-----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, HX2yLuWym2zNSisshBtta14Cqv2bbHQeVaisz/6mlwTrWFVckDty7ywDQ/W7eWI6 /J/qaENVN8439tmUCjWZOw== 0001047469-03-008022.txt : 20030307 0001047469-03-008022.hdr.sgml : 20030307 20030307112338 ACCESSION NUMBER: 0001047469-03-008022 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030307 EFFECTIVENESS DATE: 20030307 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY INSTITUTIONAL FUND INC CENTRAL INDEX KEY: 0000836487 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-05624 FILM NUMBER: 03595582 BUSINESS ADDRESS: STREET 1: 1221 AVENUE OF THE AMERICAS STREET 2: 8TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 6175578742 MAIL ADDRESS: STREET 1: 1221 AVENUE OF THE AMERICAS STREET 2: 8TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10020 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY INSTITUTIONAL FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER INSTITUTIONAL FUND INC DATE OF NAME CHANGE: 19990329 N-30D 1 a2100762zn-30d.txt N-30D ANNUAL REPORT December 31, 2002 [MORGAN STANLEY LOGO] Morgan Stanley Institutional Fund, Inc. Global and International Equity Portfolios Fixed Income Portfolio Active International Allocation Emerging Markets Debt Asian Equity Asian Real Estate Money Market Portfolios Emerging Markets European Real Estate Money Market European Value Equity Municipal Money Market Global Franchise Global Value Equity International Equity International Magnum International Small Cap Japanese Value Equity Latin American U.S. Equity Portfolios Equity Growth Focus Equity Small Company Growth Technology U.S. Real Estate Value Equity MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 Table of Contents PRESIDENT'S LETTER 2 PERFORMANCE SUMMARY 4 INVESTMENT OVERVIEWS AND STATEMENTS OF NET ASSETS GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS: Active International Allocation 6 Asian Equity 17 Asian Real Estate 21 Emerging Markets 26 European Real Estate 32 European Value Equity 36 Global Franchise 41 Global Value Equity 45 International Equity 50 International Magnum 55 International Small Cap 61 Japanese Value Equity 66 Latin American 70 U.S. EQUITY PORTFOLIOS: Equity Growth 74 Focus Equity 79 Small Company Growth 83 Technology 88 U.S. Real Estate 92 Value Equity 96 FIXED INCOME PORTFOLIO: Emerging Markets Debt 100 MONEY MARKET PORTFOLIOS: Money Market 105 Municipal Money Market 108 STATEMENTS OF OPERATIONS 113 STATEMENTS OF CHANGES IN NET ASSETS 117 FINANCIAL HIGHLIGHTS 128 NOTES TO FINANCIAL STATEMENTS 149 REPORT OF INDEPENDENT AUDITORS 157 FEDERAL TAX INFORMATION 158 DIRECTOR AND OFFICER INFORMATION 159
This report is authorized for distribution only when preceded or accompanied by prospectuses of the Morgan Stanley Institutional Fund, Inc. To receive a prospectus, which contains more complete information such as charges, expenses, risk considerations, and describes in detail each of the Portfolio's investment policies to the prospective investor, please call 1 (800) 548-7786. Please read the prospectuses carefully before you invest or send money. 1 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 President's letter Dear Shareholders: We are pleased to present to you the Fund's Annual Report for the year ended December 31, 2002. Our Fund currently offers 22 portfolios providing investors with a full array of global and domestic equity and fixed income products. The Fund's portfolios, together with the portfolios of the Morgan Stanley Institutional Fund Trust, provide investors with a means to meet specific investment needs and to allocate their investments among equities (e.g., value and growth; small, medium and large capitalization), fixed income (e.g., short, medium and long duration; investment grade and high yield) and cash (e.g., money market). In this Report, you will find portfolio commentary, performance statistics and other useful information for each of the Fund's portfolios. Additionally, we have provided a performance summary for all Portfolios on the page following this letter. MARKET OVERVIEW Over the past twelve months, U.S. equity markets have experienced several hopeful rallies only to plunge again to yet lower lows. Then in early October, markets hit an important low which held through the end of the year. By the time that low was hit, the bear market had been underway for two and a half years, making it one of the longest of the past century. But bad news for stocks was good news for bonds, and fixed-income returns soared. The technology-laden NASDAQ continued to suffer heavy losses for the twelve months ended December 31, 2002, plummeting 31.5%. The large-cap S&P 500 fell 22.1% during that time period, while the blue chip Dow Jones lost 15.0%. Even the small-cap Russell 2000, which had previously been immune to the bear market, depreciated by 20.5% in 2002. Although the drop in stock values affected equities of all sizes and styles, value stocks outperformed growth stocks. The S&P Barra Value Index tumbled 20.8% over 12 months, while the S&P Barra Growth Index fell 23.6%. Corporate earnings declined year-over-year for five quarters in a row in the worst profits recessions on record. By the second quarter of 2002, earnings eked out a small increase, rising by a modest 1.4% over the previous year. Earnings growth was expected to accelerate through the rest of 2002 and into 2003, according to First Call, which is a data provider that collects and averages analyst's earnings estimates and provides a consensus expectation for company earnings. As earnings improved but the market continued to stumble, valuations fell significantly. Price-to-earnings ratios based on trailing earnings peaked in March 2002 at 30, and then fell to 19 by the end of the year. Many international developed markets fared even worse than U.S. markets over the past year, despite a depreciating U.S. dollar, which boosted non-dollar-denominated returns. The MSCI EAFE Index for Europe, Asia and the Far East declined 15.9% in U.S dollars for the twelve months ended December 31, 2002 and lost 28.7% in local currencies. Japan, which remained gripped by deflation, a lackluster economy, and a strained banking system, still managed to outperform its European counterparts. The MSCI Japan Index lost just 10.3% in U.S. dollars and 18.8% in local currency. Germany was one of the worst performers, falling 34.1% in U.S. dollars and 44.0% in local currency. During the first quarter of 2002, the fiscal and monetary stimulus that had been pumped into the economy in late 2001 appeared to be pulling the economy out of a recession. In early 2002, Gross Domestic Product clocked in at a robust 5.0%, but from there the economic picture began to turn more mixed. The labor market continued to deteriorate, although not dramatically, consumer confidence slackened, and companies remained reluctant to make new investments. Despite those drags, consumers continued to spend, thus keeping economic growth intact in subsequent quarters. Late in the year, Federal Reserve Chairman Alan Greenspan admitted that the economy appeared to have hit a "soft patch", prompting the central bank to cut another 50 basis points off of the already low fed funds rate. Fixed-income markets enjoyed spectacular performance, outperforming equities to the greatest extent since the 1930's. The Lehman Brothers Aggregate Bond Index gained 10.3%, during the 12 months ended December 31, 2002. For that period, government long-term issues had the best performance, gaining 17.0%. Yields all across the yield curve dropped over the past year, including the 30-year Treasury bond, which lost 69 basis points to end the year at 4.8%. The 2-year Treasury note reached 1.6%, 142 basis points below where it was in December 31, 2001. 2 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 MARKET OUTLOOK Over the past twelve months, the economy and markets weathered significant stress. Business activity slowed dramatically, pushing the economy into a recession. Despite a promising economic recovery in early 2002, markets were dragged down by tremendous uncertainty. Government regulators investigated a slew of cases, including accounting fraud, corporate malfeasance and insider trading. At the same time, the administration readied for war with Iraq, while issuing warnings of possible terrorist activity. While scandals and terror grabbed the headlines, however, the fundamentals began to improve. Corporate earnings began to increase, valuations fell to more reasonable levels, business inventories were drawn down, and the consumer remained stalwart. We believe that the economy will continue to recover and, as the global environment becomes more certain, markets will continue to pick up. For the new year, the economic data is already looking better, and the consensus continues to expect the economy to grow at 2.7% in the first half of 2003 and then pick up speed to around 4% later in the year. One of the brightest lights in the recent data is the Institute for Supply Management Manufacturing Index (ISM) survey of manufacturers; all of the components rose and new orders surged. The overall composite Index appears to lead economic activity by about half a year, and the current reading on the ISM survey is consistent with 4% GDP growth. Equities will likely get a boost from several corners in 2003. Monetary and fiscal policy continues to be extraordinarily stimulative. The Federal Reserve has kept interest rates at exceptionally low levels for far longer than the market ever anticipated. The government is also planning to pour an additional $315 billion into the economy. That spending includes $180 billion that was part of last year's fiscal stimulus package, $75 billion on new defense and homeland security projects and $60 million from the administration's proposed 2003 stimulus package. Dividends will also play a crucial role in the market over the near term. The dividend yield on the S&P 500 recently edged up to about 1.75%. Meanwhile, low interest rates have driven money market yields way down. For the first time, money market yields are lower than the dividend yield on the S&P 500, making stocks look particularly attractive compared to cash. Dividends are likely to increase further because of the administration's proposed change to the way they are taxed. Even without the tax benefit, more companies are beginning to pay dividends, including technology companies where dividends had been spurned most fiercely. The renewed popularity of dividends was largely sparked by a change in investor priorities and a more modest secular outlook for stock prices. Analysts are divided over how beneficial the tax change could be, they estimate that eliminating dividend taxes could add anywhere from 2 to 20% to market return. OTHER DEVELOPMENTS The Directors of the Fund voted to liquidate the Global Fixed Income II Portfolio. The liquidation was effective October 31, 2002. On February 13, 2003, Barton M. Biggs resigned as Director and Chairman of the Board of Directors of the Fund. On that same day, Mitch Merin, President and Chief Operating Officer of the Adviser, was elected by the Fund's Board of Directors to serve as a Director and Chairman of the Board of Directors of the Fund. Sincerely, /s/ Ronald E. Robison Ronald E. Robison President January 2003 3 MORGAN STANLEY INSTITUTIONAL FUND, INC. PERFORMANCE SUMMARY December 31, 2002
ONE YEAR INCEPTION DATES TOTAL RETURN - ------------------------------------------------------------------------------------------------------------------------- COMPARABLE CLASS A CLASS B CLASS A CLASS B INDICES - ------------------------------------------------------------------------------------------------------------------------- GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS: Active International Allocation 1/17/92 1/2/96 (13.11)% (13.29)% (15.94)%(1) Asian Equity 7/1/91 1/2/96 (10.03) (10.16) (9.37)(2) Asian Real Estate 10/1/97 10/1/97 (11.55) (11.72) (6.49)(3) Emerging Markets 9/25/92 1/2/96 (6.24) (6.24) (6.17)(4) European Real Estate 10/1/97 10/1/97 24.52 24.11 22.34(6) European Value Equity 4/2/93 1/2/96 (9.24) (9.48) (18.38)(5) Global Franchise 11/28/01 11/28/01 8.10 7.82 (19.89)(7) Global Value Equity 7/15/92 1/2/96 (17.34) (17.63) (19.89)(7) International Equity 8/4/89 1/2/96 (4.02) (4.25) (15.94)(1) International Magnum 3/15/96 3/15/96 (13.36) (13.49) (15.94)(1) International Small Cap 12/15/92 -- (2.99) -- (9.58)(8) Japanese Value Equity 4/25/94 1/2/96 (11.22) (11.39) (10.28)(9) Latin American 1/18/95 1/2/96 (20.55) (20.83) (22.50)(10) - ------------------------------------------------------------------------------------------------------------------------- U.S. EQUITY PORTFOLIOS: Equity Growth 4/2/91 1/2/96 (27.64) (27.75) (22.09)(11) Focus Equity 3/8/95 1/2/96 (28.81) (28.92) (22.09)(11) Small Company Growth 11/1/89 1/2/96 (22.28) (22.44) (30.26)(12) Technology 9/16/96 9/16/96 (47.57) (47.62) (31.53)(13) U.S. Real Estate 2/24/95 1/2/96 0.18 (0.07) 3.82 (14) Value Equity 1/31/90 1/2/96 (24.22) (24.32) (15.52)(15) - ------------------------------------------------------------------------------------------------------------------------- FIXED INCOME PORTFOLIO: Emerging Markets Debt 2/1/94 1/2/96 11.29 10.34 13.11(16) - ------------------------------------------------------------------------------------------------------------------------- MONEY MARKET PORTFOLIOS: Money Market 11/15/88 -- -- -- -- Municipal Money Market 2/10/89 -- -- -- --
YIELD INFORMATION AS OF DECEMBER 31, 2002
7 DAY 7 DAY 30 DAY 30 DAY CURRENT EFFECTIVE CURRENT COMPARABLE YIELD+ YIELD+ YIELD++ YIELD - ------------------------------------------------------------------------------------------------------------ MONEY MARKET PORTFOLIOS: Money Market 1.02% 1.03% 1.16% 0.93%(17) Municipal Money Market 0.93 0.93 0.82 0.67(18)
+ The 7 day current yield and 7 day effective yield assume an annualization of the current yield with all dividends reinvested. As with all money market portfolios, yields will fluctuate as market conditions change and the 7 day yields are not necessarily indicative of future performance. ++ The current 30 day yield reflects the net investment income generated by the Portfolio over a specified 30 day period expressed as an annual percentage. Expenses accrued for the 30 day period include any fees charged to all shareholders. Yields will fluctuate as market conditions change and are not necessarily indicative of future performance. 4 MORGAN STANLEY INSTITUTIONAL FUND, INC. PERFORMANCE SUMMARY December 31, 2002
FIVE YEAR TEN YEAR AVERAGE ANNUAL TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN - ------------------------------------------------------------------------------------------------------------------------ COMPARABLE COMPARABLE CLASS A CLASS B INDICES CLASS A CLASS B INDICES - ------------------------------------------------------------------------------------------------------------------------ GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS: Active International Allocation (1.35)% (1.51)% (2.89)%(1) 4.82% --% 4.00%(1) Asian Equity (3.78) (4.02) (2.88)(2) (2.00) -- (0.23)(2) Asian Real Estate (3.13) (3.25) (2.59)(3) -- -- --(3) Emerging Markets (3.50) (4.79) (4.66)(4) 3.13 -- 1.27(4) European Real Estate 6.16 5.89 5.44(6) -- -- --(6) European Value Equity (0.02) (0.28) (2.26)(5) -- -- --(5) Global Franchise -- -- -- (7) -- -- --(7) Global Value Equity 0.18 (0.11) (2.11)(7) 10.87 -- 6.26(7) International Equity 5.54 5.33 (2.89)(1) 12.63 -- 4.00(1) International Magnum (3.32) (3.53) (2.89)(1) -- -- --(1) International Small Cap 5.17 -- (2.69)(8) 8.90 -- (0.45)(8) Japanese Value Equity (3.30) (3.57) (5.04)(9) -- -- --(9) Latin American (6.69) (6.85) (7.91)(10) -- -- --(10) - ------------------------------------------------------------------------------------------------------------------------ U.S. EQUITY PORTFOLIOS: Equity Growth (2.00) (2.24) (0.58)(11) 9.28 -- 9.35(11) Focus Equity (2.07) (2.29) (0.58)(11) -- -- --(11) Small Company Growth 9.81 9.51 (6.59)(12) 9.34 -- 2.62(12) Technology (3.26) (3.40) (3.19)(13) -- -- --(13) U.S. Real Estate 4.16 3.88 3.30(14) -- -- --(14) Value Equity 1.36 1.12 1.16(15) 9.66 -- 10.80(15) - ------------------------------------------------------------------------------------------------------------------------ FIXED INCOME PORTFOLIO: Emerging Markets Debt 2.89 2.63 7.58(16) -- -- --(16) - ------------------------------------------------------------------------------------------------------------------------ MONEY MARKET PORTFOLIOS: Money Market -- -- -- -- -- -- Municipal Money Market -- -- -- -- -- -- SINCE INCEPTION AVERAGE ANNUAL TOTAL RETURN - ------------------------------------------------------------------------------------------------ COMPARABLE COMPARABLE INDICES - INDICES - CLASS A CLASS A CLASS B CLASS B - ------------------------------------------------------------------------------------------------ GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS: Active International Allocation 3.99% 2.86% 1.33% (1.01)%(1) Asian Equity 0.63 2.16 (11.30) (8.60)(2) Asian Real Estate (7.00) (9.87) (7.27) (9.87)(3) Emerging Markets 3.27 2.00 (2.77) (4.34)(4) European Real Estate 4.89 5.18 4.62 5.18(6) European Value Equity 8.95 7.38 4.95 4.15(5) Global Franchise 12.12 (17.12) 11.66 (17.12)(7) Global Value Equity 10.10 5.84 5.94 2.34(7) International Equity 9.67 1.28 8.29 (1.01)(1) International Magnum (0.38) (0.98) (0.62) (0.98)(1) International Small Cap 8.96 (0.44) -- --(8) Japanese Value Equity (3.76) (7.44) (4.20) (9.39)(9) Latin American 3.92 (0.21) 4.97 0.57(10) - ------------------------------------------------------------------------------------------------ U.S. EQUITY PORTFOLIOS: Equity Growth 9.61 9.59 6.17 6.76(11) Focus Equity 11.79 9.77 7.46 6.76(11) Small Company Growth 11.10 4.47 8.88 (1.61)(12) Technology 3.56 1.80 3.37 1.80(13) U.S. Real Estate 13.19 10.57 11.38 9.72(14) Value Equity 9.46 11.04 7.08 8.16(15) - ------------------------------------------------------------------------------------------------ FIXED INCOME PORTFOLIO: Emerging Markets Debt 9.59 9.42 10.38 11.60(16) - ------------------------------------------------------------------------------------------------ MONEY MARKET PORTFOLIOS: Money Market -- -- -- -- Municipal Money Market -- -- -- --
INDICES: (1) MSCI EAFE (Europe, Australasia, and Far East) (2) MSCI All-Country Far East Free ex-Japan (3) GPR General Real Estate Securities Index - Far East (4) MSCI Emerging Markets Free (5) MSCI Europe (6) GPR General Real Estate Securities Index - Europe (7) MSCI World (8) MSCI EAFE Small Cap (9) MSCI Japan (10) MSCI Emerging Markets Free Latin America (11) S&P 500 (12) Russell 2000 Growth (13) NASDAQ Composite (14) National Association of Real Estate Investment Trusts (NAREIT) Equity Index (15) Russell 1000 Value (16) J.P. Morgan Emerging Markets Global Bond (17) IBC Money Fund Comparable Yield (18) IBC Municipal Money Fund Comparable Yield Past performance should not be construed as a guarantee of future performance and assumes that all dividends and distributions, if any, were reinvested. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Investments in the Money Market or Municipal Money Market Portfolios are neither insured nor guaranteed by the Federal Deposit Insurance Corporation. Although the Money Market and Municipal Money Market Portfolios seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these portfolios. Please read the Portfolios' prospectuses carefully before you invest or send money. 5 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Active International Allocation Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) UNITED KINGDOM 30.2% JAPAN 17.9% FRANCE 8.1% NETHERLANDS 6.9% SWITZERLAND 6.8% OTHER 30.1%
Of the amount shown above as "Other", a significant portion represents cash equivalents required under regulations to be held as collateral relating to investments in futures contracts. [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO - CLASS A MSCI EAFE INDEX 1992* 500000 500000 1993 653600 662800 1994 650201 714300 1995 718928 794373 1996 788735 842432 1997 856646 857427 1998 1029003 1028913 1999 1315295 1306308 2000 1118395 1121180 2001 921222 880799 2002 800444 740441
* Commenced operations on January 17, 1992 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
TOTAL RETURNS(2) ----------------------------------------- AVERAGE ANNUAL ----------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION - -------------------------------------------------------------------------------- Portfolio - Class A(3) (13.11)% (1.35)% 4.82% 3.99% Portfolio - Class B(4) (13.29) (1.51) N/A 1.33 Index - Class A (15.94) (2.89) 4.00 2.86 Index - Class B (15.94) (2.89) N/A (1.01)
(1) The MSCI EAFE Index is an unmanaged index of common stocks in Europe, Aus- tralasia and the Far East. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applica- ble, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on January 17, 1992 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Active International Allocation Portfolio seeks long-term capital appreciation by investing primarily, in accordance with country and sector weightings determined by the investment adviser, in equity securities of non-U.S. issuers which, in the aggregate, replicate broad market indices. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. For the year ended December 31, 2002, the Portfolio had a total return of - -13.11% for the Class A shares and -13.29% for the Class B shares compared to - -15.94% for the Morgan Stanley Capital International (MSCI) EAFE Index (the "Index"). MARKET REVIEW The first half of 2002 was a period of relative stability for the international equity markets. Then market volatility increased in late May beginning with a tremendous sell off (30% plus in local currency terms), followed by an August rally (about 15%), a September decline (about 18%) and then a 17% rally in October. From that point through the year end, international equities traded in a relatively narrow range. For the year, the U.S. dollar was notably weak, losing 20% versus the Swiss franc, nearly 18% versus the Euro, and roughly 10% against both the British pound and Japanese yen. The Portfolio's outperformance is relative to the Index, for the period and is chiefly explained by our defensive positioning. The Portfolio was overweight in consumer staples (-0.5% for 6 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Active International Allocation Portfolio (Cont'd) the MSCI Index return in U.S. dollars), utilities (-3.8%) and energy (-2.6%), which contributed positively to our relative return. We were underweight in the more cyclical markets, such as Australia (-1.3%) and the materials sector (-1.9%), which detracted from performance. While our below Index allocation in Japan (-10.3%) hurt the Portfolio's returns, our significant underweight in Japanese financials (-19.6%) was positive for performance. Our basic belief is that nominal gross domestic product growth in 2003 will likely be low and that extended corporate and consumer balance sheets globally may keep demands low and pricing power low. We continue to be focused on defensives, specifically, overweights in consumer staples, utilities and healthcare. Although, we have covered a good portion of our earlier underweights in telecommunications and technology hardware; we remain below the benchmark weight. Our above Index allocations to consumer staples and utilities are based on our belief that these holdings represent companies with generally solid cash earnings and a stable, albeit unexciting, outlook. The Japanese market performed strongly during the first half of the year, but steadily lost value from July through December. Investors have lost faith in the pace and depth of reforms. The market is highly ranked on valuation, earnings and technicals. On an absolute valuation basis MSCI Japan is at a price to book value of 1.34 and at 0.58 relative to MSCI Kokusai. While cheap valuations signal there is little room for the market on the downside, a catalyst to spur market performance is so far absent. Like valuations, market technicals offer hope; the market is oversold and investors appear apathetic. The Portfolio has roughly 1% invested in South Korea, focused on the technology sector. Our investment rationale is based on attractive valuation for this group and the prospect for earnings growth with a global cyclical pick up. Following weak performance for the first three quarters of the year, European markets performed strongly in the fourth quarter and led world markets with a gain of 12.3%. On an absolute valuation basis, these markets are back to their 10 year average and are attractively valued on a forward yield gap basis. However, earnings revisions are below 50 (upgrades as a percentage of total revisions) and the fundamental story for the coming year is less than compelling. Consumer and business confidence indicators are at low levels and the European Central Bank is reluctant to cut interest rates. For the consumer sector, fiscal pressure seems likely to result in higher taxes and lower social benefits, hardly encouraging. We are underweight and defensively positioned within the region. MARKET OUTLOOK Commodity prices, notably crude oil and gold, moved sharply higher into the year end. It is unclear if this is demand driven (would be positive) or supply driven and fueled by the U.S. Federal Reserve and the threat of war. We wait to see the trajectory and strength of the economic recovery. January 2003 7 MORGAN STANLEY INSTITUTIONAL FUND, INC. Active International Allocation Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (95.2%) AUSTRALIA (4.1%) Alumina Ltd. 67,829 $ 186 Amcor Ltd. 39,030 186 AMP Diversified Property Trust 23,625 35 AMP Ltd. (c)51,195 321 Ansell Ltd. (a)6,268 26 Australia & New Zealand Banking Group Ltd. 26,666 260 Australian Gas Light Co., Ltd. 18,808 111 BHP Billiton Ltd. 188,413 1,073 BHP Billiton plc 48,601 260 Boral Ltd. 31,055 76 Brambles Industries plc 54,334 143 Coca Cola Amatil Ltd. 40,730 120 Coles Myer Ltd. 67,323 238 Commonwealth Bank of Australia 50,035 758 CSL Ltd. 6,370 77 CSR Ltd. 55,490 197 Foster's Group Ltd. 114,409 289 General Property Trust 103,676 173 Goodman Fielder Ltd. 75,408 75 James Hardie Industries Ltd. 20,320 78 Leighton Holdings Ltd. 16,450 94 Lend Lease Corp., Ltd. 33,648 184 Mayne Group Ltd. 41,586 76 MIM Holdings Ltd. 103,627 88 National Australia Bank Ltd. 70,750 1,261 Newcrest Mining Ltd. 12,852 52 Newmont Mining Corp. 38,947 112 News Corp., Ltd. 90,737 585 OneSteel Ltd. 18,129 18 Orica Ltd. 33,456 197 PaperlinX Ltd. 22,587 65 QBE Insurance Group Ltd. 23,654 108 Rio Tinto plc 14,179 270 Santos Ltd. 14,755 50 Southcorp Ltd. 38,500 99 Stockland Group 20,713 56 Suncorp-Metway Ltd. 19,061 119 TABCORP Holdings Ltd. 19,618 117 Telstra Corp., Ltd. 289,183 716 Wesfarmers Ltd. 12,118 181 Westfield Trust 90,808 177 Westfield Trust (New) (a)3,301 6 Westpac Banking Corp. 81,306 627 WMC Resources Ltd. (a)67,829 161 Woolworths Ltd. 70,764 453 - -------------------------------------------------------------------------------- 10,554 ================================================================================ AUSTRIA (0.1%) Boehler-Uddeholm AG 494 23 Erste Bank der Oesterreichischen Sparkassen AG 170 11 Flughafen Wien AG 747 25 Mayr-Melnhof Karton AG 575 43 Oest Elektrizatswirts AG, Class A 1,957 167 OMV AG 74 7 VA Technologie AG 704 11 Wienerberger AG 3,242 58 - -------------------------------------------------------------------------------- 345 ================================================================================ BELGIUM (0.6%) Dexia 33,528 417 Electrabel S.A. 194 47 Fortis 44,700 789 KBC Bancassurance Holding (c)2,576 82 Solvay S.A. 1,016 70 UCB S.A. 1,410 44 Union Fenosa Group S.A. 398 17 - -------------------------------------------------------------------------------- 1,466 ================================================================================ DENMARK (0.5%) Carlsberg A/S 1,100 49 Danisco A/S 2,250 77 Danske Bank A/S 30,445 504 Group 4 Falck A/S 8,200 173 ISS A/S (a)5,500 198 Novo Nordisk A/S, Class B 3,350 97 Novozymes A/S, Class B 1,500 31 TDC A/S 1,450 35 - -------------------------------------------------------------------------------- 1,164 ================================================================================ FINLAND (0.7%) Fortum Oyj 13,532 89 Instrumentarium Oyj 800 32 Kesko Oyj, Class B 649 8 Kone Oyj, Class B 1,343 40 Metro Oyj, Class B 2,976 38 Metso Oyj 10,327 112 Nokia Oyj 49,725 791 Outokumpu Oyj (c)9,234 80 Sampo Oyj, Class A 1,948 15 Stora Enso Oyj, Series R 14,043 148 TietoEnator Oyj 6,867 94 UPM-Kymmene Oyj 7,726 248 - -------------------------------------------------------------------------------- 1,695 ================================================================================ FRANCE (8.1%) Accor S.A 7,604 230 Arcelor (a)7,210 89 Aventis S.A 36,537 1,987 AXA 38,656 519 BNP Paribas S.A 33,063 1,348 Bouygues 18,619 520 Cap Gemini S.A (c)2,503 57 Carrefour S.A 24,739 1,102 Casino Guichard - Perrachon (c)3,259 242 Compagnie de Saint-Gobain 10,768 316 Dassault Systemes S.A (c)1,657 36 Essilor International 1,491 62 Gecina 1,780 189 Groupe Danone 12,523 1,686 Imerys 484 61 Klepierre 828 112 L'Air Liquide S.A 2,118 280
The accompanying notes are an integral part of the financial statements. 8 MORGAN STANLEY INSTITUTIONAL FUND, INC. Active International Allocation Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- FRANCE (CONT'D) L'Oreal S.A. 23,713 $ 1,806 Lafarge S.A. 3,499 264 Lagardere S.C.A. 5,198 211 LVMH Moet-Hennessy Louis Vuitton (c)18,129 745 Pechiney 1,480 52 Pernod-Ricard S.A. 3,642 353 Pinault-Printemps-Redoute S.A. 2,592 191 Sanofi-Synthelabo S.A. 34,914 2,135 Schneider Electric S.A. 4,792 227 Silic 139 25 Societe BIC S.A. 4,020 139 Societe Fonciere Lyonnaise 6,835 211 Societe Generale, Class A 12,703 740 Sodexho Alliance S.A. 7,254 168 Sophia 3,014 98 STMicroelectronics N.V. 3,626 71 Suez S.A. 3,293 57 Technip-Coflexip S.A. 281 20 Thales S.A. 6,781 180 Thomson (a)4,183 71 TotalFinaElf S.A. 23,951 3,423 Unibail 7,476 532 Vivendi Universal 27,920 451 - -------------------------------------------------------------------------------- 21,006 ================================================================================ GERMANY (4.2%) Adidas-Salomon AG 450 38 Allianz AG 4,900 464 Altana AG 700 32 BASF AG 16,851 635 Bayer AG 21,252 446 Bayerische Hypo Und Vereinsbank AG 3,251 51 Beiersdorf AG 7,271 809 DaimlerChrysler AG 8,752 268 Deutsche Boerse AG 750 30 Deutsche Lufthansa AG (a)9,401 89 Deutsche Post AG (Registered) 4,101 43 Deutsche Telekom AG (Registered) 121,450 1,558 Douglas Holding AG 1,655 28 E. On AG 51,900 2,092 Epcos AG (a)850 9 Fresenius Medical Care AG 3,750 157 Gehe AG (c)2,353 91 HeidelbergerCement AG 669 25 Infineon Technologies AG (a)601 4 IVG Immobilien AG 10,409 91 Karstadt Quelle AG 1,534 26 Linde AG 4,730 174 MAN AG 2,900 40 Merck KGaA 4,086 108 Metro AG 8,844 214 Muenchener Rueckversicherungs AG (Registered) 2,800 335 RWE AG 3,851 99 SAP AG 13,893 1,090 Schering AG 7,101 309 Siemens AG (Registered) 29,876 1,270 Thyssen Krupp AG 10,851 122 TUI AG 6,200 104 Volkswagen AG 2,301 83 - -------------------------------------------------------------------------------- 10,934 ================================================================================ GREECE (0.0%) Alpha Bank A.E 1,109 13 EFG Eurobank Ergasias S.A 843 10 National Bank of Greece S.A 996 14 Titan Cement Co., S.A 700 27 - -------------------------------------------------------------------------------- 64 ================================================================================ HONG KONG (1.8%) Bank of East Asia Ltd. 85,143 146 Cathay Pacific Airways Ltd. 62,000 85 Cheung Kong Holdings Ltd. 94,000 612 CLP Holdings Ltd. 100,800 406 Esprit Holdings Ltd. 30,000 51 Hang Lung Properties Ltd. 72,000 70 Hang Seng Bank Ltd. 47,200 502 Henderson Land Development Co., Ltd. (c)38,000 114 Hong Kong & China Gas Co., Ltd. 207,079 268 Hong Kong Electric Holdings Ltd. 80,000 303 Hong Kong Exchanges & Clearing Ltd. 65,000 82 Hutchison Whampoa Ltd. 123,200 771 Johnson Electric Holdings Ltd. 92,000 101 Li & Fung Ltd. 96,000 91 MTR Corp. 80,106 85 New World Development Co., Ltd. (c)87,036 43 PCCW Ltd. (a)(c)567,062 89 Sino Land Co., Ltd. 833 @-- Sun Hung Kai Properties Ltd. 82,000 486 Swire Pacific Ltd., Class A 58,500 223 Television Broadcasts Ltd. 27,000 85 Wharf Holdings Ltd. 76,600 144 - -------------------------------------------------------------------------------- 4,757 ================================================================================ IRELAND (0.5%) Allied Irish Banks plc 44,689 603 Bank of Ireland 45,677 469 CRH plc 16,554 204 Irish Life & Permanent plc 6,208 67 Kerry Group plc, Class A 1,608 22 - -------------------------------------------------------------------------------- 1,365 ================================================================================ ITALY (4.1%) Aedes S.p.A. 30,200 104 Alleanza Assicurazioni S.p.A. 13,900 106 Assicurazioni Generali S.p.A. 29,463 606 Autogrill S.p.A. (a)9,923 77 Banca Intesa S.p.A. 210,029 443 Banca Monte dei Paschi di Siena S.p.A. 7,164 17 Banca Nazionale del Lavoro S.p.A. (a)10,036 11 Banca Popolare di Milano Scrl (a)3,560 13 Benetton Group S.p.A. 8,055 72 Beni Stabili S.p.A. (c)378,544 170
The accompanying notes are an integral part of the financial statements. 9 MORGAN STANLEY INSTITUTIONAL FUND, INC. Active International Allocation Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- ITALY (CONT'D) Enel S.p.A. 302,474 $ 1,575 ENI S.p.A. 160,071 2,546 Italcementi S.p.A. (c)3,897 39 Italgas S.p.A. 19,376 264 Mediaset S.p.A. 59,886 457 Mediobanca S.p.A. 16,384 135 Parmalat Finanziaria S.p.A. (c)77,606 185 Pirelli S.p.A. (c)89,751 83 R.A.S. S.p.A. 10,461 128 San Paolo IMI S.p.A. 37,136 242 Snia S.p.A. (a)(c)24,223 46 Telecom Italia Mobile S.p.A. (c)393,093 1,795 Telecom Italia S.p.A. (c)119,431 907 UniCredito Italiano S.p.A. 167,054 668 - -------------------------------------------------------------------------------- 10,689 ================================================================================ JAPAN (17.9%) Asatsu-DK, Inc. 2,200 39 Acom Co., Ltd. 4,970 163 Advantest Corp. 2,690 121 Aeon Co., Ltd. (c)8,800 208 Aiful Corp. 450 17 Ajinomoto Co., Inc. 45,400 474 Amada Co., Ltd. 14,000 38 Asahi Breweries Ltd. (c)22,100 145 Asahi Glass Co., Ltd. (c)66,800 409 Asahi Kasei Corp. 62,000 153 Banyu Pharmaceutical Co., Ltd. 2,000 19 Bellsystem 24, Inc. 240 47 Benesse Corp. 6,200 69 Bridgestone Corp. 38,000 470 Canon, Inc. 31,600 1,189 Casio Computer Co., Ltd. (c)24,800 138 Central Japan Railway Co. (c)86 535 Chubu Electric Power Co., Inc. (c)3,500 62 Chugai Pharmaceutical Co., Ltd. 12,900 123 Credit Saison Co., Ltd. (c)3,200 55 CSK Corp. (c)2,300 48 Dai Nippon Printing Co., Ltd. (c)42,600 471 Daicel Chemical Industries Ltd. 8,000 23 Daiichi Pharmaceutical Co., Ltd. 9,000 129 Daikin Industries Ltd. 8,600 136 Dainippon Ink & Chemicals, Inc. (a)31,000 50 Daito Trust Construction Co., Ltd. 6,200 137 Daiwa House Industry Co., Ltd. 32,600 183 Daiwa Securities Group, Inc. 59,000 262 Denki Kagaku Kogyo Kabushiki Kaisha (c)20,000 44 Denso Corp. 31,050 509 Dowa Mining Co., Ltd. 12,000 51 East Japan Railway Co. 187 927 Ebara Corp. (c)20,800 64 Eisai Co., Ltd. 9,900 222 Fanuc Ltd. (c)10,200 451 Fuji Machine Manufacturing Co., Ltd. 1,200 11 Fuji Photo Film Ltd. (c)27,000 880 Fuji Soft ABC, Inc. 1,600 25 Fuji Television Network, Inc. 10 40 Fujikura Ltd. 10,000 24 Fujisawa Pharmaceutical Co., Ltd. 4,000 91 Fujitsu Ltd. 62,200 178 Furukawa Electric Co., Ltd. 31,800 67 Hankyu Department Stores, Inc. 2,000 10 Hirose Electric Co., Ltd. 1,300 99 Hitachi Ltd. (c)110,000 421 Honda Motor Co., Ltd. (c)30,504 1,128 Hoya Corp. 4,200 294 Isetan Co., Ltd. (c)3,000 21 Ishihara Sangyo Kaisha Ltd. (a)9,000 9 Ishikawajima-Harima Heavy Industries Co., 36,000 33 Ltd. Ito-Yokado Co., Ltd. 10,000 295 Itochu Corp. (c)59,000 128 Japan Airlines System Corp. (a)49,000 104 Japan Tobacco, Inc. 69 461 JFE Holdings, Inc. (a)(c)21,300 258 JGC Corp. 6,000 34 JSR Corp. 7,000 70 Kajima Corp. (c)61,400 137 Kaneka Corp. 12,000 64 Kansai Electric Power Co., Ltd. (c)24,200 365 Kao Corp. 34,000 746 Kawasaki Heavy Industries Ltd. (a)43,000 34 Keihin Electric Express Railway Co., Ltd. (c)17,000 77 Keio Electric Railway Co., Ltd. 8,000 42 Keyence Corp. 1,200 209 Kikkoman Corp. 5,000 35 Kinden Corp. 1,000 4 Kinki Nippon Railway Co., Ltd. (a)(c)83,200 179 Kirin Brewery Co., Ltd. (c)63,400 403 Kokuyo Co., Ltd. 7,000 58 Komatsu Ltd. (c)57,400 187 Konami Co., Ltd. 4,500 104 Konica Corp. (c)9,000 65 Kubota Corp. 83,000 225 Kuraray Co., Ltd. 17,000 105 Kurita Water Industries Ltd. 4,000 40 Kyocera Corp. 6,400 372 Kyowa Hakko Kogyo Co., Ltd. (c)13,600 56 Kyushu Electric Power Co., Inc. 2,300 34 Mabuchi Motor Co., Ltd. 400 37 Marubeni Corp. (a)(c)60,000 55 Marui Co., Ltd. 8,500 83 Matsushita Electric Industrial Co., Ltd. 103,000 1,015 Matsushita Electric Works Ltd. (c)5,000 31 Meiji Seika Kaisha Ltd. (c)10,000 29 Meitec Corp. 1,600 39 Minebea Co., Ltd. 13,000 45 Mitsubishi Chemical Corp. (a)(c)89,000 178 Mitsubishi Corp. (c)61,000 372
The accompanying notes are an integral part of the financial statements. 10 MORGAN STANLEY INSTITUTIONAL FUND, INC. Active International Allocation Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- JAPAN (CONT'D) Mitsubishi Electric Corp. (a)106,800 $ 246 Mitsubishi Estate Co., Ltd. (c)51,000 388 Mitsubishi Heavy Industries Ltd. 183,000 447 Mitsubishi Logistics Corp. 5,000 24 Mitsubishi Rayon Co., Ltd. (c)24,000 55 Mitsui & Co., Ltd. 63,800 298 Mitsui Chemicals, Inc. (c)23,000 102 Mitsui Fudosan Co., Ltd. (c)35,400 230 Mitsui Mining & Smelting Co., Ltd. 28,000 65 Mitsui Trust Holdings, Inc. (c)40,545 66 Murata Manufacturing Co., Ltd. 8,800 345 NAMCO Ltd. 300 5 NEC Corp. (c)49,400 185 NGK Insulators Ltd. 22,600 123 NGK Spark Plug Co., Ltd. 16,000 103 Nidec Corp. 1,100 69 Nikko Cordial Corp. 12,000 40 Nikon Corp. (a)(c)9,000 68 Nintendo Co., Ltd. 6,100 570 Nippon Comsys Corp. 1,000 3 Nippon Express Co., Ltd. 46,800 183 Nippon Meat Packers, Inc. (c)14,600 146 Nippon Mining Holdings, Inc. (a)13,500 18 Nippon Oil Corp. 74,800 339 Nippon Sheet Glass Co., Ltd. 19,000 34 Nippon Steel Corp. 348,000 407 Nippon Telegraph & Telephone Corp. 363 1,317 Nippon Unipac Holding 39 169 Nippon Yusen Kabushiki Kaisha (c)65,000 219 Nissan Chemical Industries Ltd. 8,000 30 Nissan Motor Co., Ltd. 105,600 823 Nisshin Seifun Group, Inc. 6,000 40 Nisshinbo Industries, Inc. 4,000 14 Nissin Food Products Co., Ltd. 3,800 85 Nitto Denko Corp. (c)7,800 222 Nomura Holdings, Inc. 85,000 955 NSK Ltd. 38,000 98 NTN Corp. (c)20,000 69 NTT Data Corp. 38 105 NTT Docomo, Inc. (c)227 419 Obayashi Corp. (c)27,000 60 Oji Paper Co., Ltd. (c)64,400 277 Olympus Optical Co., Ltd. 7,000 114 Omron Corp. 8,000 118 Onward Kashiyama Co., Ltd. 10,000 78 Oracle Corp. 500 12 Oriental Land Co., Ltd. (c)4,000 242 Orix Corp. 2,400 155 Osaka Gas Co., Ltd. (c)57,600 142 Pioneer Corp. 8,854 166 Promise Co., Ltd. 3,600 128 Ricoh Co., Ltd. (c)23,000 377 Rohm Co., Ltd. 3,900 496 Sankyo Co., Ltd. 23,600 296 Sanrio Co., Ltd. 1,000 5 Sanyo Electric Co., Ltd. 93,000 242 Secom Co., Ltd. 14,100 483 Sekisui Chemical Co., Ltd. (c)16,000 41 Sekisui House Co., Ltd. 37,600 266 Seven-Eleven Japan Co., Ltd. (c)9,000 274 Sharp Corp. (c)46,200 438 Shimamura Co., Ltd. 500 32 Shimano, Inc. 6,200 94 Shimizu Corp. 46,600 117 Shin-Etsu Chemical Co., Ltd. 15,296 501 Shionogi & Co., Ltd. 12,000 170 Shiseido Co., Ltd. 20,000 260 Showa Shell Sekiyu K.K (c)10,000 69 Skylark Co., Ltd. (c)7,600 101 SMC Corp. 3,300 310 Softbank Corp. (c)12,400 141 Sony Corp. (c)38,597 1,612 Sumitomo Bakelite Co., Ltd. 8,000 33 Sumitomo Chemical Co., Ltd. (c)74,600 295 Sumitomo Corp. 40,400 173 Sumitomo Electric Industries, Ltd. 28,400 184 Sumitomo Forestry Co., Ltd. 400 2 Sumitomo Metal Mining Co., Ltd. 26,800 112 Sumitomo Trust & Banking Co., Ltd. (The) (c)8,000 32 Taisho Pharmaceutical Co., Ltd. 17,800 262 Takara Holdings, Inc. (c)6,000 26 Takashimaya Co., Ltd. 5,000 20 Takeda Chemical Industries Ltd. 36,600 1,528 Takefuji Corp. (c)5,945 343 Takuma Co., Ltd. 5,000 27 TDK Corp. 4,300 173 Teijin Ltd. (c)46,400 111 Teikoku Oil Co., Ltd. (c)6,000 24 Terumo Corp. 11,200 155 THK Co., Ltd. 1,200 13 TIS, Inc. 1,504 22 Tobu Railway Co., Ltd. (a)46,400 123 Toho Co., Ltd. (Tokyo) 2,900 28 Tohoku Electric Power Co., Inc. 11,500 169 Tokyo Broadcasting System, Inc. 7,000 88 Tokyo Electric Power Co., Inc. 34,400 653 Tokyo Electron Ltd. 5,600 253 Tokyo Gas Co., Ltd. (c)63,600 199 Tokyu Corp. (c)51,400 181 TonenGeneral Sekiyu K.K. (c)4,000 26 Toppan Printing Co., Ltd. (c)38,600 290 Toray Industries, Inc. 62,100 132 Toshiba Corp. (a)124,000 388 Tosoh Corp. 23,000 55 Tostem Inax Holding Corp. 10,000 152 Toto Ltd. 29,600 109 Toyo Seikan Kaisha Ltd. 10,000 119 Toyoba Co., Ltd. (c)5,000 7 Toyota Industries Corp. 1,950 29
The accompanying notes are an integral part of the financial statements. 11 MORGAN STANLEY INSTITUTIONAL FUND, INC. Active International Allocation Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- JAPAN (CONT'D) Toyota Motor Corp. (c)123,400 $ 3,314 Trans Cosmos, Inc. (c)400 4 Trend Micro, Inc. (a)(c)1,700 29 Uni-Charm Corp. (c)2,200 87 UNY Co., Ltd. 3,000 29 Wacoal Corp. 4,000 31 West Japan Railway Co. 13 46 World Co., Ltd. 1,600 31 Yakult Honsha Co., Ltd. 5,000 57 Yamaha Corp. 5,000 46 Yamanouchi Pharmaceutical Co., Ltd. 18,200 527 Yamato Transport Co., Ltd. (c)14,000 183 Yamazaki Baking Co., Ltd. 5,000 28 - -------------------------------------------------------------------------------- 46,176 ================================================================================ NETHERLANDS (6.9%) ABN Amro Holding N.V. 61,945 1,013 Aegon N.V. 29,981 386 Akzo Nobel N.V. 6,025 191 ASML Holding N.V. (a)2,762 23 Buhrmann N.V. 11,028 48 Corio N.V. 7,450 194 Eurocommercial Properties N.V. 4,749 100 Getronics N.V. (a)9,350 6 Hagemeyer N.V. 4,797 35 Heineken N.V. 45,276 1,768 ING Groep N.V. CVA 80,703 1,368 Koninklijke Ahold N.V. 33,281 423 Koninklijke (Royal) KPN N.V. (a)23,745 155 Koninklijke (Royal) Philips Electronics N.V. 65,582 1,150 Reed Elsevier N.V. 31,469 385 Rodamco Europe N.V. 5,562 235 Royal Dutch Petroleum Co. 120,024 5,286 TPG N.V. 25,073 407 Unilever N.V. CVA 66,888 4,112 Vedior N.V. CVA 13,403 76 Wereldhave N.V. 1,758 99 Wolters Kluwer N.V. CVA 18,209 317 - -------------------------------------------------------------------------------- 17,777 ================================================================================ NEW ZEALAND (0.0%) Carter Holt Harvey Ltd. 50,568 47 Telecom Corp. of New Zealand Ltd. 13,184 31 - -------------------------------------------------------------------------------- 78 ================================================================================ NORWAY (0.2%) DnB Holding ASA 4,319 20 Gjensidige NOR ASA 371 12 Norsk Hydro ASA 9,319 418 Norske Skogindustrier ASA 2,500 35 Orkla ASA 8,250 141 Tandberg ASA (a)800 5 - -------------------------------------------------------------------------------- 631 ================================================================================ PORTUGAL (0.6%) Banco Commercial Portugues (Registered) 40,531 97 Banco Espirito Santo S.A. (Registered) 1,553 20 Brisa-Auto Estradas de Portugal S.A. 55,810 310 Cimentos de Portugal S.A. 1 @-- Electricidade de Portugal S.A. 473,815 791 Jeronimo Martins SGPS S.A. (a)7,558 55 Portugal Telecom SGPS S.A. 25,374 175 Sonae SGPS S.A. (a)17,214 7 - -------------------------------------------------------------------------------- 1,455 ================================================================================ SINGAPORE (1.8%) CapitaLand Ltd. (c)159,750 102 Chartered Semiconductor Manufacturing Ltd. (a)(c)33,000 14 City Developments Ltd. 79,000 189 Cycle & Carriage Ltd. 8,754 17 DBS Group Holdings Ltd. 108,441 688 Fraser & Neave Ltd. 27,450 123 Haw Par Corp., Ltd. 4,306 8 Hotel Properties Ltd. 40,000 21 Keppel Corp., Ltd. 76,750 164 Oversea-Chinese Banking Corp., Ltd. 103,688 577 Overseas Union Enterprise Ltd. 13,000 44 Sembcorp Industries Ltd. (c)145,644 66 Singapore Airlines Ltd. 99,000 582 Singapore Press Holdings Ltd. 41,018 430 Singapore Technologies Engineering Ltd. 245,000 233 Singapore Telecommunications Ltd. 687,500 492 United Overseas Bank Ltd. 105,328 717 United Overseas Land Ltd. 71,000 66 Venture Corp., Ltd. 13,000 104 - -------------------------------------------------------------------------------- 4,637 ================================================================================ SOUTH KOREA (0.4%) Samsung Electro-Mechanics Co., Ltd. 2,280 84 Samsung Electronics Co., Ltd. 3,010 797 Samsung SDI Co., Ltd. 990 57 - -------------------------------------------------------------------------------- 938 ================================================================================ SPAIN (4.0%) Acerinox S.A. 1,050 39 ACESA Infraestructuras S.A. 18,700 212 Actividades de Construccion Y Servicios S.A. (c)4,129 133 Altadis S.A. 13,442 307 Amadeus Global Travel Distribution S.A., Series A 28,191 116 Banco Bilbao Vizcaya Argentaria S.A. 133,844 1,282 Banco Santander Central Hispano S.A. 201,609 1,384 Endesa S.A. (c)52,148 610 Fomento de Construcciones Y Contratas S.A. 6,286 141 Gas Natural SDG S.A. 51,789 983 Grupo Dragados S.A. 11,079 188 Iberdrola S.A. (c)49,974 700 Inmobiliaria Colonial S.A. 12,055 187 Inmobiliaria Urbis S.A. 7,600 45 Metrovacesa S.A. 14,307 303 Repsol YPF S.A. 51,886 686 Sociedad General de Aguas de Barcelona S.A. 7,789 79 Sol Melia S.A. (c)6,578 26
The accompanying notes are an integral part of the financial statements. 12 MORGAN STANLEY INSTITUTIONAL FUND, INC. Active International Allocation Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- SPAIN (CONT'D) Telefonica S.A (a)220,249 $ 1,973 Telepizza (a)15,238 12 Union Fenosa S.A (c)44,997 593 Vallehermoso S.A 43,556 453 - -------------------------------------------------------------------------------- 10,452 ================================================================================ SWEDEN (1.7%) Atlas Copco AB, Class A 6,550 128 Atlas Copco AB, Class B 3,700 66 Castellum AB 5,345 75 Electrolux AB, Series B 19,600 310 Hennes & Mauritz AB, Class B 26,050 504 Holmen AB, Class B (c)2,800 68 JM AB 3,862 72 Nordea AB 101,944 451 S.K.F. AB, Class B 4,500 117 Sandvik AB 17,592 394 Securitas AB, Class B 34,740 416 Skandia Forsakrings AB 14,886 40 Skandinaviska Enskilda Banken, Class A 13,366 112 Skanska AB 26,000 153 Svenska Cellulosa AB, Class B 4,072 138 Svenska Handelsbanken, Class A 31,336 419 Svenskt Stal AB, Series A 4,200 50 Swedish Match AB 18,700 148 Tele2 AB, Class B (a)(c)1,908 51 TeliaSonera AB (c)33,300 126 TeliaSonera AB (Helsinki Shares) (a)61,787 230 Volvo AB, Class A 2,700 42 Volvo AB, Class B (c)9,850 161 Wm-Data AB, Class B (c)19,300 17 - -------------------------------------------------------------------------------- 4,288 ================================================================================ SWITZERLAND (6.8%) Adecco S.A. (Registered) 14,054 551 Centerpulse AG (Registered) (a)128 22 Ciba Speciality Chemicals AG (Registered) 1,500 105 Clariant AG (Registered) 2,900 46 Compagnie Financiere Richemont AG, Class A 3,880 72 Credit Suisse Group (a)46,403 1,008 Georg Fischer AG 46 5 Givaudan (Registered) 191 86 Holcim Ltd., Class B 602 109 Kudelski S.A (a)(c)261 4 Logitech International S.A. (Registered) (a)(c)780 23 Lonza Group AG (Registered) 806 49 Nestle S.A. (Registered) 21,290 4,515 Novartis AG (Registered) 97,198 3,550 PSP Swiss Property AG 700 76 Roche Holding AG 25,361 1,769 Roche Holding AG (Bearer) (c)7,791 987 SGS Holding S.A 695 209 Sulzer AG (Registered) (a)60 8 Swatch Group AG (Registered) 1,327 22 Swatch Group AG, Class B 1,244 104 Swiss Reinsurance (Registered) 9,382 616 Swisscom AG (Registered) 1,721 499 Syngenta AG 2,315 134 UBS AG (Registered) (a)51,070 2,484 Unaxis Holding AG (Registered) 100 7 Valora Holding AG 57 11 Zurich Financial Services AG 3,902 364 - -------------------------------------------------------------------------------- 17,435 ================================================================================ THAILAND (0.0%) Siam City Bank PCL (a)(d)1 @-- - -------------------------------------------------------------------------------- UNITED KINGDOM (30.2%) Amersham plc 44,878 402 ARM Holdings plc (a)17,145 13 AstraZeneca plc 113,457 4,057 Aviva plc 137,726 983 AWG plc (a)7,279 51 BAA plc 66,146 537 BAE Systems plc 293,490 586 Balfour Beatty plc 1,576 4 Barclays plc 271,945 1,686 BG Group plc 182,806 789 BOC Group plc 10,836 155 Boots Co., plc 51,236 484 BP plc 1,284,451 8,833 BPB plc 10,855 43 Brambles Industries plc 82,736 203 British Airways plc (a)90,484 197 British American Tobacco plc 197,779 1,977 British Land Co. plc 59,227 431 British Sky Broadcasting plc (a)68,592 706 BT Group plc 497,224 1,562 Bunzl plc 20,034 123 Cadbury Schweppes plc 171,500 1,069 Canary Wharf Group plc (a)79,381 301 Capital Group plc 80,238 320 Carlton Communications plc 22,955 50 Centrica plc 279,674 770 Chelsfield plc 28,690 139 Chubb plc 77,343 109 Compass Group plc 149,397 794 Corus Group plc (a)66,223 29 De La Rue plc 24,142 113 Derwent Valley Holdings plc 5,694 50 Diageo plc 302,602 3,290 Dixons Group plc 54,937 128 EMI Group plc 29,286 66 GKN plc 39,388 127 GlaxoSmithKline plc 400,624 7,691 Granada plc 102,708 132 GUS plc 35,293 328 Hammerson plc 12,431 95 Hanson plc 15,606 69 Hays plc 193,430 289 HBOS plc 150,236 1,585 Hilton Group plc 128,849 347
The accompanying notes are an integral part of the financial statements. 13 MORGAN STANLEY INSTITUTIONAL FUND, INC. Active International Allocation Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- UNITED KINGDOM (CONT'D) HSBC Holdings plc 395,226 $ 4,370 Imperial Chemical Industries plc 24,715 92 Imperial Tobacco Group plc 54,809 931 Invensys plc 254,214 216 Johnson Matthey plc 5,044 65 Kelda Group plc 23,294 159 Kingfisher plc 38,336 137 Land Securities Group plc 57,776 730 Legal & General Group plc 301,101 466 Lloyds TSB Group plc 223,917 1,608 LogicaCMG plc 17,301 42 Marks & Spencer Group plc 73,440 373 Misys plc 31,574 89 National Grid Transco plc 372,497 2,739 Next plc 3,965 47 Novar plc 2,185 4 P&O Princess Cruises plc (c)42,427 294 Pearson plc 33,815 313 Peninsular & Oriental Steam Navigation (The) 35,942 95 Pilkington plc 3,840 4 Pillar Property plc 5,021 34 Prudential plc 90,970 643 Rank Group plc 1,898 8 Reckitt Benckiser plc 44,659 867 Reed Elsevier plc 53,125 455 Rentokil Initial plc 223,658 792 Reuters Group plc 53,040 152 Rexam plc 9,886 67 Rio Tinto plc 22,108 441 RMC Group plc 6,149 36 Rolls-Royce plc 138,537 239 Royal & Sun Alliance Insurance Group 67,475 131 Royal Bank of Scotland Group plc 111,082 2,662 Sage Group plc (The) 58,016 124 Sainsbury (J) plc 121,918 547 Scottish & Newcastle plc 16,142 120 Scottish & Southern Energy plc 196,783 2,155 Scottish Power plc 172,058 1,005 Serco Group plc 53,827 133 Severn Trent plc 20,606 230 Shell Transport & Trading Co., plc 270,086 1,779 Six Continents plc 67,983 550 Slough Estates plc 16,354 89 Smith & Nephew plc 24,192 148 Smiths Group plc 504 6 Tate & Lyle plc 21,015 107 Taylor Woodrow plc 1,091 3 Tesco plc 398,672 1,246 TI Automotive Ltd. (a)1,505 @-- Unilever plc 254,899 2,426 Vodafone Group plc 3,203,425 5,843 WPP Group plc 41,699 319 - -------------------------------------------------------------------------------- 77,844 ================================================================================ TOTAL COMMON STOCKS (COST $321,643) 245,750 ================================================================================ PREFERRED STOCKS (0.3%) AUSTRALIA (0.2%) News Corp., Ltd. 102,179 $ 548 - -------------------------------------------------------------------------------- GERMANY (0.0%) Henkel KGaA-Vorzug 650 41 Porsche AG (c)100 42 Volkswagen AG 1,100 29 - -------------------------------------------------------------------------------- 112 ================================================================================ ITALY (0.0%) Telecom Italia S.p.A. (RNC) 9,730 49 - -------------------------------------------------------------------------------- South Korea (0.1%) Samsung Electronics Co., Ltd. 1,100 139 - -------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS (COST $1,042) 848 - -------------------------------------------------------------------------------- NO. OF RIGHTS - -------------------------------------------------------------------------------- RIGHTS (0.0%) ITALY (0.0%) Snia S.p.A., expiring 1/8/03 (a)24,223 1 - -------------------------------------------------------------------------------- SPAIN (0.0%) Acesa Infraestructuras S.A., expiring 1/10/03 (a)(c)(d)18,700 11 - -------------------------------------------------------------------------------- TOTAL RIGHTS (COST $--@) 12 ================================================================================ TOTAL FOREIGN SECURITIES (95.5%) (COST $322,685) 246,610 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS (11.1%) SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (3.6%) Banco Bilbao Viz Argentaria, NY, 1.36%, 4/24/03 $ 1,768 1,768 Bank of Nova Scotia, NY, 2.51%, 2/4/03 1,265 1,265 Bayrische Hypo-Und Vereinsbank, 1.39%, 3/24/03 632 632 Credit Industrial et Commercial (CIC)/NY, 1.39%, 1/13/03 253 253 Credit Industrial et Commercial (CIC)/NY, 1.39%, 1/15/03 631 631 Credit Lyonnais, 1.39%, 1/27/03 1,011 1,011 General Electric Co., 1.37%, 7/17/03 884 884 Lehman Brothers, Inc., 1.35%, 1/2/03 2,273 2,273 Lloyds Bank London plc, 2.36%, 2/24/03 631 631 - -------------------------------------------------------------------------------- 9,348 ================================================================================ SHARES - -------------------------------------------------------------------------------- INVESTMENT COMPANIES HELD AS COLLATERAL ON LOANED SECURITIES (3.9%) AIM S.T. Investment Co. 808,560 809 CITI Institutional Liquid Reserve Fund 884,362 884 Dreyfus Cash Management Plus Fund 859,095 859 Evergreen Institutional Money Market Fund 808,560 809 Federated Prime Value Fund 808,560 809 Harris Insight Money Market Fund 884,362 884 Merrill Lynch Premier Institutional Fund 808,560 809 Merrimac Cash Series Fund 884,362 884 Nations Cash Reserve Fund 884,362 884 One Group Institutional Prime Money Market Fund 808,560 809
The accompanying notes are an integral part of the financial statements. 14 MORGAN STANLEY INSTITUTIONAL FUND, INC. Active International Allocation Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- INVESTMENT COMPANIES HELD AS COLLATERAL ON LOANED SECURITIES (CONT'D) Reserve Primary Money Market Fund 884,362 $ 884 TempCash Money Market Fund 631,687 632 - -------------------------------------------------------------------------------- 9,956 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENT (3.6%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 $ (f)9,268 9,268 - -------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (COST $28,572) 28,572 ================================================================================ FOREIGN CURRENCY (0.0%) British Pound GBP 37 60 Danish Krone DKK 27 4 Hong Kong Dollar HKD 17 2 New Zealand Dollar NZD 6 3 Norwegian Krone NOK 21 3 South Korean Won KRW 3,326 3 Swiss Franc CHF 1 1 - -------------------------------------------------------------------------------- TOTAL FOREIGN CURRENCY (COST $75) 76 ================================================================================ TOTAL INVESTMENTS (106.6%) (COST $351,332) 275,258 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- OTHER ASSETS (1.9%) Receivable for Investments Sold $ 2,257 Receivable Due from Broker 1,449 Net Unrealized Gain on Foreign Currency Exchange Contracts 429 Foreign Withholding Tax Reclaim Receivable 354 Dividends Receivable 288 Receivable for Portfolio Shares Sold 116 Interest Receivable 66 Other 14 4,973 - -------------------------------------------------------------------------------- LIABILITIES (-8.5%) Collateral on Securities Loaned (19,304) Payable for Investments Purchased (2,146) Investment Advisory Fees Payable (314) Bank Overdraft Payable (104) Payable for Portfolio Shares Redeemed (59) Administrative Fees Payable (42) Directors' Fees and Expenses Payable (31) Custodian Fees Payable (31) Distribution Fees, Class B (10) Other Liabilities (30) (22,071) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 258,160 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- NET ASSETS CONSIST OF: Paid-in Capital $ 429,263 Undistributed (Distributions in Excess of) Net Investment Income (121) Accumulated Net Realized Gain (Loss) (95,450) Unrealized Appreciation (Depreciation) on Investments, Futures and Foreign Currency Translations (75,532) - -------------------------------------------------------------------------------- NET ASSETS $ 258,160 ================================================================================ CLASS A: NET ASSETS $ 249,742 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 34,199,991 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 7.30 ================================================================================ CLASS B: NET ASSETS $ 8,418 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 1,136,075 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 7.41 ================================================================================
(a) -- Non-income producing security (c) -- All or a portion of security on loan at December 31, 2002 -- See note A-8 to financial statements. (d) -- Securities were valued at fair value -- See Note A-1 to financial statements. At December 31, 2002, the Portfolio held fair valued securities representing less than 0.05% of net assets. (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. @ -- Value is less than $500. CVA -- Certificaten Van Aandelen PCL -- Public Company Limited RNC -- Non-Convertible Savings Shares The accompanying notes are an integral part of the financial statements. 15 MORGAN STANLEY INSTITUTIONAL FUND, INC. Active International Allocation Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd) FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
CURRENCY IN NET TO EXCHANGE UNREALIZED DELIVER VALUE SETTLEMENT FOR VALUE GAIN/(LOSS) (000) (000) DATE (000) (000) (000) - ----------------------------------------------------------------------------------- AUD 4,533 $ 2,527 3/13/03 US$ 2,542 $ 2,542 $ 15 CHF 47 34 1/3/03 US$ 34 34 @-- CHF 55 40 1/6/03 US$ 39 39 (1) EUR 336 353 1/3/03 US$ 350 350 (3) EUR 137 144 1/06/03 US$ 143 143 (1) EUR 47,064 49,274 3/13/03 US$ 47,469 47,469 (1,805) EUR 11,032 11,550 3/13/03 US$ 11,100 11,100 (450) EUR 3,175 3,324 3/13/03 US$ 3,241 3,241 (83) EUR 277 290 3/13/03 US$ 287 287 (3) GBP 125 201 3/13/03 US$ 200 200 (1) JPY 721,040 6,087 3/13/03 US$ 5,870 5,870 (217) JPY 1,429,003 12,063 3/13/03 US$ 11,623 11,623 (440) JPY 27,759 234 3/13/03 US$ 230 230 (4) JPY 230,440 1,946 3/13/03 US$ 1,916 1,916 (30) JPY 7,781 66 3/13/03 US$ 65 65 (1) US$ 60 60 1/3/03 DKK 429 61 1 US$ 8 8 1/6/03 DKK 58 8 @-- US$ 174 174 1/2/03 EUR 167 175 1 US$ 28 28 1/3/03 EUR 27 28 @-- US$ 26 26 1/7/03 EUR 24 26 @-- US$ 49,196 49,196 3/13/03 EUR 48,903 51,199 2,003 US$ 2,416 2,416 3/13/03 EUR 2,399 2,512 96 US$ 10,321 10,321 3/13/03 EUR 10,247 10,728 407 US$ 2,599 2,599 3/13/03 GBP 1,662 2,664 65 US$ 14,962 14,962 3/13/03 JPY 1,854,151 15,652 690 US$ 4,761 4,761 3/13/03 JPY 584,931 4,938 177 US$ 300 300 3/13/03 JPY 36,881 311 11 US$ 30 30 1/3/03 NOK 207 30 @-- US$ 3 3 1/6/03 NOK 24 3 @-- US$ 116 116 1/3/03 SEK 1,021 118 2 US$ 10 10 1/7/03 SEK 88 10 @-- -------- -------- ------ $173,143 $173,572 $ 429 ======== ======== ====== - -----------------------------------------------------------------------------------
AUD - Australian Dollar EUR - Euro JPY - Japanese Yen SEK - Swedish Krona FUTURES CONTRACTS: The Portfolio had the following futures contract(s) open at period end:
NET NUMBER NOTIONAL UNREALIZED OF VALUE EXPIRATION GAIN/(LOSS) CONTRACTS (000) DATE (000) - ----------------------------------------------------------------------------------------- LONG: FTSE 100 Index (United Kingdom) 40 US$ 2,520 Mar-03 $59 TOPIX Index (Japan) 7 492 Mar-03 (12) SHORT: SPI 200 Index (Australia) 60 2,529 Mar-03 (31) --- $16 ===
SUMMARY OF TOTAL FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION -- DECEMBER 31, 2002
PERCENT VALUE OF NET INDUSTRY (000) ASSETS - ------------------------------------------------------------- Automobiles $ 5,686 2.2% Banks 31,527 12.2 Beverages 6,786 2.6 Chemicals 4,796 1.9 Commercial Services & Supplies 5,667 2.2 Diversified Financials 5,134 2.0 Diversified Telecommunication Services 9,963 3.9 Electric Utilities 14,467 5.6 Food & Drug Retailing 5,072 2.0 Food Products 15,307 5.9 Gas Utilities 2,737 1.1 Hotels, Restaurants & Leisure 3,206 1.2 Household Durables 6,350 2.4 Insurance 6,297 2.4 Machinery 3,768 1.5 Media 5,855 2.3 Metals & Mining 4,121 1.6 Oil & Gas 24,384 9.4 Personal Products 2,875 1.1 Pharmaceuticals 26,189 10.1 Real Estate 7,942 3.1 Tobacco 3,824 1.5 Wireless Telecommunication Services 8,577 3.3 Other 36,080 14.0 - ------------------------------------------------------------- $ 246,610 95.5% =============================================================
The accompanying notes are an integral part of the financial statements. 16 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Asian Equity Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) SOUTH KOREA 30.4% HONG KONG 23.7% TAIWAN 18.1% SINGAPORE 11.3% MALAYSIA 5.6% OTHER 10.9%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
MSCI ALL-COUNTRY FAR EAST ASIAN EQUITY PORTFOLIO - CLASS A FREE EX-JAPAN INDEX 1992 500000 500000 1993 1028500 1016972 1994 865894 839205 1995 925381 913425 1996 957677 1015180 1997 495215 565354 1998 438859 538104 1999 794335 872320 2000 471438 551299 2001 454040 538950 2002 408495 488450
** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) ALL-COUNTRY FAR EAST FREE EX-JAPAN INDEX(1)
TOTAL RETURNS(2) ----------------------------------------- AVERAGE ANNUAL ----------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION - -------------------------------------------------------------------------------- Portfolio - Class A(3) (10.03)% (3.78)% (2.00)% 0.63% Portfolio - Class B(4) (10.16) (4.02) N/A (11.30) Index - Class A (9.37) (2.88) (0.23) 2.16 Index - Class B (9.37) (2.88) N/A (8.60)
(1) The MSCI All-Country Far East Free ex-Japan Index is an unmanaged index of common stocks and includes Indonesia, Hong Kong, Malaysia, the Philippines, South Korea, Singapore, Taiwan and Thailand. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on July 1, 1991 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Asian Equity Portfolio seeks long-term capital appreciation by investing primarily in equity securities of Asian issuers, excluding Japan. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. In addition, investing in emerging markets may involve a relative higher degree of volatility. For the year ended December 31, 2002, the Portfolio had a total return of - -10.03% for the Class A shares and -10.16% for the Class B shares compared to - -9.37% for the Morgan Stanley Capital International (MSCI) All-Country Far East Free ex-Japan Index (the "Index"). MARKET REVIEW For the 12 months ending December 31, 2002, the Portfolio underperformed its Index. Overall, country allocation was positive while stock selection was negative. On a country allocation basis, the Portfolio's overweight position in South Korea (+8.3%) and Indonesia (+41.9%) coupled with an underweight stance in Taiwan (-24.7%) contributed strongly to relative performance. Stock selection in South Korea, Hong Kong, Thailand and Taiwan were the largest detractors to relative returns while stock selection in China and Indonesia contributed modestly to returns. 17 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Asian Equity Portfolio (cont'd) In 2002, overall, Asia ex-Japan performance was hampered by weak global economic growth, domestic concerns in select emerging markets, the continued sell-off of U.S. equities and increased geo-political risk. Nevertheless, in 2002, the asset class outperformed both the U.S. and the developed international markets. The Index fell 9.4%, versus a 15.9% decline in MSCI EAFE Index and a 22.1% decline in the S&P 500 Index. Asia ex-Japan started the year in positive territory as equities in the region were supported by early year expectations of a U.S. led economic recovery and positive economic data from select Asia ex-Japan countries. However, after outperforming for much of the year and rebounding over 50% from September 2001 lows, performance in the region turned negative during the second and third quarters. Domestic economic concerns in Hong Kong and Singapore coupled with profit taking within cyclical markets such as South Korea and Taiwan were the primary reasons for declines. During this period market participants in general shifted into more defensive domestic oriented names and away from cyclical sectors on concerns over the quality of corporate earnings, and the timing and magnitude of the global recovery. Overall, risk aversion had increased on a global basis during the second quarter, dominated by negative sentiment toward Brazil (due to poor political outlook) and greater uncertainty over the global backdrop. Increased reports of corporate accounting fraud and concerns over the strength of the U.S. economic recovery coupled with geo-political risks in the Asian subcontinent and the Middle East served to undermine investor confidence for much of the year. Nevertheless, amid a more favorable tone in U.S. equities, particularly in the months of October and November, Asian ex-Japan markets rebounded following better than expected corporate earnings and export data from select Asia ex-Japan countries. Risk appetite in particular increased at year end for technology and export stocks helping to support markets such as Taiwan and South Korea, while improving economic data in Hong Kong and Thailand led markets higher. The Asian ex-Japan region ended the period in review with a solid 3.1% fourth quarter return. MARKET OUTLOOK Our long-term outlook for Asia ex-Japan remains positive. We believe the Asian ex-Japan markets are well positioned to continue to outperform global markets given valuations, corporate fundamentals, relative growth and leveraged exposure to the pick-up in global sentiment and economic activity. Near-term, however, global equities are likely to remain volatile given concerns over high oil prices due to the crisis in Iraq and Venezuela, and economic uncertainties in the U.S., Japan and Germany. Nevertheless, our expectations are for oil prices to fall to more normal levels once the crisis in Iraq passes and for global economies to recover in the second half of this year. Asia ex-Japan markets are likely to be supported by reduced fears of a U.S. double dip recession as the economy begins to show the benefits of U.S. monetary easing that has lowered rates to 1.25%, a 41-year low. Signs of fundamental improvements in Indonesia, Thailand and Taiwan along with patches of decent domestic strength continue to support overall sentiment in Asia ex-Japan markets. On a bottom-up basis, we continue to focus on earnings visibility as a driver of medium-term returns. January 2003 18 MORGAN STANLEY INSTITUTIONAL FUND, INC. Asian Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (96.6%) CHINA (1.9%) Byd Co., Ltd., Class H (a)26,500 $ 53 China Shipping Development Co., Ltd., Class H 279,000 58 China Southern Airlines Co., Ltd., Class H 386,000 104 Huaneng Power International, Inc., Class H 162,000 130 Sinopec Shangai Petrochemical Co., Ltd. (a)433,000 65 - -------------------------------------------------------------------------------- 410 ================================================================================ HONG KONG (23.7%) Cathay Pacific Airways Ltd. 100,000 137 Cheung Kong Holdings Ltd. 82,900 539 China Mobile Ltd. (a)210,000 499 CNOOC Ltd. 145,000 189 Cosco Pacific Ltd. 80,000 66 Esprit Holdings Ltd. 122,000 206 Henderson Land Development Co., Ltd. 120,000 360 Hong Kong Exchanges & Clearing Ltd. 101,000 127 Hutchison Whampoa Ltd. 122,980 770 Johnson Electric Holdings Ltd. 234,000 257 Li & Fung Ltd. 247,400 235 QPL International Holdings Ltd. (a)330,000 72 SmarTone Telecommunications Holdings Ltd. 117,000 131 Sun Hung Kai Properties Ltd. 106,600 631 Swire Pacific Ltd., Class A 45,000 172 Techtronic Industries Co., Ltd. 175,000 166 Television Broadcasts Ltd. 46,000 145 TPV Technology Ltd. 355,000 109 Wharf Holdings Ltd. 139,000 262 - -------------------------------------------------------------------------------- 5,073 ================================================================================ INDONESIA (4.1%) Astra International Tbk PT (a)1,051,000 370 Bank Central Asia Tbk PT 382,000 107 Ramayana Lestari Sentosa Tbk PT 378,500 107 Telekomunikasi Indonesia Tbk PT 684,500 294 - -------------------------------------------------------------------------------- 878 ================================================================================ MALAYSIA (5.6%) AMMB Holdings Bhd 79,000 79 Celcom Malaysia Bhd (a)391,000 251 Gamuda Bhd 117,000 170 Magnum Corp. Bhd 173,000 104 Malayan Banking Bhd 117,700 229 Public Bank Bhd 208,750 125 Resorts World Bhd 49,000 121 SP Setia Bhd 93,499 60 Tanjong plc 24,000 54 - -------------------------------------------------------------------------------- 1,193 ================================================================================ PHILIPPINES (0.2%) Ayala Land, Inc. 498,000 42 - -------------------------------------------------------------------------------- SINGAPORE (11.3%) CapitaLand Ltd. 335,000 214 City Developments Ltd. 24,600 59 DBS Group Holdings Ltd. 49,235 312 Keppel Corp., Ltd. 52,000 111 Neptune Orient Lines Ltd. (Foreign) (a)492,000 261 SembCorp Industries Ltd. 318,000 $ 144 SembCorp Logistics Ltd. 75,800 69 Singapore Airlines Ltd. (Foreign) 101,000 594 United Overseas Bank Ltd. 46,796 318 Venture Corp., Ltd. 43,700 350 - -------------------------------------------------------------------------------- 2,432 ================================================================================ SOUTH KOREA (28.1%) CJ Home Shopping (a)3,553 127 Daishin Securities Co., Ltd. 10,040 121 Humax Co., Ltd. (a)4,810 59 Hyundai Marine & Fire Insurance Co., Ltd. 4,300 92 Hyundai Mobis (a)15,820 291 Hyundai Motor Co., Ltd. (a)4,860 114 Kookmin Bank (a)4,164 147 LG Chemical Ltd. (a)4,910 168 LG Electronics, Inc. (a)10,360 361 LG Investment & Securities Co., Ltd. 9,680 108 Pantech Co., Ltd. (a)8,300 100 POSCO 5,570 554 Samsung Electronics Co., Ltd. 8,185 2,167 Samsung Securities Co., Ltd. (a)9,910 239 Seoul Securities Co., Ltd. 20,620 74 Shinhan Financial Group Co., Ltd. (a)25,550 267 Shinsegae Co., Ltd. (a)1,020 129 SK Telecom Co., Ltd. 3,810 736 Tong Yang Confectionery Corp. (a)3,590 175 - -------------------------------------------------------------------------------- 6,029 ================================================================================ TAIWAN (18.1%) Accton Technology Corp. (a)208,975 214 ASE Test Ltd. (a)12,600 50 Asustek Computer, Inc. 70,387 124 Cathay Financial Holding Co., Ltd. 146,000 156 Chinatrust Financial Holding Co., Ltd. (a)431,560 353 CTCI Corp. 121,000 65 EVA Airways Corp. (a)417,310 176 Formosa Chemical & Fibre Corp. 77,556 82 Formosa Plastics Corp. 114,000 150 Hon Hai Precision Industry Co., Ltd. 93,550 324 Largan Precision Co., Ltd. 12,400 69 Lite-On Technology Corp. 56,000 63 Novatek Microelectronics Corp., Ltd. 49,600 94 Phoenixtec Power Co., Ltd. 115,000 87 Polaris Securities Co., Ltd. (a)288,000 101 Premier Image Technology Corp. 135,000 208 Quanta Computer, Inc. 128,287 211 Quanta Storage, Inc. (a)8,000 54 Siliconware Precision Industries Co. (a)193,682 95 SinoPac Holdings Co. (a)495,128 208 Taishin Financial Holdings Co., Ltd. (a)437,000 225 Taiwan Semiconductor Manufacturing Co. (a)536,300 659 United Microelectronics Corp. (a)202,485 123 - -------------------------------------------------------------------------------- 3,891 ================================================================================ THAILAND (3.6%) Advanced Info Sevice PCL (Foreign) 105,500 87 Bangkok Bank PCL (Foreign) (a)(d)114,000 159
