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MORGAN STANLEY DEAN WITTER
MORGAN STANLEY DEAN WITTER
INSTITUTIONAL FUND, INC.
ANNUAL REPORT
DECEMBER 31, 1998
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[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
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TABLE OF CONTENTS
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[Download Table]
President's Letter.......................... 1
Performance Summary......................... 2
Managers' Reports and Statements of Net
Assets by Portfolio:
Global and International Equity Portfolios:
Active International Allocation........... 4
Asian Equity.............................. 14
Asian Real Estate......................... 19
Emerging Markets.......................... 24
European Equity .......................... 37
European Real Estate...................... 42
Global Equity ............................ 47
International Equity ..................... 53
International Magnum ..................... 58
International Small Cap................... 65
Japanese Equity........................... 70
Latin American............................ 74
U.S. Equity Portfolios:
Aggressive Equity......................... 79
Emerging Growth........................... 84
Equity Growth............................. 89
Technology................................ 95
U.S. Equity Plus.......................... 99
U.S. Real Estate.......................... 106
Value Equity.............................. 112
Fixed Income Portfolios:
Emerging Markets Debt..................... 117
Fixed Income.............................. 123
Global Fixed Income....................... 127
High Yield................................ 132
Municipal Bond............................ 138
Money Market Portfolios:
Money Market.............................. 142
Municipal Money Market.................... 146
Statements of Operations.................... 155
Statements of Changes in Net Assets......... 159
Statement of Cash Flows..................... 172
Financial Highlights ....................... 173
Notes to Financial Statements............... 198
Report of Independent Accountants........... 207
Federal Tax Information..................... 208
Directors and Officers ..................... 209
This report is authorized for distribution only when preceded or accompanied by
prospectuses of the Morgan Stanley Dean Witter Institutional Fund, Inc.
Prospectuses describe in detail each of the Portfolio's investment policies to
the prospective investor. Please read the prospectuses carefully before you
invest or send money.
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[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
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PRESIDENT'S LETTER
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Fellow Shareholders:
We are pleased to present to you the Fund's Annual Report for the year ended
December 31, 1998. Our Fund currently offers 26 portfolios providing investors
with a full array of global and domestic equity and fixed income products
covering core strategies as well as more specialized portfolios. Together, the
Fund's portfolios allow investors to meet specific investment needs or to
allocate assets among different portfolios to implement an overall investment
strategy. Set forth below is a general market review for 1998.
Major global market indexes finished 1998 with strong gains, overcoming a
volatile and, at times, precarious market environment. The S&P 500 Index
extended its bull market run into a fourth year, rising 28.57% in 1998. Foreign
stocks also performed well, with the MSCI EAFE Index rising 20.00%, led by
European markets' euphoria over monetary union. Although bond returns were less
impressive, the asset class showed strong and steady gains. The Lehman Aggregate
Index rose 8.69% for the year. Despite the strong numbers produced by major
market indexes, capital market strength was not experienced broadly or equally.
In the U.S., mega cap and growth stocks continued their domination of smaller
value stocks. The disparity was even more pronounced with mid and small cap
securities. The magnitude of the gap between value and growth as well as between
mega-caps and smaller companies were among the largest in recent history.
Foreign stock performance was also uneven. Although EAFE posted strong gains,
most of the positive news came from Europe, as the Pacific markets performed
poorly. In Europe, like in the U.S., mega-cap growth stocks dominated
performance. Emerging equity markets experienced another disappointing year,
down 25.34% as represented by the MSCI Emerging Markets Free Index.
The investment environment in 1998 vacillated between periods of extreme
optimism and extreme pessimism. In the first half of the year, European and U.S.
stock markets soared to new highs through mid-July, driven by strong economic
undertones, liquidity, and investor optimism. However, the second half of 1998
proved to be much more challenging as markets came under severe pressure, amidst
a deepening of the Russian financial crisis, lower earnings expectations, and
the near collapse of a large U.S. hedge fund. European and U.S. equity markets
would fall as much as 20% before stabilizing at the end of September, and credit
spreads widened dramatically, as investors sought refuge in safe-haven
Treasuries.
Two preemptive easings by the Federal Reserve in October and November
resulted in global easing by central banks in Europe and Asia in a concerted
effort to inject liquidity into markets and defend the world economy against
deflationary forces. By the end of the fourth quarter, all developed markets had
shown tremendous gains, led by the Asia-Pacific (non-Japan) region, which
benefited most from the easing.
Uncertainty proved beneficial for government bonds. The U.S. 30-year
Treasury bond yield fell to a 20-year low of 5.0% during the third quarter.
However, the global market crisis did not benefit all bonds equally. Throughout
the market slump, investors sought to deleverage global risk exposure, causing
corporate bond spreads and high yield bond spreads to widen dramatically
relative to government bonds. Emerging market debt instruments in particular
were under severe pressure, as investors began to fear devaluation and default
from lenders other than Russia, such as Brazil, Argentina, and Mexico. Even with
improved investor confidence amidst the fourth quarter global easing, spreads
failed to tighten as dramatically as they had widened.
Heading into 1999, we approach the markets with caution. The key to markets
in the coming year will be in judging whether or not the reflationary policies
of global central banks will succeed in preventing the world economy from
slipping into a recession. Although the market strength in December would
indicate buoyant expectations, many economic indicators, such as commodity
prices, consumer spending, industrial production and European unemployment
remain precarious. Many emerging markets, including Latin America, are in
recession, Japanese economic news remains weak, and European economies are
softening. If profits fall short of expectations, the current high valuation
levels of markets will be difficult to maintain. We expect a volatile market
environment for 1999, in which wise diversification should help investors ride
out many storms.
In this Report, each of our portfolio managers discuss the performance
results and outlook of their markets and portfolios in greater detail. We hope
you find the enclosed Report informative. As always, we very much appreciate
your continued support of the Fund.
Sincerely,
/s/Michael F. Klein
Michael F. Klein
PRESIDENT
February 1999
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Institutional Fund, Inc.
