payments. PDI -- Past Due Interest PIK -- Payment-In-Kind. Income may be paid in additional securities or cash at the discretion of the issuer. DEM -- Deutsche Mark MXP -- Mexican Peso Floating Rate -- Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect at December 31, 1995.
FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------------ SECURITIES SOLD SHORT (NOTE A-9) MEXICO BONDS $ 20,000 United Mexican States Aztec Bonds (Floating Rate) 7.609%, 3/31/08 (Proceeds $16,900).............. $ 18,000 5,000 United Mexican States Discount Bond, Series D, (Floating Rate), 6.547%, 12/31/19 (Value Recovery Rights Attached) (Proceeds $3,500)..... 3,613 ---------- 21,613 ---------- PANAMA BONDS #) 2,000 Republic of Panama Interest Reduction Bond, 12/29/49 (Proceeds $820)........................ 905 ---------- VENEZUELA BONDS 6,500 Republic of Venezuela, Par Bond, Series A, (Floating Rate), 6.75%, 3/31/20 (Oil Warrants Attached) (Proceeds $3,250)..................... 3,724 ---------- (Total Proceeds $24,470).......................... $ 26,242 ---------- ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Emerging Markets Debt Portfolio 93 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE FIXED INCOME PORTFOLIO - --------------------------------------------------------------------------------
FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------------ FIXED INCOME SECURITIES (83.3%) U.S. GOVERNMENT AND AGENCY OBLIGATIONS (37.8%) U.S. Treasury Notes (12.1%) $ 7,000 8.25%, 7/15/98.................................... $ 7,492 10,000 6.25%, 5/31/00.................................... 10,336 2,000 7.25%, 8/15/04.................................... 2,224 ---------- 20,052 ---------- Federal Home Loan Mortgage Corporation (4.4%) 14 13.00%, 9/01/10................................... 16 6,868 9.00%, 1/01/25.................................... 7,227 ---------- 7,243 ---------- Government National Mortgage Association (21.3%) 9 11.00%, 12/15/15.................................. 10 16 10.00%, 5/15/19................................... 17 7,976 6.00%, 2/15/24.................................... 7,757 7,159 8.00%, 3/15/24.................................... 7,459 19,745 7.00%, 5/15/24.................................... 19,980 ---------- 35,223 ---------- TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS................ 62,518 ---------- FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS (14.9%) 5,000 Republic of Italy 6.875%, 9/27/23................. 4,883 5,000 Treuhandanstalt 6.50%, 4/23/03.................... 3,635 22,100 Treuhandanstalt 6.75%, 5/13/04.................... 16,171 ---------- TOTAL FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS............. 24,689 ---------- CORPORATE BONDS AND NOTES (24.9%) FINANCE (24.9%) 7,500 CCP Insurance 10.50%, 12/15/04.................... 8,171 #7,500 Farmers Insurance 8.625%, 5/01/24................. 7,781 5,000 Ford Motor Credit Co. 6.25%, 11/08/00............. 5,068 5,000 General Motors Acceptance Corp. 7.375%, 6/22/00... 5,284 5,000 Goldman Sachs Group 7.80%, 7/15/02................ 5,343 3,000 John Hancock 7.375%, 2/15/24...................... 3,002 3,000 Metropolitan Life Insurance 7.80%, 11/01/25....... 3,125 3,000 USX Corp. 9.125%, 1/15/13......................... 3,449 ---------- TOTAL CORPORATE BONDS AND NOTES............................. 41,223 ---------- FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------------ ASSET BACKED SECURITIES (5.7%) $ 4 Case Equipment Loan Trust, 92-A 5.40%, 6/15/98.... $ 4 26 Federal Home Loan Mortgage Corp., REMIC 16-B 10.00%, 10/15/19................................ 26 19 Federal National Mortgage Association, REMIC 92-59F, (Floating Rate), 6.243%, 8/25/06........ 19 100 Ford Credit Auto Loan Master Trust, 92-1A 6.875%, 1/15/99......................................... 101 7 General Motors Acceptance Corp. Trust, 92-DA 5.55%, 5/15/97.................................. 7 4,001 Resolution Trust Corp., Series 1991-M5, Class A, 9.00%, 3/25/17.................................. 4,171 5,000 Standard Credit Card Trust 6.75%, 6/07/00......... 5,136 ---------- TOTAL ASSET BACKED SECURITIES............................... 9,464 ---------- TOTAL FIXED INCOME SECURITIES (Cost $129,833)................. 137,894 ---------- SHORT-TERM INVESTMENT (15.2%) REPURCHASE AGREEMENT (15.2%) 25,181 Goldman Sachs & Co., 5.83%, dated 12/29/95, due 1/02/96, to be repurchased at $25,197, collateralized by $18,310 United States Treasury Bonds, 9.25%, due 2/15/16, valued at $25,707 (Cost $25,181).................................. 25,181 ---------- TOTAL INVESTMENTS (98.5%) (Cost $155,014)..................... 163,075 ----------
OTHER ASSETS (1.6%) Cash............................................ $ 1 Interest Receivable............................. 2,314 Net Unrealized Gain on Forward Foreign Currency 233 Exchange Contracts............................. Receivable for Portfolio Shares Sold............ 39 Other........................................... 14 2,601 ---------- LIABILITIES (-0.1%) Investment Advisory Fees Payable................ (94) Administrative Fees Payable..................... (23) Custodian Fees Payable.......................... (4) Payable for Portfolio Shares Redeemed........... (1) Other Liabilities............................... (27) (149) ---------- ---------- NET ASSETS (100%)............................................. $ 165,527 ---------- ---------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 15,306,696 outstanding $.001 par value shares (authorized 500,000,000 shares)............................. $10.81 ---------- ----------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Fixed Income Portfolio 97 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE FIXED INCOME PORTFOLIO (CONT.) - -------------------------------------------------------------------------------- FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: Under the terms of forward foreign currency exchange contracts open at December 31, 1995, the Portfolio is obligated to deliver or is to receive foreign currency in exchange for U.S. dollars as indicated below:
IN NET CURRENCY EXCHANGE UNREALIZED TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS) (000) (000) DATE (000) (000) (000) - ------------ --------- ---------- ------------ --------- --------------- DEM 23,100 $ 16,110 1/19/96 U.S.$ 16,360 $ 16,360 $ 250 U.S.$ 16,131 16,131 1/19/96 DEM 23,100 16,110 (21) DEM 28,500 20,011 6/07/96 U.S.$ 20,015 20,015 4 --------- --------- ----- $ 52,252 $ 52,485 $ 233 --------- --------- ----- --------- --------- -----
- ------------------------------------------------------------ # -- 144A Security. -- Certain conditions for public sale may exist. REMIC -- Real Estate Mortgage Investment Conduit DEM -- Deutsche Mark Floating Rate -- Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on December 31, 1995.
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Fixed Income Portfolio 98 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE GLOBAL FIXED INCOME PORTFOLIO - --------------------------------------------------------------------------------
FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------------ FIXED INCOME SECURITIES (95.7%) AUSTRALIAN DOLLAR (1.0%) GOVERNMENT BONDS (1.0%) AUD 1,300 Government of Australia 9.50%, 8/15/03............ $ 1,044 -------- BRITISH POUND (5.7%) GOVERNMENT BONDS (5.7%) GBP 3,800 United Kingdom Treasury 7.00%, 11/06/01........... 5,907 -------- CANADIAN DOLLAR (5.0%) EUROBONDS (2.6%) CAD 1,500 British Columbia Province 7.75%, 6/16/03.......... 1,131 2,100 Export-Import Bank of Japan 7.75%, 10/08/02....... 1,588 -------- 2,719 -------- GOVERNMENT BONDS (2.4%) 500 Government of Canada 7.50%, 9/01/00............... 380 2,700 Government of Canada 7.50%, 12/01/03.............. 2,039 -------- 2,419 -------- 5,138 -------- DANISH KRONE (5.8%) GOVERNMENT BONDS (5.8%) DKK 15,000 Kingdom of Denmark 8.00%, 11/15/01................ 2,890 9,500 Kingdom of Denmark 7.00%, 12/15/04................ 1,703 7,000 Kingdom of Denmark 8.00%, 3/15/06......................................... 1,328 -------- 5,921 -------- DEUTSCHE MARK (15.6%) GOVERNMENT BONDS (15.6%) DEM 5,200 German Unity Bond 8.00%, 1/21/02.................. 4,087 7,750 Treuhandanstalt 6.875%, 6/11/03................... 5,746 8,500 Treuhandanstalt 6.75%, 5/13/04.................... 6,219 -------- 16,052 -------- FRENCH FRANC (6.8%) GOVERNMENT BONDS (6.8%) FRF 24,500 French Treasury Bill 7.75%, 4/12/00............... 5,363 3,500 French Treasury Bill 7.00%, 10/12/00.............. 748 4,250 Republic of France 7.00%, 10/12/00................ 908 -------- 7,019 -------- IRISH POUND (1.6%) GOVERNMENT BONDS (1.6%) IEP 950 Irish Government 9.25%, 7/11/03................... 1,696 -------- ITALIAN LIRA (4.0%) GOVERNMENT BONDS (4.0%) ITL 6,400,000 Republic of Italy Treasury Bond 10.50%, 11/01/00........................................ 4,062 -------- FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------------ JAPANESE YEN (8.0%) EUROBONDS (4.6%) JPY 425,000 International Bank for Reconstruction & Development 4.75%, 12/20/04..................... $ 4,703 -------- GOVERNMENT BONDS (3.4%) 300,000 Japan Development Bank 6.50%, 9/20/01............. 3,546 -------- 8,249 -------- NETHERLANDS GUILDER (2.0%) GOVERNMENT BONDS (2.0%) NLG 3,000 Netherlands Government 7.75%, 1/15/00............. 2,061 -------- NEW ZEALAND DOLLAR (1.6%) GOVERNMENT BONDS (1.6%) NZD 1,800 New Zealand Government 8.00%, 7/15/98............. 1,184 750 New Zealand Government 6.50%, 2/15/00............. 475 -------- 1,659 -------- SPANISH PESETA (5.1%) GOVERNMENT BONDS (5.1%) ESP 612,000 Spanish Government 10.30%, 6/15/02................ 5,216 -------- SWEDISH KRONA (2.8%) GOVERNMENT BONDS (2.8%) SEK 17,500 Swedish Government 10.25%, 5/05/00................ 2,829 -------- UNITED STATES DOLLAR (30.7%) CORPORATE BONDS AND NOTES (6.2%) U.S.$ ++998 Asset Securitization Corp. 7.10%, 8/13/29......... 1,044 500 Goldman Sachs 6.20%, 2/15/01...................... 498 700 John Hancock 7.375%, 2/15/24...................... 701 898 LB Commercial Conduit Mortgage Trust 7.144%, 8/25/04......................................... 937 #600 Metropolitan Life Insurance 7.45%, 11/01/23....... 588 600 Prudential Insurance Co. 8.30%, 7/01/25........... 644 2,000 UCFC CMO, Series 1995-C1, Class A3, 6.775%, 11/10/17........................................ 2,018 -------- 6,430 -------- EUROBONDS (0.5%) 500 Statens Bostads 8.50%, 5/30/97.................... 519 -------- U.S. GOVERNMENT AND AGENCY OBLIGATIONS (24.0%) U.S. TREASURY BONDS ++545 10.75%, 8/15/05................................... 750 ++1,280 8.125%, 8/15/19................................... 1,610 U.S. TREASURY NOTES ++650 5.00%, 1/31/99.................................... 645 ++2,030 7.75%, 11/30/99................................... 2,199 ++890 6.25%, 2/15/03.................................... 929 ++675 7.25%, 5/15/04.................................... 751 ++2,800 7.50%, 2/15/05.................................... 3,178
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Global Fixed Income Portfolio 102 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE GLOBAL FIXED INCOME PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------------ U.S. TREASURY STRIPS U.S.$ ++/\1,600 2/15/98, Principal Only........................... $ 1,434 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ++249 ARM Pool #179778 8.00%, 5/15/02................... 259 +++2,500 7.00%, 1/15/26.................................... 2,525 +++8,250 8.50%, 1/15/26.................................... 8,663 +++1,700 6.00%, 1/20/26.................................... 1,717 -------- 24,660 -------- 31,609 -------- TOTAL FIXED INCOME SECURITIES (Cost $95,076)......................... 98,462 -------- SHORT-TERM INVESTMENT (13.7%) REPURCHASE AGREEMENT (13.7%) 14,105 The Chase Manhattan Bank, N.A. 5.35%, dated 12/29/95, due 1/02/96, to be repurchased at $14,113 collateralized by $10,890 United States Treasury Bonds, 10.75%, due 5/15/03 valued at $14,388 (Cost $14,105).......................... 14,105 -------- FOREIGN CURRENCY (0.1%) JPY 10,094 Japanese Yen (Cost $99)........................... 99 -------- TOTAL INVESTMENTS (109.5%) (Cost $109,280)........................... 112,666 --------
OTHER ASSETS (3.5%) Cash............................................ $ 531 Interest Receivable............................. 2,496 Receivable for Portfolio Shares Sold............ 411 Net Unrealized Gain on Forward Foreign Currency Exchange Contracts............................. 132 Foreign Withholding Tax Reclaim Receivable...... 9 Other........................................... 9 3,588 -------- LIABILITIES (-13.0%) Payable for Investments Purchased............... (12,882) Bank Overdraft.................................. (411) Investment Advisory Fees Payable................ (53) Administrative Fees Payable..................... (14) Custodian Fees Payable.......................... (12) Other Liabilities............................... (30) (13,402) -------- -------- NET ASSETS (100%)................................................... $ 102,852 -------- -------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 9,164,317 outstanding $.001 par value shares (authorized 500,000,000 shares).................................... $11.22 ---------------- ---------------- FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: Under the terms of forward foreign currency exchange contracts open at December 31, 1995, the Portfolio is obligated to deliver or is to receive foreign currency in exchange for U.S. dollars as indicated below:
NET CURRENCY TO IN EXCHANGE UNREALIZED DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS) (000) (000) DATE (000) (000) (000) - ------------ --------- ----------- ------------ --------- --------------- JPY 10,094 $ 98 1/04/96 U.S.$ 98 $ 98 $ -- NLG 5,600 3,497 2/13/96 U.S.$ 3,530 3,530 33 U.S.$ 1,559 1,559 2/13/96 NLG 2,500 1,562 3 CAD 2,500 1,832 2/14/96 U.S.$ 1,845 1,845 13 JPY 160,000 1,559 2/14/96 U.S.$ 1,620 1,620 61 U.S.$ 794 794 2/14/96 JPY 80,000 780 (14) DEM 5,000 3,491 2/20/96 U.S.$ 3,571 3,571 80 DEM 5,000 3,494 3/06/96 U.S.$ 3,498 3,498 4 FRF 14,000 2,860 3/07/96 U.S.$ 2,812 2,812 (48) --------- --------- ----- $ 19,184 $ 19,316 $ 132 --------- --------- ----- --------- --------- -----
- ------------------------------------------------------------ +++ -- Security is subject to delayed delivery -- see Note A-7. # -- 144A Security -- Certain conditions for public sale may exist. /\ -- Stripped securities represent the splitting of cash flows into several classes which vary by the proportion of principal and interest paid. Holders are entitled to the portion of the payments on the certificate representing interest only or principal only. ++ -- Security was pledged as collateral for delayed delivery securities. CMO -- Collateralized Mortgage Obligation
- ------------------------------------------------------------ SUMMARY OF FIXED INCOME SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
VALUE PERCENT OF INDUSTRY (000) NET ASSETS - -------------------------------------------------------------------- Finance................................... $ 13,240 12.8% Foreign Government and Agency Obligations............................... 60,562 58.9 U.S. Government and Agency Obligations.... 24,660 24.0 --------- --- $ 98,462 95.7% --------- --- --------- ---
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Global Fixed Income Portfolio 103 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE HIGH YIELD PORTFOLIO - --------------------------------------------------------------------------------
FACE AMOUNT VALUE (000) (000) ------------------------------------------------------------ CORPORATE BONDS AND NOTES (89.6%) BROADCAST-RADIO & TELEVISION (21.5%) $ 2,250 Ackerley Communications, Inc., Series A, 10.75%, 10/01/03........................................ $ 2,408 750 ACT III Broadcasting, Inc., 10.25%, 12/15/05...... 769 1,000 Cablevision Systems Corp., 10.75%, 4/01/04........ 1,058 1,250 Continental Cablevision, Inc., 9.50%, 8/01/13..... 1,328 250 Fundy Cable Ltd., 11.00%, 11/15/05................ 261 / /1,600 Helicon Group, Series B, 9.00%, 11/01/03.......... 1,544 400 Heritage Media, 11.00%, 10/01/02.................. 421 500 Katz Corp., 12.75%, 11/15/02...................... 525 / /2,400 Marcus Cable Co., 0.00%, 12/15/05................. 1,632 1,350 New World Communications Group Holding Corp., Zero Coupon, Series B, 6/15/99....................... 935 900 Rogers Cablesystems Ltd., 11.00%, 12/01/15........ 968 1,500 Viacom, Inc., 8.00%, 7/07/06...................... 1,526 -------- 13,375 -------- CHEMICALS (3.4%) 750 Harris Chemical, 10.75%, 10/15/03................. 683 1,000 Plastic Specialties & Technologies, Inc., 11.25%, 12/01/03........................................ 920 500 Sherritt, Inc., 10.50%, 3/31/14................... 533 -------- 2,136 -------- COAL, GAS & OIL (0.4%) 33 Columbia Gas Systems, Inc., Series A, 6.39%, 11/28/00........................................ 33 33 Columbia Gas Systems, Inc., Series B, 6.61%, 11/28/02........................................ 33 33 Columbia Gas Systems, Inc., Series C, 6.80%, 11/28/05........................................ 33 33 Columbia Gas Systems, Inc., Series D, 7.05%, 11/28/07........................................ 33 33 Columbia Gas Systems, Inc., Series E, 7.32%, 11/28/10........................................ 33 33 Columbia Gas Systems, Inc., Series F, 7.42%, 11/28/15........................................ 33 33 Columbia Gas Systems, Inc., Series G, 7.62%, 11/28/25........................................ 33 -------- 231 -------- ENTERTAINMENT & LEISURE (4.4%) 886 Kloster Cruise Ltd., 13.00%, 5/01/03.............. 673 #/ /2,000 Six Flags Theme Park, Inc., 0.00%, 6/15/05........ 1,560 500 Stena AB, 10.50%, 12/15/05........................ 510 -------- 2,743 -------- ENVIRONMENTAL CONTROLS (1.9%) #1,200 Norcal Waste Systems, 12.50%, 11/15/05............ 1,209 -------- FACE AMOUNT VALUE (000) (000) ------------------------------------------------------------ FINANCIAL SERVICES (6.9%) #$1,191 GPA Equipment Trust, 9.125%, 12/02/96............. $ 1,179 550 GPA Investments, 6.40%, 11/19/98.................. 451 / /500 PM Holdings Corp., 0.00%, 9/01/05................. 257 500 Rapp International Finance, 13.25%, 12/15/05...... 491 1,000 Terra Nova Holdings, 10.75%, 7/01/05.............. 1,091 1,189 Tiphook Finance Corp., 8.00%, 3/15/00............. 826 -------- 4,295 -------- FOOD (1.7%) 1,150 Pilgrim's Pride Corp., 10.875%, 8/01/03........... 1,044 -------- FOOD SERVICE & LODGING (2.8%) 2,250 Family Restaurant Inc., 9.75%, 2/01/02............ 1,238 500 United Meridian Corp., 10.375%, 10/15/05.......... 526 -------- 1,764 -------- GAMING & LODGING (2.0%) 500 Casino America, 11.50%, 11/15/01.................. 462 250 Grand Casinos Inc., 10.125%, 12/01/03............. 261 575 Louisiana Casino Cruises, 11.50%, 12/01/98........ 552 -------- 1,275 -------- HEALTH CARE SUPPLIES & SERVICES (2.6%) 1,000 Quorum Health Group, Inc., 8.75%, 11/01/05........ 1,035 500 Tenet Healthcare Corp., 10.125%, 3/01/05.......... 554 -------- 1,589 -------- MATERIALS (3.4%) 500 IMC Fertilizer, 9.25%, 10/01/00................... 526 1,500 IMC Fertilizer, 9.45%, 12/15/11................... 1,599 -------- 2,125 -------- METALS (2.0%) 750 Algoma Steel Inc., (Yankee Bond), 12.375%, 7/15/05......................................... 675 650 Sheffield Steel Corp., 12.00%, 11/01/01........... 566 -------- 1,241 -------- MULTI-INDUSTRY (0.4%) #250 Howmet Corp., 10.00%, 12/01/03.................... 260 -------- PACKAGING & CONTAINER (5.1%) 500 Owens-Illinois, Inc., 10.50%, 6/15/02............. 531 1,500 Owens-Illinois, Inc., 9.95%, 10/15/04............. 1,594 1,000 Stone Container Corp., 10.75%, 10/01/02........... 1,033 -------- 3,158 -------- PUBLISHING (1.8%) 750 Marvel III Holdings Inc., Series B, 9.125%, 2/15/98......................................... 734 500 Marvel Parent Holdings, Zero Coupon, 4/15/98...... 360 -------- 1,094 --------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- High Yield Portfolio 106 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE HIGH YIELD PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
FACE AMOUNT VALUE (000) (000) ------------------------------------------------------------ REAL ESTATE (0.8%) $#500 HMC Acquisition Properties, 9.00%, 12/15/07....... $ 505 -------- RETAIL-GENERAL (6.3%) 750 Grand Union Co., 12.00%, 9/01/04.................. 645 #800 Host Marriot Travel Plaza, Series B, 9.50%, 5/15/05......................................... 790 3,000 Southland Corp., 5.00%, 12/15/03.................. 2,498 -------- 3,933 -------- TELECOMMUNICATIONS (9.3%) / /3,000 Dial Call Communications, 0.00%, 4/15/04.......... 1,710 / /450 Horizon Cellular Telephone, 0.00%, 10/01/00....... 374 / /2,250 Nextel Communications, 0.00%, 8/15/04............. 1,221 400 Paging Network, 10.125%, 8/01/07.................. 434 500 Rogers Communications, Inc., 10.875%, 4/15/04..... 522 1,500 Telefonica de Argentina, (Yankee Bond), 11.875%, 11/01/04........................................ 1,571 -------- 5,832 -------- TEXTILES & APPAREL (4.1%) 1,000 Polysindo Eka Perkasa, (Yankee Bond), 13.00%, 6/15/01......................................... 1,035 500 Synthetic Industries, 12.75%, 12/01/02............ 494 1,000 Westpoint Stevens, Inc., 9.375%, 12/15/05......... 992 -------- 2,521 -------- TRANSPORTATION (2.4%) *243 America West Airlines, 6.00%, 3/31/97 (acquired 1/17/94 Cost $232).............................. 228 1,500 Venture Holdings, 9.75%, 4/01/04.................. 1,253 -------- 1,481 -------- UTILITIES (6.4%) 1,478 Beaver Valley Funding Corp., (Lease Obligation Bond), 9.00%, 6/01/17........................... 1,247 1,250 California Energy Co., Inc., 9.875%, 6/30/03...... 1,303 1,400 First PV Funding Corp., (Lease Obligation Bond), Series 1986B, 10.15%, 1/15/16................... 1,428 -------- 3,978 -------- TOTAL CORPORATE BONDS AND NOTES (Cost $54,542)................ 55,789 -------- FOREIGN GOVERNMENT BONDS (3.8%) BONDS (3.8%) / /2,500 Federative Republic of Brazil, Par Bond, Series Z-L, 4.25%, 4/15/24............................. 1,313 1,500 Republic of Argentina, Series L, "Euro" (Floating Rate), 6.813%, 3/31/05.......................... 1,068 -------- TOTAL FOREIGN GOVERNMENT BONDS (Cost $2,018).................. 2,381 -------- VALUE SHARES (000) ------------------------------------------------------------ COMMON STOCKS (0.8%) BUILDING MATERIALS & COMPONENTS (0.6%) +30,331 Walter Industries, Inc............................ $ 398 -------- FINANCIAL SERVICES (0.0%) +1,268 WestFed Holdings, Inc., Class B................... -- -------- FOOD SERVICE & LODGING (0.2%) +1,300 Motels of America, Inc............................ 98 -------- GAMING & LODGING (0.0%) +500 Trump Taj Mahal, Class A.......................... 10 -------- TOTAL COMMON STOCKS (Cost $599)............................... 506 -------- PREFERRED STOCKS (0.1%) FINANCIAL SERVICES (0.0%) 3,239 WestFed Holdings, Inc., Series A.................. -- -------- COAL, GAS & OIL (0.1%) +925 Columbia Gas Systems, Inc., Series A, 7.89%....... 23 -------- TOTAL PREFERRED STOCKS (Cost $80)............................. 23 -------- CONVERTIBLE PREFERRED STOCKS (0.0%) COAL, GAS & OIL (0.0%) 566 Columbia Gas Systems, Inc., Series B, 5.22%, 11/28/00 (Cost $23)............................. 22 -------- NO. OF RIGHTS - ---------- RIGHTS (0.0%) BROADCAST-RADIO & TELEVISION (0.0%) ++35,000 SpectraVision, Inc., expiring 10/08/97 (Cost $133)........................................... 2 -------- NO. OF WARRANTS - ---------- WARRANTS (0.6%) AEROSPACE & DEFENSE (0.0%) +*500 Sabreliner Corp., expiring 4/15/03 (acquired 6/21/93, cost $10).............................. 3 -------- ELECTRICAL EQUIPMENT (0.4%) +#28,000 Protection One Alarm, Inc., expiring 4/03/03...... 224 -------- GAMING & LODGING (0.0%) +#2,700 Casino Magic Corp., expiring 10/14/96............. -- +1,725 Louisiana Casino Cruises, expiring 12/01/98....... 14 -------- 14 -------- INSURANCE (0.0%) +500 Horace Mann Educators Corp., expiring 4/3/99...... 7 -------- METALS (0.1%) +8,250 Sheffield Steel Corp., expiring 11/01/01.......... 41 --------
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- High Yield Portfolio 107 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE HIGH YIELD PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
NO. OF VALUE WARRANTS (000) ------------------------------------------------------------ PACKAGING & CONTAINER (0.0%) +1,000 Crown Packaging Holdings, expiring 11/01/03....... $ 8 -------- REAL ESTATE (0.1%) +1,000 Petro PSC Properties L.P., expiring 6/01/97....... 34 -------- TELECOMMUNICATIONS (0.0%) +3,000 Dial Page, Inc., expiring 4/25/99................. -- -------- TOTAL WARRANTS (Cost $228).................................... 331 -------- NO. OF UNITS - ---------- UNITS (4.7%) BROADCAST-RADIO & TELEVISION (1.2%) #/ /1,250 American Telecasting, 14.50%, 8/15/05............. 756 -------- GAMING & LODGING (2.0%) ++#2,208 Maritime Group Series A, 13.50%, 2/15/97.......... 309 964 Trump Taj Mahal Funding Inc., PIK, 9.375%, 11/15/99........................................ 928 -------- 1,237 -------- METALS (1.5%) 1,000 Sheffield Steel Corp. (1st Mortgage Bond + 5 Common Stock Warrants), 12.00%, 11/01/01........ 940 -------- TOTAL UNITS (Cost $5,131)..................................... 2,933 -------- TOTAL INVESTMENTS (99.6%) (Cost $62,754)...................... 61,987 --------
OTHER ASSETS (1.9%) Interest Receivable............................. $1,144 Receivable for Portfolio Shares Sold............ 32 Other........................................... 7 1,183 ----------- LIABILITIES (-1.5%) Bank Overdraft.................................. (598) Payable for Portfolio Shares Redeemed........... (214) Investment Advisory Fees Payable................ (70) Administrative Fees Payable..................... (9) Custodian Fees Payable.......................... (3) Other Liabilities............................... (31) (925) ----------- -------- NET ASSETS (100.0%)............................................ $62,245 -------- -------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 5,951,111 outstanding $.001 par value shares (authorized 500,000,000 shares).............................. $10.46 -------- --------
------------------------------------------------------------ + -- Non-income producing security ++ -- Non-income producing security -- in default * -- Restricted as to public resale. Total value of restricted securities held at December 31, 1995 was $231 or 0.4% of net assets (Total Cost $242). # -- 144A Security -- Certain conditions for public sale may exist. / / -- Step Bond -- Coupon rate increases in increments to maturity. Rate disclosed is as of December 31, 1995. Maturity date disclosed is the ultimate maturity. PIK -- Payment-In-Kind. Income may be paid in additional securities or cash at the discretion of the issuer.