The accompanying notes are an integral part of the financial statements. 19 MORGAN STANLEY INSTITUTIONAL FUND, INC. Asian Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- THAILAND (CONT'D) BEC World PCL (Foreign) (d)11,400 $ 54 Land & House Co., Ltd. (Foreign) 31,800 59 Siam Cement PCL (The) (NVDR) (a)9,000 245 Siam City Cement PCL (Foreign) (d)21,366 104 Thai Farmers Bank PCL (Foreign) (a)(d)101,800 71 - -------------------------------------------------------------------------------- 779 ================================================================================ TOTAL COMMON STOCKS (COST $22,428) 20,727 ================================================================================ PREFERRED STOCKS (2.3%) SOUTH KOREA (2.3%) Daishin Securities Co., Ltd. 13,070 81 Hyundai Motor Co., Ltd. (a)10,820 127 Samsung Electronics Co., Ltd. 2,260 286 - -------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS (COST $588) 494 ================================================================================ TOTAL FOREIGN SECURITIES (98.9%) (COST $23,016) 21,221 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- FOREIGN CURRENCY (0.2%) Hong Kong Dollar HKD 57 7 Indonesian Rupiah IDR 54,532 6 Singapore Dollar SGD 18 11 South Korean Won KRW 82 @-- Taiwan Dollar TWD 299 8 Thai Baht THB 399 9 - -------------------------------------------------------------------------------- TOTAL FOREIGN CURRENCY (COST $41) 41 ================================================================================ TOTAL INVESTMENTS (99.1%) (COST $23,057) 21,262 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- OTHER ASSETS (2.6%) Receivable for Investments Sold $ 451 Receivable Due from Investment Adviser 94 Dividends Receivable 1 Foreign Withholding Tax Reclaim Receivable 1 Other 15 562 - -------------------------------------------------------------------------------- LIABILITIES (-1.7%) Bank Overdraft Payable (267) Custodian Fees Payable (70) Directors' Fees and Expenses Payable (18) Administrative Fees Payable (6) Deferred Country Taxes (1) Other Liabilities (13) (375) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 21,449 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 127,350 Undistributed Net Investment Income (Accumulated Net Investment Loss) 30 Accumulated Net Realized Gain (Loss) (104,137) Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Translations (1,794) - -------------------------------------------------------------------------------- NET ASSETS $ 21,449 ================================================================================ CLASS A: NET ASSETS $ 20,847 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 2,875,652 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 7.25 ================================================================================ CLASS B: NET ASSETS $ 602 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 83,580 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 7.20 ================================================================================
(a) -- Non-income producing security (d) -- Securities were valued at fair value -- See Note A-1 to financial statements. At December 31, 2002, the Portfolio held $388,000 of fair valued securities, representing 1.8% of net assets. @ -- Value is less than $500. NVDR -- Non-Voting Depositary Receipts PCL -- Public Company Limited SUMMARY OF TOTAL FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION -- DECEMBER 31, 2002
PERCENT VALUE OF NET INDUSTRY (000) ASSETS - -------------------------------------------------------------------------------- Airlines $ 1,011 4.7% Auto Components 291 1.4 Automobiles 610 2.8 Banks 1,960 9.1 Chemicals 466 2.2 Communications Equipment 214 1.0 Computers & Peripherals 498 2.3 Construction & Engineering 234 1.1 Construction Materials 349 1.6 Distributors 235 1.1 Diversified Financials 2,036 9.5 Diversified Telecommunication Services 546 2.5 Electrical Equipment 344 1.6 Electronic Equipment & Instruments 863 4.0 Hotels, Restaurants & Leisure 279 1.3 Household Durables 645 3.0 Industrial Conglomerates 913 4.3 Insurance 247 1.2 Leisure Equipment & Products 278 1.3 Marine 319 1.5 Media 326 1.5 Metals & Mining 554 2.6 Multiline Retail 235 1.1 Real Estate 1,907 8.9 Semiconductor Equipment & Products 3,474 16.2 Specialty Retail 206 1.0 Wireless Telecommunication Services 1,553 7.2 Other 628 2.9 - -------------------------------------------------------------------------------- $ 21,221 98.9% ================================================================================
The accompanying notes are an integral part of the financial statements. 20 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Asian Real Estate Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) HONG KONG 43.3% JAPAN 25.5% AUSTRALIA 19.8% SINGAPORE 6.2% PHILIPPINES 2.0% OTHER 3.2%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
ASIAN REAL ESTATE ASIAN REAL ESTATE GPR GENERAL REAL ESTATE PORTFOLIO-CLASS A PORTFOLIO-CLASS B SECURITIES INDEX-FAR EAST * 500000 100000 500000 1997 400400 80300 330450 1998 353073 70238 296711 1999 438764 87011 357418 2000 453857 89874 356596 2001 386187 76231 309918 2002 341582 67297 289804
* Commenced operations on October 1, 1997 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different fees assessed to that class. The GPR General Real Estate Securities Index - Far East value at December 31, 2002 assumes a minimum investment of $500,000; if a minimum initial investment of $100,000 (the minimum investment for Class B shares) is assumed, the value at December 31, 2002 would be $57,961. PERFORMANCE COMPARED TO THE GPR GENERAL REAL ESTATE SECURITIES INDEX - FAR EAST(1)
TOTAL RETURNS(2) ----------------------------------------- AVERAGE ANNUAL --------------------------- ONE FIVE SINCE YEAR YEARS INCEPTION - ----------------------------------------------------------------------- Portfolio - Class A (3) (11.55)% (3.13)% (7.00)% Portfolio - Class B (3) (11.72) (3.25) (7.27) Index (6.49) (2.59) (9.87)
(1) The GPR General Real Estate Securities Index - Far East is a market capitalization weighted index measuring total return of listed property/real estate securities in the Far East. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on October 1, 1997 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Asian Real Estate Portfolio seeks to provide long-term capital appreciation by investing primarily in equity securities of companies in the Asian real estate industry. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. The Portfolio's concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and the value of its shares may be substantially affected by economic events in the real estate industry. For the year ended December 31, 2002, the Portfolio had a total return of - -11.55% for the Class A shares and -11.72% for the Class B shares compared to - -6.49% for the GPR General Real Estate Securities Index - Far East (the "Index"). MARKET REVIEW This past year was yet another disappointing year for Asian real estate securities. Property stocks had an uninspiring fourth quarter, basically giving up gains from the October rebound on the lack of fresh direction for the sector. On a full year basis, real estate securities in Asia declined 6.5% as measured by the Index, outperforming the broader equity markets which contracted 10.4%, as measured by the MSCI Asia Pacific Index. Investors bought stocks, in the first quarter, in anticipation of an economic recovery in the second half of 2002. Early gains were quickly eroded as economic prospects dimmed on further retrenchment in global demand, erosion of pricing power and war concerns. Markets were 21 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Asian Real Estate Portfolio (cont'd) overwhelmed by a barrage of negative news including corporate accounting issues, the rising number of corporate bankruptcies, anemic corporate earnings and the drag of a looming banking crisis in Japan. Furthermore, Asia's equity risk premium rose on heightened geo-political tension, fear of increased terrorist activities after the Bali bombing incident, and the potentially negative impact of higher oil prices for technology dependent Asian exporters. Due to the higher correlation between property stocks in Hong Kong and general equities in the Hang Seng Index, property stocks in Hong Kong were the worst performers in 2002, declining 22.0% as measured by the Index. In Singapore, property stocks declined after the sharp deterioration in economic conditions from mid-2002 and fears of significant new commercial office supply to be released by the government; stocks fell 18.4% for the full year as measured by the Index. Property stocks in Japan sustained significant volatility in 2002, oscillating on every new development in the political and economic arena and deteriorating commercial office market fundamentals. The Japanese property sector braced itself to confront the onslaught of new supply as new office building completions gathered momentum in the second half. Saved by an outstanding performance by the JREIT in the second half of the year, Japanese property stocks ended the year up 1.1%, as measured by the Index. By default, Australia became a clear beneficiary as investors gravitated toward the more predictable and defensive characteristics of the listed property trust sector and the security of their dividend yields. The property trust sector gained in spite of weakening real estate fundamentals and trading at or premiums to the net asset value (NAV). Also, the sector attracted strong demand for equity issuance by larger capitalization trusts at or above NAV to fund domestic and international acquisitions from both institutions looking to raise their real estate allocations and to retail investors who participate in the market directly. Australia's listed property trusts returned 22.5% in 2002, as measured by the GPR Far East Index. MARKET OUTLOOK We enter 2003 with more somber expectations that Asia's upward momentum remains mild and fragile, especially with uncertainties of a Middle East war looming on the horizon. While the condition of Asian economies depends to a large extent on the outcome and consequences of the Middle Eastern conflict, we caution against extreme pessimism on Asian economies. We believe that markets have already discounted the possibility of a sharp contraction in Asian exports in the first half of 2003. Although some form of export contraction is likely, global inventory restocking could diminish the depth and duration of the slowdown. China's surging economy and exploding national wealth is providing a crucial cushion to intra-regional trade in Asia. The private consumption outlook remains mixed and is a key element in differentiating growth prospects from country to country. China and several South Eastern Asian emerging countries showed promising private consumption growth. So far, the situation in Hong Kong, Singapore and Taiwan remains discouraging and each of the governments is trying hard to find a solution and is pressing for restructuring. Policy flexibility varies but remains an open option to many countries in Asia. Except for Hong Kong and the Philippines, Asian governments, in our opinion, still have plenty of leeway for fiscal expansion. The wave of monetary easing led by the U.S. and the European Central Bank, as well as the absence of inflation, paved the way for central banks in Asia to adopt easier monetary policies. At some point, we expect the low interest rates to trigger the release of pent-up investment demand in Asia. When geo-political risk eases, policy relaxation by Asian governments with massive current account surpluses could facilitate a rebound in domestic demand and intra-Asian exports. The key risks to Asia are high oil prices over a sustained time horizon leading to the return of inflation and smaller current account surpluses and weaker global demand as well as regional security issues, which heavily impacts several South Eastern Asian countries due to their strong reliance on tourism revenue. We expect real estate markets in Asia to remain stagnant during the first quarter, as there is a strong chance that concerns about the Middle East conflict might stave off business and household investment decisions. Post conflict and against a backdrop of more moderate economic expectations, we expect a diverging performance in 2003 from the commercial office and residential sub-sectors. We believe the commercial office sub-sector will remain subdued until a more stable business environment emerges. We do not expect any surge in new demand for commercial offices until economic conditions improve sufficiently to encourage business expansion. Except for Japan, the new office supply pipeline remains moderate everywhere else in Asia. Although at a smaller magnitude, we believe, there is still room for commercial office rents to ease further, as landlords will be willing to accept rate reductions to retain their quality tenants upon lease renewals and to fill empty buildings. Commercial office yields in Asian cities have expanded as much as 200 basis points from their pre-Asian crisis lows. At some point, we believe that the higher property yields in Asia will prove to be attractive to international real estate investors 22 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Asian Real Estate Portfolio (cont'd) in search of higher returns, even after adjusting for Asia's higher risk premium. Household confidence holds the key to the condition of the residential sector in 2003. The state of affairs in the more developed private housing markets in Hong Kong and Singapore remains discouraging so far. While there is excess liquidity backed by robust household savings and historical low interest rates, unemployment concerns remain as industrial hollowing out dominates. Government policies have been relaxed in 2002 to favor the home purchaser. Essentially, an external recovery is needed to reverse the trend of household retrenchment and over-savings. Due to their city-state nature, Hong Kong and Singapore are the two economies in Asia that are most sensitive to any change in external trade. A sustainable external recovery could trigger the release of massive amounts of household savings into residential investment. We remain cautiously optimistic on Asian real estate securities. While we believe that real estate securities are at, if not close to cyclical lows, we are less clear on the timing of when these securities will begin to trade up on a more sustainable fashion. We need to put away the uncertainties of war and allow Asian governments' policy initiatives to work toward sustainable economic stability. During the first quarter, the defensive characteristics and security of dividends from Australia's listed property trusts are likely to appeal to investors as the world awaits a solution to the geo-political conflicts. While demand for property trusts will also be encouraged by a rising trend of higher portfolio allocation to real estate, it is important to highlight the risk of price retrenchments for the listed property trusts given current valuations. Elsewhere in Asia, real estate securities are massively oversold relative to the slower rate of deterioration in direct market fundamentals since the Asian financial crisis. Outside of Australia and New Zealand, we expect that the positive change to price to net asset value will be the single most powerful driver of returns in 2003. We believe that we have seen the worst of earnings downgrades and provisions last year. Earnings momentum should turn more positive during the second half of the year as stronger revenue stream and benefits of lower financing cost become more evident. Asia dividend yields are at historical highs. We expect dividends to be a larger contributor to Asia's total returns in 2003 and expect companies with strong cash flow and limited reinvestment opportunities to pay higher dividends or buy back shares trading at significant discounts to the NAV. January 2003 23 MORGAN STANLEY INSTITUTIONAL FUND, INC. Asian Real Estate Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (97.8%) AUSTRALIA (19.8%) Centro Properties Group 24,431 $ 51 General Property Trust 35,210 59 Investa Property Group 23,696 29 Lend Lease Corp., Ltd. 2,237 12 Mirvac Group 20,222 47 Stockland 23,055 62 Westfield Holdings Ltd. 10,350 78 Westfield Trust 52,791 103 Westfield Trust (New) (a)1,875 3 - -------------------------------------------------------------------------------- 444 ================================================================================ HONG KONG (43.3%) Cheung Kong Holdings Ltd. 13,000 85 Hang Lung Properties Ltd. 51,000 49 Henderson Land Development Co., Ltd. 53,000 159 Hong Kong Land Holdings Ltd. 47,000 65 Kerry Properties Ltd. 40,049 28 New World Development Co., Ltd. 57,541 29 Sino Land Co., Ltd. 118,866 38 Sun Hung Kai Properties Ltd. 66,000 391 Wharf Holdings Ltd. 68,000 128 - -------------------------------------------------------------------------------- 972 ================================================================================ JAPAN (25.5%) Daibiru Corp. 3,000 10 Japan Real Estate Investment Corp. REIT 9 46 Japan Retail Fund Investment Corp. REIT (a)3 14 Mitsubishi Estate Co., Ltd. 35,000 266 Mitsui Fudosan Co., Ltd. 22,000 143 Office Building Fund of Japan, Inc. REIT 10 52 Sumitomo Realty & Development Co., Ltd. 10,000 41 - -------------------------------------------------------------------------------- 572 ================================================================================ MALAYSIA (1.0%) IOI Properties Bhd 5,000 7 SP Setia Bhd 22,500 15 - -------------------------------------------------------------------------------- 22 ================================================================================ PHILIPPINES (2.0%) Ayala Land, Inc. 272,500 23 SM Prime Holdings, Inc. 258,000 23 - -------------------------------------------------------------------------------- 46 ================================================================================ SINGAPORE (6.2%) Allgreen Properties Ltd. 21,000 12 Ascendas Real Estate Investment Trust REIT (a)33,000 16 Ascott Group Ltd. (The) 20,000 4 CapitaLand Ltd. 76,500 49 CapitaMall Trust REIT (a)16,000 9 City Developments Ltd. 7,000 17 Keppel Land Ltd. 16,000 9 United Overseas Land Ltd. 24,000 22 - -------------------------------------------------------------------------------- 138 ================================================================================ TOTAL COMMON STOCKS (COST $2,455) 2,194 ================================================================================ TOTAL FOREIGN SECURITIES (97.8%) (COST $2,455) 2,194 ================================================================================ FACE AMOUNT VALUE (000) (000) - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (0.5%) REPURCHASE AGREEMENT (0.5%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 (COST $11) $ (f)11 $ 11 - -------------------------------------------------------------------------------- FOREIGN CURRENCY (1.3%) Australian Dollar AUD 8 5 Hong Kong Dollar HKD 166 21 Japanese Yen JPY 340 3 - -------------------------------------------------------------------------------- TOTAL FOREIGN CURRENCY (COST $29) 29 ================================================================================ TOTAL INVESTMENTS (99.6%) (COST $2,495) 2,234 ================================================================================ VALUE (000) - ------------------------------------------------------------------------------- OTHER ASSETS (1.1%) Receivable Due from Investment Adviser $ 18 Dividends Receivable 6 24 - -------------------------------------------------------------------------------- LIABILITIES (-0.7%) Custodian Fees Payable (5) Administrative Fees Payable (2) Directors' Fees and Expenses Payable (1) Other Liabilities (8) (16) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 2,242 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 4,867 Undistributed (Distributions in Excess of) Net Investment Income (38) Accumulated Net Realized Gain (Loss) (2,327) Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Translations (260) - -------------------------------------------------------------------------------- NET ASSETS $ 2,242 ================================================================================ CLASS A: NET ASSETS $ 1,843 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 327,389 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 5.63 ================================================================================ CLASS B: NET ASSETS $ 399 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 70,442 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 5.67 ================================================================================
(a) -- Non-income producing security (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. REIT -- Real Estate Investment Trust The accompanying notes are an integral part of the financial statements. 24 MORGAN STANLEY INSTITUTIONAL FUND, INC. Asian Real Estate Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd) SUMMARY OF TOTAL FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION -- DECEMBER 31, 2002
PERCENT VALUE OF NET INDUSTRY (000) ASSETS - -------------------------------------------------------------------------------- Diversified Financials $ 128 5.7% Hotels, Restaurants & Leisure 22 1.0 Real Estate 2,044 91.1 - -------------------------------------------------------------------------------- $ 2,194 97.8% ================================================================================
The accompanying notes are an integral part of the financial statements. 25 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Emerging Markets Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) SOUTH KOREA 21.8% TAIWAN 13.9% SOUTH AFRICA 13.1% MEXICO 7.8% RUSSIA 6.3% OTHER 37.1%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
EMERGING MARKETS MSCI EMERGING PORTFOLIO-CLASS A MARKETS FREE INDEX 1992* 500000 500000 1993 936225 843140 1994 846113 841420 1995 738107 737631 1996 828112 795859 1997 819624 681136 1998 611316 537587 1999 1233538 894598 2000 759551 620762 2001 726017 604498 2002 675565 581120
* Commenced operations on September 25, 1992 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS FREE INDEX(1)
TOTAL RETURNS(2) ----------------------------------------- AVERAGE ANNUAL ----------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION - -------------------------------------------------------------------------------- Portfolio - Class A(3) (6.24)% (3.50)% 3.13% 3.27% Portfolio - Class B(4) (6.24) (4.79) N/A (2.77) Index - Class A (6.17) (4.66) 1.27 2.00 Index - Class B (6.17) (4.66) N/A (4.34)
(1) The MSCI Emerging Markets Free Index is a market capitalization weighted index comprised of companies that are representative of the market structure of developing countries in Latin America, Asia, Eastern Europe, the Middle East and Africa. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on September 25, 1992 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Emerging Markets Portfolio seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of issuers in emerging market countries. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. In addition, investing in emerging markets may involve a relative higher degree of volatility. For the year ended December 31, 2002, the Portfolio had a total return of -6.24% for the Class A shares and -6.24% for the Class B shares compared with -6.17% for the Morgan Stanley Capital International (MSCI) Emerging Markets Free Index (the "Index"). MARKET REVIEW Overall, country allocation contributed positively to the Portfolio's performance while the impact of stock selection was mixed. Country allocations in Israel (primarily driven by stock selection as the country index was down 31.3%), coupled with underweights in Argentina (-50.7%) and our overweights in Indonesia (+41.9%) and South Korea (+8.3%) were strong contributors to relative performance. Our overweight position in Turkey (-35.8%) hurt performance. The Portfolio's holdings in Israel, India and China were 26 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Emerging Markets Portfolio (cont'd) positive contributors to relative performance while stock selection in Russia was weak. In 2002, overall, emerging market performance was hampered by weak global economic growth, domestic concerns in select emerging markets, the continued sell off of U.S. equities and increased geo-political risk. Nevertheless, in 2002 the asset class outperformed both the U.S. and developed international markets. The Index fell 6.2% versus a 15.9% decline in MSCI EAFE and a 22.1% decline in the S&P 500. Emerging markets started the year in positive territory as equities in this asset class were supported by early year expectations of a U.S. led economic recovery and positive economic data from select emerging markets countries. However, after outperforming for much of the year and rebounding over 40.0% from September 2001 lows, performance in this asset class turned negative during the second and third quarters. The sharp sell-off in Latin America (down 40.5% during the two quarters ended September 30, 2002) and profit taking within cyclical markets such as South Korea and Taiwan were the primary reasons for declines. Risk aversion increased on a global basis during the second quarter, dominated by negative sentiment toward Brazil (due to poor political outlook) and greater uncertainty over the global backdrop. Increased reports of corporate accounting fraud and concerns over the strength of the U.S. economic recovery coupled with geo-political risks in the Asian sub-continent and the Middle East served to undermine investor confidence for much of the year. Nevertheless, amid a more favorable tone in U.S. equities, particularly in the months of October and November, global emerging markets rebounded given reduced political concerns in Brazil and better than expected corporate earnings and export data from select emerging markets. Global emerging markets ended the period in review with a strong 10.0% fourth quarter return. MARKET OUTLOOK Our long-term outlook for emerging markets remains positive. We believe the emerging markets are well positioned to continue to outperform global markets given valuations, corporate fundamentals, relative growth and leveraged exposure to the pick-up in global sentiment and economic activity. Near-term, however, global equities are likely to remain volatile given concerns over high oil prices due to the crises in Iraq and Venezuela, and economic uncertainties in the U.S., Japan and Germany. Nevertheless, our expectations are for oil prices to fall to more normal levels once the crisis in Iraq passes and for global economies to recover in the second half of this year. Emerging markets are likely to be supported by reduced fears of a U.S. double dip recession as the economy begins to show the benefits of U.S. monetary easing that has lowered rates to 1.25%, a 41 year low. Signs of fundamental improvements in Turkey, Central Europe and Russia, along with patches of decent domestic strength in Asia, continue to support overall sentiment in emerging markets. On a bottom-up basis, we continue to focus on earnings visibility as a driver of medium-term returns. January 2003 27 MORGAN STANLEY INSTITUTIONAL FUND, INC. Emerging Markets Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (99.8%) (UNLESS OTHERWISE NOTED) BRAZIL (4.8%) AmBev ADR (c)371,910 $ 5,787 Aracruz Celulose S.A. (c)20,400 379 Banco Bradesco S.A. ADR (c)92,500 1,378 Banco Itau S.A. ADR (c)131,816 3,137 Banco Nacional S.A. (Preferred) (a)(d)295,998,880 @-- Celular Participacoes CRT (Preferred) 3,614,165 313 CEMIG ADR (Preferred) (c)162,431 1,191 CVRD ADR (c)31,710 917 CVRD ADR (Preferred) (c)279,554 7,688 Empresa Brasileira de Aeronautica ADR (c)161,719 2,571 Lojas Arapua (Preferred) (a)(d)119,019,000 @-- Lojas Arapua GDR (Preferred) (a)(d)(e)120,830 @-- Petrobras ADR (c)184,375 2,755 Petrobras ADR (Preferred) (c)362,198 4,853 Votorantim Celulose e Papel S.A. ADR (c)77,500 1,274 - -------------------------------------------------------------------------------- 32,243 ================================================================================ CHINA/HONG KONG (5.6%) Byd Co., Ltd. (a)635,000 1,279 China Mobile Ltd. (a)5,065,000 12,048 China Shipping Development Co., Ltd. 2,053,000 429 China Southern Airlines Co., Ltd. (c)13,862,000 3,733 CNOOC Ltd. (c)6,017,000 7,831 Cosco Pacific Ltd. 2,160,000 1,773 Huaneng Power International, Inc., Class H (c)4,920,000 3,943 Sinopec Shangai Petrochemical Co., Ltd. (a)9,377,000 1,419 Texwinca Holdings Ltd. 2,340,000 1,740 TPV Technology Ltd. 7,896,000 2,435 Yanzhou Coal Mining Co., Ltd. 2,984,000 1,186 - -------------------------------------------------------------------------------- 37,816 ================================================================================ CZECH REPUBLIC (0.3%) Komercni Banka A.S. 15,800 1,092 Komercni Banka A.S. GDR 31,300 717 - -------------------------------------------------------------------------------- 1,809 ================================================================================ HUNGARY (2.3%) Matav Rt 273,221 991 Matav Rt. ADR (c)110,192 1,961 MOL Magyar Olaj-es Gazipari Rt 165,217 3,857 MOL Magyar Olaj-es Gazipari Rt. GDR (Registered) 50,878 1,191 OTP Bank Rt 419,137 4,123 OTP Bank Rt. GDR 171,871 3,377 - -------------------------------------------------------------------------------- 15,500 ================================================================================ INDIA (5.9%) Bharat Heavy Electricals 429,465 1,546 Colgate-Palmolive (India) Ltd. 259,590 730 Container Corp. of India Ltd. 395,919 1,895 Gujarat Ambuja Cements Ltd. 351,939 1,199 Hero Honda Motors Ltd. 457,995 2,592 Hindalco Industries Ltd. 133,980 1,638 Hindustan Lever Ltd. 564,260 2,139 Hindustan Petroleum Corp. 234,155 1,406 Housing Development Finance Corp., Ltd. 202,430 1,513 India-Info.com Private Co., Ltd. (i)393,611 @-- Infosys Technologies Ltd. 45,630 4,540 Mahanagar Telephone Nigam Ltd. 556,650 1,101 Morgan Stanley Growth Fund (a)(g)17,902,900 3,528 Oil and Natural Gas Corp. Ltd. 186,500 1,361 Ranbaxy Laboratories Ltd. 173,604 2,148 Reliance Industries Ltd. 257,700 1,600 State Bank of India (d)818,002 4,950 Steel Authority of India Ltd. (a)4,073,082 871 Tata Engineering & Locomotive Co., Ltd. (a)320,000 1,077 Tata Iron & Steel Co., Ltd. 604,000 1,908 Wipro Ltd. (c)22,700 772 Wipro Ltd. ADR 25,000 837 - -------------------------------------------------------------------------------- 39,351 ================================================================================ INDONESIA (3.3%) Astra International Tbk PT (a)20,144,000 7,090 Bank Central Asia Tbk PT 10,723,000 2,995 Hanjaya Mandala Sampoerna Tbk PT 7,833,500 3,239 Ramayana Lestari Sentosa Tbk PT 6,533,500 1,843 Telekomunikasi Indonesia Tbk PT 15,617,000 6,718 - -------------------------------------------------------------------------------- 21,885 ================================================================================ ISRAEL (2.7%) Check Point Software Technologies Ltd. (a)248,564 3,224 ECI Telecommunications Ltd. (a)685,012 1,390 Teva Pharmaceutical Industries Ltd. 90,320 3,372 Teva Pharmaceutical Industries Ltd. ADR (c)267,358 10,323 - -------------------------------------------------------------------------------- 18,309 ================================================================================ MALAYSIA (4.0%) AMMB Holdings Bhd 1,711,000 1,711 Celcom Malaysia Bhd (a)6,651,000 4,271 Commerce Asset Holdings Bhd 1,969,000 1,679 Gamuda Bhd 3,012,000 4,360 Magnum Corp. Bhd 4,612,000 2,779 Malayan Banking Bhd 2,862,500 5,574 Malaysian Pacific Industries Bhd 423,000 1,547 Public Bank Bhd 2,154,375 1,287 Resorts World Bhd 861,000 2,119 SP Setia Bhd 2,630,999 1,696 - -------------------------------------------------------------------------------- 27,023 ================================================================================ MEXICO (7.8%) America Movil S.A. de C.V. ADR (c)733,453 10,532 Femsa (c)798,901 2,908 Femsa ADR (c)28,505 1,038 Grupo Aeroportuario de Sureste S.A. de C.V. 533,900 592 Grupo Aeroportuario del Sureste S.A. de C.V. ADR (c)102,200 1,201 Grupo Financiero BBVA Bancomer S.A. ADR (a)(c)30,500 461 Grupo Financiero BBVA Bancomer S.A, Class B (a)(c)8,566,153 6,534 Grupo Modelo S.A., Class C (c)1,306,000 3,212 Telmex, Class L ADR (c)537,948 17,204 Walmart de Mexico ADR (c)77,822 1,770 Walmart de Mexico, Class C 1,961,542 3,815
The accompanying notes are an integral part of the financial statements. 28 MORGAN STANLEY INSTITUTIONAL FUND, INC. Emerging Markets Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- MEXICO (CONT'D) Walmart de Mexico, Class V (c)1,340,944 $ 3,078 - -------------------------------------------------------------------------------- 52,345 ================================================================================ PHILIPPINES (0.2%) Ayala Land, Inc. 11,171,500 952 - -------------------------------------------------------------------------------- POLAND (2.2%) Bank Pekao S.A. (a)293,050 7,233 Bank Pekao S.A. GDR (a)29,723 728 Eastbridge NV (i)33,400 1,336 Polski Koncern Naftowy Orlen S.A 376,116 1,739 Polski Koncern Naftowy Orlen S.A. GDR 97,300 895 Telekomunikacja Polska S.A (a)579,306 1,929 Telekomunikacja Polska S.A. GDR (a)344,845 1,155 - -------------------------------------------------------------------------------- 15,015 ================================================================================ RUSSIA (6.3%) Alliance Cellulose Ltd. (d)592,359 @-- Gazprom ADR 85,340 1,007 Lukoil Holding ADR (c)168,134 10,330 MMC Norilsk Nickel ADR (a)116,300 2,351 Mobile Telesystems ADR (a)(c)126,000 4,680 Mustcom Ltd. (d)66,270,018 10,259 Surgutneftegaz (c)121,190 2,824 Surgutneftegaz ADR (c)233,411 3,708 Vimpel Communications ADR (a)65,100 2,084 YUKOS ADR (c)35,246 4,967 - -------------------------------------------------------------------------------- 42,210 ================================================================================ SOUTH AFRICA (13.1%) Anglo American plc 1,121,977 16,560 Anglo American plc (London Shares) 680,152 10,105 Anglo American Platinum Corp., Ltd. 145,275 5,356 AngloGold Ltd. 19,200 651 AngloGold Ltd. ADR (c)47,373 1,623 Bidvest Group Ltd. 509,530 2,675 FirstRand Ltd. 6,139,890 5,273 Gold Fields Ltd. 557,980 7,806 Gold Fields Ltd. ADR 29,100 406 Impala Platinum Holdings Ltd. 43,948 2,795 Liberty Group Ltd. 151,770 968 MTN Group Ltd. (a)806,650 1,153 Nedcor Ltd. 101,900 1,321 Old Mutual plc 4,310,680 6,110 Old Mutual plc (London Shares) 1,210,600 1,702 Sanlam Ltd. 2,567,460 2,277 Sappi Ltd. 253,610 3,388 Sappi Ltd. ADR (c)29,430 389 Sasol Ltd. 716,110 8,773 Standard Bank Group Ltd. 2,460,780 8,657 - -------------------------------------------------------------------------------- 87,988 ================================================================================ SOUTH KOREA (21.8%) CJ Home Shopping (a)84,204 3,003 Daishin Securities Co., Ltd. 252,350 3,043 Humax Co., Ltd. (a)155,990 1,914 Hyundai Marine & Fire Insurance Co., Ltd. 78,200 1,668 Hyundai Mobis (a)280,570 $ 5,157 Hyundai Motor Co., Ltd. (a)101,300 2,370 Hyundai Motor Co., Ltd. (Preferred) (a)181,200 2,124 Kookmin Bank (a)39,518 1,399 LG Chemical Ltd. (a)130,760 4,476 LG Electronics, Inc. (a)185,933 6,474 LG Household & Health Care Ltd. 69,780 2,212 LG Investment & Securities Co., Ltd. 290,820 3,261 Pantech Co., Ltd. (a)176,340 2,126 POSCO 128,363 12,771 Samsung Electronics Co., Ltd. 190,933 50,548 Samsung Electronics Co., Ltd. (Preferred) 64,970 8,217 Samsung Securities Co., Ltd. (a)210,790 5,092 Seoul Securities Co., Ltd. 487,710 1,744 Shinhan Financial Group Co., Ltd. (a)582,750 6,093 Shinsegae Co., Ltd. (a)17,100 2,155 SK Telecom Co., Ltd. 91,180 17,605 Tong Yang Confectionery Group (a)50,130 2,451 - -------------------------------------------------------------------------------- 145,903 ================================================================================ TAIWAN (13.9%) Accton Technology Corp. (a)4,801,050 4,919 ASE Test Ltd. (a)193,700 775 Asustek Computer, Inc. 1,472,786 2,593 Cathay Financial Holding Co., Ltd. 2,062,000 2,196 Chinatrust Financial Holding Co., Ltd. (a)12,155,407 9,928 CTCI Corp. 1,744,000 931 EVA Airways Corp. (a)9,323,662 3,942 Formosa Chemical & Fibre Corp. 1,686,456 1,791 Formosa Plastics Corp. 3,004,000 3,953 Hon Hai Precision Industry Co., Ltd. 2,227,300 7,714 Largan Precision Co., Ltd. 377,800 2,115 Lite-On Technology Corp. 1,145,000 1,292 Novatek Microelectronics Corp., Ltd. 1,011,800 1,913 Phoenixtec Power Co., Ltd. 2,671,000 2,027 Polaris Securities Co., Ltd. (a)4,893,000 1,709 Premier Image Technology Corp. 2,467,000 3,809 Quanta Computer, Inc. 3,220,101 5,297 Quanta Storage, Inc. (a)212,000 1,425 Siliconware Precision Industries Co. (a)5,594,380 2,729 SinoPac Holdings Co. (a)12,402,625 5,208 Taishin Financial Holdings Co., Ltd. (a)11,198,000 5,752 Taiwan Semiconductor Manufacturing Co. (a)15,250,750 18,750 United Micro Electronics Corp., Ltd. (a)3,815,387 2,323 - -------------------------------------------------------------------------------- 93,091 ================================================================================ THAILAND (2.7%) Advanced Info Sevice PCL (Foreign) 1,908,900 1,582 Bangkok Bank PCL (Foreign) (a)(c)(d)4,097,800 5,700 BEC World PCL (Foreign) (d)271,600 1,285 Land & House PCL (Foreign) (c)892,200 1,665 Siam Cement PCL (The) (a)(c)185,500 5,041 Thai Farmers Bank PCL (Foreign) (a)(c)(d)3,631,300 2,526 - -------------------------------------------------------------------------------- 17,799 ================================================================================ TURKEY (2.6%) Akbank T. AS (a)838,578,884 2,779 Akcansa Cimento AS 155,606,000 909
The accompanying notes are an integral part of the financial statements. 29 MORGAN STANLEY INSTITUTIONAL FUND, INC. Emerging Markets Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- TURKEY (CONT'D) Arcelik AS (a)183,077,000 $ 1,434 Enka Insaat ve Sanayi AS (a)47,210,100 1,166 Hurriyet Gazetecilik ve Matbaacilik AS (a)778,297,910 2,040 Koc Holding AS (a)296,791,000 3,084 Turkcell Iletisim Hizmetleri AS (a)587,812,000 3,435 Turkiye Garanti Bankasi AS (a)1,363,014,001 1,765 Turkiye Is Bankasi, Class C (a)377,538,000 989 - -------------------------------------------------------------------------------- 17,601 ================================================================================ VENEZUELA (0.3%) CANTV ADR 170,265 2,145 - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $786,053) 668,985 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- FIXED INCOME SECURITIES (0.0%) INDIA (0.0%) DCM Shriram Industries Ltd. $ (b)(d)675 @-- Saurashtra Cement & Chemicals Ltd. (b)(d)827 @-- - -------------------------------------------------------------------------------- TOTAL FIXED INCOME SECURITIES (COST $3,337) @-- ================================================================================ TOTAL FOREIGN SECURITIES (99.8%) (COST $789,390) 668,985 ================================================================================ SHORT-TERM INVESTMENTS (11.2%) SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (5.4%) Banco Bilbao Viz Argentaria, NY, 1.36%, 4/24/03 6,810 6,810 Bank of Nova Scotia, NY, 2.51%, 2/4/03 4,871 4,871 Bayrische Hypo-Und Vereinsbank, 1.39%, 3/24/03 2,432 2,432 Credit Industrial et Commercial (CIC)/NY, 1.39%, 1/13/03 973 973 Credit Industrial et Commercial (CIC)/NY, 1.39%, 1/15/03 2,432 2,432 Credit Lyonnais, 1.39%, 1/27/03 3,892 3,892 General Electric Co., 1.37%, 7/17/03 3,405 3,405 Lehman Brothers, Inc., 1.35%, 1/2/03 8,755 8,755 Lloyds Bank London plc, 2.36%, 2/24/03 2,432 2,432 - -------------------------------------------------------------------------------- 36,002 ================================================================================ SHARES - -------------------------------------------------------------------------------- INVESTMENT COMPANIES HELD AS COLLATERAL ON LOANED SECURITIES (5.7%) AIM S.T. Investment Co. 3,113,865 3,114 CITI Institutional Liquid Reserve Fund 3,405,789 3,406 Dreyfus Cash Management Plus Fund 3,308,481 3,308 Evergreen Institutional Money Market Fund 3,113,865 3,114 Federated Prime Value Fund 3,113,865 3,114 Harris Insight Money Market Fund 3,405,789 3,406 Merrill Lynch Premier Institutional Fund 3,113,865 3,114 Merrimac Cash Series Fund 3,405,789 3,406 Nations Cash Reserve Fund 3,405,789 3,406 One Group Institutional Prime Money Market Fund 3,113,865 3,114 Reserve Primary Money Market Fund 3,405,789 3,406 TempCash Money Market Fund 2,432,707 2,433 - -------------------------------------------------------------------------------- 38,341 ================================================================================ FACE AMOUNT VALUE (000) (000) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENT (0.1%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 $ (f)501 $ 501 - -------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (COST $74,844) 74,844 ================================================================================ FOREIGN CURRENCY (0.2%) Brazilian Real BRL 314 89 Euro EUR 131 137 Hungarian Forint HUF 917 4 Polish Zloty PLN 102 27 South Korean Won KRW 1,111 1 Taiwan Dollar TWD 46,527 1,343 Turkish Lira TRL 3,303,356 2 - -------------------------------------------------------------------------------- TOTAL FOREIGN CURRENCY (COST $1,586) 1,603 ================================================================================ TOTAL INVESTMENTS (111.2%) (COST $865,820) 745,432 ================================================================================ VALUE (000) - ----------------------------------------------------------------------------------- OTHER ASSETS (1.4%) Receivable for Portfolio Shares Sold $ 3,803 Receivable for Investments Sold 3,735 Dividends Receivable 934 Foreign Withholding Tax Reclaim Receivable 344 Interest Receivable 287 Other 58 9,161 - ----------------------------------------------------------------------------------- LIABILITIES (-12.6%) Collateral on Securities Loaned (74,343) Payable for Investments Purchased (3,998) Payable for Portfolio Shares Redeemed (2,727) Investment Advisory Fees Payable (2,235) Custodian Fees Payable (225) Directors' Fees and Expenses Payable (128) Administrative Fees Payable (107) Bank Overdraft Payable (82) Deferred Country Taxes (27) Distribution Fees, Class B (10) Net Unrealized Loss on Foreign Currency Exchange Contracts (2) Other Liabilities (298) (84,182) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 670,411 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $1,189,458 Undistributed Net Investment Income (Accumulated Net Investment Loss) (2,432) Accumulated Net Realized Gain (Loss) (396,194) Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Translations (120,421) - -------------------------------------------------------------------------------- NET ASSETS $ 670,411 ================================================================================
The accompanying notes are an integral part of the financial statements. 30 MORGAN STANLEY INSTITUTIONAL FUND, INC. Emerging Markets Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE (000) - -------------------------------------------------------------------------------- CLASS A: NET ASSETS $ 657,203 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 64,853,306 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 10.13 ================================================================================ CLASS B: NET ASSETS $ 13,208 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 1,312,607 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 10.06 ================================================================================
(a) -- Non-income producing security (b) -- Issuer is in default. (c) -- All or a portion of security on loan at December 31, 2002 -- See note A-8 to financial statements. (d) -- Securities were valued at fair -- See Note A-1 to financial value statements. At December 31, 2002, the Portfolio held $24,720,000 of fair valued securities, representing 3.7% of net assets. (e) -- 144A security - certain conditions for public sale may exist. (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. (g) -- The Fund is advised by an affiliate. (i) -- Restricted security valued at fair value and not registered under the Securities Act of 1933. Eastbridge NV and India-Info.com were acquired 7/93 and 3/00, respectively, at a cost of $2,245,000 and $1,734,000, respectively. At December 31, 2002, these securities had an aggregate market value of $1,336,000, representing 0.2% of net assets. @ -- Value is less than $500. ADR -- American Depositary Receipts GDR -- Global Depositary Receipts PCL -- Public Company Limited FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
CURRENCY IN NET TO EXCHANGE UNREALIZED DELIVER VALUE SETTLEMENT FOR VALUE GAIN/(LOSS) (000) (000) DATE (000) (000) (000) - --------------------------------------------------------------------------------------- GBP 135 $ 217 1/2/03 US$ 216 $ 216 $(1) US$ 101 101 1/2/03 HKD 790 101 @-- US$ 336 336 1/3/03 HKD 2,618 336 @-- US$ 269 269 1/2/03 IDR 2,392,480 267 (2) US$ 82 82 1/3/03 ZAR 704 82 @-- US$ 118 118 1/7/03 ZAR 1,016 119 1 ------ ------ ---- $1,123 $1,121 $(2) ====== ====== ==== - ---------------------------------------------------------------------------------------
GBP - British Pound HKD - Hong Kong Dollar IDR - Indonesian Rupiah ZAR - South African Rand SUMMARY OF TOTAL FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION -- DECEMBER 31, 2002
PERCENT VALUE OF NET INDUSTRY (000) ASSETS - ---------------------------------------------------------------------------------- Airlines $ 7,675 1.1% Automobiles 15,253 2.3 Banks 87,520 13.1 Beverages 12,945 1.9 Chemicals 13,239 2.0 Computers & Peripherals 11,751 1.8 Construction Materials 7,149 1.1 Diversified Financials 39,819 5.9 Diversified Telecommunication Services 47,735 7.1 Electronic Equipment & Instruments 10,284 1.5 Household Durables 11,487 1.7 Insurance 14,920 2.2 Metals & Mining 74,633 11.1 Multiline Retail 13,998 2.1 Oil & Gas 56,136 8.4 Pharmaceuticals 15,843 2.4 Semiconductor Equipment & Products 86,802 12.9 Wireless Telecommunication Services 55,558 8.3 Other 86,238 12.9 - ---------------------------------------------------------------------------------- $ 668,985 99.8% ==================================================================================
The accompanying notes are an integral part of the financial statements. 31 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview European Real Estate Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) UNITED KINGDOM 43.1% FRANCE 22.7% SPAIN 9.4% NETHERLANDS 9.1% ITALY 4.7% OTHER 11.0%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
EUROPEAN REAL ESTATE EUROPEAN REAL ESTATE GPR GENERAL REAL ESTATE CLASS A CLASS B SECURITIES INDEX-EUROPE * 500000 100000 500000 1997 476400 95240 500650 1998 499029 99621 498647 1999 487252 97021 515601 2000 559901 111138 562263 2001 515949 102158 533306 2002 642460 126788 652446
* Commenced operations on October 1, 1997 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different fees assessed to that class. The GPR General Real Estate Securities Index - Europe value at December 31, 2002 assumes a minimum investment of $500,000; if a minimum initial investment of $100,000 (the minimum investment for Class B shares) is assumed, the value at December 31, 2002 would be $130,489. PERFORMANCE COMPARED TO THE GPR GENERAL REAL ESTATE SECURITIES INDEX - EUROPE(1)
TOTAL RETURNS(2) ----------------------------------------- AVERAGE ANNUAL --------------------------- ONE FIVE SINCE YEAR YEARS INCEPTION - ----------------------------------------------------------------------- Portfolio - Class A(3) 24.52% 6.16% 4.89% Portfolio - Class B(3) 24.11 5.89 4.62 Index 22.34 5.44 5.18
(1) The GPR General Real Estate Securities Index - Europe is a market capitalization weighted index of listed property/real estate securities in Europe measuring total return. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on October 1, 1997 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The European Real Estate Portfolio seeks to provide current income and long-term capital appreciation by investing primarily in equity securities of companies in the European real estate industry. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. The Portfolio's concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and the value of its shares may be substantially affected by economic events in the real estate industry. For the year ended December 31, 2002, the Portfolio had a total return of 24.52% for the Class A shares and 24.11% for the Class B shares compared to 22.34% for the GPR General Real Estate Securities Index - Europe (the "Index"). MARKET REVIEW During 2002, the Portfolio strongly outperformed the Index. This compares to a U.S. dollar return of -18.9% for the broader European equity markets, measured by MSCI Europe Index, marking the third successive year of relative outperformance versus the broader equity markets. The best performing listed property markets for the year were Ireland, Spain and Finland, returning 189.1%, 60.3% and 43.0% in U.S. dollars, respectively. The worst performing markets, during the period, were Germany, Switzerland and Italy with U.S. dollar returns of 3.6%, 9.3% and 9.7%, respectively. 32 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview European Real Estate Portfolio (cont'd) The relative performance of the Portfolio was positively impacted by country overweights in Spain, France and Ireland, and an underweight position in Switzerland. A country overweight in Italy and an underweight in Sweden had a negative impact on performance. Stock selection in France, Netherlands and Spain added to returns, but stock selection in the U.K. and Germany negatively affected performance. The European economy failed to recover during 2002, and it also looks unlikely that the economy will improve materially during 2003. As a result, demand for office space has been weak across the major European office markets during 2002, causing vacancy rates to rise during the year, with a European average at the end of the third quarter of 5.8%, up from 4.1% at the beginning of the year. Weak demand and rising vacancies also caused prime rental levels in the European office markets to fall, with prime office rents across Europe down 6.3% in the first nine months of the year. Given current economic forecasts we do not expect a dramatic improvement in demand during 2003, and we, therefore, look for further increases in vacancy rates accompanied by further falls in rents. However, low interest rates combined with the high investment demand for property across Europe continue to support capital values, despite weaker occupational markets. In addition, the European retail markets continue to show positive growth, both in rental values, as well as, capital values. MARKET OUTLOOK In the public markets, discounts to net asset value have narrowed during the year, following the positive performance. The sector, however, is currently still offering an attractive valuation, with companies trading at an average discount of 25%, which remains greater than the long-term average. Corporate activity could again prove to be a catalyst for absolute performance as the arbitrage opportunity between the public and private markets still exist, but we do expect fewer deals than in previous years. January 2003 33 MORGAN STANLEY INSTITUTIONAL FUND, INC. European Real Estate Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (96.9%) BELGIUM (1.0%) Cofinimmo 1,900 $ 199 - -------------------------------------------------------------------------------- FINLAND (0.5%) Sponda Oyj 19,340 111 - -------------------------------------------------------------------------------- FRANCE (22.7%) Bail Investissement 1,900 291 Gecina 9,969 1,057 Klepierre 3,628 492 Silic 1,117 201 Societe Fonciere Lyonnaise 28,847 891 Sophia 8,449 273 Unibail 19,226 1,369 - -------------------------------------------------------------------------------- 4,574 ================================================================================ GERMANY (1.7%) IVG Immobilien AG 38,796 339 - -------------------------------------------------------------------------------- ITALY (4.7%) Aedes S.p.A. 114,620 396 Beni Stabili S.p.A. 1,080,500 486 Pirelli & C. Real Estate S.p.A. (a)3,500 66 - -------------------------------------------------------------------------------- 948 ================================================================================ NETHERLANDS (9.1%) Corio N.V. 15,508 404 Eurocommercial Properties N.V. 7,702 162 Rodamco Europe N.V. 23,000 972 Wereldhave N.V. 5,300 297 - -------------------------------------------------------------------------------- 1,835 ================================================================================ NORWAY (1.3%) Steen & Strom ASA (a)20,500 266 - -------------------------------------------------------------------------------- SPAIN (9.4%) Inmobiliaria Colonial S.A. 44,159 685 Inmobiliaria Urbis S.A. 82,500 494 Metrovacesa S.A. 15,024 319 Vallehermoso 37,461 389 - -------------------------------------------------------------------------------- 1,887 ================================================================================ SWEDEN (0.6%) JM AB 3,360 63 Pandox AB 6,660 56 - -------------------------------------------------------------------------------- 119 ================================================================================ SWITZERLAND (2.8%) Jelmoli Holding AG (Bearer) 195 128 PSP Swiss Property AG 3,970 429 - -------------------------------------------------------------------------------- 557 ================================================================================ United Kingdom (43.1%) Benchmark Group plc 113,300 345 British Land Co. plc 167,510 1,219 Canary Wharf Group plc (a)229,561 871 Chelsfield plc 125,653 609 CLS Holdings plc (a)70,792 249 Derwent Valley Holdings plc 53,500 470 Freeport plc 72,300 326 Hammerson plc 61,980 472 Land Securities Group plc 129,246 1,634 Liberty International plc 56,677 $ 515 London Merchant Securities plc 82,200 155 Minerva plc 226,200 658 Pillar Property plc 27,200 184 Slough Estates plc 135,240 738 Unite Group plc 99,500 256 - -------------------------------------------------------------------------------- 8,701 ================================================================================ TOTAL COMMON STOCKS (COST $18,648) 19,536 ================================================================================ TOTAL FOREIGN SECURITIES (96.9%) (COST $18,648) 19,536 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (2.6%) REPURCHASE AGREEMENT (2.6%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 (COST $532) $ (f)532 532 - -------------------------------------------------------------------------------- FOREIGN CURRENCY (0.1%) British Pound (COST $14) GBP 9 14 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (99.6%) (COST $19,194) 20,082 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- OTHER ASSETS (0.7%) Cash $ 1 Foreign Withholding Tax Reclaim Receivable 110 Dividends Receivable 24 135 - -------------------------------------------------------------------------------- LIABILITIES (-0.3%) Investment Advisory Fees Payable (15) Custodian Fees Payable (11) Payable for Investments Purchased (6) Administrative Fees Payable (5) Directors' Fees and Expenses Payable (2) Distribution Fees, Class B (1) Other Liabilities (9) (49) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 20,168 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 25,889 Undistributed (Distributions in Excess of) Net Investment Income (163) Accumulated Net Realized Gain (Loss) (6,456) Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Translations 898 - -------------------------------------------------------------------------------- NET ASSETS $ 20,168 ================================================================================
The accompanying notes are an integral part of the financial statements. 34 MORGAN STANLEY INSTITUTIONAL FUND, INC. European Real Estate Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE (000) - -------------------------------------------------------------------------------- CLASS A: NET ASSETS $ 19,215 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 1,758,310 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 10.93 ================================================================================ CLASS B: NET ASSETS $ 953 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 86,908 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 10.96 ================================================================================
(a) -- Non-income producing security (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. SUMMARY OF TOTAL FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION -- DECEMBER 31, 2002
PERCENT VALUE OF NET INDUSTRY (000) ASSETS - --------------------------------------------------------------------------------- Apartments $ 1,870 9.3% Diversified 11,229 55.7 Office & Industrial 3,511 17.4 Office Buildings 2,206 11.0 Shopping Centers 592 2.9 Other 128 0.6 - --------------------------------------------------------------------------------- $ 19,536 96.9% =================================================================================
The accompanying notes are an integral part of the financial statements. 35 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview European Value Equity Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) UNITED KINGDOM 38.5% SWITZERLAND 16.0% FRANCE 14.9% NETHERLANDS 6.0% ITALY 4.8% OTHER 19.8%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
EUROPEAN VALUE EQUITY PORTFOLIO-CLASS A MSCI EUROPE INDEX * 500000 500000 1993 645500 606800 1994 715750 620650 1995 800566 754835 1996 979012 914030 1997 1154059 1131569 1998 1247423 1454406 1999 1367176 1685511 2000 1468073 1544097 2001 1270324 1236822 2002 1152946 1009494
* Commenced operations on April 2, 1993 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EUROPE INDEX(1)
TOTAL RETURNS(2) ----------------------------------------- AVERAGE ANNUAL ------------------------- ONE FIVE SINCE YEAR YEARS INCEPTION - --------------------------------------------------------------------- Portfolio - Class A(3) (9.24)% (0.02)% 8.95% Portfolio - Class B(4) (9.48) (0.28) 4.95 Index - Class A (18.38) (2.26) 7.38 Index - Class B (18.38) (2.26) 4.15
(1) The MSCI Europe Index is an unmanaged market value weighted index of common stocks listed on the stock exchanges of countries in Europe. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on April 2, 1993 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The European Value Equity Portfolio seeks long-term capital appreciation by investing primarily in equity securities of European issuers. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. For the year ended December 31, 2002, the Portfolio had a total return of -9.24% for the Class A shares and -9.48% for the Class B shares compared to -18.38% for the Morgan Stanley Capital International (MSCI) Europe Index (the "Index"). MARKET REVIEW The Portfolio outperformed the Index during 2002 in a difficult environment for equities in Europe. The secular bear market that we have witnessed since 2000 continued as the unwinding of the financial markets bubble of the late 1990's carried on. Bad news came on all fronts with high geo-political uncertainty in the Middle East, prospects of war in the Gulf, severe downturn in corporate profitability, a squeeze on capital expenditure and serious questioning of the integrity of financial reporting with major corporations being suspected of misstating profits. As investors realized that the expected economic upturn planned for the second half of 2002 would not take place, they became increasingly pessimistic and reduced their exposure to equities. European markets were particularly exposed to these bearish trends given the slow 36 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview European Value Equity Portfolio (cont'd) response of the European Central Bank to lower interest rates and a perceived lack of flexibility in adapting cost structures and capital allocation to the new slow growth environment. After a dreadful third quarter, however, the combination of the U.S. Federal Reserve monetary boost and positive corporate profit news paved the way for a recovery led by lagging sectors such as information technology and telecommunication services. Not surprisingly, our cautious stance and our emphasis on cash flow generation, balance sheet strength and valuation allowed us to position the Portfolio well for those market conditions. Strong stock selection drove outperformance with positions in consumer staples, information technology, financials and utilities contributing most. The Portfolio's underweight in information technology and the longstanding overweight in consumer staples continued to be the main contributors. Stock selection in healthcare was the main negative contributor. MARKET OUTLOOK This past year was an extremely poor year for equities in Europe. Not only did markets fall for a third year in a row but some indices, like the DAX in Germany, fell by more than 30%. As value investors, we always relate stock prices to their fundamental intrinsic value so we can dissociate market sentiment and investor confidence from our investment process. The macroeconomic and geo-political outlook for 2003 remains challenging and there are plenty of reasons to worry. To name but a few, a record level of household debt in the United Kingdom (U.K.), rising tax burden in Germany and the U.K., a noticeable credit crunch underway in the U.S., extremely low corporate and consumer confidence in Germany, and the threat of conflict in the Middle East and in Iraq. This challenging environment is likely to keep stock market volatility high and fear will grip the market from time to time. However, for patient long-term investors, we believe some opportunities will arise to build positions in undervalued securities that will provide potential capital appreciation. These periods of uncertainty are often attractive times to build exposure to equities. The valuation excesses of the second part of the 90's have now been largely corrected and stocks in Europe trade at a large discount to their U.S. counterparts. January 2003 37 MORGAN STANLEY INSTITUTIONAL FUND, INC. European Value Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (94.8%) BELGIUM (2.5%) Fortis 25,972 $ 455 Solvay S.A. 4,555 314 - -------------------------------------------------------------------------------- 769 ================================================================================ DENMARK (1.0%) Danisco A/S 4,042 137 Danske Bank A/S 9,062 150 - -------------------------------------------------------------------------------- 287 ================================================================================ FINLAND (2.3%) Nokia Oyj 4,046 64 Sampo Oyj, Class A 43,377 330 Stora Enso Oyj 29,546 312 - -------------------------------------------------------------------------------- 706 ================================================================================ FRANCE (14.9%) Alcatel S.A. (c)13,849 61 Aventis S.A. 13,264 721 BNP Paribas S.A. 13,975 570 Cie de Saint-Gobain 15,155 445 Groupe Danone 3,549 478 Neopost S.A. (a)4,140 133 Schneider Electric S.A. 10,223 484 Societe Generale, Class A 6,514 380 TotalFinaElf S.A. 7,642 1,092 Unibail 2,170 154 - -------------------------------------------------------------------------------- 4,518 ================================================================================ GERMANY (3.8%) Deutsche Bank AG (Registered) 3,006 139 Deutsche Telekom AG (Registered) 28,767 369 Muenchener Rueckversicherungs AG (Registered) 1,564 187 Siemens AG (Registered) 7,101 302 Volkswagen AG 3,842 139 - -------------------------------------------------------------------------------- 1,136 ================================================================================ ITALY (3.5%) ENI S.p.A. 7,722 123 Parmalat Finanziaria S.p.A. (c)56,649 135 Snam Rete Gas S.p.A. 118,314 404 Telecom Italia Mobile S.p.A. (c)56,607 258 UniCredito Italiano S.p.A. 37,020 148 - -------------------------------------------------------------------------------- 1,068 ================================================================================ NETHERLANDS (6.0%) Akzo Nobel N.V. 13,972 443 Heineken N.V. 8,053 315 ING Groep N.V. CVA 8,273 140 Koninklijke (Royal) KPN N.V. (a)11,818 77 Koninklijke (Royal) Philips Electronics N.V. 14,951 262 Royal Dutch Petroleum Co. 6,642 293 Unilever N.V. CVA 4,528 278 - -------------------------------------------------------------------------------- 1,808 ================================================================================ NORWAY (2.3%) Gjensidige NOR ASA (c)4,645 152 Statoil ASA 45,612 385 Telenor ASA 43,794 $ 168 - -------------------------------------------------------------------------------- 705 ================================================================================ PORTUGAL (0.5%) Brisa-Auto Estradas de Portugal S.A. 28,818 160 - -------------------------------------------------------------------------------- SPAIN (2.0%) Amadeus Global Travel Distribution S.A. 49,146 203 Banco Popular Espanol (c)2,103 86 Telefonica S.A. (a)36,597 328 - -------------------------------------------------------------------------------- 617 ================================================================================ SWEDEN (1.5%) Nordea AB 72,536 321 Swedish Match AB 18,539 146 - -------------------------------------------------------------------------------- 467 ================================================================================ SWITZERLAND (16.0%) Converium Holding AG (a)7,194 349 Credit Suisse Group (a)13,770 299 Holcim Ltd., Class B 2,544 462 Nestle S.A. (Registered) 5,240 1,111 Novartis AG (Registered) 16,287 595 Roche Holding AG 7,982 557 Schindler Holding AG (Registered) 1,516 285 Syngenta AG 7,456 432 UBS AG (Registered) (a)12,478 607 Zurich Financial Services AG 1,819 170 - -------------------------------------------------------------------------------- 4,867 ================================================================================ UNITED KINGDOM (38.5%) Allied Domecq plc 72,629 464 AstraZeneca plc 22,612 808 Aviva plc 52,212 373 BAE Systems plc 122,673 245 Barclays plc 50,370 312 BOC Group plc 20,034 287 BP plc 69,039 475 British American Tobacco plc 44,751 447 Cadbury Schweppes plc 29,487 184 Diageo plc 19,350 210 GlaxoSmithKline plc 65,805 1,263 GUS plc 17,483 162 Hays plc 233,690 349 HSBC Holdings plc 37,158 411 Invensys plc 607,950 517 Lloyds TSB Group plc 24,767 178 National Grid Transco plc 22,279 164 Reed Elsevier plc 70,011 600 Rentokil Initial plc 137,570 487 Rolls-Royce plc 172,150 297 Sainsbury (J) plc 50,910 229 Shell Transport & Trading Co., plc 182,874 1,205 Smiths Group plc 26,872 301 Vodafone Group plc 653,580 1,192 William Hill plc 56,807 208 WPP Group plc 41,512 317 - -------------------------------------------------------------------------------- 11,685 ================================================================================ TOTAL COMMON STOCKS (COST $31,109) 28,793 ================================================================================