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PERFORMANCE SUMMARY (UNAUDITED)
DECEMBER 31, 1998
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[Enlarge/Download Table]
NET ASSETS NET ASSET VALUE
INCEPTION DATES (000) PER SHARE
------------------ ------------------- ----------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
-------- -------- ---------- ------- ------- -------
GLOBAL AND INTERNATIONAL EQUITY
PORTFOLIOS:
Active International
Allocation 1/17/92 1/02/96 $ 266,832 $ 96 $11.90 $12.12
Asian Equity 7/01/91 1/02/96 51,334 1,487 8.01 7.97
Asian Real Estate 10/01/97 10/01/97 2,447 761 6.63 6.66
Emerging Markets 9/25/92 1/02/96 772,115 7,199 9.55 9.56
European Equity 4/02/93 1/02/96 168,712 5,181 15.75 15.74
European Real Estate 10/01/97 10/01/97 33,422 2,531 9.58 9.61
Global Equity 7/15/92 1/02/96 228,748 13,123 20.74 20.63
International Equity 8/04/89 1/02/96 3,400,498 17,076 18.25 18.22
International Magnum 3/15/96 3/15/96 269,814 26,151 11.57 11.54
International Small Cap 12/15/92 -- 252,642 -- 15.25 --
Japanese Equity 4/25/94 1/02/96 57,755 1,083 6.18 6.13
Latin American 1/18/95 1/02/96 15,012 1,148 6.74 6.78
U.S. EQUITY PORTFOLIOS:
Aggressive Equity 3/08/95 1/02/96 130,734 16,682 17.50 17.40
Emerging Growth 11/01/89 1/02/96 73,276 1,282 8.07 7.93
Equity Growth 4/02/91 1/02/96 784,565 83,330 19.04 18.97
Technology 9/16/96 9/16/96 27,506 850 17.98 17.92
U.S. Equity Plus 7/31/97 7/31/97 66,640 1,431 12.43 12.42
U.S. Real Estate 2/24/95 1/02/96 259,589 13,523 12.71 12.67
Value Equity 1/31/90 1/02/96 57,543 1,045 10.78 10.76
FIXED INCOME PORTFOLIOS:
Emerging Markets Debt 2/01/94 1/02/96 46,234 1,187 2.61 2.66
Fixed Income 5/15/91 1/02/96 212,718 3,649 11.08 11.10
Global Fixed Income 5/01/91 1/02/96 45,884 362 12.51 12.48
High Yield 9/28/92 1/02/96 128,237 56,804 10.75 10.73
Municipal Bond 1/18/95 -- 34,807 -- 10.40 --
MONEY MARKET PORTFOLIOS:
Money Market 11/15/88 -- 1,958,177 -- 1.00 --
Municipal Money Market 2/10/89 -- 990,579 -- 1.00 --
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[Enlarge/Download Table]
YIELD INFORMATION AS OF DECEMBER 31, 1998
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30 DAY
CURRENT YIELD++ 7 DAY 7 DAY 30 DAY 30 DAY
----------------- CURRENT EFFECTIVE CURRENT COMPARABLE
CLASS A CLASS B YIELD+ YIELD+ YIELD++ YIELD
------- ------- -------- ---------- ------- ----------
FIXED INCOME PORTFOLIOS: MONEY MARKET PORTFOLIOS:
Emerging Markets Debt 18.70% 18.10% Money Market 4.74% 4.85% 4.74% 4.64%(16)
Fixed Income 5.32 5.17 Municipal Money Market 3.10 3.15 2.78 2.73(17)
Global Fixed Income 3.82 3.67
High Yield 9.76 9.49
Municipal Bond 4.10 --
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+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 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.
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AVERAGE ANNUAL FIVE YEAR
AVERAGE ANNUAL TOTAL
ONE YEAR TOTAL RETURN TOTAL RETURN RETURN SINCE INCEPTION
------------------------------------- ------------------------- ------------------------------------------------------------
COMPARABLE COMPARABLE COMPARABLE COMPARABLE
CLASS A CLASS B INDICES CLASS A INDICES CLASS A INDICES--CLASS A CLASS B INDICES--CLASS B
--------- --------- ------------- ---------- ------------ ---------- ---------------- --------- ----------------
20.12% 20.71% 20.00%(1) 9.50% 9.19%(1) 10.26% 9.62%(1) 12.63% 9.00%(1)
- 11.38 - 11.53 - 7.39(2) - 15.66 - 13.77(2) 1.94 2.32(2) - 22.32 - 18.11(2)
- 11.82 - 12.53 - 10.21(18) -- -- - 24.30 - 34.15(18) - 24.63 - 34.15(18)
- 25.42 - 25.65 - 21.08(3) - 8.17 - 8.69(3) 3.49 1.93(3) - 6.61 - 10.88(3)
- 25.34(22) - 9.27(22) 2.41(22) - 11.44(22)
8.09 7.80 28.53(4) 14.09 19.10(4) 17.24 20.23(4) 15.31 24.22(4)
4.75 4.60 - 0.40(19) -- -- - 0.16 - 0.30(19) - 0.30 - 0.30(19)
14.60 14.15 24.34(5) 17.20 15.68(5) 19.18 15.27(5) 19.80 17.63(5)
18.30 18.13 20.00(1) 15.14 9.19(1) 12.83 5.45(1) 16.76 9.00(1)
7.33 7.13 20.00(1) -- -- 7.94 9.81(1) 7.65 9.81(1)
4.25 -- 5.44(20) 5.51 - 3.38(20) 11.37 2.42(20) -- --
8.82 8.33 5.05(6) -- -- - 1.71 - 7.46(6) - 1.26 - 11.96(6)
- 37.10 - 36.86 - 35.29(7) -- -- 4.88 - 1.15(7) 8.09 0.49(7)
15.35 15.15 28.57(9) -- -- 34.03 30.29(9) 28.86 27.95(9)
27.54 26.86 - 2.55(8) 14.31 11.87(8) 13.49 12.42(8) 13.46 11.51(8)
39.63(21) 23.06(21) 18.70(21) 27.53(21)
19.04 18.71 28.57(9) 25.12 24.06(9) 19.09 19.13(9) 26.47 27.95(9)
53.90 53.52 28.57(9) -- -- 42.83 31.38(9) 42.51 31.38(9)
21.26 20.95 28.57(9) -- -- 17.71 21.41(9) 17.49 21.41(9)
- 12.29 - 12.52 - 17.50(10) -- -- 17.99 11.93(10) 15.45 10.33(10)
8.79 8.59 28.57(9) 17.30 24.06(9) 14.19 19.01(9) 18.35 27.95(9)
- 35.95 - 35.37 - 14.35(11) -- -- 4.75 6.94(11) 4.26 10.07(11)
7.93 7.85 8.69(12) 7.31 7.27(12) 8.45 8.54(12) 7.21 7.31(12)
13.84 13.68 15.31(13) 6.63 8.08(13) 8.24 9.40(13) 6.91 6.89(13)
3.03 2.79 0.58(14) 10.17 8.16(14) 11.73 9.73(14) 10.74 8.37(14)
5.52 -- 6.22(15) -- -- 6.37 7.64(15) -- --
5.20 -- -- -- -- -- -- -- --
3.00 -- -- -- -- -- -- -- --
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INDICES:
(1) MSCI EAFE (Europe, Australasia, and Far East)
(2) MSCI All-Country Far East Free ex-Japan
(3) IFC Global Total Return Composite
(4) MSCI Europe
(5) MSCI World
(6) MSCI Japan
(7) MSCI Emerging Markets Global Latin America
(8) Russell 2000
(9) S&P 500
(10) NAREIT Equity
(11) J.P. Morgan Emerging Markets Bond Plus
(12) Lehman Aggregate Bond
(13) J.P. Morgan Traded Global Bond
(14) CS First Boston High Yield
(15) Lehman 7-Year Municipal Bond
(16) IBC Money Fund Comparable Yield
(17) IBC Municipal Money Fund Comparable Yield
(18) GPR Life Far East Asia Real Estate T.R.
(19) GPR Life European Real Estate T.R.
(20) MSCI EAFE Small Cap
(21) NASDAQ Composite
(22) MSCI Emerging Markets Free
Past performance should not be construed as a guarantee of future performance.