Floating Rate -- Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on December 31, 1995. At December 31, 1995, approximately 99% of the Portfolio's net assets consisted of high yield securities rated below investment grade. Investments in high yield securities are accompanied by a greater degree of credit risk and the risk tends to be more sensitive to economic conditions than higher rated securities. The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- High Yield Portfolio 108 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE MUNICIPAL BOND PORTFOLIO - --------------------------------------------------------------------------------
FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------ TAX-EXEMPT INSTRUMENTS (98.0%) DAILY VARIABLE RATE BONDS (1.5%) $ 400 Platte County, Wyoming, Pollution Control Revenue Bonds, Series A, 6.00%, 7/01/14..................... $ 400 300 Port of Saint Helens, Oregon, Pollution Control Revenue Bonds, Series A, Portland General Electric Co. 5.95%, 4/01/10..................... 300 -------- TOTAL DAILY VARIABLE RATE BONDS (Cost $700)....................................... 700 -------- FIXED RATE INSTRUMENTS (96.5%) 1,000 Connecticut State Special Obligation, Tax Revenue Bonds, Transportation, 6.50%, 7/01/09, Prerefunded 7/01/99 at 102.............. 1,096 1,000 De Kalb County, Georgia, General Obligation Bonds, 7.30%, 1/01/00, Prerefunded 1/01/97 at 102.............. 1,057 1,000 De Kalb County, Georgia, Water & Sewer Revenue Bonds 7.00%, 10/01/06.................... 1,081 1,000 Delaware Transportation Authority, Transportation System Revenue Bonds, 6.50%, 7/01/11, Prerefunded 7/01/01 at 102...................... 1,122 2,000 Florida State General Obligation Bonds, 5.88%, 6/01/24..................... 2,059 1,000 Georgia State, General Obligation Bonds, Series E, 6.75%, 12/01/02............. 1,146 500 Hawaii State, General Obligation Bonds, Series BS, 6.70%, 9/01/97.............. 523 1,000 Hawaii State, General Obligation Bonds, Series CJ, 6.20%, 1/01/12.............. 1,079 1,000 Howard County, Maryland, Consolidated Public Improvement General Obligation Bonds, Series A, 7.20%, 8/01/03, Prerefunded 8/01/96 at 102.............. 1,041 1,500 Intermountain Power Agency, Utah, Power Supply Revenue Bonds, Series D, 8.38%, 7/01/12..................... 1,621 1,000 Kentucky State Housing Corp. Revenue Bonds, Series A, 6.00%, 7/01/10.............. 1,039 1,155 Maryland State Department of Transportation, Construction Revenue Bonds, Second Issue, 6.80%, 11/01/05, Prerefunded 11/01/99 at 102............. 1,285 1,000 Massachusetts State Consolidated Loan, Series A, 7.50%, 3/01/03, Prerefunded 3/01/00 at 102.............. 1,141 500 Massachusetts State Consolidated Loan, Series A, 7.63%, 6/01/08, Prerefunded 6/01/01 at 102.............. 588 2,000 Massachusetts State Special Obligation Revenue Bonds, Series A 6.00%, 6/01/13..... 2,083 1,625 Michigan State Housing Development Authority Revenue Bonds, Series A, 6.75%, 12/01/14............. 1,719 1,500 Minnesota State General Obligation Bonds, 7.00%, 8/01/99, Prerefunded 8/01/96 at 100...................... 1,530 FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------ $ 1,590 Minnesota State Infrastructure Development, General Obligation Bonds, 6.80%, 8/01/03, Prerefunded 8/01/00 at 100...................... $ 1,762 1,400 Mississippi State General Obligation Bonds, 6.00%, 2/01/09..................... 1,503 1,475 Montana State General Obligation Bonds, Long Range Building Program, Series C, 6.00%, 8/01/13.............. 1,571 1,000 New Castle County, Delaware, General Obligation Bonds, 6.25%, 10/15/01............. 1,100 1,000 New York State Local Government Assistance Corp. Revenue Bonds, Series B, 7.50%, 4/01/20, Prerefunded 4/01/01 at 102.............. 1,170 500 Ohio State General Obligation Bonds, 6.20%, 8/01/12....... 549 1,000 Ohio State Housing Finance Agency, Residential Mortgage Revenue Bonds, Series A-1, 6.20%, 9/01/14.............. 1,038 525 Pennsylvania State General Obligation Bonds, Series A, 6.50%, 1/01/00.............. 568 1,000 Pennsylvania State Higher Educational Facilities Authority, Colleges & Universities Revenue Bonds, 6.50%, 9/01/02.............. 1,118 1,000 Redmond, Washington, General Obligation Bonds, 5.75%, 12/01/05.................... 1,082 1,000 Reedy Creek Improvement District, Florida, Utility Revenue Bonds, Series 91-1, 6.50%, 10/01/16, Prerefunded 10/01/01 at 101............. 1,124 1,400 Rhode Island Depositors Economic Protection Corp., Special Obligation Revenue Bonds, Series A, 7.25%, 8/01/21, Prerefunded 8/01/96 at 102...................... 1,458 1,350 San Antonio, Texas, General Obligation Bonds, 6.50%, 8/01/14..................... 1,484 1,000 Tulsa, Oklahoma, General Obligation Bonds, 6.38%, 2/01/02..................... 1,106 1,000 Virginia Beach, Virginia, General Obligation Bonds, 6.00%, 9/01/10.............. 1,075 500 Virginia State Housing Development Authority, Commonwealth Mortgage Revenue Bonds, Series B, 6.60%, 1/01/12.............. 531 1,000 Virginia State Housing Development Authority, Commonwealth Mortgage Revenue Bonds, Series B, 6.65%, 1/01/13.............. 1,066 1,000 Washington State General Obligation Bonds, Series B, 6.20%, 6/01/01.............. 1,088 1,500 Washington State General Obligation Bonds, Series 86-D, 8.00%, 9/01/09, Prerefunded 9/01/96 at 100......................... 1,544 500 Washington Suburban Sanitary District, General Obligation Revenue Bonds, 6.50%, 11/01/05, Prerefunded 11/01/01 at 102............. 565
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Municipal Bond Portfolio 111 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE MUNICIPAL BOND PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
FACE AMOUNT VALUE (000) (000) - ------------------------------------------------------ $ 500 Washington Suburban Sanitary District, General Obligation Revenue Bonds, 6.30%, 1/01/07, Prerefunded 1/01/02 at 102...................... $ 557 -------- TOTAL FIXED RATE INSTRUMENTS (Cost $42,634).................................... 44,269 -------- TOTAL TAX-EXEMPT INSTRUMENTS (98.0%) (Cost $43,334).................................... 44,969 -------- TOTAL INVESTMENTS (98.0%) (Cost $43,334).... 44,969 --------
OTHER ASSETS (2.1%) Cash........................ $ 37 Interest Receivable......... 922 Other....................... 1 960 ---------- LIABILITIES (-0.1%) Investment Advisory Fees Payable.................... (11) Payable for Portfolio Shares Redeemed................... (7) Administrative Fees Payable.................... (7) Custodian Fees Payable...... (2) Other Liabilities........... (33) (60) ---------- -------- NET ASSETS (100%)......................... $ 45,869 -------- -------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 4,422,080 outstanding $.001 par value shares (authorized 500,000,000 shares)..................... $10.37 -------- --------
- ------------------------------------------------ Variable/Floating Rate Instruments. The interest rate changes on these instruments are based upon a designated base rate. These instruments are payable on demand and are secured by a letter of credit or other support agreements. Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate maturity dates. The effective maturity dates for such securities are the next interest reset dates which are seven days or less. Prerefunded Bonds. Outstanding Bonds have been refunded to the first call date (prerefunded date) by the issuance of new bonds. Principal and interest are paid from monies escrowed in U.S. Treasury securities. Prerefunded bonds are generally re-rated AAA due to the Treasury escrow. The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Municipal Bond Portfolio 112 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE MONEY MARKET PORTFOLIO - --------------------------------------------------------------------------------
FACE AMORTIZED AMOUNT COST (000) (000) - ------------------------------------------------------------ MONEY MARKET INSTRUMENTS (93.5%) U.S. GOVERNMENT AND AGENCY OBLIGATIONS (70.5%) AGENCY DISCOUNT NOTES (44.4%) Federal Home Loan Bank $ 50,000 6.10%, 1/02/96.................................... $ 49,991 10,000 5.47%, 1/22/96.................................... 9,968 15,000 5.56%, 1/24/96.................................... 14,947 10,000 5.56%, 2/01/96.................................... 9,952 25,000 5.47%, 3/06/96.................................... 24,753 Federal Home Loan Mortgage Corp. 25,000 5.59%, 1/16/96.................................... 24,942 Federal National Mortgage Corp. 25,000 5.61%, 1/05/96.................................... 24,984 25,000 5.67%, 1/09/96.................................... 24,969 15,000 5.56%, 1/10/96.................................... 14,979 25,000 5.55%, 1/19/96.................................... 24,931 30,000 5.63%, 1/24/96.................................... 29,892 20,000 5.58%, 1/26/96.................................... 19,923 20,000 5.57%, 2/08/96.................................... 19,882 25,000 5.57%, 2/14/96.................................... 24,830 18,000 5.50%, 2/28/96.................................... 17,841 20,000 5.45%, 4/05/96.................................... 19,712 15,000 5.37%, 4/30/96.................................... 14,731 ---------- 371,227 ---------- AGENCY FLOATING RATE NOTES (23.8%) Federal National Mortgage Association 25,000 5.53%, 11/20/96................................... 24,985 65,000 5.85%, 9/02/97.................................... 65,000 25,000 5.26%, 6/02/99.................................... 25,000 13,000 5.26%, 7/26/99.................................... 12,950 25,000 5.26%, 9/22/99.................................... 25,000 Student Loan Marketing Association 46,000 5.40%, 10/30/97................................... 46,053 ---------- 198,988 ---------- U.S. TREASURY STRIPS (2.3%) /\20,000 5/15/96, Principal Only........................... 19,587 ---------- TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS (Cost $589,802)............................................. 589,802 ---------- COMMERCIAL PAPER (11.9%) FINANCE (11.9%) 15,000 Abbey National North America 5.62%, 1/16/96....... 14,965 10,000 Commerzbank 5.58%, 1/31/96........................ 9,954 35,000 Koch Industries 5.65%, 1/19/96.................... 34,901 20,000 Pfizer, Inc., 5.70%, 1/17/96...................... 19,949 20,000 Pfizer, Inc., 5.70%, 1/19/96...................... 19,943 ---------- TOTAL COMMERCIAL PAPER (Cost $99,712)......................... 99,712 ---------- CORPORATE FLOATING RATE NOTES (3.0%) FINANCE (3.0%) 15,000 General Electric Credit Corp. 5.85%, 2/09/96...... 15,000 10,000 General Electric Credit Corp. 5.85%, 2/15/96......................................... 10,000 ---------- TOTAL CORPORATE FLOATING RATE NOTES (Cost $25,000)............ 25,000 ---------- FACE AMORTIZED AMOUNT COST (000) (000) - ------------------------------------------------------------ CERTIFICATES OF DEPOSIT (8.1%) $ 30,000 Deutsche Bank (Yankee) 5.64%, 3/08/96............. $ 30,000 30,000 Rabo Bank, New York (Yankee) 5.75%, 3/06/96....... 30,001 8,000 Rabo Bank New York (Yankee) 5.93%, 5/16/96........ 8,003 ---------- TOTAL CERTIFICATES OF DEPOSIT (Cost $68,004).................. 68,004 ---------- TOTAL MONEY MARKET INSTRUMENTS (Cost $782,518)................ 782,518 ---------- AMOUNT (000) ---------- SHORT TERM INVESTMENT (6.5%) REPURCHASE AGREEMENT (6.5%) 53,913 Goldman Sachs 5.83%, dated 12/29/95, due 1/02/96, to be repurchased at $53,948, collateralized by $39,585, United States Treasury Bonds, 10.375%, due 11/15/11, valued at $55,023 (Cost $53,913)........................................ 53,913 ---------- TOTAL INVESTMENTS (100.0%) (Cost $836,431).................... 836,431 ----------
OTHER ASSETS (0.3%) Cash............................................ $ 1 Interest Receivable............................. 2,802 Other........................................... 57 2,860 ---------- LIABILITIES (-0.3%) Dividends Payable............................... (1,718) Investment Advisory Fees Payable................ (638) Administrative Fees Payable..................... (116) Custodian Fees Payable.......................... (22) Other Liabilities............................... (104) (2,598) ---------- ---------- NET ASSETS (100%)............................................. $ 836,693 ---------- ---------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 836,710,488 outstanding $.001 par value shares (authorized 4,000,000,000 shares).... $1.00 ---------- ----------
- ------------------------------------------------------------ /\ -- Stripped securities represent the splitting of cash flows into several classes which vary by the proportion of principal and interest paid. Holders are entitled to the portion of the payments on the certificate representing interest only or principal only. Floating Rate -- The interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect at December 31, 1995. Maturity dates disclosed for Floating Rate Instruments are the ultimate maturity dates. The effective maturity dates for such securities are the next interest reset dates. Interest rates disclosed for Commercial Paper and Agency Discount Notes represent effective yields at December 31, 1995. The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Money Market Portfolio 115 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE MUNICIPAL MONEY MARKET PORTFOLIO - --------------------------------------------------------------------------------
FACE AMORTIZED AMOUNT COST (000) (000) - ------------------------------------------------------------ TAX-EXEMPT INSTRUMENTS (96.4%) FIXED RATE INSTRUMENTS (43.9%) NOTES (2.0%) $ 3,400 Charleston, South Carolina, Water & Sewer System Revenue, 7.50%, 1/01/14 Prerefunded 1/01/96 at 102...................... $ 3,468 500 Du Page Water Commission, Illinois, 7.10%, 3/01/96......................................... 503 5,000 New York State Urban Development Correctional Facilities, 8.00%, 1/01/15 Prerefunded 1/01/96 at 102.......................................... 5,100 ---------- 9,071 ---------- PUT OPTION BONDS (0.4%) 1,000 York County, South Carolina, Series B-4, 3.75%, 9/15/14 (Putable 3/15/96)....................... 1,000 1,000 York County, South Carolina, Series E-2, 3.80%, 8/15/14 (Putable 2/15/96)....................... 1,000 ---------- 2,000 ---------- TAX & REVENUE ANTICIPATION NOTES (1.6%) 4,000 Colorado State, 4.50%, 6/27/96, TRANS............. 4,012 3,000 Texas State, Series 95A, 4.75%, 8/30/96, TRANS.... 3,013 ---------- 7,025 ---------- COMMERCIAL PAPER (39.9%) 3,000 Beaver County, Pennsylvania, Industrial Development Authority, Duquesne Light, Series 90, 3.75%, 2/14/96.............................. 3,000 4,000 Burke County, Georgia, Development Authority, Oglethorpe, Series 92A, 3.80%, 2/15/96.......... 4,000 2,000 Burlington, Kansas, Kansas City Power & Light Co., Series 87A, 3.70%, 2/20/96...................... 2,000 2,700 Burlington, Kansas, Kansas City Power & Light Co., Series 87B, 3.70%, 2/20/96...................... 2,700 3,500 City of Austin, Texas, Series A, 3.55%, 3/28/96... 3,500 4,530 City of Dallas, Texas, 3.80%, 2/05/96............. 4,530 6,000 City of Honolulu, Hawaii, 3.75%, 2/12/96.......... 6,000 1,900 City of San Antonio, Texas, 3.70%, 2/12/96........ 1,900 10,000 Commonwealth of Massachusetts, Series A, 3.70%, 1/09/96......................................... 10,000 5,000 Commonwealth of Virginia, 3.83%, 1/10/96.......... 5,000 1,200 Connecticut State Health & Education Facilities Authority, Yale University, Series N, 3.70%, 1/12/96......................................... 1,200 2,525 Gainesville, Florida, Series C, 3.85%, 1/30/96.... 2,525 4,000 Georgia Municipal Gas Authority, 3.75%, 2/23/96... 4,000 2,000 Illinois Development Finance Authority, Series 93A, 3.65%, 2/16/96............................. 2,000 1,000 Illinois Health & Education, Series 89A, 3.75%, 2/22/96......................................... 1,000 4,000 Independence, Missouri, Water Utility Revenue, 3.75%, 2/12/96.................................. 4,000 FACE AMORTIZED AMOUNT COST (000) (000) - ------------------------------------------------------------ $ 3,100 Intermountain Power Agency, Utah, Series E 3.75%, 2/07/96......................................... $ 3,100 2,400 Intermountain Power Agency, Utah, Series E, 3.75%, 2/23/96......................................... 2,400 700 Intermountain Power Agency, Utah, Series F2, 3.90%, 1/11/96.................................. 700 1,500 Intermountain Power Agency, Utah, Series 85F, 3.90%, 1/11/96.................................. 1,500 3,100 Jacksonville, Florida, Electric Authority, Series C-1, 3.50%, 3/07/96............................. 3,100 7,700 Jacksonville, Florida, Electric Authority, 3.65%, 2/16/96......................................... 7,700 3,600 Jasper County, Indiana, Series 88B, 3.75%, 2/06/96......................................... 3,600 2,000 Jasper County, Indiana, Series 88C, 3.75%, 2/06/96......................................... 2,000 1,100 Lehigh County, Pennsylvania, 3.85%, 1/30/96....... 1,100 6,600 Massachusetts Health & Education Facilities Authority, Harvard University, Series L, 3.80%, 2/09/96......................................... 6,600 6,020 Montgomery, Alabama, Industrial Development Board, General Electric Series, 3.80%, 2/08/96......... 6,020 4,000 Mount Vernon, Indiana, Pollution Control & Solid Waste Disposal Revenue Bonds, General Electric Project, Series 89A, 3.70%, 2/27/96............. 4,000 4,000 Mount Vernon, Indiana, Pollution Control & Solid Waste Disposal Revenue Bonds, General Electric Project, Series 89A, 3.80%, 2/07/96............. 4,000 4,025 North Carolina Eastern Municipal Power, 3.75%, 2/26/96......................................... 4,025 300 Northeastern Pennsylvania Hospital Authority, Series B, 3.85%, 2/07/96........................ 300 2,990 Omaha, Nebraska, Public Power District, 3.85%, 2/07/96......................................... 2,990 1,000 Peninsula Ports Authority, Virginia, Series 92, 3.75%, 2/12/96.................................. 1,000 3,000 Petersburg, Indiana, Indiana Power & Light, Series 91, 3.70%, 2/13/96.............................. 3,000 2,200 Platte River Authority, Colorado, 3.80%, 1/22/96......................................... 2,200 1,000 Rochester, Minnesota, Health Facilities, Mayo Clinic, Series B, 3.80%, 2/08/96................ 1,000 1,500 Rochester, Minnesota, Health Facilities, Mayo Clinic, Series C, 3.80%, 2/08/96................ 1,500 1,065 Rochester, Minnesota, Health Facilities, Mayo Clinic, Series E, 3.80%, 2/08/96................ 1,065 1,500 Rochester, Minnesota, Health Facilities, Mayo Clinic, Series F, 3.75%, 2/26/96................ 1,500 5,750 State of Louisiana, General Obligation Bond, 3.80%, 2/21/96.................................. 5,750 8,950 Sunshine State, Florida, Government Finance Authority, Series 86, 3.50%, 3/08/96............ 8,950
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Municipal Money Market Portfolio 118 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
FACE AMORTIZED AMOUNT COST (000) (000) - ------------------------------------------------------------ $ 5,000 Sweetwater County, Wyoming, Series 88A, 3.50%, 3/08/96......................................... $ 5,000 6,000 Salt River, Arizona, 3.90%, 1/17/96............... 6,000 2,000 Salt River, Arizona, 3.75%, 2/14/96............... 2,000 3,000 State of New York, General Obligation Bond, BAN, Series Q, 3.75%, 2/05/96........................ 3,000 2,000 Sunshine State, Florida, Government Finance Authority, Series 86, 3.85%, 1/30/96............ 2,000 6,600 Texas Municipal Power Agency, 3.65%, 2/15/96...... 6,600 2,000 Texas Municipal Power Agency, 3.75%, 2/22/96...... 2,000 1,000 Trimble County, Kentucky, Louisville Gas & Electric Series, 3.70%, 2/13/96................. 1,000 5,000 Trimble County, Kentucky, Louisville Gas & Electric Series, 3.80%, 3/07/96................. 5,000 5,500 University of Minnesota, Series A, 3.80%, 2/06/96......................................... 5,500 3,000 University of Texas, Series A, 3.80%, 2/05/96..... 3,000 2,500 Vanderbilt University, Tennessee, Series 89A, 3.75%, 2/22/96.................................. 2,500 ---------- 180,055 ---------- TOTAL FIXED RATE INSTRUMENTS............................ 198,151 ---------- VARIABLE/FLOATING RATE INSTRUMENTS (52.5%) DAILY VARIABLE RATE BONDS (34.1%) 1,500 Ascension Parish, Louisiana, Pollution Control Revenue Bonds, Shell Oil Project, 6.00%, 9/01/23......................................... 1,500 2,400 Birmingham, Alabama, Medical Clinic Board Revenue, University of Alabama Hospital Services Fund, 6.10%, 12/01/26................................. 2,400 5,500 Burke County, Georgia, Development Authority, Series 94, 5.50%, 7/01/24....................... 5,500 6,300 Burke County, Georgia, Development Authority, 6.00%, 4/01/25.................................. 6,300 6,000 California Pollution Control Financing Authority, Southern Edison, Series 86A, 5.40%, 2/28/08..... 6,000 4,000 Chattanooga-Hamilton County, Tennessee, Hospital Authority Revenue, Erlanger Medical Center, 6.10%, 10/01/17................................. 4,000 4,200 Chicago, Illinois, O'Hare International Airport Special Facilities Revenue Bonds, American Airlines, Series A, 6.00%, 12/01/17............. 4,200 4,200 Chicago, Illinois, O'Hare International Airport Special Facilities Revenue Bonds, American Airlines, Series B, 6.00%, 12/01/17............. 4,200 700 Delaware County, Pennsylvania, Industrial Development Authority, Series 95, 6.00%, 12/01/09........................................ 700 FACE AMORTIZED AMOUNT COST (000) (000) - ------------------------------------------------------------ $ 1,700 Delta County, Michigan, Pollution Control Revenue Bonds, Mead Corp., 5.90%, 12/01/23.............. $ 1,700 700 East Baton Rouge Parish, Louisiana, Pollution Control Revenue Bonds, Exxon Project, 5.90%, 11/01/19........................................ 700 1,000 Hapeville, Georgia, Industrial Development Authority, Series 85, 6.00%, 11/01/15........... 1,000 3,700 Harris County, Texas, Health Facilities Development Corp., St. Lukes Episcopal, Series 6.00%, 2/15/16.................................. 3,700 200 Harris County, Texas, Pollution Control Revenue Bonds, Exxon Project, Series 84B, 6.00%, 3/01/24......................................... 200 5,700 Hurley, New Mexico, Pollution Control Revenue Bonds, 5.95%, 12/01/15.......................... 5,700 8,600 Jackson County, Mississippi, Port Facility, Chevron Project, Series 93, 5.95%, 6/01/23...... 8,600 900 Kansas City, Kansas, Industrial Development Authority, PQ Corp., 6.00%, 8/01/15............. 900 1,900 Lake Charles, Louisiana, Harbor & Terminal District Port Facilities, Series 84, 5.95%, 11/01/11........................................ 1,900 2,500 Lincoln County, Wyoming, Pollution Control Revenue Bonds, Exxon Project, Series 84A, 5.90%, 11/01/14........................................ 2,500 4,400 Lincoln County, Wyoming, Pollution Control Revenue Bonds, Exxon Project, Series 84A, 5.95%, 8/01/15......................................... 4,400 900 Lincoln County, Wyoming, Pollution Control Revenue Bonds, Exxon Project, Series 84D, 5.90%, 11/01/14........................................ 900 1,620 Louisiana Public Facilities Authority, Industrial Development, Kenner Hotel Series, 6.00%, 12/01/15........................................ 1,620 4,500 Maricopa County, Arizona, Pollution Control Revenue Bonds, Series 94B, 5.95%, 5/01/29....... 4,500 4,600 Maricopa County, Arizona, Public Services, Series 94C, 6.00%, 5/01/29............................. 4,600 1,000 Marshall County, West Virginia, Pollution Control Revenue Bonds, Mountaineer Carbon Co., 6.00%, 12/01/20........................................ 1,000 6,700 Michigan State Strategic Fund, Consumers Power Series 88A, 5.95%, 4/15/18...................... 6,700 1,570 Missouri State Health & Educational Facilities Authority Revenue, Washington University, Series 89A, 6.00%, 3/01/17............................. 1,570 3,700 Monroe County, Georgia, Pollution Control Revenue Bonds, Georgia Power Co., Series 2, 5.50%, 7/01/25......................................... 3,700 3,900 New York City, New York, Cultural Resources, 5.90%, 12/01/15................................. 3,900
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Municipal Money Market Portfolio 119 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
FACE AMORTIZED AMOUNT COST (000) (000) - ------------------------------------------------------------ $ 2,100 New York City, New York, Water Finance Authority, Water & Sewer System Revenue Bonds, Series 92C, 5.90%, 6/15/22.................................. $ 2,100 18,400 New York City, New York, Water Finance Authority, Water & Sewer System Revenue Bonds, Series 94C, 5.90%, 6/15/23.................................. 18,400 2,900 New York State, Energy Research and Development Authority, Pollution Control Revenue Bonds, 5.95%, 12/01/25................................. 2,900 1,000 Nueces River Authority, Texas, Pollution Control Revenue Bonds, Series 85, 6.10%, 12/01/99....... 1,000 3,000 Ohio State Air Quality Development Authority Revenue Bonds, Series 85A, 5.50%, 12/01/15...... 3,000 1,400 Ohio State Air Quality Development Authority Revenue Bonds, Cincinnati Gas & Electric, Series B, 5.95%, 9/01/30............................... 1,400 700 Peninsula Ports Authority, Virginia, Coal Revenue Bonds, 5.95%, 7/01/16........................... 700 4,300 Pennsylvania Higher Education Authority Revenue Bonds, Carnegie Mellon University, Series 95B, 6.00%, 11/01/27................................. 4,300 3,300 Pennsylvania Higher Education Authority Revenue Bonds, Carnegie Mellon University, Series 95C, 6.00%, 11/01/29................................. 3,300 3,800 Platte County, Wyoming, Pollution Control Revenue Bonds, Series A, 6.00%, 7/01/14................. 3,800 1,000 Platte County, Wyoming, Pollution Control Revenue Bonds, Series B, 6.00%, 7/01/14................. 1,000 2,000 Port of Saint Helens, Oregon, Pollution Control Revenue Bonds, Portland General Electric Co., Series A, 5.95%, 4/01/10........................ 2,000 1,600 Port of Saint Helens, Oregon, Pollution Control Revenue Bonds, Portland General Electric Co., Series B, 5.95%, 6/01/10........................ 1,600 1,400 Saint Charles Parish, Louisiana, Pollution Control Revenue Bonds, Shell Oil Project, 5.95%, 10/01/22........................................ 1,400 5,000 Salt Lake County, Utah, Pollution Control Revenue Bonds, British Petroleum Co., 5.95%, 2/01/08.... 5,000 2,700 Salt Lake County, Utah, Pollution Control Revenue Bonds, SVC Station Holdings, 6.00%, 8/01/07..... 2,700 4,900 Southwest, Texas, Higher Education Authority Revenue Bonds, Southern Methodist University, Series 85, 5.95%, 7/01/15....................... 4,900 ---------- 154,090 ---------- WEEKLY VARIABLE RATE BONDS (18.4%) 1,000 Albuquerque, New Mexico, Revenue Bond, Series A, 5.15%, 7/01/22.................................. 1,000 FACE AMORTIZED AMOUNT COST (000) (000) - ------------------------------------------------------------ $ 1,000 Beaver County, Pennsylvania, Industrial Development Authority, Duquesne Light Series, 4.95%, 8/01/09.................................. $ 1,000 1,000 Beaver County, Pennsylvania, Industrial Development Authority, Duquesne Light Series, 4.95%, 8/01/20.................................. 1,000 1,000 Brunswick & Glynn County, Georgia, Development Authority, Series 85, 5.25%, 12/01/15........... 1,000 7,000 Burke County, Georgia, Development Authority, Oglethorpe, Series 93A, 5.15%, 1/01/16.......... 7,000 5,800 Charlotte, North Carolina, Airport, Series 93A, 5.15%, 7/01/16.................................. 5,800 1,000 City of Baltimore, Maryland, Pollution Control Revenue Bonds, General Motors Corp., 5.10%, 2/01/00......................................... 1,000 2,500 City of Columbia, Missouri, Special Revenue Bonds, Series 88A, 5.15%, 6/01/08...................... 2,500 1,500 City of Columbia, Missouri, Water & Electric Revenue Bonds, Series 85B, 5.15%, 12/01/15...... 1,500 300 City of Forsyth, Montana, Pollution Control Revenue Bonds, Series B, 5.00%, 6/01/13......... 300 700 City of Forsyth, Montana, Pollution Control Revenue Bonds, Series D, 4.90%, 6/01/13......... 700 2,600 City of Midlothian, Texas, Industrial Development Corp., Pollution Control Revenue Bonds, Box-Crow Cement Co., 5.80%, 12/01/09..................... 2,600 1,000 City of Minnetonka, Minnesota, Multifamily, Cliffs Ridgedale, 5.20%, 9/15/25....................... 1,000 1,700 City of San Antonio, Texas, Higher Education Authority, Trinity University, 5.20%, 4/01/04... 1,700 7,800 Clark County, Nevada, Airport Revenue Bonds, Series 93A, 5.15%, 7/01/12...................... 7,800 2,700 Clark County, Nevada, Airport Revenue Bonds, Series 95-A1, 5.05%, 7/01/25.................... 2,700 4,000 Clark County, Nevada, Industrial Development Corp, Nevada Power Co., Series C, 5.05%, 10/01/30..... 4,000 280 Clear Creek County, Colorado, Revenue Bonds, Colorado Finance Pool Program, 5.15%, 6/01/98... 280 600 Colorado Student Obligation Bond Authority, Student Loan Revenue, Series 91C1, 5.05%, 8/01/00......................................... 600 7,200 Dade County, Florida, Water & Sewer Revenue Bonds, 4.90%, 10/05/22................................. 7,200 1,200 Delaware County, Pennsylvania, Industrial Development Authority, Scott Paper Series D, 5.00%, 12/01/18................................. 1,200