The accompanying notes are an integral part of the financial statements. 38 MORGAN STANLEY INSTITUTIONAL FUND, INC. European Value Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- PREFERRED STOCK (1.3%) ITALY (1.3%) Telecom Italia S.p.A. (RNC) (COST $408) (c)78,790 $ 398 - -------------------------------------------------------------------------------- TOTAL FOREIGN SECURITIES (96.1%) (COST $31,517) 29,191 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS (6.5%) SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (1.6%) Banco Bilbao Viz Argentaria, NY, 1.36%, 4/24/03 $ 89 89 Bank of Nova Scotia, NY, 2.51%, 2/4/03 64 64 Bayrische Hypo-Und Vereinsbank, 1.39%, 3/24/03 32 32 Credit Industrial et Commercial (CIC)/NY, 1.39%, 1/13/03 13 13 Credit Industrial et Commercial (CIC)/NY, 1.39%, 1/15/03 32 32 Credit Lyonnais, 1.39%, 1/27/03 51 51 General Electric Co., 1.37%, 7/17/03 45 45 Lehman Brothers, Inc., 1.35%, 1/2/03 114 114 Lloyds Bank London plc, 2.36%, 2/24/03 32 32 - -------------------------------------------------------------------------------- 472 ================================================================================ SHARES - ------------------------------------------------------------------------------- INVESTMENT COMPANIES HELD AS COLLATERAL ON LOANED SECURITIES (1.6%) AIM S.T. Investment Co. 40,712 41 CITI Institutional Liquid Reserve Fund 44,529 44 Dreyfus Cash Management Plus Fund 43,257 43 Evergreen Institutional Money Market 40,712 41 Fund Federated Prime Value Fund 40,712 41 Harris Insight Money Market Fund 44,529 44 Merrill Lynch Premier Institutional Fund 40,712 41 Merrimac Cash Series Fund 44,529 44 Nations Cash Reserve Fund 44,529 44 One Group Institutional Prime Money Market Fund 40,712 41 Reserve Primary Money Market Fund 44,529 44 TempCash Money Market Fund 31,806 32 - -------------------------------------------------------------------------------- 500 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENT (3.3%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 $ (f)995 995 - -------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (COST $1,967) 1,967 ================================================================================ FOREIGN CURRENCY (0.2%) British Pound GBP 14 23 Euro EUR 22 23 Swedish Krona SEK 30 3 - -------------------------------------------------------------------------------- TOTAL FOREIGN CURRENCY (COST $49) 49 ================================================================================ VALUE VALUE (000) (000) - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (102.8%) (COST $33,533) $ 31,207 - -------------------------------------------------------------------------------- OTHER ASSETS (1.1%) Foreign Withholding Tax Reclaim Receivable $ 279 Dividends Receivable 50 Interest Receivable 1 330 - -------------------------------------------------------------------------------- LIABILITIES (-3.9%) Collateral on Securities Loaned (972) Payable for Portfolio Shares Redeemed (128) Custodian Fees Payable (20) Directors' Fees and Expenses Payable (18) Investment Advisory Fees Payable (15) Administrative Fees Payable (6) Distribution Fees, Class B (1) Other Liabilities (10) (1,170) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 30,367 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 36,626 Undistributed Net Investment Income (Accumulated Net Investment Loss) 29 Accumulated Net Realized Gain (Loss) (4,012) Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Translations (2,276) - -------------------------------------------------------------------------------- NET ASSETS $ 30,367 ================================================================================ CLASS A: NET ASSETS $ 29,425 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 2,887,997 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 10.19 ================================================================================ CLASS B: NET ASSETS $ 942 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 92,251 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 10.21 ================================================================================
(a) -- Non-income producing security (c) -- All or a portion of security on loan at December 31, 2002 -- See note A-8 to financial statements. (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. @ -- Value is less than $500. CVA -- Certificaten Van Aandelen RNC -- Non-Convertible Savings Shares The accompanying notes are an integral part of the financial statements. 39 MORGAN STANLEY INSTITUTIONAL FUND, INC. European Value Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd) FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
CURRENCY IN NET TO EXCHANGE UNREALIZED DELIVER VALUE SETTLEMENT FOR VALUE GAIN/(LOSS) (000) (000) DATE (000) (000) (000) - ------------------------------------------------------------------------ EUR 22 $23 1/3/03 US$ 23 $23 $@-- GBP 14 23 1/3/03 US$ 23 23 @-- --- --- ------ $46 $46 $@-- === === ====== - ------------------------------------------------------------------------
SUMMARY OF TOTAL FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION -- DECEMBER 31, 2002
PERCENT VALUE OF NET INDUSTRY (000) ASSETS - -------------------------------------------------------------------------------- Aerospace & Defense $ 542 1.8% Banks 3,752 12.3 Beverages 989 3.3 Building Products 445 1.5 Chemicals 1,476 4.9 Commercial Services & Supplies 1,039 3.4 Construction Materials 462 1.5 Diversified Financials 595 2.0 Diversified Telecommunication Services 1,339 4.4 Electrical Equipment 484 1.6 Food Products 2,324 7.7 Gas Utilities 404 1.3 Industrial Conglomerates 603 2.0 Insurance 1,409 4.6 Machinery 802 2.6 Media 917 3.0 Oil & Gas 3,572 11.8 Paper & Forest Products 312 1.0 Pharmaceuticals 3,945 13.0 Tobacco 594 1.9 Wireless Telecommunication Services 1,451 4.8 Other 1,735 5.7 - -------------------------------------------------------------------------------- $ 29,191 96.1% ================================================================================
The accompanying notes are an integral part of the financial statements. 40 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Global Franchise Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) UNITED KINGDOM 39.1% UNITED STATES 23.3% SWITZERLAND 7.1% FRANCE 5.8% SWEEDEN 4.9% OTHER 19.8%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
GLOBAL FRANCHISE PORTFOLIO-CLASS A GLOBAL FRANCHISE PORTFOLIO-CLASS B MSCI WORLD INDEX * 500000 100000 500000 2001 524000 104600 503100 2002 566444 112780 403033
* Commenced operations on November 28, 2001 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different fees assessed to that class. The MSCI World Index value at December 31, 2002 assumes a minimum investment of $500,000; if a minimum initial investment of $100,000 (the minimum for Class B shares) is assumed, the value at December 31, 2002 would be $80,607. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1)
TOTAL RETURNS(2) --------------------------- AVERAGE ANNUAL ONE SINCE YEAR INCEPTION - ------------------------------------------------------ Portfolio - Class A(3) 8.10% 12.12% Portfolio - Class B(3) 7.82 11.66 Index (19.89) (17.12)
(1) The MSCI World Index is an unmanaged index of common stocks and includes securities representative of the market structure of 22 developed market countries in North America, Europe, and the Asia/Pacific region. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on November 28, 2001 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Global Franchise Portfolio seeks long-term capital appreciation by investing primarily in equity securities of issuers located throughout the world, that it believes have, among other things, resilient business franchises and growth potential. This Portfolio's concentration of its assets in a smaller number of companies may subject it to greater investment risk than a portfolio with a larger number of companies. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. For the year ended December 31, 2002, the Portfolio had a total return of 8.10% for the Class A shares and 7.82% for the Class B shares compared to -19.89% for the Morgan Stanley Capital International (MSCI) World Index (the "Index"). MARKET REVIEW The autumn equity rebound fizzled out in December leaving the Index with its third consecutive negative year, dragged down by big declines in technology, telecoms and financials. During the year, the Portfolio benefited from strong stock selection across consumer staples, consumer discretionary and industrials. The Portfolio's overweight to consumer staples (69% versus 9% in the Index) and zero weight to the Index's heavyweights in technology and telecoms, was significantly positive to relative performance. The Portfolio's concentration in attractively valued, high quality and stable cash flow 41 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Global Franchise Portfolio (cont'd) businesses produced a positive return for the year compared to the Index's negative return. In the third quarter, we reduced the weighting of strong performing consumer staples holdings and invested the proceeds into existing consumer staples holdings and media companies with high free cash flow yields. During the year, we also initiated positions in several health care companies. We have added to this sector since it has a high return on capital employed and generates a healthy cash flow. In addition, the value emerged in the sector as it was sold off in July. Portfolio activity aims to improve either the quality or the value, or both, of the Portfolio. The Portfolio seeks companies that possess four quality characteristics: high return on operating capital employed, dominant intangible assets (brands, copyright, etc.), recurring revenue and the potential for growth through reinvestment of free cash. We also demand a reasonable valuation, which we define as free cash flow yield equal to or greater than interest rates. The quality and value hurdle we set, by necessity, leads to a concentrated number of stocks. Not surprisingly, in the current environment of economic uncertainty, accounting irregularities and corporate impropriety the market has revalued upwards a number of our companies. MARKET OUTLOOK Hopes of economic recovery and improved stock market performance in 2003 resonate from Wall Street. However, a cautious investor might only anticipate modestly positive growth in the coming years given that economic imbalances remain and risks are rising. The Portfolio's strategy of investing exclusively in companies with resilient business franchises, substantial free cash, capable management and growth potential has served investors well by generating positive absolute returns to date during one of the nastiest bear markets on record. With economic conditions still broadly grim, we believe that the quality and value combination in the Portfolio could continue to generate positive absolute returns over time. January 2003 42 MORGAN STANLEY INSTITUTIONAL FUND, INC. Global Franchise Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (98.4%) CANADA (2.9%) Torstar Corp., Class B 88,742 $ 1,439 - -------------------------------------------------------------------------------- FINLAND (4.5%) Kone Oyj, Class B 75,076 2,255 - -------------------------------------------------------------------------------- FRANCE (5.8%) Groupe Danone 17,503 2,356 Pernod-Ricard S.A. 5,838 566 - -------------------------------------------------------------------------------- 2,922 ================================================================================ ITALY (4.7%) Davide Campari-Milano S.p.A. 75,632 2,364 - -------------------------------------------------------------------------------- NETHERLANDS (1.8%) Reed Elsevier N.V. 75,124 919 - -------------------------------------------------------------------------------- SPAIN (4.3%) Zardoya Otis S.A. 162,038 2,135 - -------------------------------------------------------------------------------- SWEDEN (4.9%) Swedish Match AB 310,032 2,446 - -------------------------------------------------------------------------------- SWITZERLAND (7.1%) Compagnie Financiere Richemont AG, Class A 53,596 1,001 Nestle S.A. (Registered) 12,051 2,556 - -------------------------------------------------------------------------------- 3,557 ================================================================================ UNITED KINGDOM (39.1%) Allied Domecq plc 325,918 2,084 British American Tobacco plc 365,143 3,649 Cadbury Schweppes plc 474,024 2,955 Capital Radio plc 110,888 909 Diageo plc 219,031 2,381 GlaxoSmithKline plc 86,197 1,655 Imperial Tobacco Group plc 64,846 1,102 Reckitt Benckiser plc 79,848 1,550 SMG plc 920,539 1,379 Ulster Television plc 62,119 302 WPP Group plc 210,213 1,606 - -------------------------------------------------------------------------------- 19,572 ================================================================================ UNITED STATES (23.3%) Bristol-Myers Squibb Co. 46,841 1,084 Brown-Forman Corp., Class B 33,164 2,167 Fortune Brands, Inc. 19,601 912 Kimberly-Clark Corp. 40,611 1,928 Merck & Co., Inc. 21,900 1,240 New York Times Co., Class A 44,732 2,046 Philip Morris Cos., Inc. 56,723 2,299 - -------------------------------------------------------------------------------- 11,676 ================================================================================ TOTAL COMMON STOCKS (COST $46,730) 49,285 ================================================================================ TOTAL FOREIGN SECURITIES (98.4%) (COST $46,730) 49,285 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (1.8%) REPURCHASE AGREEMENT (1.8%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 (COST $907) $ (f)907 907 - -------------------------------------------------------------------------------- FACE AMOUNT VALUE (000) (000) - -------------------------------------------------------------------------------- FOREIGN CURRENCY (0.1%) Canadian Dollar CAD 10 $ 7 Euro EUR 17 18 - -------------------------------------------------------------------------------- TOTAL FOREIGN CURRENCY (COST $24) 25 ================================================================================ TOTAL INVESTMENTS (100.3%) (COST $47,661) 50,217 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- OTHER ASSETS (0.3%) Cash $ 1 Dividends Receivable 109 Foreign Withholding Tax Reclaim Receivable 22 Other 1 133 - -------------------------------------------------------------------------------- LIABILITIES (-0.6%) Net Unrealized Loss on Foreign Currency Exchange Contracts (208) Investment Advisory Fees Payable (44) Administrative Fees Payable (9) Custodian Fees Payable (6) Distribution Fees, Class B (1) Directors' Fees and Expenses Payable (1) Other Liabilities (10) (279) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 50,071 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 48,227 Accumulated Net Realized Gain (Loss) (508) Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Translations 2,352 - -------------------------------------------------------------------------------- NET ASSETS $ 50,071 ================================================================================ CLASS A: NET ASSETS $ 48,644 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 4,310,242 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 11.29 ================================================================================ CLASS B: NET ASSETS $ 1,427 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 126,963 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 11.24 ================================================================================
(f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. The accompanying notes are an integral part of the financial statements. 43 MORGAN STANLEY INSTITUTIONAL FUND, INC. Global Franchise Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd) FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
CURRENCY IN NET TO EXCHANGE UNREALIZED DELIVER VALUE SETTLEMENT FOR VALUE GAIN/(LOSS) (000) (000) DATE (000) (000) (000) - ------------------------------------------------------------------------------ GBP 5,300 $ 8,514 2/7/03 US$ 8,241 $8,241 $(273) US$ 1,501 1,501 2/7/03 GBP 975 1,566 65 ------- ------ ----- $10,015 $9,807 $(208) ======= ====== =====
GBP - British Pound SUMMARY OF TOTAL FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION -- DECEMBER 31, 2002
PERCENT VALUE OF NET INDUSTRY (000) ASSETS - --------------------------------------------------- Beverages $ 9,563 19.1% Food Products 7,866 15.7 Household Durables 912 1.8 Household Products 3,477 6.9 Machinery 4,390 8.8 Media 8,601 17.2 Pharmaceuticals 3,979 7.9 Textiles & Apparel 1,001 2.0 Tobacco 9,496 19.0 - --------------------------------------------------- $49,285 98.4% ===================================================
The accompanying notes are an integral part of the financial statements. 44 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Global Value Equity Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) UNITED STATES 42.0% UNITED KINGDOM 17.5% JAPAN 9.1% FRANCE 9.0% SWITZERLAND 7.5% OTHER 14.9%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
GLOBAL VALUE EQUITY PORTFOLIO-CLASS A MSCI WORLD NET INDEX 1992* 500000 500000 1993 721020 612500 1994 771160 643615 1995 915089 776972 1996 1124040 881708 1997 1391045 1020665 1998 1594193 1269095 1999 1658184 1585607 2000 1853087 1376594 2001 1698262 1145051 2002 1403299 917289
* Commenced operations on July 15, 1992 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1)
TOTAL RETURNS(2) ----------------------------------------------------- AVERAGE ANNUAL ----------------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION - -------------------------------------------------------------------------------- Portfolio - Class A(3) (17.34)% 0.18% 10.87% 10.10% Portfolio - Class B(4) (17.63) (0.11) N/A 5.94 Index - Class A (19.89) (2.11) 6.26 5.84 Index - Class B (19.89) (2.11) N/A 2.34
(1) The MSCI World Index is an unmanaged index of common stocks and includes securities representative of the market structure over 20 developed market countries in North America, Europe, and the Asia/Pacific region. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on July 15, 1992 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Global Value Equity Portfolio seeks long-term capital appreciation by investing primarily in equity securities of issuers throughout the world, including U.S. issuers. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. For the year ended December 31, 2002, the Portfolio had a total return of - -17.34% for the Class A shares and -17.63% for the Class B shares compared to - -19.89% for the Morgan Stanley Capital International (MSCI) World Index (the "Index"). MARKET REVIEW The year 2002 may be remembered for its contrast to the equity returns of years 2000 and 2001 as much as anything else. Markets lost nearly 20% of their value (in U.S. dollar terms) over the course of the year. Those sectors of the markets which had previously been most bloated, both in terms of valuations and excess capital expenditure, were those which suffered the most. Fortunately, early October was a nadir during the period and markets, led by the U.S., have posted a modest recovery since. We have been fortunate to have managed maintaining a margin of outperformance versus the Index since the beginning of the year. The Portfolio's performance through the year was driven largely by its underweight position and stock selection in information technology and by its 45 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Global Value Equity Portfolio (cont'd) overweight position in consumer staples. Our long held view that the information technology sector was overvalued served the Portfolio well over the year and the largest companies in this sector continued to suffer the effects of the correction of excessive valuations previously ascribed to them. Our stock selection in the telecommunication sector, favoring the regional U.S. operators, and our underweighting and stock selection in the utilities sector also made notable contributions. The positioning of the Portfolio has changed only modestly over the period. Recognizing value in a number of the more economically sensitive sectors, we have gradually increased our holdings in the insurance, materials, and technology sectors, while reducing our holdings in the utilities and energy sectors. We have also selectively trimmed positions in consumer staples as companies in this sector have reached their fair value targets. The Portfolio remains underweight in technology and overweight in consumer staples and materials. MARKET OUTLOOK In our view, the global geo-political situation is likely to remain precarious for some time as the world's major powers accelerate preparations for military conflict in the Middle East. Investors are likely to remain nervous and hopes of a consumer led recovery are presently in doubt. However, there are reasons for optimism, not the least of these being the economic stimulus being applied in both the U.S. and the major European economies. In this environment, we remain intently focused on our key quality criteria when picking stocks for the Portfolio. As we seek opportunities to invest in stocks which are trading at more attractive discounts to their fair values, we anticipate continuing the measured and steady rotation of our sector allocation away from the more defensive sectors. January 2003 46 MORGAN STANLEY INSTITUTIONAL FUND, INC. Global Value Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (97.4%) DENMARK (0.8%) Danisco A/S 13,970 $ 475 - -------------------------------------------------------------------------------- FINLAND (0.6%) Sampo Oyj, Class A 46,300 352 - -------------------------------------------------------------------------------- FRANCE (9.0%) Aventis S.A. 27,490 1,495 BNP Paribas S.A. 16,100 657 Cie de Saint-Gobain 19,754 580 Credit Agricole S.A. 19,090 288 Groupe Danone 5,200 700 Lafarge S.A. 8,869 669 Pernod-Ricard S.A. 5,180 502 TotalFinaElf S.A. 4,390 627 - -------------------------------------------------------------------------------- 5,518 ================================================================================ GERMANY (1.2%) BASF AG 13,854 522 Muenchener Rueckversicherungs AG (Registered) 2,014 241 - -------------------------------------------------------------------------------- 763 ================================================================================ HONG KONG (0.0%) Hong Kong Electric Holdings Ltd. 180 1 - -------------------------------------------------------------------------------- ITALY (1.4%) ENI S.p.A. 55,630 885 - -------------------------------------------------------------------------------- JAPAN (9.1%) Canon, Inc. 29,000 1,091 Daiwa Securities Group, Inc. 72,000 319 Fuji Photo Film Co., Ltd. 24,000 782 Fuji Television Network, Inc. 43 173 Fujitsu Ltd. 123,000 351 Hitachi Ltd. 56,000 214 Mitsubishi Electric Corp. (a)110,000 254 Mitsubishi Estate Co., Ltd. 50,000 381 Mitsui Sumitomo Insurance Co., Ltd. 88,000 405 Nippon Telegraph & Telephone Corp. 189 686 Sankyo Co., Ltd. 52,000 652 Sumitomo Electric Industries Ltd. 40,000 259 - -------------------------------------------------------------------------------- 5,567 ================================================================================ NETHERLANDS (4.9%) Akzo Nobel N.V. 17,570 558 Heineken N.V. 16,500 644 ING Groep N.V. CVA 40,392 685 Koninklijke (Royal) Philips Electronics N.V. 29,990 526 Royal Dutch Petroleum Co. (NY Shares) 12,800 563 - -------------------------------------------------------------------------------- 2,976 ================================================================================ NORWAY (0.8%) Statoil ASA 57,800 488 - -------------------------------------------------------------------------------- SINGAPORE (0.6%) United Overseas Bank Ltd. 57,000 388 - -------------------------------------------------------------------------------- SOUTH KOREA (0.7%) Samsung Electronics Co., Ltd. GDR (Registered) 3,300 440 - -------------------------------------------------------------------------------- SPAIN (0.6%) Telefonica S.A. 39,712 356 - -------------------------------------------------------------------------------- SWEDEN (1.2%) Nordea AB 163,100 722 - -------------------------------------------------------------------------------- SWITZERLAND (7.5%) Cie de Saint-Gobain 23,880 $ 446 Converium Holding AG (a)17,996 873 Credit Suisse Group (a)14,645 318 Holcim Ltd., Class B 2,156 392 Nestle S.A. (Registered) 6,800 1,442 Syngenta AG 8,916 517 UBS AG (Registered) (a)7,185 349 Zurich Financial Services AG 2,491 232 - -------------------------------------------------------------------------------- 4,569 ================================================================================ UNITED KINGDOM (17.5%) Allied Domecq plc 189,210 1,210 Aviva plc 51,054 364 BAA plc 41,100 334 BAE Systems plc 357,925 715 Cadbury Schweppes plc 186,013 1,159 Diageo plc 53,916 586 GlaxoSmithKline plc 53,316 1,024 Hays plc 150,340 225 Imperial Tobacco Group plc 39,694 674 Lloyds TSB Group plc 102,645 737 Prudential plc 38,762 274 Reed Elsevier plc 118,050 1,011 Rolls-Royce plc 150,700 260 Sainsbury (J) plc 93,718 421 Vodafone Group plc 509,300 929 WPP Group plc 102,500 783 - -------------------------------------------------------------------------------- 10,706 ================================================================================ UNITED STATES (41.5%) Albertson's, Inc. 31,222 695 Alcoa, Inc. 42,240 962 AT&T Wireless Services, Inc. (a)40,800 231 BJ's Wholesale Club, Inc. (a)29,940 548 Boeing Co. (The) 6,700 221 Boise Cascade Corp. 26,140 659 Bristol-Myers Squibb Co. 24,800 574 Cadiz, Inc. (a)67,540 37 ChevronTexaco Corp. 4,200 279 Deere & Co. 12,920 592 Delphi Corp. 27,100 218 Exelon Corp. 6,350 335 First Data Corp. 8,700 308 Gap, Inc. (The) 8,300 129 General Dynamics Corp. 5,610 445 Georgia-Pacific Group 20,073 324 Hewlett-Packard Co. 28,100 488 International Business Machines Corp. 16,594 1,286 Interpublic Group of Companies, Inc. 23,500 331 JP Morgan Chase & Co. 35,340 848 Kimberly-Clark Corp. 17,650 838 Kroger Co. (a)25,200 389 Loews Corp.-Carolina Group 15,500 314 MBIA, Inc. 17,100 750 McDonald's Corp. 35,330 568 McGraw-Hill Cos., Inc. (The) 15,600 943
The accompanying notes are an integral part of the financial statements. 47 MORGAN STANLEY INSTITUTIONAL FUND, INC. Global Value Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- UNITED STATES (CONT'D) Mellon Financial Corp. 28,270 $ 738 Merrill Lynch & Co., Inc. 18,200 691 Metlife, Inc. 23,300 630 Motorola, Inc. 104,200 901 NCR Corp. (a)21,300 506 New York Times Co., Class A 7,670 351 Northrop Grumman Corp. 9,035 876 Philip Morris Cos., Inc. 32,150 1,303 Principal Financial Group, Inc. 19,300 582 Prudential Financial, Inc. 16,000 508 Sabre Holdings Corp. (a)7,600 138 SBC Communications, Inc. 27,900 756 Sears, Roebuck & Co. 10,430 250 St. Paul Cos., Inc. (The) 20,300 691 Travelers Property Casualty Corp. Class A (a)47,520 696 Tupperware Corp. 17,010 257 Verizon Communications, Inc. 21,531 834 Wells Fargo & Co. 4,000 188 Wyeth 31,860 1,192 - -------------------------------------------------------------------------------- 25,400 ================================================================================ TOTAL COMMON STOCKS (COST $70,284) 59,606 ================================================================================ PREFERRED STOCKS (1.2%) ITALY (0.7%) Telecom Italia S.p.A. (RNC) 89,583 452 - -------------------------------------------------------------------------------- UNITED STATES (0.5%) Ford Motor Co., Capital Trust II (a)6,600 270 - -------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS (COST $811) 722 ================================================================================ TOTAL FOREIGN SECURITIES (98.6%) (COST $71,095) 60,328 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (1.2%) REPURCHASE AGREEMENT (1.2%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 (COST $734) $ (f)734 734 - -------------------------------------------------------------------------------- FOREIGN CURRENCY (0.1%) Canadian Dollar CAD 2 1 Euro EUR 20 21 Japanese Yen JPY 1,388 12 - -------------------------------------------------------------------------------- TOTAL FOREIGN CURRENCY (COST $34) 34 ================================================================================ VALUE VALUE (000) (000) - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (99.9%) (COST $71,863) $ 61,096 ================================================================================ OTHER ASSETS (0.5%) Cash $ 1 Foreign Withholding Tax Reclaim Receivable 148 Dividends Receivable 107 Receivable for Portfolio Shares Sold 66 Receivable for Investments Sold 5 Other 5 332 - -------------------------------------------------------------------------------- LIABILITIES (-0.4%) Investment Advisory Fees Payable (117) Net Unrealized Loss on Foreign Currency Exchange Contracts (50) Payable for Investments Purchased (23) Directors' Fees and Expenses Payable (16) Distribution Fees, Class B (15) Payable for Portfolio Shares Redeemed (14) Administrative Fees Payable (11) Custodian Fees Payable (7) Other Liabilities (12) (265) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 61,163 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 76,151 Undistributed (Distributions in Excess of) Net Investment Income (38) Accumulated Net Realized Gain (Loss) (4,161) Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Translations (10,789) - -------------------------------------------------------------------------------- NET ASSETS $ 61,163 ================================================================================ CLASS A: NET ASSETS $ 34,297 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 2,753,209 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 12.46 ================================================================================ CLASS B: NET ASSETS $ 26,866 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 2,175,313 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 12.35 ================================================================================
(a) -- Non-income producing security (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. @ -- Value is less than $500. CVA -- Certificaten Van Aandelen GDR -- Global Depositary Receipts RNC -- Non-Convertible Savings Shares The accompanying notes are an integral part of the financial statements. 48 MORGAN STANLEY INSTITUTIONAL FUND, INC. Global Value Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd) FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
CURRENCY IN NET TO EXCHANGE UNREALIZED DELIVER VALUE SETTLEMENT FOR VALUE GAIN/(LOSS) (000) (000) DATE (000) (000) (000) - ------------------------------------------------------------------------------ EUR 20 $ 21 1/3/03 US$ 21 $ 21 $@-- JPY 300,000 2,533 3/20/03 US$ 2,483 2,483 (50) SGD 8 5 1/3/03 US$ 5 5 @-- US$ 9 9 1/2/03 GBP 5 9 @-- US$ 13 13 1/3/03 GBP 8 13 @-- ------ ------ ---- $2,581 $2,531 $(50) ====== ====== ====
GBP - British Pound SGD - Singapore Dollar SUMMARY OF TOTAL FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION -- DECEMBER 31, 2002
PERCENT VALUE OF NET INDUSTRY (000) ASSETS - ----------------------------------------------------------------------- Aerospace & Defense $ 2,517 4.1% Banks 4,384 7.2 Beverages 2,942 4.8 Building Products 580 1.0 Chemicals 1,597 2.6 Commercial Services & Supplies 670 1.1 Communications Equipment 901 1.5 Computers & Peripherals 2,125 3.5 Construction Materials 1,060 1.7 Diversified Financial 3,124 5.1 Diversified Telecommunication Services 3,085 5.0 Food & Drug Retailing 1,505 2.5 Food Products 3,814 6.2 Household Durables 782 1.3 Household Products 838 1.4 Insurance 6,017 9.8 Leisure Equipment & Products 782 1.3 Machinery 592 1.0 Media 3,592 5.9 Metals & Mining 962 1.6 Multiline Retail 798 1.3 Office Electronics 1,091 1.8 Oil & Gas 2,843 4.7 Paper & Forest Products 984 1.6 Pharmaceuticals 4,936 8.1 Tobacco 2,292 3.7 Wireless Telecommunication Services 1,159 1.9 Other 4,356 6.9 - ----------------------------------------------------------------------- $ 60,328 98.6% =======================================================================
The accompanying notes are an integral part of the financial statements. 49 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview International Equity Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) UNITED KINGDOM 31.5% JAPAN 21.1% NETHERLANDS 10.3% FRANCE 8.7% SWITZERLAND 8.4% OTHER 20.0%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
INTERNATIONAL EQUITY PORTFOLIO-CLASS A MSCI EAFE INDEX 1992 500000 500000 1993 732575 662750 1994 823330 714378 1995 920071 794460 1996 1100773 842525 1997 1253891 857522 1998 1483353 1028992 1999 1734188 1306408 2000 1895294 1121238 2001 1710617 880800 2002 1642090 740437
** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
TOTAL RETURNS(2) ---------------------------------------------------------- AVERAGE ANNUAL ----------------------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION - ------------------------------------------------------------------------------------- Portfolio - Class A(3) (4.02)% 5.54% 12.63% 9.67% Portfolio - Class B(4) (4.25) 5.33 N/A 8.29 Index - Class A (15.94) (2.89) 4.00 1.28 Index - Class B (15.94) (2.89) N/A (1.01)
(1) The MSCI EAFE Index is an unmanaged index of common stocks in Europe, Aus- tralasia and the Far East. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on August 4, 1989 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The International Equity Portfolio seeks long-term capital appreciation by investing primarily in equity securities of non- U.S. issuers. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. For the year ended December 31, 2002, the Portfolio had a total return of -4.02% for the Class A shares and -4.25% for the Class B shares compared to -15.94% for the Morgan Stanley Capital International (MSCI) EAFE Index (the "Index"). MARKET REVIEW The October/November rally in global equity markets fizzled out in December as investors took an unseasonably sober view of the geo-political and economic risks that lie ahead in 2003 thus closing the year in negative territory for the third successive year. The European markets suffered steep declines in local currency terms, with the falling U.S. dollar giving some benefit to U.S. investors. Despite its well-documented problems and the market falling to a 19 year low, Japan actually fared relatively better than the European markets. All major markets and sectors had negative returns; consumer staples, materials and energy defended best, while information technology and telecommunications had the worst results. Over the course of the year, despite being interrupted by two attempted rallies in technology and telecommunications, the 50 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview International Equity Portfolio (cont'd) Portfolio benefited from its defensive positioning. Our consumer staples and utilities holdings all provided positive absolute returns, and together accounted for over 40% of the relative outperformance. The underweight position and cautious stock selection in financials also paid off in the later stages of the year, as deteriorating asset quality finally began to flow through to increase provisioning. Outright avoidance of most of the disasters in the technology, consumer discretionary, and telecommunications sectors also resulted in strong relative outperformance. The materials sector was the only negative contributor. In all, stock selection accounted for 76% of the relative outperformance over the year with sector allocation accounting for the remainder. MARKET OUTLOOK One cannot help but feel that after three punishing years of a bear market, the post-bubble hangover should have cleared, the negative news should be largely behind us and we should be able to see the first buds of recovery. Instead, it feels like a lot more trouble lies ahead. The gloom of Wall Street has not really spilled onto Main Street, the consumer and house price bubbles remain intact, many of the economic imbalances remain, and the laundry list of geo-political risks seems to be growing longer, not shorter. A weak U.S. dollar, particularly if it becomes official policy, does not bode well for economic growth in Europe or Japan as their export sectors have been the only cushion against moribund domestic demand. Maybe the optimistic strategists will get it right this time and equity markets will end 2003 higher than where they closed in 2002. However, one suspects it will be anything but a smooth progression and there will be one or two more deep valleys to cross before we make it to the other side. In other words, the risks remain heavily skewed towards the downside. We therefore remain comfortable with the defensive bias of the Portfolio, particularly, our overweight in consumer staples and underweight financials. January 2003 51 MORGAN STANLEY INSTITUTIONAL FUND, INC. International Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (92.6%) AUSTRALIA (1.9%) Alumina Ltd. 1,083,000 $ 2,978 BHP Billiton plc 5,097,380 27,236 Telstra Corp., Ltd. 19,815,784 49,037 WMC Resources Ltd. (a)1,083,000 2,565 - -------------------------------------------------------------------------------- 81,816 ================================================================================ BELGIUM (0.6%) Fortis 1,414,282 24,739 - -------------------------------------------------------------------------------- DENMARK (0.5%) Danisco A/S 698,158 23,742 - -------------------------------------------------------------------------------- FINLAND (1.0%) Nokia Oyj 2,706,856 43,057 - -------------------------------------------------------------------------------- FRANCE (8.7%) Aventis S.A. 2,078,534 113,046 BNP Paribas S.A. 970,860 39,581 Cie de Saint-Gobain (c)427,639 12,554 Groupe Danone (c)656,369 88,350 Societe Generale, Class A 799,799 46,606 Total Fina Elf S.A. 562,259 80,346 - -------------------------------------------------------------------------------- 380,483 ================================================================================ GERMANY (2.6%) Deutsche Bank AG (Registered) 183,900 8,476 Deutsche Telekom AG (Registered) 2,061,595 26,451 E. On AG 649,855 26,201 Muenchener Rueckversicherungs AG (Registered) 170,087 20,341 RWE AG 542,448 13,954 Volkswagen AG (c)563,895 20,426 - -------------------------------------------------------------------------------- 115,849 ================================================================================ HONG KONG (0.3%) Hong Kong Land Holdings Ltd. 10,972,306 15,142 - -------------------------------------------------------------------------------- ITALY (1.6%) ENI S.p.A. 4,415,235 70,232 - -------------------------------------------------------------------------------- JAPAN (21.1%) Asahi Kasei Corp. (c)3,435,000 8,503 Asatsu-DK, Inc. (c)465,500 8,250 Canon, Inc. (c)1,286,000 48,400 Central Japan Railway Co. (c)5,434 33,811 Dai Nippon Printing Co., Ltd. (c)4,303,000 47,570 Daiwa Securities Group, Inc. (c)5,653,000 25,083 Fuji Photo Film Co., Ltd. (c)1,400,000 45,618 Fuji Television Network, Inc. 8,667 34,881 Fujitsu Ltd. (c)17,106,000 48,825 Japan Tobacco, Inc. 6,585 44,022 Lawson, Inc. (c)728,800 17,550 Matsushita Electric Industrial Co., Ltd. (c)2,243,000 22,096 Millea Holdings, Inc. (a)(c)5,798 41,690 Mitsubishi Estate Co., Ltd. (c)3,220,000 24,508 Mitsui Sumitomo Insurance Co., Ltd. 4,397,000 20,213 Nippon Telegraph & Telephone Corp. 14,021 50,880 Rohm Co., Ltd. (c)219,900 27,976 Sankyo Co., Ltd. (c)3,761,000 47,151 Sekisui House Ltd. 4,651,000 32,894 Shionogi & Co., Ltd. 867,000 12,249 Sumitomo Electric Industries Ltd. 7,058,000 $ 45,698 Tokyo Electric Power Co., Inc. (c)520,700 9,886 Tokyo Gas Co., Ltd. (c)11,079,200 34,701 Toppan Printing Co., Ltd. (c)3,026,000 22,752 Toyo Seikan Kaisha Ltd. 2,119,000 25,245 Toyota Motor Corp. (c)1,908,800 51,268 Yamanouchi Pharmaceutical Co., Ltd. (c)3,332,800 96,530 - -------------------------------------------------------------------------------- 928,250 ================================================================================ NETHERLANDS (10.3%) ABN Amro Holding N.V. 1,805,450 29,534 Akzo Nobel N.V. 1,454,112 46,153 CSM N.V. CVA 1,126,502 23,632 Heineken N.V. 910,142 35,548 ING Groep N.V. CVA 1,065,520 18,057 Koninklijke (Royal) KPN N.V. (a)3,166,322 20,612 Koninklijke (Royal) Philips Electronics 2,683,453 47,052 N.V. Royal Dutch Petroleum Co. 3,122,983 137,553 Unilever N.V. CVA 1,570,633 96,554 - -------------------------------------------------------------------------------- 454,695 ================================================================================ NEW ZEALAND (0.5%) Telecom Corp. of New Zealand Ltd. 9,518,624 22,603 - -------------------------------------------------------------------------------- PORTUGAL (0.3%) Electricidade de Portugal S.A. 7,034,238 11,743 - -------------------------------------------------------------------------------- SINGAPORE (0.2%) Jardine Strategic Holdings Ltd. 2,867,656 7,485 - -------------------------------------------------------------------------------- SOUTH KOREA (1.3%) Samsung Electronics Co., Ltd. GDR (Registered) (c)429,997 57,297 - -------------------------------------------------------------------------------- SPAIN (0.8%) Telefonica S.A. (a)3,711,434 33,240 - -------------------------------------------------------------------------------- SWEDEN (1.5%) ForeningsSparbanken AB 2,082,779 24,712 Nordea AB 9,195,553 40,675 - -------------------------------------------------------------------------------- 65,387 ================================================================================ SWITZERLAND (7.9%) Credit Suisse Group (a)772,504 16,775 Holcim Ltd., Class B (c)118,544 21,538 Nestle S.A. (Registered) 531,125 112,645 Novartis AG (Registered) 2,351,966 85,890 Roche Holding AG 594,221 41,443 UBS AG (Registered) (a)1,098,591 53,438 Zurich Financial Services AG 172,502 16,108 - -------------------------------------------------------------------------------- 347,837 ================================================================================ UNITED KINGDOM (31.5%) Allied Domecq plc 6,331,141 40,482 Aviva plc 3,727,897 26,598 BAA plc 2,738,811 22,232 BAE Systems plc 18,248,476 36,445 Barclays plc 8,611,166 53,396 BOC Group plc 2,766,031 39,560 BP plc 17,386,521 119,572 British American Tobacco plc 6,188,676 61,848 Bunzl plc 3,778,043 23,123 Cadbury Schweppes plc 15,454,482 96,328
The accompanying notes are an integral part of the financial statements. 52 MORGAN STANLEY INSTITUTIONAL FUND, INC. International Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- UNITED KINGDOM (CONT'D) GlaxoSmithKline plc 7,474,664 $ 143,501 GUS plc 5,376,027 49,960 Hays plc 29,098,137 43,468 HSBC Holdings plc 5,612,158 62,052 Imperial Tobacco Group plc 3,754,643 63,798 Lloyds TSB Group plc 2,510,550 18,034 National Grid Transco plc 7,282,759 53,546 Prudential plc 3,136,478 22,177 Reckitt Benckiser plc 1,045,403 20,289 Reed Elsevier plc 10,324,728 88,466 Rentokil Initial plc 17,221,658 61,022 RMC Group plc 1,296,900 7,666 Rolls-Royce plc 8,811,547 15,185 Sainsbury (J) plc 7,177,674 32,225 Vodafone Group plc 55,461,742 101,162 Wolseley plc 2,704,594 22,717 WPP Group plc 7,690,132 58,770 - -------------------------------------------------------------------------------- 1,383,622 ================================================================================ TOTAL COMMON STOCKS (COST $4,363,875) 4,067,219 ================================================================================ PREFERRED STOCKS (1.8%) ITALY (1.3%) Telecom Italia S.p.A. (RNC) (c)11,168,842 56,406 - -------------------------------------------------------------------------------- SWITZERLAND (0.5%) Schindler Holding AG 120,300 23,468 - -------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS (COST $70,035) 79,874 ================================================================================ TOTAL FOREIGN SECURITIES (94.4%) (COST $4,433,910) 4,147,093 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS (8.8%) SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (2.4%) Banco Bilbao Viz Argentaria, NY, 1.36%, 4/24/03 $ 19,651 19,651 Bank of Nova Scotia, NY, 2.51%, 2/4/03 14,055 14,055 Bayrische Hypo-Und Vereinsbank, 1.39%, 3/24/03 7,020 7,020 Credit Industrial et Commercial (CIC)/NY, 1.39%, 1/13/03 2,808 2,808 Credit Industrial et Commercial (CIC)/NY, 1.39%, 1/15/03 7,020 7,020 Credit Lyonnais, 1.39%, 1/27/03 11,231 11,231 General Electric Co., 1.37%, 7/17/03 9,825 9,825 Lehman Brothers, Inc., 1.35%, 1/2/03 25,262 25,262 Lloyds Bank London plc, 2.36%, 2/24/03 7,020 7,020 - -------------------------------------------------------------------------------- 103,892 ================================================================================ SHARES - -------------------------------------------------------------------------------- INVESTMENT COMPANIES HELD AS COLLATERAL ON LOANED SECURITIES (2.5%) AIM S.T. Investment Co. 8,985,117 8,985 CITI Institutional Liquid Reserve Fund 9,827,472 9,827 Dreyfus Cash Management Plus Fund 9,546,687 9,547 Evergreen Institutional Money Market Fund 8,985,117 8,985 Federated Prime Value Fund 8,985,117 8,985 Harris Insight Money Market Fund 9,827,472 9,827 VALUE SHARES (000) - -------------------------------------------------------------------------------- Merrill Lynch Premier Institutional 8,985,117 $ 8,985 Fund Merrimac Cash Series Fund 9,827,472 9,827 Nations Cash Reserve Fund 9,827,472 9,827 One Group Institutional Prime Money Market Fund 8,985,117 8,985 Reserve Primary Money Market Fund 9,827,472 9,827 TempCash Money Market Fund 7,019,623 7,020 - -------------------------------------------------------------------------------- 110,627 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- Repurchase Agreement (3.9%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 $ (f)172,233 172,233 - --------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (COST $386,752) 386,752 ================================================================================= Foreign Currency (0.0%) British Pound (COST $4) GBP 2 4 - --------------------------------------------------------------------------------- TOTAL INVESTMENTS (103.2%) (COST $4,820,666) 4,533,849 ================================================================================= VALUE (000) - -------------------------------------------------------------------------------- Other Assets (2.6%) Receivable for Portfolio Shares Sold $ 92,096 Net Unrealized Gain on Foreign Currency Exchange Contracts 10,755 Dividends Receivable 5,049 Foreign Withholding Tax Reclaim Receivable 4,558 Interest Receivable 120 Receivable for Investments Sold 33 Other 123 112,734 - -------------------------------------------------------------------------------- LIABILITIES (-5.8%) Collateral on Securities Loaned (214,519) Payable for Portfolio Shares Redeemed (24,198) Investment Advisory Fees Payable (8,406) Bank Overdraft Payable (4,142) Administrative Fees Payable (616) Payable for Investments Purchased (543) Directors' Fees and Expenses Payable (360) Custodian Fees Payable (234) Distribution Fees, Class B (218) Other Liabilities (270) (253,506) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 4,393,077 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 4,765,812 Undistributed (Distributions in Excess of) Net Investment Income (13,902) Accumulated Net Realized Gain (Loss) (83,489) Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Translations (275,344) - -------------------------------------------------------------------------------- NET ASSETS $ 4,393,077 ================================================================================
The accompanying notes are an integral part of the financial statements. 53 MORGAN STANLEY INSTITUTIONAL FUND, INC. International Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE (000) - -------------------------------------------------------------------------------- CLASS A: NET ASSETS $ 3,953,655 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 270,735,511 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 14.60 ================================================================================ CLASS B: NET ASSETS $ 439,422 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 30,235,227 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 14.53 ================================================================================
(a) -- Non-income producing security (c) -- All or a portion of security on loan at December 31, 2002 -- See note A-8 to financial statements. (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. @ -- Value is less than $500. CVA -- Certificaten Van Aandelen GDR -- Global Depositary Receipts RNC -- Non-Convertible Savings Shares FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
CURRENCY IN NET TO EXCHANGE UNREALIZED DELIVER VALUE SETTLEMENT FOR VALUE GAIN/(LOSS) (000) (000) DATE (000) (000) (000) - ----------------------------------------------------------------------------------------- GBP 108,000 $173,470 2/10/03 EUR 168,321 $176,440 $ 2,970 JPY 25,400,000 214,201 2/14/03 EUR 211,803 221,986 7,785 US$ 543 543 1/3/03 GBP 337 543 @-- -------- -------- ------- $388,214 $398,969 $10,755 ======== ======== =======
EUR - Euro JPY - Japanese Yen SUMMARY OF TOTAL FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION -- DECEMBER 31, 2002
PERCENT VALUE OF NET INDUSTRY (000) ASSETS - -------------------------------------------------------------------------------- Aerospace & Defense $ 51,630 1.2% Automobiles 71,694 1.6 Banks 393,281 9.0 Beverages 76,030 1.7 Chemicals 94,217 2.2 Commercial Services & Supplies 197,933 4.5 Communications Equipment 43,057 1.0 Computers & Peripherals 48,825 1.1 Diversified Financials 75,363 1.7 Diversified Telecommunication Services 259,229 5.9 Electric Utilities 101,376 2.3 Electrical Equipment 45,698 1.0 Food & Drug Retailing 49,774 1.1 Food Products 441,251 10.0 Household Durables 102,042 2.3 Insurance 147,126 3.4 Internet & Catalog Retail 49,960 1.1 Leisure Equipment & Products 45,618 1.0 Media 190,368 4.3 Office Electronics 48,400 1.1 Oil & Gas 407,703 9.3 Pharmaceuticals 539,810 12.3 Semiconductor Equipment & Products 85,273 1.9 Tobacco 169,668 3.9 Wireless Telecommunication Services 101,162 2.3 Other 310,605 7.2 - -------------------------------------------------------------------------------- $ 4,147,093 94.4% ================================================================================
The accompanying notes are an integral part of the financial statements. 54 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview International Magnum Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) UNITED KINGDOM 25.7% JAPAN 19.4% SWITZERLAND 10.5% FRANCE 9.4% NETHERLANDS 5.1% OTHER 29.9%
Of the amount shown above as "Other", a significant portion represents cash equivalents required under regulations to be held as collateral relating to investments in futures contracts. [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
INTERNATIONAL MAGNUM INTERNATIONAL MAGNUM PORTFOLIO-CLASS A PORTFOLIO-CLASS B MSCI EAFE INDEX * 500000 100000 500000 1996 541250 107900 526300 1997 576864 114730 535668 1998 619148 122910 642802 1999 773130 153121 816101 2000 691951 136569 700459 2001 562487 110798 550281 2002 487339 95851 462566
* Commenced operations on March 15, 1996 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different fees assessed to that class. The MSCI EAFE Index value at December 31, 2002 assumes a minimum investment of $500,000; if a minimum initial investment of $100,000 (the minimum investment for Class B shares) is assumed, the value at December 31, 2002 would be $92,513. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1)
TOTAL RETURNS(2) ----------------------------------------- AVERAGE ANNUAL --------------------------- ONE FIVE SINCE YEAR YEARS INCEPTION - ----------------------------------------------------------------------- Portfolio - Class A(3) (13.36)% (3.32)% (0.38)% Portfolio - Class B(3) (13.49) (3.53) (0.62) Index (15.94) (2.89) (0.98)
(1) The MSCI EAFE Index is an unmanaged index of common stocks in Europe, Aus- tralasia and the Far East. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on March 15, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The International Magnum Portfolio seeks long-term capital appreciation by investing primarily in equity securities of non- U.S. issuers domiciled in EAFE countries. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. For the year ended December 31, 2002, the Portfolio had a total return of - -13.36% for the Class A shares and -13.49% for the Class B shares compared to - -15.94% for the Morgan Stanley Capital International (MSCI) EAFE Index (the "Index"). MARKET REVIEW This past year was the third consecutive year of negative returns for equity markets. Nearly every market in the Index saw double-digit declines, over the course of the year, as investors worried about the state of the global economy as well as revelations of corporate malfeasance and bankruptcies, which dominated the headlines. Aside from an end of year fourth quarter cyclical rally, defensive sectors again proved to be relative safe havens for most of the year. Household & personal products (+9.0% USD) and food, beverage & tobacco (+5.1% USD) were the sole positive performers within the Index for the year. Telecommunication, media and technology stocks were again the laggards, followed closely by insurance companies, which fell on ongoing concerns about their solvency levels. For the year, information technology stocks were the clear losers (-39.1% USD), followed closely by 55 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview International Magnum Portfolio (cont'd) insurance (-38.4% USD), media (-32.1% USD) and telecommunication services (-22.9% USD). International markets outperformed those of the U.S. during the year, with the S&P 500 Index return of -22.1%. The severe market performance of 2002 has been particularly surprising given a benign environment in which global GDP growth was positive, aggregate recurring profits bottomed and stabilized, and monetary policy remained supportive. However, investors' fears of a double dip recession coupled with deflation, and the growing distrust of corporate financial statement integrity cast a cloud over risky assets and induced further flights to quality. During most of the year, the Portfolio was positioned defensively in order to minimize losses incurred from the volatility of the markets. We began the year with an underweighting to Europe and Pacific ex-Japan and a neutral positioning in Japan. By mid-year, we had increased the Portfolio's exposure to Japan to be overweight relative to the Index as that market had among the most attractive valuations within the EAFE universe. At the start of the fourth quarter, we realigned the Portfolio to incorporate our more bullish outlook for the cyclically sensitive sectors. At this time, we scaled back the Portfolio's exposure to Japan, which had enjoyed substantial appreciation over the course of the year. Assets were redeployed to Europe, with the focus on cyclical sectors and companies that we felt were attractively valued. At year end, the Portfolio was approximately market weight in Europe, slightly underweight to Japan and Pacific ex-Japan, and maintained a small cash position. The Portfolio's allocation posture over the course of the year contributed to the overall return. Adding exposure to Japan, during the first part of the year, contributed to overall returns as Japan was the top performing EAFE region for the year. Likewise, adding to Europe while scaling back from Japan during the fourth quarter benefited the Portfolio as Europe gained steam and outperformed all EAFE regions during the end of the year, while Japan was the relative underperformer. Stock selection proved to be the main contributor to outperformance over the course of the year. Specifically, remaining underweight to European information technology companies was the single largest contributor to performance. Likewise, an overweight to and stock selection within European consumer staples, stock selection in European financials and information technology companies, and stock selection in Japanese consumer discretionary, materials and industrial companies added to returns. MARKET OUTLOOK A positive fourth quarter was a welcome relief from what has been a difficult year for equity investors. The global economic outlook, however, remains mixed. Japan's economic policy makers remain lethargic and are showing few signs of true stimulus or reform, while within Europe, the German economy continues to weaken and there remains the possibility of a housing price bubble bursting in the U.K. However, a stimulative monetary policy spearheaded by the U.S. Federal Reserve shows commitment to avoiding global deflation and the Bush administration's economic stimulus plans should bolster both U.S. and global growth. We continue to believe that a cyclical recovery will gain steam in 2003. Investor fears of global deflation and a possible "triple-dip" are overrated and valuations, especially in the telecommunications and pharmaceuticals sectors are very compelling. Finally, international investments for U.S. dollar-based investors may benefit in the coming months from a likely appreciation of non-U.S. currencies relative to the dollar. January 2003 56 MORGAN STANLEY INSTITUTIONAL FUND, INC. International Magnum Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (88.5%) AUSTRALIA (2.2%) Australia & New Zealand Banking Group Ltd. 10,500 $ 102 BHP Billiton Ltd. 37,889 216 Commonwealth Bank of Australia 10,450 158 Foster's Group Ltd. 51,900 131 MIM Holdings Ltd. 216,100 183 National Australia Bank Ltd. 10,380 185 News Corp., Ltd. 31,300 202 Qantas Airways Ltd. 48,600 105 Rio Tinto Ltd. 10,650 203 Westpac Banking Corp. 18,050 139 - -------------------------------------------------------------------------------- 1,624 ================================================================================ BELGIUM (1.1%) Fortis 28,333 496 Solvay S.A 4,991 344 - -------------------------------------------------------------------------------- 840 ================================================================================ DENMARK (0.4%) Danisco A/S 4,367 148 Danske Bank A/S 10,200 169 - -------------------------------------------------------------------------------- 317 ================================================================================ FINLAND (2.1%) Nokia Oyj 50,287 800 Sampo Oyj, Class A 61,924 472 Stora Enso Oyj, Class R 31,390 331 - -------------------------------------------------------------------------------- 1,603 ================================================================================ FRANCE (9.4%) Alcatel S.A., Class A (c)40,100 176 Aventis S.A 27,509 1,496 BNP Paribas S.A 19,982 815 Cie de Saint-Gobain 16,516 485 Groupe Danone 3,812 513 JC Decaux S.A (a)220 3 L'Oreal S.A 1,525 116 LVMH Moet Hennessy Louis Vuitton S.A 3,054 125 Neopost S.A (a)4,543 146 Sanofi-Synthelabo S.A 3,137 192 Schneider Electric S.A 10,871 515 Societe Generale, Class A 6,790 396 TotalFinaElf S.A 13,130 1,876 Unibail 2,387 170 - -------------------------------------------------------------------------------- 7,024 ================================================================================ GERMANY (2.2%) Deutsche Bank AG (Registered) 8,911 411 Deutsche Telekom AG (Registered) 31,200 400 Muenchener Rueckversicherungs AG (Registered) 2,482 297 Schering AG 1,740 76 Siemens AG (Registered) 7,694 327 Volkswagen AG 4,241 154 - -------------------------------------------------------------------------------- 1,665 ================================================================================ HONG KONG (2.1%) Cathay Pacific Airways Ltd. 58,000 79 Cheung Kong Holdings Ltd. 22,900 149 China Mobile Ltd. (a)44,200 $ 105 Esprit Holdings Ltd. 61,800 104 Henderson Land Development Co., Ltd. 56,000 168 Hutchison Whampoa Ltd. 35,640 223 Johnson Electric Holdings Ltd. 201,000 221 Li & Fung Ltd. 133,000 126 SmarTone Telecommunications Holdings Ltd. (c)137,500 154 Sun Hung Kai Properties Ltd. 27,500 163 Television Broadcasts Ltd. 28,000 88 - -------------------------------------------------------------------------------- 1,580 ================================================================================ ITALY (2.6%) ENI S.p.A 24,498 390 Mediaset S.p.A 17,482 133 Parmalat Finanziaria S.p.A (c)61,791 147 Snam Rete Gas S.p.A 129,764 443 Telecom Italia Mobile S.p.A 62,734 286 Telecom Italia S.p.A (c)22,355 170 UniCredito Italiano S.p.A 92,130 369 - ------------------------------------------------------------------------------- 1,938 =============================================================================== JAPAN (19.4%) Amada Co., Ltd. 50,000 136 Canon, Inc. 13,000 489 Casio Computer Co., Ltd. 41,000 228 Dai Nippon Printing Co., Ltd. 22,000 243 Daicel Chemical Industries Ltd. 75,000 212 Daifuku Co., Ltd. 58,000 174 Daikin Industries Ltd. 24,000 380 Denki Kagaku Kogyo Kabushiki Kaisha (c)79,000 172 East Japan Railway Co. 73 362 FamilyMart Co., Ltd. (c)13,300 260 Fuji Machine Manufacturing Co., Ltd. 13,300 125 Fuji Photo Film Co., Ltd. 14,000 456 Fujitec Co., Ltd. 22,000 114 Fujitsu Ltd. 53,000 151 Furukawa Electric Co., Ltd. 38,000 80 Hitachi Capital Corp. (c)24,700 296 Hitachi High-Technologies Corp. (c)7,000 87 Hitachi Ltd. 60,000 230 House Foods Corp. 13,000 123 Kaneka Corp. 49,000 262 Kurita Water Industries Ltd. 24,000 242 Kyocera Corp. 5,100 297 Kyudenko Corp. 17,000 63 Lintec Corp. 18,000 141 Matsushita Electric Industrial Co., Ltd. 35,000 345 Minebea Co., Ltd. 46,000 160 Mitsubishi Chemical Corp. (a)77,000 154 Mitsubishi Corp. (c)45,000 275 Mitsubishi Estate Co., Ltd. 46,000 350 Mitsubishi Heavy Industries Ltd. 94,000 230 Mitsubishi Logistics Corp. 14,000 68 Mitsubishi Tokyo Financial Group, Inc. 7 38 Mitsumi Electric Co., Ltd. 19,000 173 Nagase & Co., Ltd. 14,000 63 NEC Corp. 42,000 157
The accompanying notes are an integral part of the financial st atements. 57 MORGAN STANLEY INSTITUTIONAL FUND, INC. International Magnum Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- JAPAN (CONT'D) Nifco, Inc. 20,000 $ 217 Nintendo Co., Ltd. 3,900 364 Nippon Meat Packers, Inc. (c)18,000 180 Nippon Telegraph & Telephone Corp. 96 348 Nissan Motor Co., Ltd. 69,000 538 Nissha Printing Co., Ltd. 17,000 107 Nisshinbo Industries, Inc. 26,000 90 Obayashi Corp. (c)68,000 151 Ono Pharmaceutical Co., Ltd. 10,000 302 Ricoh Co., Ltd. 27,000 443 Rinnai Corp. 7,700 175 Rohm Co., Ltd. 1,500 191 Ryosan Co., Ltd. (c)11,000 111 Sangetsu Co., Ltd. 1,000 16 Sanki Engineering Co., Ltd. 6,000 29 Sankyo Co., Ltd. 24,000 301 Sanwa Shutter Corp. 50,000 135 Sekisui Chemical Co., Ltd. (c)43,000 111 Sekisui House Ltd. 33,000 233 Shin-Etsu Polymer Co., Ltd. 31,000 130 Sony Corp. 9,600 401 Suzuki Motor Corp. (c)29,000 315 TDK Corp. 6,400 258 Toho Co., Ltd. 8,000 77 Tokyo Electric Power Co., Inc. 16,600 315 Toshiba Corp. (a)105,000 329 Toyota Motor Corp. 17,300 465 Tsubakimoto Chain Co. (c)72,000 170 Yamaha Corp. 25,000 231 Yamanouchi Pharmaceutical Co., Ltd. 16,000 463 - -------------------------------------------------------------------------------- 14,532 ================================================================================ NETHERLANDS (5.1%) Akzo Nobel N.V 15,160 481 Gucci Group N.V 1,024 94 Heineken N.V 15,658 612 ING Groep N.V. CVA 24,022 407 Koninklijke (Royal) KPN N.V (a)40,021 260 Koninklijke (Royal) Philips Electronics N.V 33,201 582 Royal Dutch Petroleum Co. 23,701 1,044 Unilever N.V. CVA 4,977 306 - -------------------------------------------------------------------------------- 3,786 ================================================================================ NORWAY (1.0%) Gjensidige NOR ASA (c)5,030 165 Statoil ASA 49,143 415 Telenor ASA 47,685 182 - -------------------------------------------------------------------------------- 762 ================================================================================ PORTUGAL (0.4%) Brisa-Auto Estradas de Portugal S.A 31,630 175 Portugal Telecom SGPS S.A. (Registered) 22,029 152 - -------------------------------------------------------------------------------- 327 ================================================================================ SINGAPORE (1.6%) CapitaLand Ltd. 114,000 73 City Developments Ltd. 34,000 82 DBS Group Holdings Ltd. 15,965 101 Neptune Orient Lines Ltd. (a)201,000 $ 107 SembCorp Industries Ltd. 122,000 55 SembCorp Logistics Ltd. 58 52 Singapore Airlines Ltd. 31,000 182 United Overseas Bank Ltd. 22,416 152 Venture Corp., Ltd. 46,000 369 - -------------------------------------------------------------------------------- 1,173 ================================================================================ SPAIN (1.7%) Amadeus Global Travel Distribution S.A., 90,936 375 Class A Banco Popular Espanol (c)2,294 94 Gas Natural SDG S.A 8,034 152 Telefonica S.A (a)75,701 678 - -------------------------------------------------------------------------------- 1,299 ================================================================================ SWEDEN (1.0%) Assa Abloy AB, Class B (c)13,996 160 Nordea AB 78,713 348 Securitas AB, Class B 8,506 102 Swedish Match AB 20,095 159 - -------------------------------------------------------------------------------- 769 ================================================================================ SWITZERLAND (10.5%) Adecco S.A. (Registered) 3,063 120 Converium Holding AG (a)7,853 381 Credit Suisse Group (a)18,368 399 Holcim Ltd., Class B 2,808 510 Kaba Holdings AG, Class B (Registered) 371 69 Nestle S.A. (Registered) 9,463 2,007 Novartis AG (Registered) 38,737 1,415 Roche Holding AG 8,754 610 Schindler Holding AG (Registered) 1,677 316 Syngenta AG 11,682 677 UBS AG (Registered) (a)23,462 1,141 Zurich Financial Services AG 1,941 181 - -------------------------------------------------------------------------------- 7,826 ================================================================================ UNITED KINGDOM (25.7%) Allied Domecq plc 124,584 797 Amvescap plc 27,985 179 AstraZeneca plc 32,628 1,167 Aviva plc 63,601 454 BAE Systems plc 133,281 266 Barclays plc 119,031 738 BOC Group plc 22,061 316 BP plc 124,664 857 British American Tobacco plc 60,695 607 Cadbury Schweppes plc 79,803 497 Compass Group plc 40,460 215 Diageo plc 37,703 410 GlaxoSmithKline plc 131,524 2,525 GUS plc 19,219 179 Hays plc 407,237 608 HMV Group plc (a)44,392 85 HSBC Holdings plc 78,237 865 Invensys plc 669,946 569 Lloyds TSB Group plc 85,678 615 National Grid Transco plc 25,185 185 Reed Elsevier plc 101,284 868
The accompanying notes are an integral part of the financial statements. 58 MORGAN STANLEY INSTITUTIONAL FUND, INC. International Magnum Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- UNITED KINGDOM (CONT'D) Rentokil Initial plc 245,650 $ 870 Rolls-Royce plc 190,214 328 Sainsbury (J) plc 49,198 221 Shell Transport & Trading Co. plc 227,697 1,500 Smiths Group plc 29,665 332 Vodafone Group plc 1,183,765 2,159 William Hill plc 62,800 230 WPP Group plc 78,517 600 - -------------------------------------------------------------------------------- 19,242 ================================================================================ TOTAL COMMON STOCKS (COST $78,958) 66,307 ================================================================================ PREFERRED STOCK (0.6) ITALY (0.6%) Telecom Italia S.p.A. (RNC) (COST $448) (c)87,210 441 - -------------------------------------------------------------------------------- TOTAL FOREIGN SECURITIES (89.1%) (COST $79,406) 66,748 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS (12.5%) SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (1.6%) Banco Bilbao Viz Argentaria, NY, 1.36%, 4/24/03 $ 235 235 Bank of Nova Scotia, NY, 2.51%, 2/4/03 168 168 Bayrische Hypo-Und Vereinsbank, 1.39%, 3/24/03 84 84 Credit Industrial et Commercial (CIC)/NY, 1.39%, 1/13/03 37 37 Credit Industrial et Commercial (CIC)/NY, 1.39%, 1/15/03 84 84 Credit Lyonnais, 1.39%, 1/27/03 135 135 General Electric Co., 1.37%, 7/17/03 118 118 Lehman Brothers, Inc., 1.35%, 1/2/03 303 303 Lloyds Bank London plc, 2.36%, 2/24/03 84 84 - -------------------------------------------------------------------------------- 1,248 ================================================================================ SHARES - -------------------------------------------------------------------------------- INVESTMENT COMPANIES HELD AS COLLATERAL ON LOANED SECURITIES (1.8%) AIM S.T. Investment Co. 107,668 107 CITI Institutional Liquid Reserve Fund 117,762 118 Dreyfus Cash Management Plus Fund 114,397 114 Evergreen Institutional Money Market Fund 107,668 107 Federated Prime Value Fund 107,668 107 Harris Insight Money Market Fund 117,762 118 Merrill Lynch Premier Institutional Fund 107,668 107 Merrimac Cash Series Fund 117,762 118 Nations Cash Reserve Fund 117,762 118 One Group Institutional Prime Money Market Fund 107,668 107 Reserve Primary Money Market Fund 117,762 118 TempCash Money Market Fund 84,115 84 - -------------------------------------------------------------------------------- 1,323 ================================================================================ FACE AMOUNT VALUE (000) (000) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENT (9.1%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 $ (f)6,808 $ 6,808 - -------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (COST $9,379) 9,379 ================================================================================ Foreign Currency (0.2%) Australian Dollar AUD 24 13 British Pound GBP 60 97 Japanese Yen JPY 5,172 44 Norwegian Krone NOK 1 @-- Singapore Dollar SGD 1 1 Swedish Krona SEK 35 4 Swiss Franc CHF 2 1 - -------------------------------------------------------------------------------- TOTAL FOREIGN CURRENCY (COST $159) 160 ================================================================================ TOTAL INVESTMENTS (101.8%) (COST $88,944) 76,287 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- OTHER ASSETS (2.2%) Receivable Due From Broker $ 1,051 Dividends Receivable 280 Net Unrealized Gain on Foreign Currency Exchange Contracts 248 Receivable for Investments Sold 49 Receivable for Portfolio Shares Sold 47 Other 3 1,678 - -------------------------------------------------------------------------------- LIABILITIES (-4.0%) Collateral on Securities Loaned (2,571) Payable for Portfolio Shares Redeemed (192) Investment Advisory Fees Payable (104) Payable for Investments Purchased (53) Bank Overdraft Payable (36) Custodian Fees Payable (26) Directors' Fees and Expenses Payable (18) Administrative Fees Payable (17) Distribution Fees, Class B (5) Other Liabilities (24) (3,046) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 74,919 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $107,424 Undistributed Net Investment Income (Accumulated Net Investment Loss) 22 Accumulated Net Realized Gain (Loss) (20,135) Unrealized Appreciation (Depreciation) on Investments, Futures and Foreign Currency Translations (12,392) - -------------------------------------------------------------------------------- NET ASSETS $ 74,919 ================================================================================
The accompanying notes are an integral part of the financial statements. 59 MORGAN STANLEY INSTITUTIONAL FUND, INC. International Magnum Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE (000) - -------------------------------------------------------------------------------- CLASS A: NET ASSETS $ 68,275 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 8,486,820 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 8.04 - -------------------------------------------------------------------------------- CLASS B: NET ASSETS $ 6,644 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 826,717 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 8.04 - --------------------------------------------------------------------------------