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Investments in the Money Market and Municipal Money Market Portfolios are
neither insured nor guaranteed by the U.S. Government. There is no assurance
that the Money Market and Municipal Money Market Portfolios will be able to
maintain a stable net asset value of $1.00 per share. Please read the
Portfolios' prospectuses carefully before you invest or send money.
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3
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OVERVIEW
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ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1998)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Download Table]
Australia 2.5%
Austria 0.3%
France 8.9%
Germany 9.0%
Hong Kong 3.6%
Italy 5.4%
Japan 16.8%
Netherlands 4.3%
Norway 0.1%
Portugal 1.1%
Singapore 2.2%
Spain 4.7%
Sweden 2.3%
Switzerland 6.4%
United Kingdom 15.1%
Other 17.3%
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
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EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Download Table]
MSCI EAFE Index(1) Active International
Allocation Portfolio-Class
A
1/17/92* $ 500,000 $ 500,000
10/31/92 $ 468,500 $ 452,945
12/31/92 $ 479,500 $ 459,595
12/31/93 $ 626,820 $ 609,250
12/31/94 $ 623,550 $ 656,200
12/31/95 $ 689,459 $ 730,205
12/31/96 $ 756,405 $ 774,382
12/31/97 $ 821,531 $ 788,166
12/31/98 $ 945,799 $ 986,823
* Commencement of operations
** 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. 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)
------------------------------------------
[Download Table]
TOTAL RETURNS(2)
------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
---------- ----------------- -----------------
PORTFOLIO -- CLASS A.... 20.12% 9.50% 10.26%
PORTFOLIO -- CLASS B.... 20.71 N/A 12.63
INDEX -- CLASS A........ 20.00 9.19 9.62
INDEX -- CLASS B........ 20.00 N/A 9.00
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (includes dividends net of withholding
taxes).
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Active International Allocation Portfolio invests in international equity
markets, with emphasis placed upon countries, rather that stock selection. This
approach reflects our belief that a diversified selection of securities
representing exposure to countries that we find attractive provides an effective
way to maximize the return potential and minimize the risk associated with
global investing.
For the year ended December 31, 1998, the Portfolio had a total return of 20.12%
for the Class A shares and 20.71% for the Class B shares compared to 20.00% for
the Morgan Stanley Capital International (MSCI) EAFE Index (the "Index"). For
the five-year period ended December 31, 1998, the average annual total return
for Class A shares was 9.50% compared to 9.19% for the Index. From inception on
January 17, 1992 through December 31, 1998, the average annual total return for
Class A shares was 10.26% compared to 9.62% for the Index. From inception on
January 2, 1996 through December 31, 1998, the average annual total return for
Class B shares was 12.63% compared to 9.00% for the Index.
In the first week of October, a powerful rally began in the beleaguered, global
equity markets that lasted into mid November. The result was recoveries of
roughly half of the losses of August and September, with the exception of the
U.S. of course, with the S&P 500 Index bouncing back to a new high. In addition
to high equity market volatility, the fourth quarter was plagued by vicious
cross-currents in the fixed income and currency markets.
We reduced our large cash position in a timely manner and participated
reasonably well in the equity markets, but our underweight and hedged position
in the yen hurt us, particularly versus the Index. We characterize our current
stance as still invested but defensive; tilting towards Asia, away from Europe,
with a moderate cash position.
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CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE INFORMATION CONTAINED IN THIS
OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES
MENTIONED. THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY
THE MSCI EAFE INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE
CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE
SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.
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Active International Allocation Portfolio
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OVERVIEW
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ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
In retrospect, last fall we were too focussed on the negative fundamentals of
the yen that logically called for its further depreciation. We failed to fully
appreciate that we were in company with excessive and highly leveraged
investors, who changed the yen's momentum, when forced into liquidation of
staggering proportions in early October. The result was one of the most violent
moves in a major currency that has ever occurred; with the yen strengthening 20%
in one week. Since October, the yen temporarily weakened, only to rise again. We
removed our hedge at the level of 116.5, and no longer have a hedge against our
Japanese equity holdings.
During the fourth quarter we gradually reduced our commitment to European
equities and increased our positions in Japan, Hong Kong, and Singapore. We are
now slightly underweight Europe. Our rationale is relatively straightforward.
Asia has already experienced a severe recession, deflation, and a secular bear
market. Although we cannot identify the beginnings of an economic recovery,
currencies have strengthened, interest rates have fallen and corporate cost
cutting is accelerating. Asian equities are still cheap both absolutely and
relative to the rest of the world.
By contrast, Europe is just beginning to be affected by the deflationary
malaise. European economies are showing signs of slowing: 1999 gross domestic
product growth estimates have fallen from over 3% to 1.5%, export growth is
collapsing, and price indexes are falling. In the third quarter of 1998 many
European companies reported serious earnings shortfalls, but analysts
expectations of 1999 earnings are still +15%. We believe there is a good chance
corporate earnings in Europe could be flat to down next year.
We discussed our reasoning on Japan in last quarter's letter, and are now
roughly 75% of the Index weight. Japan is depressed and cheap, but unfortunately
there are still no real signs of positive marginal change which is what our
process requires to bring us to a market-weight or over-weight position. The
analysis of Japan's economy, politics, and banking system are very complex and
abstruse. The bottom line is that downside risks include policy failure and
slowing external demand. Upside risks involve unexpectedly aggressive financial
sector restructuring and reformist political change. We plan to visit Japan in
the next several weeks to try to determine first hand what is going on. We will
update you on our findings.
We are apprehensive about 1999. The immense flood of liquidity unleashed by the
central banks of the world is driving markets higher as we write. However, the
fundamentals everywhere, with the possible exception of the U.S., continue to
deteriorate. We are not sure whether the central banks have succeeded in saving
the world's economy and stock markets or merely postponed the final reckoning.
We will move aggressively when we know the answer.
Ann D. Thivierge
PORTFOLIO MANAGER
Barton M. Biggs
PORTFOLIO MANAGER
January 1999
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Active International Allocation Portfolio
5
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Institutional Fund, Inc.