The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Municipal Money Market Portfolio 120 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- THE MUNICIPAL MONEY MARKET PORTFOLIO (CONT.) - --------------------------------------------------------------------------------
FACE AMORTIZED AMOUNT COST (000) (000) - ------------------------------------------------------------ $ 500 Delaware County, Pennsylvania, Industrial Development Authority, Scott Paper Series E, 5.00%, 12/01/18................................. $ 500 3,000 Foothill/Eastern California Toll Road Revenue, Series 95C, 4.80%, 1/02/35...................... 3,000 5,000 Harris County, Texas, Series 94G, 5.10%, 8/01/20......................................... 5,000 5,000 Harris County, Texas, Series 94H, 5.10%, 8/01/20......................................... 5,000 300 Illinois Development Finance Authority, A.E. Staley Manufacturing Series 85, 5.05%, 12/01/05........................................ 300 1,000 Lehigh County, Pennsylvania, Allegheny Electric Cooperative, 5.25%, 12/01/15.................... 1,000 1,500 Louisiana Public Facilities Authority, Hospital Revenue, Series 85, 6.40%, 12/01/00............. 1,500 1,000 Massachusetts Health & Education Facilities Authority, Series G-1, 4.75%, 1/01/19........... 1,000 3,900 Nueces County, Texas, Health Facilities, Driscoll Childrens' Foundation, 5.20%, 7/01/15........... 3,900 1,500 Person County, North Carolina, Carolina Power & Light, 5.20%, 11/01/19.......................... 1,500 235 Pinellas County, Florida, Health Facilities, Bayfront Medical Center, Series 89, 4.90%, 6/01/98......................................... 235 450 Polk County, Iowa, Hospital Equipment & Improvement Authority, 5.15%, 12/01/05 . 450 800 Port Development Corporation Marine Terminal, Texas, Series 89, 5.05%, 1/15/14................ 800 1,500 Port of Corpus Christi, Texas, Marine Terminal, R.J. Reynolds Metals Series, 5.25%, 9/01/14..... 1,500 600 Putnam County, Florida, Development Authority, Seminole Electric Series 84 H1, 4.65%, 3/15/14......................................... 600 1,000 Rapides Parish, Louisiana, Central Louisiana Electric Series, 5.05%, 7/01/18 . 1,000 700 Sheboygan, Wisconsin, Wisconsin Power & Light Series, 5.25%, 8/01/14.......................... 700 1,100 University of North Carolina, Chapel Hill Fund Inc., Certificates of Participation, 5.10%, 10/01/09........................................ 1,100 2,000 Washington Public Power, Series 93-1A3, 4.95%, 7/01/17......................................... 2,000 ---------- 82,965 ---------- TOTAL VARIABLE/FLOATING RATE INSTRUMENTS.................... 237,055 ---------- TOTAL TAX-EXEMPT INSTRUMENTS (Cost $435,206).................. 435,206 ---------- TAXABLE INSTRUMENT (3.3%) U.S. GOVERNMENT & AGENCY OBLIGATION (3.3%) 14,820 Federal Home Loan Bank Discount Note, 5.57%, 1/05/96 (Cost $14,811).......................... 14,811 ---------- TOTAL INVESTMENTS (99.7%) (Cost $450,017)..................... 450,017 ----------
AMOUNT (000) - ------------------------------------------------------------ OTHER ASSETS (0.6%) Interest Receivable............................. $ 2,563 Other........................................... 29 $ 2,592 ---------- LIABILITIES (-0.3%) Dividends Payable............................... (607) Investment Advisory Fees Payable................ (338) Administrative Fees Payable..................... (63) Custodian Fees Payable.......................... (12) Payable to Custodian............................ (10) Director's Fees & Expenses...................... (2) Other Liabilities............................... (58) (1,090) ---------- ---------- NET ASSETS (100%)............................................. $ 451,519 ---------- ---------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 451,502,422 outstanding $.001 par value shares (authorized 4,000,000,000 shares)........................... $1.00 ---------- ----------
- ------------------------------------------------------------ BAN -- Bond Anticipation Note TRANS -- Tax & Revenue Anticipation Notes
Variable/Floating Rate Instruments. The interest rate changes on these instruments are based on changes in a designated base rate. These instruments are payable on demand and are secured by a letter of credit or other support agreements. Maturity dates disclosed for Variable/Floating Rate Instruments are the ultimate maturity dates. The effective maturity dates for such securities are the next interest reset dates which are seven days or less. Interest rates disclosed for U.S. Government & Agency Obligations represent effective yields at December 31, 1995. At December 31, 1995, approximately 12% of the net assets were invested in Texas municipal securities. Economic changes affecting the state and certain of it's public bodies and municipalities may affect the ability of issuers to pay the required principal and interest payments of the municipal securities. The accompanying notes are an integral part of the financial statements. (Pages 150-156) - -------------------------------------------------------------------------------- Municipal Money Market Portfolio 121 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - --------------------------------------------------------------------------------
ACTIVE EMERGING COUNTRY ASIAN MARKETS EUROPEAN ALLOCATION EQUITY PORTFOLIO EQUITY GLOBAL EQUITY PORTFOLIO PORTFOLIO YEAR ENDED PORTFOLIO YEAR PORTFOLIO YEAR ENDED YEAR ENDED DECEMBER ENDED DECEMBER YEAR ENDED DECEMBER 31, DECEMBER 31, 31, 31, DECEMBER 31, 1995 1995 1995 1995 1995 (000) (000) (000) (000) (000) - ----------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 3,730 $ 5,477 $ 19,196 $ 1,146 $ 1,896 Interest 179 711 4,215 245 48 Less: Foreign Taxes Withheld (519) (487) (1,993) (158) (168) ------------- ------------- ----------- ------ ------------- Total Income 3,390 5,701 21,418 1,233 1,776 ------------- ------------- ----------- ------ ------------- EXPENSES: Investment Advisory Fees: Basic Fees -- Adviser 1,068 2,301 11,563 416 653 Less: Fees Waived (618) (522) -- (130) (109) ------------- ------------- ----------- ------ ------------- Investment Advisory Fees -- Net 450 1,779 11,563 286 544 Administrative Fees 322 458 1,458 100 141 Sub-Administrative Fees 2 -- 173 -- -- Custodian Fees 403 474 2,073 51 44 Filing and Registration Fees 18 23 45 24 16 Insurance 15 21 69 2 4 Directors' Fees and Expenses 7 10 47 3 4 Legal Fees 8 13 39 3 5 Audit Fees 42 46 113 38 42 Shareholder Reports 37 25 81 9 11 Foreign Tax Expense -- 28 202 -- -- Other Expenses 12 28 42 3 5 ------------- ------------- ----------- ------ ------------- Total Expenses 1,316 2,905 15,905 519 816 ------------- ------------- ----------- ------ ------------- NET INVESTMENT INCOME 2,074 2,796 5,513 714 960 ------------- ------------- ----------- ------ ------------- NET REALIZED GAIN (LOSS): Investments sold 5,468 12,299 (33,253)* 604 5,893 Foreign Currency Transactions (6,591) 160 (981) 39 (86) ------------- ------------- ----------- ------ ------------- Total Net Realized Gain (Loss) (1,123) 12,459 (34,234) 643 5,807 ------------- ------------- ----------- ------ ------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION): Investments 5,557 7,840 (101,142) 3,003 7,313 Foreign Currency Translations 10,118 12 4,125 39 (118) ------------- ------------- ----------- ------ ------------- Total Net Change in Unrealized Appreciation (Depreciation) 15,675 7,852 (97,017) 3,042 7,195 ------------- ------------- ----------- ------ ------------- TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 14,552 20,311 (131,251) 3,685 13,002 ------------- ------------- ----------- ------ ------------- Net Increase (Decrease) in Net Assets Resulting from Operations $ 16,626 $ 23,107 $(125,738) $ 4,399 $ 13,962 ------------- ------------- ----------- ------ ------------- ------------- ------------- ----------- ------ -------------
- --------------- *Net of foreign tax of $650,000 on net realized gains. The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 122 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - --------------------------------------------------------------------------------
INTERNATIONAL LATIN AMERICAN EQUITY INTERNATIONAL JAPANESE PORTFOLIO GOLD PORTFOLIO PORTFOLIO SMALL CAP EQUITY JANUARY 18, YEAR ENDED YEAR ENDED PORTFOLIO YEAR PORTFOLIO YEAR 1995* TO DECEMBER 31, DECEMBER 31, ENDED DECEMBER ENDED DECEMBER DECEMBER 31, 1995 1995 31, 1995 31, 1995 1995 (000) (000) (000) (000) (000) - ------------------------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME: Dividends $ 84 $ 34,103 $ 5,511 $ 524 $ 263 Interest 92 4,293 549 229 108 Less: Foreign Taxes Withheld (6) (4,270) (630) (78) (19) ------ ------------- ------- ------- ----- Total Income 170 34,126 5,430 675 352 ------ ------------- ------- ------- ----- EXPENSES: Investment Advisory Fees: Basic Fees -- Adviser 109 11,452 1,796 469 146 Basic Fees -- Sub Adviser 73 -- -- -- -- Less: Fees Waived -- Adviser (55) (424) (181) (118) (146) Fees Waived -- Sub Adviser (37) -- -- -- -- ------ ------------- ------- ------- ----- Investment Advisory Fees -- Net 90 11,028 1,615 351 -- Administrative Fees 35 2,252 309 101 27 Sub-Administrative Fees -- -- -- -- 9 Custodian Fees 19 545 126 38 111 Filing and Registration Fees 18 47 24 35 17 Insurance 1 100 11 4 -- Directors' Fees and Expenses 3 43 7 3 2 Legal Fees 2 57 9 3 5 Audit Fees 37 61 46 37 39 Shareholder Reports 19 99 17 9 11 Foreign Tax Expense -- -- -- -- 45 Other Expenses 3 81 10 4 4 ------ ------------- ------- ------- ----- Total Expenses 227 14,313 2,174 585 270 ------ ------------- ------- ------- ----- NET INVESTMENT INCOME (LOSS) (57) 19,813 3,256 90 82 ------ ------------- ------- ------- ----- NET REALIZED GAIN (LOSS): Investments Sold 880 108,572 7,974 (2,999) (530) Foreign Currency Transactions (4) (20,102) (297) -- (13) ------ ------------- ------- ------- ----- Total Net Realized Gain (Loss) 876 88,470 7,677 (2,999) (543) ------ ------------- ------- ------- ----- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION): Investments Sold 2,423 44,604 (6,040) 2,624 208 Foreign Currency Translations -- 6,374 (771) 3,310 -- ------ ------------- ------- ------- ----- Total Net Change in Unrealized Appreciation (Depreciation) 2,423 50,978 (6,811) 5,934 208 ------ ------------- ------- ------- ----- TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 3,299 139,448 866 2,935 (335) ------ ------------- ------- ------- ----- Net Increase (Decrease) in Net Assets Resulting from Operations $ 3,242 $ 159,261 $ 4,122 $ 3,025 $ (253) ------ ------------- ------- ------- ----- ------ ------------- ------- ------- -----
- --------------- *Commencement of operations. The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 123 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - --------------------------------------------------------------------------------
AGGRESSIVE SMALL CAP U.S. REAL EQUITY EMERGING EQUITY VALUE ESTATE VALUE PORTFOLIO GROWTH GROWTH EQUITY PORTFOLIO EQUITY BALANCED MARCH 8, PORTFOLIO PORTFOLIO PORTFOLIO FEBRUARY PORTFOLIO PORTFOLIO 1995* TO YEAR ENDED YEAR ENDED YEAR ENDED 24, 1995* YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER DECEMBER TO DECEMBER DECEMBER DECEMBER 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 (000) (000) (000) (000) (000) (000) (000) - ------------------------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME: Dividends $ 338 $ 203 $ 2,580 $ 1,575 $ 1,796 $ 3,986 $ 374 Interest 88 445 694 118 103 245 642 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Income 426 648 3,274 1,693 1,899 4,231 1,016 ----------- ----------- ----------- ----------- ----------- ----------- ----------- EXPENSES: Investment Advisory Fees: Basic Fees -- Adviser 128 1,325 830 400 299 570 106 Less: Fees Waived (96) (18) (105) (97) (129) (85) (68) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Investment Advisory Fees -- Net 32 1,307 725 303 170 485 38 Administrative Fees 28 214 223 82 61 183 42 Custodian Fees 19 29 46 19 36 30 12 Filing and Registration Fees 18 22 23 14 29 27 13 Insurance 1 9 8 3 1 7 2 Directors' Fees and Expenses 2 6 6 4 2 5 3 Legal Fees 24 6 6 3 25 5 2 Audit Fees 22 27 32 25 22 27 25 Shareholder Reports 12 28 28 13 25 21 8 Other Expenses 2 9 8 4 2 7 3 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Expenses 160 1,657 1,105 470 373 797 148 ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET INVESTMENT INCOME (LOSS) 266 (1,009) 2,169 1,223 1,526 3,434 868 ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET REALIZED GAIN (LOSS): Investments Sold 4,082 11,225 32,477 1,546 3,495 10,276 1,158 Written Options (22) -- -- -- -- -- -- Securities Sold Short (19) -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Net Realized Gain 4,041 11,225 32,477 1,546 3,495 10,276 1,158 ----------- ----------- ----------- ----------- ----------- ----------- ----------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 1,860 27,942 15,685 5,880 3,896 17,116 2,413 ----------- ----------- ----------- ----------- ----------- ----------- ----------- TOTAL NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 5,901 39,167 48,162 7,426 7,391 27,392 3,571 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net Increase in Net Assets Resulting from Operations $ 6,167 $ 38,158 $ 50,331 $ 8,649 $ 8,917 $ 30,826 $ 4,439 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
- --------------- *Commencement of operations. The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 124 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - --------------------------------------------------------------------------------
EMERGING GLOBAL MUNICIPAL MUNICIPAL MARKETS FIXED FIXED BOND MONEY MONEY DEBT INCOME INCOME HIGH YIELD PORTFOLIO MARKET MARKET PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO JANUARY 18, PORTFOLIO PORTFOLIO YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1995* TO YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 31, 1995 (000) (000) (000) (000) (000) (000) (000) - ------------------------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME: Dividends $ -- $ -- $ -- $ 53 $ -- $ -- $ -- Interest 28,018 13,011 6,987 7,927 2,154 48,910 15,686 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Income 28,018 13,011 6,987 7,980 2,154 48,910 15,686 ----------- ----------- ----------- ----------- ----------- ----------- ----------- EXPENSES: Investment Advisory Fees: Basic Fees -- Adviser 1,702 624 383 335 149 2,500 1,210 Less: Fees Waived -- (247) (204) (55) (119) -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Investment Advisory Fees -- Net 1,702 377 179 280 30 2,500 1,210 Administrative Fees 275 288 157 118 72 1,307 635 Custodian Fees 204 27 46 20 9 119 72 Filing and Registration Fees 18 17 19 18 23 58 54 Insurance 10 14 9 7 1 67 31 Interest Expense 616 -- -- -- -- -- -- Directors' Fees and Expenses 25 7 5 4 3 29 14 Legal Fees 9 8 5 4 14 25 13 Audit Fees 72 26 35 32 22 23 27 Shareholder Reports 23 18 15 13 14 57 26 Other Expenses 44 21 9 7 3 68 25 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Expenses 2,998 803 479 503 191 4,253 2,107 ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET INVESTMENT INCOME 25,020 12,208 6,508 7,477 1,963 44,657 13,579 ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET REALIZED GAIN (LOSS): Investments Sold 9,470 5,823 1,542 (3,145) 193 79 (1) Foreign Currency Transactions (2,072) 98 (1,527) -- -- -- -- Securities Sold Short 1,116 -- -- -- -- -- -- Written Options 673 -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Net Realized Gain (Loss) 9,187 5,921 15 (3,145) 193 79 (1) ----------- ----------- ----------- ----------- ----------- ----------- ----------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION): Investments Sold 15,093 12,945 9,810 9,886 1,635 -- -- Foreign Currency Translations 197 180 381 -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Net Change in Unrealized Appreciation (Depreciation) 15,290 13,125 10,191 9,886 1,635 -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 24,477 19,046 10,206 6,741 1,828 79 (1) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net Increase in Net Assets Resulting from Operations $ 49,497 $ 31,254 $ 16,714 $ 14,218 $ 3,791 $ 44,736 $ 13,578 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
- --------------- *Commencement of operations. The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 125 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- THE ACTIVE COUNTRY ALLOCATION PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - -------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 2,652 $ 2,074 Net Realized Gain (Loss) 8,147 (1,123) Change in Unrealized Appreciation (Depreciation) (12,455) 15,675 -------------- -------------- Net Increase (Decrease) in Net Assets Resulting from Operations (1,656) 16,626 -------------- -------------- DISTRIBUTIONS: Net Investment Income (1,773) (3,492) In Excess of Net Investment Income - (1,308) Net Realized Gain (4,419) (12,502) -------------- -------------- Total Distributions (6,192) (17,302) -------------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 169,994 88,081 Distributions Reinvested 5,395 15,283 Redeemed (135,418) (115,002) -------------- -------------- Net Increase (Decrease) from Capital Share Transactions 39,971 (11,638) -------------- -------------- Total Increase (Decrease) in Net Assets 32,123 (12,314) NET ASSETS: Beginning of Period 150,854 182,977 -------------- -------------- End of Period (2) $ 182,977 $ 170,663 -------------- -------------- -------------- -------------- - -------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 14,259 7,883 Shares Issued on Distributions Reinvested 458 1,346 Shares Redeemed (11,357) (10,268) -------------- -------------- Net Increase (Decrease) in Capital Shares Outstanding 3,360 (1,039) -------------- -------------- -------------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 168,882 $ 157,244 Undistributed (Distributions in Excess of) Net Investment Income 1,418 (7,782) Accumulated Net Realized Gain 7,989 838 Unrealized Appreciation (Net of accrual for foreign tax of $4 on unrealized appreciation on investments at December 31, 1995) 4,688 20,363 -------------- -------------- $ 182,977 $ 170,663 -------------- -------------- -------------- --------------
- -------------------------------------------------------------------------------- THE ASIAN EQUITY PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - -------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 1,397 $ 2,796 Net Realized Gain 32,848 12,459 Change in Unrealized Appreciation (Depreciation) (80,975) 7,852 -------------- -------------- Net Increase (Decrease) in Net Assets Resulting from Operations (46,730) 23,107 -------------- -------------- DISTRIBUTIONS: Net Investment Income (972) (4,866) In Excess of Net Investment Income -- (3) Net Realized Gain (5,840) (40,469) -------------- -------------- Total Distributions (6,812) (45,338) -------------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 213,200 472,587 Distributions Reinvested 6,036 41,003 Redeemed (175,924) (453,381) -------------- -------------- Net Increase from Capital Share Transactions 43,312 60,209 -------------- -------------- Total Increase (Decrease) in Net Assets (10,230) 37,978 NET ASSETS: Beginning of Period 287,136 276,906 -------------- -------------- End of Period (2) $ 276,906 $ 314,884 -------------- -------------- -------------- -------------- - -------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 9,345 24,613 Shares Issued on Distributions Reinvested 233 2,138 Shares Redeemed (7,685) (23,439) -------------- -------------- Net Increase in Capital Shares Outstanding 1,893 3,312 -------------- -------------- -------------- -------------- (2) Net Assets were Comprised of: Paid in Capital $ 207,594 $ 268,221 Undistributed (Distributions in Excess of) Net Investment Income 1,886 (3) Accumulated Net Realized Gain 32,350 3,738 Unrealized Appreciation 35,076 42,928 -------------- -------------- $ 276,906 $ 314,884 -------------- -------------- -------------- --------------
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 126 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- THE EMERGING MARKETS PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - -------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ (2,302) $ 5,513 Net Realized Gain (Loss) 66,824 (34,234) Change in Unrealized Appreciation (Depreciation) (168,042) (97,017) -------------- -------------- Net Decrease in Net Assets Resulting from Operations (103,520) (125,738) -------------- -------------- DISTRIBUTIONS: Net Investment Income -- (3,978) Net Realized Gain (37,393) (66,711) -------------- -------------- Total Distributions (37,393) (70,689) -------------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 579,390 379,789 Distributions Reinvested 35,730 67,401 Redeemed (279,921) (303,810) -------------- -------------- Net Increase from Capital Share Transactions 335,199 143,380 -------------- -------------- Total Increase (Decrease) in Net Assets 194,286 (53,047) NET ASSETS: Beginning of Period 735,352 929,638 -------------- -------------- End of Period (2) $ 929,638 $ 876,591 -------------- -------------- -------------- -------------- - -------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 32,685 27,709 Shares Issued on Distributions Reinvested 1,974 4,586 Shares Redeemed (16,342) (22,595) -------------- -------------- Net Increase in Capital Shares Outstanding 18,317 9,700 -------------- -------------- -------------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 818,267 $ 962,160 Accumulated Net Investment Loss/Undistributed Net Investment Income (785) 167 Accumulated Net Realized Gain (Loss) 65,253 (35,622) Unrealized Appreciation (Depreciation) (Net of accrual for India tax of $4,779 and $308, respectively on unrealized appreciation on investments.) 46,903 (50,114) -------------- -------------- $ 929,638 $ 876,591 -------------- -------------- -------------- --------------
- -------------------------------------------------------------------------------- THE EUROPEAN EQUITY PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - -------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSSETS OPERATIONS: Net Investment Income $ 159 $ 714 Net Realized Gain 2,606 643 Change in Unrealized Appreciation (Depreciation) (1,886) 3,042 -------------- -------------- Net Increase in Net Assets Resulting from Operations 879 4,399 -------------- -------------- DISTRIBUTIONS: Net Investment Income (87) (738) Net Realized Gain (251) (3,017) -------------- -------------- Total Distributions (338) (3,755) -------------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 39,425 56,209 Distributions Reinvested 337 3,468 Redeemed (25,350) (18,372) -------------- -------------- Net Increase from Capital Share Transactions 14,412 41,305 -------------- -------------- Total Increase in Net Assets 14,953 41,949 NET ASSETS: Beginning of Period 12,681 27,634 -------------- -------------- End of Period (2) $ 27,634 $ 69,583 -------------- -------------- -------------- -------------- - -------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 2,791 4,104 Shares Issued on Distributions Reinvested 27 264 Shares Redeemed (1,818) (1,350) -------------- -------------- Net Increase in Capital Shares Outstanding 1,000 3,018 -------------- -------------- -------------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 25,071 $ 66,433 Undistributed Net Investment Income 31 24 Accumulated Net Realized Gain 2,731 283 Unrealized Appreciation (Depreciation) (199) 2,843 -------------- -------------- $ 27,634 $ 69,583 -------------- -------------- -------------- --------------
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 127 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- THE GLOBAL EQUITY PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - ------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 450 $ 960 Net Realized Gain 1,493 5,807 Change in Unrealized Appreciation (Depreciation) (1,816) 7,195 -------------- -------------- Net Increase in Net Assets Resulting from Operations 127 13,962 -------------- -------------- DISTRIBUTIONS: Net Investment Income (170) (1,202) Net Realized Gain (1,756) (7,032) -------------- -------------- Total Distributions (1,926) (8,234) -------------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 72,166 30,429 Distributions Reinvested 1,926 8,198 Redeemed (13,276) (31,615) -------------- -------------- Net Increase from Capital Share Transactions 60,816 7,012 -------------- -------------- Total Increase in Net Assets 59,017 12,740 NET ASSETS: Beginning of Period 19,918 78,935 -------------- -------------- End of Period (2) $ 78,935 $ 91,675 -------------- -------------- -------------- -------------- - ------------------------------------------------------------------------------------------------ (1) Capital Share Transactions: Shares Subscribed 5,281 2,175 Shares Issued on Distributions Reinvested 154 583 Shares Redeemed (982) (2,239) -------------- -------------- Net Increase in Capital Shares Outstanding 4,453 519 -------------- -------------- -------------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 75,435 $ 82,447 Undistributed Net Investment Income 373 -- Accumulated Net Realized Gain 1,568 474 Unrealized Appreciation 1,559 8,754 -------------- -------------- $ 78,935 $ 91,675 -------------- -------------- -------------- --------------
- -------------------------------------------------------------------------------- THE GOLD PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM FEBRUARY 1, 1994* YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - -------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 77 $ (57) Net Realized Gain 971 876 Change in Unrealized Appreciation (Depreciation) (2,809) 2,423 ------- -------------- Net Increase (Decrease) in Net Assets Resulting from Operations (1,761) 3,242 ------- -------------- DISTRIBUTIONS: Net Investment Income (38) (37) Net Realized Gain -- (2,066) ------- -------------- Total Distributions (38) (2,103) ------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 40,892 21,820 Distributions Reinvested 32 1,913 Redeemed (8,882) (47,706) ------- -------------- Net Increase (Decrease) from Capital Share Transactions 32,042 (23,973) ------- -------------- Total Increase (Decrease) in Net Assets 30,243 (22,834) NET ASSETS: Beginning of Period -- 30,243 ------- -------------- End of Period (2) $ 30,243 $ 7,409 ------- -------------- ------- -------------- - -------------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 4,264 2,403 Shares Issued on Distributions Reinvested 3 222 Shares Redeemed (954) (5,071) ------- -------------- Net Increase (Decrease) in Capital Shares Outstanding 3,313 (2,446) ------- -------------- ------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 32,042 $ 7,817 Undistributed Net Investment Income 36 -- Accumulated Net Realized Gain (Loss) 974 (22) Unrealized Depreciation (2,809) (386) ------- -------------- $ 30,243 $ 7,409 ------- -------------- ------- -------------- - ----------------- *Commencement of operations.