(a) -- Non-income producing security (c) -- All or a portion of security on loan at December 31, 2002 -- See note A-8 to financial statements. (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. @ -- Value is less than $500. CVA -- Certificaten Van Aandelen RNC -- Non-Convertible Savings Shares FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
CURRENCY IN NET TO EXCHANGE UNREALIZED DELIVER VALUE SETTLEMENT FOR VALUE GAIN/(LOSS) (000) (000) DATE (000) (000) (000) - -------------------------------------------------------------------------------- AUD 86 $ 48 1/2/03 US$ 48 $ 48 $@-- CHF 1 1 1/3/03 US$ 1 1 @-- GBP 1,383 2,216 3/13/03 US$ 2,198 2,198 (18) US$ 2,125 2,125 3/13/03 EUR 2,112 2,211 86 US$ 752 752 3/13/03 EUR 744 779 27 US$ 3,513 3,513 3/13/03 GBP 2,246 3,600 87 US$ 1,480 1,480 3/13/03 GBP 946 1,515 35 US$ 446 446 3/13/03 JPY 54,865 463 17 US$ 419 419 3/13/03 JPY 51,300 433 14 US$ 19 19 1/2/03 SGD 34 19 @-- US$ 34 34 1/3/03 SGD 58 34 @-- ------- ------- ---- $11,053 $11,301 $248 ======= ======= ====
EUR - Euro FUTURES CONTRACTS: The Portfolio had the following futures contract(s) open at period end:
NET NUMBER NOTIONAL UNREALIZED OF VALUE EXPIRATION LOSS CONTRACTS (000) DATE (000) - -------------------------------------------------------------------------------- LONG: HANG SENG Index (Hong Kong) 6 US$ 357 Jan-03 $(12) EURO STOXX 50 Index (Italy) 118 2,967 Mar-03 (55) FTSE 100 Index (United Kingdom) 41 2,583 Mar-03 61 TOPIX Index (Japan) 12 843 Mar-03 (21) ----- $(27) =====
SUMMARY OF TOTAL FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION -- DECEMBER 31, 2002
PERCENT VALUE OF NET INDUSTRY (000) ASSETS - -------------------------------------------------------------------------------- Automobiles $ 1,471 2.0% Banks 7,400 9.9 Beverages 1,949 2.6 Building Products 1,160 1.6 Chemicals 3,106 4.2 Commercial Services & Supplies 2,495 3.3 Communications Equipment 976 1.3 Computers & Peripherals 810 1.1 Diversified Financials 1,378 1.8 Diversified Telecommunication Services 2,631 3.5 Electrical Equipment 815 1.1 Electronic Equipment & Instruments 1,350 1.8 Food Products 3,922 5.2 Household Durables 2,457 3.3 Industrial Conglomerates 938 1.3 Insurance 1,784 2.4 Machinery 2,236 3.0 Media 1,970 2.6 Office Electronics 1,078 1.4 Oil & Gas 6,082 8.1 Pharmaceuticals 8,547 11.4 Real Estate 1,155 1.5 Tobacco 765 1.0 Wireless Telecommunication Services 2,704 3.6 Other 7,569 10.1 - -------------------------------------------------------------------------------- $ 66,748 89.1% ================================================================================
The accompanying notes are an integral part of the financial statements. 60 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview International Small Cap Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) JAPAN 30.9% UNITED KINGDOM 12.3% FRANCE 6.0% SWEDEN 5.5% SWITZERLAND 5.3% OTHER 40.0%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
INTERNATIONAL SMALL MSCI EAFE SMALL CAP PORTFOLIO CAP TOTAL RETURN INDEX MSCI EAFE SMALL CAP INDEX 1992* 500000 500000 500000 1993 726700 685950 685950 1994 764852 742952 742952 1995 784738 727944 727945 1996 916181 726925 726926 1997 912847 547811 547811 1998 950456 577612 577612 1999 1324365 679676 679676 2000 1284858 616942 616942 2001 1209257 528781 528755 2002 1173855 487430 478124
* Commenced operations on December 15, 1992 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE SMALL CAP TOTAL RETURN INDEX (1) AND THE MSCI EAFE SMALL CAP INDEX (2)
TOTAL RETURNS(3) --------------------------------------------------------- AVERAGE ANNUAL ------------------------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION - ----------------------------------------------------------------------------------------------------- Portfolio(4) (2.99)% 5.17% 8.90% 8.96% MSCI EAFE Small Cap Total Return Index (7.82) (2.69) (0.45) (0.44) MSCI EAFE Small Cap Index (9.58) (2.69) (0.45) (0.44)
(1) The Portfolio's performance will be compared with the MSCI EAFE Small Cap Total Return Index, which more accurately reflects the Portfolio's investable universe. This index is an unmanaged market valued weighted average of the performance of over 900 securities of companies listed on the stock exchanges of countries in Europe, Australasia and the Far East, including price performance and income from dividend payments. (2) As of December 31, 2002, the Portfolio's performance is compared with the MSCI EAFE Small Cap Index. This index is an unmanaged market valued weighted average of the performance of over 900 securities of companies listed on the stock exchanges of countries in Europe, Australasia and the Far East. (3) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (4) Commenced operations on December 15, 1992 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The International Small Cap Portfolio seeks long-term capital appreciation by investing primarily in equity securities of small non-U.S. companies. Investments in small sized corporations are more vulnerable to financial risks and other risks than larger corporations and may involve a higher degree of price volatility than investments in the general equity markets. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. For the year ended December 31, 2002, the Portfolio had a total return of -2.99% compared to -9.58% for the Morgan Stanley Capital International (MSCI) EAFE Small Cap Index (the "Index"). MARKET REVIEW While 2002 proved to be another challenging year for equity markets, international small caps continued their relative outperformance against international large caps. Small cap markets rose at the onset of 2002 when economic recovery showed more positive signs with continued high consumer confidence levels and higher demand in Europe and Asia. 61 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview International Small Cap Portfolio (cont'd) However, the continued deluge of corporate scandals, lower corporate earnings and rising geo-political events led markets into negative territory in the last half of 2002 and the Index closed down 9.6%. Stock selection in industrials, the Portfolio's largest allocation, as well as stock selection in and underweight to information technology, were key contributors. In general, holdings within the industrials sector rose on news of a more positive economic environment. In addition, several companies in the sector were subject to takeover activity. The Portfolio's strong performance in information technology was led by its holding in the world's second largest franking machine company, which has experienced consistent revenue growth. In addition, holdings in several Japanese technology companies rebounded on positive news from an increase in capital expenditure. Stock selection in financials proved to be the largest detractor for the year. The Portfolio is underweight in both banks and European real estate, as we believe that the valuation levels and prospects for these industries are not appealing in the current economic environment However, the Portfolio's positions in a Japanese consumer finance company and two Japanese real estate companies declined on sector weakness. The Portfolio's stock selection in healthcare was also a detractor in 2002, as the sector has suffered from a more cautious outlook on growth and some specific issues associated with some of the holdings. Portfolio activity reflected the opportunities to reduce the Portfolio's weighting in some of the stronger performing consumer staples positions and other areas where the fundamental story has weakened and the prospects of the companies have dimmed. The Portfolio's Japanese weighting gradually increased over the year as the depressed Japanese market continued to provide opportunities to find companies with strong franchises and sound balance sheets at appealing valuations. MARKET OUTLOOK The year ahead looks to be as challenging as 2002 with poor consumer and corporate confidence in Europe, weak economic growth, rising consumer debt and increasing tax burdens. We will remain focused on our investment philosophy and process, as we believe the current level of uncertainty does create some opportunities. While in the immediate future we are somewhat careful on the relative performance of small caps versus large caps, in light of the significant de-rating of large cap companies over the last two years, over the longer term it is our opinion that small caps continue to offer significant rewards. January 2003 62 MORGAN STANLEY INSTITUTIONAL FUND, INC. International Small Cap Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (96.4%) AUSTRALIA (4.0%) BHP Steel Ltd. (a)3,426,200 $ 6,210 John Fairfax Holdings Ltd. 2,882,200 5,208 Neverfail Springwater Ltd. 3,846,086 4,619 Ramsay Health Care Ltd. 798,552 1,595 - -------------------------------------------------------------------------------- 17,632 ================================================================================ BELGIUM (1.3%) Omega Pharma S.A 192,115 5,511 - -------------------------------------------------------------------------------- DENMARK (2.2%) Danisco A/S 131,000 4,455 Kobenhavns Lufthavne A/S 73,960 5,333 - -------------------------------------------------------------------------------- 9,788 ================================================================================ FINLAND (4.5%) KCI Konecranes International 106,969 2,616 Kone Oyj, Class B 162,362 4,877 Metso Oyj 430,977 4,661 Rapala VMC Corp. 515,708 2,410 Uponor Oyj 246,728 5,046 - -------------------------------------------------------------------------------- 19,610 ================================================================================ FRANCE (6.0%) Algeco 51,082 3,862 Autoroutes du Sud de la France (a)180,700 4,369 Chargeurs 97,753 2,617 Europeene d'Extincteurs (a)(d)131,043 @-- Kaufman & Broad S.A 56,185 1,082 Neopost S.A (a)300,985 9,702 Zodiac S.A 231,580 4,715 - -------------------------------------------------------------------------------- 26,347 ================================================================================ GERMANY (2.4%) Beru AG 100,315 4,478 Marseille-Kliniken AG 195,496 1,371 MPC Muenchmeyer Petersen Capital AG 147,588 1,588 Pfeiffer Vacuum Technology AG 47,121 943 SCS Standard Computer System AG (d)21,289 @-- Techem AG (a)277,886 2,013 - -------------------------------------------------------------------------------- 10,393 ================================================================================ GREECE (0.5%) Greek Organization of Football Prognostics SA 214,060 2,270 - -------------------------------------------------------------------------------- HONG KONG (1.4%) Asia Satellite Telecommunications Holdings Ltd. 3,282,000 3,851 Television Broadcasts Ltd. 797,000 2,514 - -------------------------------------------------------------------------------- 6,365 ================================================================================ ITALY (5.0%) Buzzi Unicem S.p.A 577,118 4,108 Cassa di Risparmio di Firenze S.p.A 1,943,043 2,387 Davide Campari-Milano S.p.A 298,141 9,319 Parmalat Finanziaria S.p.A 815,950 1,945 SAES Getters S.p.A 96,462 841 SAES Getters S.p.A. (RNC) 163,637 933 Sogefi S.p.A 1,156,000 2,512 - -------------------------------------------------------------------------------- 22,045 ================================================================================ JAPAN (30.9%) Asatsu-DK, Inc. 500,900 $ 8,878 Aiful Corp. 96,050 3,607 Ariake Japan Co., Ltd. 235,600 6,665 Arisawa Manufacturing Co., Ltd. 75,300 1,404 Asia Securities Printing Co., Ltd. 526,000 2,613 Cosel Co., Ltd. 232,600 4,073 Daibiru Corp. 1,354,000 4,503 Fujimi, Inc. 117,600 2,139 Fukuda Denshi Co., Ltd. 270,800 4,332 Hurxley Corp. 246,300 3,339 ITO EN Ltd. 104,600 3,540 Jaccs Co., Ltd. 1,827,000 6,015 Maezawa Kasei Industries Co., Ltd. 194,300 1,902 Megane TOP Co., Ltd. 150,100 1,572 Mirai Industry Co., Ltd. 321,300 1,407 Mori Seiki Co., Ltd. 394,100 2,004 Nichiha Corp. 422,300 2,962 Nippon Broadcasting System, Inc. 102,000 3,049 Nissei Corp. 307,600 1,761 Nitta Corp. 864,600 5,969 Osaka Steel Co., Ltd. 690,600 3,268 Osaki Electric Co., Ltd. 1,564,000 4,122 Pacific Metals Co., Ltd. (a)4,751,000 3,320 Shidax Corp. 2,000 2,526 Shimano, Inc. 475,600 7,208 Shinkawa Ltd. 314,400 5,241 Sumitomo Osaka Cement Co., Ltd. 3,171,000 4,165 Taisei Lamick Co., Ltd. 63,300 1,897 Taiyo Ink Manufacturing Co., Ltd. 92,700 2,615 Tenma Corp. 433,000 3,536 Toc Co., Ltd. 1,819,000 8,102 Tokyo Kikai Seisakusho Ltd. 745,000 1,349 Tomy Co., Ltd. 266,200 2,190 Union Tool Co. 98,400 2,494 Yamaichi Electronics Co., Ltd. 225,000 2,273 Yomiuri Land Co., Ltd. 1,500,000 4,294 Zeon Corp. 1,464,000 5,534 - -------------------------------------------------------------------------------- 135,868 ================================================================================ NETHERLANDS (5.0%) BE Semiconductor Industries (a)539,945 2,409 CSM N.V. CVA 110,656 2,321 IHC Caland N.V 124,901 6,596 Imtech N.V 157,711 2,082 Nutreco Holding N.V 266,041 4,969 OPG Groep N.V. CVA 61,700 2,125 Samas Groep N.V. CVA 293,418 1,664 - -------------------------------------------------------------------------------- 22,166 ================================================================================ NEW ZEALAND (5.1%) Fisher & Paykel Appliances Holdings Ltd. 402,427 2,120 Fisher & Paykel Healthcare Corp., Ltd. 1,082,666 5,363 Fletcher Building Ltd. 3,978,187 6,986 Sky City Entertainment Group Ltd. 1,926,402 8,170 - -------------------------------------------------------------------------------- 22,639 ================================================================================
The accompanying notes are an integral part of the financial statements. 63 MORGAN STANLEY INSTITUTIONAL FUND, INC. International Small Cap Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- NORWAY (1.9%) Gjensidige NOR ASA 220,148 $ 7,215 Storebrand ASA (a)252,640 948 - -------------------------------------------------------------------------------- 8,163 ================================================================================ SPAIN (3.1%) Amadeus Global Travel Distribution S.A., 671,200 2,770 Class A Aurea Concesiones de Infraestructuras S.A 201,540 5,034 Miquel y Costas & Miquel S.A 267,648 6,126 - -------------------------------------------------------------------------------- 13,930 ================================================================================ SWEDEN (5.5%) D. Carnegie & Co., AB 125,100 807 Getinge AB, Class B 279,570 5,732 Haldex AB 221,740 1,992 Hoganas AB, Class B 174,940 3,325 Intrum Justitia AB (a)1,013,856 4,730 Swedish Match AB 949,420 7,492 - -------------------------------------------------------------------------------- 24,078 ================================================================================ SWITZERLAND (5.3%) Converium Holding AG (a)51,700 2,507 Edipresse (Bearer) 15,403 5,129 Galenica Holding AG (Registered), Class B 5,677 5,424 Saurer AG (Registered) (a)52,490 1,168 Valora Holding AG 25,496 4,891 Zehnder Group AG, Class B 7,688 4,035 - -------------------------------------------------------------------------------- 23,154 ================================================================================ UNITED KINGDOM (12.3%) Alliance Unichem plc 423,205 3,047 British Vita plc 867,440 3,367 Cattles plc 1,077,340 5,015 Devro plc 4,046,347 2,868 HMV Group plc (a)2,389,720 4,580 Kensington Group plc 621,793 1,387 Luminar plc 428,300 2,694 Michael Page International plc 1,235,261 2,184 Novar plc 2,166,821 3,828 PHS Group plc 3,964,424 4,980 Regent Inns plc 1,537,063 1,782 SIG plc 1,164,500 3,245 SMG plc 1,173,251 1,757 Spirax-Sarco Engineering plc 673,441 4,491 SSL International plc 942,440 3,890 William Hill plc 683,900 2,500 Xstrata plc (a)252,600 2,640 - -------------------------------------------------------------------------------- 54,255 ================================================================================ TOTAL COMMON STOCKS (COST $478,555) 424,214 ================================================================================ PREFERRED STOCKS (0.9%) GERMANY (0.9%) Hugo Boss AG 115,400 1,164 Sartorius AG 328,921 1,278 Wuerttembergische Metallwarenfabrik AG 150,775 1,518 - -------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS (COST $7,048) 3,960 ================================================================================ TOTAL FOREIGN SECURITIES (97.3%) (COST $485,603) 428,174 ================================================================================ SHORT-TERM INVESTMENT (2.7%) REPURCHASE AGREEMENT (2.7%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 (COST $12,101) $ (f)12,101 $ 12,101 - -------------------------------------------------------------------------------- Foreign Currency (0.0%) Japanese Yen (COST $1) JPY 112 1 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.0%) (COST $497,705) 440,276 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- OTHER ASSETS (0.5%) Foreign Withholding Tax Reclaim Receivable $ 1,068 Receivable for Portfolio Shares Sold 598 Dividends Receivable 323 Net Unrealized Gain on Foreign Currency Exchange Contracts 1 Other 13 2,003 - -------------------------------------------------------------------------------- LIABILITIES (-0.5%) Investment Advisory Fees Payable (970) Payable for Portfolio Shares Redeemed (787) Payable for Investments Purchased (221) Administrative Fees Payable (64) Custodian Fees Payable (44) Directors' Fees and Expenses Payable (31) Other Liabilities (38) (2,155) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 440,124 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 513,934 Undistributed Net Investment Income (Accumulated Net Investment Loss) 416 Accumulated Net Realized Gain (Loss) (16,972) Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Translations (57,254) - -------------------------------------------------------------------------------- NET ASSETS $ 440,124 ================================================================================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 30,969,585 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 14.21 ================================================================================
(a) -- Non-income producing security (d) -- Securities were valued at fair -- See Note A-1 to value financial statements. At December 31, 2002, the Portfolio held fair valued securities representing less than 0.05% of net assets. (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. @ -- Value is less than $500. CVA -- Certificaten Van Aandelen RNC -- Non-Convertible Savings Shares The accompanying notes are an integral part of the financial statements. 64 MORGAN STANLEY INSTITUTIONAL FUND, INC. International Small Cap Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd) FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
CURRENCY IN NET TO EXCHANGE UNREALIZED DELIVER VALUE SETTLEMENT FOR VALUE GAIN/(LOSS) (000) (000) DATE (000) (000) (000) - -------------------------------------------------------------------------- US$ 220 $220 1/7/03 JPY 26,255 $221 $ 1 ==== ====== ==== =====
SUMMARY OF TOTAL FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION -- DECEMBER 31, 2002
PERCENT VALUE OF NET INDUSTRY (000) ASSETS - -------------------------------------------------------------------------------- Aerospace & Defense $ 4,715 1.1% Auto Components 6,990 1.6 Banks 11,796 2.7 Beverages 17,478 4.0 Building Products 15,081 3.4 Chemicals 19,597 4.4 Commercial Services & Supplies 20,086 4.6 Construction Materials 17,162 3.9 Diversified Financials 20,954 4.8 Electrical Equipment 4,943 1.1 Electronic Equipment & Instruments 13,520 3.1 Energy Equipment & Services 6,596 1.5 Food Products 23,223 5.3 Health Care Equipment & Supplies 24,828 5.6 Health Care Providers & Services 13,562 3.1 Hotels, Restaurants & Leisure 24,236 5.5 Household Durables 4,721 1.1 Leisure Equipment & Products 11,807 2.7 Machinery 38,359 8.7 Media 26,534 6.0 Metals & Mining 16,123 3.7 Multiline Retail 4,580 1.0 Office Electronics 9,702 2.2 Paper & Forest Products 6,126 1.4 Real Estate 12,605 2.9 Semiconductor Equipment & Products 7,651 1.7 Specialty Retail 6,463 1.5 Tobacco 7,492 1.7 Transportation Infrastructure 14,737 3.3 Other 16,507 3.7 - -------------------------------------------------------------------------------- $ 428,174 97.3% ================================================================================
The accompanying notes are an integral part of the financial statements. 65 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Japanese Value Equity Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) HOUSEHOLD DURABLES 14.0% CHEMICALS 11.0% MACHINERY 10.5% AUTOMOBILES 9.0% ELECTRONIC EQUIPMENT & INSTRUMENTS 7.6% OTHER 47.9%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
JAPANESE VALUE EQUITY PORTFOLIO-CLASS A MSCI JAPAN INDEX * 500000 500000 1994 491500 512000 1995 473609 515533 1996 466979 435625 1997 423877 332513 1998 461263 349304 1999 755318 564231 2000 576383 405344 2001 403699 286173 2002 358404 256754
* Commenced operations on April 25, 1994 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) JAPAN INDEX(1)
TOTAL RETURNS(2) ----------------------------------------- AVERAGE ANNUAL --------------------------- ONE FIVE SINCE YEAR YEARS INCEPTION - ----------------------------------------------------------------------- Portfolio - Class A(3) (11.22)% (3.30)% (3.76)% Portfolio - Class B(4) (11.39) (3.57) (4.20) Index - Class A (10.28) (5.04) (7.44) Index - Class B (10.28) (5.04) (9.39)
(1) The MSCI Japan Index is an unmanaged index of common stocks. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applica- ble, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on April 25, 1994 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Japanese Value Equity Portfolio seeks long-term capital appreciation by investing primarily in equity securities of Japanese issuers. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. In addition, investing in emerging markets may involve a relative higher degree of volatility. For the year ended December 31, 2002, the Portfolio had a total return of - -11.22% for the Class A shares and -11.39% for the Class B shares compared to - -10.28% for the Morgan Stanley Capital International (MSCI) Japan Index (the "Index"). MARKET REVIEW The Japanese market had provided investors with good relative returns among asset classes during the twelve months ended December 2002, as positive indicators of a cyclical recovery pushed Japanese equities higher throughout the first half of the reporting period. As the period came to a close, however, mounting concerns about the prospects for an economic recovery in the United States led investors to reevaluate the anticipated cyclical recovery in Japan. The fourth quarter began with many market observers believing that Japan's economy might be entering the final phase of its 12-year bear market with the appointment of HeizoTakenaka, the new head of Japan's Financial Services Agency. His initial ideas were perceived to have a negative impact on the economy, and many lower-quality companies and bank shares were sold 66 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Japanese Value Equity Portfolio (cont'd) aggressively on fears of bankruptcies. Japanese corporate earnings, for the six months ending September, showed surprising improvement, especially in recurring profits (ex-financials) and return on equity ratios, owing largely to cost cutting and restructuring efforts over the last several years. The Portfolio's small exposure to the languishing banking sector helped it sidestep major declines in that sector on fears of forced bankruptcies or nationalization. Conversely, the Portfolio's significant exposure to Japanese technology stocks negatively affected its performance, as these issues declined on fears of a deteriorating U.S. economy and rising Japanese yen. Although we believe Japanese technology companies have a generally positive outlook, we modestly reduced the Portfolio's exposure to Japanese technology companies while we increased the number of holdings with measurable positive balance sheet qualities in order to reduce overall tracking error. MARKET OUTLOOK The appointment of a new Bank of Japan governor will likely be the main issue for the first quarter of 2003. With the cyclical recovery beginning to wane, a more liberal governor may provide needed help and incentive for the Koizumi government to push reforms ahead more aggressively. With an election year in 2004, we believe that U.S. authorities will exercise every available option to stimulate the economy through stimulus spending and tax cuts and that the exchange rates between the Japanese yen and the U.S. dollar will remain relatively stable. We believe that select Japanese companies are continuing to reinvent themselves by focusing on their core competencies through restructuring, rationalization of their businesses and presenting attractive global valuation comparisons. January 2003 67 MORGAN STANLEY INSTITUTIONAL FUND, INC. Japanese Value Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (107.3%) AUTOMOBILES (9.0%) Nissan Motor Co., Ltd. 110,000 $ 857 Suzuki Motor Co., Ltd. 53,000 576 Toyota Motor Corp. 29,000 779 - -------------------------------------------------------------------------------- 2,212 ================================================================================ BUILDING PRODUCTS (3.5%) Daikin Industries Ltd. 41,000 649 Sanwa Shutter Corp. 80,000 216 - -------------------------------------------------------------------------------- 865 ================================================================================ CHEMICALS (11.0%) Daicel Chemical Industries Ltd. 140,000 395 Denki Kagaku Kogyo Kabushiki Kaisha 185,000 403 Kaneka Corp. 90,000 481 Lintec Corp. 30,000 235 Mitsubishi Chemical Corp. (a)210,000 419 Nifco, Inc. 35,000 380 Shin-Etsu Polymer Co., Ltd. 62,000 261 Toyo Ink Mfg. Co., Ltd. 45,000 122 - -------------------------------------------------------------------------------- 2,696 ================================================================================ COMMERCIAL SERVICES & SUPPLIES (2.1%) Dai Nippon Printing Co., Ltd. 39,000 431 Nissha Printing Co., Ltd. 11,000 69 - -------------------------------------------------------------------------------- 500 ================================================================================ COMPUTERS & PERIPHERALS (7.4%) Fujitsu Ltd. 130,000 371 Mitsumi Electric Co., Ltd. 41,500 378 NEC Corp. 115,000 430 Toshiba Corp. (a)204,000 639 - -------------------------------------------------------------------------------- 1,818 ================================================================================ CONSTRUCTION & ENGINEERING (1.8%) Kyudenko Corp. 22,000 82 Obayashi Corp. 130,000 289 Sanki Engineering Co., Ltd. 15,000 72 - -------------------------------------------------------------------------------- 443 ================================================================================ DIVERSIFIED FINANCIALS (2.0%) Hitachi Capital Corp. 40,000 479 - -------------------------------------------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES (2.2%) Nippon Telegraph & Telephone Corp. 145 526 - -------------------------------------------------------------------------------- ELECTRIC UTILITIES (1.9%) Tokyo Electric Power Co., Inc. 24,200 459 - -------------------------------------------------------------------------------- ELECTRICAL EQUIPMENT (0.5%) Furukawa Electric Co., Ltd. 52,000 109 - -------------------------------------------------------------------------------- ELECTRONIC EQUIPMENT & INSTRUMENTS (7.6%) Hitachi High-Technologies Corp. 9,000 112 Hitachi Ltd. 130,000 498 Kyocera Corp. 8,800 512 Ryosan Co., Ltd. 26,000 261 TDK Corp. 12,000 483 - -------------------------------------------------------------------------------- 1,866 ================================================================================ FOOD & DRUG RETAILING (2.2%) FamilyMart Co., Ltd. 27,000 529 - -------------------------------------------------------------------------------- FOOD PRODUCTS (2.0%) House Foods Corp. 21,000 $ 198 Nippon Meat Packers, Inc. 30,000 300 - -------------------------------------------------------------------------------- 498 ================================================================================ HOUSEHOLD DURABLES (14.0%) Casio Computer Co., Ltd. 68,000 378 Matsushita Electric Industrial Co., Ltd. 72,000 709 Nintendo Co., Ltd. 7,300 682 Rinnai Corp. 12,000 273 Sangetsu Co., Ltd. 2,000 33 Sekisui Chemical Co., Ltd. 100,000 259 Sekisui House Ltd. 55,000 389 Sony Corp. 17,000 710 - -------------------------------------------------------------------------------- 3,433 ================================================================================ LEISURE EQUIPMENT & PRODUCTS (5.1%) Fuji Photo Film Co., Ltd. 23,000 749 Yamaha Corp. 55,000 508 - -------------------------------------------------------------------------------- 1,257 ================================================================================ MACHINERY (10.5%) Amada Co., Ltd. 110,000 300 Daifuku Co., Ltd. 110,000 330 Fuji Machine Manufacturing Co., Ltd. 18,000 170 Fujitec Co., Ltd. 30,000 156 Kurita Water Industries Ltd. 46,000 463 Minebea Co., Ltd. 97,000 337 Mitsubishi Heavy Industries Ltd. 210,000 513 Tsubakimoto Chain Co. 130,000 307 - -------------------------------------------------------------------------------- 2,576 ================================================================================ MARINE (0.7%) Mitsubishi Logistics Corp. 35,000 171 - -------------------------------------------------------------------------------- MEDIA (0.6%) Toho Co., Ltd. 15,400 148 - -------------------------------------------------------------------------------- OFFICE ELECTRONICS (6.3%) Canon, Inc. 21,000 790 Ricoh Co., Ltd. 46,000 754 - -------------------------------------------------------------------------------- 1,544 ================================================================================ PHARMACEUTICALS (7.5%) Ono Pharmaceutical Co., Ltd. 16,000 483 Sankyo Co., Ltd. 48,000 602 Yamanouchi Pharmaceutical Co., Ltd. 26,000 753 - -------------------------------------------------------------------------------- 1,838 ================================================================================ REAL ESTATE (2.3%) Mitsubishi Estate Co., Ltd. 74,000 563 - -------------------------------------------------------------------------------- ROAD & Rail (2.2%) East Japan Railway Co. 110 546 - -------------------------------------------------------------------------------- SEMICONDUCTOR EQUIPMENT & PRODUCTS (1.3%) Rohm Co., Ltd. 2,400 305 - -------------------------------------------------------------------------------- TEXTILES & APPAREL (0.8%) Nisshinbo Industries, Inc. 53,000 184 - -------------------------------------------------------------------------------- TRADING COMPANIES & DISTRIBUTORS (2.8%) Mitsubishi Corp. 91,000 556 Nagase & Co., Ltd. 30,000 134 - -------------------------------------------------------------------------------- 690 ================================================================================
The accompanying notes are an integral part of the financial statements. 68 MORGAN STANLEY INSTITUTIONAL FUND, INC. Japanese Value Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
FACE AMOUNT VALUE (000) (000) - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $35,800) $ 26,255 ================================================================================ FOREIGN CURRENCY (0.4%) Japanese Yen (COST $96) JPY 11,546 96 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (107.7%) (COST $35,896) 26,351 ================================================================================ VALUE (000) ================================================================================ OTHER ASSETS (0.2%) Receivable for Portfolio Shares Sold $ 47 Dividends Receivable 3 Other 3 53 - -------------------------------------------------------------------------------- LIABILITIES (-7.9%) Bank Overdraft Payable (1,735) Payable for Portfolio Shares Redeemed (147) Investment Advisory Fees Payable (21) Directors' Fees and Expenses Payable (11) Custodian Fees Payable (7) Administrative Fees Payable (6) Other Liabilities (10) (1,937) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 24,467 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 74,084 Undistributed Net Investment Income (Accumulated Net Investment Loss) (11) Accumulated Net Realized Gain (Loss) (40,063) Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Translations (9,543) - -------------------------------------------------------------------------------- NET ASSETS $ 24,467 ================================================================================ CLASS A: NET ASSETS $ 24,159 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 5,189,010 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 4.66 ================================================================================== CLASS B: NET ASSETS $ 308 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 67,182 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 4.59 ================================================================================
(a) -- Non-income producing security The accompanying notes are an integral part of the financial statements. 69 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Latin American Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) MEXICO 51.6% BRAZIL 35.6% CHILE 4.9% ARGENTINA 2.5% VENEZUELA 1.8% OTHER 3.6%
[CHART] COMPARISON OF THE CHNAGE IN VALUE OF $500,000** INVESTMENT
LATIN AMERICAN PORTFOLIO-CLASS A MSCI EMERGING MARKETS FREE LATIN AMERICAN INDEX * 500000 500000 1995 456600 459800 1996 679284 560726 1997 959692 738252 1998 603647 477723 1999 1033927 790393 2000 866326 658714 2001 853504 655208 2002 678109 507786
* Commenced operations on January 18, 1995 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS FREE LATIN AMERICA INDEX(1)
TOTAL RETURNS(2) ----------------------------------------- AVERAGE ANNUAL --------------------------- ONE FIVE SINCE YEAR YEARS INCEPTION - ----------------------------------------------------------------------- Portfolio - Class A(3) (20.55)% (6.69)% 3.92% Portfolio - Class B(4) (20.83) (6.85) 4.97 Index - Class A (22.50) (7.91) (0.21) Index - Class B (22.50) (7.91) 0.57
(1) The MSCI Emerging Markets Free Latin America Index (the "Index") is a broad based market cap weighted composite index covering at least 60% of markets in Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. The Index takes into account local market restrictions for specific securities or classes of shares that may be excluded from or limited for foreign investor ownership. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applica- ble, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on January 18, 1995 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Latin American Portfolio seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of Latin American issuers. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. In addition, investing in emerging markets may involve a relative higher degree of volatility. For the year ended December 31, 2002, the Portfolio had a total return of - -20.55% for the Class A shares and -20.83% for the Class B shares compared to - -22.50% for the Morgan Stanley Capital International (MSCI) Emerging Markets Free Latin America Index (the "Index"). MARKET REVIEW The Portfolio's underweight stance in Argentina (-50.7%) coupled with overweight positions in Mexico (-13.3%) and Venezuela (-15.8%) were the primary contributors to relative performance, while an underweight position in Peru (+29.1%) and Colombia (+24.8%) hurt performance. Stock selection in Mexico, Venezuela and Brazil contributed positively to relative performance, while stock selection in Chile was weak. In 2002, Latin American markets finished down 22.5% in U.S. dollar terms, their worst performance since 1998. All but 70 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Latin American Portfolio (cont'd) a few smaller less liquid markets of Colombia (+24.8%) and Peru (+29.1%) declined in 2002, with particularly poor performance from Argentina (-50.7%), Brazil (-30.7%) and Chile (-20.3%). Overall performance was hampered by weak global economic growth, domestic concerns in the region, increased geo-political risk and the continued sell off of U.S. equities. Latin American markets, led by strong country returns in Mexico and Brazil, started the year in positive territory as equities in the region were supported by early year expectations of a U.S. led economic recovery and positive economic data from select Latin American countries. However, after outperforming other asset classes during the first quarter and rebounding 37.2% from September 2001 lows, performance in the region turned negative during the second and third quarters. The Latin American region weakened sharply declining 40.5% during the six months ending September 30, 2002. Risk aversion increased on a global basis during the second quarter, dominated by negative sentiment toward Brazil (due to a poor political outlook and financial woes) and greater uncertainty over the global backdrop. A lack of confidence in Mexico and Chile and the continuing crisis in Argentina only served to weigh down market performance. Meanwhile, increased reports of corporate accounting fraud and concerns over the strength of the U.S. economic recovery coupled with geo-political risks in the Asian sub-continent and the Middle East served to undermine investor confidence for much of the year. Nevertheless, amid a more favorable tone in U.S. equities, particularly in the months of October and November, Latin American markets rebounded given reduced political concerns in Brazil and generally supportive corporate and economic data. Latin American markets ended the period in review with a strong 20.5% fourth quarter return. MARKET OUTLOOK We remain positive in Latin markets due to valuations and sentiment. Near-term, however, global equities are likely to remain volatile given concerns over high oil prices due to the crises in Iraq and Venezuela, as well as economic uncertainties in the U.S., Japan and Germany. Nevertheless, our expectations are for oil prices to fall to more normal levels once the crisis in Iraq passes and for global economies led by the U.S. to recover in the second half of this year. Any increase in U.S. economic growth benefits the Mexican economy, is supportive of the peso and improves the underlying earnings outlook for Mexican companies. A majority of Mexican equities now trade at historical lows on valuations relative to their own history and are attractive relative to global peers. In Brazil, we are cautiously optimistic in the short-term and neutral in the medium-term. In the short-term we expect President Lula to continue to build credibility by appointing an efficient economic team. Medium-term concerns lie in implementation risk due to the possible slowdown in much needed reforms and poor management of state companies' cash flows. With the elections now over, market-friendly economic policy announcements by Lula's administration team will be key to avoiding a crisis. Nevertheless, the economic environment for Latin America in 2003-2004 is expected to improve slightly from 2002. Economic activity is expected to remain strong in Peru and is expected to stabilize and recover in Mexico, Chile and Venezuela thus helping to support overall market sentiment. January 2003 71 MORGAN STANLEY INSTITUTIONAL FUND, INC. Latin American Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (96.4%) ARGENTINA (2.5%) Quilmes Industrial S.A. ADR (a)13,502 $ 84 Tenaris S.A. ADR (a)19,065 366 - -------------------------------------------------------------------------------- 450 ================================================================================ BRAZIL (35.6%) Aracruz Celulose S.A. ADR 8,600 160 Banco Bradesco S.A. ADR 23,840 355 Banco Itau S.A. ADR 18,931 451 Banco Nacional S.A. (Preferred) (a)(d)11,847,000 @-- Brasil Telecom Participacoes S.A. ADR 10,429 263 CEMIG S.A. ADR 24,724 181 Cia Brasileira de Distribuicao Grupo Pao de Acucar ADR 4,500 69 Cia Siderurgica Nacional S.A. ADR 18,388 264 Companhia de Bebidas das Americas ADR 72,698 1,131 CVRD (Bonus Shares) 34,986 @-- CVRD ADR 22,290 645 CVRD ADR (Preferred) 20,813 572 Empresa Brasileira de Aeronautica S.A. ADR 29,206 464 Gerdau S.A. ADR 22,963 204 Lojas Arapua (Preferred) (a)(d)10,009,300 @-- Lojas Arapua GDR (Preferred) (a)(d)(e)13,460 @-- Petrobras ADR 72,814 1,088 Petrobras ADR (Preferred) 30,736 412 Tele Centro Oeste Celular Participacoes S.A. ADR 30,600 123 Tele Leste Celular Participacoes S.A. (Preferred) 1 @-- Votorantim Celulose e Papel S.A. ADR 7,192 118 - -------------------------------------------------------------------------------- 6,500 ================================================================================ CHILE (4.9%) Banco de Chile ADR 10,766 172 Banco Santander Chile S.A. ADR 14,416 268 CCU ADR 26,414 386 Distribucion y Servicio D&S S.A. ADR 6,821 68 - -------------------------------------------------------------------------------- 894 ================================================================================ MEXICO (51.6%) America Movil S.A. de C.V., Series L ADR 113,623 1,632 America Telecom S.A. de C.V. (a)56,636 33 Carso Global Telecom S.A. de C.V. (a)56,936 64 Cemex S.A. de C.V. 85,929 372 Cemex S.A. de C.V. ADR 8,074 174 Femsa 40,400 147 Femsa ADR 14,905 543 Grupo Aeroportuario del Sureste S.A. de C.V. ADR 1,310 15 Grupo Aeroportuario del Sureste S.A. de C.V., Class B 142,100 158 Grupo Financiero BBVA Bancomer S.A., Class B (a)1,391,361 1,061 Grupo Modelo S.A., Class C 240,454 591 Kimberly-Clark de Mexico, Class A 125,562 291 Panamerican Beverages, Inc., Class A 8,666 180 Telmex, Class L ADR 91,996 2,942 Wal-Mart de Mexico ADR 980 22 Wal-Mart de Mexico, Series C 100,079 195 Wal-Mart de Mexico, Series V 428,780 $ 984 - -------------------------------------------------------------------------------- 9,404 ================================================================================ VENEZUELA (1.8%) CANTV ADR 25,454 321 - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $21,222) 17,569 ================================================================================ TOTAL FOREIGN SECURITIES (96.4%) (COST $21,222) 17,569 ================================================================================ FACE AMOUNT (000) ================================================================================ SHORT-TERM INVESTMENT (3.6%) REPURCHASE AGREEMENT (3.6%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 (COST $648) $ (f)648 648 - -------------------------------------------------------------------------------- FOREIGN CURRENCY (0.1%) Brazilian Real (COST $27) BRL 93 26 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.1%) (COST $21,897) 18,243 ================================================================================ VALUE (000) ================================================================================ OTHER ASSETS (1.0%) Cash $ 1 Dividends Receivable 105 Receivable for Investments Sold 86 192 - -------------------------------------------------------------------------------- LIABILITIES (-1.1%) Payable for Investments Purchased (134) Investment Advisory Fees Payable (48) Custodian Fees Payable (7) Administrative Fees Payable (5) Directors' Fees and Expenses Payable (4) Other Liabilities (9) (207) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 18,228 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 50,447 Undistributed Net Investment Income (Accumulated Net Investment Loss) 8 Accumulated Net Realized Gain (Loss) (28,572) Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Translations (3,655) - -------------------------------------------------------------------------------- NET ASSETS $ 18,228 ================================================================================ CLASS A: NET ASSETS $ 18,032 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 2,530,128 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 7.13 ================================================================================ CLASS B: NET ASSETS $ 196 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 27,480 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 7.15 ================================================================================
The accompanying notes are an integral part of the financial statements. 72 MORGAN STANLEY INSTITUTIONAL FUND, INC. Latin American Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd) (a) -- Non-income producing security (d) -- Securities were valued at fair value -- See Note A-1 to financial statement. At December 31, 2002, the Portfolio held fair valued securities representing less than 0.05% of net assets. (e) -- 144A security - certain conditions for public sale may exist. (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. @ -- Value is less than $500. ADR -- American Depositary Receipts GDR -- Global Depositary Receipts FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
CURRENCY IN NET TO EXCHANGE UNREALIZED DELIVER VALUE SETTLEMENT FOR VALUE GAIN/(LOSS) (000) (000) DATE (000) (000) (000) - ------------------------------------------------------------------------------ US$ 15 $ 15 1/2/03 MXN 153 $ 15 $@-- ====== ===== ====
MXN - Mexican Peso ======================================================================== SUMMARY OF TOTAL FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION -- DECEMBER 31, 2002
PERCENT VALUE OF NET INDUSTRY (000) ASSETS - ------------------------------------------------------------------------ Aerospace & Defense $ 464 2.6% Banks 2,136 11.7 Beverages 3,062 16.8 Construction Materials 546 3.0 Diversified Telecommunication Services 3,590 19.7 Electric Utilities 181 1.0 Energy Equipment & Services 366 2.0 Household Products 291 1.6 Metals & Mining 1,685 9.2 Multiline Retail 1,201 6.6 Oil & Gas 1,500 8.2 Paper & Forest Products 278 1.5 Transportation Infrastructure 173 1.0 Wireless Telecommunication Services 1,787 9.8 Other 309 1.7 - ------------------------------------------------------------------------ $ 17,569 96.4% ========================================================================
The accompanying notes are an integral part of the financial statements. 73 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Equity Growth Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) HEALTH CARE 22.6% INFORMATION TECHNOLOGY 20.4% FINANCIALS 13.2% CONSUMER DISCRETIONARY 11.8% CONSUMER STAPLES 11.3% OTHER 20.7%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
EQUITY GROWTH PORTFOLIO-CLASS A S&P 500 INDEX * 500000 500000 1993 521650 550320 1994 538656 557696 1995 781159 767077 1996 1023083 943229 1997 1343548 1257928 1998 1599413 1617368 1999 2237483 1957727 2000 1973908 1779280 2001 1678414 1567991 2002 1214343 1220906
** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE S&P 500 INDEX(1)
TOTAL RETURNS(2) ------------------------------------------------------ AVERAGE ANNUAL ---------------------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION - ------------------------------------------------------------------------------------ Portfolio - Class A (3) (27.64)% (2.00)% 9.28% 9.61% Portfolio - Class B (4) (27.75) (2.24) N/A 6.17 Index - Class A (22.09) (0.58) 9.35 9.59 Index - Class B (22.09) (0.58) N/A 6.76
(1) The S&P 500 Index is comprised of the stocks of 500 large-cap U.S. companies with market capitalization of $1 billion or more. These 500 companies represent approximately 100 industries chosen mainly for market size, liquidity and industry group representation. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applica- ble, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on April 2, 1991 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Equity Growth Portfolio seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of large capitalization companies. For the year ended December 31, 2002, the Portfolio had a total return of - -27.64% for the Class A shares and -27.75% for the Class B shares compared to - -22.09% for the S&P 500 Index (the "Index"). MARKET REVIEW During 2002, domestic equities declined for a third straight year, the first time that has occurred since 1939 - 1941. Despite a rally during the fourth quarter, the Index finished the year down more than 22%, its worst year since 1974. Growth stocks were particularly hard hit across the capitalization spectrum and weakness was especially pronounced in the traditional growth areas of technology, biotechnology and telecommunication services. Although the Portfolio under performed the Index for the year, it exceeded both the Russell 1000 Growth Index and the Lipper peer group median. Security selection was weak in consumer discretionary and industrials. Some major retailers turned in disappointing years due to slower consumer spending. Industrial performance was dragged down by major companies. One company is an industrial conglomerate that was in the wake of Enron-related fears and comprised of a number of seemingly valuable businesses. Our portfolio managers liquidated the Portfolio's position during January when company management was considering spin-offs of the 74 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Equity Growth Portfolio (cont'd) individual businesses. We viewed the diversified business as attractive. Spin-offs, in our opinion, would only dilute shareholder value. In terms of allocation, our underweight to energy detracted from performance. We view exploration and production companies as a hedge given the possibility of war. We favor diversified financial companies, however, an underweight to financials detracted from performance. A diversified financial company experienced an exceptional growth in 2002 due to the mortgage refinance boom. Our overweight to information technology detracted from relative performance. The second half recovery did not unfold as businesses chose to hang on to their capital and postponed technology spending. Our largest percentage of technology investments has positioned the Portfolio to benefit from a possible recovery in technology. Our overweight to health care was positive, however, security selection detracted from relative performance. MARKET OUTLOOK We are cautiously optimistic the economic recovery will continue as we see signs of stabilization. Recent data on purchasing activity are encouraging and we see early stage positives in areas such as advertising. Consumer spending has slowed somewhat, and in our view, what needs to unfold to sustain the recovery is a pickup in corporate spending. At this point, there is not a great deal of visibility for the vast number of companies we follow. Geo-political concerns around oil and the possibility of war continue to cast a cloud for individual companies and the markets in general. We continue to invest in a mix of stable and cyclical growth companies and at the margin will look to add beta to the Portfolio in anticipation of a recovery. January 2003 75 MORGAN STANLEY INSTITUTIONAL FUND, INC. Equity Growth Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (96.0%) CONSUMER DISCRETIONARY (11.8%) AUTOMOBILES (0.5%) Harley-Davidson, Inc. 68,500 $ 3,165 - -------------------------------------------------------------------------------- HOTELS, RESTAURANTS & LEISURE (0.6%) Wendy's International, Inc. 37,600 1,018 YUM! Brands, Inc. (a)102,650 2,486 - -------------------------------------------------------------------------------- 3,504 ================================================================================ MEDIA (2.7%) Clear Channel Communications, Inc. (a)52,800 1,969 Gannett Co., Inc. 51,850 3,723 Univision Communications, Inc., Class A (a)(c)188,775 4,625 Viacom, Inc., Class B (a)128,780 5,249 - -------------------------------------------------------------------------------- 15,566 ================================================================================ MULTILINE RETAIL (5.0%) Costco Wholesale Corp. (a)37,288 1,046 Dollar General Corp. 144,125 1,722 Dollar Tree Stores, Inc. (a)61,000 1,499 Kohl's Corp. (a)62,925 3,521 Target Corp. 59,400 1,782 Wal-Mart Stores, Inc. 392,738 19,837 - -------------------------------------------------------------------------------- 29,407 ================================================================================ SPECIALTY RETAIL (3.0%) Bed Bath & Beyond, Inc. (a)76,300 2,635 Home Depot, Inc. 252,945 6,060 Limited Brands 113,063 1,575 Lowe's Cos., Inc. 98,900 3,709 Tiffany & Co. 63,150 1,510 TJX Cos., Inc. 120,100 2,344 - -------------------------------------------------------------------------------- 17,833 ================================================================================ 69,475 ================================================================================ CONSUMER STAPLES (11.3%) BEVERAGES (4.5%) Anheuser Busch Cos., Inc. 97,220 4,705 Coca Cola Co. (The) 270,663 11,861 Coca Cola Enterprises, Inc. 29,200 634 PepsiCo., Inc. 226,370 9,557 - -------------------------------------------------------------------------------- 26,757 ================================================================================ FOOD & DRUG RETAILING (1.1%) Sysco Corp. 97,000 2,889 Walgreen Co. 126,750 3,700 - -------------------------------------------------------------------------------- 6,589 ================================================================================ FOOD PRODUCTS (0.9%) Kraft Foods, Inc., Class A 135,650 5,281 - -------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS (3.2%) Colgate-Palmolive Co. 68,388 3,585 Procter & Gamble Co. 175,888 15,116 - -------------------------------------------------------------------------------- 18,701 ================================================================================ PERSONAL PRODUCTS (0.8%) Alberto-Culver Co., Class B (c)47,700 2,404 Gillette Co. (The) 83,850 2,546 - -------------------------------------------------------------------------------- 4,950 ================================================================================ TOBACCO (0.8%) Philip Morris Cos., Inc. 108,500 $ 4,398 - -------------------------------------------------------------------------------- 66,676 ================================================================================ ENERGY (4.6%) ENERGY EQUIPMENT & SERVICES (2.1%) Baker Hughes, Inc. 225,775 7,268 BJ Services Co. (a)118,675 3,835 Smith International, Inc. (a)36,000 1,174 - -------------------------------------------------------------------------------- 12,277 ================================================================================ OIL & GAS (2.5%) Exxon Mobil Corp. 428,600 14,975 - -------------------------------------------------------------------------------- 27,252 ================================================================================ FINANCIALS (13.2%) BANKS (1.5%) Bank of New York Co., Inc. (The) 66,500 1,593 Fifth Third Bancorp 68,725 4,024 Wells Fargo & Co. 62,800 2,944 - -------------------------------------------------------------------------------- 8,561 ================================================================================ DIVERSIFIED FINANCIALS (9.0%) American Express Co. 179,650 6,351 Charles Schwab Corp. (The) 109,550 1,188 Citigroup, Inc. 466,379 16,412 Freddie Mac 398,588 23,536 Goldman Sachs Group, Inc. 80,715 5,497 - -------------------------------------------------------------------------------- 52,984 ================================================================================ INSURANCE (2.7%) American International Group, Inc. 272,900 15,787 - -------------------------------------------------------------------------------- 77,332 ================================================================================ HEALTH CARE (22.6%) BIOTECHNOLOGY (2.1%) Amgen, Inc. (a)217,333 10,506 Celgene Corp. (a)(c)38,375 824 Gilead Sciences, Inc. (a)27,725 943 - -------------------------------------------------------------------------------- 12,273 ================================================================================ HEALTH CARE EQUIPMENT & SUPPLIES (1.6%) Medtronic, Inc. 202,000 9,211 - -------------------------------------------------------------------------------- HEALTH CARE PROVIDERS & SERVICES (3.3%) AmerisourceBergen Corp. 64,100 3,481 Cardinal Health, Inc. 37,425 2,215 HCA, Inc. (c)106,550 4,422 UnitedHealth Group, Inc. 116,000 9,686 - -------------------------------------------------------------------------------- 19,804 ================================================================================ PHARMACEUTICALS (15.6%) Abbott Laboratories 187,613 7,505 Bristol-Myers Squibb Co. 129,900 3,007 Eli Lilly & Co. 115,400 7,328 Johnson & Johnson 433,200 23,267 Merck & Co., Inc. 189,675 10,737 Pfizer, Inc. 849,975 25,984 Pharmacia Corp. 178,577 7,465
The accompanying notes are an integral part of the financial statements. 76 MORGAN STANLEY INSTITUTIONAL FUND, INC. Equity Growth Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- HEALTH CARE (CONT'D) PHARMACEUTICALS (CONT'D) Wyeth 176,238 $ 6,591 - -------------------------------------------------------------------------------- 91,884 ================================================================================ 133,172 ================================================================================ INDUSTRIALS (10.6%) AEROSPACE & DEFENSE (2.4%) General Dynamics Corp. 42,050 3,337 Lockheed Martin Corp. 113,450 6,552 United Technologies Corp. 72,175 4,471 - -------------------------------------------------------------------------------- 14,360 ================================================================================ COMMERCIAL SERVICES & SUPPLIES (2.1%) Apollo Group, Inc., Class A (a)44,650 1,965 Automatic Data Processing, Inc. 80,050 3,142 First Data Corp. 102,700 3,636 Weight Watchers International, Inc. (a)(c)72,575 3,336 - -------------------------------------------------------------------------------- 12,079 ================================================================================ INDUSTRIAL CONGLOMERATES (6.1%) 3M Co. 57,700 7,115 General Electric Co. 1,187,600 28,918 - -------------------------------------------------------------------------------- 36,033 ================================================================================ 62,472 ================================================================================ INFORMATION TECHNOLOGY (20.4%) COMMUNICATIONS EQUIPMENT (2.6%) Cisco Systems, Inc. (a)832,350 10,904 Motorola, Inc. 115,750 1,001 QUALCOMM, Inc. (a)95,713 3,483 - -------------------------------------------------------------------------------- 15,388 ================================================================================ COMPUTERS & PERIPHERALS (3.8%) Dell Computer Corp. (a)367,825 9,836 EMC Corp. (a)183,025 1,124 Hewlett-Packard Co. 149,800 2,600 International Business Machines Corp. 115,350 8,939 Seagate Technology, Inc. 186,100 @-- - -------------------------------------------------------------------------------- 22,499 ================================================================================ ELECTRONIC EQUIPMENT & INSTRUMENTS (0.3%) Jabil Circuit, Inc. (a)(c)93,530 1,676 - -------------------------------------------------------------------------------- IT CONSULTING & SERVICES (0.3%) SunGard Data Systems, Inc. (a)63,820 1,504 - -------------------------------------------------------------------------------- SEMICONDUCTOR EQUIPMENT & PRODUCTS (5.0%) Applied Materials, Inc. (a)248,351 3,236 Intel Corp. 801,925 12,486 Linear Technology Corp. 84,650 2,177 Maxim Integrated Products, Inc. 65,475 2,163 Microchip Technology, Inc. 76,600 1,873 Novellus Systems, Inc. (a)62,400 1,752 Texas Instruments, Inc. 236,250 3,546 Xilinx, Inc. (a)95,275 1,963 - -------------------------------------------------------------------------------- 29,196 ================================================================================ SOFTWARE (8.4%) Adobe Systems, Inc. 47,300 1,173 Electronic Arts, Inc. (a)38,700 1,926 Microsoft Corp. (a)703,063 $ 36,349 Oracle Corp. (a)628,800 6,791 Peoplesoft, Inc. (a)36,400 666 Symantec Corp. (a)31,700 1,284 VERITAS Software Corp. (a)96,750 1,511 - -------------------------------------------------------------------------------- 49,700 ================================================================================ 119,963 ================================================================================ TELECOMMUNICATION SERVICES (1.5%) DIVERSIFIED TELECOMMUNICATION SERVICES (1.2%) Verizon Communications, Inc. 182,581 7,075 - -------------------------------------------------------------------------------- WIRELESS TELECOMMUNICATION SERVICES (0.3%) AT&T Wireless Services, Inc. (a)121,300 685 Nextel Communications, Inc., Class A (a)(c)73,800 853 - -------------------------------------------------------------------------------- 1,538 ================================================================================ 8,613 ================================================================================ TOTAL COMMON STOCKS (COST $597,707) 564,955 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS (6.3%) SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (1.0%) Banco Bilbao Viz Argentaria, NY, 1.36%, 4/24/03 $ 1,105 1,105 Bank of Nova Scotia, NY, 2.51%, 2/4/03 790 790 Bayrische Hypo-Und Vereinsbank, 1.39%, 3/24/03 395 395 Credit Industrial et Commercial (CIC)/NY, 1.39%, 1/13/03 395 395 Credit Industrial et Commercial (CIC)/NY, 1.39%, 1/15/03 158 158 Credit Lyonnais, 1.39%, 1/27/03 631 631 General Electric Co., 1.37%, 7/17/03 552 552 Lehman Brothers, Inc., 1.35%, 1/2/03 1,420 1,420 Lloyds Bank London plc, 2.36%, 2/24/03 395 395 - -------------------------------------------------------------------------------- 5,841 ================================================================================ SHARES - -------------------------------------------------------------------------------- INVESTMENT COMPANIES HELD AS COLLATERAL ON LOANED SECURITIES (1.0%) AIM S.T. Investment Co. 505,159 505 CITI Institutional Liquid Reserve Fund 552,518 553 Dreyfus Cash Management Plus Fund 536,732 536 Evergreen Institutional Money Market Fund 505,159 505 Federated Prime Value Fund 505,159 505 Harris Insight Money Market Fund 552,518 553 Merrill Lynch Premier Institutional Fund 505,159 505 Merrimac Cash Series Fund 552,518 553 Nations Cash Reserve Fund 552,518 553 One Group Institutional Prime Money Market 505,159 505 Fund Reserve Primary Money Market Fund 552,518 553 TempCash Money Market Fund 394,656 394 - -------------------------------------------------------------------------------- 6,220 ================================================================================ The accompanying notes are an integral part of the financial statements. 77 MORGAN STANLEY INSTITUTIONAL FUND, INC. Equity Growth Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd) FACE AMOUNT VALUE (000) (000) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENT (4.3%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 $ (f)25,361 $ 25,361 - -------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (COST $37,422) 37,422 ================================================================================ TOTAL INVESTMENTS (102.3%) (COST $635,129) 602,377 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- OTHER ASSETS (2.3%) Receivable for Investments Sold 12,517 Dividends Receivable 633 Receivable for Portfolio Shares Sold 600 Interest Receivable 30 Other 13 13,793 - -------------------------------------------------------------------------------- LIABILITIES (-4.6%) Payable for Investments Purchased (13,461) Collateral on Securities Loaned (12,061) Investment Advisory Fees Payable (941) Payable for Portfolio Shares Redeemed (656) Distribution Fees, Class B (104) Administrative Fees Payable (92) Directors' Fees and Expenses Payable (84) Custodian Fees Payable (14) Other Liabilities (49) (27,462) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 588,708 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 847,283 Undistributed (Distributions in Excess of) Net Investment Income (37) Accumulated Net Realized Gain (Loss) (225,786) Unrealized Appreciation (Depreciation) on Investments (32,752) - -------------------------------------------------------------------------------- NET ASSETS $ 588,708 ================================================================================ CLASS A: NET ASSETS $ 432,207 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 34,604,652 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 12.49 ================================================================================= CLASS B: NET ASSETS $ 156,501 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 12,683,205 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 12.34 =================================================================================
(a) -- Non-income producing security (c) -- All or a portion of security on loan at See note December 31, 2002 -- See note A-8 to financial statements. (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. @ -- Value is less than $500. The accompanying notes are an integral part of the financial statements. 78 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Focus Equity Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) HEALTH CARE 23.3% INFORMATION TECHNOLOGY 22.2% FINANCIALS 12.5% CONSUMER DISCRETIONARY 11.2% INDUSTRIALS 9.9% OTHER 20.9%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
FOCUS EQUITY PORTFOLIO - CLASS A S&P 500 INDEX * 500000 500000 1995 706250 650860 1996 995106 800285 1997 1326576 1067260 1998 1530205 1372176 1999 2240832 1660883 2000 1979551 1509410 2001 1678263 1330092 2002 1194755 1036275
* Commenced operations on March 8, 1995 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE S&P 500 INDEX AND THE LIPPER LARGE CAP GROWTH INDEX(1)
TOTAL RETURNS(2) ----------------------------------------- AVERAGE ANNUAL --------------------------- ONE FIVE SINCE YEAR YEARS INCEPTION - ----------------------------------------------------------------------------------- Portfolio - Class A (3) (28.81)% (2.07)% 11.79% Portfolio - Class B (4) (28.92) (2.29) 7.46 S&P 500 Index - Class A (22.09) (0.58) 9.77 S&P 500 Index - Class B (22.09) (0.58) 6.76 Lipper Large Cap Growth Index - Class A (28.11) (4.16) 6.34 Lipper Large Cap Growth Index - Class B (28.11) (4.16) 3.14