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STATEMENT OF NET ASSETS
DECEMBER 31, 1998
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ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
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[Download Table]
VALUE
SHARES (000)
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COMMON STOCKS (82.1%)
AUSTRALIA (2.2%)
(a)31,391 AMP Ltd........................................... $ 398
23,986 Amcor Ltd......................................... 102
12,301 Australian Gas Light Co., Ltd..................... 89
40,186 Boral Ltd......................................... 57
7,670 Brambles Industries Ltd........................... 187
73,371 Broken Hill Proprietary Co., Ltd.................. 540
38,675 CSR Ltd........................................... 95
27,496 Coca Cola Amatil Ltd.............................. 102
39,038 Coles Myer Ltd.................................... 204
52,886 Crown Ltd......................................... 20
12,504 Email Ltd......................................... 18
4,633 F.H. Faulding & Co., Ltd.......................... 22
62,179 Fosters Brewing Group Ltd......................... 168
(c)22,505 Gio Australia Holdings Ltd........................ 74
45,587 Goodman Fielder Ltd............................... 46
11,082 Leighton Holdings Ltd............................. 48
19,602 Lend Lease Corp., Ltd............................. 264
77,233 MIM Holdings Ltd.................................. 34
49,402 National Australia Bank Ltd....................... 745
66,082 News Corp., Ltd................................... 437
84,598 Normandy Mining Ltd............................... 78
(c)36,435 North Ltd......................................... 59
10,255 Orica Ltd......................................... 53
37,341 Pacific Dunlop Ltd................................ 60
31,545 Pioneer International Ltd......................... 67
14,358 QBE Insurance Group Ltd........................... 59
9,582 Rio Tinto Ltd..................................... 114
(c)21,310 Santos Ltd........................................ 57
19,751 Schroders Property Fund........................... 32
6,634 Smith (Howard) Ltd................................ 44
21,983 Southcorp Holdings Ltd............................ 70
10,721 Stockland Trust Group............................. 27
12,018 TABCORP Holdings Ltd.............................. 74
180,725 Telstra Corp., Ltd................................ 845
48,500 WMC Ltd........................................... 146
67,368 Westpac Banking Corp.............................. 451
----------
5,886
----------
AUSTRIA (0.3%)
664 Austria Tabakwerke AG............................. 51
676 Austian Airlines/Oest Luftv AG.................... 24
90 Austria Mikro Systeme International AG............ 3
276 BBag Oest Brau Beteiligungs AG.................... 16
51 BWT AG............................................ 11
3,400 Bank Austria AG................................... 173
142 Bau Holding AG.................................... 7
333 Boehler-Uddeholm AG............................... 16
213 EA-Generali AG.................................... 52
640 Flughafen Wein AG................................. 31
(a)112 Lenzing AG........................................ 7
362 Mayr-Melnhof Karton AG............................ 17
806 OMV AG............................................ 76
920 Oest Elektrizatswirts AG, Class A................. 141
422 Radex-Heraklith Industriebet AG................... 11
452 VA Technologie AG................................. 39
260 Wienerberger Baustoffindustrie AG................. 52
----------
727
----------
VALUE
SHARES (000)
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FRANCE (8.9%)
2,510 Accor............................................. $ 543
5,276 Alcatel Alsthom................................... 646
9,464 Axa............................................... 1,372
6,637 Banque Nationale de Paris......................... 547
754 Bouygues.......................................... 155
1,200 Canal Plus........................................ 327
2,379 Cap Gemini Sogeti................................. 382
1,278 Carrefour......................................... 965
3,072 Casino Guichard-Perrachon......................... 320
2,816 Cie de Saint Gobain............................... 398
4,745 Compangnie Financiere de Paribas.................. 412
9,170 Elf Aquitaine..................................... 1,060
1,081 Eridania Beghin-Say............................... 187
242 Essilor International............................. 95
24,446 France Telecom.................................... 1,942
2,460 Groupe Danone..................................... 704
634 Imetal............................................ 64
4,858 Klepierre......................................... 496
2,231 L'OREAL........................................... 1,613
2,679 L'Air Liquide..................................... 491
3,081 LVMH Moet Hennessy Louis Vuitton.................. 610
3,054 Lafarge........................................... 290
4,289 Lagardere S.C.A................................... 182
897 Legrand........................................... 238
4,715 Michelin Compagnie Generale des Establissements,
Class B......................................... 189
1,678 PSA Peugeot Citroen............................... 260
378 Pathe............................................. 105
2,382 Pernod Ricard..................................... 155
3,044 Pinault-Printemps - Re doute...................... 582
630 Promodes.......................................... 458
12,501 Rhone-Poulenc, Class A............................ 643
220 Sagem............................................. 146
(c)3,830 Sanofi............................................ 631
4,760 Schneider......................................... 289
1,448 Silic............................................. 269
4,782 Simco (RFD)....................................... 434
2,158 Soceite BIC....................................... 120
178 Societe Eurafrance................................ 118
3,221 Societe Generale, Class A......................... 522
1,005 Sodexho Alliance.................................. 225
5,960 Sophia............................................ 253
4,466 Suez Lyonnaise des Eaux........................... 917
4,142 Thomson CSF....................................... 178
8,182 Total, Class B.................................... 829
3,417 Unibail........................................... 498
7,724 Usinor Sacilor.................................... 86
3,008 Valeo............................................. 237
5,705 Vivendi........................................... 1,480
----------
23,663
----------
GERMANY (8.7%)
1,533 AGIV AG........................................... 40
1,533 Adidas AG......................................... 169
7,708 Allianz AG........................................ 2,868
650 AMB AG............................................ 94
19,500 BASF AG........................................... 744
22,450 Bayer AG.......................................... 943
12,720 Bayerische Vereinsbank AG......................... 1,006
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
Active International Allocation Portfolio
6
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
----------------------------------------------------------------------------
GERMANY (CONT.)
[Download Table]
2,067 Bilfinger & Berger Bau AG......................... $ 46
17 Brau Und Brunnen AG............................... 2
767 CKAG AG........................................... 87
3,717 Continential AG................................... 103
(a,c)31,150 DaimlerChrysler AG................................ 3,094
2,317 Degussa AG........................................ 128
15,900 Deutsche Bank AG.................................. 938
67,489 Deutsche Telekom AG............................... 2,218
(c)15,417 Dresdner Bank AG.................................. 646
4,767 FAG Kugelfischer Georg Schaefer AG................ 40
635 Heidelberger Zement AG............................ 50
3,333 Hochtief AG....................................... 131
383 Karstadt AG....................................... 200
2,183 Kloeckner-Humboldt-Deutz AG....................... 20
233 Linde AG.......................................... 141
11,283 Lufthansa AG...................................... 250
383 MAN AG............................................ 114
11,300 Mannesmann AG..................................... 1,307
6,817 Merck KGaA........................................ 307
(c)7,443 Metro AG.......................................... 585
2,557 Muechener Rueck AG (Registered)................... 1,251
(c)500 Preussag AG....................................... 227
13,423 RWE AG............................................ 741
1,917 SAP AG............................................ 828