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 128 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- THE INTERNATIONAL EQUITY PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - -------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 13,406 $ 19,813 Net Realized Gain 64,532 88,470 Change in Unrealized Appreciation (Depreciation) 46,399 50,978 ------------ ------------ Net Increase in Net Assets Resulting from Operations 124,337 159,261 ------------ ------------ DISTRIBUTIONS: Net Investment Income (11,956) (5,969) Net Realized Gain (18,019) (168,582) ------------ ------------ Total Distributions (29,975) (174,551) ------------ ------------ CAPITAL SHARE TRANSACTIONS: (1) Subscribed 330,843 276,622 Distributions Reinvested 25,762 167,795 Redeemed (93,242) (135,367) ------------ ------------ Net Increase from Capital Share Transactions 263,363 309,050 ------------ ------------ Total Increase in Net Assets 357,725 293,760 NET ASSETS: Beginning of Period 947,045 1,304,770 ------------ ------------ End of Period (2) $ 1,304,770 $ 1,598,530 ------------ ------------ ------------ ------------ - -------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 22,148 18,165 Shares issued on Distributions Reinvested 1,872 11,272 Shares Redeemed (6,156) (8,961) ------------ ------------ Net Increase in Capital Shares Outstanding 17,864 20,476 ------------ ------------ ------------ ------------ (2) Net Assets were Comprised of: Paid in Capital $ 1,001,514 $ 1,310,630 Undistributed Net Investment Income 7,083 13,219 Accumulated Net Realized Gain (Loss) 70,335 (2,135) Unrealized Appreciation 225,838 276,816 ------------ ------------ $ 1,304,770 $ 1,598,530 ------------ ------------ ------------ ------------
- -------------------------------------------------------------------------------- THE INTERNATIONAL SMALL CAP PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - ------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 1,413 $ 3,256 Net Realized Gain (Loss) (2,342) 7,677 Change in Unrealized Appreciation (Depreciation) (5,180) (6,811) -------------- -------------- Net Increase (Decrease) in Net Assets Resulting from Operations (6,109) 4,122 -------------- -------------- DISTRIBUTIONS: Net Investment Income (96) (2,947) Net Realized Gain (794) (4,763) -------------- -------------- Total Distributions (890) (7,710) -------------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 132,287 59,699 Distributions Reinvested 763 6,777 Redeemed (18,784) (24,320) -------------- -------------- Net Increase from Capital Share Transactions 114,266 42,156 -------------- -------------- Total Increase in Net Assets 107,267 38,568 NET ASSETS: Beginning of Period 52,834 160,101 -------------- -------------- End of Period (2) $ 160,101 $ 198,669 -------------- -------------- -------------- -------------- - ------------------------------------------------------------------------------------------------ (1) Capital Share Transactions: Shares Subscribed 8,068 3,865 Shares Issued on Distributions Reinvested 52 453 Shares Redeemed (1,164) (1,584) -------------- -------------- Net Increase in Capital Shares Outstanding 6,956 2,734 -------------- -------------- -------------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 162,928 $ 205,084 Undistributed Net Investment Income 703 715 Accumulated Net Realized Gain (Loss) (1,989) 1,222 Unrealized Depreciation (1,541) (8,352) -------------- -------------- $ 160,101 $ 198,669 -------------- -------------- -------------- --------------
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 129 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- THE JAPANESE EQUITY PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM APRIL 25, 1994* TO YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - ------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ (31) $ 90 Net Realized Loss (527) (2,999) Change in Unrealized Appreciation (Depreciation) (215) 5,934 -------------- -------------- Net Increase (Decrease) in Net Assets Resulting from Operations (773) 3,025 -------------- -------------- DISTRIBUTIONS: In Excess of Net Investment Income -- (2,539) -------------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 69,015 132,973 Distributions Reinvested -- 2,277 Redeemed (17,910) (66,790) -------------- -------------- Net Increase from Capital Share Transactions 51,105 68,460 -------------- -------------- Total Increase in Net Assets 50,332 68,946 NET ASSETS: Beginning of Period -- 50,332 -------------- -------------- End of Period (2) $ 50,332 $ 119,278 -------------- -------------- -------------- -------------- - ------------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 6,910 15,121 Shares Issued on Distributions Reinvested -- 245 Shares Redeemed (1,789) (7,618) -------------- -------------- Net Increase in Capital Shares Outstanding 5,121 7,748 -------------- -------------- -------------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 50,808 $ 119,268 Accumulated Net Investment Loss/Distributions in Excess of Net Investment Income (261) (2,710) Accumulated Net Realized Loss -- (2,999) Unrealized Appreciation (Depreciation) (215) 5,719 -------------- -------------- $ 50,332 $ 119,278 -------------- -------------- -------------- -------------- - ----------------- * Commencement of operations
- -------------------------------------------------------------------------------- THE LATIN AMERICAN PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM JANUARY 18, 1995* TO DECEMBER 31, 1995 (000) - ------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 82 Net Realized Loss (543) Change in Unrealized Appreciation 208 ------- Net Decrease in Net Assets Resulting from Operations (253) ------- DISTRIBUTIONS: Net Investment Income (74) Return of Capital (49) ------- Total Distributions (123) ------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 21,860 Distributions Reinvested 108 Redeemed (6,216) ------- Net Increase from Capital Share Transactions 15,752 ------- Total Increase in Net Assets 15,376 NET ASSETS: Beginning of Period -- ------- End of Period (2) $ 15,376 ------- ------- - ------------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 2,375 Shares Issued on Distributions Reinvested 12 Shares Redeemed (690) ------- Net Increase in Capital Shares Outstanding 1,697 ------- ------- (2) Net Assets were comprised of: Paid in Capital $ 15,698 Accumulated Net Realized Loss (530) Unrealized Appreciation 208 ------- $ 15,376 ------- ------- - ----------------- *Commencement of operations
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 130 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- THE AGGRESSIVE EQUITY PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM MARCH 8, 1995* TO DECEMBER 31, 1995 (000) - ------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 266 Net Realized Gain 4,041 Change in Unrealized Appreciation 1,860 ------- Net Increase in Net Assets Resulting from Operations 6,167 ------- DISTRIBUTIONS: Net Investment Income (268) Net Realized Gain (3,617) ------- Total Distributions (3,885) ------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 26,611 Distributions Reinvested 3,556 Redeemed (3,901) ------- Net Increase from Capital Share Transactions 26,266 ------- Total Increase in Net Assets 28,548 NET ASSETS: Beginning of Period -- ------- End of Period (2) $ 28,548 ------- ------- - ------------------------------------------------------------------------------------------------ (1) Capital Share Transactions: Shares Subscribed 2,360 Shares Issued on Distributions Reinvested 293 Shares Redeemed (308) ------- Net Increase in Capital Shares Outstanding 2,345 ------- ------- (2) Net Assets were comprised of: Paid in Capital $ 26,266 Accumulated Net Realized Gain 422 Unrealized Appreciation 1,860 ------- $ 28,548 ------- ------- - ----------------- *Commencement of operations.
- -------------------------------------------------------------------------------- THE EMERGING GROWTH PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - ------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Loss $ (673) $ (1,009) Net Realized Gain 1,331 11,225 Change in Unrealized Appreciation (Depreciation) (891) 27,942 -------------- -------------- Net Increase (Decrease) in Net Assets Resulting from Operations (233) 38,158 -------------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 85,970 100,167 Redeemed (71,689) (136,616) -------------- -------------- Net Increase (Decrease) from Capital Share Transactions 14,281 (36,449) -------------- -------------- Total Increase in Net Assets 14,048 1,709 NET ASSETS: Beginning of Period 103,621 117,669 -------------- -------------- End of Period (2) $ 117,669 $ 119,378 -------------- -------------- -------------- -------------- - ------------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 5,433 5,737 Shares Redeemed (4,522) (7,483) -------------- -------------- Net Increase (Decrease) in Capital Shares Outstanding 911 (1,746) -------------- -------------- -------------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 103,598 $ 66,140 Accumulated Net Realized Gain (Loss) (10,925) 300 Unrealized Appreciation 24,996 52,938 -------------- -------------- $ 117,669 $ 119,378 -------------- -------------- -------------- --------------
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 131 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- THE EQUITY GROWTH PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - -------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSSETS OPERATIONS: Net Investment Income $ 1,293 $ 2,169 Net Realized Gain 3,710 32,477 Change in Unrealized Appreciation (Depreciation) (2,690) 15,685 -------------- -------------- Net Increase in Net Assets Resulting from Operations 2,313 50,331 -------------- -------------- DISTRIBUTIONS: Net Investment Income (952) (2,636) Net Realized Gain (2,220) (26,092) -------------- -------------- Total Distributions (3,172) (28,728) -------------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 47,456 78,470 Distributions Reinvested 3,096 26,785 Redeemed (26,223) (66,005) -------------- -------------- Net Increase from Capital Share Transactions 24,329 39,250 -------------- -------------- Total Increase in Net Assets 23,470 60,853 NET ASSETS: Beginning of Period 73,789 97,259 -------------- -------------- End of Period (2) $ 97,259 $ 158,112 -------------- -------------- -------------- -------------- - -------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 3,964 5,794 Shares Issued on Distributions Reinvested 267 1,955 Shares Redeemed (2,218) (4,657) -------------- -------------- Net Increase in Capital Shares Outstanding 2,013 3,092 -------------- -------------- -------------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 92,584 $ 131,834 Undistributed Net Investment Income 461 -- Accumulated Net Realized Gain 3,459 9,838 Unrealized Appreciation 755 16,440 -------------- -------------- $ 97,259 $ 158,112 -------------- -------------- -------------- --------------
- -------------------------------------------------------------------------------- THE SMALL CAP VALUE EQUITY PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER DECEMBER 31, 31, 1994 1995 (000) (000) - ------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSSETS OPERATIONS: Net Investment Income $ 951 $ 1,223 Net Realized Gain 1,484 1,546 Change in Unrealized Appreciation (Depreciation) (1,598) 5,880 ----------- -------------- Net Increase in Net Assets Resulting from Operations 837 8,649 ----------- -------------- DISTRIBUTIONS: Net Investment Income (831) (1,519) Net Realized Gain (720) (2,511) ----------- -------------- Total Distributions (1,551) (4,030) ----------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 25,447 18,293 Distributions Reinvested 1,464 3,611 Redeemed (12,939) (14,637) ----------- -------------- Net Increase from Capital Share Transactions 13,972 7,267 ----------- -------------- Total Increase in Net Assets 13,258 11,886 NET ASSETS: Beginning of Period 26,775 40,033 ----------- -------------- End of Period (2) $ 40,033 $ 51,919 ----------- -------------- ----------- -------------- - ------------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 2,358 1,631 Shares Issued on Distributions Reinvested 137 324 Shares Redeemed (1,200) (1,304) ----------- -------------- Net Increase in Capital Shares Outstanding 1,295 651 ----------- -------------- ----------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 39,194 $ 46,460 Undistributed Net Investment Income 281 -- Accumulated Net Realized Gain 1,484 505 Unrealized Appreciation (Depreciation) (926) 4,954 ----------- -------------- $ 40,033 $ 51,919 ----------- -------------- ----------- --------------
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 132 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- THE U.S. REAL ESTATE PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM FEBRUARY 24, 1995* TO DECEMBER 31, 1995 (000) - ------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 1,526 Net Realized Gain 3,495 Change in Unrealized Appreciation 3,896 ------- Net Increase in Net Assets Resulting from Operations 8,917 ------- DISTRIBUTIONS: Net Investment Income (1,405) Net Realized Gain (2,504) ------- Total Distributions (3,909) ------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 67,651 Distributions Reinvested 3,148 Redeemed (6,298) ------- Net Increase from Capital Share Transactions 64,501 ------- Total Increase in Net Assets 69,509 NET ASSETS: Beginning of Period -- ------- End of Period (2) $ 69,509 ------- ------- - ------------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 6,381 Shares Issued on Distributions Reinvested 279 Shares Redeemed (573) ------- Net Increase in Capital Shares Outstanding 6,087 ------- ------- (2) Net Assets were comprised of: Paid in Capital $ 64,501 Undistributed Net Investment Income 121 Accumulated Net Realized Gain 991 Unrealized Appreciation 3,896 ------- $ 69,509 ------- ------- - ----------------- *Commencement of operations
- -------------------------------------------------------------------------------- THE VALUE EQUITY PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - --------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSSETS OPERATIONS: Net Investment Income $ 2,376 $ 3,434 Net Realized Gain 2,378 10,276 Change in Unrealized Appreciation (Depreciation) (6,089) 17,116 -------------- -------------- Net Increase (Decrease) in Net Assets Resulting from Operations (1,335) 30,826 -------------- -------------- DISTRIBUTIONS: Net Investment Income (2,189) (4,042) Net Realized Gain (2,504) (6,330) -------------- -------------- Total Distributions (4,693) (10,372) -------------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 45,372 70,393 Distributions Reinvested 4,395 9,289 Redeemed (24,931) (26,177) -------------- -------------- Net Increase from Capital Share Transactions 24,836 53,505 -------------- -------------- Total Increase in Net Assets 18,808 73,959 NET ASSETS: Beginning of Period 54,598 73,406 -------------- -------------- End of Period (2) $ 73,406 $ 147,365 -------------- -------------- -------------- -------------- - --------------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 3,798 5,522 Shares Issued on Distributions Reinvested 372 731 Shares Redeemed (2,109) (2,068) -------------- -------------- Net Increase in Capital Shares Outstanding 2,061 4,185 -------------- -------------- -------------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 72,751 $ 126,256 Undistributed Net Investment Income 643 8 Accumulated Net Realized Gain 2,307 6,280 Unrealized Appreciation (Depreciation) (2,295) 14,821 -------------- -------------- $ 73,406 $ 147,365 -------------- -------------- -------------- --------------
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 133 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- THE BALANCED PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - -------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 987 $ 868 Net Realized Gain 496 1,158 Change in Unrealized Appreciation (Depreciation) (1,998) 2,413 -------------- ------- Net Increase (Decrease) in Net Assets Resulting from Operations (515) 4,439 -------------- ------- DISTRIBUTIONS: Net Investment Income (1,257) (1,080) Net Realized Gain (3,880) (1,047) -------------- ------- Total Distributions (5,137) (2,127) -------------- ------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 4,396 3,530 Distributions Reinvested 4,725 1,695 Redeemed (14,661) (3,387) -------------- ------- Net Increase (Decrease) from Capital Share Transactions (5,540) 1,838 -------------- ------- Total Increase (Decrease) in Net Assets (11,192) 4,150 NET ASSETS: Beginning of Period 29,684 18,492 -------------- ------- End of Period (2) $ 18,492 $ 22,642 -------------- ------- -------------- ------- - -------------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 470 380 Shares Issued on Distributions Reinvested 502 182 Shares Redeemed (1,574) (358) -------------- ------- Net Increase (Decrease) in Capital Shares Outstanding (602) 204 -------------- ------- -------------- ------- (2) Net Assets were comprised of: Paid in Capital $ 18,279 $ 20,117 Undistributed Net Investment Income 214 2 Accumulated Net Realized Gain 495 606 Unrealized Appreciation (Depreciation) (496) 1,917 -------------- ------- $ 18,492 $ 22,642 -------------- ------- -------------- -------
- -------------------------------------------------------------------------------- THE EMERGING MARKETS DEBT PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM FEBRUARY 1, 1994* YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - ------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 8,511 $ 25,020 Net Realized Gain (Loss) (2,516) 9,187 Change in Unrealized Appreciation (Depreciation) (9,457) 15,290 -------- -------------- Net Increase (Decrease) in Net Assets Resulting from Operations (3,462) 49,497 -------- -------------- DISTRIBUTIONS: Net Investment Income -- (33,418) Net Realized Gain -- (7,508) -------- -------------- Total Distributions -- (40,926) -------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 190,661 147,278 Distributions Reinvested -- 29,155 Redeemed (42,250) (148,075) -------- -------------- Net Increase from Capital Share Transactions 148,411 28,358 -------- -------------- Total Increase in Net Assets 144,949 36,929 NET ASSETS: Beginning of Period -- 144,949 -------- -------------- End of Period (2) $ 144,949 $ 181,878 -------- -------------- -------- -------------- - ------------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 21,753 18,475 Shares issued on Distributions Reinvested -- 3,468 Shares Redeemed (4,872) (17,651) -------- -------------- Net Increase in Capital Shares Outstanding 16,881 4,292 -------- -------------- -------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 148,411 $ 176,769 Undistributed (Distributions in Excess of) Net Investment Income 8,322 (1,501) Accumulated Net Realized Gain (Loss) (2,327) 777 Unrealized Appreciation (Depreciation) (9,457) 5,833 -------- -------------- $ 144,949 $ 181,878 -------- -------------- -------- -------------- - ----------------- * Commencement of operations.
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 134 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- THE FIXED INCOME PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - ------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 12,421 $ 12,208 Net Realized Gain (Loss) (14,879) 5,921 Change in Unrealized Appreciation (Depreciation) (5,219) 13,125 -------------- -------------- Net Increase (Decrease) in Net Assets Resulting from Operations (7,677) 31,254 -------------- -------------- DISTRIBUTIONS: Net Investment Income (11,181) (13,570) Net Realized Gain (8,092) -- In Excess of Net Realized Gain (22) -- -------------- -------------- Total Distributions (19,295) (13,570) -------------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 91,618 67,883 Distributions Reinvested 16,756 10,529 Redeemed (112,739) (139,900) -------------- -------------- Net Decrease from Capital Share Transactions (4,365) (61,488) -------------- -------------- Total Decrease in Net Assets (31,337) (43,804) NET ASSETS: Beginning of Period 240,668 209,331 -------------- -------------- End of Period (2) $ 209,331 $ 165,527 -------------- -------------- -------------- -------------- - ------------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscriptions 9,049 6,668 Shares Issued on Distributions Reinvested 1,625 1,022 Shares Redeemed (11,150) (13,696) -------------- -------------- Net Decrease in Capital Shares Outstanding (476) (6,006) -------------- -------------- -------------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 227,051 $ 165,563 Undistributed Net Investment Income 1,274 10 Accumulated Net Realized Loss (14,154) (8,331) Unrealized Appreciation (Depreciation) (4,840) 8,285 -------------- -------------- $ 209,331 $ 165,527 -------------- -------------- -------------- --------------
- -------------------------------------------------------------------------------- THE GLOBAL FIXED INCOME PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - ------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 9,291 $ 6,508 Net Realized Gain (Loss) (9,075) 15 Change in Unrealized Appreciation (Depreciation) (10,682) 10,191 -------------- -------------- Net Increase (Decrease) in Net Assets Resulting from Operations (10,466) 16,714 -------------- -------------- DISTRIBUTIONS: Net Investment Income (5,595) (9,003) Net Realized Gain (4,564) -- -------------- -------------- Total Distributions (10,159) (9,003) -------------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 96,510 36,622 Distributions Reinvested 9,111 7,887 Redeemed (126,789) (80,043) -------------- -------------- Net Decrease from Capital Share Transactions (21,168) (35,534) -------------- -------------- Total Decrease in Net Assets (41,793) (27,823) NET ASSETS: Beginning of Period 172,468 130,675 -------------- -------------- End of Period (2) $ 130,675 $ 102,852 -------------- -------------- -------------- -------------- - ------------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 8,912 3,346 Shares Issued on Distributions Reinvested 833 737 Shares Redeemed (11,801) (7,623) -------------- -------------- Net Decrease in Capital Shares Outstanding (2,056) (3,540) -------------- -------------- -------------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 141,657 $ 106,123 Undistributed Net Investment Income 1,613 309 Accumulated Net Realized Loss (5,933) (7,109) Unrealized Appreciation (Depreciation) (6,662) 3,529 -------------- -------------- $ 130,675 $ 102,852 -------------- -------------- -------------- --------------
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 135 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- THE HIGH YIELD PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - ------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 9,341 $ 7,477 Net Realized Loss (1,581) (3,145) Change in Unrealized Appreciation (Depreciation) (12,785) 9,886 -------------- -------------- Net Increase (Decrease) in Net Assets Resulting from Operations (5,025) 14,218 -------------- -------------- DISTRIBUTIONS: Net Investment Income (9,097) (8,122) Net Realized Gain (1,413) -- -------------- -------------- Total Distributions (10,510) (8,122) -------------- -------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 72,764 59,247 Distributions Reinvested 8,869 6,088 Redeemed (43,375) (106,409) -------------- -------------- Net Increase (Decrease) from Capital Share Transactions 38,258 (41,074) -------------- -------------- Total Increase (Decrease) in Net Assets 22,723 (34,978) NET ASSETS: Beginning of Period 74,500 97,223 -------------- -------------- End of Period (2) $ 97,223 $ 62,245 -------------- -------------- -------------- -------------- - ------------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 6,882 5,865 Shares Issued on Distributions Reinvested 858 609 Shares Redeemed (4,235) (10,704) -------------- -------------- Net Increase (Decrease) in Capital Shares Outstanding 3,505 (4,230) -------------- -------------- -------------- -------------- (2) Net Assets were comprised of: Paid in Capital $ 108,726 $ 67,652 Undistributed Net Investment Income 731 86 Accumulated Net Realized Loss (1,581) (4,726) Unrealized Depreciation (10,653) (767) -------------- -------------- $ 97,223 $ 62,245 -------------- -------------- -------------- --------------
- -------------------------------------------------------------------------------- THE MUNICIPAL BOND PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM JANUARY 18, 1995* TO DECEMBER 31, 1995 (000) - ------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 1,963 Net Realized Gain 193 Change in Unrealized Appreciation 1,635 -------- Net Increase in Net Assets Resulting from Operations 3,791 -------- DISTRIBUTIONS: Net Investment Income (1,963) In Excess of Net Investment Income (15) Net Realized Gain (193) -------- Total Distributions (2,171) -------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 61,800 Distributions Reinvested 2,060 Redeemed (19,611) -------- Net Increase from Capital Share Transactions 44,249 -------- Total Increase in Net Assets 45,869 NET ASSETS: Beginning of Period -- -------- End of Period (2) $ 45,869 -------- -------- - ------------------------------------------------------------------------------------------------ (1) Capital Share Transactions: Shares Subscribed 6,134 Shares Issued on Distributions Reinvested 200 Shares Redeemed (1,912) -------- Net Increase in Capital Shares Outstanding 4,422 -------- -------- (2) Net Assets were comprised of: Paid in Capital $ 44,249 Distributions in Excess of Net Investment Income (15) Unrealized Appreciation 1,635 -------- $ 45,869 -------- -------- - ----------------- *Commencement of operations.