(1) The S&P 500 Index is an unmanaged stock index comprised of 500 large-cap U.S. companies with market capitalization of $1 billion or more. The Lipper Large Cap Growth Index is a composite of mutual funds managed for maximum capital gains. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applica- ble, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on March 8, 1995 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Focus Equity Portfolio seeks capital appreciation by investing primarily in growth-oriented equity securities of large capitalization companies. The Portfolio's concentration of its assets in a small number of issuers will subject it to greater risks. For the year ended December 31, 2002, the Portfolio had a total return of - -28.81% for the Class A shares and -28.92% for the Class B shares compared to - -22.09% for the S&P 500 Index (the "S&P Index") and -28.11% for the Lipper Large Cap Growth Index. MARKET REVIEW During 2002, domestic equities declined for a third straight year, the first time that has occurred since 1939 - 1941. Despite a rally during the fourth quarter, the S&P Index finished the year down more than 22%, its worst year since 1974. Growth stocks were particularly hard hit across the capitalization spectrum and weakness was especially pronounced in the traditional growth areas of technology, biotechnology and telecommunication services. The Portfolio under performed the S&P Index for the year. Security selection and sector allocation both detracted from performance relative to the S&P Index. Of particular note, security selection was weak in consumer discretionary and industrials. Some major retailers turned in disappointing years. Industrial performance was dragged down by major companies. One company is an industrial conglomerate that 79 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Focus Equity Portfolio (cont'd) was in the wake of Enron-related fears and comprised of a number of seemingly valuable businesses. Our portfolio managers liquidated the Portfolio's position during January when company management was considering spin-offs of the individual businesses. We viewed the diversified business as attractive. Spin-offs, in our opinion, would only dilute shareholder value. One major company experienced a cyclical downturn in its power systems business and its insurance business is down sharply as a result of a $1.4 billion restructuring charge. The other units of the company were not able to offset these events. In terms of allocation, three sectors figured prominently in the Portfolio's under performance. The Portfolio's underweight in energy detracted from performance. We found growth opportunities in exploration and production companies which we view as a hedge given the possibility of war. The underweight in financials had an adverse impact on performance. We favor diversified financial companies which demonstrate growth opportunities. The Portfolio's overweight in information technology detracted from relative performance. It was widely viewed that technology companies were poised for a second half recovery. Unfortunately, businesses chose to hold on to their capital and postponed technology spending. Stock selection within technology contributed to relative performance. The Portfolio's largest percentage of technology investments has positioned it to benefit from a possible recovery in technology and we believe these dominant players will continue to take market share from their smaller rivals. Health care represented the heaviest weight in the Portfolio and largest bet relative to the Index. In our view, pharmaceutical and biotechnology companies have compelling growth prospects. We take a portfolio approach to investing in this space by owning a number of companies. MARKET OUTLOOK We see signs of stabilization and are cautiously optimistic the economic recovery will continue. Recent data on purchasing activity are encouraging and we see early stage positives in areas such as advertising. Consumer spending has slowed somewhat, and in our view, what needs to unfold to sustain the recovery is a pickup in corporate spending. At this point, there is not a great deal of visibility for the vast number of companies we follow. Geo-political concerns around oil and the possibility of war continue to cast a cloud for individual companies and the markets in general. We continue to invest in a mix of stable and cyclical growth companies and at the margin will look to add beta to the Portfolio in anticipation of a recovery. January 2003 80 MORGAN STANLEY INSTITUTIONAL FUND, INC. Focus Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (94.3%) CONSUMER DISCRETIONARY (11.2%) MEDIA (2.8%) Clear Channel Communications, Inc. (a)28,100 $ 1,048 Univision Communications, Inc. (a)22,750 557 - -------------------------------------------------------------------------------- 1,605 ================================================================================ MULTILINE RETAIL (5.1%) Kohl's Corp. (a)11,675 653 Wal-Mart Stores, Inc. 45,800 2,314 - -------------------------------------------------------------------------------- 2,967 ================================================================================ SPECIALTY RETAIL (3.3%) Bed Bath & Beyond, Inc. (a)30,750 1,062 Lowe's Cos., Inc. 23,000 862 - -------------------------------------------------------------------------------- 1,924 - -------------------------------------------------------------------------------- 6,496 ================================================================================ CONSUMER STAPLES (9.8%) BEVERAGES (5.2%) Anheuser Busch Cos., Inc. 9,300 450 Coca Cola Co. (The) 30,775 1,349 PepsiCo., Inc. 28,600 1,207 - -------------------------------------------------------------------------------- 3,006 ================================================================================ FOOD PRODUCTS (1.4%) Kraft Foods, Inc., Class A 20,700 806 - -------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS (3.2%) Procter & Gamble Co. 21,875 1,880 - -------------------------------------------------------------------------------- 5,692 ================================================================================ ENERGY (5.0%) ENERGY EQUIPMENT & SERVICES (2.0%) Baker Hughes, Inc. 35,800 1,152 - -------------------------------------------------------------------------------- OIL & GAS (3.0%) Exxon Mobil Corp. 49,500 1,730 - -------------------------------------------------------------------------------- 2,882 ================================================================================ FINANCIALS (12.5%) DIVERSIFIED FINANCIALS (9.4%) American Express Co. 21,550 762 Citigroup, Inc. 53,820 1,894 Federal Home Loan Mortgage Corp. 47,000 2,775 - -------------------------------------------------------------------------------- 5,431 ================================================================================ INSURANCE (3.1%) American International Group, Inc. 30,875 1,786 - -------------------------------------------------------------------------------- 7,217 ================================================================================ HEALTH CARE (23.3%) BIOTECHNOLOGY (2.3%) Amgen, Inc. (a)27,705 1,339 - -------------------------------------------------------------------------------- HEALTH CARE EQUIPMENT & SUPPLIES (2.0%) Medtronic, Inc. 25,100 1,145 - -------------------------------------------------------------------------------- HEALTH CARE PROVIDERS & SERVICES (3.1%) AmerisourceBergen Corp. 9,450 513 UnitedHealth Group, Inc. 15,050 1,257 - -------------------------------------------------------------------------------- 1,770 ================================================================================ PHARMACEUTICALS (15.9%) Eli Lilly & Co. 13,075 $ 830 Johnson & Johnson 46,775 2,512 Merck & Co., Inc. 19,325 1,094 Pfizer, Inc. 123,100 3,763 Wyeth 26,775 1,002 - -------------------------------------------------------------------------------- 9,201 ================================================================================ 13,455 ================================================================================ INDUSTRIALS (9.9%) AEROSPACE & DEFENSE (2.3%) General Dynamics Corp. 6,675 530 Lockheed Martin Corp. 13,550 782 - -------------------------------------------------------------------------------- 1,312 ================================================================================ COMMERCIAL SERVICES & SUPPLIES (0.8%) First Data Corp. 12,675 449 - -------------------------------------------------------------------------------- INDUSTRIAL CONGLOMERATES (6.8%) 3M Co. 8,650 1,067 General Electric Co. 117,950 2,872 - -------------------------------------------------------------------------------- 3,939 ================================================================================ 5,700 ================================================================================ INFORMATION TECHNOLOGY (22.2%) COMMUNICATIONS EQUIPMENT (2.9%) Cisco Systems, Inc. (a)88,300 1,157 QUALCOMM, Inc. (a)13,775 501 - -------------------------------------------------------------------------------- 1,658 ================================================================================ COMPUTERS & PERIPHERALS (4.7%) Dell Computer Corp. (a)43,025 1,150 Hewlett-Packard Co. 33,300 578 International Business Machines Corp. 12,450 965 - -------------------------------------------------------------------------------- 2,693 ================================================================================ ELECTRONIC EQUIPMENT & INSTRUMENTS (0.4%) Jabil Circuit, Inc. (a)13,670 245 - -------------------------------------------------------------------------------- SEMICONDUCTOR EQUIPMENT & PRODUCTS (6.3%) Applied Materials, Inc. (a)47,225 615 Intel Corp. 107,700 1,677 Linear Technology Corp. 16,025 412 Texas Instruments, Inc. 46,675 701 Xilinx, Inc. (a)12,900 266 - -------------------------------------------------------------------------------- 3,671 ================================================================================ SOFTWARE (7.9%) Microsoft Corp. (a)72,300 3,738 Oracle Corp. (a)74,375 803 - -------------------------------------------------------------------------------- 4,541 ================================================================================ 12,808 ================================================================================ TELECOMMUNICATION SERVICES (0.4%) WIRELESS TELECOMMUNICATION SERVICES (0.4%) AT&T Wireless Services, Inc. (a)40,350 228 - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $58,699) 54,478 ================================================================================
The accompanying notes are an integral part of the financial statements. 81 MORGAN STANLEY INSTITUTIONAL FUND, INC. Focus Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
FACE AMOUNT VALUE (000) (000) - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (6.5%) REPURCHASE AGREEMENT (6.5%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 (COST $3,767) $ (f)3,767 $ 3,767 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.8%) (COST $62,466) 58,245 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- OTHER ASSETS (4.7%) Cash 1 Receivable for Investments Sold 2,642 Dividends Receivable 50 Receivable for Portfolio Shares Sold 8 Other 1 2,702 - -------------------------------------------------------------------------------- LIABILITIES (-5.5%) Payable for Investments Purchased (2,946) Investment Advisory Fees Payable (99) Payable for Portfolio Shares Redeemed (93) Directors' Fees and Expenses Payable (14) Administrative Fees Payable (11) Custodian Fees Payable (6) Distribution Fees, Class B (4) Other Liabilities (13) (3,186) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 57,761 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $106,005 Undistributed Net Investment Income (Accumulated Net Investment Loss) (13) Accumulated Net Realized Gain (Loss) (44,010) Unrealized Appreciation (Depreciation) on Investments (4,221) - -------------------------------------------------------------------------------- NET ASSETS $ 57,761 ================================================================================ CLASS A: NET ASSETS $ 51,347 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 5,693,420 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 9.02 ================================================================================ CLASS B: NET ASSETS $ 6,414 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 724,920 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 8.85 ================================================================================
(a) -- Non-income producing security (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. The accompanying notes are an integral part of the financial statements. 82 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Small Company Growth Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) CONSUMER DISCRETIONARY 30.3% TECHNOLOGY 20.7% HEALTH CARE 14.9% FINANCIAL SERVICES 9.8% PRODUCER DURABLES 8.5% OTHER 15.8%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
SMALL COMPANY GROWTH RUSSELL 2000 PORTFOLIO-CLASS A GROWTH INDEX 1992 500000 500000 1993 500000 594396 1994 496886 583555 1995 662398 749582 1996 687039 873220 1997 765087 1068499 1998 975792 1041304 1999 1916943 1262685 2000 1789581 979465 2001 1571539 889060 2002 1221544 620030
** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE RUSSELL 2000 GROWTH INDEX(1)
TOTAL RETURNS(2) ----------------------------------------- AVERAGE ANNUAL ------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION - ------------------------------------------------------------------------ Portfolio - Class A(3) (22.28)% 9.81% 9.34% 11.10% Portfolio - Class B(4) (22.44) 9.51 N/A 8.88 Index - Class A (30.26) (6.59) 2.62 4.47 Index - Class B (30.26) (6.59) N/A (1.61)
(1) The Russell 2000 Growth Index is a market capitalization - weighted index comprised of those companies of the Russell 3000 Index with higher forecasted growth values and higher price-to-book ratios. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on November 1, 1989 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Small Company Growth Portfolio seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small U.S. and, to a limited extent, foreign companies that are listed on U.S. exchanges or traded in U.S. markets. Investments in small sized corporations are more vulnerable to financial risks and other risks than larger corporations and may involve a higher degree of price volatility than investments in the general equity markets. For the year ended December 31, 2002, the Portfolio had a total return of - -22.28% for the Class A shares and -22.44% for the Class B shares compared to - -30.26% for the Russell 2000 Growth Index (the "Index"). MARKET REVIEW During 2002, domestic equities declined for a third straight year, the first time that has occurred since 1939 - 1941. The New Year began on a strong note, as investors were hopeful about the prospects for economic recovery, but that optimism quickly dissipated amid a growing number of headline accounting and corporate governance scandals. The viability of many companies and even entire industry groups also came into question, as 7 of the 12 largest U.S. bankruptcies ever took place during the year. Weak corporate profits, a slew of earnings warnings and misses, and a lack of encouraging forward guidance also contributed to market pessimism, as did investor concerns about geo-political issues overseas, particularly in the Middle East. The macroeconomic picture did show some signs of improvement, as evidenced by four 83 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Small Company Growth Portfolio (cont'd) consecutive quarters of Gross Domestic Product growth, and interest rates fell to their lowest levels in 40 years. However, concerns remained about the psychology of the consumer, especially in light of unemployment levels which hit an 8 year high of 6%, and a sharp rise in energy prices. The Portfolio outperformed the Index primarily as a result of stock selection, although sector allocation was a positive factor as well. Stock selection exceeded the Index in eight sectors, representing roughly 68% of the Portfolio, with the strongest contribution coming from consumer discretionary. A number of individual holdings within areas such as gaming, discount and specialty retail, education, radio, and consumer services showed solid business momentum, which became reflected in their stock prices. During the year, consumer discretionary represented our largest sector weighting and our largest overweight versus the Index. Many of the Portfolio's holdings are characterized by strong free cash flow generation and solid balance sheets, which we believe are desirable traits in an uncertain economy. The second half of the year represented a difficult environment for consumer-oriented companies, and we have generally attempted to own less economically sensitive stocks within the sector. Stock selection was also favorable within health care. During the year, there were a large number of land mines within the sector, especially within biotechnology and pharmaceuticals, and we generally benefited from our underweights in these areas during the first half of the year. The Portfolio's better performing holdings tended to be more stable growth companies. We added somewhat to biotechnology during the second half of the year, as valuations became more compelling, and news flow for a number of companies became more positive. Other areas in which stock selection was strong included producer durables and consumer staples. In terms of detractors, technology was the worst performing sector for the year for both the Index and the Portfolio. Stock selection lagged the benchmark sector, although our modest underweight had a slight offsetting positive impact. The sector was hurt by expectations at the beginning of the year for a strong second-half recovery in information technology spending, which did not materialize. With few exceptions, end demand did not pick up, and companies missed earnings and lowered guidance throughout the year. As the year progressed, our strategy was to focus on companies' earnings quality and balance sheet strength, as we sought companies that would be able to withstand the difficult environment. Financial services also detracted from performance, due to an underweight and unfavorable stock selection. MARKET OUTLOOK We see signs of stabilization and are cautiously optimistic that the economic recovery will continue. Recent data on purchasing activity are encouraging, and we see early stage positives in areas such as advertising. Consumer spending has slowed somewhat, and in our view, what needs to unfold to sustain the recovery is a pickup in corporate spending. At this point, there is not a great deal of visibility for the vast number of companies we follow. Geo-political concerns around oil and the possibility of war continue to cast a cloud for individual companies and the markets in general. January 2003 84 MORGAN STANLEY INSTITUTIONAL FUND, INC. Small Company Growth Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (95.9%) AUTO & TRANSPORTATION (0.2%) TRUCKERS (0.2%) Arkansas Best Corp. (a)23,453 $ 609 - -------------------------------------------------------------------------------- CONSUMER DISCRETIONARY (30.3%) ADVERTISING AGENCIES (1.8%) R.H. Donnelley Corp. (a)177,977 5,216 - -------------------------------------------------------------------------------- CASINOS & GAMBLING (4.9%) Alliance Gaming Corp. (a)104,300 1,776 GTECH Holdings Corp. (a)285,169 7,945 Penn National Gaming, Inc. (a)284,350 4,510 - -------------------------------------------------------------------------------- 14,231 ================================================================================ COMMUNICATIONS & MEDIA (2.1%) Media General, Inc., Class A 65,725 3,940 Westwood One, Inc. (a)60,325 2,254 - -------------------------------------------------------------------------------- 6,194 ================================================================================ CONSUMER ELECTRONICS (0.5%) Activision, Inc. (a)91,200 1,331 - -------------------------------------------------------------------------------- EDUCATION SERVICES (1.2%) Career Education Corp. (a)50,850 2,034 Strayer Education, Inc. 23,600 1,357 - -------------------------------------------------------------------------------- 3,391 ================================================================================ HOTEL/MOTEL (0.6%) Orient-Express Hotels Ltd., Class A (a)132,150 1,784 - -------------------------------------------------------------------------------- HOUSEHOLD FURNISHINGS (0.5%) Furniture Brands International, Inc. (a)60,357 1,439 - -------------------------------------------------------------------------------- PUBLISHING: NEWSPAPERS (1.0%) Pulitzer, Inc. 64,969 2,920 - -------------------------------------------------------------------------------- RADIO & TV BROADCASTERS (1.3%) Radio One, Inc., Class D (a)251,336 3,627 - -------------------------------------------------------------------------------- RESTAURANTS (2.7%) CBRL Group, Inc. 100,300 3,022 P.F. Chang's China Bistro, Inc. (a)49,350 1,792 Sonic Corp. (a)141,738 2,904 - -------------------------------------------------------------------------------- 7,718 ================================================================================ RETAIL (7.9%) Abercrombie & Fitch Co., Class A (a)130,500 2,670 Chico's FAS, Inc. (a)122,750 2,321 Cost Plus, Inc. (a)22,950 658 Dick's Sporting Goods, Inc. (a)156,700 3,009 Fred's, Inc. 115,575 2,971 HOT Topic, Inc. (a)124,700 2,853 J. Jill Group, Inc. (The) (a)207,861 2,906 Kirkland's, Inc. (a)127,450 1,440 Krispy Kreme Doughnuts, Inc. (a)44,900 1,516 Tractor Supply Co. (a)70,800 2,662 - -------------------------------------------------------------------------------- 23,006 ================================================================================ SERVICES: COMMERCIAL (4.9%) AMN Healthcare Services, Inc. (a)79,800 1,349 Arbitron, Inc. (a)96,025 3,217 Corporate Executive Board Co. (The) (a)257,399 8,216 G & K Services, Inc., Class A 43,050 1,524 - -------------------------------------------------------------------------------- 14,306 ================================================================================ TEXTILE APPAREL MANUFACTURERS (0.9%) Coach, Inc. (a)83,199 $ 2,739 - -------------------------------------------------------------------------------- 87,902 ================================================================================ CONSUMER STAPLES (2.9%) FOODS (2.9%) Dreyer's Grand Ice Cream, Inc. 43,050 3,055 International Multifoods Corp. (a)35,100 744 J & J Snack Foods Corp. (a)130,724 4,668 - -------------------------------------------------------------------------------- 8,467 ================================================================================ FINANCIAL SERVICES (9.8%) BANKS: OUTSIDE NEW YORK CITY (2.4%) Doral Financial Corp. 168,750 4,826 Southwest Bancorp. of Texas, Inc. (a)70,550 2,033 - -------------------------------------------------------------------------------- 6,859 ================================================================================ FINANCIAL MISCELLANEOUS (4.6%) Hilb, Rogal & Hamilton Co. 109,200 4,466 Interactive Data Corp. (a)645,875 8,881 - -------------------------------------------------------------------------------- 13,347 ================================================================================ INSURANCE: LIFE (1.4%) Stancorp Financial Group, Inc. 82,525 4,031 - -------------------------------------------------------------------------------- INVESTMENT MANAGEMENT COMPANIES (1.4%) Affiliated Managers Group (a)44,700 2,248 Investment Technology Group, Inc. (a)43,600 975 W. P. Stewart & Co., Ltd. 52,100 934 - -------------------------------------------------------------------------------- 4,157 ================================================================================ 28,394 ================================================================================ HEALTH CARE (14.9%) BIOTECHNOLOGY RESEARCH & PRODUCTION (3.0%) Celgene Corp. (a)66,950 1,437 InterMune, Inc. (a)31,050 792 Taro Pharmaceuticals Industries Ltd. (a)95,400 3,587 Telik, Inc. (a)249,475 2,909 - -------------------------------------------------------------------------------- 8,725 ================================================================================ DRUGS & PHARMACEUTICALS (1.9%) Array Biopharma, Inc. (a)226,940 1,259 Regeneron Pharmaceuticals, Inc. (a)107,325 1,987 Scios, Inc. (a)65,000 2,118 - -------------------------------------------------------------------------------- 5,364 ================================================================================ HEALTH CARE FACILITIES (0.8%) Community Health Systems, Inc. (a)107,691 2,217 - -------------------------------------------------------------------------------- HEALTH CARE SERVICES (2.8%) Accredo Health, Inc. (a)123,853 4,366 Stericycle, Inc. (a)119,375 3,865 - -------------------------------------------------------------------------------- 8,231 ================================================================================ MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (2.3%) Cooper Cos., Inc. 99,936 2,500 Techne Corp. (a)45,870 1,311 Viasys Healthcare, Inc. (a)94,425 1,406 Wright Medical Group, Inc. (a)85,450 1,492 - -------------------------------------------------------------------------------- 6,709 ================================================================================
The accompanying notes are an integral part of the financial statements. 85 MORGAN STANLEY INSTITUTIONAL FUND, INC. Small Company Growth Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- HEALTH CARE (CONT'D) MEDICAL SERVICES (0.6%) Inveresk Research Group, Inc. (a)41,050 $ 886 Laboratory Corp. of America Holdings (a)1 @-- Specialty Laboratories, Inc. (a)87,450 845 - -------------------------------------------------------------------------------- 1,731 ================================================================================ MISCELLANEOUS HEALTH CARE (3.5%) Allos Therapeutics (a)276,412 2,079 Amylin Pharmaceuticals, Inc. (a)97,300 1,570 CV Therapeutics, Inc. (a)42,675 778 Neurocrine Biosciences, Inc. (a)16,550 756 NPS Pharmaceuticals, Inc. (a)147,200 3,705 Trimeris, Inc. (a)31,850 1,372 - -------------------------------------------------------------------------------- 10,260 ================================================================================ 43,237 ================================================================================ MATERIALS & PROCESSING (1.4%) CHEMICALS (1.2%) Albemarle Corp. 127,500 3,627 - -------------------------------------------------------------------------------- METALS & MINERALS MISCELLANEOUS (0.2%) Liquidmetal Technologies (a)59,300 610 - -------------------------------------------------------------------------------- 4,237 ================================================================================ OTHER ENERGY (6.0%) ENERGY MISCELLANEOUS (5.2%) Chesapeake Energy Corp. 458,800 3,551 Frontier Oil Corp. 104,800 1,805 Patterson-UTI Energy, Inc. (a)150,225 4,532 Pioneer Natural Resources Co. (a)205,950 5,200 - -------------------------------------------------------------------------------- 15,088 ================================================================================ OIL: CRUDE PRODUCERS (0.8%) Petroquest Energy, Inc. (a)544,875 2,261 - -------------------------------------------------------------------------------- 17,349 ================================================================================ PRODUCER DURABLES (8.5%) AEROSPACE (2.5%) Alliant Techsystems, Inc. (a)35,637 2,222 Moog, Inc., Class A (a)71,775 2,228 MTC Technologies, Inc. (a)55,450 1,403 United Defense Industries, Inc. (a)62,175 1,448 - -------------------------------------------------------------------------------- 7,301 ================================================================================ ELECTRONICS: INSTRUMENTS GAUGES & METERS (0.8%) Fisher Scientific International, Inc. (a)79,675 2,397 - -------------------------------------------------------------------------------- HOMEBUILDING (1.6%) NVR, Inc. (a)13,900 4,525 - -------------------------------------------------------------------------------- INDUSTRIAL PRODUCTS (0.6%) Maverick Tube Corp. (a)136,300 1,776 - -------------------------------------------------------------------------------- MACHINERY & ENGINEERING (1.5%) AGCO Corp. (a)196,125 4,334 - -------------------------------------------------------------------------------- MANUFACTURING (0.7%) Actuant Corp., Class A (a)20,550 955 Griffon Corp. (a)86,850 1,183 - -------------------------------------------------------------------------------- 2,138 ================================================================================ PRODUCTION TECHNOLOGY EQUIPMENT (0.8%) Cymer, Inc. (a)66,550 $ 2,146 - -------------------------------------------------------------------------------- 24,617 ================================================================================ TECHNOLOGY (20.4%) COMMUNICATIONS TECHNOLOGY (1.2%) Adtran, Inc. (a)19,300 635 Advanced Fibre Communications, Inc. (a)66,150 1,103 Extreme Networks, Inc. (a)200,075 654 Foundry Networks, Inc. (a)177,050 1,247 - -------------------------------------------------------------------------------- 3,639 ================================================================================ COMPUTER SERVICES SOFTWARE & SYSTEMS (13.6%) Forrester Research, Inc. (a)188,020 2,928 Global Payments, Inc. 133,375 4,269 Hyperion Solutions Corp. (a)32,550 836 Imation Corp. (a)37,450 1,314 Informatica Corp. (a)522,300 3,008 Internet Security Systems (a)52,100 955 J.D. Edwards & Co. (a)102,000 1,151 Mercury Interactive Corp. (a)65,900 1,954 NetIQ Corp. (a)70,175 867 Precise Software Solutions Ltd. (a)185,300 3,059 Quest Software, Inc. (a)172,100 1,774 Rational Software Corp. (a)233,650 2,428 Secure Computing Corp. (a)121,100 776 SRA International, Inc., Class A (a)54,825 1,485 Storage Technology Corp. (a)206,595 4,425 TIBCO Software, Inc. (a)474,075 2,930 United Online, Inc. (a)96,950 1,545 Verint Systems, Inc. (a)68,500 1,382 VeriSign, Inc. (a)81,600 654 Vignette Corp. (a)1,429,175 1,754 - -------------------------------------------------------------------------------- 39,494 ================================================================================ COMPUTER TECHNOLOGY (1.6%) Emulex Corp. (a)103,373 1,918 SanDisk Corp. (a)131,675 2,673 - -------------------------------------------------------------------------------- 4,591 ================================================================================ ELECTRONICS (0.3%) Kopin Corp. (a)197,372 774 - -------------------------------------------------------------------------------- ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (3.7%) ASM International N.V. (a)110,815 1,429 Exar Corp. (a)108,700 1,348 Intersil Corp., Class A (a)129,150 1,800 Marvell Technology Group Ltd. (a)83,500 1,575 Micrel, Inc. (a)91,950 826 Skyworks Solutions, Inc. (a)292,116 2,518 Triquint Semiconductor, Inc. (a)294,125 1,247 - -------------------------------------------------------------------------------- 10,743 ================================================================================ 59,241 ================================================================================ UTILITIES (1.5%) UTILITIES: TELECOMMUNICATIONS (1.5%) Commonwealth Telephone Enterprises, Inc. (a)58,525 2,098 IDT Corp., Class B (a)149,350 2,316 - -------------------------------------------------------------------------------- 4,414 ================================================================================
The accompanying notes are an integral part of the financial statements. 86 MORGAN STANLEY INSTITUTIONAL FUND, INC. Small Company Growth Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $285,798) $ 278,467 ================================================================================ PREFERRED STOCK (0.3%) TECHNOLOGY (0.3%) COMPUTER TECHNOLOGY (0.3%) Warp Solution, Inc., Series A (COST $785) (a)(i)1,163,108 879 - -------------------------------------------------------------------------------- FACE AMOUNT (000) - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (4.2%) REPURCHASE AGREEMENT (4.2%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 (COST $12,376) $ (f)12,376 12,376 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.4%) (COST $298,959) 291,722 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- OTHER ASSETS (0.4%) Cash 1 Receivable for Investments Sold 603 Receivable for Portfolio Shares Sold 531 Dividends Receivable 50 Other 9 1,194 - -------------------------------------------------------------------------------- LIABILITIES (-0.8%) Payable for Portfolio Shares Redeemed (900) Payable for Investments Purchased (768) Investment Advisory Fees Payable (583) Distribution Fees, Class B (124) Administrative Fees Payable (44) Directors' Fees and Expenses Payable (11) Custodian Fees Payable (10) Other Liabilities (23) (2,463) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 290,453 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 396,217 Undistributed Net Investment Income (Accumulated Net Investment Loss) (10) Accumulated Net Realized Gain (Loss) (98,517) Unrealized Appreciation (Depreciation) on Investments (7,237) - -------------------------------------------------------------------------------- NET ASSETS $ 290,453 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- CLASS A: NET ASSETS $ 74,554 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 9,936,752 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 7.50 ================================================================================ CLASS B: NET ASSETS $ 215,899 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 29,727,815 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 7.26 ================================================================================
(a) -- Non-income producing security (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. (i) -- Restricted security valued at fair value and not registered under the Securities Act of 1933. Acquired 12/99 and 7/00 at a cost of $402,000 and $383,000, respectively. At December 31, 2002, this security had an aggregate market value of $879,000, representing 0.3% of net assets. @ -- Value is less than $500. The accompanying notes are an integral part of the financial statements. 87 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Technology Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) SOFTWARE 26.4% SEMICONDUCTOR EQUIPMENT & PRODUCTS 25.7% COMMUNICATIONS EQUIPMENT 12.8% COMPUTERS & PERIPHERALS 8.8% INTERNET SOFTWARE & SERVICES 8.2% OTHER 18.1%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $250,000** INVESTMENT
TECHNOLOGY PORTFOLIO - CLASS A TECHNOLOGY PORTFOLIO - CLASS B NASDAQ COMPOSITE INDEX * 250000 50000 250000 1996 267750 53550 270325 1997 367540 73310 328823 1998 565645 112545 459136 1999 1474184 292910 852111 2000 1139984 225952 517316 2001 594046 117518 408421 2002 311458 61556 279646
* Commenced operations on September 16, 1996 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different fees assessed to that class. The NASDAQ Composite Index value at December 31, 2002 assumes a minimum investment of $250,000; if a minimum initial investment of $50,000 (the minimum investment for Class B shares) is assumed, the value at December 31, 2002 would be $55,929. PERFORMANCE COMPARED TO THE NASDAQ COMPOSITE INDEX AND THE S&P 500 INDEX(1)
TOTAL RETURNS(2) --------------------------------- AVERAGE ANNUAL --------------------- ONE FIVE SINCE YEAR YEARS INCEPTION - ------------------------------------------------------------------- Portfolio - Class A(3) (47.57)% (3.26) 3.56% Portfolio - Class B(3) (47.62) (3.40) 3.37 NASDAQ Composite Index (31.53) (3.19) 1.80 S&P 500 Index (22.09) (0.58) 5.63
(1) The NASDAQ Composite Index is a market capitalization - weighted index comprised of all common stocks listed on the NASDAQ Stock Market. The S&P 500 Index is comprised of the stocks of 500 large-cap U.S. companies with market capitalization of $1 billion or more. These 500 companies represent approximately 100 industries chosen mainly for market size, liquidity, and industry group representation. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on September 16, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Technology Portfolio seeks long-term capital appreciation by investing primarily in equity securities of companies that the investment adviser expects will benefit from their involvement in technology and technology-related industries. The Portfolio's concentration in the technology sector makes it subject to greater risk and volatility than portfolios that are more diversified, and the value of its shares may be substantially affected by economic events. In addition, the Portfolio may invest up to 35% of its total assets in the equity or fixed income securities of foreign issuers. For the year ended December 31, 2002, the Portfolio had a total return of - -47.57% for the Class A shares and -47.62% for the Class B shares compared to - -31.53% for the NASDAQ Composite Index (the "Index") and -22.09% for the S&P 500 Index. MARKET REVIEW During 2002, domestic equities declined for a third straight year, the first time that has occurred since 1939 - 1941. Despite a rally during the fourth quarter, the S&P 500 finished the year down more than 22%, its worst year since 1974. Growth stocks were particularly hard hit across the capitalization spectrum and weakness was especially pronounced in the traditional growth areas of technology, biotechnology and telecommunication services. 88 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Technology Portfolio (cont'd) Our strategy in 2002 was to attempt to be more defensive in the face of extreme volatility and poor conditions for the technology sector. In retrospect, most of the moves we made were correct, but were not enough to offset the exposure to higher beta, premium valuation, and lower capitalization names. From a capitalization perspective, we increased the Portfolio weight in larger cap names, as the mid and small cap names we typically favor were hit harder in the downturn. The Portfolio increased its exposure to the largest names that dominate the Index, within its constraints on exposure to individual issues. The Portfolio held fewer names, concentrating in the names where we had the greatest conviction in the business model and underlying fundamentals. The Portfolio owned lower beta names in several areas, including information technology outsourcing, and payroll and transaction processors, and cut back on some of the highest beta areas such as communication integrated circuits, which were particularly volatile. The sector emphasis in the Portfolio was fairly stable over the year. The Portfolio's biggest exposure was to semi-conductors, the only large area of the market that remained profitable even through the worst of the downturn. There was an inventory build-up in the first quarter, which benefited the names; however subsequent weakness was driven by the lack of end demand. Going into the end of last year, inventories were again lean, and semi-conductors are a necessary component for every area of technology, regardless of which area leads the recovery. We increased the Portfolio's exposure to semiconductors in the fourth quarter. The Portfolio's second largest exposure was in software. Software is a highly leveraged growth play, as there are no inventories to maintain and the businesses are highly scaleable as a result. Software was hurt by a lack of business visibility as companies deferred purchases. We tended to favor companies involved in smaller deal sizes, as large contracts were virtually nonexistent. Enterprise software, specifically in the areas of security and integration, were areas of emphasis in the Portfolio. Both corporate and government spending should be positive for selected software companies which we added in the fourth quarter. Throughout the year, the Portfolio was underweight in telecommunications, with the exception of its exposure to one major company. In our view, the workout in telecommunications will take years because there still is an excess of capacity and companies that impedes recovery in this area. MARKET OUTLOOK In our view, the significant economic stimulus that the Federal Reserve has provided will be a positive catalyst for the economic recovery. We are cautiously optimistic that the recovery in technology may happen sooner than the consensus expectations for the second half of this year. The consolidations, we are seeing, are signals usually seen at bottoming inflection points. Of concern is the geo-political overhang, most notably oil and the threat of war, which could destabilize or postpone the recovery. January 2003 89 MORGAN STANLEY INSTITUTIONAL FUND, INC. Technology Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (93.8%) INFORMATION TECHNOLOGY (81.8%) COMMUNICATIONS EQUIPMENT (12.8%) Cisco Systems, Inc. (a)85,950 $ 1,126 Emulex Corp. (a)15,225 282 Extreme Networks, Inc. (a)18,650 61 Finisar Corp. (a)54,725 52 McData Corp., Class A (a)27,975 199 Motorola, Inc. 24,875 215 QUALCOMM, Inc. (a)25,075 913 - -------------------------------------------------------------------------------- 2,848 ================================================================================ COMPUTERS & PERIPHERALS (8.8%) Dell Computer Corp. (a)22,000 588 EMC Corp. (a)38,150 234 Hewlett-Packard Co. 29,750 517 Network Appliance, Inc. (a)25,125 251 SanDisk Corp. (a)12,925 263 Sun Microsystems, Inc. (a)32,550 101 - -------------------------------------------------------------------------------- 1,954 ================================================================================ ELECTRONIC EQUIPMENT & INSTRUMENTS (3.6%) Amphenol Corp., Class A (a)1,725 66 Flextronics International Ltd. (a)17,375 142 Jabil Circuit, Inc. (a)4,750 85 Micrel, Inc. (a)13,025 117 QLogic Corp. (a)11,025 380 - -------------------------------------------------------------------------------- 790 ================================================================================ INTERNET SOFTWARE & SERVICES (3.2%) TIBCO Software, Inc. (a)45,450 281 VeriSign, Inc. (a)19,200 154 Vignette Corp. (a)131,100 161 Yahoo!, Inc. (a)7,675 125 - -------------------------------------------------------------------------------- 721 ================================================================================ IT CONSULTING & SERVICES (1.3%) Internet Security Systems (a)8,000 147 SunGard Data Systems, Inc. (a)5,925 139 - -------------------------------------------------------------------------------- 286 ================================================================================ SEMICONDUCTOR EQUIPMENT & PRODUCTS (25.7%) Advanced Micro Devices, Inc. (a)15,700 102 Altera Corp. (a)36,025 444 Analog Devices, Inc. (a)10,200 244 Applied Materials, Inc. (a)25,775 336 Broadcom Corp., Class A (a)12,375 186 Conexant Systems, Inc. (a)25,975 42 Cymer, Inc. (a)3,200 103 Intel Corp. 89,850 1,399 Intersil Corp., Class A (a)29,125 406 KLA-Tencor Corp. (a)4,450 157 Kopin Corp. (a)86,050 337 Linear Technology Corp. 9,300 239 Marvell Technology Group Ltd. (a)5,250 99 Maxim Integrated Products, Inc. 9,850 326 Microchip Technology, Inc. 4,800 117 Novellus Systems, Inc. (a)11,000 309 Skyworks Solutions, Inc. (a)19,187 165 STMicroelectronics NV (NY Shares) 5,300 $ 104 Texas Instruments, Inc. 10,600 159 Triquint Semiconductor, Inc. (a)13,875 59 Xilinx, Inc. (a)18,200 375 - -------------------------------------------------------------------------------- 5,708 ================================================================================ SOFTWARE (26.4%) Adobe Systems, Inc. 8,300 206 BEA Systems, Inc. (a)41,025 471 Computer Associates International, Inc. 6,275 85 Electronic Arts, Inc. (a)875 44 Informatica Corp. (a)38,395 221 Intuit, Inc. (a)6,375 299 Mercury Interactive Corp. (a)9,700 288 Microsoft Corp. (a)39,175 2,025 Networks Associates, Inc. (a)14,500 233 Oracle Corp. (a)74,825 808 Peoplesoft, Inc. (a)11,100 203 Quest Software, Inc. (a)17,800 183 SAP AG ADR 4,500 88 Siebel Systems, Inc. (a)7,800 58 Symantec Corp. (a)7,650 310 VERITAS Software Corp. (a)21,825 341 - -------------------------------------------------------------------------------- 5,863 ================================================================================ 18,170 ================================================================================ CONSUMER DISCRETIONARY (0.5%) SPECIALTY RETAIL (0.5%) CDW Computer Centers, Inc. (a)2,275 100 - -------------------------------------------------------------------------------- HEALTH CARE (7.4%) BIOTECHNOLOGY (6.9%) Amgen, Inc. (a)10,810 522 Celgene Corp. (a)7,175 154 Exelixis, Inc. (a)23,775 190 Gilead Sciences, Inc. (a)7,050 240 Idec Pharmaceuticals Corp. (a)4,875 162 Medimmune, Inc. (a)3,625 98 Regeneron Pharmaceuticals, Inc. (a)9,400 174 - -------------------------------------------------------------------------------- 1,540 ================================================================================ HEALTH CARE EQUIPMENT & SUPPLIES (0.5%) Bruker Daltonics, Inc. (a)23,200 113 - -------------------------------------------------------------------------------- 1,653 ================================================================================ INDUSTRIALS (2.2%) COMMERCIAL SERVICES & SUPPLIES (2.2%) Affiliated Computer Services, Inc., Class A (a)2,400 126 Apollo Group, Inc., Class A (a)5,130 226 BISYS Group, Inc. (The) (a)3,525 56 Concord EFS, Inc. (a)5,350 84 - -------------------------------------------------------------------------------- 492 ================================================================================ TELECOMMUNICATION SERVICES (1.9%) WIRELESS TELECOMMUNICATION SERVICES (1.9%) AT&T Wireless Services, Inc. (a)43,200 244 Nextel Communications, Inc., Class A (a)14,600 169 - -------------------------------------------------------------------------------- 413 ================================================================================ TOTAL COMMON STOCKS (COST $30,057) 20,828 ================================================================================
The accompanying notes are an integral part of the financial statements. 90 MORGAN STANLEY INSTITUTIONAL FUND, INC. Technology Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- PREFERRED STOCK (5.0%) INFORMATION TECHNOLOGY (5.0%) INTERNET SOFTWARE & SERVICES (5.0%) Warp Solutions, Inc., Series A (COST $804) (a)(i)1,480,824 $ 1,119 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (98.8%) (COST $30,861) 21,947 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- OTHER ASSETS (2.7%) Receivable for Investments Sold $ 597 Dividends Receivable 3 Other 1 601 - -------------------------------------------------------------------------------- LIABILITIES (-1.5%) Bank Overdraft Payable (140) Payable for Portfolio Shares Redeemed (92) Investment Advisory Fees Payable (57) Payable for Investments Purchased (32) Administrative Fees Payable (6) Directors' Fees and Expenses Payable (5) Custodian Fees Payable (3) Distribution Fees, Class B (1) Other Liabilities (9) (345) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 22,203 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 115,932 Undistributed Net Investment Income (Accumulated Net Investment Loss) (5) Accumulated Net Realized Gain (Loss) (84,810) Unrealized Appreciation (Depreciation) on Investments (8,914) - -------------------------------------------------------------------------------- NET ASSETS $ 22,203 ================================================================================ CLASS A: NET ASSETS $ 20,331 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 3,038,483 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 6.69 ================================================================================ CLASS B: NET ASSETS $ 1,872 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 283,093 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 6.61 ================================================================================
(a) -- Non-income producing security (i) -- Restricted security valued at fair value and not registered under the Securities Act of 1933. Acquired 12/99 at a cost of $804,000. At December 31, 2002, this security had a market value of $1,119,000, representing 5.0% of net assets. ADR -- American Depositary Receipts The accompanying notes are an integral part of the financial statements. 91 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview U.S. Real Estate Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) RESIDENTIAL APARTMENTS 20.8% RETAIL REGIONAL MALLS 18.8% OFFICE 16.9% LODGING/RESORTS 11.1% INDUSTRIAL 8.3% OTHER 24.1%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
U.S. REAL ESTATE PORTFOLIO CLASS A NAREIT EQUITY INDEX * 500000 500000 1995 605350 572300 1996 844826 780617 1997 1078167 939004 1998 945660 774678 1999 931664 738888 2000 1207902 933659 2001 1319875 1063718 2002 1322251 1104352
* Commenced operations on February 24, 1995 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT TRUSTS (NAREIT) EQUITY INDEX(1)
TOTAL RETURNS(2) -------------------------------- AVERAGE ANNUAL --------------------- ONE FIVE SINCE YEAR YEARS INCEPTION - ---------------------------------------------------------------- Portfolio - Class A(3) 0.18% 4.16% 13.19% Portfolio - Class B(4) (0.07) 3.88 11.38 Index - Class A 3.82 3.30 10.57 Index - Class B 3.82 3.30 9.72
(1) The NAREIT Equity Index is an unmanaged market weighted index of tax qualified REITs listed on the New York Stock Exchange, American Stock Exchange and the NASDAQ National Market System, including dividends. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on February 24, 1995 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The 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 ("REITs"). The Portfolio's concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified, and the value of its shares may be substantially affected by economic events in the real estate industry. For the year ended December 31, 2002, the Portfolio had a total return of 0.18% for the Class A shares and -0.07% for the Class B shares compared to 3.82% for the National Association of Real Estate Investment Trusts (NAREIT) Equity Index (the "Index"). MARKET REVIEW REIT shares dramatically outperformed the broader equity indexes. REIT returns can be divided into three distinct periods. In the first half of the year, REITs gained 13.7% while the broader market declined. In the third quarter, REITs declined along with the broader market as it appeared that deteriorating occupancies and rents caught up with the sector. In the fourth quarter, REITs were flat while the broader market surged. From an attribution perspective, the bulk of the underperformance came from sector allocation. The larger 92 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview U.S. Real Estate Portfolio (cont'd) detractions came from an overweight to the hotel, apartment and office sectors. The cause for the weakness in these sectors was the weaker than expected economic recovery, which resulted in a lack of meaningful job growth and continued weakness in business confidence. In contrast, the retail sector experienced favorable demand from tenants. Thus, the favorable attribution from the overweight of the mall sub-sector was primarily offset by an underweight to the strip shopping center sub-sector, where we view the stocks as expensive and vulnerable to the more successful discount stores. We continued to shape the Portfolio with companies offering attractive fundamental valuations relative to their underlying real estate value. We reduced our position in apartments due to continued supply and weak levels of demand. We retained a significant overweight in the hotel sector where we are finding 30% to 40% discounts to asset value. We reduced our weight in the office sector and continue to favor urban assets, which feature longer lease terms. We increased our overweighting to the malls, where we continue to see good relative value. MARKET OUTLOOK Given the dramatic slowdown in new construction of real estate, we expect to see occupancy rates, rental levels, and property values to recover when demand recovers. There is some risk that non-dedicated real estate investors may rotate out of REITs and into early cyclical stocks that are likely to benefit more in the beginning stages of an economic recovery. However, since the sector is already trading on par with underlying asset value, we believe share price declines would result in additional corporate share repurchases, which would support valuations. January 2003 93 MORGAN STANLEY INSTITUTIONAL FUND, INC. U.S. Real Estate Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (97.3%) REAL ESTATE (97.3%) DIVERSIFIED (1.8%) Frontline Capital Group (a)(d)1,179,600 $ @-- Vornado Realty Trust REIT 336,800 12,529 - -------------------------------------------------------------------------------- 12,529 ================================================================================ HEALTH CARE (0.6%) Ventas, Inc. REIT 340,600 3,900 - -------------------------------------------------------------------------------- INDUSTRIAL (8.3%) AMB Property Corp. REIT 966,600 26,446 ProLogis Trust REIT 1,216,999 30,608 - -------------------------------------------------------------------------------- 57,054 ================================================================================ LODGING/RESORTS (10.3%) Hilton Hotels Corp. 1,214,300 15,434 Host Marriot Corp. REIT (a)2,796,300 24,747 Innkeepers USA Trust REIT 27,100 208 Interstate Hotels & Resorts, Inc. (a)28,830 138 John Q. Hammons Hotels, Inc. (a)103,500 572 Starwood Hotels & Resorts Worldwide, Inc. 1,229,093 29,179 Wyndham International, Inc., Class A (a)1,468,154 338 - -------------------------------------------------------------------------------- 70,616 ================================================================================ MIXED (1.0%) Kilroy Realty Corp. REIT 311,200 7,173 - -------------------------------------------------------------------------------- OFFICE (16.4%) Arden Realty, Inc. REIT 1,118,300 24,771 Beacon Capital Partners, Inc. (a)(i)335,100 1,743 Boston Properties, Inc. REIT 848,450 31,274 Equity Office Properties Trust REIT 1,294,367 32,333 Mack-Cali Realty Corp. REIT 66,700 2,021 Reckson Associates Realty Corp. REIT 323,500 6,810 SL Green Realty Corp. REIT 274,400 8,671 Trizec Properties, Inc. REIT 528,400 4,962 - -------------------------------------------------------------------------------- 112,585 ================================================================================ OTHER (6.9%) Atlantic Gulf Communities Corp. (a)(i)140,284 @-- Brookfield Properties Corp. 2,096,301 42,345 Internap Network Services Corp. (a)18,427 7 Pacific Gulf Properties, Inc. (d)413,000 10 Wellsford Real Properties, Inc. (a)305,949 4,822 - -------------------------------------------------------------------------------- 47,184 ================================================================================ RESIDENTIAL APARTMENTS (20.8%) Amli Residential Properties Trust REIT 139,000 2,958 Apartment Investment & Management Co., Class A REIT 494,500 18,534 Archstone-Smith Trust REIT 1,344,196 31,642 AvalonBay Communities, Inc. REIT 1,064,962 41,683 Equity Residential REIT 1,126,480 27,689 Essex Property Trust, Inc. REIT 343,400 17,462 Gables Residential Trust REIT 69,200 1,725 Post Properties, Inc. REIT 43,100 1,030 Summit Properties, Inc. REIT 26,100 464 - -------------------------------------------------------------------------------- 143,187 ================================================================================ RESIDENTIAL MANUFACTURED HOMES (3.4%) Chateau Communities, Inc. REIT 546,152 $ 12,561 Manufactured Home Communities, Inc. REIT 221,800 6,572 Sun Communities, Inc. REIT 107,000 3,913 - -------------------------------------------------------------------------------- 23,046 ================================================================================ RETAIL REGIONAL MALLS (18.8%) Forest City Enterprises, Inc., Class A 84,100 2,805 General Growth Properties, Inc. REIT 483,900 25,163 Macerich Co. (The) REIT 43,000 1,322 Rouse Co. (The) REIT 1,074,200 34,052 Simon Property Group, Inc. REIT 1,448,700 49,357 Taubman Centers, Inc. REIT 1,013,678 16,452 - -------------------------------------------------------------------------------- 129,151 ================================================================================ RETAIL STRIP CENTERS (4.0%) Burnham Pacific Property, Inc. (d)113,290 110 Chelsea Property Group, Inc. REIT 6,400 213 Federal Realty Investment Trust REIT 809,400 22,760 JDN Realty Corp. REIT 473 5 Regency Centers Corp. REIT 136,300 4,329 - -------------------------------------------------------------------------------- 27,417 ================================================================================ SELF STORAGE (5.0%) Public Storage, Inc. REIT 676,590 21,861 Shurgard Storage Centers, Inc., Class A REIT 404,600 12,680 - -------------------------------------------------------------------------------- 34,541 ================================================================================ TOTAL COMMON STOCKS (COST $658,639) 668,383 ================================================================================ PREFERRED STOCKS (1.3%) REAL ESTATE (1.3%) LODGING/RESORTS (0.8%) Wyndham International, Inc., Series I (d)79,846 5,766 - -------------------------------------------------------------------------------- OFFICE (0.5%) Wyndham International, Inc., Series II (d)42,734 3,233 - -------------------------------------------------------------------------------- OTHER (0.0%) Atlantic Gulf Communities Corp., Series B (a)(d)107,021 @-- - -------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS (COST $6,570) 8,999 ================================================================================ CONVERTIBLE PREFERRED STOCK (0.0%) REAL ESTATE (0.0%) OTHER (0.0%) Atlantic Gulf Communities Corp., Series B (COST $758) (a)(d)75,765 @-- ================================================================================ NO.OF WARRANTS - -------------------------------------------------------------------------------- WARRANTS (0.0%) REAL ESTATE (0.0%) OTHER (0.0%) Atlantic Gulf Communities Corp., Class A, expiring 6/24/04 (a)(d)62,000 @-- Atlantic Gulf Communities Corp., Class B, expiring 6/23/04 (a)(d)50,510 @-- Atlantic Gulf Communities Corp., Class B, expiring 6/24/04 (a)(d)62,000 @-- Atlantic Gulf Communities Corp., Class C, expiring 6/23/04 (a)(d)50,510 @--
The accompanying notes are an integral part of the financial statements. 94 MORGAN STANLEY INSTITUTIONAL FUND, INC. U.S. Real Estate Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
NO.OF VALUE WARRANTS (000) - -------------------------------------------------------------------------------- REAL ESTATE (CONT'D) Atlantic Gulf Communities Corp., Class C, expiring 6/24/04 (a)(d)62,000 $ @-- - -------------------------------------------------------------------------------- TOTAL WARRANTS (COST $--@) @-- ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (1.3%) REPURCHASE AGREEMENT (1.3%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 (COST $8,890) $ (f)8,890 8,890 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (99.9%) (COST $674,857) 686,272 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- OTHER ASSETS (1.5%) Cash 179 Dividends Receivable 5,244 Receivable for Investments Sold 3,839 Receivable for Portfolio Shares Sold 684 Other 13 9,959 - -------------------------------------------------------------------------------- LIABILITIES (-1.4%) Payable for Portfolio Shares Redeemed (6,973) Investment Advisory Fees Payable (1,478) Payable for Investments Purchased (686) Administrative Fees Payable (104) Directors' Fees and Expenses Payable (37) Distribution Fees, Class B (24) Custodian Fees Payable (16) Other Liabilities (55) (9,373) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 686,858 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $ 687,071 Undistributed (Distributions in Excess of) Net Investment Income (32) Accumulated Net Realized Gain (Loss) (11,596) Unrealized Appreciation (Depreciation) on Investments 11,415 - -------------------------------------------------------------------------------- NET ASSETS $ 686,858 ================================================================================ CLASS A: NET ASSETS $ 655,274 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 48,358,333 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 13.55 ================================================================================ CLASS B: NET ASSETS $ 31,584 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 2,344,747 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 13.47 ================================================================================
(a) -- Non-income producing security (d) -- Securities were valued at fair value -- See Note A-1 to financial statements. At December 31, 2002, the Portfolio held $9,119,000 of fair valued securities, representing 1.3% of net assets. (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. (i) -- Restricted security valued at fair value and not registered under the Securities Act of 1933. Atlantic Gulf Communities Corp. and Beacon Capital Partners, Inc. were acquired 6/97 and 3/98, respectively, at a cost of $790,000 and $1,743,000, respectively. At December 31, 2002, these securities had an aggregate market value of $1,743,000, representing 0.3% of net assets. @ -- Value is less than $500. REIT -- Real Estate Investment Trust The accompanying notes are an integral part of the financial statements. 95 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Value Equity Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) FINANCIAL SERVICES 33.3% HEALTH CARE 11.7% INTEGRATED OILS 11.2% PRODUCER DURABLES 9.8% MATERIALS & PROCESSING 8.3% OTHER 25.7%
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
VALUE EQUITY PORTFOLIO-CLASS A RUSSELL 1000 VALUE INDEX 1992 500000 500000 1993 575720 590350 1994 568322 578637 1995 759812 800603 1996 909754 973853 1997 1175416 1316455 1998 1278735 1522217 1999 1427451 1634100 2000 1685535 1748813 2001 1659409 1650983 2002 1257321 1394868
** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE RUSSELL 1000 VALUE INDEX AND S&P 500 INDEX(1)
TOTAL RETURNS(2) ------------------------------------------ AVERAGE ANNUAL ------------------------------ ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION - ------------------------------------------------------------------------------ Portfolio - Class A (3) (24.22)% 1.36% 9.66% 9.46% Portfolio - Class B (4) (24.32) 1.12 N/A 7.08 Russell 1000 Value Index - Class A (15.52) 1.16 10.80 11.04 Russell 1000 Value Index - Class B (15.52) 1.16 N/A 8.16 S&P 500 Index - Class A (22.09) (0.58) 9.35 10.34 S&P 500 Index - Class B (22.09) (0.58) N/A 6.76
(1) The Russell 1000 Value Index (the "Index") consists of the largest 1000 companies in the Russell 3000 Index. This Index represents the universe of large capitalization stocks from which most active money managers typically select. The S&P 500 Index is comprised of 500 large-cap U.S. companies with market capitalization of $1 billion or more. These 500 companies represent approximately 100 industries chosen mainly for market size, liquidity and industry group representation. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on January 31, 1990 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Value Equity Portfolio seeks high total return by investing primarily in equity securities that the investment adviser believes to be undervalued relative to the stock market in general at the time of purchase. For the year ended December 31, 2002, the Portfolio had a total return of - -24.22% for the Class A shares and -24.32% for the Class B shares compared to - -15.52% for the Russell 1000 Value Index (the "Russell Index") and -22.09% for the S&P 500 Index (the "S&P Index"). MARKET REVIEW Stocks in the U.S. suffered a third straight year of decline in 2002, as concerns about the pace of economic recovery, corporate governance scandals and geo-political issues took center stage. The Portfolio in comparison to the Russell Index had a relative performance differential of 870 basis points. Sector selection and stock selection were both negative factors affecting performance results for the year. Sector selection was most unfavorable in the telephone services group, where the Portfolio is overweighted relative to the Russell Index. The Portfolio's underweights in the beverages & personal products and utility areas were also negatives. An overexposure in the heavy industry sector, however, proved to 96 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Value Equity Portfolio (cont'd) be a positive, as did an underweight in the consumer services area. Other sector exposures were, essentially, neutral factors overall. Stock selection detracted from Portfolio results in 2002, most notably in telephone services and health care stocks. Relatively good performance in the consumer durables, retail, and food & tobacco names provided a partial offset. MARKET OUTLOOK Although the prospect of war with Iraq and other geo-political concerns impact the level of uncertainty among investors, the general economic outlook for the U.S. appears to be somewhat more encouraging as we move into the new year. Weak capital spending, which has been widely identified as the primary cause of slow economic growth may be showing some signs of improving now that profits are recovering, and this may demonstrate gradually stronger momentum as depleted inventories are rebuilt and capital equipment expenditures increase. Consumer spending has been strong and should remain a factor as the mortgage refinancing wave continues to fuel the psychology of the retail buyer, and low interest rates continue to underpin strong housing and auto sales. The job market remains relatively stable, and after-tax incomes are growing. Also, a weaker U.S. dollar should impact export volumes positively. We continue to believe that the Portfolio is well positioned to benefit and perform well as the economy in the U.S. improves and investor sentiment becomes more positive. Our sector distribution demonstrates a distinct cyclical bias, while portfolio valuations are reasonable and overall profitability and growth expectations are favorable, consistent with our disciplined portfolio management process. January 2003 97 MORGAN STANLEY INSTITUTIONAL FUND, INC. Value Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
VALUE SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (98.3%) AUTO & Transportation (3.4%) AIR TRANSPORT (0.2%) Continental Airlines, Inc., Class B (a)36,100 $ 262 - -------------------------------------------------------------------------------- AUTO TRUCKS & PARTS (2.1%) ArvinMeritor, Inc. 158,150 2,636 - -------------------------------------------------------------------------------- AUTOMOBILES (1.1%) General Motors Corp. 37,250 1,373 - -------------------------------------------------------------------------------- 4,271 ================================================================================ CONSUMER DISCRETIONARY (7.6%) COMMUNICATIONS & MEDIA (0.2%) Walt Disney Co. (The) 18,600 303 - -------------------------------------------------------------------------------- COSMETICS (1.9%) Procter & Gamble Co. 27,900 2,398 - -------------------------------------------------------------------------------- RADIO & TV BROADCASTERS (0.9%) Liberty Media Corp., Class A (a)119,600 1,069 - -------------------------------------------------------------------------------- RETAIL (4.6%) Best Buy Co., Inc. (a)92,300 2,229 Federated Department Stores (a)3,100 89 TJX Cos., Inc. 171,900 3,356 - -------------------------------------------------------------------------------- 5,674 ================================================================================ 9,444 ================================================================================ CONSUMER STAPLES (1.6%) FOODS (1.6%) Kraft Foods, Inc., Class A 49,250 1,917 - -------------------------------------------------------------------------------- FINANCIAL SERVICES (33.3%) BANKS: OUTSIDE NEW YORK CITY (12.2%) Bank of America Corp. 76,550 5,326 Comerica, Inc. 58,300 2,521 PNC Financial Services Group, Inc. 76,500 3,205 U.S. Bancorp 185,000 3,926 - -------------------------------------------------------------------------------- 14,978 ================================================================================ DIVERSIFIED FINANCIAL SERVICES (4.6%) Citigroup, Inc. 160,200 5,637 - -------------------------------------------------------------------------------- FINANCE COMPANIES (1.4%) Mellon Financial Corp. 68,200 1,781 - -------------------------------------------------------------------------------- FINANCIAL MISCELLANEOUS (6.6%) Federal Home Loan Mortgage Corp. 110,500 6,525 Federal National Mortgage Association 9,950 640 MBNA Corp. 52,900 1,006 - -------------------------------------------------------------------------------- 8,171 ================================================================================ INSURANCE: LIFE (2.8%) Lincoln National Corp. 66,000 2,084 Principal Financial Group, Inc. 43,700 1,317 - -------------------------------------------------------------------------------- 3,401 ================================================================================ INSURANCE: MULTI-LINE (4.7%) Allstate Corp. (The) 137,050 5,070 Prudential Financial, Inc. 14,800 470 Travelers Property Casualty Corp., Class A (a)6,921 101 Travelers Property Casualty Corp., Class B (a)14,220 208 - -------------------------------------------------------------------------------- 5,849 ================================================================================ INVESTMENT MANAGEMENT COMPANIES (1.0%) JP Morgan Chase & Co. 50,250 $ 1,206 - -------------------------------------------------------------------------------- 41,023 ================================================================================ HEALTH CARE (11.7%) DRUGS & PHARMACEUTICALS (8.1%) Abbott Laboratories 28,200 1,128 Bristol-Myers Squibb Co. 85,700 1,984 Merck & Co., Inc. 66,800 3,781 Wyeth 80,850 3,024 - -------------------------------------------------------------------------------- 9,917 ================================================================================ HEALTH CARE FACILITIES (1.8%) Healthsouth Corp. (a)526,800 2,213 - -------------------------------------------------------------------------------- HEALTH CARE SERVICES (1.8%) Health Net, Inc. (a)86,200 2,276 - -------------------------------------------------------------------------------- 14,406 ================================================================================ INTEGRATED OILS (11.2%) OIL: INTEGRATED DOMESTIC (11.2%) BP plc ADR 49,650 2,018 Exxon Mobil Corp. 171,600 5,996 Royal Dutch Petroleum Co. ADR 73,100 3,218 TotalFinaElf S.A. ADR 36,300 2,595 - -------------------------------------------------------------------------------- 13,827 ================================================================================ MATERIALS & Processing (8.3%) BUILDING: MISCELLANEOUS (1.4%) Masco Corp. 79,950 1,683 - -------------------------------------------------------------------------------- CHEMICALS (4.8%) Air Products & Chemicals, Inc. 68,100 2,911 Engelhard Corp. 51,300 1,147 Millennium Chemicals, Inc. 99,950 952 PPG Industries, Inc. 16,700 837 - -------------------------------------------------------------------------------- 5,847 ================================================================================ CONTAINERS & PACKAGING: PAPER & PLASTIC (1.1%) Smurfit-Stone Container Corp. (a)91,400 1,407 - -------------------------------------------------------------------------------- PAPER (1.0%) Weyerhaeuser Co. 26,100 1,284 - -------------------------------------------------------------------------------- 10,221 ================================================================================ OTHER ENERGY (2.3%) ENERGY MISCELLANEOUS (0.6%) Noble Corp. (a)19,800 696 - -------------------------------------------------------------------------------- MACHINERY: OIL WELL EQUIPMENT & SERVICES (1.7%) Cooper Cameron Corp. (a)42,100 2,097 - -------------------------------------------------------------------------------- 2,793 ================================================================================ PRODUCER DURABLES (9.8%) AEROSPACE (3.4%) Boeing Co. (The) 36,800 1,214 General Dynamics Corp. 20,400 1,619 United Technologies Corp. 21,950 1,360 - -------------------------------------------------------------------------------- 4,193 ================================================================================ INDUSTRIAL PRODUCTS (1.0%) Stanley Works (The) 33,700 1,165 - -------------------------------------------------------------------------------- MACHINERY: CONSTRUCTION & HANDLING (1.3%) Caterpillar, Inc. 35,300 1,614 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 98 MORGAN STANLEY INSTITUTIONAL FUND, INC. Value Equity Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE SHARES (000) - -------------------------------------------------------------------------------- PRODUCER DURABLES (CONT'D) MANUFACTURING (4.1%) Honeywell International, Inc. 12,250 $ 294 Tyco International Ltd. 280,000 4,783 - -------------------------------------------------------------------------------- 5,077 ================================================================================ 12,049 ================================================================================ TECHNOLOGY (4.1%) COMMUNICATIONS TECHNOLOGY (2.0%) ADC Telecommunications, Inc. (a)169,700 355 Lucent Technologies, Inc. (a)241,700 304 Motorola, Inc. 149,450 1,293 Tellabs, Inc. (a)64,500 469 - -------------------------------------------------------------------------------- 2,421 ================================================================================ COMPUTER SERVICES SOFTWARE & SYSTEMS (0.5%) Check Point Software Technologies (a)47,000 610 - -------------------------------------------------------------------------------- COMPUTER TECHNOLOGY (0.6%) Hewlett-Packard Co. 43,700 759 - -------------------------------------------------------------------------------- ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (1.0%) Agere Systems, Inc., Class A (a)2,605 4 Koninklijke Philips Electronics N.V. (NY Shares) 68,250 1,206 - -------------------------------------------------------------------------------- 1,210 ================================================================================ 5,000 ================================================================================ UTILITIES (5.0%) UTILITIES: TELECOMMUNICATIONS (5.0%) SBC Communications, Inc. 128,950 3,496 Verizon Communications, Inc. 68,400 2,650 - -------------------------------------------------------------------------------- 6,146 ================================================================================ TOTAL COMMON STOCKS (COST $135,941) 121,097 ================================================================================ FACE AMOUNT (000) - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (2.3%) REPURCHASE AGREEMENT (2.3%) J.P. Morgan Securities, Inc., 1.05%, dated 12/31/02, due 1/2/03 (COST $2,849) $ (f)2,849 2,849 - -------------------------------------------------------------------------------- VALUE VALUE (000) (000) - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.6%) (COST $138,790) $ 123,946 ================================================================================ OTHER ASSETS (0.2%) Dividends Receivable $ 183 Receivable for Portfolio Shares Sold 2 Other 6 191 - -------------------------------------------------------------------------------- LIABILITIES (-0.8%) Payable for Portfolio Shares Redeemed (552) Payable for Investments Purchased (163) Investment Advisory Fees Payable (129) Distribution Fees, Class B (28) Administrative Fees Payable (20) Directors' Fees and Expenses Payable (18) Custodian Fees Payable (3) Other Liabilities (15) (928) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 123,209 ================================================================================ Net Assets Consist Of: Paid-in Capital $ 163,825 Undistributed (Distributions in Excess of) Net Investment Income (1) Accumulated Net Realized Gain (Loss) (25,771) Unrealized Appreciation (Depreciation) on Investments (14,844) - -------------------------------------------------------------------------------- NET ASSETS $ 123,209 ================================================================================ CLASS A: NET ASSETS $ 76,452 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 10,607,801 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 7.21 ================================================================================ CLASS B: NET ASSETS $ 46,757 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 6,486,421 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 7.21 ================================================================================