2,417 Schering AG....................................... 304
17,683 Siemens AG........................................ 1,162
(c)1,300 Thyssen AG........................................ 246
15,500 VEBA AG........................................... 918
923 Viag AG........................................... 546
9,230 Volkswagen AG..................................... 747
----------
23,241
----------
HONG KONG (3.6%)
95,600 Bank of East Asia Ltd............................. 166
197,000 Cathay Pacific Airways Ltd........................ 196
141,000 Cheung Kong Holdings Ltd.......................... 1,014
158,500 CLP Holdings Ltd.................................. 790
192,000 Chinese Estates Holdings.......................... 28
(a)83,200 Hopewell Holdings (New)........................... 45
96,000 Hang Lung Development Co.......................... 103
116,200 Hang Seng Bank Ltd................................ 1,039
(c)298,000 Hong Kong & China Gas Co., Ltd.................... 379
61,500 Hong Kong & Shanghai Hotel Ltd.................... 44
775,200 Hong Kong Telecommunications Ltd.................. 1,356
248,000 Hutchison Whampoa Ltd............................. 1,753
71,000 Hysan Development Co., Ltd........................ 106
41,000 Johnson Electric Holdings......................... 105
137,000 New World Development Co., Ltd.................... 345
392,000 Regal Hotel International Ltd..................... 42
1,000 Shangri-La Asia Ltd............................... 1
247,000 Sino Land Co...................................... 132
152,000 South China Morning Post Holdings Ltd............. 78
151,000 Sun Hung Kai Properties Ltd....................... 1,101
101,500 Swire Pacific Ltd., Class A....................... 455
29,000 Television Broadcasts Ltd......................... 75
159,000 Wharf Holdings Ltd................................ 232
----------
9,585
----------
VALUE
SHARES (000)
----------------------------------------------------------------------------
ITALY (5.4%)
(a)46,127 ALITALIA.......................................... $ 171
37,122 Assicurazioni Generali S.p.A...................... 1,553
66,700 Banca Commerciale Italiana........................ 461
(c)71,300 Banco Ambrosiano Veneto S.p.A..................... 429
9,000 Banco Popolare di Milano.......................... 82
(a)65,940 Benetton Group S.p.A.............................. 133
3,500 Cartiere Burgo.................................... 23
(a)272,220 Ciga S.p.A........................................ 223
152,512 Credito Italiano S.p.A............................ 906
297,000 ENI S.p.A......................................... 1,945
26,000 Edison S.p.A...................................... 307
2,300 Falck Acciaierie & Ferriere Lombarde.............. 19
(c)152,950 Fiat S.p.A........................................ 532
35,980 Fiat S.p.A. Di Risp (NCS)......................... 72
41,500 Immobiliaria Urbis................................ 51
(a)16,500 Impregilo S.p.A................................... 15
147,280 Istituto Nazionale delle Assicurazioni............ 390
5,850 Italcementi S.p.A................................. 65
8,300 Italcementi S.p.A. (RNC).......................... 42
17,800 Italgas........................................... 96
13,900 Magneti Marelli S.p.A............................. 24
(c)41,000 Mediaset S.p.A.................................... 333
23,800 Mediobanca S.p.A.................................. 331
145,574 Montedison S.p.A.................................. 194
46,900 Montedison S.p.A. Di Risp (NCS)................... 47
(a)109,680 Olivetti S.p.A.................................... 382
61,920 Parmalat Finanziaria S.p.A........................ 119
78,000 Pirelli S.p.A..................................... 250
(c)17,760 R.A.S. S.p.A...................................... 258
705 R.A.S. S.p.A. (RNC)............................... 6
(c)8,400 Rinascente S.p.A.................................. 87
4,900 SAI............................................... 59
(a,c)55,721 San Paolo S.p.A................................... 986
7,000 Sirti S.p.A....................................... 42
33,000 Snia BPD S.p.A.................................... 52
(c)134,444 Telecom Italia S.p.A.............................. 1,149
39,534 Telecom Italia S.p.A. (RNC)....................... 249
238,900 Telecom Italia Mobile S.p.A....................... 1,767
(c)57,500 Telecom Italia Mobile S.p.A. (RNC)................ 271
(a,c)419,527 Unione Immobiliare S.p.A.......................... 219
----------
14,340
----------
JAPAN (16.8%)
8,000 77 BANK........................................... 80
3,200 Acom Co., Ltd..................................... 206
100 Advantest Corp.................................... 6
39,400 Ajinomoto Co., Inc................................ 419
(a,c)41,600 Aoki Corp......................................... 20
46,900 Asahi Bank Ltd.................................... 172
25,000 Asahi Breweries Ltd............................... 369
75,000 Asahi Chemical Industry Co., Ltd.................. 358
69,800 Asahi Glass Co., Ltd.............................. 434
150,000 Bank of Tokyo-Mitsubushi Ltd...................... 1,555
16,800 Bank of Yokohama Ltd.............................. 40
27,000 Bridgestone Corp.................................. 614
3,700 Credit Saison..................................... 91
32,600 Canon, Inc........................................ 698
(c)17,800 Casio Computer Co., Ltd........................... 132
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
Active International Allocation Portfolio
7
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
----------------------------------------------------------------------------
JAPAN (CONT.)
[Download Table]
16,400 Chiba Bank Ltd.................................... $ 65
25,600 Chugai Pharmaceuticals Co., Ltd................... 256
30,600 Dai Nippon Printing Co., Ltd...................... 489
(c)26,600 Daiei, Inc........................................ 72
25,600 Daikin Industries Ltd............................. 254
26,600 Daiwa House Industry Co., Ltd..................... 284
78,000 Daiwa Securities Co., Ltd......................... 267
9,600 Denso Corp........................................ 178
148 East Japan Railway Co............................. 828
17,800 Ebara Corp........................................ 154
10,500 Fanuc Ltd......................................... 360
(c)123,000 Fuji Bank......................................... 453
15,000 Fuji Photo Film Ltd............................... 558
60,200 Fujitsu Ltd....................................... 803
17,800 Furukawa Electric Co., Ltd........................ 61
8,000 Gunma Bank Ltd.................................... 64
32,000 Hankyu Corp....................................... 141
(a)24,000 Hazama Corp....................................... 16
125,000 Hitachi Ltd....................................... 775
30,000 Honda Motor Co., Ltd.............................. 986
57,000 Industrial Bank of Japan.......................... 263
12,000 Ito-Yokado Co., Ltd............................... 840
(a,c)78,000 Japan Airlines Co., Ltd........................... 206
59,000 Japan Energy Corp................................. 56
8,600 Joyo Bank Ltd..................................... 34
16,800 Jusco Co., Ltd.................................... 340
(c)48,400 Kajima Corp....................................... 127
31,800 Kansai Electric Power Co., Ltd.................... 697
32,000 Kao Corp.......................................... 723
39,400 Kawasaki Steel Corp............................... 59
56,200 Kinki Nippon Railway Co., Ltd..................... 301
50,400 Kirin Brewery Co., Ltd............................ 643
45,400 Komatsu Ltd....................................... 239
70,000 Kubota Corp....................................... 209
(a,c)77,400 Kumagai Gumi Co., Ltd............................. 60
7,400 Kyocera Corp...................................... 392
22,600 Kyowa Hakko Kogyo Co., Ltd........................ 112
67,000 Marubeni Corp..................................... 115
7,800 Marui Co., Ltd.................................... 150
66,000 Matsushita Electric Industrial Co., Ltd........... 1,169
(c)75,000 Mitsubishi Chemical Corp.......................... 158
66,000 Mitsubishi Corp................................... 380
87,800 Mitsubishi Electric Corp.......................... 276
17,000 Mitsubishi Estate Co., Ltd........................ 153
135,000 Mitsubishi Heavy Industries Ltd................... 526
46,400 Mitsubishi Materials Corp......................... 78
36,000 Mitsubishi Trust & Banking Co..................... 232
67,800 Mitsui & Co., Ltd................................. 379
48,400 Mitsui Engineering & Shipbuilding Co., Ltd........ 48
13,400 Mitsui Fudosan Co., Ltd........................... 102
1,200 Mitsui Trust & Banking Co., Ltd................... 1