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 136 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- THE MONEY MARKET PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - ----------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSSETS OPERATIONS: Net Investment Income $ 26,880 $ 44,657 Net Realized Gain (Loss) (26) 79 ------------- ------------- Net Increase in Net Assets Resulting from Operations 26,854 44,736 ------------- ------------- DISTRIBUTIONS: Net Investment Income (26,888) (44,657) ------------- ------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 4,547,025 8,093,985 Distributions Reinvested 24,451 41,765 Redeemed (4,538,102) (7,989,639) ------------- ------------- Net Increase from Capital Share Transactions 33,374 146,111 ------------- ------------- Total Increase in Net Assets 33,340 146,190 NET ASSETS: Beginning of Period 657,163 690,503 ------------- ------------- End of Period (2) $ 690,503 $ 836,693 ------------- ------------- ------------- ------------- - ----------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 4,547,025 8,093,987 Shares Issued on Distributions Reinvested 24,451 41,765 Shares Redeemed (4,538,102) (7,989,639) ------------- ------------- Net Increase in Capital Shares Outstanding 33,374 146,113 ------------- ------------- ------------- ------------- (2) Net Assets were comprised of: Paid in Capital $ 690,595 $ 836,706 Accumulated Net Realized Loss (92) (13) ------------- ------------- $ 690,503 $ 836,693 ------------- ------------- ------------- -------------
- -------------------------------------------------------------------------------- THE MUNICIPAL MONEY MARKET PORTFOLIO - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1994 1995 (000) (000) - ----------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 8,186 $ 13,579 Net Realized Loss (6) (1) ------------- ------------- Net Increase in Net Assets Resulting from Operations 8,180 13,578 ------------- ------------- DISTRIBUTIONS: Net Investment Income (8,186) (13,579) ------------- ------------- CAPITAL SHARE TRANSACTIONS: (1) Subscribed 2,267,352 3,169,110 Distributions Reinvested 7,587 13,182 Redeemed (2,182,013) (3,090,216) ------------- ------------- Net Increase from Capital Share Transactions 92,926 92,076 ------------- ------------- Total Increase in Net Assets 92,920 92,075 NET ASSETS: Beginning of Period 266,524 359,444 ------------- ------------- End of Period (2) $ 359,444 $ 451,519 ------------- ------------- ------------- ------------- - ----------------------------------------------------------------------------------------------- (1) Capital Share Transactions: Shares Subscribed 2,267,352 3,169,110 Shares Issued on Distributions Reinvested 7,587 13,182 Shares Redeemed (2,182,013) (3,090,216) ------------- ------------- Net Increase in Capital Shares Outstanding 92,926 92,076 ------------- ------------- ------------- ------------- (2) Net Assets were comprised of: Paid in Capital $ 359,452 $ 451,528 Accumulated Net Realized Loss (8) (9) ------------- ------------- $ 359,444 $ 451,519 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 137 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS: - -------------------------------------------------------------------------------- THE ACTIVE COUNTRY ALLOCATION PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM JANUARY 17, 1992* TWO MONTHS TO ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1992 1992 1993 1994 1995 - ----------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.37 $ 9.59 $ 12.21 $ 11.65 ------ ----- ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.11 0.02 0.13 0.19 0.17 Net Realized and Unrealized Gain (Loss) on Investments (0.74) 0.20 2.75 (0.25) 1.00 ------ ----- ------ ------ ------ Total from Investment Operations (0.63) 0.22 2.88 (0.06) 1.17 ------ ----- ------ ------ ------ DISTRIBUTIONS Net Investment Income -- -- (0.09) (0.14) (0.25) In Excess of Net Investment Income -- -- (0.08) -- (0.10) Net Realized Gain -- -- -- (0.36) (0.84) In Excess of Net Realized Gain -- -- (0.09) -- -- ------ ----- ------ ------ ------ Total Distributions -- -- (0.26) (0.50) (1.19) ------ ----- ------ ------ ------ NET ASSET VALUE, END OF PERIOD $ 9.37 $ 9.59 $ 12.21 $ 11.65 $ 11.63 ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ TOTAL RETURN (6.30)% 2.35% 30.72% (0.52)% 10.57% ------ ----- ------ ------ ------ ------ ----- ------ ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $47,534 $50,234 $150,854 $182,977 $170,663 Ratio of Expenses to Average Net Assets 0.88%** 0.80%** 0.80% 0.80% 0.80% Ratio of Net Investment Income to Average Net Assets 2.32%** 1.22%** 1.29% 1.43% 1.26% Portfolio Turnover Rate 62% 2% 53% 51% 72% - ----------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.03 $ 0.01 $ 0.05 $ 0.03 $ 0.05 Ratios before expense limitation: Expenses to Average Net Assets 1.58%** 1.70%** 1.33% 1.00% 1.18% Net Investment Income to Average Net Assets 1.62%** 0.32%** 0.76% 1.23% 0.88% *Commencement of operations. **Annualized
- -------------------------------------------------------------------------------- THE ASIAN EQUITY PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM JULY 1, TWO MONTHS 1991* TO YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1991 1992 1992 1993 1994 1995 - -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $ 9.67 $ 13.63 $ 13.11 $ 26.20 $ 21.54 ----- ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.03 0.14 0.01 0.10 0.11 0.18 Net Realized and Unrealized Gain (Loss) on Investments (0.36) 3.86 (0.53) 13.38 (4.15) 1.11 ----- ------ ------ ------ ------ ------ Total from Investment Operations (0.33) 4.00 (0.52) 13.48 (4.04) 1.29 ----- ------ ------ ------ ------ ------ DISTRIBUTIONS Net Investment Income -- (0.04) -- (0.01) (0.09) (0.34) In Excess of Net Investment Income -- -- -- (0.13) -- (0.00)+ Net Realized Gain -- -- -- (0.12) (0.53) (3.01) In Excess of Net Realized Gain -- -- -- (0.13) -- -- ----- ------ ------ ------ ------ ------ Total Distributions -- (0.04) -- (0.39) (0.62) (3.35) ----- ------ ------ ------ ------ ------ NET ASSET VALUE, END OF PERIOD $ 9.67 $ 13.63 $ 13.11 $ 26.20 $ 21.54 $ 19.48 ----- ------ ------ ------ ------ ------ ----- ------ ------ ------ ------ ------ TOTAL RETURN (3.30)% 41.50% (3.82)% 105.71% (15.81)% 6.87% ----- ------ ------ ------ ------ ------ ----- ------ ------ ------ ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $10,719 $41,017 $41,978 $287,136 $276,906 $314,884 Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00% 1.00%** 1.00% 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets (1) 1.13%** 1.53% 0.61%** 0.83% 0.52% 0.97% Portfolio Turnover Rate 2% 33% 10% 18% 47% 42% - ----------------- (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 $ 0.03 Ratios before expense limitation: Expenses to Average Net Assets 2.52%** 1.63% 2.02%** 1.38% 1.20% 1.18% Net Investment Income (Loss) to Average Net Assets (0.39)%** 0.90% (0.41)%** 0.45% 0.32% 0.79% *Commencement of operations. **Annualized +Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 138 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS: - -------------------------------------------------------------------------------- THE EMERGING MARKETS PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM SEPTEMBER 25, 1992* TWO MONTHS TO ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1992 1992 1993 1994 1995 - --------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.11 $ 10.22 $ 19.00 $ 16.30 ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) -- -- (0.01) (0.04) 0.08 Net Realized and Unrealized Gain (Loss) on Investments 0.11 0.11 8.79 (1.69) (2.05) ------ ------ ------ ------ ------ Total from Investment Operations 0.11 0.11 8.78 (1.73) (1.97) ------ ------ ------ ------ ------ DISTRIBUTIONS Net Investment income -- -- -- -- (0.06) Net Realized Gain -- -- -- (0.97) (1.13) ------ ------ ------ ------ ------ Total Distributions -- -- -- (0.97) (1.19) ------ ------ ------ ------ ------ NET ASSET VALUE, END OF PERIOD $ 10.11 $ 10.22 $ 19.00 $ 16.30 $ 13.14 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL RETURN 1.10% 1.09% 85.91% (9.63)% (12.77)% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $28,806 $74,219 $735,352 $929,638 $876,591 Ratio of Expenses to Average Net Assets (1) 1.75%** 1.75%** 1.75% 1.75% 1.72% Ratio of Net Investment Income (Loss) to Average Net Assets (1) (0.53)%** (0.33)%** (0.06)% (0.26)% 0.60% Portfolio Turnover Rate 0% 2% 52% 32% 54% - ----------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.02 $ 0.00 $ 0.01 N/A N/A Ratios before expense limitation: Expenses to Average Net Assets 4.82%** 2.48%** 1.79% N/A N/A Net Investment Loss to Average Net Assets (3.60)%** (1.06)%** (0.10)% N/A N/A *Commencement of operations. **Annualized
- -------------------------------------------------------------------------------- THE EUROPEAN EQUITY PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM APRIL 2, 1993* TO YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1995 - --------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 12.91 $ 13.94 ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.08 0.08 0.14 Net Realized and Unrealized Gain on Investments 2.83 1.29 1.37 ------ ------ ------ Total from Investment Operations 2.91 1.37 1.51 ------ ------ ------ DISTRIBUTIONS Net Investment Income -- (0.09) (0.15) Net Realized Gain -- (0.25) (1.38) ------ ------ ------ Total Distributions -- (0.34) (1.53) ------ ------ ------ NET ASSET VALUE, END OF PERIOD $ 12.91 $ 13.94 $ 13.92 ------ ------ ------ ------ ------ ------ TOTAL RETURN 29.10% 10.88% 11.85% ------ ------ ------ ------ ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $12,681 $27,634 $69,583 Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets (1) 1.23%** 0.87% 1.37% Portfolio Turnover Rate 15% 79% 13% - ----------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.09 $ 0.06 $ 0.03 Ratios before expense limitation: Expenses to Average Net Assets 2.43%** 1.62% 1.25% Net Investment Income (Loss) to Average Net Assets (0.21)%** 0.25% 1.12% *Commencement of operations. **Annualized
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 139 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS: - -------------------------------------------------------------------------------- THE GLOBAL EQUITY PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM TWO MONTHS JULY 15, 1992* ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1992 1992 1993 1994 1995 - ------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.35 $ 9.75 $ 13.87 $ 13.40 ------- ----- ------------- ------------- ------------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.02 0.01 0.08 0.08 0.18 Net Realized and Unrealized Gain (Loss) on Investments (0.67) 0.39 4.18 0.79 2.26 ------- ----- ------------- ------------- ------------- Total from Investment Operations (0.65) 0.40 4.26 0.87 2.44 ------- ----- ------------- ------------- ------------- DISTRIBUTIONS Net Investment Income -- -- (0.02) (0.12) (0.22) In Excess of Net Investment Income -- -- (0.03) -- -- Net Realized Gain -- -- (0.09) (1.22) (1.31) ------- ----- ------------- ------------- ------------- Total Distributions -- -- (0.14) (1.34) (1.53) ------- ----- ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD $ 9.35 $ 9.75 $ 13.87 $ 13.40 $ 14.31 ------- ----- ------------- ------------- ------------- ------- ----- ------------- ------------- ------------- TOTAL RETURN (6.50)% 4.28% 44.24% 6.95% 18.66% ------- ----- ------------- ------------- ------------- ------- ----- ------------- ------------- ------------- RATIO AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $11,257 $11,739 $19,918 $78,935 $91,675 Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00%** 1.00% 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets (1) 1.00%** 0.69%** 0.84% 0.87% 1.17% Portfolio Turnover Rate 10% 5% 42% 12% 28% - ----------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.08 $ 0.02 $ 0.01 $ 0.02 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets 5.22%** 2.49%** 1.66% 1.24% 1.13% Net Investment Income (Loss) to Average Net Assets (3.22)%** (0.80)%** 0.18% 0.63% 1.04% *Commencement of operations. **Annualized
- -------------------------------------------------------------------------------- THE GOLD PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM FEBRUARY 1, 1994* YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1994 1995 - ---------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.13 ------- ------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.03 (0.07) Net Realized and Unrealized Gain (Loss) on Investments (0.88) 1.22 ------- ------- Total from Investment Operations (0.85) 1.15 ------- ------- DISTRIBUTIONS Net Investment Income (0.02) (0.01) Net Realized Gain -- (1.72) ------- ------- Total Distributions (0.02) (1.73) ------- ------- NET ASSET VALUE, END OF PERIOD $9.13 $8.55 ------- ------- ------- ------- TOTAL RETURN (8.49)% 13.21% ------- ------- ------- ------- RATIO AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $30,243 $7,409 Ratio of Expenses to Average Net Assets (1) 1.25%** 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 0.41%** (0.31)% Portfolio Turnover Rate 56% 47% - ----------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.04 $ 0.11 Ratios before expense limitation: Expenses to Average Net Assets 1.72%** 1.76% Net Investment Loss to Average Net Assets (0.06)%** (0.82)% *Commencement of operations. **Annualized
The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- 140 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS: - -------------------------------------------------------------------------------- THE INTERNATIONAL EQUITY PORTFOLIO - --------------------------------------------------------------------------------
TWO MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER DECEMBER OCTOBER 31, OCTOBER 31, 31, 31, 31, 31, 1991 1992 1992 1993 1994 1995 - ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.05 $ 10.52 $ 9.83 $ 9.98 $ 14.09 $ 15.34 ----------- ----------- ----------- ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.12 0.12 0.01 0.15 0.16 0.16 Net Realized and Unrealized Gain (Loss) on Investments 0.58 (0.59) 0.14 4.36 1.54 1.55 ----------- ----------- ----------- ---------- ---------- ---------- Total from Investment Operations 0.70 (0.47) 0.15 4.51 1.70 1.71 ----------- ----------- ----------- ---------- ---------- ---------- DISTRIBUTIONS Net Investment Income (0.15) (0.17) -- (0.01) (0.18) (0.06) In Excess of Net Investment Income -- -- -- (0.13) -- -- Net Realized Gain (0.08) (0.05) -- (0.26) (0.27) (1.84) ----------- ----------- ----------- ---------- ---------- ---------- Total Distributions (0.23) (0.22) -- (0.40) (0.45) (1.90) ----------- ----------- ----------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.52 $ 9.83 $ 9.98 $ 14.09 $ 15.34 $ 15.15 ----------- ----------- ----------- ---------- ---------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- TOTAL RETURN 7.17% (4.56)% 1.53% 46.50% 12.39% 11.77% ----------- ----------- ----------- ---------- ---------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $283,776 $486,836 $510,727 $947,045 $1,304,770 $1,598,530 Ratio of Expenses to Average Net Assets (1) 1.00% 1.00% 1.00%** 1.00% 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets (1) 2.27% 1.46% 0.68%** 1.25% 1.12% 1.38% Portfolio Turnover Rate 22% 12% 5% 23% 16% 27% - ----------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.01 $ 0.00 $ 0.00 $ 0.01 $0.004 $0.003 Ratios before expense limitation: Expenses to Average Net Assets 1.09% 1.02% 1.14%** 1.06% 1.03% 1.03% Net Investment Income to Average Net Assets 2.18% 1.44% 0.54%** 1.19% 1.09% 1.35% **Annualized
- -------------------------------------------------------------------------------- THE INTERNATIONAL SMALL CAP PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM DECEMBER 15, 1992* YEAR ENDED YEAR ENDED YEAR ENDED TO DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1992 1993++ 1994 1995 - ------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.09 $ 14.64 $ 15.15 ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.01 0.09 0.14 0.24 Net Realized and Unrealized Gain on Investments (2) 0.08 4.48 0.62 0.15 ------ ------ ------ ------ Total from Investment Operations 0.09 4.57 0.76 0.39 ------ ------ ------ ------ DISTRIBUTIONS Net Investment Income -- 0.00 (0.03) (0.23) In Excess of Net Investment Income -- (0.02) -- -- Net Realized Gain -- -- (0.22) (0.37) ------ ------ ------ ------ Total Distributions -- (0.02) (0.25) (0.60) ------ ------ ------ ------ NET ASSET VALUE, END OF PERIOD $ 10.09 $ 14.64 $ 15.15 $ 14.94 ------ ------ ------ ------ ------ ------ ------ ------ TOTAL RETURN 0.90% 45.34% 5.25% 2.60% ------ ------ ------ ------ ------ ------ ------ ------ RATIO AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $3,824 $52,834 $160,101 $198,669 Ratio of Expenses to Average Net Assets (1) 1.15%** 1.15% 1.15% 1.15% Ratio of Net Investment Income to Average Net Assets (1) 1.37%** 0.66% 1.18% 1.72% Portfolio Turnover Rate 0% 14% 8% 24% - ----------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.16 $ 0.10 $ 0.02 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 21.67%** 1.86% 1.29% 1.24% Net Investment Income (Loss) to Average Net Assets (19.15)%** (0.05)% 1.04% 1.63% (2) Includes a 1% transaction fee on purchases and redemptions of capital shares. ++Per share amounts for the year ended December 31, 1993 are based on average outstanding shares. *Commencement of operations. **Annualized
The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- 141 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS: - -------------------------------------------------------------------------------- THE JAPANESE EQUITY PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM APRIL 25, 1994* YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1994 1995 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.83 ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) (0.01) 0.04 Net Realized and Unrealized Loss on Investments++ (0.16) (0.40) ------ ------ Total from Investment Operations (0.17) (0.36) ------ ------ DISTRIBUTIONS In Excess of Net Investment Income -- (0.20) ------ ------ NET ASSET VALUE, END OF PERIOD $ 9.83 $ 9.27 ------ ------ ------ ------ TOTAL RETURN (1.70)% (3.64)% ------ ------ ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $50,332 $119,278 Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1) (0.10)%** 0.15% Portfolio Turnover Rate 1% 52% - --------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.02 $ 0.06 Ratios before expense limitation: Expenses to Average Net Assets 1.27%** 1.20% Net Investment Loss to Average Net Assets (0.37)%** (0.05)% *Commencement of operations. **Annualized ++The amount shown for the year ended December 31, 1995 for a share outstanding throughout the year does not accord with aggregate net gains on investments for the year because of the timing of sales and repurchases of the Portfolio shares in relation to fluctuating market value of the investments in the Portfolio.