(a) -- Non-income producing security (f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. ADR -- American Depositary Receipts The accompanying notes are an integral part of the financial statements. 99 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Emerging Markets Debt Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) MEXICO 19.7% BRAZIL 16.0% RUSSIA 15.2% VENEZUELA 6.6% COLOMBIA 5.7% OTHER 36.8%
Of the amount shown above as "Other", a significant portion represents cash equivalents required under regulations to be held as collateral relating to investments in futures contracts. [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
EMERGING MARKETS DEBT J.P. MORGAN EMERGING PORTFOLIO-CLASS A MARKETS BOND GLOBAL INDEX * 500,000 500,000 1994 429,500 404,780 1995 550,748 511,541 1996 828,986 691,741 1997 978,949 774,404 1998 627,017 685,007 1999 810,231 850,641 2000 914,022 973,218 2001 1,010,634 986,454 2002 1,124,735 1,115,778
* Commenced operations on February 1, 1994 ** Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. The performance of Class B shares will vary based upon the different inception dates and fees assessed to that class. PERFORMANCE COMPARED TO THE J.P. MORGAN EMERGING MARKETS BOND GLOBAL INDEX(1)
TOTAL RETURNS(2) ------------------------------ AVERAGE ANNUAL ------------------ ONE FIVE SINCE YEAR YEARS INCEPTION - -------------------------------------------------------------- Portfolio - Class A(3) 11.29% 2.89% 9.59% Portfolio - Class B(4) 10.34 2.63 10.38 Index - Class A 13.11 7.58 9.42 Index - Class B 13.11 7.58 11.60
(1) The J.P. Morgan Emerging Markets Bond Global Index tracks total returns for U.S. dollar - denominated debt instruments issued by emerging market sovereign and quasi - sovereign entities, including Brady Bonds, loans, Eurobonds and local market instruments for over 30 emerging market countries. (2) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waiver and reimbursement, total returns would be lower. Fees waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (3) Commenced operations on February 1, 1994 (4) Commenced operations on January 2, 1996 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The Emerging Markets Debt Portfolio seeks high total return by investing primarily in fixed income securities of government and government-related issuers and, to a lesser extent, of corporate issuers in emerging market countries. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. In addition, investing in emerging markets may involve a relatively higher degree of volatility. For the year ended December 31, 2002, the Portfolio had a total return of 11.29% for the Class A shares and 10.34% for the Class B shares compared to 13.11% for the J.P. Morgan Emerging Markets Bond Global Index (the "Index"). MARKET REVIEW The emerging market debt (EMD) asset class has spent the better part of the last decade trying to shake its reputation for high risk and volatile return pattern. With another year of muted volatility and solid returns under its belt in 2002, it seems likely that EMD could receive some overdue attention by investors seeking higher yields in 2003. EMD performed quite well in 2002 due to the substantial decline in U.S. Treasury yields and contracting yield spreads for most EMD issues. More importantly, a number of positive trends gained momentum over the course of the year, including a continued improvement in overall credit quality, a 100 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Emerging Markets Debt Portfolio (cont'd) steady decline in inter-country correlations and continued new allocations to the EMD asset class. Relative returns were aided by security selection decisions in Russia, security selection in Indonesian corporates undergoing restructuring and consistent underweights in both Ecuador and Uruguay. Defensive positioning in Brazil, during the fourth quarter, detracted from relative returns, as did an overweight in Venezuelan assets. The EMD asset class got off to a very strong start in 2002 as spreads tightened by over 130 basis points during the first five months of the year. The rebound in the global economy and significant inflows into EMD were major factors driving this strong absolute performance. Motivated by evidence of a turn in the global economic cycle and low nominal interest rates in the developed world, many investors increased their EMD allocations. In addition, oil exporters such as Ecuador, Mexico, Nigeria, Russia and Venezuela performed particularly well in this environment as a result of higher than expected oil prices. The strong start for EMD gave way to a period of heightened volatility during the late spring and summer months. A left-leaning presidential candidate in Brazil unsettled the markets, as did a pause in global economic activity and revelations of corporate accounting scandals. These events rattled investor confidence in all financial markets and caused EMD to give back all of the gains earned during the first few months of the year. During the third quarter, the intensification of market volatility and the acknowledgement that new capital flows would not be forthcoming to Latin America caused EMD bond prices to fall further; yield spreads widened more than 300 basis points between May and the end of September. Fortunately, the asset class reversed course and rallied strongly during the final quarter of the year, allowing the yield spread on the overall Index to end the year 15 basis points below its starting level. The year end EMD rally was largely a response to the improvement in other non-Treasury bond markets, the sharp turnaround in equity prices in the final few months of the year, and the U.S. Federal Reserve's early November 50 basis point cut in the federal funds target rate. There was tremendous dispersion in the performance of EMD countries during 2002 as a number of countries posted total returns above 20% including Russia, South Africa, Turkey and Pakistan; while other countries such as Argentina, Brazil and Uruguay experienced negative returns. MARKET OUTLOOK As is usually the case, the high current income provided by EMD bonds may provide some protection against the potential for rising interest rates within the developed markets. Moreover, the combination of favorable liquidity conditions, a rebounding U.S. economy and the continuation of EMD inflows from new investors may provide a strong foundation supporting the EMD asset class in 2003. January 2003 101 MORGAN STANLEY INSTITUTIONAL FUND, INC. Emerging Markets Debt Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
FACE AMOUNT VALUE (000) (000) - -------------------------------------------------------------------------------- DEBT INSTRUMENTS (96.8%) ALGERIA (0.7%) SOVEREIGN (0.7%) Republic of Algeria, Tranche 1, 7.188%, 3/31/10 $ 361 $ 336 - -------------------------------------------------------------------------------- ARGENTINA (3.2%) SOVEREIGN (3.2%) Republic of Argentina, 11.375%, 3/15/10 1,070 235 Republic of Argentina, 11.75%, 4/07/09 1,120 252 Republic of Argentina, 11.75%, 6/15/15 1,060 243 Republic of Argentina, Series L-GP, 6.00%, 3/31/23 1,820 837 - -------------------------------------------------------------------------------- 1,567 ================================================================================ BRAZIL (16.0%) SOVEREIGN (16.0%) Federative Republic of Brazil, 2.563%, 4/15/24 (h)1,600 964 Federative Republic of Brazil, 2.625%, 4/15/09 (h)1,017 674 Federative Republic of Brazil, 2.625%, 4/15/12 (h)650 354 Federative Republic of Brazil, 8.875%, 4/15/24 2,880 1,555 Federative Republic of Brazil, 12.00%, 4/15/10 660 478 Federative Republic of Brazil, 12.25%, 3/06/30 250 174 Federative Republic of Brazil, 12.75%, 1/15/20 440 308 Federative Republic of Brazil, Series C, 8.00%, 4/15/14 2,746 1,799 Federative Republic of Brazil, Series Z-L, 2.625%, 4/15/12 (h)2,830 1,528 - -------------------------------------------------------------------------------- 7,834 ================================================================================ BULGARIA (2.0%) SOVEREIGN (2.0%) Republic of Bulgaria, 8.25%, 1/15/15 (e)373 407 Republic of Bulgaria, (Registered), 8.25%, 1/15/15 350 382 Republic of Bulgaria, Front Loaded Interest Reduction Bond, Series A, 2.688%, 7/28/12 (h)190 180 - -------------------------------------------------------------------------------- 969 ================================================================================ CHILE (0.9%) CORPORATE (0.9%) Empresa Nacional De Petroleo, 6.75%, 11/15/12 (e)420 443 - -------------------------------------------------------------------------------- COLOMBIA (5.7%) SOVEREIGN (5.7%) Republic of Colombia, 9.75%, 4/23/09 220 227 Republic of Colombia, 9.75%, 4/09/11 1,744 1,800 Republic of Colombia, 10.50%, 7/09/10 710 745 - -------------------------------------------------------------------------------- 2,772 ================================================================================ CROATIA (0.7%) SOVEREIGN (0.7%) Croatia, Series A, 2.688%, 7/31/10 (e)(h)327 324 - -------------------------------------------------------------------------------- DOMINICAN REPUBLIC (0.6%) SOVEREIGN (0.6%) Dominican Republic, 9.50%, 9/27/06 (e)100 107 Dominican Republic, (Registered), 9.50%, 9/27/06 190 205 - -------------------------------------------------------------------------------- 312 ================================================================================ EL SALVADOR (1.0%) SOVEREIGN (1.0%) Republic of El Salvador, 7.75%, 1/24/23 (e)480 478 - -------------------------------------------------------------------------------- INDONESIA (0.8%) CORPORATE (0.8%) Tjiwi Kimia Finance Mauritius Ltd., 10.00%, 8/01/04 $ (b)380 $ 93 Tjiwi Kimia International BV, 13.25%, 8/1/49 (b)1,190 292 - -------------------------------------------------------------------------------- 385 ================================================================================ IVORY COAST (0.6%) SOVEREIGN (0.6%) Ivory Coast, 2.00%, 3/29/18 (h)1,460 183 Ivory Coast, PDI, 2.00%, 3/29/18 (b)(h)988 128 - -------------------------------------------------------------------------------- 311 ================================================================================ MALAYSIA (3.4%) SOVEREIGN (3.4%) Malaysia, 7.50%, 7/15/11 1,460 1,679 - -------------------------------------------------------------------------------- MAURITIUS (0.6%) CORPORATE (0.6%) Pindo Deli Financial Mauritius, 10.75%, 10/01/07 (b)(e)1,300 299 - -------------------------------------------------------------------------------- MEXICO (19.6%) CORPORATE (4.6%) Pemex Project Funding Master Trust, 8.625%, 2/01/22 (e)480 506 Pemex Project Funding Master Trust, 9.125%, 10/13/10 890 1,014 Petroleos Mexicanos, 9.50%, 9/15/27 650 748 - -------------------------------------------------------------------------------- 2,268 ================================================================================ SOVEREIGN (15.0%) United Mexican States, (MTN), 8.30%, 8/15/31 2,170 2,296 United Mexican States, 11.375%, 9/15/16 1,620 2,171 United Mexican States, Series A, 9.875%, 2/01/10 (h)2,350 2,885 - -------------------------------------------------------------------------------- 7,352 ================================================================================ 9,620 ================================================================================ MOROCCO (2.3%) SOVEREIGN (2.3%) Kingdom of Morocco, Series A, 2.563%, 1/01/09 (h)1,242 1,134 - -------------------------------------------------------------------------------- NIGERIA (1.0%) SOVEREIGN (1.0%) Central Bank of Nigeria, 6.25%,11/15/20 (n)750 510 - -------------------------------------------------------------------------------- PANAMA (2.9%) SOVEREIGN (2.9%) Republic of Panama, 2.25%, 7/17/16 (h)286 228 Republic of Panama, 9.375%, 4/01/29 770 826 Republic of Panama, 9.625%, 2/08/11 345 377 - -------------------------------------------------------------------------------- 1,431 ================================================================================ PERU (4.7%) SOVEREIGN (4.7%) Republic of Peru, 9.125%, 2/21/12 980 960 Republic of Peru, Front Loaded Interest Reduction Bond, 4.00%, 3/07/17 (h)940 668 Republic of Peru, Front Loaded Interest Reduction Bond, 4.50%, 3/07/17 (h)872 680 - -------------------------------------------------------------------------------- 2,308 ================================================================================
The accompanying notes are an integral part of the financial statements. 102 MORGAN STANLEY INSTITUTIONAL FUND, INC. Emerging Markets Debt Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
FACE AMOUNT VALUE (000) (000) - -------------------------------------------------------------------------------- PHILIPPINES (1.5%) SOVEREIGN (1.5%) Republic of Philippines, 9.375%, 1/18/17 $ 730 $ 750 - -------------------------------------------------------------------------------- POLAND (0.8%) SOVEREIGN (0.8%) Republic of Poland, 3.75%, 10/27/24 (n)470 395 - -------------------------------------------------------------------------------- QATAR (0.9%) SOVEREIGN (0.9%) State of Qatar, (Registered), 9.75%, 6/15/30 350 445 - -------------------------------------------------------------------------------- RUSSIA (15.2%) SOVEREIGN (15.2%) Russia Federation, 5.00%, 3/31/30 (e)(n)65 52 Russia Federation, 5.00%, 3/31/30 (n)4,003 3,172 Russia Federation, 8.25%, 3/31/10 305 323 Russia Federation, 8.25%, 3/31/10 (e)5 5 Russia Federation, 8.75%, 7/24/05 740 802 Russia Federation, 12.75%, 6/24/28 2,350 3,114 - -------------------------------------------------------------------------------- 7,468 ================================================================================ SOUTH AFRICA (1.7%) SOVEREIGN (1.7%) Republic of South Africa, 7.375%, 4/25/12 790 855 - -------------------------------------------------------------------------------- SOUTH KOREA (1.7%) CORPORATE (1.2%) Korea Electric Power, 7.75%, 4/01/13 500 602 - -------------------------------------------------------------------------------- SOVEREIGN (0.5%) Republic of Korea, Global Bond, 8.875%, 4/15/08 200 248 - -------------------------------------------------------------------------------- 850 ================================================================================ TUNISIA (0.4%) CORPORATE (0.4%) Banque Centrale de Tunisie, 7.375%, 4/25/12 210 220 - -------------------------------------------------------------------------------- TURKEY (0.9%) SOVEREIGN (0.9%) Republic of Turkey, 12.375%, 6/15/09 410 445 - -------------------------------------------------------------------------------- UKRAINE (0.4%) SOVEREIGN (0.4%) Ukraine Government, 11.00%, 3/15/07 192 197 - -------------------------------------------------------------------------------- VENEZUELA (6.6%) SOVEREIGN (6.6%) Republic of Venezuela, 9.25%, 9/15/27 2,080 1,407 Republic of Venezuela, Debt Conversion Bond, Series DL, 2.3125%, 12/18/07 (h)1,786 1,370 Republic of Venezuela, Series A, 6.75%, 3/31/20 540 435 - -------------------------------------------------------------------------------- 3,212 ================================================================================ TOTAL DEBT INSTRUMENTS (COST $47,669) 47,549 ================================================================================ NO. OF RIGHTS - -------------------------------------------------------------------------------- RIGHTS (0.1%) MEXICO (0.1%) United Mexican States, Value Recovery Rights, Series A, expiring 6/30/03 (COST $--@) (a)12,466,000 38 - -------------------------------------------------------------------------------- NO. OF VALUE WARRANTS (000) - -------------------------------------------------------------------------------- WARRANTS (0.0%) COLOMBIA (0.0%) Occidente y Caribe Cellular, expiring 3/15/04 (a)(e)20,600 $ @-- - -------------------------------------------------------------------------------- NIGERIA (0.0%) Central Bank of Nigeria, expiring 11/15/20 (a)(d)7,750 @-- - -------------------------------------------------------------------------------- VENEZUELA (0.0%) Republic of Venezuela, expiring 4/15/20 (a)2,700 @-- - -------------------------------------------------------------------------------- TOTAL WARRANTS (COST $13) @-- ================================================================================ TOTAL INVESTMENTS (96.9%) (COST $47,682) 47,587 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- OTHER ASSETS (3.6%) Interest Receivable $ 1,038 Receivable for Investments Sold 562 Receivable Due from Broker 85 Receivable for Portfolio Shares Sold 59 Other 6 1,750 - -------------------------------------------------------------------------------- LIABILITIES (-0.5%) Investment Advisory Fees Payable (93) Bank Overdraft Payable (92) Directors' Fees and Expenses Payable (13) Administrative Fees Payable (9) Custodian Fees Payable (4) Other Liabilities (14) (225) - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 49,112 ================================================================================ Net Assets Consist Of: Paid-in Capital $ 143,644 Undistributed (Distributions in Excess of) Net Investment Income (570) Accumulated Net Realized Gain (Loss) (93,770) Unrealized Appreciation (Depreciation) on Investments and Futures (192) - -------------------------------------------------------------------------------- NET ASSETS $ 49,112 ================================================================================ CLASS A: NET ASSETS $ 48,769 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 16,556,458 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 2.95 ================================================================================ CLASS B: NET ASSETS $ 343 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 114,172 outstanding $0.001 par value shares (authorized 500,000,000 shares) $ 3.00 ================================================================================
The accompanying notes are an integral part of the financial statements. 103 MORGAN STANLEY INSTITUTIONAL FUND, INC. Emerging Markets Debt Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd) (a) -- Non-income producing security (b) -- Issuer is in default. (d) -- Securities were valued at fair value -- See Note A-1 to financial statements. At December 31, 2002, the Portfolio held fair valued securities representing less than 0.05% of net assets. (e) -- 144A security - certain conditions for public sale may exist. (h) -- Variable/Floating Rate Security - interest rate changes on these instruments are based on changes in designated base rate. The rates shown are those in effect on December 31, 2002. (n) -- Step Bond - coupon rate increases in increments to maturity. Rate disclosed is as of December 31, 2002. Maturity date disclosed is the ultimate maturity date. @ -- Value is less than $500. MTN -- Medium-Term Note PDI -- Past Due Interest FUTURES CONTRACTS: The Portfolio had the following futures contract(s) open at period end:
NET NUMBER NOTIONAL UNREALIZED OF VALUE EXPIRATION GAIN/(LOSS) CONTRACTS (000) DATE (000) - ------------------------------------------------------------------------- SHORT: U.S. Treasury 5 yr. Note 53 US$6,002 Mar-03 $ (97) ====== - -------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 104 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Money Market Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) US GOVERNMENT & AGENCY SECURITIES 25.6% INTERNATIONAL BANKS 16.8% INTEGRATED OIL COMPANIES 11.3% DIVERSIFIED FINANCIAL SERVICES 8.0% MAJOR BANKS 7.7% OTHER 30.6%
[CHART] COMPARATIVE MONTHLY AVERAGE YIELDS
MONEY MARKET PORTFOLIO iMONEYNET MONEY FUND 30 DAY YIELDS COMPARABLE YIELDS Jan 1.46 1.49 Feb 1.35 1.41 Mar 1.3 1.37 Apr 1.31 1.37 May 1.33 1.33 Jun 1.35 1.32 Jul 1.33 1.29 Aug 1.31 1.26 Sept 1.29 1.24 Oct 1.26 1.21 Nov 1.26 1.07 Dec 1.16 0.92
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE. The Money Market Portfolio seeks to maximize current income and preserve capital while maintaining high levels of liquidity. Investments in shares of the Portfolio are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Portfolio seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Portfolio. The seven day yield and seven day effective yield (which assumes an annualization of the current yield with all dividends reinvested) for the Portfolio as of December 31, 2002, were 1.02% and 1.03%, respectively. The yield quotation more closely reflects the current earnings of the Portfolio than the total return. As with all money market portfolios, the seven day yields are not necessarily indicative of future performance. MARKET REVIEW The Federal Open Market Committee, having lowered its federal funds target to 1.75% on December 11, 2001, maintained that level for almost eleven months until November 6, 2002 when it reduced its target to 1.25%, a 41 year low. The Federal Reserve Bank has taken this accommodative posture as it tries to moderate the slowing pace of economic activity until greater confidence is achieved. Against this backdrop, money market yield levels have fallen to record lows. With the federal funds target rate at such low levels for 2002, the economy appears to be firming. Gross Domestic Product growth rebounded to 4% in the third quarter of 2002, up from just 1.3% in the second quarter. However, early fourth quarter data have been mixed. The Institute for Supply Management Manufacturing Index rose in both November and December. The December level of 54.7 was well above expected, and the first reading above 50 since August. After declining for all of the third quarter, the Index of Leading Economic Indicators rose in both October and November. However, non-farm payrolls contracted in three of the final four months of 2002, and durable goods orders unexpectedly fell 1.4% in November, after a 1.7% gain in October. Given the extremely low level of money market interest rates and our belief that the U.S. economy will continue to recover over the next year, we have begun to prudently shorten the weighted average maturity of the Portfolio slightly. Throughout the year, we maintained our high credit standards in the Portfolio by using a significant proportion of Federal agency obligations, especially in the three-month and longer maturity segment. At the same time, we attempted to limit purchases of corporate obligations to those issuers possessing 105 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Money Market Portfolio (cont'd) both top short-term credit ratings and relatively high long-term debt ratings. On December 31, 2002, approximately 42% of the Portfolio was invested in high-quality commercial paper, 25% in Federal agency obligations, 18% in repurchase agreements and the remaining 15% in short-term bank notes and certificates of deposit issued by financially strong commercial banks. The average maturity of the Portfolio was 45 days. At the end of the fiscal period, 83% of the Portfolio's holdings were due to mature in less than three months. Consequently, we believe that the Portfolio is well positioned for stability of value with a high degree of liquidity. As always, we attempt to operate the Portfolio in a conservative manner without the use of derivatives or structured notes that might fluctuate excessively with changing interest rates. We believe that the Portfolio continues to serve as a useful investment for liquidity, preservation of capital and a yield that reflects prevailing money market conditions. MARKET OUTLOOK We expect the pace of economic activity during the first six months of 2003 to begin to reflect some improvement as the economy responds to stimulative monetary and fiscal conditions. Barring the outbreak of war or further significant terrorist activity, consumer and business confidence should continue to improve, producing meaningful economic expansion. Such an environment normally leads to moderately higher levels of short-term interest rates, which could become more evident during the second half of 2003. January 2003 106 MORGAN STANLEY INSTITUTIONAL FUND, INC. Money Market Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
FACE AMORTIZED AMOUNT COST (000) (000) - -------------------------------------------------------------------------------- MONEY MARKET INSTRUMENTS (82.5%) BANKING (2.2%) Northern Trust, 1.70%, 1/07/03 $ 30,000 $ 29,991 - -------------------------------------------------------------------------------- DIVERSIFIED FINANCIAL SERVICES (8.0%) General Electric Capital Corp., 1.68%, 2/11/03 55,000 54,896 Mortgage Interest Networking Trust, 1.33%, 1/21/03 55,000 54,959 - -------------------------------------------------------------------------------- 109,855 ================================================================================ FINANCE - AUTOMOTIVE (2.9%) BMW US Capital Corp., 1.40%, 1/09/03 40,000 39,987 - -------------------------------------------------------------------------------- FINANCE - CONSUMER (4.0%) New Center Asset Trust, 1.33%, 1/10/03 25,000 24,992 New Center Asset Trust, 1.33%, 1/28/03 30,000 29,970 - -------------------------------------------------------------------------------- 54,962 ================================================================================ INSURANCE (4.0%) AIG Funding, 1.31%, 1/30/03 55,000 54,942 - -------------------------------------------------------------------------------- INTEGRATED OIL COMPANIES (11.3%) BP America, Inc., 1.33%, 6/02/03 55,000 54,694 ChevronTexaco Corp., 1.32%, 1/15/03 50,000 49,974 Shell Finance plc, 1.72%, 3/11/03 50,000 49,837 - -------------------------------------------------------------------------------- 154,505 ================================================================================ INTERNATIONAL BANKS (16.8%) BNP Paribas Finance, Inc., 1.73%, 1/16/03 55,000 55,000 Lloyds TSB Bank plc, 1.32%, 2/19/03 40,000 40,001 Royal Bank of Scotland, 1.33%, 1/06/03 40,000 39,993 Societe Generale, 1.33%, 2/24/03 55,000 54,891 Westpac Capital Corp., 1.30%, 2/12/03 40,000 39,939 - -------------------------------------------------------------------------------- 229,824 ================================================================================ MAJOR BANKS (7.7%) Citibank N.A., 1.32%, 2/20/03 50,000 50,001 State Street Bank & Trust Co., 1.35%, 1/03/03 55,000 55,000 - -------------------------------------------------------------------------------- 105,001 ================================================================================ US GOVERNMENT & Agency Securities (25.6%) Federal Farm Credit Bank, 1.48%, 8/06/03 25,000 24,780 Federal National Mortgage Association, 1.28%, 3/12/03 50,000 49,876 Federal National Mortgage Association, 1.28%, 4/15/03 40,715 40,566 Federal National Mortgage Association, 1.28%, 5/07/03 40,000 39,822 Federal National Mortgage Association, 1.52%, 4/30/03 30,000 29,850 Federal National Mortgage Association, 1.68%, 2/14/03 50,000 49,898 Federal National Mortgage Association, 1.69%, 1/10/03 26,000 25,989 Federal National Mortgage Association, 1.73%, 4/23/03 50,000 49,734 Federal National Mortgage Association, 1.81%, 2/05/03 40,000 39,930 - -------------------------------------------------------------------------------- 350,445 ================================================================================ TOTAL MONEY MARKET INSTRUMENTS (COST $1,129,512) 1,129,512 ================================================================================ REPURCHASE AGREEMENT (17.6%) Bear Stearns & Co., Tri-Party, 1.25%, dated 12/31/02, due 1/2/03 (COST $242,000) $(f)242,000 $ 242,000 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.1%) (COST $1,371,512) 1,371,512 ================================================================================ VALUE (000) - -------------------------------------------------------------------------------- OTHER ASSETS (0.1%) Cash 98 Interest Receivable 409 Other 62 569 - -------------------------------------------------------------------------------- LIABILITIES (-0.2%) Investment Advisory Fees Payable (1,077) Dividends Declared (645) Administrative Fees Payable (195) Directors' Fees and Expenses Payable (186) Custodian Fees Payable (11) Other Liabilities (32) (2,146) - -------------------------------------------------------------------------------- NET ASSETS (100%) $1,369,935 ================================================================================ NET ASSETS CONSIST OF: Paid-in Capital $1,369,847 Undistributed Net Investment Income 88 - -------------------------------------------------------------------------------- NET ASSETS $1,369,935 ================================================================================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 1,370,014,162 outstanding $0.001 par value shares (authorized 4,000,000,000 shares) $ 1.00 ================================================================================
(f) -- The repurchase agreement is fully collateralized by U.S. government and/or agency obligations based on market prices at the date of this statement of net assets. The investment in the repurchase agreement is through participation in a joint account with affiliated parties. The accompanying notes are an integral part of the financial statements. 107 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Municipal Money Market Portfolio (Unaudited) [CHART] COMPOSITION OF NET ASSETS (AT DECEMBER 31, 2002) WEEKLY VARIABLE RATE BONDS 45.9% COMMERCIAL PAPER 24.7% DAILY VARIABLE RATE BONDS 11.8% MUNICIPAL BONDS & NOTES 11.6% PUT OPTION BONDS 5.8% OTHER 0.2%
[CHART] COMPARATIVE MONTHLY AVERAGE YIELDS
MUNICIPAL MONEY MARKET iMONEYNET MUNICIPAL MONEY FUND PORTFOLIO 30 DAY YIELDS COMPARABLE YIELDS Jan 0.99 0.95 Feb 0.89 0.92 Mar 0.8 0.9 Apr 0.84 1.02 May 0.97 1.13 Jun 0.86 0.95 Jul 0.86 0.84 Aug 0.86 0.85 Sept 0.94 0.91 Oct 1.04 1.08 Nov 1.03 1.04 Dec 0.82 0.67
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE AND ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. YIELD WILL FLUCTUATE AS MARKET CONDITIONS CHANGE. The Municipal Money Market Portfolio seeks to maximize current tax-exempt income and preserve capital. Investments in shares of the Portfolio are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Portfolio seeks to preserve its net asset value of $1.00 per share, it is possible to lose money by investing in the Portfolio. The seven day yield and seven day effective yield (assumes an annualization of the current yield with all dividends reinvested) for the Portfolio as of December 31, 2002, were 0.93% and 0.93%, respectively. The seven day taxable equivalent yield and the seven day taxable equivalent effective yield for the Portfolio at December 31, 2002 assuming a Federal income tax rate of 38.6% (maximum rate) were 1.51% and 1.51%, respectively. The seven day yields are not necessarily indicative of future performance. MARKET REVIEW Tax-free money market yields remained relatively stable during the first half of 2002, which was in line with prevailing monetary policy. The Federal Reserve Board shifted its bias from weakness to neutral and it held constant until November when they reduced the target rate for federal funds to 1.25%, a 41 year low. Subsequently, yields for both fixed-rate and variable-rate municipal money market instruments registered further sharp declines. The Bond Buyer One Year Note Index, a benchmark indicator for the tax-free money market, decreased from 1.64% to 1.18% between the end of October and the end of December. At the same time, yields for daily and weekly variable rate demand obligations (VRDOs) declined even more dramatically. Yields for weekly VRDOs fell from a 12 month high of 1.85% in late October to just above 1.00% in early December. The year closed with daily and weekly VRDO yields at more attractive levels as the market faced its traditional seasonal cash outflows. Nonetheless, the market was braced for another drop in yields with the start of 2003, and the heavy cash inflows that normally occur in early January. During 2002, the net assets of the Portfolio declined 32% to $910 million as investors resisted the meager yields available. Our asset allocation heavily favored VRDOs and short-maturity commercial paper, and the Portfolio's weighted average maturity moved within a short to moderate range. In June, our seasonal purchases of new one year notes were more modest than a year earlier. The low interest rate environment, coupled with increasing municipal budgetary pressures, called for greater restraint in managing portfolio maturity. At the 108 MORGAN STANLEY INSTITUTIONAL FUND, INC. Investment Overview Municipal Money Market Portfolio (cont'd) end of December, the Portfolio's average maturity was 32 days. MARKET OUTLOOK We expect the pace of economic activity during 2003 to begin to reflect some improvement as the economy responds to stimulative monetary and fiscal conditions. Barring the outbreak of war or further significant terrorist activity in the world, consumer and business confidence should continue to improve, producing meaningful economic expansion. Such an economic environment normally leads to moderately higher levels of short-term interest rates, which could become more evident during the second half of 2003. January 2003 109 MORGAN STANLEY INSTITUTIONAL FUND, INC. Municipal Money Market Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets
FACE AMORTIZED AMOUNT COST (000) (000) - ---------------------------------------------------------------------------------------------- TAX-EXEMPT INSTRUMENTS (99.8%) FIXED RATE INSTRUMENTS (42.1%) COMMERCIAL PAPER (24.7%) Clark County, Nevada, Motor Vehicle Fuel Tax, Ser. B, 1.00%, 2/12/03 $ 15,000 $ 15,000 Harris County, Texas, Ser. A-1Notes, 1.15%, 2/06/03 7,422 7,422 Houston, Texas, Water & Sewer, Ser. 1994 A, 1.10%, 2/20/03 5,000 5,000 Indiana State Office Building Commission, Hoosier Notes, Ser. A, 1.10%, 2/18/03 7,906 7,906 Jacksonville Health Facilities Authority, Florida, St Luke's Hospital Association, Ser. 2001 A, 1.25%, 2/26/03 5,445 5,445 JEA, Florida, Water & Sewer System, Ser. E, 1.15%, 2/25/03 10,000 10,000 King County, Washington, Sewer Ser. A, 1.35%, 1/13/03 15,000 15,000 Maryland Health & Higher Educational Facilities Authority, Maryland, Johns Hopkins University, Ser. A, 1.05%, 1/29/03 10,000 10,000 Montgomery County Industrial Development Authority, Pennsylvania, PECO Energy Co., Ser. 1994 A, 1.10%, 1/13/03 13,000 13,000 Montgomery Industrial Development Board, Alabama, General Electric Co., Ser. 1990, 1.30%, 1/21/03 10,000 10,000 New York City Municipal Water Finance Authority, New York, Ser. 4, 1.15%, 2/10/03 6,500 6,500 Purdue University Dormitory System, Indiana, Ser. 2000, 1.25%, 2/25/03 6,000 6,000 Rochester, Minnesota, Mayo Foundation, Ser. 1992 C, 1.30%, 1/28/03 12,000 12,000 Rochester, Minnesota, Mayo Foundation, Ser. 2000 C, 1.25%, 1/14/03 10,000 10,000 San Antonio, Texas, Electric & Gas, Ser. 1995 A, 1.05%, 2/27/03 12,000 12,000 San Antonio, Texas, Electric & Gas, Ser. 1995 A, 1.25%, 2/26/03 7,200 7,200 San Antonio, Texas, Water System, Ser. A, 1.00%, 1/22/03 7,200 7,200 South Carolina Public Service Authority, Santee Cooper, Ser. 1998, 1.05%, 2/11/03 15,000 15,000 South Carolina Public Service Authority, Santee Cooper, Ser. 1998, 1.05%, 2/13/03 15,000 15,000 Texas Municipal Power Agency, Ser. 1991, 1.05%, 1/22/03 20,000 20,000 University of Texas System Board of Regents, Ser. A, 1.40%, 1/14/03 15,000 15,000 - ---------------------------------------------------------------------------------------------- 224,673 ============================================================================================== MUNICIPAL BONDS & NOTES (11.6%) Colorado, Ser. 2002 A, TRANs, 3.00%, 6/27/03 20,000 20,142 Greenville County School District, South Carolina, Ser. 2002, 2.00%, 3/01/03 10,000 10,012 Houston, Texas, Ser. 2002, TRANs, 3.00%, 6/30/03 10,000 10,069 Idaho, Ser. 2002, TANs, 3.00%, 6/30/03 12,500 12,583 Illinois, Revenue Anticipation Certificates, Ser. 2002, 3.00%, 4/15/03 10,000 10,046 Indiana Bond Bank, Advance Funding, Ser. 2002 A-2, 2.25%, 1/22/03 10,000 10,004 Indianapolis Local Improvement Bond Bank, Indiana, Ser. 2002 A Notes, 2.375%, 1/09/03 $ 3,000 $ 3,001 New Jersey, Ser. 2003 A, TRANs, 3.00%, 6/12/03 10,000 10,067 South Carolina Association of Government Organizations, Ser. 2002, COPs, TANs, 3.00%, 4/15/03 10,000 10,044 Texas, Ser. 2002, TRANs, 2.75%, 8/29/03 10,000 10,088 - ---------------------------------------------------------------------------------------------- 106,056 ============================================================================================== PUT OPTION BONDS (5.8%) Intermountain Power Agency, Utah, Ser. 1985 E, (Put 3/17/03), 1.50%, 7/01/14 23,500 23,500 Intermountain Power Agency, Utah, Ser. 1985 F, (Put 6/01/03), 1.25%, 7/01/18 10,000 10,000 Oklahoma Water Resources Board, State Loan, Ser. 1995, (Put 3/03/03), 1.30%, 9/01/24 10,000 10,000 Oklahoma Water Resources Board, State Loan, Ser. 2001, (Put 4/01/03), 1.45%, 10/01/34 9,100 9,100 - ---------------------------------------------------------------------------------------------- 52,600 ============================================================================================== 383,329 ============================================================================================== VARIABLE/FLOATING RATE INSTRUMENTS (57.7%) DAILY VARIABLE RATE BONDS (11.8%) Breckinridge County, Kentucky, Kentucky Association of Counties Leasing Trust, Ser. 2002 A, 1.80%, 2/01/32 1,400 1,400 California Health Facilities Financing Authority, Adventist Health System/West, Ser. 1998 B (MBIA), 1.55%, 9/01/28 1,800 1,800 California Health Facilities Financing Authority, Adventist Health System/West, Ser. 2002 A, 1.50%, 9/01/25 4,000 4,000 Clarksville Public Building Authority, Tennessee, Pooled Financing, Ser. 2001, 1.75%, 7/01/31 4,600 4,600 Harris County Health Facilities Development Corp., Texas, Methodist Hospital, Ser. 2002, 1.80%, 12/01/32 16,250 16,250 Idaho Health Facilities Authority, St. Luke's Regional Medical Center, Ser. 1995, 1.80%, 5/01/22 2,485 2,485 Illinois Development Finance Authority, Jewish Federation of Metropolitan Chicago, Ser. 2002 (AMBAC), 1.80%, 9/01/32 3,200 3,200 Illinois Development Finance Authority, YMCA of Metropolitan Chicago, Ser. 2001, 1.80%, 6/01/29 4,240 4,240 Illinois Health Facilities Authority, Northwestern Memorial Hospital, Ser. 1995, 1.75%, 8/15/25 5,800 5,800 Illinois Health Facilities Authority, Northwestern Memorial Hospital, Ser. 2002 B, 1.75%, 8/15/09 7,200 7,200 Irvine Ranch Water District, California, Capital Improvement, Ser. 1986, COPs, 1.45%, 8/01/16 600 600 Maricopa County, Arizona, Arizona Public Service Co., Ser. 1994 C, 1.80%, 5/01/29 8,200 8,200 Metropolitan Government of Nashville & Davidson County Health & Education Board, Tennessee, Vanderbilt University, Ser. 2002 B, 1.85%, 10/01/32 2,600 2,600 Missouri Health & Educational Facilities Authority, Cox Health System, Ser. 1997 (MBIA), 1.75%, 6/01/15 4,000 4,000 Missouri Health & Educational Facilities Authority, Washington University, Ser. 2000 B, 1.80%, 3/01/40 4,200 4,200 Tempe, Arizona, Excise Tax, Ser. 1998, 1.75%, 7/01/23 15,600 15,600 University of Missouri, Ser. 2000 B, 1.80%, 11/01/30 3,700 3,700
The accompanying notes are an integral part of the financial statements. 110 MORGAN STANLEY INSTITUTIONAL FUND, INC. Municipal Money Market Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
FACE AMORTIZED AMOUNT COST (000) (000) - ---------------------------------------------------------------------------------------------- VARIABLE/FLOATING RATE INSTRUMENTS (CONT'D) DAILY VARIABLE RATE BONDS (CONT'D) Utah County, Utah, IHC Health Services, Inc., Ser. 2002 B, 1.80%, 5/15/35 $ 4,500 $ 4,500 Ward County, North Dakota, Trinity Obligated Group, Ser. 2002 A, 1.85%, 7/01/29 4,250 4,250 Washington Health Care Facilities Authority, Virginia Mason Medical Center, Ser. 1997 B (MBIA), 1.66%, 2/15/27 2,200 2,200 West Side Calhoun County, Texas, Sohio Chemical Co., Ser. 1985, 1.80%, 12/01/15 6,100 6,100 - ---------------------------------------------------------------------------------------------- 106,925 ============================================================================================== WEEKLY VARIABLE RATE BONDS (45.9%) Arizona Health Facilities Authority, Northern Arizona Healthcare, Ser. 1996 B (MBIA), 1.60%, 10/01/26 4,250 4,250 Arkansas Development Finance Authority, Higher Education Capital Asset Program, Ser. 1985 A, 1.60%, 12/01/15 6,900 6,900 Atlanta, Georgia, Water & Wastewater, Ser. 2001 B, 1.55%, 11/01/38 25,000 25,000 Bi-State Development Agency of the Missouri-Illinois Metropolitan District, Metrolink Cross County Extension, Ser. 2002 A (FSA), 1.60%, 10/01/32 13,000 13,000 Charlotte-Mecklenburg Hospital Authority, North Carolina, Health Care System, Ser. C, 1.45%, 1/15/26 11,000 11,000 Chicago Board of Education, Illinois, Ser. 2000 B, 1.50%, 3/01/32 11,400 11,400 Clark County, Nevada, Airport System, Sub-Lien, Ser. 2001 C (FGIC), 1.45%, 7/01/29 26,360 26,360 Clarksville Public Building Authority, Tennessee, Pooled Financing, Ser. 1995, 1.55%, 10/01/25 11,310 11,310 Cleveland, Ohio, Airport System, Ser. 2001 C, 1.55%, 1/01/31 10,000 10,000 Cleveland, Ohio, Income Tax Refunding, Sub Ser. 1994, 1.55%, 5/15/24 11,823 11,823 Detroit, Michigan, Sewage Disposal System, Senior Lien, Ser. 2001 C-1 (FSA), 1.60%, 7/01/27 15,600 15,600 Fulton County Development Authority, Georgia, Morehouse College, Ser. 1997, 1.55%, 8/01/17 3,415 3,415 Harris County, Texas, Toll Road Unlimited Tax Sub Lien, Ser. 1994 B, 1.60%, 8/01/15 13,800 13,800 Harris County Industrial Development Corporation, Texas, Baytank, Inc., Ser. 1998, 1.60%, 2/01/20 4,400 4,400 Illinois Development Finance Authority, Consolidated Edison Co., Ser. C, 1.60%, 3/01/09 5,000 5,000 Indiana Health Facilities Authority, Community Hospitals of Indiana, Inc., Ser. 2000 A, 1.55%, 7/01/28 7,500 7,500 Jackson Energy Authority, Tennessee, Water System, Ser. 2002 (FSA), 1.55%, 12/01/23 5,390 5,390 Jacksonville Health Facilities Authority, Florida, Charity Obligated Group, Ser. 1997 C, 1.35%, 8/15/19 21,205 21,205 Louisiana Public Facilities Authority, College & University Equipment, Ser. A, 1.60%, 9/01/10 5,000 5,000 Michigan, Grant Anticipation Notes, Ser. 2001 B (FSA), 1.45%, 9/15/08 10,000 10,000 Michigan Building Authority, 2002 Multi-Modal Ser. II, 1.60%, 10/15/36 10,000 10,000 Missouri Health & Educational Facilities Authority, Stowers Institute, Ser. 2000 (MBIA), 1.60%, 7/01/35 $ 8,600 $ 8,600 Montgomery County Public Building Authority, Tennessee, Pooled Financing, Ser. 1997, 1.55%, 11/01/27 7,100 7,100 New York City Transitional Finance Authority, New York, Fiscal 1999 2nd Ser. SubSer. A-1, 1.60%, 11/15/22 9,135 9,135 New York City Transitional Finance Authority, New York, Recovery, Fiscal 2003 Ser. 3 SubSer. 3D, 1.55%, 11/01/22 12,600 12,600 North Carolina Medical Care Commission, North Carolina Baptist Hospitals, Ser. 2000, 1.55%, 6/01/30 13,900 13,900 North Carolina, Ser. 2002 C, 1.45%, 6/01/19 5,700 5,700 Oregon, Veteran's Welfare, Ser. 73 F, 1.45%, 12/01/17 20,500 20,500 Pennsylvania Higher Educational Facilities Authority, University of Pennsylvania Health Services, Ser. 1994 B, 1.60%, 1/01/24 10,500 10,500 Pennsylvania Turnpike Commission, Ser. 2002 A-2, 1.50%, 12/01/31 10,000 10,000 Piedmont Municipal Power Agency, South Carolina, Ser. 2002 B (FGIC), 1.60%, 1/01/18 15,900 15,900 Regional Transportation District, Colorado, Transit Vehicles, Ser. 2002 A, COPs (AMBAC), 1.55%, 12/01/22 11,000 11,000 University of Delaware, Ser. 1998, 1.60%, 11/01/23 10,000 10,000 Utah, Ser. A, 1.45%, 7/01/16 10,500 10,500 Washington State, Ser. VR-96 B, 1.45%, 6/01/20 11,000 11,000 Weber County, Utah, IHC Health Services, Inc., Ser. 2000 C, 1.60%, 2/15/35 15,000 15,000 Williamsburg, Kentucky, Cumberland College, Ser. 2002, 1.52%, 9/01/32 9,500 9,500 Winston-Salem, North Carolina, Water & Sewer System, Ser. 2002 B, 1.50%, 6/01/30 4,700 4,700 - ---------------------------------------------------------------------------------------------- 417,988 ============================================================================================== 524,913 ============================================================================================== TOTAL TAX-EXEMPT INSTRUMENTS (COST $908,242) 908,242 ============================================================================================== TOTAL INVESTMENTS (99.8%) (COST $908,242) 908,242 ============================================================================================== VALUE (000) - ---------------------------------------------------------------------------------------------- OTHER ASSETS (1.6%) Receivable for Investments Sold 12,011 Interest Receivable 2,729 Other 36 14,776 - ---------------------------------------------------------------------------------------------- LIABILITIES (-1.4%) Bank Overdraft Payable (11,197) Investment Advisory Fees Payable (754) Dividends Declared (335) Administrative Fees Payable (137) Directors' Fees and Expenses Payable (105) Custodian Fees Payable (13) Other Liabilities (51) (12,592) - ---------------------------------------------------------------------------------------------- NET ASSETS (100%) $ 910,426 ==============================================================================================
The accompanying notes are an integral part of the financial statements. 111 MORGAN STANLEY INSTITUTIONAL FUND, INC. Municipal Money Market Portfolio FINANCIAL STATEMENTS December 31, 2002 Statement of Net Assets (cont'd)
VALUE (000) - -------------------------------------------------------------------------------- Net Assets Consist Of: Paid-in Capital $ 910,417 Undistributed Net Investment Income 9 - -------------------------------------------------------------------------------- NET ASSETS $ 910,426 ================================================================================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE Applicable to 910,419,519 outstanding $0.001 par value shares (authorized 4,000,000,000 shares) $ 1.00 ================================================================================
SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE
AMORTIZED PERCENT COST OF NET STATE (000) ASSETS - -------------------------------------------------------------- Arizona $ 28,050 3.1% Arkansas 6,900 0.8 California 6,400 0.7 Colorado 31,142 3.4 Florida 36,650 4.0 Georgia 28,415 3.1 Idaho 15,068 1.7 Illinois 46,886 5.1 Indiana 34,411 3.8 Kentucky 10,900 1.2 Louisiana 5,000 0.5 Maryland 20,000 2.2 Michigan 35,600 3.9 Minnesota 22,000 2.4 Missouri 33,500 3.7 Nevada 41,360 4.5 New Jersey 10,067 1.1 New York 28,235 3.1 North Carolina 35,300 3.9 North Dakota 4,250 0.5 Ohio 21,823 2.4 Oklahoma 19,100 2.1 Oregon 20,500 2.3 Pennsylvania 43,500 4.8 South Carolina 65,956 7.2 Tennessee 31,000 3.4 Texas 134,529 14.8 Utah 63,500 7.0 Washington 28,200 3.1 - -------------------------------------------------------------- $ 908,242 99.8% ==============================================================
The accompanying notes are an integral part of the financial statements. 112 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements STATEMENTS OF OPERATIONS For the year ended December 31, 2002
ACTIVE ASIAN EUROPEAN EUROPEAN INTERNATIONAL ASIAN REAL EMERGING REAL VALUE ALLOCATION EQUITY ESTATE MARKETS ESTATE EQUITY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO (000) (000) (000) (000) (000) (000) - ---------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 7,672 $ 858 $ 85 $ 16,668 $ 753 $ 909 Interest 690 9 1 460 7 46 Less: Foreign Taxes Withheld (830) (64) (4) (1,065) -- (60) - ---------------------------------------------------------------------------------------------------------------------------------- Total Income 7,532 803 82 16,063 760 895 - ---------------------------------------------------------------------------------------------------------------------------------- EXPENSES: Investment Advisory Fees 2,069 338 19 10,036 139 269 Administrative Fees 512 71 9 1,176 36 58 Custodian Fees 196 234 19 1,106 50 117 Directors' Fees and Expenses 3 -- -- 7 1 1 Filing and Registration Fees 44 26 24 254 23 30 Country Tax Expense -- 17 -- 533 -- -- Insurance Fees 8 1 -- 19 -- 1 Interest Expense --# 4 --# 10 1 3 Professional Fees 52 28 15 43 15 20 Shareholder Reporting Fees 69 18 --# 35 1 1 Distribution Fees on Class B Shares 24 2 1 48 3 3 Other Expenses 8 3 5 10 5 5 - ---------------------------------------------------------------------------------------------------------------------------------- Total Expenses 2,985 742 92 13,277 274 508 - ---------------------------------------------------------------------------------------------------------------------------------- Waiver of Investment Advisory Fees (416) (296) (19) -- (97) (165) Expenses Reimbursed by Adviser -- (1) (48) -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net Expenses 2,569 445 25 13,277 177 343 - ---------------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 4,963 358 57 2,786 583 552 - ---------------------------------------------------------------------------------------------------------------------------------- REALIZED GAIN (LOSS): Investments Sold (45,403) (3,151) 32 (50,980) 661 (2,002) Foreign Currency Transactions 1,907 (126) 1 (5,392) (7) 43 Futures Contracts (1,157) -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net Realized Gain (Loss) (44,653) (3,277) 33 (56,372) 654 (1,959) - ---------------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION): Investments 5,572 (1,067) (377) 698 2,332 (1,684) Foreign Currency Translations (227) 1 -- 3,905* 34 44 Futures Contracts (284) -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net Change in Unrealized Appreciation (Depreciation) 5,061 (1,066) (377) 4,603 2,366 (1,640) - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (39,592) (4,343) (344) (51,769) 3,020 (3,599) - ---------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations $(34,629) $(3,985) $(287) $(48,983) $3,603 $(3,047) ==================================================================================================================================
* Net of foreign tax of $5,000. # Amount is less than $500. The accompanying notes are an integral part of the financial statements. 113 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements STATEMENTS OF OPERATIONS For the year ended December 31, 2002
GLOBAL JAPANESE GLOBAL VALUE INTERNATIONAL INTERNATIONAL INTERNATIONAL VALUE FRANCHISE EQUITY EQUITY MAGNUM SMALL CAP EQUITY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO (000) (000) (000) (000) (000) (000) - ---------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $1,528 $ 1,373 $ 98,520 $ 1,495 $ 9,991 $ 245 Interest 41 75 7,083 152 261 13 Less: Foreign Taxes Withheld (154) (53) (10,820) (167) (1,070) (37) - ---------------------------------------------------------------------------------------------------------------------------------- Total Income 1,415 1,395 94,783 1,480 9,182 221 - ---------------------------------------------------------------------------------------------------------------------------------- EXPENSES: Investment Advisory Fees 470 536 33,926 653 4,061 203 Administrative Fees 95 109 6,639 147 673 45 Custodian Fees 35 44 1,101 148 239 24 Directors' Fees and Expenses 1 4 64 2 7 -- Filing and Registration Fees 30 25 45 47 24 25 Insurance Fees 1 1 94 3 7 1 Interest Expense --# --# 3 8 --# 6 Professional Fees 45 25 275 22 47 17 Shareholder Reporting Fees 72 4 273 24 29 3 Distribution Fees on Class B Shares 3 71 640 24 -- 2 Other Expenses 1 6 37 5 6 4 - ---------------------------------------------------------------------------------------------------------------------------------- Total Expenses 753 825 43,097 1,083 5,093 330 - ---------------------------------------------------------------------------------------------------------------------------------- Waiver of Investment Advisory Fees (163) (85) (62) (236) (177) (68) - ---------------------------------------------------------------------------------------------------------------------------------- Net Expenses 590 740 43,035 847 4,916 262 - ---------------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 825 655 51,748 633 4,266 (41) - ---------------------------------------------------------------------------------------------------------------------------------- REALIZED GAIN (LOSS): Investments Sold 152 (3,285) (72,312) (7,957) (15,539) (3,518) Foreign Currency Transactions (1,312) 52 40,091 (232) 18 (11) Futures Contracts -- -- -- (1,021) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net Realized Gain (Loss) (1,160) (3,233) (32,221) (9,210) (15,521) (3,529) - ---------------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION): Investments 2,275 (9,698) (190,089) (3,264) (5,727) 894 Foreign Currency Translations (186) (152) 5,638 298 197 2 Futures Contracts -- -- -- (44) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net Change in Unrealized Appreciation (Depreciation) 2,089 (9,850) (184,451) (3,010) (5,530) 896 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 929 (13,083) (216,672) (12,220) (21,051) (2,633) - ---------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations $1,754 $(12,428) $(164,924) $(11,587) $(16,785) $(2,674) ==================================================================================================================================
# Amount is less than $500. The accompanying notes are an integral part of the financial statements. 114 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements STATEMENTS OF OPERATIONS For the year ended December 31, 2002
SMALL LATIN EQUITY FOCUS COMPANY AMERICAN GROWTH EQUITY GROWTH TECHNOLOGY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO (000) (000) (000) (000) (000) - -------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 655 $ 6,450 $ 688 $ 558 $ 22 Interest 13 580 69 214 20 - -------------------------------------------------------------------------------------------------------------------------------- Total Income 668 7,030 757 772 42 - -------------------------------------------------------------------------------------------------------------------------------- EXPENSES: Investment Advisory Fees 231 4,119 592 2,747 275 Administrative Fees 27 1,095 122 438 50 Custodian Fees 25 66 30 49 16 Directors' Fees and Expenses 1 16 1 4 -- Filing and Registration Fees 26 59 25 41 43 Country Tax Expense 20 -- -- -- -- Insurance Fees 1 18 2 5 1 Interest Expense --# 29 --# 1 2 Professional Fees 17 59 18 27 14 Shareholder Reporting Fees -- 62 7 48 -- Distribution Fees on Class B Shares 1 460 23 496 5 Other Expenses 4 7 5 2 2 - -------------------------------------------------------------------------------------------------------------------------------- Total Expenses 353 5,990 825 3,858 408 - -------------------------------------------------------------------------------------------------------------------------------- Waiver of Investment Advisory Fees -- (15) (63) (342) (57) - -------------------------------------------------------------------------------------------------------------------------------- Net Expenses 353 5,975 762 3,516 351 - -------------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 315 1,055 (5) (2,744) (309) - -------------------------------------------------------------------------------------------------------------------------------- REALIZED GAIN (LOSS): Investments Sold (3,863) (161,941) (22,037) (42,857) (22,790) Foreign Currency Transactions (261) -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------------- Net Realized Gain (Loss) (4,124) (161,941) (22,037) (42,857) (22,790) - -------------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION): Investments (1,199) (66,890) (4,056) (27,447) 3,898 Foreign Currency Translations 209 -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------------- Net Change in Unrealized Appreciation (Depreciation) (990) (66,890) (4,056) (27,447) 3,898 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (5,114) (228,831) (26,093) (70,304) (18,892) - -------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations $(4,799) $(227,776) $(26,098) $(73,048) $(19,201) ================================================================================================================================
# Amount is less than $500. The accompanying notes are an integral part of the financial statements. 115 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements STATEMENTS OF OPERATIONS For the year ended December 31, 2002
EMERGING MUNICIPAL U.S. REAL VALUE MARKETS MONEY MONEY ESTATE EQUITY DEBT MARKET MARKET PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO (000) (000) (000) (000) (000) - -------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 35,217 $ 3,147 $ -- $ -- $ -- Interest 454 68 5,235 32,339 15,750 Less: Foreign Taxes Withheld (127) (2) (20) -- -- - -------------------------------------------------------------------------------------------------------------------------------- Total Income 35,544 3,213 5,215 32,339 15,750 - -------------------------------------------------------------------------------------------------------------------------------- EXPENSES: Investment Advisory Fees 6,355 673 397 5,400 3,433 Administrative Fees 1,248 217 88 2,822 1,703 Custodian Fees 71 24 21 107 103 Directors' Fees and Expenses 16 13 -- 76 37 Filing and Registration Fees 33 48 24 52 39 Insurance Fees 17 3 1 45 -- Interest Expense 2 1 1 -- -- Professional Fees 54 19 23 149 89 Shareholder Reporting Fees 97 18 3 47 22 Distribution Fees on Class B Shares 73 112 1 -- -- Other Expenses 8 7 3 24 14 - -------------------------------------------------------------------------------------------------------------------------------- Total Expenses 7,974 1,135 562 8,722 5,440 - -------------------------------------------------------------------------------------------------------------------------------- Waiver of Investment Advisory Fees -- (80) -- -- -- - -------------------------------------------------------------------------------------------------------------------------------- Net Expenses 7,974 1,055 562 8,722 5,440 - -------------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 27,570 2,158 4,653 23,617 10,310 - -------------------------------------------------------------------------------------------------------------------------------- REALIZED GAIN (LOSS): Investments Sold 20,017 (21,579) 2,057 -- -- Foreign Currency Transactions (6) -- -- -- -- Futures Contracts -- -- (303) -- -- - -------------------------------------------------------------------------------------------------------------------------------- Net Realized Gain (Loss) 20,011 (21,579) 1,754 -- -- - -------------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION): Investments (55,613) (19,695) (1,149) -- -- Futures Contracts -- -- (97) -- -- - -------------------------------------------------------------------------------------------------------------------------------- Net Change in Unrealized Appreciation (Depreciation) (55,613) (19,695) (1,246) -- -- - -------------------------------------------------------------------------------------------------------------------------------- TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (35,602) (41,274) 508 -- -- - -------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations $ (8,032) $(39,116) $ 5,161 $23,617 $10,310 ================================================================================================================================
The accompanying notes are an integral part of the financial statements. 116 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements Statements of Changes in Net Assets
ACTIVE INTERNATIONAL ALLOCATION ASIAN EQUITY PORTFOLIO PORTFOLIO - ----------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2002 2001 (000) (000) (000) (000) - ----------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 4,963 $ 5,682 $ 358 $ 370 Net Realized Gain (Loss) (44,653) (30,371) (3,277) (19,739) Net Change in Unrealized Appreciation (Depreciation) 5,061 (65,978) (1,066) 17,812 - ----------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations (34,629) (90,667) (3,985) (1,557) - ----------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (7,427) (6,140) (221) (313) Net Realized Gain -- (219) -- -- Return of Capital -- -- (49) -- CLASS B: Net Investment Income (222) (119) (4) (3) Net Realized Gain -- (10) -- -- Return of Capital -- -- (2) -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (7,649) (6,488) (276) (316) - ----------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 159,875 131,550 26,242 87,412 Distributions Reinvested 4,778 4,464 264 285 Redeemed (261,623) (162,938) (47,004) (96,750) CLASS B: Subscribed 71,895 378,609 463 798 Distributions Reinvested 216 126 6 3 Redeemed (73,290) (385,192) (416) (1,233) - ----------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions (98,149) (33,381) (20,445) (9,485) - ----------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets (140,427) (130,536) (24,706) (11,358) NET ASSETS: Beginning of Period 398,587 529,123 46,155 57,513 - ---------------------------------------------------------------------------------------------------------------------------------- End of Period $ 258,160 $ 398,587 $ 21,449 $ 46,155 ================================================================================================================================== Undistributed (distributions in excess of) net investment income included in end of period net assets $ (121) $ 469 $ 30 $ (27) Accumulated net investment loss included in end of period net assets -- -- -- -- ================================================================================================================================== (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 20,117 15,490 3,022 10,609 Shares Issued on Distributions Reinvested 635 523 35 36 Shares Redeemed (31,429) (18,829) (5,757) - ----------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding (10,677) (2,816) (2,700) (1,029) ================================================================================================================================== CLASS B: Shares Subscribed 9,059 36,900 51 91 Shares Issued on Distributions Reinvested 28 14 1 -- Shares Redeemed (9,132) (37,567) (50) (149) - ----------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding (45) (653) 2 (58) ==================================================================================================================================
The accompanying notes are an integral part of the financial statements. 117 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements Statements of Changes in Net Assets
ASIAN REAL ESTATE EMERGING MARKETS PORTFOLIO PORTFOLIO - ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2002 2001 (000) (000) (000) (000) - ------------------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 57 $ 44 $ 2,786 $ 4,088 Net Realized Gain (Loss) 33 119 (56,372) (293,520) Net Change in Unrealized Appreciation (Depreciation) (377) (591) 4,603 245,734 - ------------------------------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Net Assets Resulting from Operations (287) (428) (48,983) (43,698) - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (69) (66) (324) -- CLASS B: Net Investment Income (13) (13) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total Distributions (82) (79) (324) -- - ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 160 2 888,416 649,086 Distributions Reinvested 5 1 306 -- Redeemed (41) (349) (928,810) (774,429) CLASS B: Subscribed 33 12 446,446 108,329 Distributions Reinvested 13 12 -- -- Redeemed -- -- (449,154) (107,814) - ------------------------------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions 170 (322) (42,796) (124,828) - ------------------------------------------------------------------------------------------------------------------------------------ Total Increase (Decrease) in Net Assets (199) (829) (92,103) (168,526) NET ASSETS: Beginning of Period 2,441 3,270 762,514 931,040 - ------------------------------------------------------------------------------------------------------------------------------------ End of Period $2,242 $2,441 $670,411 $762,514 =================================================================================================================================== Undistributed (distributions in excess of) net investment income included in end of period net assets $ (38) $ (33) $ -- $ -- Accumulated net investment loss included in end of period net assets -- -- (2,432) (387) =================================================================================================================================== (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 27 -- 85,929 60,810 Shares Issued on Distributions Reinvested 1 -- 30 -- Shares Redeemed (6) (42) (90,310) (72,689) - ------------------------------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Class A Shares Outstanding 22 (42) (4,351) (11,879) =================================================================================================================================== CLASS B: Shares Subscribed 5 2 40,886 10,642 Shares Issued on Distributions Reinvested 2 1 -- -- Shares Redeemed -- -- (40,921) (10,534) - ------------------------------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Class B Shares Outstanding 7 3 (35) 108 ===================================================================================================================================
The accompanying notes are an integral part of the financial statements. 118 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements Statements of Changes in Net Assets
EUROPEAN REAL ESTATE EUROPEAN VALUE EQUITY PORTFOLIO PORTFOLIO - --------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2002 2001 (000) (000) (000) (000) - --------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 583 $ 338 $ 552 $ 794 Net Realized Gain (Loss) 654 12 (1,959) (1,484) Net Change in Unrealized Appreciation (Depreciation) 2,366 (1,522) (1,640) (8,765) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 3,603 (1,172) (3,047) (9,455) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (1,033) (394) (497) (1,385) Net Realized Gain -- -- -- (2,150) CLASS B: Net Investment Income (54) (38) (13) (29) Net Realized Gain -- -- -- (44) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1,087) (432) (510) (3,608) - --------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 4,490 8,870 40,190 22,991 Distributions Reinvested 959 352 470 3,187 Redeemed (2,366) (1,719) (41,916) (45,029) CLASS B: Subscribed 148 906 530 -- Distributions Reinvested 37 32 13 72 Redeemed (1,129) (539) (489) (1,066) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions 2,139 7,902 (1,202) (19,845) - --------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets 4,655 6,298 (4,759) (32,908) NET ASSETS: Beginning of Period 15,513 9,215 35,126 68,034 - --------------------------------------------------------------------------------------------------------------------------------- End of Period $20,168 $15,513 $30,367 $35,126 ================================================================================================================================= Undistributed (distributions in excess of) net investment income included in end of period net assets $ (163) $ (77) $ 29 $ (56) Accumulated net investment loss included in end of period net assets -- -- -- -- ================================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 407 878 3,704 1,781 Shares Issued on Distributions Reinvested 88 37 46 270 Shares Redeemed (223) (178) (3,850) (3,701) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding 272 737 (100) (1,650) ================================================================================================================================= CLASS B: Shares Subscribed 13 91 46 -- Shares Issued on Distributions Reinvested 3 3 1 6 Shares Redeemed (110) (53) (43) (79) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding (94) 41 4 (73) =================================================================================================================================