(c)24,800 Mitsukoshi Ltd.................................... 66
9,000 Murata Manufacturing Co., Ltd..................... 374
17,800 Mycal Corp........................................ 106
(c)44,400 NEC Corp.......................................... 409
26,600 NGK Insulators Ltd................................ 343
145,800 NKK Corp.......................................... 99
18,800 Nippon Express Co., Ltd........................... 106
VALUE
SHARES (000)
----------------------------------------------------------------------------
22,600 Nippon Fire & Marine Insurance Co., Ltd........... $ 83
22,800 Nippon Light Metal Co., Ltd....................... 24
23,600 Nippon Meat Packers, Inc.......................... 381
71,800 Nippon Oil Co., Ltd............................... 251
277,000 Nippon Steel Co................................... 503
376 Nippon Telegraph & Telephone Corp................. 2,905
70,000 Nippon Yusen Kabushiki Kaisha..................... 221
(c)88,600 Nissan Motor Co., Ltd............................. 272
40,000 Nomura Securities Co., Ltd........................ 349
900 Orix Corp......................................... 67
28,600 Odakyu Electric Railway Corp...................... 100
50,400 Oji Paper Co., Ltd. (New)......................... 262
102,600 Osaka Gas Co., Ltd................................ 354
22,600 Penta-Ocean Construction Co., Ltd................. 45
8,000 Pioneer Electric Corp............................. 134
2,000 Rohm Co., Ltd..................................... 182
1,500 SMC............................................... 120
(c)93,000 Sakura Bank Ltd................................... 213
18,800 Sankyo Co., Ltd................................... 411
(c)80,000 Sanwa Bank Ltd.................................... 617
66,000 Sanyo Electric Co., Ltd........................... 205
7,800 Secom Co., Ltd.................................... 647
(c)5,000 Sega Enterprises Ltd.............................. 111
26,600 Sekisui House Co.,Ltd............................. 282
45,200 Sharp Corp........................................ 408
8,800 Shimano, Inc...................................... 227
(c)36,600 Shimizu Corp...................................... 123
13,000 Shin-Etsu Chemical Co., Ltd....................... 313
14,000 Shiseido Co., Ltd................................. 180
11,600 Shizuoka Bank Ltd................................. 143
47,400 Showa Denko....................................... 42
11,600 Sony Corp......................................... 846
49,000 Sumitomo Bank..................................... 504
(c)92,600 Sumitomo Chemical Co., Ltd........................ 361
47,400 Sumitomo Corp..................................... 231
33,400 Sumitomo Electric Industries...................... 376
12,800 Sumitomo Forestry Co., Ltd........................ 92
23,800 Sumitomo Metal & Mining Co........................ 77
89,800 Sumitomo Metal Industries......................... 103
23,600 Sumitomo Osaka Cement Co., Ltd.................... 44
(c)50,400 Taisei Corp., Ltd................................. 97
15,800 Taisho Pharmaceutical Co., Ltd.................... 435
30,000 Taiyo Yuden Co., Ltd.............................. 356
30,600 Takeda Chemical Industries........................ 1,180
50,400 Teijin Ltd........................................ 186
32,400 Tobu Railway Co., Ltd............................. 95
17,000 Tohoku Electric Power Co., Ltd.................... 301
38,800 Tokai Bank Ltd.................................... 184
75,000 Tokio Marine & Fire Insurance Co., Ltd............ 897
41,100 Tokyo Electric Power Co........................... 1,016
5,000 Tokyo Electron Ltd................................ 190
100,600 Tokyo Gas Co...................................... 265
39,400 Tokyu Corp........................................ 104
32,600 Toppan Printing Co., Ltd.......................... 399
75,100 Toray Industries, Inc............................. 393
27,600 Toto Ltd.......................................... 222
50,400 Toyoba Co......................................... 65
101,000 Toyota Motor Corp................................. 2,748
(c)47,400 Ube Industries Ltd................................ 72
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
Active International Allocation Portfolio
8
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
----------------------------------------------------------------------------
JAPAN (CONT.)
[Download Table]
(d)600 Yamaichi Securities Co., Ltd...................... $ --
25,000 Yokogawa Electric Corp............................ 124
----------
44,967
----------
NETHERLANDS (4.3%)
32,693 ABN Amro Holding N.V.............................. 688
13,000 Aegon N.V......................................... 1,597
7,800 Akzo Nobel N.V.................................... 355
2,180 Buhrmann N.V...................................... 39
14,000 Elsevier N.V...................................... 196
2,008 Getronics N.V..................................... 99
1,900 Hagemeyer N.V..................................... 69
7,237 Heineken N.V...................................... 436
21,511 ING Groep N.V..................................... 1,312
1,970 KLM Royal Dutch Airlines N.V...................... 60
11,733 Koninklijke Ahold N.V............................. 434
650 Nedlloyd Groep N.V................................ 9
2,127 Oce N.V........................................... 76
8,300 Philips Electronics N.V........................... 557
10,184 Rodamco N.V....................................... 259
50,100 Royal Dutch Petroleum Co.......................... 2,495
10,424 Royal KPN N.V..................................... 522
1,168 Stork N.V......................................... 27
11,327 TNT Post Group N.V................................ 365
14,260 UNI-INVEST N.V.................................... 224
15,200 Unilever N.V...................................... 1,299
1,700 Vedior N.V........................................ 34
1,709 Wolters Kluwer N.V................................ 366
----------
11,518
----------
NORWAY (0.1%)
(a)69,700 Choice Hotels Scandinavia ASA..................... 98
(a)33,930 Linstow ASA....................................... 161
----------
259
----------
PORTUGAL (1.1%)
11,576 Banco Commercial Portugues (Registered)........... 356
7,100 Banco Espirito Santo e Comercial de Lisboa
(Registered).................................... 220
4,700 Banco Portugues de Investimento (New)............. 159
3,500 Brisa Auto-Estradas............................... 206
1,300 Cia de Seguros Tranquilidade, (Registered)........ 42
5,300 Cimpor SGPS....................................... 169
200 Cin-Corparacao Industial do Norte................. 8
35,300 EDP-Electricidade de Portugal..................... 777
300 INAPA-Investimentos Participacoes e Gestao........ 3
4,050 Jeronimo Martins SGPS............................. 222
11,700 Portugal Telecom (Registered)..................... 536
6,300 Portucel Industrial-Empressa...................... 41
360 Sociedade de Construcoes Soares da Costa.......... 1
1,695 Somague-Sociedade Gestora de Participacoes........ 10
2,700 Sonae Investmentos................................ 131
1,000 UNICER-Uniao Cervejeira........................... 24
----------
2,905
----------
VALUE
SHARES (000)
----------------------------------------------------------------------------
SINGAPORE (2.2%)
(a)32,000 Asia Food & Properties Ltd........................ $ 5
77,000 City Developments Ltd............................. 334
(a,c)8,700 Creative Technology Ltd........................... 123
36,000 Cycle & Carriage Ltd.............................. 123
115,000 DBS Land Ltd...................................... 169
62,000 Development Bank of Singapore Ltd. (Foreign)...... 560
28,800 Fraser & Neave Ltd................................ 84
48,000 Hotel Properties Ltd.............................. 20
2,000 Inchcape Bhd...................................... 2
(a)5,000 Inchcape Marketing Services Ltd................... 3
106,750 Keppel Corp., Ltd................................. 286
37,000 NatSteel Ltd...................................... 41
(a)111,000 Neptune Orient Lines Ltd. (Foreign)............... 36
99,560 Oversea-Chinese Banking Corp. (Foreign)........... 676
(a)18,226 Overseas Union Enterprise Ltd..................... 36
32,000 Parkway Holdings Ltd.............................. 57
4,200 Robinson & Co., Ltd............................... 9
(a)149,644 Sembcorp Industries Ltd........................... 171
10,600 Shangri-La Hotel Ltd.............................. 17
105,000 Singapore Airlines Ltd. (Foreign)................. 770
36,018 Singapore Ltd. (Foreign).......................... 391
275,000 Singapore Technologies Engineering Ltd............ 257
(c)587,000 Singapore Telecommunications Ltd.................. 896
4,000 Straits Trading Co., Ltd.......................... 3