- -------------------------------------------------------------------------------- THE LATIN AMERICAN PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM JANUARY 18, 1995* TO DECEMBER 31, 1995 - ----------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.05 Net Realized and Unrealized Loss on Investments (0.92) ------ Total from Investment Operations (0.87) ------ DISTRIBUTIONS Net Investment Income (0.04) Return of Capital (0.03) ------ Total Distributions (0.07) ------ NET ASSET VALUE, END OF PERIOD $ 9.06 ------ ------ TOTAL RETURN (8.68)% ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $15,376 Ratio of Expenses to Average Net Assets (1) 1.70%** Ratio of Net Investment Income to Average Net Assets (1) 0.62%** Portfolio Turnover Rate 137% - --------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.09 Ratios before expense limitation: Expenses to Average Net Assets 3.13%** Net Investment Loss to Average Net Assets (0.48)%** *Commencement of operations. **Annualized
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 142 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS: - -------------------------------------------------------------------------------- THE AGGRESSIVE EQUITY PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM MARCH 8, 1995* TO DECEMBER 31, 1995 - -------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.15 Net Realized and Unrealized Gain on Investments 3.95 ------ Total from Investment Operations 4.10 ------ DISTRIBUTIONS Net Investment Income (0.15) Net Realized Gain (1.78) ------ Total Distributions (1.93) ------ NET ASSET VALUE, END OF PERIOD $ 12.17 ------ ------ TOTAL RETURN 41.25% ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $28,548 Ratio of Expenses to Average Net Assets (1) 1.00%** Ratio of Net Investment Income to Average Net Assets (1) 1.64%** Portfolio Turnover Rate 309% - --------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.06 Ratios before expense limitation: Expenses to Average Net Assets 1.59%** Net Investment Income to Average Net Assets 1.05%** *Commencement of operations. **Annualized
- -------------------------------------------------------------------------------- THE EMERGING GROWTH PORTFOLIO - --------------------------------------------------------------------------------
TWO MONTHS YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1991++ 1992 1992 1993 1994 1995 - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.03 $ 16.18 $ 14.97 $ 16.22 $ 16.22 $ 16.12 ------ ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Loss (1) -- (0.09) (0.01) (0.11) (0.09) (0.18) Net Realized and Unrealized Gain (Loss) on Investments 7.19 (1.12) 1.26 0.11 (0.01) 5.55 ------ ------ ------ ------ ------ ------ Total from Investment Operations 7.19 (1.21) 1.25 0.00 (0.10) 5.37 ------ ------ ------ ------ ------ ------ DISTRIBUTIONS Net Investment Income (0.04) -- -- -- -- -- ------ ------ ------ ------ ------ ------ NET ASSET VALUE, END OF PERIOD $ 16.18 $ 14.97 $ 16.22 $ 16.22 $ 16.12 $ 21.49 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL RETURN 79.84% (7.48)% 8.35% 0.00% (0.62)% 33.31% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $54,364 $80,156 $94,161 $103,621 $117,669 $119,378 Ratio of Expenses to Average Net Assets (1) 1.25% 1.25% 1.25%** 1.25% 1.25% 1.25% Ratio of Net Investment Loss to Average Net Assets (1) 0.00% (0.66)% (0.68)%** (0.77)% (0.61)% (0.76)% Portfolio Turnover Rate 2% 17% 1% 25% 24% 25% - --------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment loss $ 0.02 $ 0.01 $ 0.00 $ 0.01 $ 0.002 $ 0.003 Ratios before expense limitation: Expenses to Average Net Assets 1.39% 1.29% 1.36%** 1.31% 1.26% 1.26% Net Investment Loss to Average Net Assets (0.14)% (0.71)% (0.79)%** (0.83)% (0.62)% (0.77)% ++Per share amounts for the year ended October 31, 1991 are based on average outstanding shares. **Annualized
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 143 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS: - -------------------------------------------------------------------------------- THE EQUITY GROWTH PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM APRIL 2, 1991* TWO MONTHS YEAR ENDED TO OCTOBER YEAR ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 31, 1991 1992 1992 1993 1994 1995 - ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.66 $ 11.44 $ 11.88 $ 12.14 $ 12.02 ----------- ----------- ------ ------ ------ ----------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.05 0.16 0.03 0.22 0.17 0.22 Net Realized and Unrealized Gain on Investments 0.61 0.82 0.41 0.28 0.21 4.93 ----------- ----------- ------ ------ ------ ----------- Total from Investment Operations 0.66 0.98 0.44 0.50 0.38 5.15 ----------- ----------- ------ ------ ------ ----------- DISTRIBUTIONS Net Investment Income -- (0.20) -- (0.23) (0.13) (0.28) In Excess of Net Investment Income -- -- -- (0.01) -- -- Net Realized Gain -- -- -- -- (0.37) (2.75) ----------- ----------- ------ ------ ------ ----------- Total Distributions -- (0.20) -- (0.24) (0.50) (3.03) ----------- ----------- ------ ------ ------ ----------- NET ASSET VALUE, END OF PERIOD $ 10.66 $ 11.44 $ 11.88 $ 12.14 $ 12.02 $ 14.14 ----------- ----------- ------ ------ ------ ----------- ----------- ----------- ------ ------ ------ ----------- TOTAL RETURN 6.60% 9.26% 3.85% 4.33% 3.26% 45.02% ----------- ----------- ------ ------ ------ ----------- ----------- ----------- ------ ------ ------ ----------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $18,139 $36,558 $45,985 $73,789 $97,259 $158,112 Ratio of Expenses to Average Net Assets (1) 0.80%** 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% 1.57% Portfolio Turnover Rate 3% 38% 1% 172% 146% 186% - --------------- (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 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 1.37%** 1.01% 1.11%** 0.93% 0.89% 0.88% Net Investment Income to Average Net Assets 1.77%** 1.52% 1.62%** 1.46% 1.35% 1.49% *Commencement of operations. **Annualized
- -------------------------------------------------------------------------------- THE SMALL CAP VALUE EQUITY PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM DECEMBER 17, 1992* TO DECEMBER YEAR ENDED YEAR ENDED YEAR ENDED 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1992 1993 1994 1995 - ------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.14 $ 11.10 $ 10.80 ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.01 0.24 0.28 0.30 Net Realized and Unrealized Gain (Loss) on Investments 0.13 0.90 (0.01) 1.82 ------ ------ ------ ------ Total from Investment Operations 0.14 1.14 0.27 2.12 ------ ------ ------ ------ DISTRIBUTIONS Net Investment Income -- (0.18) (0.27) (0.38) Net Realized Gain -- -- (0.30) (0.63) ------ ------ ------ ------ Total Distributions -- (0.18) (0.57) (1.01) ------ ------ ------ ------ NET ASSET VALUE, END OF PERIOD $ 10.14 $ 11.10 $ 10.80 $ 11.91 ------ ------ ------ ------ ------ ------ ------ ------ TOTAL RETURN 1.40% 11.33% 2.53% 20.63% ------ ------ ------ ------ ------ ------ ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $5,974 $26,775 $40,033 $51,919 Ratio of Expenses to Average Net Assets (1) 1.00%** 1.00% 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets (1) 1.64%** 2.56% 2.67% 2.60% Portfolio Turnover Rate 0% 29% 22% 36% - --------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.13 $ 0.06 $ 0.03 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets 23.14%** 1.68% 1.26% 1.21% Net Investment Income (Loss) to Average Net Assets (20.50)%** 1.88% 2.41% 2.39% *Commencement of operations. **Annualized
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 144 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS: - -------------------------------------------------------------------------------- THE U.S. REAL ESTATE PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM FEBRUARY 24, 1995* TO DECEMBER 31, 1995 - ------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.26 Net Realized and Unrealized Gain on Investments 1.84 ------ Total from Investment Operations 2.10 ------ DISTRIBUTIONS Net Investment Income (0.24) Net Realized Gain (0.44) ------ Total Distributions (0.68) ------ NET ASSETS, END OF PERIOD $11.42 ------ ------ TOTAL RETURN 21.07% ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $69,509 Ratio of Expenses to Average Net Assets (1) 1.00%** Ratio of Net Investment Income to Average Net Assets (1) 4.04%** Portfolio Turnover Rate 158% - --------------- (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 1.33%** Net Investment Income to Average Net Assets 3.71%** *Commencement of operations. **Annualized
- -------------------------------------------------------------------------------- THE VALUE EQUITY PORTFOLIO - --------------------------------------------------------------------------------
TWO MONTHS YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1991 1992 1992 1993 1994 1995 - ----------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.59 $ 10.24 $ 10.71 $ 11.31 $ 12.63 $ 11.50 ------ ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.46 0.38 0.08 0.37 0.40 0.38 Net Realized and Unrealized Gain (Loss) on Investments 1.67 0.48 0.52 1.31 (0.55) 3.30 ------ ------ ------ ------ ------ ------ Total from Investment Operations 2.13 0.86 0.60 1.68 (0.15) 3.68 ------ ------ ------ ------ ------ ------ DISTRIBUTIONS Net Investment Income (0.48) (0.39) -- (0.36) (0.40) (0.47) Net Realized Gain -- -- -- -- (0.58) (0.77) ------ ------ ------ ------ ------ ------ Total Distributions (0.48) (0.39) -- (0.36) (0.98) (1.24) ------ ------ ------ ------ ------ ------ NET ASSET VALUE, END OF PERIOD $ 10.24 $ 10.71 $ 11.31 $ 12.63 $ 11.50 $ 13.94 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL RETURN 25.34% 8.51% 5.60% 15.14% (1.29)% 33.69% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $16,304 $25,013 $27,541 $54,598 $73,406 $147,365 Ratio of Expenses to Average Net Assets (1) 0.70% 0.70% 0.70%** 0.70% 0.70% 0.70% Ratio of Net Investment Income to Average Net Assets (1) 4.57% 3.72% 4.41%** 3.23% 3.37% 3.01% Portfolio Turnover Rate 90% 56% 9% 51% 33% 43% - --------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.02 $ 0.01 $ 0.01 $ 0.03 $ 0.01 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 0.87% 0.84% 1.20%** 0.95% 0.80% 0.77% Net Investment Income to Average Net Assets 4.40% 3.58% 3.91%** 2.98% 3.27% 2.94% **Annualized
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 145 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS: - -------------------------------------------------------------------------------- THE BALANCED PORTFOLIO - --------------------------------------------------------------------------------
TWO MONTHS YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, DECEMBER DECEMBER 31, DECEMBER 31, DECEMBER 31, 1991 1992 31, 1992 1993 1994 1995 - ---------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.62 $ 10.61 $ 11.00 $ 11.31 $ 11.13 $ 8.96 ------ ----------- ----------- ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.59 0.58 0.10 0.44 0.42 0.39 Net Realized and Unrealized Gain (Loss) on Investments 1.03 0.42 0.21 0.79 (0.64) 1.62 ------ ----------- ----------- ------ ------ ------ Total from Investment Operations 1.62 1.00 0.31 1.23 (0.22) 2.01 ------ ----------- ----------- ------ ------ ------ DISTRIBUTIONS Net Investment Income (0.63) (0.58) -- (0.41) (0.49) (0.50) In Excess of Net Investment Income -- -- -- (0.08) -- -- Net Realized Gain -- (0.03) -- (0.06) (1.46) (0.49) In Excess of Net Realized Gain -- -- -- (0.86) -- -- ------ ----------- ----------- ------ ------ ------ Total Distributions (0.63) (0.61) -- (1.41) (1.95) (0.99) ------ ----------- ----------- ------ ------ ------ NET ASSET VALUE, END OF PERIOD $ 10.61 $ 11.00 $ 11.31 $ 11.13 $ 8.96 $ 9.98 ------ ----------- ----------- ------ ------ ------ ------ ----------- ----------- ------ ------ ------ TOTAL RETURN 17.31% 9.57% 2.82% 12.09% (2.32)% 23.63% ------ ----------- ----------- ------ ------ ------ ------ ----------- ----------- ------ ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $51,334 $40,332 $39,984 $29,684 $18,492 $22,642 Ratio of Expenses to Average Net Assets (1) 0.70% 0.70% 0.70%** 0.70% 0.70% 0.70% Ratio of Net Investment Income to Average Net Assets (1) 5.99% 5.21% 5.29%** 3.88% 4.13% 4.10% Portfolio Turnover Rate 67% 40% 4% 136% 44% 26% - --------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.01 $ 0.01 $ 0.01 $ 0.04 $ 0.03 $ 0.03 Ratios before expense limitation: Expenses to Average Net Assets 0.78% 0.79% 1.00%** 1.02% 0.95% 1.02% Net Investment Income to Average Net Assets 5.91% 5.12% 4.99%** 3.56% 3.88% 3.78% **Annualized
- -------------------------------------------------------------------------------- THE EMERGING MARKETS DEBT PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM FEBRUARY 1, 1994* YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1994 1995 - ---------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 8.59 ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income 0.50 1.36 Net Realized and Unrealized Gain (Loss) on Investments (1.91) 0.91 ------ ------ Total from Investment Operations (1.41) 2.27 ------ ------ DISTRIBUTIONS Net Investment Income -- (1.86) Net Realized Gain -- (0.41) ------ ------ Total Distributions -- (2.27) ------ ------ NET ASSET VALUE, END OF PERIOD $ 8.59 $ 8.59 ------ ------ ------ ------ TOTAL RETURN (14.10)% 28.23% ------ ------ ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $144,949 $181,878 Ratio of Expenses to Average Net Assets 1.49%** 1.75% Ratio of Net Investment Income to Average Net Assets 9.97%** 14.70% Portfolio Turnover Rate 273% 406% - --------------- *Commencement of operations. **Annualized
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 146 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS: - -------------------------------------------------------------------------------- THE FIXED INCOME PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM MAY 15, TWO MONTHS 1991* YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO OCTOBER OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 31, 1991 1992 1992 1993 1994 1995 - ---------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82 ------ ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.22 0.69 0.10 0.54 0.59 0.72 Net Realized and Unrealized Gain (Loss) on Investments 0.49 0.39 0.01 0.41 (0.92) 1.06 ------ ------ ------ ------ ------ ------ Total from Investment Operations 0.71 1.08 0.11 0.95 (0.33) 1.78 ------ ------ ------ ------ ------ ------ DISTRIBUTIONS Net Investment Income (0.16) (0.69) (0.10) (0.56) (0.53) (0.79) 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) (0.79) ------ ------ ------ ------ ------ ------ NET ASSET VALUE, END OF PERIOD $ 10.55 $ 10.92 $ 10.93 $ 11.05 $ 9.82 $ 10.81 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL RETURN 7.12% 10.61% 1.02% 9.07% (3.10)% 18.76% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $72,326 $146,546 $154,210 $240,668 $209,331 $165,527 Ratio of Expenses to Average Net Assets (1) 0.45%** 0.45% 0.45%** 0.45% 0.45% 0.45% Ratio of Net Investment Income to Average Net Assets (1) 7.29%** 6.59% 5.56%** 4.97% 5.73% 6.85% Portfolio Turnover Rate 48% 105% 15% 240% 388% 172% - --------------- (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 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 0.81%** 0.59% 0.75%** 0.60% 0.58% 0.59% Net Investment Income to Average Net Assets 6.93%** 6.45% 5.26%** 4.82% 5.60% 6.71% *Commencement of operations. **Annualized +Amount is less than $0.01 per share
- -------------------------------------------------------------------------------- THE GLOBAL FIXED INCOME PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM MAY 1, 1991* TWO MONTHS TO OCTOBER YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1991 1992 1992 1993 1994 1995 - ---------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.61 $ 11.41 $ 11.26 $ 11.68 $ 10.29 ------ ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.16 0.53 0.14 0.69 0.70 0.76 Net Realized and Unrealized Gain (Loss) on Investments 0.45 0.55 (0.29) 0.90 (1.38) 1.15 ------ ------ ------ ------ ------ ------ Total from Investment Operations 0.61 1.08 (0.15) 1.59 (0.68) 1.91 ------ ------ ------ ------ ------ ------ DISTRIBUTIONS Net Investment Income -- (0.27) -- (0.79) (0.40) (0.98) 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) (0.98) ------ ------ ------ ------ ------ ------ NET ASSET VALUE, END OF PERIOD $ 10.61 $ 11.41 $ 11.26 $ 11.68 $ 10.29 $ 11.22 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL RETURN 6.10% 10.29% (1.31)% 15.34% (6.08)% 19.32% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $28,236 $94,847 $92,897 $172,468 $130,675 $102,852 Ratio of Expenses to Average Net Assets (1) 0.50%** 0.50% 0.50%** 0.50% 0.50% 0.50% Ratio of Net Investment Income to Average Net Assets (1) 7.24%** 6.92% 6.99%** 5.99% 6.34% 6.79% Portfolio Turnover Rate 20% 144% 9% 108% 171% 207% - --------------- (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 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets 1.62%** 0.86% 0.90%** 0.70% 0.66% 0.71% Net Investment Income to Average Net Assets 6.12%** 6.56% 6.59%** 5.79% 6.18% 6.58% *Commencement of operations. **Annualized
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 147 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS: - -------------------------------------------------------------------------------- THE HIGH YIELD PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM TWO MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 28, 1992* DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, TO OCTOBER 31, 1992 1992 1993 1994 1995 - ---------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.77 $ 9.95 $ 11.16 $ 9.55 ------- ------ ------------ ------------ ------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.08 0.14 0.90 0.97 1.14 Net Realized and Unrealized Gain (Loss) on Investments (0.31) 0.19 1.21 (1.40) 0.97 ------- ------ ------------ ------------ ------- Total from Investment Operations (0.23) 0.33 2.11 (0.43) 2.11 ------- ------ ------------ ------------ ------- DISTRIBUTIONS Net Investment Income -- (0.15) (0.90) (0.97) (1.20) Net Realized Gain -- -- -- (0.21) -- ------- ------ ------------ ------------ ------- Total Distributions -- (0.15) (0.90) (1.18) (1.20) ------- ------ ------------ ------------ ------- NET ASSET VALUE, END OF PERIOD $ 9.77 $ 9.95 $ 11.16 $ 9.55 $ 10.46 ------- ------ ------------ ------------ ------- ------- ------ ------------ ------------ ------- TOTAL RETURN (2.30)% 3.41% 22.11% (4.18)% 23.35% ------- ------ ------------ ------------ ------- ------- ------ ------------ ------------ ------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $16,950 $20,194 $74,500 $97,223 $62,245 Ratio of Expenses to Average Net Assets (1) 0.75%** 0.75%** 0.75% 0.75% 0.75% Ratio of Net Investment Income to Average Net Assets (1) 9.89%** 8.96%** 8.70% 9.42% 11.09% Portfolio Turnover Rate 9% 24% 104% 74% 90% - ----------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.01 $ 0.01 $ 0.02 $0.001 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 1.23%** 1.62%** 0.96% 0.76% 0.83% Net Investment Income to Average Net Assets 9.41%** 8.09%** 8.49% 9.41% 11.01% *Commencement of operations. **Annualized
- -------------------------------------------------------------------------------- THE MUNICIPAL BOND PORTFOLIO - --------------------------------------------------------------------------------
PERIOD FROM JANUARY 18, 1995* TO DECEMBER 31, 1995 - ------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 ------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.44 Net Realized and Unrealized Gain on Investments 0.42 ------- Total from Investment Operations 0.86 ------- DISTRIBUTIONS Net Investment Income (0.45) In Excess of Net Investment Income (0.00)+ Net Realized Gain (0.04) ------- TOTAL DISTRIBUTIONS (0.49) ------- Net Asset Value, End of Period $10.37 ------- ------- TOTAL RETURN 8.80% ------- ------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $45,869 Ratio of Expenses to Average Net Assets (1) 0.45%** Ratio of Net Investment Income to Average Net Assets (1) 4.61%** Portfolio Turnover Rate 180% - ----------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.03 Ratios before expense limitation: Expenses to Average Net Assets 0.73%** Net Investment Income to Average Net Assets 4.33%** *Commencement of operations. **Annualized +Amount is less than $0.01 per share.
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 148 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS: - -------------------------------------------------------------------------------- THE MONEY MARKET PORTFOLIO - --------------------------------------------------------------------------------
TWO MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER DECEMBER OCTOBER 31, OCTOBER 31, 31, 31, 31, 31, 1991 1992 1992 1993 1994 1995 - ------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ----------- ----------- ----------- ----------- ----------- ----------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.062 0.039 0.005 0.027 0.040 0.054 ----------- ----------- ----------- ----------- ----------- ----------- DISTRIBUTIONS Net Investment Income (0.062) (0.039) (0.005) (0.027) (0.040) (0.054) In Excess of Net Investment Income -- -- -- 0.000+ -- -- ----------- ----------- ----------- ----------- ----------- ----------- Total Distributions (0.062) (0.039) (0.005) (0.027) (0.040) (0.054) ----------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- TOTAL RETURN 6.37% 3.77% 0.50% 2.76% 3.84% 5.51% ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $607,087 $612,968 $599,172 $657,163 $690,503 $836,693 Ratio of Expenses to Average Net Assets (1) 0.53% 0.52% 0.55%** 0.53% 0.49% 0.51% Ratio of Net Investment Income to Average Net Assets (1) 6.11% 3.74% 3.11%** 2.71% 3.77% 5.37% - --------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income N/A N/A $ 0.000+ $ 0.000+ N/A N/A Ratios before expense limitation: Expenses to Average Net Assets N/A N/A 0.59%** 0.54% N/A N/A Net Investment Income to Average Net Assets N/A N/A 3.07%** 2.70% N/A N/A **Annualized +Amount is less than $0.001 per share.
- -------------------------------------------------------------------------------- THE MUNICIPAL MONEY MARKET PORTFOLIO - --------------------------------------------------------------------------------
TWO MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER DECEMBER DECEMBER DECEMBER OCTOBER 31, OCTOBER 31, 31, 31, 31, 31, 1991 1992 1992 1993 1994 1995 - ------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ----------- ----------- ----------- ----------- ----------- ----------- INCOME FROM INVESTMENT OPERATIONS Net Investment Income (1) 0.043 0.026 0.004 0.019 0.020 0.034 ----------- ----------- ----------- ----------- ----------- ----------- DISTRIBUTIONS Net Investment Income (0.043) (0.026) (0.004) (0.019) (0.020) (0.034) In Excess of Net Investment Income -- -- -- (0.000)+ -- -- ----------- ----------- ----------- ----------- ----------- ----------- Total Distributions (0.043) (0.026) (0.004) (0.019) (0.020) (0.034) ----------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- TOTAL RETURN 4.35% 2.74% 0.37% 1.91% 2.44% 3.44% ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $166,953 $206,691 $208,866 $266,524 $359,444 $451,519 Ratio of Expenses to Average Net Assets (1) 0.56% 0.55% 0.57%** 0.54% 0.51% 0.52% Ratio of Net Investment Income to Average Net Assets (1) 4.18% 2.66% 2.31%** 1.89% 2.42% 3.38% - --------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income N/A N/A $ 0.000+ $ 0.000+ N/A N/A Ratios before expense limitation: Expenses to Average Net Assets N/A N/A 0.67%** 0.56% N/A N/A Net Investment Income to Average Net Assets N/A N/A 2.21%** 1.87% N/A N/A **Annualized +Amount is less than $0.001 per share.
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 149 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 - -------------------------------------------------------------------------------- Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as an open-end management investment company. As of December 31, 1995, the Fund was comprised of 24 separate active, diversified and non-diversified portfolios (each referred to as the "Portfolio"). During the year ended December 31, 1995, the following Portfolios commenced operations: Latin American Portfolio and Municipal Bond Portfolio on January 18, 1995, the U.S. Real Estate Portfolio on February 24, 1995, and the Aggressive Equity Portfolio on March 8, 1995. Please refer to the manager's reports included elsewhere in this annual report for a description of each Portfolio's investment objectives. A. The following significant accounting policies are in conformity with generally accepted accounting principles for investment companies. Such policies are consistently followed by the Fund in the preparation of the financial statements. Generally accepted accounting principles may require management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results may differ from those estimates. The U.S. Real Estate Portfolio owns shares of real estate investment trusts ("REITs") which report information on the source of their distributions annually. A portion of distributions received from REITs during the year is estimated to be a return of capital and is recorded as a reduction of their cost. 1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity securities traded on NASDAQ are valued at the latest quoted sales price. 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 the mean between the current bid and asked prices obtained from reputable brokers. Bonds and other fixed income securities may be valued according to the broadest and most representative market. In addition, bonds and other fixed income securities may be valued on the basis of prices provided by a pricing service which are based primarily on institutional size trading in similar groups of securities. Debt securities purchased with remaining maturities of 60 days or less are valued at amortized cost, if it approximates market value. Securities owned by the Money Market and Municipal Money Market Portfolios are stated at amortized cost, which approximates market value. All other securities and assets for which market values are not readily available, including restricted securities, are valued at fair value as determined in good faith by the Board of Directors, although the actual calculations may be done by others. 2. INCOME TAXES: It is each Portfolio's intention to qualify as a regulated investment company and distribute all of its taxable and tax-exempt income. Accordingly, no provision for Federal income taxes is required in the financial statements. A Portfolio may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on either income or gains earned or repatriated. The Portfolio accrues such taxes when the related income is earned. For investments in securities subject to a capital gains tax, such taxes are accrued based on the relative amounts of net realized gains and net unrealized appreciation of such securities. Prior to March 10, 1995, the Brazilian government assessed a 1% tax on all settlements of foreign currency used to purchase listed equity securities. The Brazilian government repealed this tax on March 10, 1995. Paid in capital, undistributed (distributions in excess of) net investment income/accumulated net investment loss and accumulated gain (loss) have been adjusted for permanent book-tax differences, if any, for the Portfolios. These differences are primarily due to differing book-tax treatments for foreign currency transactions, net operating losses, foreign taxes on net realized gains, deductibility of interest expense on short sales and gains on certain securities of corporations designated as "passive foreign investment companies". 3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase agreements, a bank as custodian for the Fund takes possession of the underlying securities, with a market value at least equal to the amount of the repurchase transaction, including principal and accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market on a daily basis to determine the adequacy of the collateral. In the event of default on the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. In the event of default or bankruptcy by the counter party to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. 4. REVERSE REPURCHASE AGREEMENTS: The Emerging Markets Debt Portfolio may enter into reverse repurchase agreements with institutions that the Portfolio's investment adviser has determined are creditworthy. Under a reverse repurchase agreement, the Portfolio sells securities and agrees to repurchase them at a mutually agreed upon date and price. Reverse repurchase agreements involve the risk that the market value of the securities purchased with the proceeds from the sale of securities received by the Portfolio may decline below the price of the securities the Portfolio is - -------------------------------------------------------------------------------- 150 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONT.) DECEMBER 31, 1995 - -------------------------------------------------------------------------------- obligated to repurchase. Securities subject to repurchase under reverse repurchase agreements are designated as such in the Statement of Net Assets. At December 31, 1995 the Emerging Markets Debt Portfolio had reverse repurchase agreements outstanding as follows:
MATURITY IN 30 TO 90 DAYS ------------ Maturity Amount................................. $12,225,000 ------------ Market Value of Assets Sold Under Agreements..................................... 14,250,000 Weighted Average Interest Rate.................. 6.503% ------------