The accompanying notes are an integral part of the financial statements. 119 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements Statements of Changes in Net Assets
GLOBAL FRANCHISE GLOBAL VALUE EQUITY PORTFOLIO PORTFOLIO - --------------------------------------------------------------------------------------------------------------------------------- PERIOD FROM NOVEMBER 28, YEAR ENDED 2001* TO YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2002 2001 (000) (000) (000) (000) - --------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 825 $ 3 $ 655 $ 492 Net Realized Gain (Loss) (1,160) (7) (3,233) 444 Net Change in Unrealized Appreciation (Depreciation) 2,089 263 (9,850) (5,774) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 1,754 259 (12,428) (4,838) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income -- -- (527) (364) Net Realized Gain (164) -- (335) -- CLASS B: Net Investment Income -- -- (334) (262) Net Realized Gain (5) -- (266) -- - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (169) -- (1,462) (626) - --------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 60,250 10,351 143,418 11,104 Distributions Reinvested 164 -- 844 319 Redeemed (24,012) -- (135,881) (14,405) CLASS B: Subscribed 1,835 400 15,905 14,901 Distributions Reinvested 4 -- 600 262 Redeemed (765) -- (14,001) (13,163) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions 37,476 10,751 10,885 (982) - --------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets 39,061 11,010 (3,005) (6,446) NET ASSETS: Beginning of Period 11,010 -- 64,168 70,614 - --------------------------------------------------------------------------------------------------------------------------------- End of Period $ 50,071 $11,010 $ 61,163 $ 64,168 ================================================================================================================================= Undistributed (distributions in excess of) net investment income included in end of period net assets $ -- $ (4) $ (38) $ 116 Accumulated net investment loss included in end of period net assets -- -- -- -- ================================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 5,437 1,011 10,431 705 Shares Issued on Distributions Reinvested 14 -- 66 21 Shares Redeemed (2,152) -- (9,948) (891) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding 3,299 1,011 549 (165) ================================================================================================================================= CLASS B: Shares Subscribed 154 40 1,143 980 Shares Issued on Distributions Reinvested 1 -- 47 17 Shares Redeemed (68) -- (978) (819) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding 87 40 212 178 =================================================================================================================================
* Commencement of Operations The accompanying notes are an integral part of the financial statements. 120 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements Statements of Changes in Net Assets
INTERNATIONAL EQUITY INTERNATIONAL MAGNUM PORTFOLIO PORTFOLIO - --------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2002 2001 (000) (000) (000) (000) - --------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 51,748 $ 60,117 $ 633 $ 1,634 Net Realized Gain (Loss) (32,221) 98,154 (9,210) (11,213) Net Change in Unrealized Appreciation (Depreciation) (184,451) (642,551) (3,010) (23,558) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations (164,924) (484,280) (11,587) (33,137) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (87,623) (83,187) (442) (750) Net Realized Gain (7,616) (49,310) -- -- CLASS B: Net Investment Income (8,590) (3,289) (23) (39) Net Realized Gain (802) (2,059) -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (104,631) (137,845) (465) (789) - --------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 1,471,477 1,309,026 86,175 372,553 Distributions Reinvested 79,948 110,929 433 726 Redeemed (1,351,956) (1,612,189) (127,233) (405,868) CLASS B: Subscribed 654,576 153,973 116,041 31,560 Distributions Reinvested 9,264 5,071 23 38 Redeemed (370,933) (45,226) (119,763) (40,828) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions 492,376 (78,416) (44,324) (41,819) - --------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets 222,821 (700,541) (56,376) (75,745) NET ASSETS: Beginning of Period 4,170,256 4,870,797 131,295 207,040 - --------------------------------------------------------------------------------------------------------------------------------- End of Period $ 4,393,077 $ 4,170,256 $ 74,919 $ 131,295 ================================================================================================================================= Undistributed (distributions in excess of) net investment income included in end of period net assets $ (13,902) $ (1,972) $ 22 $ (56) Accumulated net investment loss included in end of period net assets -- -- -- -- ================================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 129,820 95,828 9,726 37,283 Shares Issued on Distributions Reinvested 5,495 7,260 51 79 Shares Redeemed (121,464) (115,322) (14,222) (40,315) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding 13,851 (12,234) (4,445) (2,953) ================================================================================================================================= CLASS B: Shares Subscribed 43,886 9,784 13,932 3,167 Shares Issued on Distributions Reinvested 640 333 3 4 Shares Redeemed (24,947) (2,826) (14,240) (4,077) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding 19,579 7,291 (305) (906) =================================================================================================================================
The accompanying notes are an integral part of the financial statements. 121 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements Statements of Changes in Net Assets
INTERNATIONAL SMALL CAP JAPANESE VALUE EQUITY PORTFOLIO PORTFOLIO - --------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2002 2001 (000) (000) (000) (000) - --------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 4,266 $ 5,123 $ (41) $ (96) Net Realized Gain (Loss) (15,521) 7,218 (3,529) 508 Net Change in Unrealized Appreciation (Depreciation) (5,530) (35,447) 896 (14,454) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations (16,785) (23,106) (2,674) (14,042) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (4,135) (6,718) -- (683) Net Realized Gain (1,006) (5,923) -- -- CLASS B: Net Investment Income -- -- -- (32) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (5,141) (12,641) -- (715) - --------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 243,823 41,400 36,263 24,582 Distributions Reinvested 4,538 11,761 -- 562 Redeemed (163,292) (15,387) (32,381) (44,409) Transaction Fees -- 30* -- -- CLASS B: Subscribed -- -- 1,345 994 Distributions Reinvested -- -- -- 26 Redeemed -- -- (2,064) (3,177) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions 85,069 37,804 3,163 (21,422) - --------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets 63,143 2,057 489 (36,179) NET ASSETS: Beginning of Period 376,981 374,924 23,978 60,157 - --------------------------------------------------------------------------------------------------------------------------------- End of Period $ 440,124 $376,981 $ 24,467 $ 23,978 ================================================================================================================================= Undistributed (distributions in excess of) net investment income included in end of period net assets $ 416 $ (554) $ -- $ (151) Accumulated net investment loss included in end of period net assets -- -- (11) -- ================================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 16,577 5,453 7,334 3,791 Shares Issued on Distributions Reinvested 313 787 -- 83 Shares Redeemed (11,351) (3,815) (6,511) (6,896) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding 5,539 2,425 823 (3,022) ================================================================================================================================= CLASS B: Shares Subscribed -- -- 252 149 Shares Issued on Distributions Reinvested -- -- -- 4 Shares Redeemed -- -- (389) (459) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding -- -- (137) (306) =================================================================================================================================
* Effective January 18, 2001, the transaction fee of one-half of one percent charged on subscriptions and redemptions of capital shares was eliminated. The accompanying notes are an integral part of the financial statements. 122 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements Statements of Changes in Net Assets
LATIN AMERICAN EQUITY GROWTH PORTFOLIO PORTFOLIO - --------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2002 2001 (000) (000) (000) (000) - --------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 315 $ 568 $ 1,055 $ (71) Net Realized Gain (Loss) (4,124) (2,351) (161,941) (49,745) Net Change in Unrealized Appreciation (Depreciation) (990) 1,073 (66,890) (141,991) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations (4,799) (710) (227,776) (191,807) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (233) (327) (1,002) -- Net Realized Gain -- -- -- (6,695) CLASS B: Net Investment Income (1) (9) -- -- Net Realized Gain -- -- -- (2,633) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (234) (336) (1,002) (9,328) - --------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 5,693 3,163 152,575 340,476 Distributions Reinvested 230 322 978 6,571 Redeemed (5,623) (5,176) (158,888) (484,577) CLASS B: Subscribed 99 256 39,890 80,644 Distributions Reinvested 2 8 -- 2,609 Redeemed (664) (546) (44,367) (154,670) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) from Net Assets Resulting from Capital Share Transactions (263) (1,973) (9,812) (208,947) - --------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets (5,296) (3,019) (238,590) (410,082) NET ASSETS: Beginning of Period 23,524 26,543 827,298 1,237,380 - --------------------------------------------------------------------------------------------------------------------------------- End of Period $18,228 $23,524 $ 588,708 $ 827,298 ================================================================================================================================= Undistributed (distributions in excess of) net investment income included in end of period net assets $ 8 $ 210 $ (37) $ 39 Accumulated net investment loss included in end of period net assets -- -- -- -- ================================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 741 318 19,117 21,593 Shares Issued on Distributions Reinvested 32 37 77 360 Shares Redeemed (741) (571) (19,492) (30,299) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding 32 (216) (298) (8,346) ================================================================================================================================= CLASS B: Shares Subscribed 10 25 2,672 4,462 Shares Issued on Distributions Reinvested 1 1 -- 144 Shares Redeemed (74) (57) (3,079) (8,764) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding (63) (31) (407) (4,158) =================================================================================================================================
The accompanying notes are an integral part of the financial statements. 123 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements Statements of Changes in Net Assets
FOCUS EQUITY SMALL COMPANY GROWTH PORTFOLIO PORTFOLIO - --------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2002 2001 (000) (000) (000) (000) - --------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ (5) $ (269) $ (2,744) $ (1,797) Net Realized Gain (Loss) (22,037) (20,649) (42,857) (51,329) Net Change in Unrealized Appreciation (Depreciation) (4,056) (2,309) (27,447) 35,383 - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations (26,098) (23,227) (73,048) (17,743) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Realized Gain -- (2,293) -- (16) CLASS B: Net Realized Gain -- (393) -- (9) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions -- (2,686) -- (25) - --------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 23,618 34,740 46,585 51,798 Distributions Reinvested -- 2,165 -- 9 Redeemed (34,446) (55,763) (33,493) (47,236) CLASS B: Subscribed 2,113 1,756 147,135 117,401 Distributions Reinvested -- 385 -- -- Redeemed (5,773) (4,430) (63,125) (18,241) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions (14,488) (21,147) 97,102 103,731 - --------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets (40,586) (47,060) 24,054 85,963 NET ASSETS: Beginning of Period 98,347 145,407 266,399 180,436 - --------------------------------------------------------------------------------------------------------------------------------- End of Period $ 57,761 $ 98,347 $290,453 $266,399 ================================================================================================================================= Undistributed (distributions in excess of) net investment income included in end of period net assets $ -- $ 15 $ -- $ (11) Accumulated net investment loss included in end of period net assets (13) -- (10) -- ================================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 5,039 2,729 5,967 6,325 Shares Issued on Distributions Reinvested -- 162 -- 1 Shares Redeemed (6,073) (4,430) (4,557) (5,934) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding (1,034) (1,539) 1,410 392 ================================================================================================================================= CLASS B: Shares Subscribed 228 126 18,139 13,222 Shares Issued on Distributions Reinvested -- 29 -- 2 Shares Redeemed (558) (351) (8,081) (2,086) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding (330) (196) 10,058 11,138 =================================================================================================================================
The accompanying notes are an integral part of the financial statements. 124 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements Statements of Changes in Net Assets
TECHNOLOGY U.S. REAL ESTATE PORTFOLIO PORTFOLIO - --------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2002 2001 (000) (000) (000) (000) - --------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ (309) $ (722) $ 27,570 $ 27,219 Net Realized Gain (Loss) (22,790) (59,781) 20,011 26,151 Net Change in Unrealized Appreciation (Depreciation) 3,898 8,347 (55,613) 6,103 - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations (19,201) (52,156) (8,032) 59,473 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income -- -- (26,650) (25,005) Net Realized Gain -- (3,360) (29,124) (27,746) CLASS B: Net Investment Income -- -- (996) (780) Net Realized Gain -- (260) (1,321) (934) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions -- (3,620) (58,091) (54,465) - --------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 15,412 37,400 290,341 210,287 Distributions Reinvested -- -- 50,451 47,000 Redeemed (19,397) (44,388) (319,193) (149,787) CLASS B: Subscribed 6,182 3,474 24,064 14,956 Distributions Reinvested -- -- 2,306 1,633 Redeemed (6,125) (3,217) (15,057) (13,526) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transaction (3,928) (6,731) 32,912 110,563 - --------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets (23,129) (62,507) (33,211) 115,571 NET ASSETS: Beginning of Period 45,332 107,839 720,069 604,498 - --------------------------------------------------------------------------------------------------------------------------------- End of Period $ 22,203 $ 45,332 $ 686,858 $ 720,069 ================================================================================================================================= Undistributed (distributions in excess of) net investment income included in end of period net assets $ -- $ (8) $ (32) $ 291 Accumulated net investment loss included in end of period net assets (5) -- -- -- ================================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 1,912 2,289 24,809 14,786 Shares Issued on Distributions Reinvested -- -- 3,577 3,202 Shares Redeemed (2,180) (2,917) (27,657) (10,648) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding (268) (628) 729 7,340 ================================================================================================================================= CLASS B: Shares Subscribed 831 218 1,630 1,014 Shares Issued on Distributions Reinvested -- -- 166 112 Shares Redeemed (797) (213) (1,046) (931) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding 34 5 750 195 =================================================================================================================================
The accompanying notes are an integral part of the financial statements. 125 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements Statements of Changes in Net Assets
VALUE EQUITY EMERGING MARKETS DEBT PORTFOLIO PORTFOLIO - --------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2002 2001 (000) (000) (000) (000) - --------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 2,158 $ 1,593 $ 4,653 $ 4,016 Net Realized Gain (Loss) (21,579) 1,340 1,754 (453) Net Change in Unrealized Appreciation (Depreciation) (19,695) (4,864) (1,246) 1,951 - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations (39,116) (1,931) 5,161 5,514 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (1,456) (1,384) (5,033) (4,292) Net Realized Gain -- (3,174) -- -- CLASS B: Net Investment Income (693) (247) (33) (30) Net Realized Gain -- (741) -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (2,149) (5,546) (5,066) (4,322) - --------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 42,581 71,706 10,976 20,595 Distributions Reinvested 1,266 4,178 4,640 3,069 Redeemed (42,155) (38,786) (19,493) (19,363) CLASS B: Subscribed 43,271 28,809 -- -- Distributions Reinvested 644 816 33 30 Redeemed (7,421) (4,303) (129) -- - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions 38,186 62,420 (3,973) 4,331 - --------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets (3,079) 54,943 (3,878) 5,523 NET ASSETS: Beginning of Period 126,288 71,345 52,990 47,467 - --------------------------------------------------------------------------------------------------------------------------------- End of Period $123,209 $126,288 $ 49,112 $ 52,990 ================================================================================================================================= Undistributed (distributions in excess of) net investment income included in end of period net assets $ (1) $ (10) $ (570) $ (267) Accumulated net investment loss included in end of period net assets -- -- -- -- ================================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 6,387 7,205 7,995 7,000 Shares Issued on Distributions Reinvested 162 428 1,578 1,037 Shares Redeemed (6,448) (3,951) (10,813) (6,613) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding 101 3,682 (1,240) 1,424 ================================================================================================================================= CLASS B: Shares Subscribed 4,789 2,805 -- -- Shares Issued on Distributions Reinvested 84 84 11 10 Shares Redeemed (930) (432) (40) -- - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding 3,943 2,457 (29) 10 =================================================================================================================================
The accompanying notes are an integral part of the financial statements. 126 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Statements Statements of Changes in Net Assets
MONEY MARKET MUNICIPAL MONEY MARKET PORTFOLIO PORTFOLIO - ------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2002 2001 (000) (000) (000) (000) - ------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 23,617 $ 122,588 $ 10,310 $ 32,457 Net Realized Gain (Loss) -- 378 -- 104 - ------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 23,617 122,966 10,310 32,561 - ------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (23,615) (122,588) (10,310) (32,457) - ------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 6,805,999 22,912,054 5,534,478 8,233,752 Distributions Reinvested 23,615 119,156 10,310 31,747 Redeemed (8,165,964) (23,351,717) (5,981,180) (8,395,221) - ------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions (1,336,350) (320,507) (436,392) (129,722) - ------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets (1,336,348) (320,129) (436,392) (129,618) NET ASSETS: Beginning of Period 2,706,283 3,026,412 1,346,818 1,476,436 - ------------------------------------------------------------------------------------------------------------------------------- End of Period $ 1,369,935 $ 2,706,283 $ 910,426 $ 1,346,818 ================================================================================================================================= Undistributed net investment income $ 88 $ 86 $ 9 $ 9 ================================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 6,805,999 23,019,981 5,534,480 8,231,752 Shares Issued on Distributions Reinvested 23,615 119,148 10,310 31,746 Shares Redeemed (8,165,964) (23,459,644) (5,981,170) (8,393,216) - ------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding (1,336,350) (320,515) (436,380) (129,718) =================================================================================================================================
The accompanying notes are an integral part of the financial statements. 127 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Active International Allocation Portfolio Selected Per Share Data and Ratios
CLASS A ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998++ - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.65 $ 10.68 $ 14.26 $ 11.90 $ 10.39 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss)(1) 0.13 0.12 0.19 0.22 0.22 Net Realized and Unrealized Gain (Loss) on Investments (1.26) (2.01) (2.32) 3.01 1.86 - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.13) (1.89) (2.13) 3.23 2.08 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.22) (0.14) (0.01) (0.11) (0.34) Net Realized Gain -- (0.00)+ (1.44) (0.76) (0.23) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.22) (0.14) (1.45) (0.87) (0.57) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 7.30 $ 8.65 $ 10.68 $ 14.26 $ 11.90 ================================================================================================================================= TOTAL RETURN (13.11)% (17.63)% (14.97)% 27.82% 20.12% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $249,742 $388,225 $509,309 $583,607 $266,832 Ratio of Expenses to Average Net Assets(1) 0.80% 0.81% 0.82% 0.80% 0.80% Ratio of Expenses to Average Net Assets Excluding Interest N/A 0.80% 0.80% N/A N/A Expense Ratio of Net Investment Income (Loss) to Average Net Assets(1) 1.57% 1.25% 1.55% 1.71% 1.91% Portfolio Turnover Rate 42% 36% 80% 53% 49% - --------------------------------------------------------------------------------------------------------------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets 0.93% 0.89% 0.93% 0.92% 1.03% Net Investment Income (Loss) to Average Net Assets 1.44% 1.17% 1.45% 1.59% 1.70% - --------------------------------------------------------------------------------------------------------------------------------- CLASS B ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998++ - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.77 $ 10.80 $ 14.41 $ 12.12 $ 10.48 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss)(2) 0.11 0.13 0.27 0.13 0.22 Net Realized and Unrealized Gain (Loss) on Investments (1.27) (2.06) (2.43) 3.02 1.94 - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.16) (1.93) (2.16) 3.15 2.16 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.20) (0.10) (0.01) (0.10) (0.29) Net Realized Gain -- (0.00)+ (1.44) (0.76) (0.23) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.20) (0.10) (1.45) (0.86) (0.52) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 7.41 $ 8.77 $ 10.80 $ 14.41 $ 12.12 ================================================================================================================================= TOTAL RETURN (13.29)% (17.81)% (15.02)% 26.63% 20.71% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 8,418 $ 10,362 $ 19,814 $ 9,959 $ 96 Ratio of Expenses to Average Net Assets(2) 1.05% 1.06% 1.07% 1.05% 1.05% Ratio of Expenses to Average Net Assets Excluding Interest N/A 1.05% 1.05% N/A N/A Expense Ratio of Net Investment Income (Loss) to Average Net Assets(2) 1.32% 1.05% 1.42% 1.16% 1.80% Portfolio Turnover Rate 42% 36% 80% 53% 49% - --------------------------------------------------------------------------------------------------------------------------------- (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.01 $ 0.01 $ 0.02 $ 0.01 $ 0.03 Ratios before expense limitation: Expenses to Average Net Assets 1.18% 1.14% 1.18% 1.17% 1.27% Net Investment Income (Loss) to Average Net Assets 1.19% 0.97% 1.31% 0.95% 1.58% - ---------------------------------------------------------------------------------------------------------------------------------
+ Amount is less than $0.005 per share. ++ Per share amounts for the years ended December 31, 2002 and 1998 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 128 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Asian Equity Portfolio Selected Per Share Data and Ratios
CLASS A ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001++ 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.16 $ 8.53 $ 14.39 $ 8.01 $ 9.43 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss)(1) 0.07 0.06 0.03 0.06 0.12 Net Realized and Unrealized Gain (Loss) on Investments (0.89) (0.38) (5.87) 6.42 (1.24) - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (0.82) (0.32) (5.84) 6.48 (1.12) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.07) (0.05) (0.02) (0.10) (0.30) Return of Capital (0.02) -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.09) (0.05) (0.02) (0.10) (0.30) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 7.25 $ 8.16 $ 8.53 $ 14.39 $ 8.01 ================================================================================================================================= TOTAL RETURN (10.03)% (3.69)% (40.65)% 81.00% (11.38)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $20,847 $45,489 $56,330 $103,513 $51,334 Ratio of Expenses to Average Net Assets (1) 1.05% 1.18% 1.06% 1.07% 1.19% Ratio of Expenses to Average Net Assets Excluding Country Tax Expense and Interest Expense 1.00% 1.00% 1.00% 1.00% 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 0.85% 0.71% 0.21% 0.58% 1.36% Portfolio Turnover Rate 73% 94% 101% 197% 151% - --------------------------------------------------------------------------------------------------------------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.06 $ 0.06 $ 0.04 $ 0.06 $ 0.05 Ratios before expense limitation: Expenses to Average Net Assets 1.75% 1.83% 1.32% 1.61% 1.79% Net Investment Income (Loss) to Average Net Assets 0.15% 0.06% (0.05)% 0.04% 0.76% - --------------------------------------------------------------------------------------------------------------------------------- CLASS B ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001++ 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.09 $ 8.44 $ 14.28 $ 7.97 $ 9.40 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) 0.04 (0.13) (0.06) 0.05 0.07 Net Realized and Unrealized Gain (Loss) on Investments (0.86) (0.20) (5.76) 6.34 (1.20) - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (0.82) (0.33) (5.82) 6.39 (1.13) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.05) (0.02) (0.02) (0.08) (0.30) Return of Capital (0.02) -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.07) (0.02) (0.02) (0.08) (0.30) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 7.20 $ 8.09 $ 8.44 $ 14.28 $ 7.97 ================================================================================================================================= TOTAL RETURN (10.16)% (3.89)% (40.74)% 79.95% (11.53)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 602 $ 666 $ 1,183 $ 2,828 $ 1,487 Ratio of Expenses to Average Net Assets (2) 1.30% 1.43% 1.31% 1.32% 1.47% Ratio of Expenses to Average Net Assets Excluding Country Tax Expense and Interest Expense 1.25% 1.25% 1.25% 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (2) 0.60% 0.49% 0.02% 0.33% 1.06% Portfolio Turnover Rate 73% 94% 101% 197% 151% - --------------------------------------------------------------------------------------------------------------------------------- (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.07 $ 0.08 $ 0.04 $ 0.08 $ 0.04 Ratios before expense limitation: Expenses to Average Net Assets 2.00% 2.08% 1.57% 1.87% 2.07% Net Investment Income (Loss) to Average Net Assets (0.10)% (0.16)% (0.23)% (0.22)% 0.46% - ---------------------------------------------------------------------------------------------------------------------------------
++ Per share amounts for the years ended December 31, 2002 and 2001 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 129 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Asian Real Estate Portfolio Selected Per Share Data and Ratios
CLASS A ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 6.60 $ 8.01 $ 7.90 $ 6.63 $ 7.94 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss)(1) 0.15 0.12 0.15 0.11 0.26 Net Realized and Unrealized Gain (Loss) on Investments (0.91) (1.31) 0.11 1.50 (1.24) - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (0.76) (1.19) 0.26 1.61 (0.98) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.21) (0.22) (0.15) (0.34) (0.33) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 5.63 $ 6.60 $ 8.01 $ 7.90 $ 6.63 ================================================================================================================================= TOTAL RETURN (11.55)% (14.91)% 3.44% 24.27% (11.82)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 1,843 $ 2,020 $ 2,786 $ 2,912 $ 2,447 Ratio of Expenses to Average Net Assets(1) 1.00% 1.02% 1.02% 1.01% 1.05% Ratio of Expenses to Average Net Assets Excluding Interest Expense N/A 1.00% 1.00% 1.00% 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets(1) 2.41% 1.69% 2.03% 1.64% 2.47% Portfolio Turnover Rate 38% 40% 87% 98% 261% - --------------------------------------------------------------------------------------------------------------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.18 $ 0.17 $ 0.22 $ 0.15 $ 0.36 Ratios before expense limitation: Expenses to Average Net Assets 3.81% 3.29% 4.04% 3.19% 4.52% Net Investment Income (Loss) to Average Net Assets (0.40)% (0.58)% (0.98)% (0.54)% (1.00)% - --------------------------------------------------------------------------------------------------------------------------------- CLASS B ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 6.64 $ 8.06 $ 7.93 $ 6.66 $ 8.03 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss)(2) 0.14 0.10 0.09 0.13 0.12 Net Realized and Unrealized Gain (Loss) on Investments (0.91) (1.32) 0.16 1.46 (1.16) - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (0.77) (1.22) 0.25 1.59 (1.04) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.20) (0.20) (0.12) (0.32) (0.33) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 5.67 $ 6.64 $ 8.06 $ 7.93 $ 6.66 ================================================================================================================================= TOTAL RETURN (11.72)% (15.18)% 3.29% 23.88% (12.53)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 399 $ 421 $ 484 $ 1,372 $ 761 Ratio of Expenses to Average Net Assets(2) 1.25% 1.27% 1.27% 1.25% 1.38% Ratio of Expenses to Average Net Assets Excluding Interest Expense N/A 1.25% 1.25% 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets(2) 2.16% 1.33% 1.56% 1.39% 2.39% Portfolio Turnover Rate 38% 40% 87% 98% 261% - --------------------------------------------------------------------------------------------------------------------------------- (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.18 $ 0.16 $ 0.34 $ 0.17 $ 0.18 Ratios before expense limitation: Expenses to Average Net Assets 4.06% 3.54% 4.20% 3.10% 5.03% Net Investment Income (Loss) to Average Net Assets (0.65)% (0.94)% (1.36)% (0.45)% (1.27)% - ---------------------------------------------------------------------------------------------------------------------------------
++ Per share amounts for the year ended December 31, 2002 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 130 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Emerging Markets Portfolio Selected Per Share Data and Ratios
CLASS A ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.81 $ 11.31 $ 19.27 $ 9.55 $ 12.97 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.04 0.05 (0.10) (0.03) 0.16 Net Realized and Unrealized Gain (Loss) on Investments (0.71) (0.55) (7.28) 9.75 (3.46) - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (0.67) (0.50) (7.38) 9.72 (3.30) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.01) -- -- -- (0.12) Net Realized Gain -- -- (0.58) -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.01) -- (0.58) -- (0.12) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 10.13 $ 10.81 $ 11.31 $ 19.27 $ 9.55 ================================================================================================================================= TOTAL RETURN (6.24)% (4.42)% (38.43)% 101.78% (25.42)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $657,203 $748,058 $917,091 $1,544,893 $772,115 Ratio of Expenses to Average Net Assets 1.65% 1.65% 1.63% 1.64% 1.81% Ratio of Expenses to Average Net Assets Excluding Country Tax Expense and Interest Expense 1.58% N/A N/A N/A 1.70% Ratio of Net Investment Income (Loss) to Average Net Assets 0.35% 0.47% (0.63)% (0.26)% 1.04% Portfolio Turnover Rate 91% 93% 92% 133% 98% - --------------------------------------------------------------------------------------------------------------------------------- CLASS B ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.73 $ 11.26 $ 19.24 $ 9.56 $ 12.98 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.01 0.03 (0.11) (0.04) 0.10 Net Realized and Unrealized Gain (Loss) on Investments (0.68) (0.56) (7.29) 9.72 (3.43) - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (0.67) (0.53) (7.40) 9.68 (3.33) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income -- -- -- -- (0.09) Net Realized Gain -- -- (0.58) -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions -- -- (0.58) -- (0.09) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 10.06 $ 10.73 $ 11.26 $ 19.24 $ 9.56 ================================================================================================================================= TOTAL RETURN (6.24)% (4.71)% (38.60)% 101.26% (25.65)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 13,208 $ 14,456 $ 13,949 $ 16,999 $ 7,199 Ratio of Expenses to Average Net Assets 1.90% 1.90% 1.88% 1.88% 2.06% Ratio of Expenses to Average Net Assets Excluding Country Tax Expense and Interest Expense 1.83% N/A N/A N/A 1.95% Ratio of Net Investment Income (Loss) to Average Net Assets 0.10% 0.22% (0.82)% (0.51)% 0.80% Portfolio Turnover Rate 91% 93% 92% 133% 98% - ---------------------------------------------------------------------------------------------------------------------------------
++ Per share amounts for the year ended December 31, 2002 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 131 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights European Real Estate Portfolio Selected Per Share Data and Ratios
CLASS A -------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.30 $ 10.38 $ 9.16 $ 9.58 $ 9.52 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.37 0.27 0.07 (0.05) 0.12 Net Realized and Unrealized Gain (Loss) on Investments 1.90 (1.09) 1.30 (0.17) 0.33 - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 2.27 (0.82) 1.37 (0.22) 0.45 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.64) (0.26) (0.15) (0.20) (0.39) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 10.93 $ 9.30 $10.38 $ 9.16 $ 9.58 ================================================================================================================================= TOTAL RETURN 24.52% (7.85)% 14.91% (2.36)% 4.75% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $19,215 $13,826 $7,766 $9,931 $33,422 Ratio of Expenses to Average Net Assets (1) 1.00% 1.01% 1.03% 1.23% 1.03% Ratio of Expenses to Average Net Assets Excluding Interest Expense N/A 1.00% 1.00% 1.00% 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 3.37% 2.30% 1.55% 2.33% 1.33% Portfolio Turnover Rate 79% 46% 74% 35% 119% - --------------------------------------------------------------------------------------------------------------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.06 $ 0.05 $ 0.09 $ 0.01 $ 0.03 Ratios before expense limitation: Expenses to Average Net Assets 1.56% 1.53% 1.90% 1.71% 1.43% Net Investment Income (Loss) to Average Net Assets 2.81% 1.74% 0.69% 1.85% 0.95% - --------------------------------------------------------------------------------------------------------------------------------- CLASS B -------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.33 $ 10.41 $ 9.19 $ 9.61 $ 9.52 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) 0.27 0.08 0.18 0.19 0.11 Net Realized and Unrealized Gain (Loss) on Investments 1.97 (0.93) 1.16 (0.43) 0.33 - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 2.24 (0.85) 1.34 (0.24) 0.44 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.61) (0.23) (0.12) (0.18) (0.35) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 10.96 $ 9.33 $10.41 $ 9.19 $ 9.61 ================================================================================================================================= TOTAL RETURN 24.11% (8.08)% 14.55% (2.61)% 4.60% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 953 $ 1,687 $1,449 $1,786 $ 2,531 Ratio of Expenses to Average Net Assets (2) 1.25% 1.26% 1.28% 1.47% 1.28% Ratio of Expenses to Average Net Assets Excluding Interest Expense N/A 1.25% 1.25% 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (2) 3.12% 1.53% 1.50% 2.35% 1.15% Portfolio Turnover Rate 79% 46% 74% 35% 119% - --------------------------------------------------------------------------------------------------------------------------------- (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.06 $ 0.04 $ 0.10 $ 0.04 $ 0.04 Ratios before expense limitation: Expenses to Average Net Assets 1.81% 1.78% 2.15% 1.96% 1.68% Net Investment Income (Loss) to Average Net Assets 2.56% 0.96% 0.61% 1.91% 0.77% - ---------------------------------------------------------------------------------------------------------------------------------
++ Per share amounts for the year ended December 31, 2002 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 132 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights European Value Equity Portfolio Selected Per Share Data and Ratios
CLASS A ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.42 $ 14.17 $ 15.09 $ 15.75 $ 17.96 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.18 0.18 0.25 0.29 0.43 Net Realized and Unrealized Gain (Loss) on Investments (1.24) (2.08) 0.76 1.10 1.08 - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.06) (1.90) 1.01 1.39 1.51 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.17) (0.36) (0.21) (0.35) (0.42) Net Realized Gain -- (0.49) (1.72) (1.70) (3.30) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.17) (0.85) (1.93) (2.05) (3.72) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 10.19 $ 11.42 $ 14.17 $ 15.09 $ 15.75 ================================================================================================================================= TOTAL RETURN (9.24)% (13.47)% 7.38% 9.60% 8.09% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $29,425 $34,117 $65,747 $105,030 $168,712 Ratio of Expenses to Average Net Assets (1) 1.01% 1.07% 1.02% 1.09% 1.00% Ratio of Expenses to Average Net Assets Excluding Interest 1.00% 1.00% 1.00% 1.00% N/A Expense Ratio of Net Investment Income (Loss) to Average Net Assets (1) 1.65% 1.42% 1.22% 1.46% 1.47% Portfolio Turnover Rate 104% 59% 47% 74% 52% - --------------------------------------------------------------------------------------------------------------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.05 $ 0.04 $ 0.03 $ 0.03 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets 1.50% 1.31% 1.14% 1.22% 1.08% Net Investment Income (Loss) to Average Net Assets 1.16% 1.19% 1.09% 1.34% 1.40% - --------------------------------------------------------------------------------------------------------------------------------- CLASS B ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.44 $ 14.19 $ 15.11 $ 15.74 $ 17.94 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) 0.18 0.03 0.19 0.12 0.33 Net Realized and Unrealized Gain (Loss) on Investments (1.26) (1.96) 0.78 1.23 1.13 - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.08) (1.93) 0.97 1.35 1.46 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.15) (0.33) (0.17) (0.28) (0.36) Net Realized Gain -- (0.49) (1.72) (1.70) (3.30) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.15) (0.82) (1.89) (1.98) (3.66) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 10.21 $ 11.44 $ 14.19 $ 15.11 $ 15.74 ================================================================================================================================= TOTAL RETURN (9.48)% (13.71)% 7.08% 9.36% 7.80% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 942 $ 1,009 $ 2,287 $ 2,196 $ 5,181 Ratio of Expenses to Average Net Assets (2) 1.26% 1.32% 1.27% 1.34% 1.25% Ratio of Expenses to Average Net Assets Excluding Interest 1.25% 1.25% 1.25% 1.25% N/A Expense Ratio of Net Investment Income (Loss) to Average Net Assets (2) 1.40% 1.05% 0.96% 1.30% 1.15% Portfolio Turnover Rate 104% 59% 47% 74% 52% - --------------------------------------------------------------------------------------------------------------------------------- (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.05 $ 0.03 $ 0.03 $ 0.01 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets 1.75% 1.56% 1.39% 1.48% 1.34% Net Investment Income (Loss) to Average Net Assets 0.91% 0.81% 0.83% 1.16% 1.08% - ---------------------------------------------------------------------------------------------------------------------------------
++ Per share amounts for year ended December 31, 2002 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 133 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Global Franchise Portfolio Selected Per Share Data and Ratios
CLASS A ---------------------------------------------------------------- YEAR ENDED PERIOD FROM DECEMBER 31, NOVEMBER 28, 2001* 2002++ TO DECEMBER 31, 2001 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.48 $ 10.00 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.17 0.01 Net Realized and Unrealized Gain (Loss) on Investments 0.68 0.47 - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.85 0.48 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Realized Gain (0.04) -- - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 11.29 $ 10.48 ================================================================================================================================= TOTAL RETURN 8.10% 4.80%# ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $48,644 $10,595 Ratio of Expenses to Average Net Assets (1) 1.00% 1.00%** Ratio of Net Investment Income (Loss) to Average Net Assets (1) 1.41% 1.30%** Portfolio Turnover Rate 62% N/A - --------------------------------------------------------------------------------------------------------------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.03 $ 0.07 Ratios before expense limitation: Expenses to Average Net Assets 1.28% 16.47%** Net Investment Income (Loss) to Average Net Assets 1.13% (14.17)%** - --------------------------------------------------------------------------------------------------------------------------------- CLASS B ---------------------------------------------------------------- YEAR ENDED PERIOD FROM DECEMBER 31, NOVEMBER 28, 2001* 2002++ TO DECEMBER 31, 2001 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.46 $ 10.00 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) 0.11 (0.09) Net Realized and Unrealized Gain (Loss) on Investments 0.71 0.55 - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.82 0.46 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Realized Gain (0.04) -- - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 11.24 $ 10.46 ================================================================================================================================= TOTAL RETURN 7.82% 4.60%# ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 1,427 $ 415 Ratio of Expenses to Average Net Assets (2) 1.25% 1.25%** Ratio of Net Investment Income (Loss) to Average Net Assets (2) 1.16% (13.29)%** Portfolio Turnover Rate 62% N/A - --------------------------------------------------------------------------------------------------------------------------------- (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.04 $ 0.00+ Ratios before expense limitation: Expenses to Average Net Assets 1.53% 16.72%** Net Investment Income (Loss) to Average Net Assets 0.88% (21.62)%** - ---------------------------------------------------------------------------------------------------------------------------------
+ Amount is less than $0.005 per share. ++ Per share amounts for the year ended December 31, 2002 are based on average shares outstanding. * Commencement of Operations ** Annualized # Not annualized. The accompanying notes are an integral part of the financial statements. 134 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Global Value Equity Portfolio Selected Per Share Data and Ratios
CLASS A ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.45 $ 17.05 $ 18.32 $ 20.74 $ 18.52 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.15 0.13 0.26 0.44 0.15 Net Realized and Unrealized Gain (Loss) on Investments (2.82) (1.56) 1.75 0.32 2.55 - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (2.67) (1.43) 2.01 0.76 2.70 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.20) (0.17) (0.62) (0.44) (0.17) Net Realized Gain (0.12) -- (2.66) (2.74) (0.31) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.32) (0.17) (3.28) (3.18) (0.48) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 12.46 $ 15.45 $ 17.05 $ 18.32 $ 20.74 ================================================================================================================================= TOTAL RETURN (17.34)% (8.36)% 11.75% 4.01% 14.60% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $34,297 $34,079 $40,418 $115,646 $228,748 Ratio of Expenses to Average Net Assets (1) 1.00% 1.01% 1.01% 1.01% 1.00% Ratio of Expenses to Average Net Assets Excluding Interest N/A 1.00% 1.00% 1.00% N/A Expense Ratio of Net Investment Income (Loss) to Average Net Assets (1) 1.08% 0.79% 1.16% 1.26% 0.96% Portfolio Turnover Rate 42% 51% 48% 41% 39% - --------------------------------------------------------------------------------------------------------------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.02 $ 0.02 $ 0.04 $ 0.02 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 1.12% 1.16% 1.17% 1.06% 1.07% Net Investment Income (Loss) to Average Net Assets 0.96% 0.64% 1.00% 1.20% 0.90% - --------------------------------------------------------------------------------------------------------------------------------- CLASS B ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.33 $ 16.92 $ 18.20 $ 20.63 $ 18.46 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) 0.12 0.13 0.27 0.21 0.15 Net Realized and Unrealized Gain (Loss) on Investments (2.82) (1.58) 1.68 0.50 2.46 - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (2.70) (1.45) 1.95 0.71 2.61 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.16) (0.14) (0.57) (0.40) (0.13) Net Realized Gain (0.12) -- (2.66) (2.74) (0.31) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.28) (0.14) (3.23) (3.14) (0.44) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 12.35 $ 15.33 $ 16.92 $ 18.20 $ 20.63 ================================================================================================================================= TOTAL RETURN (17.63)% (8.58)% 11.52% 3.75% 14.15% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $26,866 $30,089 $30,196 $ 28,089 $ 13,123 Ratio of Expenses to Average Net Assets (2) 1.25% 1.26% 1.26% 1.26% 1.25% Ratio of Expenses to Average Net Assets Excluding Interest N/A 1.25% 1.25% 1.25% N/A Expense Ratio of Net Investment Income (Loss) to Average Net Assets (2) 0.83% 0.78% 1.14% 0.89% 0.68% Portfolio Turnover Rate 42% 51% 48% 41% 39% - --------------------------------------------------------------------------------------------------------------------------------- (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.02 $ 0.02 $ 0.04 $ 0.01 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 1.37% 1.41% 1.42% 1.31% 1.32% Net Investment Income (Loss) to Average Net Assets 0.71% 0.64% 0.97% 0.83% 0.62% - ---------------------------------------------------------------------------------------------------------------------------------
++ Per share amounts for the year ended December 31, 2002 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 135 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights International Equity Portfolio Selected Per Share Data and Ratios
CLASS A ------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 2002++ 2001 2000 1999 1998++ - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 15.59 $ 17.88 $ 19.62 $ 18.25 $ 17.16 ==================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.19 0.25 0.25 0.24 0.27 Net Realized and Unrealized Gain (Loss) on Investments (0.82) (2.00) 1.44 2.80 2.86 - ------------------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations (0.63) (1.75) 1.69 3.04 3.13 - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.33) (0.34) (0.04) (0.18) (0.38) Net Realized Gain (0.03) (0.20) (3.39) (1.49) (1.66) - ------------------------------------------------------------------------------------------------------------------------------------ Total Distributions (0.36) (0.54) (3.43) (1.67) (2.04) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 14.60 $ 15.59 $ 17.88 $ 19.62 $ 18.25 ==================================================================================================================================== TOTAL RETURN (4.02)% (9.74)% 9.29% 16.91% 18.30% ==================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $3,953,655 $4,004,817 $4,810,852 $4,630,035 $3,400,498 Ratio of Expenses to Average Net Assets (1) 1.00% 1.00% 1.00% 1.00% 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 1.24% 1.35% 1.45% 1.28% 1.33% Portfolio Turnover Rate 51% 63% 53% 37% 33% - ------------------------------------------------------------------------------------------------------------------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income: $ 0.00+ $ 0.00+ N/A $ 0.00+ $ 0.00+ Ratios before expense limitation: Expenses to Average Net Assets 1.00% 1.01% 1.00% 1.01% 1.02% Net Investment Income (Loss) to Average Net Assets 1.24% 1.34% 1.45% 1.27% 1.32% - ------------------------------------------------------------------------------------------------------------------------------------ CLASS B ------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 2002++ 2001 2000 1999 1998++ - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 15.53 $ 17.81 $ 19.58 $ 18.22 $ 17.13 ==================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) 0.12 0.07 0.23 0.19 0.24 Net Realized and Unrealized Gain (Loss) on Investments (0.78) (1.83) 1.39 2.81 2.85 - ------------------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations (0.66) (1.76) 1.62 3.00 3.09 - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.31) (0.32) -- (0.15) (0.34) Net Realized Gain (0.03) (0.20) (3.39) (1.49) (1.66) - ------------------------------------------------------------------------------------------------------------------------------------ Total Distributions (0.34) (0.52) (3.39) (1.64) (2.00) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 14.53 $ 15.53 $ 17.81 $ 19.58 $ 18.22 ==================================================================================================================================== TOTAL RETURN (4.25)% (9.83)% 8.94% 16.68% 18.13% ==================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 439,422 $ 165,439 $ 59,945 $ 41,374 $ 17,076 Ratio of Expenses to Average Net Assets (2) 1.25% 1.25% 1.25% 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (2) 0.99% 0.73% 1.44% 0.93% 0.96% Portfolio Turnover Rate 51% 63% 53% 37% 33% - ------------------------------------------------------------------------------------------------------------------------------------ (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income: $ 0.00+ $ 0.00+ N/A $ 0.00+ $ 0.00+ Ratios before expense limitation: Expenses to Average Net Assets 1.25% 1.26% 1.25% 1.26% 1.28% Net Investment Income (Loss) to Average Net Assets 0.99% 0.72% 1.44% 0.92% 0.95% - ------------------------------------------------------------------------------------------------------------------------------------
+ Amount is less than $0.005 per share. ++ Per share amounts for the year ended December 31, 2002 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 136 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights International Magnum Portfolio Selected Per Share Data and Ratios
CLASS A ------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2002++ 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.34 $ 11.56 $ 13.62 $ 11.57 $ 10.87 =================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.07 0.11 0.11 0.19 0.14 Net Realized and Unrealized Gain (Loss) on Investments (1.31) (2.27) (1.52) 2.64 0.66 - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.24) (2.16) (1.41) 2.83 0.80 - ----------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.06) (0.06) (0.16) (0.15) (0.10) Net Realized Gain -- -- (0.49) (0.63) -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.06) (0.06) (0.65) (0.78) (0.10) - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 8.04 $ 9.34 $ 11.56 $ 13.62 $ 11.57 =================================================================================================================================== TOTAL RETURN (13.36)% (18.71)% (10.50)% 24.87% 7.33% =================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $68,275 $120,753 $183,566 $188,586 $269,814 Ratio of Expenses to Average Net Assets (1) 1.01% 1.01% 1.01% 1.01% 1.00% Ratio of Expenses to Average Net Assets Excluding Interest 1.00% 1.00% 1.00% 1.00% N/A Expense Ratio of Net Investment Income (Loss) to Average Net Assets (1) 0.81% 1.00% 0.84% 0.89% 1.34% Portfolio Turnover Rate 59% 44% 56% 59% 39% - ----------------------------------------------------------------------------------------------------------------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.02 $ 0.01 $ 0.01 $ 0.02 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 1.30% 1.14% 1.10% 1.11% 1.13% Net Investment Income (Loss) to Average Net Assets 0.52% 0.87% 0.75% 0.80% 1.24% - ----------------------------------------------------------------------------------------------------------------------------------- CLASS B ------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2002++ 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.32 $ 11.52 $ 13.58 $ 11.54 $ 10.84 =================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) 0.06 0.01 0.08 0.11 0.14 Net Realized and Unrealized Gain (Loss) on Investments (1.31) (2.18) (1.54) 2.68 0.64 - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.25) (2.17) (1.46) 2.79 0.78 - ----------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.03) (0.03) (0.12) (0.12) (0.08) Net Realized Gain -- -- (0.48) (0.63) -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.03) (0.03) (0.60) (0.75) (0.08) - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 8.04 $ 9.32 $ 11.52 $ 13.58 $ 11.54 =================================================================================================================================== TOTAL RETURN (13.49)% (18.87)% (10.81)% 24.58% 7.13% =================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 6,644 $ 10,542 $ 23,474 $ 30,770 $ 26,151 Ratio of Expenses to Average Net Assets (2) 1.26% 1.26% 1.26% 1.25% 1.25% Ratio of Expenses to Average Net Assets Excluding Interest 1.25% 1.25% 1.25% 1.25% N/A Expense Ratio of Net Investment Income (Loss) to Average Net Assets (2) 0.56% 0.75% 0.58% 0.87% 1.24% Portfolio Turnover Rate 59% 44% 56% 59% 39% - ----------------------------------------------------------------------------------------------------------------------------------- (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.03 $ 0.01 $ 0.01 $ 0.01 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 1.55% 1.39% 1.35% 1.35% 1.37% Net Investment Income (Loss) to Average Net Assets 0.27% 0.62% 0.49% 0.54% 1.14% - -----------------------------------------------------------------------------------------------------------------------------------
++ Per share amounts for the year ended December 31, 2002 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 137 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights International Small Cap Portfolio Selected Per Share Data and Ratios
CLASS A ------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 14.82 $ 16.30 $ 19.67 $ 15.25 $ 15.61 ==================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.15 0.21 0.24 0.22 0.22 Net Realized and Unrealized Gain (Loss) on Investments * (0.59) (1.18) (0.86) 5.66 0.39 - ------------------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations (0.44) (0.97) (0.62) 5.88 0.61 - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.13) (0.27) (0.17) (0.29) (0.24) Net Realized Gain (0.04) (0.24) (2.61) (1.20) (0.79) - ------------------------------------------------------------------------------------------------------------------------------------ Total Distributions (0.17) (0.51) (2.78) (1.49) (1.03) - ------------------------------------------------------------------------------------------------------------------------------------ TRANSACTION FEES -- 0.00+ 0.03 0.03 0.06 ==================================================================================================================================== NET ASSET VALUE, END OF PERIOD $ 14.21 $ 14.82 $ 16.30 $ 19.67 $ 15.25 ==================================================================================================================================== TOTAL RETURN (2.99)% (5.88)% (2.92)% 39.34% 4.25% ==================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $440,124 $376,981 $374,924 $357,708 $252,642 Ratio of Expenses to Average Net Assets (1) 1.15% 1.15% 1.16% 1.15% 1.15% Ratio of Expenses to Average Net Assets Excluding Interest N/A N/A 1.15% N/A N/A Expense Ratio of Net Investment Income (Loss) to Average Net Assets (1) 1.00% 1.38% 1.32% 1.30% 1.23% Portfolio Turnover Rate 34% 39% 54% 48% 39% - ------------------------------------------------------------------------------------------------------------------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 1.19% 1.19% 1.22% 1.20% 1.21% Net Investment Income (Loss) to Average Net Assets 0.96% 1.34% 1.38% 1.25% 1.18% - ------------------------------------------------------------------------------------------------------------------------------------
* Includes a 1% transaction fee on purchases and redemptions of capital shares through 1999 and 0.50% for the years ended December 31, 2001 and 2000. + Amount is less than $0.005 per share. ++ Per share amounts for year ended December 31, 2002 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 138 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Japanese Value Equity Portfolio Selected Per Share Data and Ratios
CLASS A ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001++ 2000 1999++ 1998 - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 5.25 $ 7.62 $ 10.12 $ 6.18 $ 5.89 ==================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) (0.01) (0.01) (0.02) (0.02) 0.04 Net Realized and Unrealized Gain (Loss) on Investments (0.58) (2.25) (2.37) 3.96 0.48 - ------------------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations (0.59) (2.26) (2.39) 3.94 0.52 - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income -- (0.11) (0.11) -- (0.23) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 4.66 $ 5.25 $ 7.62 $ 10.12 $ 6.18 ==================================================================================================================================== TOTAL RETURN (11.22)% (29.96)% (23.69)% 63.75% 8.82% ==================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $24,159 $22,921 $56,306 $73,666 $57,755 Ratio of Expenses to Average Net Assets (1) 1.02% 1.02% 1.03% 1.01% 1.11% Ratio of Expenses to Average Net Assets Excluding Interest Expense 1.00% 1.00% 1.00% 1.00% 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1) (0.15)% (0.21)% (0.29)% (0.28)% 0.03% Portfolio Turnover Rate 45% 14% 14% 26% 66% - ------------------------------------------------------------------------------------------------------------------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.01 $ 0.02 $ 0.01 $ 0.01 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 1.29% 1.26% 1.12% 1.14% 1.30% Net Investment Income (Loss) to Average Net Assets (0.42)% (0.45)% (0.38)% (0.41)% (0.14)% - ------------------------------------------------------------------------------------------------------------------------------------ CLASS B ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001++ 2000 1999++ 1998 - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 5.18 $ 7.54 $ 10.02 $ 6.13 $ 5.87 ==================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) (0.03) (0.03) 0.02 0.08 (0.09) Net Realized and Unrealized Gain (Loss) on Investments (0.56) (2.22) (2.41) 3.81 0.58 - ------------------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations (0.59) (2.25) (2.39) 3.89 0.49 - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income -- (0.11) (0.09) -- (0.23) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 4.59 $ 5.18 $ 7.54 $ 10.02 $ 6.13 ==================================================================================================================================== TOTAL RETURN (11.39)% (30.15)% (23.93)% 63.46% 8.33% ==================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 308 $ 1,057 $ 3,851 $ 3,538 $ 1,083 Ratio of Expenses to Average Net Assets (2) 1.27% 1.27% 1.28% 1.26% 1.36% Ratio of Expenses to Average Net Assets Excluding Interest Expense 1.25% 1.25% 1.25% 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (2) (0.40)% (0.50)% (0.54)% (0.57)% (0.25)% Portfolio Turnover Rate 45% 14% 14% 26% 66% - ------------------------------------------------------------------------------------------------------------------------------------ (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.01 $ 0.02 $ 0.00+ $ 0.01 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets 1.54% 1.51% 1.37% 1.39% 1.55% Net Investment Income (Loss) to Average Net Assets (0.67)% (0.74)% (0.62)% (0.67)% (0.42)% - ------------------------------------------------------------------------------------------------------------------------------------
+ Amount is less than $0.005 per share. ++ Per share amounts for the years ended December 31, 2002, 2001 and 1999 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 139 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Latin American Portfolio Selected Per Share Data and Ratios
CLASS A ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998++ - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.09 $ 9.36 $ 11.32 $ 6.74 $ 10.91 ==================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.12 0.23 0.01 0.18 0.13 Net Realized and Unrealized Gain (Loss) on Investments (1.99) (0.36) (1.82) 4.59 (4.16) - ------------------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations (1.87) (0.13) (1.81) 4.77 (4.03) - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.09) (0.14) (0.15) (0.19) (0.09) Net Realized Gain -- -- -- -- (0.05) - ------------------------------------------------------------------------------------------------------------------------------------ Total Distributions (0.09) (0.14) (0.15) (0.19) (0.14) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 7.13 $ 9.09 $ 9.36 $ 11.32 $ 6.74 ==================================================================================================================================== TOTAL RETURN (20.55)% (1.48)% (16.21)% 71.28% (37.10)% ==================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $18,032 $22,699 $25,403 $13,809 $15,012 Ratio of Expenses to Average Net Assets (1) 1.67% 1.80% 1.84% 1.79% 1.81% Ratio of Expenses to Average Net Assets Excluding Country Tax and Interest Expense 1.58% 1.72% 1.70% 1.70% 1.64% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 1.52% 2.27% (0.03)% 1.40% 1.40% Portfolio Turnover Rate 76% 58% 133% 124% 196% - ------------------------------------------------------------------------------------------------------------------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income N/A $ 0.00+ $ 0.02 $ 0.04 N/A Ratios before expense limitation: Expenses to Average Net Assets 1.67% 1.80% 2.06% 2.12% N/A Net Investment Income (Loss) to Average Net Assets 1.52% 2.25% (0.25)% 1.07% N/A - ------------------------------------------------------------------------------------------------------------------------------------ CLASS B ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998++ - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.10 $ 9.37 $ 11.36 $ 6.78 $ 10.80 ==================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.13 0.25 (0.01) 0.19 0.12 Net Realized and Unrealized Gain (Loss) on Investments (2.02) (0.41) (1.83) 4.58 (4.09) - ------------------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations (1.89) (0.16) (1.84) 4.77 (3.97) - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.06) (0.11) (0.15) (0.19) -- Net Realized Gain -- -- -- -- (0.05) - ------------------------------------------------------------------------------------------------------------------------------------ Total Distributions (0.06) (0.11) (0.15) (0.19) (0.05) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 7.15 $ 9.10 $ 9.37 $ 11.36 $ 6.78 ==================================================================================================================================== TOTAL RETURN (20.83)% (1.77)% (16.42)% 70.85% (36.86)% ==================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 196 $ 825 $ 1,140 $ 1,387 $ 1,148 Ratio of Expenses to Average Net Assets (2) 1.92% 2.05% 2.09% 2.05% 2.01% Ratio of Expenses to Average Net Assets Excluding Country Tax and Interest Expense 1.83% 1.97% 1.95% 1.95% 1.85% Ratio of Net Investment Income (Loss) to Average Net Assets (2) 1.27% 2.05% 0.33% 1.04% 1.24% Portfolio Turnover Rate 76% 58% 133% 124% 196% - ------------------------------------------------------------------------------------------------------------------------------------ (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income N/A $ 0.00+ $ 0.03 $ 0.05 N/A Ratios before expense limitation: Expenses to Average Net Assets 1.92% 2.05% 2.31% 2.35% N/A Net Investment Income (Loss) to Average Net Assets 1.27% 2.03% (0.26)% 0.75% N/A - ------------------------------------------------------------------------------------------------------------------------------------
+ Amount is less than $0.005 per share. ++ Per share amounts for the years ended December 31, 2002 and 1998 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 140 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Equity Growth Portfolio Selected Per Share Data and Ratios
CLASS A ------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 17.29 $ 20.51 $ 25.04 $ 19.04 $ 16.93 =================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.03 0.01 (0.01) (0.02) 0.04 Net Realized and Unrealized Gain (Loss) on Investments (4.80) (3.08) (2.76) 7.49 3.17 - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (4.77) (3.07) (2.77) 7.47 3.21 - ----------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.03) -- -- (0.00)+ (0.03) Net Realized Gain -- (0.15) (1.76) (1.47) (1.07) - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.03) (0.15) (1.76) (1.47) (1.10) - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 12.49 $ 17.29 $ 20.51 $ 25.04 $ 19.04 =================================================================================================================================== TOTAL RETURN (27.64)% (14.97)% (11.78)% 39.89% 19.04% =================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $432,207 $603,652 $886,824 $977,005 $784,565 Ratio of Expenses to Average Net Assets (1) 0.80% 0.80% 0.80% 0.80% 0.80% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 0.21% 0.05% 0.79% (0.10)% 0.22% Portfolio Turnover Rate 143% 94% 71% 91% 156% - ----------------------------------------------------------------------------------------------------------------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.00+ $ 0.00+ $ 0.00+ $ 0.00+ $ 0.00+ Ratios before expense limitation: Expenses to Average Net Assets 0.81% 0.81% 0.80% 0.80% 0.80% Net Investment Income (Loss) to Average Net Assets 0.21% 0.06% (0.06)% (0.10)% 0.22% - ----------------------------------------------------------------------------------------------------------------------------------- CLASS B ------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 17.08 $ 20.32 $ 24.90 $ 18.97 $ 16.91 =================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) 0.00+ (0.04) (0.04) (0.04) (0.00)+ Net Realized and Unrealized Gain (Loss) on Investments (4.74) (3.05) (2.78) 7.44 3.15 - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (4.74) (3.09) (2.82) 7.40 3.15 - ----------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income -- -- -- (0.00)+ (0.02) Net Realized Gain -- (0.15) (1.76) (1.47) (1.07) - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions -- (0.15) (1.76) (1.47) (1.09) - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 12.34 $ 17.08 $ 20.32 $ 24.90 $ 18.97 =================================================================================================================================== TOTAL RETURN (27.75)% (15.26)% (12.01)% 39.61% 18.71% =================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $156,501 $223,646 $350,556 $246,889 $ 83,330 Ratio of Expenses to Average Net Assets (2) 1.05% 1.05% 1.05% 1.05% 1.05% Ratio of Net Investment Income (Loss) to Average Net Assets (2) (0.04)% (0.22)% (1.04)% (0.34)% (0.02)% Portfolio Turnover Rate 143% 94% 71% 91% 156% - ----------------------------------------------------------------------------------------------------------------------------------- (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.00+ $ 0.00+ $ 0.00+ $ 0.00+ $ 0.00+ Ratios before expense limitation: Expenses to Average Net Assets 1.06% 1.06% 1.05% 1.05% 1.05% Net Investment Income (Loss) to Average Net Assets (0.04)% (0.22)% (0.30)% (0.34)% (0.20)% - -----------------------------------------------------------------------------------------------------------------------------------