(c)135,000 United Industrial Corp., Ltd...................... 54
81,000 United Overseas Bank Ltd. (Foreign)............... 520
(a)64,000 United Overseas Land Ltd.......................... 43
19,000 Venture Manufacturing (Singapore) Ltd............. 73
----------
5,759
----------
SPAIN (4.7%)
3,000 ACS Actividades................................... 118
3,675 Acerinox.......................................... 86
2,389 Aguas de Barcelona................................ 161
25,800 Argentaria........................................ 669
13,107 Autopistas Concesionaria Espanola................. 218
1,150 Azucarera Ebro Agricolas.......................... 25
103,300 Banco Bilbao Vizcaya (Registered)................. 1,622
(c)48,035 Banco Central Hispano Americano................... 571
59,800 Banco Santander .................................. 1,190
700 Corporacion Financiera Alba....................... 117
3,590 Corporacion Mapfre................................ 97
3,900 Dragados y Construccion........................... 144
50 Empresa Nacional de Celulosas..................... 1
48,800 Endesa............................................ 1,294
(a)100 Ercros............................................ --
3,700 Fomento Construction y Cantractas................. 275
7,400 Gas Natural SDG................................... 807
44,500 Iberdrola......................................... 833
(a)2,270 Immobiliaria Metropolitana Vasco Central.......... 68
16,100 Repsol............................................ 860
1,600 Sol Melia......................................... 56
(a)11,300 Telepizza......................................... 108
8,900 Tabacalera........................................ 225
51,572 Telefonica........................................ 2,296
14,700 Union Electrica Fenosa............................ 255
50 Uralita........................................... 1
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
Active International Allocation Portfolio
9
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
----------------------------------------------------------------------------
SPAIN (CONT.)
[Download Table]
(a)41,361 Vallehermoso...................................... $ 592
50 Viscofan Envolturas Celulosicas................... 2
1,220 Zardoya Otis...................................... 38
----------
12,729
----------
SWEDEN (2.3%)
16,500 ABB AB, Class A................................... 176
6,900 ABB AB, Class B................................... 73
3,900 AGA AB, Class B................................... 51
(a)28,710 Asticus AB........................................ 282
32,633 Astra AB, Class A................................. 667
7,900 Astra AB, Class B................................. 161
3,150 Atlas Copco AB, Class A........................... 69
1,700 Atlas Copco AB, Class B........................... 37
47,060 Castellum AB...................................... 512
(a)34,680 Diligentia AB..................................... 244
7,600 Electrolux AB, Series B........................... 131
47,000 Ericsson LM, Class B.............................. 1,121
15,600 Fastighets AB Tornet.............................. 228
8,600 ForeningsSparbanken AB............................ 223
5,100 Hennes & Mauritz AB, Class B...................... 417
(a)2,600 Netcom Systems AB, Class B........................ 106
1,800 OM Gruppen AB..................................... 23
11,000 Piren AB.......................................... 70
2,100 S.K.F. AB, Class B................................ 25
6,640 Securitas AB, Class B............................. 103
4,900 Sandvik AB, Class A............................... 85
2,000 Sandvik AB, Class B............................... 35
12,700 Skandia Forsakrings AB............................ 195
14,800 Skandinaviska Enskilda Banken, Class A............ 156
3,100 Skanska AB, Class B............................... 86
5,500 Svenska Cellulosa AB, Class B..................... 120
5,300 Svenska Handelsbanken, Class A.................... 224
3,000 Svenskt Stal AB (SSAB), Series A.................. 29
3,600 Trelleborg AB, Class B............................ 29
3,600 Volvo AB, Class A................................. 81
7,550 Volvo AB, Class B................................. 173
1,800 WM-Data AB, Class B............................... 77
----------
6,009
----------
SWITZERLAND (6.4%)
285 ABB AG............................................ 334
555 Adecco............................................ 254
(c)175 Alusuisse-Lonza Holdings Ltd. (Registered)........ 204
8,000 CS Holding AG (Registered)........................ 1,254
220 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 261
1,165 Nestle (Registered)............................... 2,540
1,895 Novartis AG (Registered).......................... 3,731
48 Roche Holding AG (Bearer)......................... 871
204 Roche Holding AG (Registered)..................... 2,493
(a)470 SAirGroup (Registered)............................ 117
60 SGS Surveillance.................................. 59
160 SMH AG (Bearer)................................... 99
130 Sulzer AG (Registered)............................ 79
435 Swiss Reinsurance (Registered).................... 1,136
(a)1,990 Swisscom AG (Registered).......................... 834
VALUE
SHARES (000)
----------------------------------------------------------------------------
(a)6,009 Union Bank of Switzerland AG (Registered)......... $ 1,849
185 Valora Holding AG................................. 50
1,410 Zurich Allied AG.................................. 1,045
----------
17,210
----------
THAILAND (0.0%)
(a,d)8,000 CMIC Finance & Securities PCL (Foreign)........... --
(a,d)18,600 General Finance & Securities PCL (Foreign)........ --
(d)34,700 Siam City Bank PCL (Foreign)...................... --
----------
--
----------
UNITED KINGDOM (15.1%)
28,300 Abbey National plc................................ 606
34,817 Albert Fisher Group plc........................... 3
1,851 Alldays plc....................................... 5
2,415 Allders plc....................................... 5
(a)35,717 Allied Zurich plc................................. 533
7,063 AMEC plc.......................................... 21
20,898 Anglian Water plc................................. 289
18,300 Arjo Wiggins Appleton plc......................... 34
13,000 Associated British Foods plc...................... 123
21,152 Associated British Ports Hldgs plc................ 98
10,766 Astec plc......................................... 15
16,674 Baird (William) plc............................... 28
33,917 Barclays plc...................................... 731
10,099 Barratt Developments plc.......................... 39
20,467 Bass plc.......................................... 298
1,209 BBA Group plc..................................... 8
25,448 Beazer Group plc.................................. 65
17,594 Berisford plc..................................... 53
93,241 BG plc............................................ 588
25,425 BICC plc.......................................... 30
34,840 Blue Circle Industries plc........................ 180
16,670 BOC Group plc..................................... 238
25,700 Boots Co. plc..................................... 438
53,648 BPB Industries plc................................ 203
52,300 British Aerospace plc............................. 443
28,525 British Airways plc............................... 192
35,717 British American Tobacco plc...................... 314
45,890 British Land Co. plc.............................. 341
139,235 British Petroleum Co. plc......................... 2,079
41,700 British Sky Broadcasting plc...................... 317
52,200 British Steel plc................................. 77
142,500 British Telecommunications plc.................... 2,147
179,158 BTR plc........................................... 370
119,040 Buford Holdings plc............................... 194
29,791 Burmah Castrol plc................................ 426
54,672 Cable & Wireless plc.............................. 672
28,680 Cadbury Schweppes plc............................. 489
(a)4,621 Capital Corp. plc................................. 5
79,650 Capital Shopping Centers plc...................... 447
66,447 Caradon plc....................................... 114
11,379 Carpetright plc................................... 43
84,200 Centrica plc...................................... 169
23,543 Coats Viyella plc................................. 11
4,309 Cobham plc........................................ 50
14,396 Commercial Union plc.............................. 225
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
Active International Allocation Portfolio
10
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
----------------------------------------------------------------------------
UNITED KINGDOM (CONT.)