For the Emerging Markets Debt Portfolio, the average weekly balance of reverse repurchase agreements outstanding during the year ended December 31, 1995 was approximately $1,952,000, at a weighted average interest rate of 5.820%. 5. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records of the Fund are maintained in United States dollars. Foreign currency amounts are translated into U.S. dollars at the mean of the bid and asked prices of such currencies against U.S. dollars last quoted by a major U.S. or foreign bank. Although the net assets of the Fund are presented at the foreign exchange rates and market values at the close of the period, the Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of the securities held at period end. Similarly, the Fund does not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities sold during the period. Accordingly, realized and unrealized foreign currency gains (losses) are included in the reported net realized and unrealized gains (losses) on investment transactions balances. However, pursuant to U.S. Federal income tax regulations, gains and losses from certain foreign currency transactions are treated as ordinary income for U.S. Federal income tax purposes. Net realized gains (losses) on foreign currency transactions represent net foreign exchange gains (losses) from forward foreign currency exchange contracts, disposition of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains (losses) from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of unrealized appreciation (depreciation) on the Statement of Changes in Net Assets. The change in net unrealized currency gains (losses) for the period is reflected on the Statement of Operations. Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability. 6. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: Each Portfolio, except the Equity Growth, U.S. Real Estate, Municipal Bond, Money Market and Municipal Money Market Portfolios, may enter into forward currency exchange contracts to attempt to protect securities and related receivables and payables against changes in future foreign currency exchange rates. A forward currency exchange contract is an agreement between two parties to buy or sell currency at a set price on a future date. The market value of the contract will fluctuate with changes in currency exchange rates. The contract is marked-to-market daily using the forward rate and the change in market value is recorded by the Fund as unrealized gain or loss. The Fund records realized gains or losses when the contract is closed equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Risk may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and is generally limited to the amount of the unrealized gain on the contracts (if any) at the date of default. Risks may also arise from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. 7. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each Portfolio may make forward commitments to purchase or sell securities. Payment and delivery for securities which have been purchased or sold on a forward commitment basis can take place a month or more (not to exceed 120 days) after the date of the transaction. Additionally, certain Portfolios may purchase securities on a when-issued or delayed-delivery basis. Securities purchased on a when-issued or delayed delivery basis are purchased for delivery beyond the normal settlement date at a stated price and yield, and no income accrues to the Portfolio on such securities prior to delivery. When the Portfolio enters into a purchase transaction on a when-issued or delayed delivery basis, it establishes a segregated account in which it maintains liquid assets in an amount at least equal in value to the Portfolio's commitments to purchase such securities. Purchasing - -------------------------------------------------------------------------------- 151 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONT.) DECEMBER 31, 1995 - -------------------------------------------------------------------------------- securities on a forward commitment or when-issued or delayed-delivery basis may involve a risk that the market price at the time of delivery may be lower than the agreed-upon purchase price, in which case there could be an unrealized loss at the time of delivery. 8. LOAN AGREEMENTS: The Emerging Markets, Emerging Markets Debt and High Yield Portfolios may invest in fixed and floating rate loans ("Loans") arranged through private negotiations between an issuer of sovereign debt obligations and one or more financial institutions ("Lenders") deemed to be creditworthy by the investment adviser. The Portfolio's investments in Loans may be in the form of participations in Loans ("Participations") or assignments of all or a portion of Loans ("Assignments") from third parties. The Portfolio's investment in Participations typically results in the Portfolio having a contractual relationship with only the Lender and not with the borrower. The Portfolio has 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. The Portfolio generally has no right to enforce compliance by the borrower with the terms of the loan agreement. As a result, the Portfolio may be subject to the credit risk of both the borrower and the Lender that is selling the Participation. When the Portfolio purchases Assignments from Lenders, it acquires direct rights against the borrower on the Loan. 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. 9. SHORT SALES: The Aggressive Equity and Emerging Markets Debt Portfolios may sell securities short. A short sale is a transaction in which the Portfolio sells securities it does not own, but has borrowed, in anticipation of a decline in the market price of the securities. The Portfolio is obligated to replace the borrowed securities at the market price at the time of replacement. The Portfolio may have to pay a premium to borrow the securities as well as 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 generally 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 cannot exceed the total amount invested. 10. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and put options on their securities. Premiums are received and are recorded as liabilities, and subsequently adjusted to the current value of the options written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are canceled in closing purchase transactions are offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. By writing a covered call option, a Portfolio foregoes in exchange for the premium the opportunity for capital appreciation above the exercise price should the market price of the underlying security increase. By writing a covered put option, a Portfolio, in exchange for the premium, accepts the risk of a decline in the market value of the underlying security below the exercise price. Certain Portfolios may purchase call and put options on their portfolio securities. Each Portfolio may purchase call options to close out covered written call positions or to protect against an increase in the price of the security it anticipates purchasing. Each Portfolio may purchase put options on their securities to protect against a decline in the value of the security or to close out covered written put positions. Possible losses from purchased options cannot exceed the total amount invested. 11. OTHER: Security transactions are accounted for on the date the securities are purchased or sold. Costs used in determining realized gains and losses on the sale of investment securities are those of specific securities sold. Dividend income is recorded on the ex-dividend date. Interest income is recognized on the accrual basis except where collection is in doubt. Discounts and premiums on securities purchased (other than mortgage-backed securities) are amortized according to the effective yield method over their respective lives. Most expenses of the Fund can be directly attributed to a particular Portfolio. Expenses which cannot be directly attributed are apportioned among - -------------------------------------------------------------------------------- 152 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONT.) DECEMBER 31, 1995 - -------------------------------------------------------------------------------- the Portfolios based upon relative average net assets. Dividends to the shareholders of the Money Market and the Municipal Money Market Portfolios are accrued daily and are distributed on or about the 15th of each month. Distributions from the remaining Portfolios are recorded on the ex-date. Income distributions and capital gain distributions are determined in accordance with U.S. Federal income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the timing of the recognition of gains or losses on securities and forward currency exchange contracts, the timing of the deductibility of certain foreign taxes, dividends received from real estate investment trusts and permanent differences as presented in Note A-2. Current period permanent book-tax differences, if any, are not included in ending undistributed (distributions in excess of) net investment income/accumulated net investment loss for the purpose of calculating net investment income (loss) per share in the Financial Highlights. Prior governmental approval for foreign investments may be required under certain circumstances in some emerging countries, and the extent of foreign investment in 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. As a result, an additional class of shares (identified as "Foreign" in the Statement of Net Assets) may be created and offered for investment. The "local" and "foreign" shares' market values may differ. A transaction fee of one percent is charged on subscriptions and redemptions of capital shares of the International Small Cap Portfolio. Such fees are paid to or retained by the Portfolio and included in paid in capital. During the year ended December 31, 1995, such transaction fees totaled approximately $827,000. B. Morgan Stanley Asset Management Inc. ("MSAM") (the "Adviser") provides the Fund with investment advisory services at a fee calculated at the annual rates of average daily net assets indicated below. MSAM has agreed to reduce fees payable to it and to reimburse the Portfolios, if necessary, if the annual operating expenses, as defined, expressed as a percentage of average daily net assets, exceed the maximum ratios indicated as follows:
ADVISORY MAXIMUM PORTFOLIO FEE EXPENSE RATIO ------------ ------------- Active Country Allocation............. .65% .80% Asian Equity.......................... .80 1.00 Emerging Markets...................... 1.25 1.75 European Equity....................... .80 1.00 Global Equity......................... .80 1.00 Gold.................................. 1.00 1.25 International Equity.................. .80 1.00 International Small Cap............... .95 1.15 Japanese Equity....................... .80 1.00 Latin American........................ 1.10 1.70 Aggressive Equity..................... .80 1.00 Emerging Growth....................... 1.00 1.25 Equity Growth......................... .60 .80 Small Cap Value Equity................ .85 1.00 U.S. Real Estate...................... .80 1.00 Value Equity.......................... .50 .70 Balanced.............................. .50 .70 Emerging Markets Debt................. 1.00 1.75 Fixed Income.......................... .35 .45 Global Fixed Income................... .40 .50 High Yield............................ .50 .75 Municipal Bond........................ .35 .45 Money Market.......................... .30 .55 Municipal Money Market................ .30 .57
Sun Valley Gold Company is the sub-adviser ("Sub-Adviser") of the Gold Portfolio. The Sub-Adviser is entitled to receive an annual sub-advisory fee in an amount equal to .40% of the average daily net assets of the Portfolio. The Sub-Adviser has agreed to a proportionate reduction in its fees if the Adviser is required to waive its fees or to reimburse the Portfolio. C. MSAM also provides the Fund with administrative services pursuant to an administrative agreement, for a monthly fee which on an annual basis equals 0.15% of the average daily net assets of each Portfolio plus reimbursement of out-of-pocket expenses. Under an agreement between MSAM and The Chase Manhattan Bank, N.A. ("Chase"), effective September 1, 1995, Chase, through its affiliate Chase Global Funds Services Company, formerly Mutual Funds Service Company ("MFSC"), provides certain administrative services to the Fund. For such services, MSAM pays Chase a portion of the fee MSAM receives from the Fund. Prior to September 1, 1995, MFSC was an affiliate of United States Trust Company of New York ("UST") and provided certain administrative services to the Fund under the same terms as stated above. D. Morgan Stanley Trust Company ("MSTC") acts as custodian for the Fund's assets held outside the United States in accordance with a custodian agreement. Custodian fees are computed and payable monthly based on securities held, investment purchases and sales activity, an account maintenance fee, plus reimbursement for certain out-of-pocket expenses. MSTC and the Adviser are wholly-owned subsidiaries of Morgan Stanley Group, Inc. - -------------------------------------------------------------------------------- 153 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONT.) DECEMBER 31, 1995 - -------------------------------------------------------------------------------- Effective September 1, 1995, Chase replaced UST as custodian for the Fund's assets held in the United States. For the year ended December 31, 1995, the following Portfolios incurred custody fees and had amounts due to MSTC at December 31, 1995 totaling:
MSTC CUSTODY FEES FEES PAYABLE TO INCURRED MSTC (000) (000) ------------- ----------------- Active Country Allocation..... $ 397 $ 70 Asian Equity.................. 466 111 Emerging Markets.............. 2,062 399 European Equity............... 44 11 Global Equity................. 40 11 Gold.......................... 9 1 International Equity.......... 532 141 International Small Cap....... 117 29 Japanese Equity............... 33 11 Latin American................ 104 27 Emerging Markets Debt......... 197 49 Global Fixed Income........... 36 9
In addition, for the year ended December 31, 1995, the following Portfolios have earned interest income and incurred interest expense on balances with MSTC as follows:
INTEREST INCOME INTEREST EXPENSE (000) (000) ----------------- ------------------- Active Country Allocation................ $ 29 $ 53 Asian Equity............... 58 17 Emerging Markets........... 42 69 European Equity............ 156 3 Global Equity.............. 9 1 International Equity....... 1,644 39 International Small Cap.... 84 6 Japanese Equity............ 2 13 Latin American............. 1 3 Emerging Markets Debt...... 38 94 Global Fixed Income........ 87 3
At December 31, 1995, the Emerging Markets Portfolio owned shares of an affiliated fund for which the Portfolio earned dividend income of $219,000. E. During the year ended December 31, 1995, purchases and sales of investment securities other than long-term U.S. Government securities and short-term investments were:
(000) ---------------------- PORTFOLIO PURCHASES SALES - ---------------------------------------- ----------- --------- Active Country Allocation............... $ 115,608 $ 155,753 Asian Equity............................ 116,591 114,296 Emerging Markets........................ 536,860 475,065 European Equity......................... 42,814 6,125 Global Equity........................... 22,401 38,489 Gold.................................... 8,137 32,525 International Equity.................... 472,776 364,466 International Small Cap................. 79,415 43,618 Japanese Equity......................... 88,100 29,619 Latin American.......................... 32,425 16,689 Aggressive Equity....................... 75,727 52,711 Emerging Growth......................... 31,159 66,673 Equity Growth........................... 246,443 231,522 Small Cap Value Equity.................. 19,861 16,332 U.S. Real Estate........................ 122,466 62,011 Value Equity............................ 92,679 46,530 Balanced................................ 4,611 5,122 Emerging Markets Debt................... 616,750 637,624 Fixed Income............................ 173,429 182,202 Global Fixed Income..................... 159,473 175,658 High Yield.............................. 58,042 95,389 Municipal Bond.......................... 118,467 74,955
Purchases and sales during the year ended December 31, 1995 of long-term U.S. Government securities occurred only in the Balanced, Fixed Income and Global Fixed Income Portfolios and amounted to:
(000) ---------------------- PORTFOLIO PURCHASES SALES - ---------------------------------------- ----------- --------- Balanced................................ $ 1,113 $ -- Fixed Income............................ 112,464 151,037 Global Fixed Income..................... 24,602 32,115
During the year ended December 31, 1995, the following Portfolios incurred brokerage commissions related to Morgan Stanley & Co., Incorporated, an affiliated broker/dealer, of approximately:
(000) --------------- BROKERAGE PORTFOLIO COMMISSION - ----------------------------------------------- --------------- Asian Equity................................... $ 99 Emerging Markets............................... 69 European Equity................................ 4 Global Equity.................................. 3 Gold........................................... 1 International Equity........................... 69 International Small Cap........................ 1 Japanese Equity................................ 121 Latin American................................. 4 Equity Growth.................................. 1 U.S. Real Estate............................... 6
- -------------------------------------------------------------------------------- 154 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONT.) DECEMBER 31, 1995 - -------------------------------------------------------------------------------- F. At December 31, 1995, cost and unrealized appreciation (depreciation) for U.S. Federal income tax purposes of the investments of each Portfolio were:
(000) -------------------------------------------- NET APPREC. PORTFOLIO COST APPREC. DEPREC. (DEPREC.) - -------------------------- --------- --------- --------- ----------- Active Country Allocation............... $ 150,104 $ 14,780 $ (4,620) $ 10,160 Asian Equity.............. 270,401 58,854 (16,312) 42,542 Emerging Markets.......... 915,174 97,063 (150,829) (53,766) European Equity........... 65,638 5,746 (2,983) 2,763 Global Equity............. 68,989 11,625 (2,744) 8,881 Gold...................... 7,729 246 (651) (405) International Equity...... 1,265,148 305,267 (31,924) 273,343 International Small Cap... 202,263 16,894 (24,355) (7,461) Japanese Equity........... 114,012 4,851 (3,036) 1,815 Latin American............ 15,535 1,098 (1,194) (96) Aggressive Equity......... 28,800 2,001 (314) 1,687 Emerging Growth........... 66,320 53,480 (542) 52,938 Equity Growth............. 142,804 17,849 (1,941) 15,908 Small Cap Value Equity.... 46,841 6,840 (1,886) 4,954 U.S. Real Estate.......... 65,257 5,625 (1,810) 3,815 Value Equity.............. 132,222 20,118 (5,352) 14,766 Balanced.................. 20,531 2,426 (526) 1,900 Emerging Markets Debt..... 173,477 12,534 (5,407) 7,127 Fixed Income.............. 155,055 8,025 (5) 8,020 Global Fixed Income....... 109,218 3,611 (262) 3,349 High Yield................ 62,766 2,929 (3,708) (779) Municipal Bond............ 43,334 1,635 -- 1,635 Money Market.............. 836,431 -- -- -- Municipal Money Market.... 450,017 -- -- --
At December 31, 1995, the following Portfolios had available capital loss carryforwards to offset future net capital gains, to the extent provided by regulations, through the indicated expiration dates:
EXPIRATION DATE DECEMBER 31, (000) ------------------------------- PORTFOLIO 2001 2002 2003 TOTAL - ------------------------------- --- --------- --------- --------- Emerging Markets............... $ -- $ -- $ 33,313 $ 33,313 Japanese Equity................ -- -- 2,666 2,666 Latin American................. -- -- 224 224 Fixed Income................... -- 8,291 -- 8,291 Global Fixed Income............ -- 5,293 1,780 7,073 High Yield..................... -- 497 4,145 4,642 Money Market................... -- 13 -- 13 Municipal Money Market......... 1 7 1 9
During the year ended December 31, 1995, the International Small Cap, Emerging Growth, Fixed Income and Money Market Portfolios utilized capital loss carryforwards for U.S. Federal income tax purposes of approximately $1,764,000, $10,861,000, $5,579,000 and $79,000, respectively. To the extent that capital loss carryovers are used to offset any future net capital gains realized during the carryover period as provided by U.S. Federal income tax regulations, no capital gains tax liability will be incurred by a Portfolio for gains realized and not distributed. It is unlikely that the gains so offset would be distributed to shareholders. Net capital and net currency losses incurred after October 31 and within the taxable year are deemed to arise on the first business day of the Portfolio's next taxable year. For the period from November 1, 1995 to December 31, 1995 certain Portfolios incurred and elected to defer until January 1, 1996 for U.S. Federal income tax purposes net capital and net currency losses of approximately:
CAPITAL CURRENCY LOSSES LOSSES PORTFOLIO (000) (000) - ------------------------------------------- ----------- ----------- Emerging Markets........................... $ -- $ 64 Global Equity.............................. -- 2 Latin American............................. 2 6 Emerging Markets Debt...................... 245 1,501 High Yield................................. 73 -- Municipal Money Market..................... 1 --
G. During the year ended December 31, 1995, the following Portfolios wrote covered call and put options as follows: COVERED CALL OPTIONS
NUMBER OF PREMIUM AGGRESSIVE EQUITY PORTFOLIO CONTRACTS (000) - ------------------------------------- ------------- ------------- Options outstanding at December 31, 1994................................ -- $ -- Options written during the period.... 386 39 Options cancelled in closing transactions during the period...... (386) (39) ----- --- Options outstanding at December 31, 1995................................ -- $ -- ----- --- ----- ---
FACE AMOUNT PREMIUM EMERGING MARKETS DEBT PORTFOLIO (000) (000) - ----------------------------------- ------------- ----------- Options outstanding at December 31, 1994.............................. $ 15,000 $ 105 Options written during the period............................ 69,900 1,281 Options cancelled in closing transactions during the period.... (11,000) (240) Options expired during the period............................ (43,900) (508) Options exercised during the period............................ (30,000) (638) ------------- ----------- Options outstanding at December 31, 1995.............................. $ -- $ -- ------------- ----------- ------------- -----------
COVERED PUT OPTIONS
NUMBER OF PREMIUM AGGRESSIVE EQUITY PORTFOLIO CONTRACTS (000) - ------------------------------------- ------------- ------------- Options outstanding at December 31, 1994................................ -- $ -- Options written during the period.... 60 10 Options cancelled in closing transactions during the period...... (60) (10) --- --- Options outstanding at December 31, 1995................................ -- $ -- --- --- --- ---
H. OTHER. At December 31, 1995, the net assets of certain Portfolios were substantially comprised of foreign denominated securities and currency. Changes in currency exchange rates will affect the U.S. dollar value of and investment income from such securities. - -------------------------------------------------------------------------------- 155 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONT.) DECEMBER 31, 1995 - -------------------------------------------------------------------------------- During the year ended December 31, 1995, the Gold Portfolio realized losses from in-kind redemptions of approximately $252,000. Portfolio securities and foreign currency holdings were translated at the following exchange rates as of December 31, 1995: Argentine Peso........................ 1.00015 = $ 1.00 Australian Dollar..................... 1.34544 = $ 1.00 Belgian Franc......................... 29.43000 = $ 1.00 Brazilian Real........................ 0.97190 = $ 1.00 British Pound......................... 0.64412 = $ 1.00 Canadian Dollar....................... 1.36505 = $ 1.00 Colombian Peso........................ 990.75000 = $ 1.00 Danish Krone.......................... 5.55680 = $ 1.00 Deutsche Mark......................... 1.43390 = $ 1.00 Finnish Markka........................ 4.34955 = $ 1.00 French Franc.......................... 4.89700 = $ 1.00 Greek Drachma......................... 236.99000 = $ 1.00 Hong Kong Dollar...................... 7.73250 = $ 1.00 Hungarian Forint...................... 136.63000 = $ 1.00 Indonesian Rupiah..................... 2,286.50000 = $ 1.00 Irish Pound........................... 0.62441 = $ 1.00 Italian Lira.......................... 1,588.25000 = $ 1.00 Japanese Yen.......................... 103.25000 = $ 1.00 Korean Won............................ 775.75000 = $ 1.00 Malaysian Ringgit..................... 2.53970 = $ 1.00 Mexican Peso.......................... 7.69500 = $ 1.00 Moroccan Dirham....................... 8.46890 = $ 1.00 Netherlands Guilder................... 1.60470 = $ 1.00 New Zealand Dollar.................... 1.52964 = $ 1.00 Norwegian Krone....................... 6.32905 = $ 1.00 Pakistani Rupee....................... 34.21580 = $ 1.00 Peruvian New Sol...................... 2.31000 = $ 1.00 Philippine Peso....................... 26.23000 = $ 1.00 Polish Zloty.......................... 2.46550 = $ 1.00 Portuguese Escudo..................... 149.67500 = $ 1.00 Singapore Dollar...................... 1.41450 = $ 1.00 Spanish Peseta........................ 121.30000 = $ 1.00 Sri Lanka Rupee....................... 53.65000 = $ 1.00 Swedish Krona......................... 6.63965 = $ 1.00 Swiss Franc........................... 1.15350 = $ 1.00 Taiwan Dollar......................... 27.28700 = $ 1.00 Thai Baht............................. 25.19000 = $ 1.00 Turkish Lira.......................... 60,900.00000 = $ 1.00
From time to time, certain Portfolios of the Fund have shareholders that hold a significant portion of a Portfolio's outstanding shares. Investment activities of these shareholders could have a material impact on those Portfolios. I. SUBSEQUENT EVENT. On January 2, 1996, each Portfolio (with the exception of the International Small Cap, Money Market and Municipal Money Market Portfolios) began offering two classes of shares -- Class A and Class B. All the shares of these Portfolios outstanding prior to January 2, 1996, were redesignated Class A shares on January 2, 1996. - -------------------------------------------------------------------------------- 156 [LOGO] Morgan Stanley Institutional Fund, Inc. - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- To the Shareholders and Board of Directors of Morgan Stanley Institutional Fund, Inc. In our opinion, the accompanying statements of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Active Country Allocation Portfolio, Asian Equity Portfolio, Emerging Markets Portfolio, European Equity Portfolio, Global Equity Portfolio, Gold Portfolio, International Equity Portfolio, International Small Cap Portfolio, Japanese Equity Portfolio, Latin American Portfolio, Aggressive Equity Portfolio, Emerging Growth Portfolio, Equity Growth Portfolio, Small Cap Value Equity Portfolio, U.S. Real Estate Portfolio, Value Equity Portfolio, Balanced Portfolio, Emerging Markets Debt Portfolio, Fixed Income Portfolio, Global Fixed Income Portfolio, High Yield Portfolio, Municipal Bond Portfolio, Money Market Portfolio and Municipal Money Market Portfolio (constituting the Morgan Stanley Institutional Fund, Inc., hereafter referred to as the "Fund") at December 31, 1995, the results of each of their operations, the changes in each of their net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1995 by correspondence with the custodians and counterparties and the application of alternative auditing procedures where confirmations from counterparties were not received, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, New York 10036 February 9, 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 157 PART C Morgan Stanley Institutional Fund, Inc. Other Information ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (A) FINANCIAL STATEMENTS The Registrant's audited financial statements for the Money Market, Municipal Money Market, Aggressive Equity, Emerging Growth, Equity Growth, Value Equity, Small Cap Value Equity, U.S. Real Estate, Balanced, Active Country Allocation, Global Equity, International Equity, International Small Cap, European Equity, Asian Equity, Emerging Markets, Gold, Japanese Equity, Latin American, Emerging Markets Debt, Fixed Income, Global Fixed Income, High Yield and Municipal Bond Portfolios, respectively, for the fiscal year ended December 31, 1995, and Price Waterhouse LLP's report thereon, are included in Part B (the Statement of Additional Information) from the Registrant's December 31, 1995 Annual Report to Shareholders. Included in such financial statements are the following: 1. Report of Independent Accountants 2. Statement of Net Assets at December 31, 1995 3. Statement of Operations for the period ended December 31, 1995 4. Statement of Changes in Net Assets for the respective periods presented in the two year period ended December 31, 1995 5. Financial Highlights for the respective periods presented in the five year period ended December 31, 1995 6. Notes to Financial Statements (B) EXHIBITS 1 Articles of Amendment and Restatement are incorporated by reference to Post-Effective Amendment No. 26 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on October 13, 1995. 2 Amended and Restated By-laws are incorporated by reference to Post- Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. 3 Not Applicable. 4 Registrant's Form of Specimen Security was previously filed and is incorporated herein by reference. 5 (a) Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (b) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding Registrant's Equity, Balanced and Fixed Income Portfolios) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (c) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Global Equity, Global Fixed Income, European Equity and Equity Growth Portfolios) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (d) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Asian Equity Portfolio) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (e) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Active Country Allocation Portfolio) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (f) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Emerging Markets, High Yield and International Small Cap Portfolios) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (g) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Small Cap Value Equity Portfolio) is incorporated by reference to Post- Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (h) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Emerging Markets Debt, Mortgage-Backed Securities, Municipal Bond and Japanese Equity Portfolios) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (i) Sub-Advisory Agreement among Registrant, Morgan Stanley Asset Management Inc. and Sun Valley Gold Company (with respect to the Gold Portfolio) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (j) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the China Growth Portfolio) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (k) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Latin American Portfolio) is incorporated by reference to Post- Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (l) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Contrarian Portfolio) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (m) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Aggressive Equity and U.S. Real Estate Portfolios) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (n) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management, Inc. (adding the MicroCap Portfolio) is incorporated by reference to Post-Effective C-2 Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (o) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management, Inc. (adding the International Magnum Portfolio) is incorporated by reference to Post-Effective Amendment No. 28 to the Registrant's Registration Statement on Form N1-A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on November 3, 1995. 6 (a) Distribution Agreement between Registrant and Morgan Stanley & Co. Incorporated is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (b) Supplement to Distribution Agreement between Registrant and Morgan Stanley & Co. Incorporated, filed herewith. 8 (a) Mutual Fund Custody Agreement (Domestic Custody Agreement) between Registrant and United States Trust Company of New York dated March 10, 1994 is incorporated by reference to Post- Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (b) Registrant's Custody Agreement (International), dated July 31, 1989, as amended on [____________, 1995] is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. 9 (a) Administration Agreement between Registrant and Morgan Stanley Asset Management Inc. (the "MSAM Administration Agreement") is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. (b) U.S. Trust Administration Agreement is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. 10 Opinion of Counsel is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. 11 Consent of Independent Accountants, filed herewith. 13 Purchase Agreement is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. 15 Form of Plan of Distribution Pursuant to Rule 12b-1 for Class B Shares (the "Class B Plan") of the Active Country Allocation Portfolio is incorporated by reference to Post-Effective Amendment No. 27 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on November 1, 1995. The following Class B Plans have been omitted because they are substantially identical to the one filed herewith. The omitted Class B Plans differ from the Class B Plan filed herewith only in references to the portfolio to which the Class B Plan relates: Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed Securities, High Yield, Money Market, Municipal Money Market, Small Cap Value Equity, Value Equity, Balanced, Gold, Global Equity, International Equity, International Small Cap, Asian Equity, European Equity, Japanese Equity, Latin American, Emerging Markets, Emerging Markets Debt, China Growth, Equity Growth, Emerging Growth, MicroCap, Aggressive Equity, U.S. Real Estate and International Magnum Portfolios. C-3 16 Schedule of Computation of Performance Information is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. 19 Registrant's Rule 18F-3 Multiple Class Plan is incorporated by reference to Post-Effective Amendment No. 27 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on November 1, 1995. 24 Powers of Attorney are incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. 27 Financial Data Schedules for the fiscal year ended December 31, 1995 for Registrant's portfolios in operation during such periods (See Item 24(A)), filed herewith. ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Registrant is not controlled by or under common control with any person. ITEM 26. NUMBER OF HOLDERS OF SECURITIES (ON MARCH 29, 1996) Active Country Allocation Portfolio Class A........................................................63 Class B........................................................28 Aggressive Equity Portfolio Class A.......................................................114 Class B........................................................67 Asian Equity Portfolio Class A.......................................................928 Class B.......................................................246 Balanced Portfolio Class A........................................................53 Class B........................................................63 Emerging Growth Portfolio Class A.......................................................489 Class B.......................................................158 Emerging Markets Portfolio Class A......................................................1107 Class B.......................................................236 Equity Growth Portfolio Class A.......................................................498 Class B.......................................................105 Fixed Income Portfolio Class A.......................................................287 Class B........................................................63 Global Equity Portfolio Class A........................................................22 Class B........................................................50 Global Fixed Income Portfolio Class A........................................................88 Class B........................................................52 High Yield Portfolio Class A.......................................................381 Class B........................................................68 International Equity Portfolio Class A.......................................................308 Class B.......................................................142 C-4 International Small Cap Portfolio Class A.......................................................151 Latin American Portfolio Class A.......................................................491 Class B........................................................18 Money Market Portfolio Class A.......................................................513 Municipal Money Market Portfolio Class A.......................................................331 Small Cap Value Equity Portfolio Class A.......................................................447 Class B........................................................45 U.S. Real Estate Portfolio Class A.......................................................479 Class B........................................................55 Value Equity Portfolio Class A.......................................................476 Class B........................................................67 European Equity Portfolio Class A.......................................................594 Class B........................................................34 Municipal Bond Portfolio Class A.......................................................109 Class B.........................................................3 Mortgage-Backed Securities Portfolio Class A.........................................................0 Class B.........................................................0 Japanese Equity Portfolio Class A.......................................................660 Class B........................................................74 Emerging Markets Debt Portfolio Class A.......................................................563 Class B........................................................62 Gold Portfolio Class A........................................................45 Class B.........................................................9 China Growth Portfolio Class A.........................................................0 Class B.........................................................0 MicroCap Portfolio Class A.........................................................0 Class B.........................................................0 International Magnum Portfolio Class A.........................................................3 Class B.........................................................0 ITEM 27. INDEMNIFICATION Reference is made to Article TEN of the Registrant's Articles of Incorporation. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a trustee, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. C-5 ITEM 28. BUSINESS AND OTHER CONNECTIONS WITH INVESTMENT ADVISER Reference is made to the caption "The Investment Adviser" in the Prospectus constituting Part A of this Registration Statement and "Investment Advisory Services" in Part B of Registration Statement. Listed below are the officers and Directors of Morgan Stanley Asset Management Inc. ("MSAM"). The information as to any other business, profession, vocation, or employment of substantial nature engaged in by the Chairman, President and Directors during the past two fiscal years, is incorporated by reference to Schedules A and D of Form ADV filed by MSAM pursuant to the Advisers Act (SEC File No. 801-15757). DIRECTORS: James M. Allwin Director Barton M. Biggs Director Gordon S. Gray Director Peter A. Nadosy Director Dennis G. Sherva Director OFFICERS: Barton M Biggs Chairman Peter A. Nadosy Vice Chairman James M. Allwin President - Managing Director Barton M. Biggs Managing Director P. Dominic Caldecott Managing Director (MSAM) - UK A. Macdonald Caputo Managing Director Ean Wah Chin Managing Director (MSAM) - Singapore Garry B. Crowder Managing Director Michael A. Crowe Managing Director Madhav Dhar Managing Director Kurt A. Feuerman Managing Director Gordon S. Gray Managing Director Gary D. Latainer Managing Director Peter A. Nadosy Managing Director Dennis G. Shorva Managing Director Richard G. Woolworth, Jr. Managing Director Warren Ackerman III Principal John R. Alkire Principal (MSAM) - Tokyo Robert E. Angevine Principal Gerald P. Barth-Wehrenalp Principal Francine J. Bovich Principal Stuart J. M. Breslow Principal Terence P. Carmichael Principal Arthur Certosimo Principal James K. K. Cheng Principal (MSAM) - Singapore Stephen C. Cordy Principal Jacqueline A. Day Principal (MSAM) - UK Paul B. Ghaffari Principal James Wayne Grisham Principal Perry E. Hall II Principal Marianne Laing Hay Principal (MSAM) - UK Margaret Kinsley Johnson Principal Kathryn Jonas Kasanoff Principal Debra A. F. Kushma Principal Marianne J. Lippamnn Principal Gary J. Mangino Principal M. Paul Martin Principal Walter Maynard, Jr. Principal C-6 Robert L. Meyer Principal Margaret P. Naylor Principal (MSAM) - UK Warren Olsen Principal Christopher G. Petrow Principal Russell C. Platt Principal Gail Hunt Reeke Principal Christine I. Reilly Principal Bruce R. Sandberg Principal Robert A. Sargent Principal (MSAM) - UK Harold J. Schaaff, Jr. Principal Kiat Seng Scah Principal (MSAM) - Singapore Vinod R. Sethl Principal Stephen C. Sexauer Principal Robert M. Smith Principal Philip W. Winters Principal Alford E. Zick, Jr. Principal Marshall T. Bassett Vice President L. Kenneth Brooks Vice President Andrew C. Brown Vice President (MSAM) - UK Frances Campion Vice President (MSAM) - UK Carl Kuo-Wei Chien Vice President (MSAM) - Hong Kong Lori A. Cohane Vice President James Colmenares Vice President Kate Cornish-Bowden Vice President (MSAM) - UK Bertrand Le Pan De Ligny Vice President (MSAM) - UK Christine H. du Bois Vice President Raye L. Dube Vice President Abigail Jones Feder Vice President Josephine M. Glass Vice President Maureen A. Grover Vice President Kenneth R. Holley Vice President Nan B. Levy Vice President Valerie Y. Lewis Vice President Gordon W. Loory Vice President Yvonne Longley Vice President (MSAM) - UK Jeffrey Margolis Vice President Paula J. Morgan Vice President (MSAM) - UK Clare K. Mutone Vice President Martin O. Pearce Vice President Alexander A. Pena Vice President Anthony J. Pesce Vice President David J. Polansky Vice President Donald P. Ryan Vice President Michael James Smith Vice President (MSAM) - UK Kim I. Spellman Vice President Joseph P. Stadler Vice President Christian K. Stadlinger Vice President Catherine Steinhardt Vice President Kunihiko Sugio Vice President (MSAM) - Tokyo Joseph Y.S. Tern Vice President (MSAM) - Singapore Ann D. Thiviergo Vice President Richard Boon Hwee Toh Vice President (MSAM) - Singapore K.N. Vaidyanathan Vice President (MSAM) - Bombay Kevin V. Wasp Vice President Harold J. Schaaff, Jr. General Counsel and Secretary Madeline D. Barkhorn Assistant Secretary Charlene R. Herzer Assistant Secretary Charles R. Hintz Treasurer C-7 In addition, MSAM acts as investment adviser to the following registered investment companies: American Advantage International Equity Fund; The Brazilian Investment Fund, Inc.; certain portfolios of The Enterprise Group of Funds, Inc.; Fountain Square International Equity Fund; General American Capital Co.; The Latin American Discovery Fund, Inc., certain portfolios of The Legends Fund, Inc.; The Malaysia Fund, Inc.; Morgan Stanley Africa Investment Fund, Inc.; Morgan Stanley Asia-Pacific Fund, Inc.; Morgan Stanley Emerging Markets Debt Fund, Inc.; Morgan Stanley Emerging Markets Fund, Inc.; all funds of the Morgan Stanley Fund, Inc.; Morgan Stanley Global Opportunity Bond Fund, Inc.; The Morgan Stanley High Yield Fund, Inc.; Morgan Stanley India Investment Fund, Inc.; The Pakistan Investment Fund, Inc.; PCS Cash Fund, Inc.; The Thai Fund, Inc., The Turkish Investment Fund, Inc.; Principal Aggressive Growth Fund, Inc.; Principal Asset Allocation Fund, Inc. and Sun America Series Trust. ITEM 29. PRINCIPAL UNDERWRITERS Morgan Stanley & Co. Incorporated ("MS&Co.") is distributor for Morgan Stanley Institutional Fund, Inc., Morgan Stanley Fund, Inc. and PCS Cash Fund, Inc. The information required by this Item 29 with respect to each Director and officer of MS&Co. is incorporated by reference to Schedule A of Form BD filed by MS&Co. pursuant to the Securities and Exchange Act of 1934 (SEC File No. 8-15869). ITEM 30. LOCATION OF ACCOUNTS AND RECORDS The books, accounts and other documents required by Section 31(a) under the Investment Company Act of 1940 and the rules promulgated thereunder are maintained in the physical possession of the Registrant; Registrant's Transfer Agent, Chase Global Funds Services Company, P.O. Box 2798, Boston, Massachusetts 02208-2798; MSAM; MS&Co.; and the Registrant's custodian banks, including sub-custodians. ITEM 31. MANAGEMENT SERVICES The Registrant has entered into a Service Agreement with The Chase Manhattan Bank, N.A., successor in interest to United States Trust Company of New York, which was filed as Exhibit No. 9(b) to Post-Effective Amendment No. 25 to the Fund's Registration Statement and is incorporated herein by reference. ITEM 32. UNDERTAKINGS 1. Registrant hereby undertakes to file a post-effective amendment containing reasonably current financial statements, which need not be certified, for the International Magnum and MicroCap Portfolios within four to six months of their effective date or the commencement of operations, whichever is later. 2. Registrant hereby undertakes that whenever a Shareholder or Shareholders who meet the requirements of Section 16(c) of the Investment Company Act of 1940 inform the Board of Directors of his or their desire to communicate with other Shareholders of the Fund, the Directors will inform such Shareholder(s) as to the approximate number of Shareholders of record and the approximate costs of mailing or afford said Shareholders access to a list of Shareholders. C-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York, on April 25, 1996. MORGAN STANLEY INSTITUTIONAL FUND, INC. By: /s/ WARREN J. OLSEN --------------------- Warren J. Olsen President and Director Pursuant to the requirements of the Securities Act of 1933, this amendment to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - --------- ----- ---- /S/ WARREN J. OLSEN Director, President April 25, 1996 - ------------------- (Principal Executive Warren J. Olsen Officer) */S/ BARTON M. BIGGS Director (Chairman) April 25, 1996 - ------------------- Barton M. Biggs */S/ FERGUS REID - ------------------- Director April 25, 1996 Fergus Reid */S/ FREDERICK O. ROBERTSHAW Director April 25, 1996 - ------------------- Frederick O. Robertshaw */S/ ANDREW MCNALLY IV Director April 25, 1996 - ------------------- Andrew McNally IV */S/ JOHN D. BARRETT II Director April 25, 1996 - ------------------- John D. Barrett II */S/ GERARD E. JONES Director April 25, 1996 - ------------------- Gerard E. Jones */S/ SAMUEL T. REEVES Director April 25, 1996 - ------------------- Samuel T. Reeves */S/ FREDERICK B. WHITTEMORE Director April 25, 1996 - ------------------- Frederick B. Whittemore */S/ JAMES R. ROONEY Treasurer April 25, 1996 - ------------------ (Principal James R. Rooney Accounting Officer) *By:/S/ WARREN J. OLSEN -------------------- Warren J. Olsen Attorney-In-Fact EXHIBIT INDEX EDGAR Exhibit Number Description EX-99.B 1 Articles of Amendment and Restatement are incorporated by reference to Post-Effective Amendment No. 26 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on October 13, 1995. EX-99.B 2 Amended and Restated By-laws are incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. 4 Registrant's Form of Specimen Security was previously filed and is incorporated herein by reference. EX-99.B 5 (a) Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (b) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding Registrant's Equity, Balanced and Fixed Income Portfolios) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (c) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Global Equity, Global Fixed Income, European Equity and Equity Growth Portfolios) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (d) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Asian Equity Portfolio) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (e) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Active Country Allocation Portfolio) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (f) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Emerging Markets, High Yield and International Small Cap Portfolios) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (g) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Small Cap Value Equity Portfolio) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (h) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Emerging Markets Debt, Mortgage-Backed Securities, Municipal Bond and Japanese Equity Portfolios) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (i) Sub-Advisory Agreement among Registrant, Morgan Stanley Asset Management Inc. and Sun Valley Gold Company (with respect to the Gold Portfolio) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (j) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the China Growth Portfolio) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (k) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Latin American Portfolio) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (l) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Contrarian Portfolio) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (m) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management Inc. (adding the Aggressive Equity and U.S. Real Estate Portfolios) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement 2 on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (n) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management, Inc. (adding the MicroCap Portfolio) is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 5 (o) Supplement to Investment Advisory Agreement between Registrant and Morgan Stanley Asset Management, Inc. (adding the International Magnum Portfolio) is incorporated by reference to Post-Effective Amendment No. 28 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on November 3, 1995. EX-99.B 6 (a) Distribution Agreement between Registrant and Morgan Stanley & Co. Incorporated is incorporated by reference to Post- Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 6 (b) Supplement to Distribution Agreement between Registrant and Morgan Stanley & Co. Incorporated, filed herewith. EX-99.B 8 (a) Mutual Fund Custody Agreement (Domestic Custody Agreement) between Registrant and United States Trust Company of New York dated March 10, 1994 is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 8 (b) Registrant's Custody Agreement (International), dated July 31, 1989, as amended on [_____________, 1995] is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 9 (a) Administration Agreement between Registrant and Morgan Stanley Asset Management Inc. (the "MSAM Administration Agreement") is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 9 (b) U.S. Trust Administration Agreement is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 10 Opinion of Counsel is incorporated by reference to Post- Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. 3 EX-99.B 11 Consent of Independent Accountants, filed herewith. EX-99.B 13 Purchase Agreement is incorporated by reference to Post- Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 15 Form of Plan of Distribution Pursuant to Rule 12b-1 for Class B Shares (the "Class B Plan") of the Active Country Allocation Portfolio is incorporated by reference to Post- Effective Amendment No. 27 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on November 1, 1995. The following Class B Plans have been omitted because they are substantially identical to the one filed herewith. The omitted Class B Plans differ from the Class B Plan filed herewith only in references to the portfolio to which the Class B Plan relates: Fixed Income, Global Fixed Income, Municipal Bond, Mortgage-Backed Securities, High Yield, Money Market, Municipal Money Market, Small Cap Value Equity, Value Equity, Balanced, Gold, Global Equity, International Equity, International Small Cap, Asian Equity, European Equity, Japanese Equity, Latin American, Emerging Markets, Emerging Markets Debt, China Growth, Equity Growth, Emerging Growth, MicroCap, Aggressive Equity, U.S. Real Estate and International Magnum Portfolios. EX-99.B 16 Schedule of Computation of Performance Information is incorporated by reference to Post-Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 19 Registrant's Rule 18F-3 Multiple Class Plan is incorporated by reference to Post-Effective Amendment No. 27 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on November 1, 1995. EX-99.B 24 Powers of Attorney are incorporated by reference to Post- Effective Amendment No. 25 to the Registrant's Registration Statement on Form N-1A (File Nos. 33-23166 and 811-5624), as filed with the SEC via EDGAR on August 1, 1995. EX-99.B 27 Financial Data Schedules for the fiscal year ended December 31, 1995 for Registrant's portfolios in operation during such periods (See Item 24(A)), filed herewith. 4 EX-6.(B) 2 EXHIBIT 6(B) SUPPLEMENT TO THE DISTRIB. AGMT. EXHIBIT 6(b) SUPPLEMENT TO DISTRIBUTION AGREEMENT OF MORGAN STANLEY INSTITUTIONAL FUND, INC. (CLASS B SHARES) Supplement dated as of December 18, 1995, (the "Supplement") to Distribution Agreement dated as of October 1, 1988 (the "Agreement") among Morgan Stanley Institutional Fund, Inc., a Maryland corporation (the "Fund"), and Morgan Stanley & Co. Incorporated, a Delaware corporation (the "Distributor"). RECITALS The Fund has executed and delivered a Distribution Agreement, dated as of October 1, 1988, between the Fund and the Distributor. The Agreement appoints the Distributor in connection with the offering and sale of the shares of common stock, par value $0.001, of the Fund and sets forth the rights and obligations of the parties with respect to the distribution of the shares. AGREEMENTS NOW, therefore, the parties agree that the rights and obligations set forth in the Distribution Agreement shall be applicable to the Class B Shares of the Fund and that with respect to such shares, the Agreement is amended and supplemented by the following: COMPENSATION For the services to be rendered and the expenses assumed by the Distributor with respect to the Class B Shares, the Fund shall pay to the Distributor, compensation at the annual rate of .25% of the average daily net assets of the Class B Shares. Except as hereinafter set forth, continuing compensation under this Agreement shall be calculated and accrued daily and the amounts of the daily accruals shall be paid monthly in arrears within ten days after the end of the month. If this Agreement becomes effective subsequent to the first day of a month or shall terminate before the last day of a month, compensation for that part of the month this Agreement is in effect shall be prorated in a manner consistent with the calculations of the fees as set forth above. Payment of the Distributor's compensation for the preceding month shall be made as promptly as possible, but in no event later than ten days after the end of the month. This Supplement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. The parties listed below have executed this Supplement as of December 18, 1995. MORGAN STANLEY & CO. INCORPORATED By: /s/ Warren J. Olsen ------------------------------------ Name: Title: Principal MORGAN STANLEY INSTITUTIONAL FUND, INC. By: /s/ Warren J. Olsen ------------------------------------ Name: Title: Director and President EX-11 3 EXHIBIT 11 CONSENT OF INDEPENDENT ACCTS CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Statement of Additional Information constituting part of this Post-Effective Amendment No. 29 to the registration on Form N-1A (the "Registration Statement") of our report dated February 9, 1996, relating to the financial statements and financial highlights of Morgan Stanley Institutional Fund, Inc., which appears in such Statement of Additional Information, and the incorporation by reference of our report into the Prospectuses which constitute parts of this Registration Statement. We also consent to the references to us under the heading "Financial Statements" in such Statement of Additional Information and the references to us under the headings "Financial Highlights", where applicable, and "Independent Accountants" in such Prospectuses. PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, New York 10036 April 22, 1996 EX-27.(A) 4 EXHIBIT 27(A) FDS ACTIVE COUNTRY ALLOCATION
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 14 ACTIVE COUNTRY ALLOCATION PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 149,711 160,656 857 14 9,417 170,944 (23) 0 (258) (281) 0 157,244 14,673 15,712 0 (7,782) 838 0 20,363 170,663 3,211 179 0 (1,316) 2,074 (1,123) 15,675 16,626 0 (4,800) (12,502) 0 7,883 (10,268) 1,346 (12,314) 1,418 7,989 0 0 1,068 0 1,934 164,600 11.65 0.17 1.00 (0.35) (0.84) 0 11.63 0.80 0 0
EX-27.(B) 5 EXHIBIT 27(B) FDS ASIAN EQUITY
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 12 ASIAN EQUITY PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 270,840 313,770 3,696 23 0 317,489 427 0 2,178 2,605 0 268,221 16,166 12,854 0 (3) 3,738 0 42,928 314,884 4,990 711 0 (2,905) 2,796 12,459 7,852 23,107 0 (4,869) (40,469) 0 24,613 (23,439) 2,138 37,978 1,886 32,350 0 0 2,301 0 3,427 287,937 21.54 0.18 1.11 (0.34) (3.01) 0 19.48 1.00 0 0
EX-27.(C) 6 EXHIBIT 27(C) FDS EMERGING MARKETS
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 13 EMERGING MARKETS PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 921,043 871,316 24,642 367 0 896,325 12,102 0 7,632 19,734 0 962,160 66,716 57,016 167 0 (35,622) 0 (50,114) 876,591 17,203 4,215 0 15,905 5,513 (34,234) (97,017) (125,738) 0 (3,978) (66,711) 0 27,709 (22,595) 4,586 (53,047) (785) 65,253 0 0 11,563 0 15,905 925,488 16.30 0.08 (2.05) (0.06) (1.13) 0 13.14 1.72 0 0
EX-27.(D) 7 EXHIBIT 27(D) FDS EUROPEAN EQUITY
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 9 EUROPEAN EQUITY PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 67,787 70,608 291 2 20 70,921 710 0 628 1,338 0 66,433 5,000 1,982 24 0 283 0 2,843 69,583 988 245 0 (519) 714 643 3,042 4,399 0 (738) (3,017) 0 4,104 (1,350) 264 41,949 31 2,731 0 0 416 0 649 51,986 13.94 0.14 1.37 (0.15) (1.38) 0 13.92 1.00 0 0
EX-27.(E) 8 EXHIBIT 27(E) FDS GLOBAL EQUITY
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 8 GLOBAL EQUITY PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 69,508 78,392 13,608 6 0 92,006 2 0 329 331 0 82,447 6,408 5,889 0 0 474 0 8,754 91,675 1,728 48 0 (816) 960 5,807 7,195 13,962 0 (1,202) (7,032) 0 2,175 (2,239) 583 12,740 373 1,568 0 0 653 0 925 81,742 13.40 0.18 2.26 (0.22) (1.31) 0 14.31 1.00 0 0
EX-27.(F) 9 EXHIBIT 27(F) FDS GOLD PORTFOLIO
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 19 GOLD PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 7,710 7,324 125 0 1 7,450 0 0 41 41 0 7,817 869 3,313 0 0 (22) 0 (386) 7,409 78 92 0 (227) (57) 876 2,423 3,242 0 (37) (2,066) 0 2,403 (5,071) 222 (22,834) 36 974 0 0 182 0 319 18,160 9.13 (0.07) 1.22 (0.01) (1.72) 0 8.55 1.25 0 0
EX-27.(G) 10 EXHIBIT 27(G) FDS INT'L EQUITY
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 4 INTERNATIONAL EQUITY PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1,318,708 1,591,885 26,613 103 3,637 1,622,238 9,689 0 14,019 23,708 0 1,310,630 105,547 85,071 13,219 0 (2,135) 0 276,816 1,598,530 29,833 4,293 0 (14,313) 19,813 88,470 50,978 159,261 0 (5,969) (168,582) 0 18,165 (8,961) 11,272 293,760 7,083 70,335 0 0 11,452 0 14,737 1,432,395 15.34 0.16 1.55 (0.06) (1.84) 0 15.15 1.00 0 0
EX-27.(H) 11 EXHIBIT 27(H) FDS INT'L SMALL CAP
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 15 INTERNATIONAL SMALL CAP PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 208,494 201,071 1,469 12 0 202,552 1,492 0 2,391 3,883 0 205,084 13,300 10,566 715 0 1,222 0 (8,352) 198,669 4,881 549 0 (2,174) 3,256 7,677 (6,811) 4,122 0 (2,947) (4,763) 0 3,865 (1,584) 453 38,568 703 (1,989) 0 0 1,796 0 2,355 189,039 15.15 0.24 0.15 (0.23) (0.37) 0 14.94 1.15 0 0
EX-27.(I) 12 EXHIBIT 27(I) FDS JAPANESE EQUITY
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 20 JAPANESE EQUITY PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 113,705 115,853 91 4 3,571 119,519 0 0 241 241 0 119,268 12,869 5,121 0 (2,710) (2,999) 0 5,719 119,278 446 229 0 (585) 90 (2,999) 5,934 3,025 0 (2,539) 0 0 15,121 (7,618) 245 68,946 (261) 0 0 0 469 0 703 58,657 9.83 0.04 (0.40) (0.20) 0 0 9.27 1.00 0 0
EX-27.(J) 13 EXHIBIT 27(J) FDS LATIN AMERICA
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 25 LATIN AMERICAN PORTFOLIO 1,000 OTHER DEC-31-1995 JAN-18-1995 DEC-31-1995 15,263 15,471 634 1 0 16,106 0 0 730 730 0 15,698 1,697 0 0 0 (530) 0 208 15,376 244 108 0 (270) 82 (543) 208 (253) 0 (74) 0 (49) 2,375 (690) 12 15,376 0 0 0 0 146 0 416 13,889 10.00 0.05 (0.92) (0.04) 0 (0.03) 9.06 1.70 0 0
EX-27.(K) 14 EXHIBIT 27(K) FDS AGGRESSIVE EQUITY
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 27 AGGRESSIVE EQUITY PORTFOLIO 1,000 OTHER DEC-31-1995 MAR-08-1995 DEC-31-1995 28,692 30,487 3,427 1 0 33,915 873 0 4,494 5,367 0 26,266 2,345 0 0 0 422 0 1,860 28,548 338 88 0 (160) 266 4,041 1,860 6,167 0 (268) (3,617) 0 2,360 (308) 293 28,548 0 0 0 0 128 0 256 19,623 10.00 0.15 3.95 (0.15) (1.78) 0 12.17 1.00 0 0
EX-27.(L) 15 EXHIBIT 27(L) FDS EMERGING GROWTH
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 3 EMERGING GROWTH PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 66,320 119,258 536 10 1 119,805 0 0 427 427 0 66,140 5,555 7,301 0 0 300 0 52,938 119,378 203 445 0 (1,657) (1,009) 11,225 27,942 38,158 0 0 0 0 5,737 (7,483) 0 1,709 0 (10,925) 0 0 1,325 0 1,675 132,485 16.12 (0.18) 5.55 0 0 0 21.49 1.25 0 0
EX-27.(M) 16 EXHIBIT 27(M) EQUITY GROWTH
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 11 EQUITY GROWTH PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 142,272 158,712 3,638 9 0 162,359 2,782 0 1,465 4,247 0 131,834 11,182 8,090 0 0 9,838 0 16,440 158,112 2,580 694 0 (1,105) 2,169 32,477 15,685 50,331 0 (2,636) (26,092) 0 5,794 (4,657) 1,955 60,853 461 3,459 0 0 830 0 1,210 138,322 12.02 0.22 4.93 (0.28) (2.75) 0 14.14 0.80 0 0
EX-27.(N) 17 EXHIBIT 27(N) FDS SMALL CAP VALUE EQUITY
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 17 SMALL CAP VALUE EQUITY PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 46,841 51,795 248 4 0 52,047 0 0 128 128 0 46,460 4,358 3,707 0 0 505 0 4,954 51,919 1,575 118 0 (470) 1,223 1,546 5,880 8,649 0 (1,519) (2,511) 0 1,631 (1,304) 324 11,886 281 1,484 0 0 400 0 567 47,009 10.80 0.30 1.82 (0.38) (0.63) 0 11.91 1.00 0 0
EX-27.(O) 18 EXHIBIT 27(O) FDS US REAL ESTATE
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 26 U.S. REAL ESTATE PORTFOLIO 1,000 OTHER DEC-31-1995 FEB-24-1995 DEC-31-1995 65,176 69,072 3,273 2 1 72,348 2,706 0 133 2,839 0 64,501 6,087 0 121 0 991 0 3,896 69,509 1,796 103 0 (373) 1,526 3,495 3,896 8,917 0 (1,405) (2,504) 0 6,381 (573) 279 69,509 0 0 0 0 299 0 502 43,880 10.00 0.26 1.84 (0.24) (0.44) 0 11.42 1.00 0 0
EX-27.(P) 19 EXHIBIT 27(P) FDS VALUE EQUITY
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 5 VALUE EQUITY PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 132,167 146,988 651 8 0 147,647 0 0 282 282 0 126,256 10,568 6,383 8 0 6,280 0 14,821 147,365 3,986 245 0 (797) 3,434 10,276 17,116 30,826 0 (4,042) (6,330) 0 5,522 (2,068) 731 73,959 643 2,307 0 0 570 0 882 113,958 11.50 0.38 3.30 (0.47) (0.77) 0 13.94 0.70 0 0
EX-27.(Q) 20 EXHIBIT 27(Q) FDS BALANCED PORTFOLIO
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 6 BALANCED PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 20,514 22,431 267 1 0 22,699 0 0 57 57 0 20,117 2,268 2,064 2 0 606 0 1,917 22,642 374 642 0 (148) 868 1,158 2,413 4,439 0 (1,080) (1,047) 0 380 (358) 182 4,150 214 495 0 0 106 0 216 21,149 8.96 0.39 1.62 (0.50) (0.49) 0 9.98 0.70 0 0
EX-27.(R) 21 EXHIBIT 27(R) FDS EMERGING MARKETS DEBT
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 21 EMERGING MARKETS DEBT PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 172,913 180,604 45,832 12 24,039 250,487 26,106 0 42,503 68,609 0 176,769 21,173 16,881 0 (1,501) 777 0 5,833 181,878 0 28,018 0 (2,998) 25,020 9,187 15,290 49,497 0 (33,418) (7,508) 0 18,475 (17,651) 3,468 36,929 8,322 (2,327) 0 0 1,702 0 2,998 170,234 8.59 1.36 0.91 (1.86) (0.41) 0 8.59 1.75 0 0
EX-27.(S) 22 EXHIBIT 27(S) FDS FIXED INCOME
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 7 FIXED INCOME PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 155,014 163,075 2,353 14 234 165,676 0 0 149 149 0 165,563 15,307 21,313 10 0 (8,331) 0 8,285 165,527 0 13,011 0 (803) 12,208 5,921 13,125 31,254 0 (13,570) 0 0 6,668 (13,696) 1,022 (43,804) 1,274 (14,154) 0 0 624 0 1,050 178,265 9.82 0.72 1.06 (0.79) 0 0 10.81 0.45 0 0
EX-27.(T) 23 EXHIBIT 27(T) FDS GLOBAL FIXED INCOME
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 10 GLOBAL FIXED INCOME PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 109,280 112,666 2,916 9 663 116,254 12,882 0 520 13,402 0 106,123 9,164 12,704 309 0 (7,109) 0 3,529 102,852 0 6,987 0 (479) 6,508 15 10,191 16,714 0 (9,003) 0 0 3,346 (7,623) 737 (27,823) 1,613 (5,933) 0 0 383 0 683 95,870 10.29 0.76 1.15 (0.98) 0 0 11.22 0.50 0 0
EX-27.(U) 24 EXHIBIT 27(U) FDS HIGH YIELD
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 16 HIGH YIELD PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 62,754 61,987 1,176 7 0 63,170 0 0 925 925 0 67,652 5,951 10,181 86 0 (4,726) 0 (767) 62,245 53 7,927 0 (503) 7,477 (3,145) 9,886 14,218 0 (8,122) 0 0 5,865 (10,704) 609 (34,978) 731 (1,581) 0 0 335 0 558 67,393 9.55 1.14 0.97 (1.20) 0 0 10.46 0.75 0 0
EX-27.(V) 25 EXHIBIT 27(V) FDS MUNICIPAL BOND
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 23 MUNICIPAL BOND PORTFOLIO 1,000 OTHER DEC-31-1995 JAN-18-1995 DEC-31-1995 43,334 44,969 922 1 37 45,929 0 0 60 60 0 42,249 4,422 0 0 (15) 0 0 1,635 45,869 0 2,154 0 (191) 1,963 193 1,635 3,791 0 (1,978) (193) 0 6,134 (1,912) 200 45,869 0 0 0 0 149 0 310 44,573 10.00 0.44 0.42 (0.45) (0.04) 0 10.37 0.45 0 0
EX-27.(W) 26 EXHIBIT 27(W) FDS MONEY MARKET
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 1 MONEY MARKET PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 836,431 836,431 2,802 57 1 839,291 0 0 2,598 2,598 0 836,706 836,710 690,597 0 0 (13) 0 0 836,693 0 48,910 0 (4,253) 44,657 79 0 44,736 0 (44,657) 0 0 8,093,987 (7,989,639) 41,765 146,190 0 (92) 0 0 2,500 0 4,253 831,489 1.000 0.054 0 (0.054) 0 0 1.000 0.51 0 0
EX-27.(X) 27 EXHIBIT 27(X) FDS MUNICIPAL MONEY MARKET
6 0000836487 MORGAN STANLEY INSTITUTIONAL FUND, INC. 2 MUNICIPAL MONEY MARKET PORTFOLIO 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 450,017 450,017 2,563 29 0 452,609 0 0 (1,090) (1,090) 0 451,528 451,502 359,426 0 0 (9) 0 0 451,519 0 15,686 0 (2,107) 13,579 (1) 0 13,578 0 (13,579) 0 0 3,169,110 (3,090,216) 13,182 92,075 0 (8) 0 0 1,210 0 2,107 401,513 1.000 0.034 0 (0.034) 0 0 1.000 0.52 0 0
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