+ Amount is less than $0.005 per share. ++ Per share amounts for year ended December 31, 2002 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 141 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Focus Equity Portfolio Selected Per Share Data and Ratios
CLASS A ----------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.67 $ 15.31 $ 19.70 $ 17.50 $ 15.78 ================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.00+ (0.03) (0.05) (0.06) (0.00)+ Net Realized and Unrealized Gain (Loss) on Investments (3.65) (2.28) (2.05) 7.89 2.42 - ---------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (3.65) (2.31) (2.10) 7.83 2.42 - ---------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Realized Gain -- (0.33) (2.29) (5.63) (0.70) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 9.02 $ 12.67 $ 15.31 $ 19.70 $ 17.50 ================================================================================================================================== TOTAL RETURN (28.81)% (15.22)% (11.66)% 46.44% 15.35% ================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $51,347 $85,204 $126,531 $136,128 $130,734 Ratio of Expenses to Average Net Assets (1) 1.00% 1.01% 1.00% 1.01% 1.01% Ratio of Expenses to Average Net Assets Excluding Interest Expense N/A 1.00% N/A 1.00% 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 0.02% (0.21)% (0.27)% (0.33)% 0.01% Portfolio Turnover Rate 173% 95% 93% 155% 373% - ---------------------------------------------------------------------------------------------------------------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.01 $ 0.01 $ 0.00+ $ 0.01 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 1.09% 1.08% 1.04% 1.07% 1.03% Net Investment Income (Loss) to Average Net Assets (0.07)% (0.28)% (0.29)% (0.39)% (0.01)% - ---------------------------------------------------------------------------------------------------------------------------------- CLASS B ----------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.45 $ 15.09 $ 19.50 $ 17.40 $ 15.72 ================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) (0.03) (0.07) (0.08) (0.08) (0.06) Net Realized and Unrealized Gain (Loss) on Investments (3.57) (2.24) (2.04) 7.81 2.44 - ---------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (3.60) (2.31) (2.12) 7.73 2.38 - ---------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Realized Gain -- (0.33) (2.29) (5.63) (0.70) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 8.85 $ 12.45 $ 15.09 $ 19.50 $ 17.40 ================================================================================================================================== TOTAL RETURN (28.92)% (15.45)% (11.89)% 46.13% 15.15% ================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 6,414 $13,143 $ 18,876 $ 22,168 $ 16,682 Ratio of Expenses to Average Net Assets (2) 1.25% 1.26% 1.25% 1.26% 1.26% Ratio of Expenses to Average Net Assets Excluding Interest Expense N/A 1.25% 1.25% 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (2) (0.23)% (0.45)% (0.52)% (0.58)% (0.26)% Portfolio Turnover Rate 173% 95% 93% 155% 373% - ---------------------------------------------------------------------------------------------------------------------------------- (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.01 $ 0.00+ $ 0.00+ $ 0.01 $ 0.00+ Ratios before expense limitation: Expenses to Average Net Assets 1.34% 1.33% 1.29% 1.32% 1.28% Net Investment Income (Loss) to Average Net Assets (0.32)% (0.53)% (0.54)% (0.64)% (0.28)% - ----------------------------------------------------------------------------------------------------------------------------------
+ Amount is less than $0.005 per share. ++ Per share amounts for year ended December 31, 2002 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 142 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Small Company Growth Portfolio Selected Per Share Data and Ratios
CLASS A ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.65 $ 10.99 $ 13.32 $ 8.07 $ 7.72 ================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) (0.07) (0.06) (0.08) (0.05) 0.09 Net Realized and Unrealized Gain (Loss) on Investments (2.08) (1.28) (0.69) 7.40 1.97 - ---------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (2.15) (1.34) (0.77) 7.35 2.06 - ---------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income -- -- -- -- (0.09) Net Realized Gain -- (0.00)+ (1.56) (2.10) (1.62) - ---------------------------------------------------------------------------------------------------------------------------------- Total Distributions -- (0.00)+ (1.56) (2.10) (1.71) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 7.50 $ 9.65 $ 10.99 $ 13.32 $ 8.07 ================================================================================================================================== TOTAL RETURN (22.28)% (12.18)% (6.64)% 96.45% 27.54% ================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 74,554 $ 82,300 $89,367 $77,193 $73,276 Ratio of Expenses to Average Net Assets (1) 1.10% 1.10% 1.25% 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (1) (0.82)% (0.69)% (0.68)% (0.59)% 1.06% Portfolio Turnover Rate 133% 144% 129% 204% 331% - ---------------------------------------------------------------------------------------------------------------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 1.22% 1.25% 1.30% 1.43% 1.35% Net Investment Income (Loss) to Average Net Assets (0.94)% (0.83)% (0.73)% (0.78)% 0.96% - ---------------------------------------------------------------------------------------------------------------------------------- CLASS B ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.36 $ 10.68 $ 13.01 $ 7.93 $ 7.63 INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) (0.09) (0.06) (0.10) (0.08) 0.09 Net Realized and Unrealized Gain (Loss) on Investments (2.01) (1.26) (0.67) 7.26 1.90 - ---------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (2.10) (1.32) (0.77) 7.18 1.99 - ---------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income -- -- -- -- (0.07) Net Realized Gain -- (0.00)+ (1.56) (2.10) (1.62) - ---------------------------------------------------------------------------------------------------------------------------------- Total Distributions -- (0.00)+ (1.56) (2.10) (1.69) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 7.26 $ 9.36 $ 10.68 $ 13.01 $ 7.93 ================================================================================================================================== TOTAL RETURN (22.44)% (12.35)% (6.81)% 95.97% 26.86% ================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $215,899 $184,099 $91,069 $14,775 $ 1,282 Ratio of Expenses to Average Net Assets (2) 1.35% 1.35% 1.50% 1.50% 1.50% Ratio of Net Investment Income (Loss) to Average Net Assets (2) (1.07)% (0.97)% (0.97)% (0.87)% 0.88% Portfolio Turnover Rate 133% 144% 129% 204% 331% - ---------------------------------------------------------------------------------------------------------------------------------- (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.01 $ 0.01 $ 0.00+ $ 0.02 $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 1.47% 1.50% 1.55% 1.66% 1.60% Net Investment Income (Loss) to Average Net Assets (1.19)% (1.12)% (1.02)% 1.03% 0.78% - ----------------------------------------------------------------------------------------------------------------------------------
+ Amount is less than $0.005 per share. ++ Per share amounts for year ended December 31, 2002 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 143 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Technology Portfolio Selected Per Share Data and Ratios
CLASS A ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999++ 1998++ - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 12.76 $ 25.82 $ 38.91 $ 17.98 $ 11.73 ==================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) (0.10) (0.18) (0.34) (0.28) (0.13) Net Realized and Unrealized Gain (Loss) on Investments (5.97) (12.00) (7.69) 28.07 6.45 - ------------------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations (6.07) (12.18) (8.03) 27.79 6.32 - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Realized Gain -- (0.88) (5.06) (6.86) (0.07) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 6.69 $ 12.76 $ 25.82 $ 38.91 $ 17.98 ==================================================================================================================================== TOTAL RETURN (47.57)% (47.89)% (22.67)% 160.62% 53.90% ==================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $20,331 $42,195 $101,588 $82,190 $27,506 Ratio of Expenses to Average Net Assets (1) 1.26% 1.26% 1.26% 1.26% 1.29% Ratio of Expenses to Average Net Assets Excluding Interest Expense 1.25% 1.25% 1.25% 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (1) (1.11)% (1.09)% (1.05)% (1.06)% (0.95)% Portfolio Turnover Rate 122% 107% 150% 250% 265% - ------------------------------------------------------------------------------------------------------------------------------------ (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income (Loss) $ 0.02 $ 0.01 $ 0.01 $ 0.00+ $ 0.07 Ratios before expense limitation: Expenses to Average Net Assets 1.46% 1.34% 1.29% 1.28% 1.82% Net Investment Income (Loss) to Average Net Assets (1.32)% (1.17)% (1.08)% (1.09)% (1.47)% - ------------------------------------------------------------------------------------------------------------------------------------ CLASS B ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999++ 1998++ - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 12.61 $ 25.58 $ 38.69 $ 17.92 $ 11.72 ==================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) (0.12) (0.21) (0.41) (0.35) (0.16) Net Realized and Unrealized Gain (Loss) on Investments (5.88) (11.88) (7.64) 27.98 6.43 - ------------------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations (6.00) (12.09) (8.05) 27.63 6.27 - ------------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Realized Gain -- (0.88) (5.06) (6.86) (0.07) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 6.61 $ 12.61 $ 25.58 $ 38.69 $ 17.92 ==================================================================================================================================== TOTAL RETURN (47.62)% (47.99)% (22.86)% 160.26% 53.52% ==================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 1,872 $ 3,137 $ 6,251 $ 4,192 $ 850 Ratio of Expenses to Average Net Assets (2) 1.51% 1.51% 1.51% 1.51% 1.55% Ratio of Expenses to Average Net Assets Excluding Interest Expense 1.50% 1.50% 1.50% 1.50% 1.50% Ratio of Net Investment Income (Loss) to Average Net Assets (2) (1.36)% (1.34)% (1.30)% (1.31)% (1.32)% Portfolio Turnover Rate 122% 107% 150% 250% 265% - ------------------------------------------------------------------------------------------------------------------------------------ (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.02 $ 0.01 $ 0.01 $ 0.00+ $ 0.07 Ratios before expense limitation: Expenses to Average Net Assets 1.71% 1.59% 1.54% 1.53% 2.08% Net Investment Income (Loss) to Average Net Assets (1.57)% (1.42)% (1.34)% (1.32)% (1.84)% - ------------------------------------------------------------------------------------------------------------------------------------
+ Amount is less than $0.005 per share ++ Per share amounts for the years ended December 31, 2002, 1999 and 1998 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 144 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights U.S. Real Estate Portfolio Selected Per Share Data and Ratios
CLASS A ------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 2002++ 2001 2000 1999 1998++ - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 14.63 $ 14.50 $ 11.84 $ 12.71 $ 15.38 =================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.52 0.60 0.51 0.81 0.47 Net Realized and Unrealized Gain (Loss) on Investments (0.48) 0.71 2.94 (0.98) (2.32) - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.04 1.31 3.45 (0.17) (1.85) - ----------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.52) (0.57) (0.56) (0.66) (0.49) Net Realized Gain (0.60) (0.61) (0.23) (0.04) (0.33) - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.12) (1.18) (0.79) (0.70) (0.82) - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 13.55 $ 14.63 $ 14.50 $ 11.84 $ 12.71 =================================================================================================================================== TOTAL RETURN 0.18% 9.27% 29.65% (1.48)% (12.29)% =================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $655,274 $696,871 $584,263 $311,064 $259,589 Ratio of Expenses to Average Net Assets (1) 0.99% 1.00% 1.00% 1.00% 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 3.49% 4.19% 4.13% 6.52% 3.33% Portfolio Turnover Rate 47% 33% 31% 47% 117% - ----------------------------------------------------------------------------------------------------------------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income N/A $ 0.00+ $ 0.00+ $ 0.00+ $ 0.00+ Ratios before expense limitation: Expenses to Average Net Assets 0.99% 1.01% 1.01% 1.02% 1.04% Net Investment Income (Loss) to Average Net Assets 3.49% 4.18% 4.11% 6.51% 3.30% - ----------------------------------------------------------------------------------------------------------------------------------- CLASS B ------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 2002++ 2001 2000 1999 1998++ - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 14.55 $ 14.45 $ 11.80 $ 12.67 $ 15.34 =================================================================================================================================== INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) 0.45 0.56 0.49 0.82 0.47 Net Realized and Unrealized Gain (Loss) on Investments (0.45) 0.68 2.92 (1.02) (2.35) - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.00 1.24 3.41 (0.20) (1.88) - ----------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.48) (0.53) (0.53) (0.63) (0.46) Net Realized Gain (0.60) (0.61) (0.23) (0.04) (0.33) - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.08) (1.14) (0.76) (0.67) (0.79) - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 13.47 $ 14.55 $ 14.45 $ 11.80 $ 12.67 =================================================================================================================================== TOTAL RETURN (0.07)% 8.78% 29.36% (1.73)% (12.52)% =================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 31,584 $ 23,198 $ 20,235 $ 13,418 $ 13,523 Ratio of Expenses to Average Net Assets (2) 1.24% 1.25% 1.25% 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (2) 3.24% 3.96% 3.83% 6.13% 3.23% Portfolio Turnover Rate 47% 33% 31% 47% 117% - ----------------------------------------------------------------------------------------------------------------------------------- (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income N/A $ 0.00+ $ 0.00+ $ 0.00+ $ 0.01 Ratios before expense limitation: Expenses to Average Net Assets 1.24% 1.26% 1.26% 1.27% 1.29% Net Investment Income (Loss) to Average Net Assets 3.24% 3.95% 3.81% 6.12% 3.20% - -----------------------------------------------------------------------------------------------------------------------------------
+ Amount is less than $0.005 per share. ++ Per share amounts for the years ended December 31, 2002 and 1998 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 145 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Value Equity Portfolio Selected Per Share Data and Ratios
CLASS A ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001++ 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.68 $ 10.32 $ 9.63 $ 10.78 $ 13.62 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (1) 0.14 0.15 0.16 0.26 0.20 Net Realized and Unrealized Gain (Loss) on Investments (2.47) (0.31) 1.54 0.97 0.98 - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (2.33) (0.16) 1.70 1.23 1.18 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.14) (0.15) (0.16) (0.17) (0.21) Net Realized Gain -- (0.33) (0.85) (2.21) (3.81) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.14) (0.48) (1.01) (2.38) (4.02) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 7.21 $ 9.68 $ 10.32 $ 9.63 $ 10.78 ================================================================================================================================= TOTAL RETURN (24.22)% (1.55)% 18.08% 11.63% 8.79% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $76,452 $101,691 $70,454 $46,768 $57,543 Ratio of Expenses to Average Net Assets (1) 0.70% 0.70% 0.70% 0.73% 0.70% Ratio of Expenses to Average Net Assets Excluding Interest Expense N/A N/A N/A 0.70% N/A Ratio of Net Investment Income (Loss) to Average Net Assets (1) 1.69% 1.56% 1.64% 1.25% 1.36% Portfolio Turnover Rate 45% 50% 62% 80% 153% - --------------------------------------------------------------------------------------------------------------------------------- (1) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.01 $ 0.01 $ 0.01 $ 0.03 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets 0.76% 0.79% 0.81% 0.86% 0.82% Net Investment Income (Loss) to Average Net Assets 1.63% 1.47% 1.54% 1.12% 1.25% - --------------------------------------------------------------------------------------------------------------------------------- CLASS B ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001++ 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.67 $ 10.32 $ 9.60 $ 10.76 $ 13.59 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (2) 0.12 0.13 0.12 0.20 0.07 Net Realized and Unrealized Gain (Loss) on Investments (2.46) (0.32) 1.56 0.99 1.08 - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (2.34) (0.19) 1.68 1.19 1.15 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.12) (0.13) (0.11) (0.13) (0.17) Net Realized Gain -- (0.33) (0.85) (2.22) (3.81) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.12) (0.46) (0.96) (2.35) (3.98) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 7.21 $ 9.67 $ 10.32 $ 9.60 $ 10.76 ================================================================================================================================= TOTAL RETURN (24.32)% (1.89)% 17.92% 11.22% 8.59% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $46,757 $ 24,597 $ 891 $ 921 $ 1,045 Ratio of Expenses to Average Net Assets (2) 0.95% 0.95% 0.95% 0.98% 0.95% Ratio of Expenses to Average Net Assets Excluding Interest Expense N/A N/A N/A 0.95% N/A Ratio of Net Investment Income (Loss) to Average Net Assets (2) 1.44% 1.25% 1.35% 1.01% 1.12% Portfolio Turnover Rate 45% 50% 62% 80% 153% - --------------------------------------------------------------------------------------------------------------------------------- (2) Effect of voluntary expense limitation during the period: Per share benefit to net investment income $ 0.00+ $ 0.01 $ 0.01 $ 0.03 $ 0.02 Ratios before expense limitation: Expenses to Average Net Assets 1.01% 1.04% 1.11% 1.13% 1.07% Net Investment Income (Loss) to Average Net Assets 1.38% 1.17% 1.24% 0.87% 1.01% - ---------------------------------------------------------------------------------------------------------------------------------
+ Amount is less than $0.005 per share. ++ Per share amounts for the years ended December 31, 2002 and 2001 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 146 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Emerging Markets Debt Portfolio Selected Per Share Data and Ratios
CLASS A ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999++ 1998++ - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 2.95 $ 2.88 $ 3.00 $ 2.61 $ 5.77 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income 0.27 0.21 0.55 0.43 1.13 Net Realized and Unrealized Gain (Loss) on Investments 0.06 0.09 (0.17) 0.34 (3.19) - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.33 0.30 0.38 0.77 (2.06) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.33) (0.23) (0.50) (0.37) (1.10) Return of Capital -- -- -- (0.01) -- - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.33) (0.23) (0.50) (0.38) (1.10) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 2.95 $ 2.95 $ 2.88 $ 3.00 $ 2.61 ================================================================================================================================= TOTAL RETURN 11.29% 10.57% 12.81% 29.22% (35.95)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $48,769 $52,561 $47,080 $52,654 $46,234 Ratio of Expenses to Average Net Assets 1.06% 1.13% 1.15% 1.40% 2.38% Ratio of Expenses to Average Net Assets Excluding Interest Expense N/A N/A 1.10% 1.29% 1.34% Ratio of Net Investment Income to Average Net Assets 8.79% 8.22% 13.33% 13.12% 11.61% Portfolio Turnover Rate 157% 316% 375% 249% 457% - --------------------------------------------------------------------------------------------------------------------------------- CLASS B ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2002++ 2001 2000 1999++ 1998++ - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 3.01 $ 2.92 $ 3.03 $ 2.66 $ 5.77 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income 0.26 0.30 0.20 0.28 1.13 Net Realized and Unrealized Gain (Loss) on Investments 0.05 0.02 0.17 0.46 (3.17) - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.31 0.32 0.37 0.74 (2.04) - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.32) (0.23) (0.48) (0.05) (1.07) Return of Capital -- -- -- (0.32) -- - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.32) (0.23) (0.48) (0.37) (1.07) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 3.00 $ 3.01 $ 2.92 $ 3.03 $ 2.66 ================================================================================================================================= TOTAL RETURN 10.34% 10.50% 12.50% 28.01% (35.37)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 343 $ 429 $ 387 $ 860 $ 1,187 Ratio of Expenses to Average Net Assets 1.31% 1.38% 1.40% 1.65% 2.62% Ratio of Expenses to Average Net Assets Excluding Interest Expense N/A N/A 1.35% 1.55% 1.60% Ratio of Net Investment Income to Average Net Assets 8.54% 7.97% 13.28% 12.85% 11.09% Portfolio Turnover Rate 157% 316% 375% 249% 457% - ---------------------------------------------------------------------------------------------------------------------------------
++ Per share amounts for the years ended December 31, 2002, 1999 and 1998 are based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 147 MORGAN STANLEY INSTITUTIONAL FUND, INC. Financial Highlights Money Market Portfolio Selected Per Share Data and Ratios
CLASS A --------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income 0.013 0.038 0.060 0.047 0.051 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.013) (0.038) (0.060) (0.047) (0.051) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ================================================================================================================================= TOTAL RETURN 1.30% 3.82% 6.06% 4.80% 5.20% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $1,369,935 $2,706,283 $3,026,412 $2,931,316 $1,958,177 Ratio of Expenses to Average Net Assets 0.48% 0.48% 0.48% 0.50% 0.49% Ratio of Net Investment Income to Average Net Assets 1.32% 3.90% 6.07% 4.73% 5.07% - ---------------------------------------------------------------------------------------------------------------------------------
Municipal Money Market Portfolio
CLASS A --------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ================================================================================================================================= INCOME FROM INVESTMENT OPERATIONS Net Investment Income 0.009 0.022 0.044 0.027 0.030 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF Net Investment Income (0.009) (0.022) (0.044) (0.027) (0.030) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ================================================================================================================================= TOTAL RETURN 0.90% 2.23% 3.57% 2.77% 3.00% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $910,426 $1,346,818 $1,476,436 $1,405,646 $990,579 Ratio of Expenses to Average Net Assets 0.48% 0.49% 0.48% 0.50% 0.50% Ratio of Net Investment Income to Average Net Assets 0.90% 2.25% 3.50% 2.76% 2.96% - ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 148 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 Notes to Financial Statements Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund is comprised of twenty-two separate, active, diversified and non-diversified portfolios (individually referred to as a "Portfolio", collectively as the "Portfolios"). Each Portfolio (with the exception of the International Small Cap, Money Market and Municipal Money Market Portfolios) offers two classes of shares -- Class A and Class B. Both classes of shares have identical voting rights (except that shareholders of a Class have exclusive voting rights regarding any matter relating solely to that Class of shares), dividend, liquidation and other rights. Effective May 20, 2002, the Fixed Income III and High Yield II Portfolios were combined with the assets of the Investment Grade Fixed Income and High Yield Portfolios, respectively, of the Morgan Stanley Institutional Fund Trust. Effective October 31, 2002, the Global Fixed Income II Portfolio was liquidated with the approval of the Directors of the Fund. The investment objectives of each of the Portfolios are described in detail in the Investment Overviews appearing elsewhere in this Annual Report. Generally, the investment objective of the domestic and international equity portfolios is to seek capital appreciation by investing in equity and equity-related securities. The investment objective of the international fixed income portfolio is primarily to seek a high total return consistent with preservation of capital. The investment objective of the money market portfolios is to seek current income and preserve capital. A. ACCOUNTING POLICIES: The following significant accounting policies are in conformity with accounting principles generally accepted in the United States of America. Such policies are consistently followed by the Fund in the preparation of the financial statements. Accounting principles generally accepted in the United States of America 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. 1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and/or traded on NASDAQ are valued at the latest quoted sales price on the valuation date. 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. The prices provided by a pricing service take into account broker dealer market price quotations for institutional size trading in similar groups of securities, security quality, maturity, coupon and other security characteristics as well as any developments related to the specific 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. For all other securities and investments for which market values are not readily available, including restricted securities, and where prices determined in accordance with the aforementioned procedures are not reflective of fair market value, values are determined in good faith, under fair valuation procedures adopted by the Board of Directors, although actual calculations may be done by others. 2. REPURCHASE AGREEMENTS: The Portfolios may enter into repurchase agreements under which a Portfolio lends excess cash and takes possession of securities with an agreement that the counterparty will repurchase such securities. In connection with transactions in repurchase agreements, a bank as custodian for the Fund takes possession of the underlying securities which are held as collateral, 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 counterparty to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. The Portfolios, along with other affiliated investment companies, may utilize a joint trading account for the purpose of entering into repurchase agreements. 3. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records of the Fund are maintained in U.S. 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 bank as follows: - investments, other assets and liabilities-at the prevailing rates of exchange on the valuation date; - investment transactions, investment income and expenses-at the prevailing rates of exchange on the dates of such transactions. 149 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 Notes to Financial Statements (cont'd) 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) on investments in securities are included in the reported net realized and unrealized gains (losses) on investment transactions and balances. However, pursuant to U.S. Federal income tax regulations, gains and losses from certain foreign currency transactions and the foreign currency portion of gains and losses realized on sales and maturities of foreign denominated debt securities 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 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 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 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, fluctuations of exchange rates in relation to the U.S. dollar, the possibility of lower levels of government supervision and regulation of foreign securities markets and the possibility of political or economic instability. Prior governmental approval for foreign investments may be required under certain circumstances in some countries, and the extent of foreign investments in domestic companies may be subject to limitation in other countries. Foreign ownership limitations also may be imposed by the charters of individual companies to prevent, among other concerns, violations 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. In the absence of trading of the foreign shares in such markets, the Fund values the foreign shares at the closing exchange price of the local shares. Such securities, if any, are identified as fair valued on the Statement of Net Assets. 4. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into foreign currency exchange contracts generally to attempt to protect securities and related receivables and payables against changes in future foreign currency exchange rates and, in certain situations, to gain exposure to foreign currencies. A foreign 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 and the change in market value is recorded by the Portfolios as unrealized gain or loss. The Portfolios record 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. Credit 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 gains 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. 5. 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 up to 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 either 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 or designates such assets as segregated on the Portfolio's records. Purchasing 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 150 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 Notes to Financial Statements (cont'd) price, in which case there could be an unrealized loss at the time of delivery. Purchasing investments on a when-issued or delayed delivery basis may be considered a form of leverage which may increase the impact that gains or losses may have on a Portfolio. 6. LOAN AGREEMENTS: Certain 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. A 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. A Portfolio's investment in Participations typically results in the Portfolio having a contractual relationship with only the Lender and not with the borrower. The Portfolios have the right to receive payments of principal, interest and any fees to which it is entitled only upon receipt by the Lender of the payments from the borrower. The Portfolios generally have no right to enforce compliance by the borrower under 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 and any intermediaries between the Lender and the Portfolio. When a Portfolio purchases Assignments from Lenders, it typically 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. 7. SHORT SALES: Certain Portfolios may sell securities short. A short sale is a transaction in which a Portfolio sells securities it may or may 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. Dividends and interest payable on such securities sold short are included as dividend expense and interest expense, respectively, in the Statement of Operations. A 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 either designate on the Portfolio's records or 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) cash, U.S. government securities or other liquid high grade debt obligations deposited as collateral with the broker in connection with the short sale. Short sales by the Portfolios involve certain risks and special considerations. Possible losses from short sales differ from losses that could be incurred from the purchase of a security, because losses from short sales may be unlimited, whereas losses from purchases cannot exceed the total amount invested. 8. SECURITY LENDING: Certain Portfolios may lend investment securities to qualified financial institutions, such as broker-dealers, to earn additional income. Any increase or decline in the fair value of the securities loaned that might occur and any interest earned or dividends declared on those securities during the term of the loan would remain in the Portfolio. Portfolios that lend securities receive cash as collateral in an amount equal to or exceeding 100% of the current fair value of the loaned securities. The collateral is marked to market daily, by the securities lending agent, to ensure that a minimum of 100% collateral coverage is maintained. Based on pre-established guidelines, the securities lending agent invests the cash collateral that is received in high-quality short-term investments. The Portfolio retains a portion of the income derived from these investments, which is included in the Statement of Operations in interest income. Risks in securities lending transactions are that a borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral plus any rebate that is required to be returned to the borrower. The value of loaned securities and related collateral outstanding at December 31, 2002 are as follows:
VALUE OF LOANED VALUE OF SECURITIES COLLATERAL PORTFOLIO (000) (000) - -------------------------------------------------------------- Active International Allocation $ 18,326 $ 19,304 Emerging Markets 72,128 74,343 European Value Equity 925 972 International Equity 204,085 214,519 International Magnum 2,455 2,571 Equity Growth 11,930 12,061
151 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 Notes to Financial Statements (cont'd) The following Portfolios had income from securities lending (after rebates to borrowers and fee paid to securities lending agent):
NET INTEREST EARNED BY PORTFOLIO PORTFOLIO (000) - -------------------------------------------------------------- Active International Allocation $ 341 Emerging Markets 415 European Value Equity 26 International Equity 3,280 International Magnum 38 Equity Growth 82
9. STRUCTURED SECURITIES: The Emerging Markets Debt Portfolio may invest 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 of specified instruments and the issuance by that entity of one or more classes of securities ("Structured Securities") backed by, or representing interests in, the underlying instruments. Structured Securities generally will expose the Portfolio to credit risks of the underlying instruments as well as of the issuer of the structured security. Structured securities are typically sold in private placement transactions with no active trading market. Investments in Structured Securities may be more volatile than their underlying instruments, however, any loss is limited to the amount of the original investment. 10. FUTURES: Certain Portfolios may purchase and sell futures contracts. Futures contracts provide for the sale by one party and purchase by another party of a specified amount of a specified security, index, instrument or basket of instruments. Futures contracts (secured by cash, government securities or other high grade liquid investments deposited with brokers or custodians as "initial margin") are valued based upon their quoted daily settlement prices; changes in initial settlement value (represented by cash paid to or received from brokers as "variation margin") are accounted for as unrealized appreciation (depreciation). When futures contracts are closed, the difference between the opening value at the date the contract was entered into and the value at closing is recorded as realized gains or losses in the Statement of Operations. Due from (to) broker is comprised of initial margin and variation margin, as stated in the Statement of Net Assets. Certain Portfolios may use futures contracts in order to manage their exposure to the stock and bond markets, to hedge against unfavorable changes in the value of securities or to remain fully invested and to reduce transaction costs. Futures contracts involve market risk in excess of the amounts recognized in the Statement of Net Assets. Risks arise from the possible movements in security values underlying these instruments. The change in value of futures contracts primarily corresponds with the value of their underlying instruments, which may not correlate with the change in value of hedged investments. 11. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and put options on portfolio securities and other financial instruments. Premiums are received and are recorded as liabilities. The liabilities are subsequently adjusted to reflect 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 closed are added to or offset against the proceeds or amount paid on the transaction to determine the net realized gain or loss. By writing a covered call option, a Portfolio, in exchange for the premium, foregoes the opportunity for capital appreciation above the exercise price should the market price of the underlying security increase. By writing a put option, a Portfolio, in exchange for the premium, accepts the risk of having to purchase a security at an exercise price that is above the current market price. Certain Portfolios may purchase call and put options on their portfolio securities or other financial instruments. Each Portfolio may purchase call options to protect against an increase in the price of the security or financial instrument it anticipates purchasing. Each Portfolio may purchase put options on securities which it holds or other financial instruments to protect against a decline in the value of the security or financial instrument or to close out covered written put positions. Risks may arise from an 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 from the possible lack of a liquid secondary market for an option. The maximum exposure to loss for any purchased option is limited to the premium initially paid for the option. 12. OTHER: Security transactions are accounted for on the date the securities are purchased or sold. Realized gains and losses on the sale of investment securities are determined on the specific identified cost basis. Dividend income is recorded on the ex-dividend date (except for certain foreign dividends which may be recorded as soon as the Fund is informed of such dividends) net of applicable withholding taxes. Interest income is recognized on the accrual basis except where collection is in doubt. Discounts and premiums on securities purchased (other than 152 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 Notes to Financial Statements (cont'd) 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 the Portfolios based upon relative net assets. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses are allocated to each class of shares based upon their relative 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 for the remaining Portfolios are recorded on the ex-distribution date. 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. For certain Portfolios that invest in international securities, a 2.00% redemption fee is imposed on shares purchased in those Portfolios and held less than 60 days. The purpose of the redemption fees is to protect the Portfolios and their shareholders from the effects of short-term trading in Portfolios' shares. These fees, if any, are included in Capital Share Redemptions on the Statement of Changes in Net Assets. B. ADVISER: Morgan Stanley Investment Management, Inc. (the "Adviser" or "MS Investment Management"), a wholly-owned subsidiary of Morgan Stanley, provides the Fund with investment advisory services under the terms of an Investment Advisory and Management Agreement (the "Agreement") at the annual rates of average daily net assets indicated below. MS Investment Management 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:
MAXIMUM EXPENSE RATIO ADVISORY ----------------- PORTFOLIO FEE CLASS A CLASS B - ------------------------------------------------------------------ Active International Allocation 0.65% 0.80% 1.05% Asian Equity 0.80 1.00 1.25 Asian Real Estate 0.80 1.00 1.25 Emerging Markets 1.25 1.75 2.00 European Real Estate 0.80 1.00 1.25 European Value Equity 0.80 1.00 1.25 Global Franchise 0.80 1.00 1.25 Global Value Equity 0.80 1.00 1.25 International Equity 0.80 1.00 1.25 International Magnum 0.80 1.00 1.25 International Small Cap 0.95 1.15 N/A Japanese Value Equity 0.80 1.00 1.25 Latin American 1.10 1.70 1.95 Equity Growth 0.60 0.80 1.05 Focus Equity 0.80 1.00 1.25 Small Company Growth 1.00 1.10 1.35 Technology 1.00 1.25 1.50 U.S. Real Estate 0.80 1.00 1.25 Value Equity 0.50 0.70 0.95 Emerging Markets Debt 0.75 1.75 2.00 Money Market 0.30 0.55 N/A Municipal Money Market 0.30 0.57 N/A
Morgan Stanley Investment Advisors Inc., (the "Sub-Advisor" or "MS Advisors"), provides sub-advisory services to the Money Market and Municipal Money Market Portfolios. MS Advisors receives a sub-advisory fee from the investment advisory fees paid to MS Investment Management by the Money Market and Municipal Money Market Portfolios. C. ADMINISTRATOR: MS Investment Management (the "Administrator") 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 the Administrator and J.P. Morgan Investor Services Co. ("JPMIS"), a corporate affiliate of JPMorgan Chase Bank, JPMIS provides certain administrative services to the Fund. For such services, the Administrator pays JPMIS a portion of the fee the Administrator receives from the Fund. An employee of JPMIS is an officer of the Fund. In addition, the Fund incurs local administration fees in connection with doing business in certain emerging market countries. D. DISTRIBUTOR: Morgan Stanley & Co., Incorporated (the "Distributor"), a wholly-owned subsidiary of Morgan Stanley, and an affiliate of MS Investment Management, serves as the distributor of the Fund and provides Class B shareholders of the applicable Portfolios with distribution services pursuant to a Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the Investment Company Act of 1940. Under the Plan, the Distributor is entitled to receive from each applicable Portfolio, a distribution fee, which is accrued daily and paid quarterly, at an annual rate of 0.25% of the Class B shares' average daily net assets. The Distributor may voluntarily waive from time to time all or any portion of its distribution fee. E. CUSTODIAN: JPMorgan Chase Bank serves as custodian for the Fund in accordance with a custodian agreement. F. DIRECTORS' FEES: Each Director of the Fund who is not an officer of the Fund or an affiliated person as defined under the Investment Company Act of 1940, as amended, may elect to participate in the Directors' Deferred Compensation Plan 153 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 Notes to Financial Statements (cont'd) (the "Compensation Plan"). Under the Compensation Plan, such Directors may elect to defer payment of a percentage of their total fees earned as a Director of the Fund. These deferred portions are treated, based on an election by the Director, as if they were either invested in certain Portfolios' shares or invested in U.S. Treasury Bills, as defined under the Compensation Plan. The deferred fees payable, under the Compensation Plan, at December 31, 2002, totaled $1,054,000 and are included in Directors' Fees and Expenses Payable for the applicable Portfolios on the Statement of Net Assets. The deferred portion of Directors' Fees and Expenses shown on the Statement of Operations is impacted by fluctuations in the market value of the investments selected by each Director. For the year ended December 31, 2002, Directors' Fees and Expenses were reduced by approximately $65,000 due to these fluctuations. G. PURCHASES AND SALES: During the year ended December 31, 2002, purchases and sales of investment securities, other than long-term U.S. Government securities and short-term investments, were:
PURCHASES SALES PORTFOLIO (000) (000) - ------------------------------------------------------------ Active International Allocation $ 124,292 $ 193,963 Asian Equity 29,901 49,308 Asian Real Estate 1,025 889 Emerging Markets 704,667 752,232 European Real Estate 14,341 13,274 European Value Equity 33,756 34,354 Global Franchise 70,144 33,867 Global Value Equity 38,070 26,485 International Equity 2,478,688 2,067,003 International Magnum 45,571 92,208 International Small Cap 229,581 139,627 Japanese Value Equity 16,733 11,148 Latin American 15,317 15,473 Equity Growth 948,941 966,471 Focus Equity 122,424 137,900 Small Company Growth 452,392 351,653 Technology 33,326 37,321 U.S. Real Estate 380,136 359,231 Value Equity 96,120 58,469 Emerging Markets Debt 78,127 82,857
There was no purchases and sales of U.S. Government securities for the year ended December 31, 2002. During the year ended December 31, 2002, the following Portfolios paid brokerage commissions to Morgan Stanley & Co., an affiliated broker/dealer:
BROKERAGE COMMISSIONS PORTFOLIO (000) - ------------------------------------------------------------ Asian Equity $ 19 Asian Real Estate 1 Emerging Markets 227 Global Value Equity 4 International Magnum 1 Japanese Value Equity 3 Equity Growth 34 Focus Equity 10 Small Company Growth 22 Technology 1 Value Equity 24
H. FEDERAL 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 income and/or capital gains earned or repatriated. Taxes are accrued based on net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned. Taxes may also be based on the movement of foreign currency and are accrued based on the value of investments denominated in such currency. The tax character of distributions paid may differ from the character of distributions shown on the Statements of Changes in Net Assets due to short-term capital gains being treated as ordinary income for tax purposes. In addition to the distributions shown below, Asian Equity Portfolio had a return of capital of $51,000 in 2002. Municipal Money Market Portfolio's ordinary income distributions shown below include tax-exempt as well as taxable components. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 DISTRIBUTIONS 2001 DISTRIBUTIONS PAID FROM: PAID FROM: ------------------------ ------------------------ ORDINARY LONG-TERM ORDINARY LONG-TERM INCOME CAPITAL GAIN INCOME CAPITAL GAIN PORTFOLIO (000) (000) (000) (000) - ---------------------------------------------------------------------------------------- Active International Allocation $ 7,649 $ -- $ 6,488 $ -- Asian Equity 225 -- 316 -- Asian Real Estate 82 -- 79 -- Emerging Markets 324 -- -- -- European Real Estate 1,087 -- 432 -- European Value Equity 510 -- 1,446 2,162 Global Franchise 169 -- -- -- Global Value Equity 861 601 626 -- International Equity 104,631 -- 86,476 51,369 International Magnum 465 -- 789 -- International Small Cap 4,992 149 11,711 930 Japanese Value Equity -- -- 715 -- Latin American 234 -- 336 -- Equity Growth 1,002 -- -- 9,328 Focus Equity -- -- -- 2,686 Small Company Growth -- -- 25 -- Technology -- -- -- 3,620 U.S. Real Estate 30,807 27,284 30,286 24,179 Value Equity 2,149 -- 2,648 2,898 Emerging Markets Debt 5,066 -- 4,322 -- Money Market 23,615 -- 122,588 -- Municipal Money Market 10,310 -- 32,457 --
154 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 Notes to Financial Statements (cont'd) The amount and character of income and capital gain distributions to be paid by the Portfolios of the Fund are determined in accordance with Federal income tax regulations, which may differ from generally accepted accounting principles. The book/tax differences are either considered temporary or permanent in nature. Temporary differences are attributable to differing book and tax treatments for the timing of the recognition of gains and losses on certain investment transactions and the timing of the deductibility of certain expenses. Permanent book and tax basis differences may result in reclassification among undistributed net investment income (loss), accumulated net realized gain (loss) and paid-in capital. Permanent book and taxes differences, if any, are not included in ending undistributed net investment income (loss) for the purpose of calculating net investment income (loss) per share in the Financial Highlights. At December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED LONG-TERM ORDINARY INCOME CAPTIAL GAIN PORTFOLIO (000) (000) - -------------------------------------------------------------------------------- Active International Allocation $ 555 $ -- Asian Real Estate 22 -- European Real Estate 39 -- European Value Equity 47 -- Global Franchise 142 -- Global Value Equity 12 472 International Magnum 288 -- International Small Cap 448 -- Latin American 24 -- Equity Growth 43 -- U.S. Real Estate -- 305 Value Equity 16 -- Money Market 270 -- Municipal Money Market 108 --
Any Portfolios not shown above have no distributable earnings on a tax basis. The undistributed ordinary income for the Municipal Money Market represents tax-exempt income. At December 31, 2002, cost, unrealized appreciation, unrealized depreciation, and net unrealized appreciation (depreciation) for U.S. Federal income tax purposes of the investments of each of the Portfolios (excluding foreign currency if applicable) were:
NET APPRECIATION COST APPRECIATION DEPRECIATION (DEPRECIATION) PORTFOLIO (000) (000) (000) (000) - ----------------------------------------------------------------------------------------------- Active International Allocation $ 360,653 $ 7,712 $ (93,183) $ (85,471) Asian Equity 24,768 1,027 (4,574) (3,547) Asian Real Estate 2,595 44 (434) (390) Emerging Markets 893,731 42,798 (192,700) (149,902) European Real Estate 19,526 1,508 (966) 542 European Value Equity 35,030 477 (4,349) (3,872) Global Franchise 48,260 3,972 (2,040) 1,932 Global Value Equity 76,462 1,154 (16,554) (15,400) International Equity 4,856,496 211,698 (534,349) (322,651) International Magnum 91,169 2,005 (17,047) (15,042) International Small Cap 501,146 37,211 (98,082) (60,871) Japanese Value Equity 38,630 138 (12,513) (12,375) Latin American 22,766 133 (4,682) (4,549) Equity Growth 685,715 -- (83,338) (83,338) Focus Equity 70,219 -- (11,974) (11,974) Small Company Growth 304,217 15,639 (28,134) (12,495) Technology 34,726 335 (13,114) (12,779) U.S. Real Estate 678,331 60,587 (52,646) 7,941 Value Equity 139,928 6,118 (22,100) (15,982) Emerging Markets Debt 48,069 2,761 (3,243) (482) Money Market 1,371,512 -- -- -- Municipal Money Market 908,242 -- -- --
At December 31, 2002, 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 2005 2006 2007 2008 2009 2010 TOTAL - ----------------------------------------------------------------------------------------------------------- Active International Allocation $ -- $ -- $ -- $ -- $ 20,350 $ 60,663 $ 81,013 Asian Equity 10,287 67,604 -- -- 17,418 6,691 102,000 Asian Real Estate -- 2,190 -- -- -- 68 2,258 Emerging Markets -- -- -- -- 266,985 102,776 369,761 European Real Estate -- 1,283 4,708 215 101 -- 6,307 European Value Equity -- -- -- -- 717 1,359 2,076 International Magnum -- -- -- -- 11,881 4,936 16,817 International Small Cap -- -- -- -- -- 9,475 9,475 Japanese Value Equity 9,712 23,700 583 -- -- 3,162 37,157 Latin American -- 15,053 5,508 -- 1,705 4,597 26,863 Equity Growth -- -- -- -- 33,000 117,052 150,052 Focus Equity -- -- -- -- 14,650 21,111 35,761 Small Company Growth -- -- -- -- 48,399 41,886 90,285 Technology -- -- -- -- 50,529 28,302 78,831 Value Equity -- -- -- -- -- 23,101 23,101 Emerging Markets Debt -- 83,015 9,761 -- 704 -- 93,480
During the year ended December 31, 2002, the European Real Estate, Global Value Equity and Emerging Markets Debt utilized capital loss carryforward for U.S. Federal income tax 155 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 Notes to Financial Statements (cont'd) purposes of approximately $209,000, $75,000 and $1,030,000 respectively. To the extent that capital loss carryovers are used to offset any future 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. To the extent that capital gains are offset, such gains will not be distributed to the shareholders. Net capital, passive investment company (PFIC), and currency losses incurred after October 31, and within the taxable year are deemed to arise on the first day of the Portfolio's next taxable year. For the year ended December 31, 2002, the Portfolio deferred to January 1, 2003 for U.S. Federal income tax purposes, post-October capital, PFIC and currency losses as indicated:
CAPITAL CURRENCY LOSSES PFIC LOSSES PORTFOLIO (000) (000) (000) - ---------------------------------------------------------------------------- Active International Allocation $ 5,259 $ -- $ -- Asian Equity 385 -- 3 Emerging Markets -- -- 128 European Real Estate -- -- 3 European Value Equity 389 -- -- Global Franchise 27 -- 208 Global Value Equity -- -- 84 International Magnum 933 -- -- International Small Cap 4,057 -- -- Japanese Value Equity 75 -- -- Latin American 813 -- 12 Equity Growth 25,150 -- -- Focus Equity 496 -- -- Small Company Growth 2,976 -- -- Technology 2,114 -- -- U.S. Real Estate 8,427 -- -- Value Equity 1,531 -- --
I. OTHER: The net assets of certain Portfolios are 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. Further, at times certain of the Portfolios' investments are concentrated in a limited number of countries and regions. This concentration may further increase the risk of the Portfolio. The Emerging Markets Debt Portfolio holds a significant portion of its investments in securities which are traded by a small number of market makers who may also be utilized by the Portfolio to provide pricing information used to value such investments. The amounts realized upon disposition of these securities may differ from the value reflected on the Statement of Net Assets. Settlement and registration of foreign securities transactions may be subject to significant risks not normally associated with investments in the United States. In certain markets, including Russia, ownership of shares is defined according to entries in the issuer's share register. In Russia, currently no central registration system exists and the share registrars may not be subject to effective state supervision. It is possible that a Portfolio could lose its share registration through fraud, negligence or even mere oversight. In addition, shares being delivered for sales and cash being paid for purchases may be delivered before the exchange is complete. This may subject the Portfolio to further risk of loss in the event of a counterparty's failure to complete the transaction. From time to time, certain Portfolios may have shareholders that hold a significant portion of a Portfolio's outstanding shares. Investment decisions of these shareholders could have a material impact on those Portfolios. 156 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2001 Report of Ernst & Young, Independent Auditors TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF MORGAN STANLEY INSTITUTIONAL FUND, INC. We have audited the accompanying statements of net assets of the Morgan Stanley Institutional Fund, Inc. (comprising, respectively, the Active International Allocation Portfolio, Asian Equity Portfolio, Asian Real Estate Portfolio, Emerging Markets Portfolio, European Real Estate Portfolio, European Value Equity Portfolio, Global Franchise Portfolio, Global Value Equity Portfolio, International Equity Portfolio, International Magnum Portfolio, International Small Cap Portfolio, Japanese Value Equity Portfolio, Latin American Portfolio, Equity Growth Portfolio, Focus Equity Portfolio, Small Company Growth Portfolio, Technology Portfolio, U.S. Real Estate Portfolio, Value Equity Portfolio, Emerging Markets Debt Portfolio, Money Market Portfolio and Municipal Money Market Portfolio) (the "Fund") as of December 31, 2002, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for each of the two years in the period ended December 31, 1999 were audited by other auditors whose report, dated February 18, 2000, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2002 by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the respective portfolios constituting the Morgan Stanley Institutional Fund, Inc. at December 31, 2002, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Ernst & Young LLP Boston, Massachusetts February 7, 2003 157 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 Federal Tax Information (Unaudited) For the year ended December 31, 2002, the percentage of dividends paid that qualify for the 70% dividend received deduction for corporate shareholders for the Global Value Equity, Equity Growth and Value Equity Portfolios are 63.69%, 100%, and 100%, respectively. For the year ended December 31, 2002, the percentage of income earned from direct U.S. Treasury Obligations for the Money Market Portfolio is 2.39%. For the year ended December 31, 2002, the percentage of exempt interest dividends paid by the Municipal Money Market Portfolios is 99.63%. For the year ended December 31, 2002, the following Portfolios intend to pass through foreign tax credits and have derived gross income from sources within foreign countries amounting to:
FOREIGN FOREIGN TAX CREDIT SOURCE PASS-THROUGH INCOME PORTFOLIO (000) (000) ------------------------------------------------------------ Active International Allocation $ 830 $ 7,692 Asian Equity 64 857 Asian Real Estate 4 85 Emerging Markets 1,531 16,684 European Real Estate 86 840 European Value Equity 60 909 Global Franchise 154 1,199 Global Value Equity 53 765 International Equity* 10,410 95,692 International Magnum 167 1,499 International Small Cap 1,070 9,992 Latin American 30 654
*Amounts based on October 31 tax year end. 158 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 Director and Officer Information (Unaudited) Independent Directors:
TERM OF NUMBER OF OFFICE AND PORTFOLIOS IN LENGTH OF FUND COMPLEX NAME, AGE AND ADDRESS POSITION(S)HELD TIME PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD OF DIRECTOR WITH REGISTRANT SERVED* PAST 5 YEARS DIRECTOR** BY DIRECTOR - ----------------------- --------------- ---------- ------------------------------ -------------- ------------------------- John D. Barrett II (67) Director Director Chairman and Director of 71 Director of the Ashforth 565 Fifth Avenue since 1996 Barrett Associates, Inc. Company (real estate). New York, NY 10017 (investment counseling). Thomas P. Gerrity (61) Director Director Professor of Management, 71 Director, ICG Commerce, 219 Grays Lane since 2001 formerly, Dean, Wharton School Inc.; Sunoco; Fannie Mae; Haverford, PA 19041 of Business, University of Reliance Group Holdings, Pennsylvania; formerly, Inc., CVS Corporation and Director, IKON Office Knight-Ridder, Inc. Solutions, Inc., Fiserv, Digital Equipment Corporation, Investor Force Holdings, Inc. and Union Carbide Corporation. Gerard E. Jones (65) Director Director Of Counsel, Shipman & Goodwin, 72 Director of Tractor Supply Shipman & Goodwin, LLP since 1996 LLP (law firm). Company, Tiffany 43 Arch Street Foundation, and Fairfield Greenwich, CT 06830 County Foundation and The India Magnum Fund Ltd. Joseph J. Kearns (60) Director Director Investment consultant; 71 Director, Electro Rent Kearns & Associates LLC since 2001 formerly CFO of The Corporation and The Ford PMB754 J. Paul Getty Trust. Family Foundation. 23852 Pacific Coast Highway Malibu, CA 90265 Vincent R. McLean (71) Director Director Formerly, Executive Vice 71 Director, Banner Life 702 Shackamaxon Drive since 2001 President, Chief Financial Insurance Co.; William Westfield, NJ 07090 Officer, Director and Member Penn Life Insurance of the Executive Committee of Company of New York. Sperry Corporation (now part of Unisys Corporation). C. Oscar Morong, Jr. Director Director Managing Director, Morong 71 Trustee of the mutual (67) since 2001 Capital Management; formerly, funds in the Smith 1385 Outlook Drive West Senior Vice President and Barney/CitiFunds fund Mountainside, NJ 07092 Investment Manager for CREF, complex. TIAA-CREF Investment Management, Inc. (investment management); formerly, Director, The Indonesia Fund (mutual fund). William G. Morton, Jr. Director Director Chairman Emeritus and former 71 Director of Radio Shack (65) since 2000 Chief Executive Officer of Corporation (electronics). 304 Newbury Street, Boston Stock Exchange. #560 Boston, MA 02115 Michael Nugent (66) Director Director General Partner, Triumph 194 Director of various c/o Triumph Capital, since 2001 Capital, L.P. (private business organizations; L.P. 237 Park Avenue investment partnership); Chairman of the Insurance New York, NY 10017 formerly, Vice President, Committee and Director or Bankers Trust Company and BT Trustee of the retail Capital Corporation. families of funds advised by Morgan Stanley Investment Advisors Inc. Fergus Reid (70) Director Director Chairman and Chief Executive 72 Trustee and Director of 85 Charles Colman Blvd. since 1996 Officer of Lumelite Plastics approximately 30 Pawling, NY 12564 Corporation. investment companies in the JPMorgan Funds complex managed by JPMorgan Investment Management Inc., Director of The India Magnum Fund Ltd.
159 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 Director and Officer Information (cont'd) Independent Directors:
TERM OF NUMBER OF OFFICE AND PORTFOLIOS IN LENGTH OF FUND COMPLEX NAME, AGE AND ADDRESS POSITION(S)HELD TIME PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD OF DIRECTOR WITH REGISTRANT SERVED* PAST 5 YEARS DIRECTOR** BY DIRECTOR - ----------------------- --------------- ---------- ------------------------------ -------------- ------------------------- Barton M. Biggs (70) Chairman and Chairman Chairman, Director and 72 Member of the Yale 1221 Avenue of the Director and Managing Director of Morgan Development Board Americas Director Stanley Investment Management New York, NY 10020 since 1996 Inc. and Chairman and Director of Morgan Stanley Investment Management Limited; Managing Director of Morgan Stanley & Co. Incorporated; Director and Chairman of the Board of various U.S. registered companies managed by Morgan Stanley Investment Management Inc. Ronald E. Robison (63) President and President President and Trustee; Chief 72 1221 Avenue of the Director and Global Operations Officer and Americas Director Managing Director of Morgan New York, NY 10020 since 2001 Stanley Investment Management Inc.; Managing Director of Morgan Stanley & Co. Incorporated; formerly, Managing Director and Chief Operating Officer of TCW Investment Management Company; Director and President of various funds in the Fund Complex.
- ---------- * Each Director serves an indefinite term, until his or her successor is elected. ** The Fund Complex includes all funds advised by Morgan Stanley Investment Management Inc. and any funds that have an investment advisor that is an affiliated entity of Morgan Stanley Investment Management Inc. (including, but not limited to, Morgan Stanley Investments LP, Morgan Stanley Investment Advisors Inc. and Van Kampen Asset Management Inc.). Additional information about the Fund's Directors can be found in the Fund's Statement of Additional Information (SAI). The SAI may be obtained without charge upon request, by calling the Fund at 1-800-281-2715. You may also retrieve this information on-line at the Securities and Exchange Commission's web site at "http://www.sec.gov". To aid you in obtaining this information on-line, the Fund's Central Index Key (CIK) number is 836487 and the SAI is found within form type 485BPOS. 160 MORGAN STANLEY INSTITUTIONAL FUND, INC. December 31, 2002 Director and Officer Information (cont'd) Officers:
TERM OF OFFICE NAME, AGE AND ADDRESS POSITION(S)HELD AND LENGTH OF OF EXECUTIVE OFFICER WITH REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS - ------------------------------------------ --------------- --------------- --------------------------------------------------- Ronald E. Robison (63 President and President since Chief Global Operations Officer and Managing Morgan Stanley Investment Management Inc. Director 2001 Director of Morgan Stanley Investment Management 1221 Avenue of the Americas Inc.; Director and President of various U.S. New York, NY 10020 registered investment companies managed by Morgan Stanley Investment Management Inc.; previously, Managing Director and Chief Operating Officer of TCW Investment Management Company. Stefanie V. Chang (36) Vice President Vice President Executive Director of Morgan Stanley & Co. Morgan Stanley Investment Management Inc. since 1997 Incorporated and Morgan Stanley Investment 1221 Avenue of the Americas Management Inc.; formerly, practiced law with the New York, NY 10020 New York law firm of Rogers & Wells (now Clifford Chance US LLP); Vice President of certain funds in the Fund Complex. Lorraine Truten (41) Vice President Vice President Executive Director of Morgan Stanley Investment Morgan Stanley Investment Management Inc. since 2001 Management Inc.; Head of Global Client Services, 1221 Avenue of the Americas Morgan Stanley Investment Management Inc.; New York, NY 10020 President, Morgan Stanley Fund Distribution, Inc. formerly, President of Morgan Stanley Institutional Fund Trust; Vice President of certain funds in the Fund Complex. Mary E. Mullin (35) Secretary Secretary since Vice President of Morgan Stanley & Co. Incorporated Morgan Stanley Investment Management Inc. 1999 and Morgan Stanley Investment Management Inc.; 1221 Avenue of the Americas formerly, practiced law with the New York law firms New York, NY 10020 of McDermott, Will & Emery and Skadden, Arps, Slate, Meagher & Flom LLP; Secretary of certain funds in the Fund Complex. James W. Garrett (34) Treasurer Treasurer since Executive Director of Morgan Stanley & Co., Morgan Stanley Investment Management Inc. 2002 Incorporated and Morgan Stanley Investment 1221 Avenue of the Americas Management Inc. and Treasurer of various U.S. New York, NY 10020 registered investment companies managed by Morgan Stanley Investment Management Inc.; formerly, with Price Waterhouse LLP (now PricewaterhouseCoopers LLP) Belinda A. Brady (35) Assistant Assistant Fund Administration Senior Manager, J.P. Morgan J.P. Morgan Investor Services Co. Treasurer Treasurer since Investor Services Co. (formerly, Chase Global Funds 73 Tremont Street 2001 Services Company); formerly, Senior Auditor at Boston, MA 02108-3913 Price Waterhouse LLP (now PricewaterhouseCoopers LLP); Assistant Treasurer of certain funds in the Fund Complex.
- ---------------- * Each Officer serves an indefinite term, until his or her successor is elected. 161 Morgan Stanley Institutional Fund, Inc. December 31, 2002 Director and Officer Information (cont'd) Investment Adviser and Administrator Morgan Stanley Investment Management Inc. 1221 Avenue of the Americas New York, New York 10020 Distributor Morgan Stanley & Co. Incorporated 1221 Avenue of the Americas New York, New York 10020 Custodian JP Morgan Chase Bank 3 Chase MetroTech Center Brooklyn, New York 11245 Legal Counsel Mayer, Brown, Rowe & Maw LLP 1675 Broadway New York, New York 10019-5820 Independent Auditors Ernst & Young LLP 200 Clarendon Street Boston, Massachusetts 02116-5072 This report is authorized for distribution only when preceded or accompanied by the prospectus of the The Morgan Stanley Institutional Fund, Inc. which describes in detail each Investment Portfolio's investment policies, risks, fees and expenses. Please read the prospectus carefully before you invest or send money. For additional information, including information regarding the investments comprising the Portfolio, please visit our website at www.morganstanley.com/im or call 1(800) 548-7786. 162 Printed in U.S.A. This Report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus. Morgan Stanley Investment Management Inc. 1221 Avenue of the Americas New York, NY 10020 MSIF: (800) 548-7786 (C) 2003 Morgan Stanley Morgan Stanley 1231-fibaleqseman-0203 -----END PRIVACY-ENHANCED MESSAGE-----