[Download Table]
2,616 De La Rue Co. plc................................. $ 9
2,363 Delta plc......................................... 4
(a)4,384 Dialog Corp. plc.................................. 4
80,181 Diageo plc........................................ 912
5,841 EMAP plc.......................................... 112
52,340 EMI Group plc..................................... 350
26,630 Enterprise Oil plc................................ 131
80 Elementis plc..................................... --
25,800 Firstgroup plc.................................... 171
21,058 FKI plc........................................... 47
62,600 General Electric plc.............................. 565
31,230 GKN plc........................................... 414
77,100 Glaxo Wellcome plc................................ 2,653
18,272 Granada Group plc................................. 323
171,120 Grantchester Holdings plc......................... 399
28,100 Great Universal Stores plc........................ 296
5,362 Greycoat plc...................................... 15
19,869 Guardian Royal Exchange plc....................... 111
33,290 Hammerson plc..................................... 191
41,263 Hanson plc........................................ 328
13,575 House of Fraser................................... 12
42,188 HSBC Holdings plc................................. 1,067
12,400 HSBC Holdings plc (75p)........................... 336
9,035 Hyder plc......................................... 113
24,877 IMI plc........................................... 98
20,900 Imperial Chemical Industries plc.................. 181
14,587 Jarvis plc........................................ 162
1,427 JBA Holdings plc.................................. 4
29,407 Johnson Matthey plc............................... 199
27,800 Kingfisher plc.................................... 301
2,469 Kwik-Fit Holdings plc............................. 20
31,641 Ladbroke Group plc................................ 127
6,302 Laird Group plc................................... 17
20,900 Land Securities plc............................... 269
91,246 Lasmo plc......................................... 152
25,100 Legal & General Group plc......................... 326
11,777 Lex Service plc................................... 75
11,340 Limit plc......................................... 31
130,200 Lloyds TSB Group plc.............................. 1,852
21,361 London Clubs Intlernational Plc................... 58
7,019 London Forfaiting Co. plc......................... 13
5,224 Lonrho Africa plc................................. 5
23,828 Lonrho plc........................................ 130
1,872 Low & Bonar plc................................... 5
76,702 Lucascarity plc................................... 256
1,810 Manchester United plc............................. 7
77,300 Marks and Spencer plc............................. 530
(a)40,248 Marley plc........................................ 82
237 Mayflower Corp. plc............................... 1
2,171 McKechnie plc..................................... 13
5,553 Meggitt plc....................................... 12
12,865 MEPC plc.......................................... 86
21,924 Mirror Group News plc............................. 55
(a)37,168 MISYS plc......................................... 271
32,066 National Power plc................................ 276
16,137 NEXT plc.......................................... 133
42,137 NFC plc........................................... 83
(a)890 Ocean Group plc................................... 11
VALUE
SHARES (000)
----------------------------------------------------------------------------
9,481 Parity plc........................................ $ 91
17,071 Peninsular & Oriental Steam Navigation............ 202
11,317 Pennon Group plc.................................. 219
148,877 Pilkington plc.................................... 149
1,975 Powerscreen International plc..................... 4
44,762 Prudential Corp. plc.............................. 676
10,414 Racal Electronic plc.............................. 60
10,300 Railtrack Group plc............................... 269
52,362 Rank Group plc.................................... 202
29,000 Reed International plc............................ 227
42,533 Reuters Group plc................................. 447
(a)14,439 Rexam plc......................................... 40
31,348 Rio Tinto plc..................................... 365
7,800 RMC Group plc..................................... 107
37,611 Rolls-Royce plc................................... 156
13,070 Royal Bank of Scotland Group plc.................. 209
34,528 Royal & Sun Alliance Insurance Group plc.......... 282
12,052 Rugby Group plc................................... 19
21,127 Safeway plc....................................... 106
37,523 Sainsbury (J) plc................................. 301
7,800 Schroders plc..................................... 142
(a)5,310 Scotia Holdings plc............................... 6
26,130 Scottish Power plc................................ 268
37,456 Sears plc......................................... 161
4,690 Selfridges plc.................................... 17
1,614 Skillsgroup plc................................... 5
13,100 Slough Estates plc................................ 59
130,396 Smithkline Beecham plc............................ 1,822
5,564 Smiths Industries plc............................. 79
35,618 Southern Electric plc............................. 403
45,467 Stagecoach holdings plc........................... 181
36,507 Tarmac plc........................................ 68
18,300 Tate & Lyle plc................................... 101
20,916 Taylor Woodrow plc................................ 52
133,860 Tesco plc......................................... 381
12,422 Thames Water plc.................................. 238
6,861 The Berkeley Group plc............................ 50
13,017 TI Group plc...................................... 70
1,574 Torotrac plc...................................... 2
76,000 Unilever plc...................................... 852
14,586 United Utilities plc.............................. 202
2,637 Vickers plc....................................... 8
71,056 Vodafone Group plc................................ 1,154
235,070 Wates City of London Properties plc............... 278
1,107 Wickes plc........................................ 5
30,156 WPP Group plc..................................... 184
19,291 Yorkshire Water plc............................... 177
22,600 Zeneca Group plc.................................. 984
----------
40,240
----------
TOTAL COMMON STOCKS (Cost $189,243)............................. 219,038
----------
PREFERRED STOCKS (0.5%)
AUSTRALIA (0.2%)
59,760 News Corp., Ltd................................... 363
----------
AUSTRIA (0.0%)
2 Bau Holding AG.................................... --
----------
The accompanying notes are an integral part of the financial statements.
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Active International Allocation Portfolio
11
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
----------------------------------------------------------------------------
GERMANY (0.3%)
1,317 SAP AG............................................ $ 632
2,980 Volkswagen AG..................................... 148
----------
780
----------
ITALY (0.0%)
(c)47,900 Fiat S.p.A........................................ 92
----------
TOTAL PREFERRED STOCKS (Cost $921).............................. 1,235
----------
[Download Table]
NO. OF
RIGHTS
------------
RIGHTS (0.0%)
SPAIN (0.0%)
(a)51,572 Telefonica, expiring 1/30/99 (Cost $0)............ 46
----------
[Download Table]
NO. OF
WARRANTS
------------
WARRANTS (0.0%)
HONG KONG (0.0%)
(a)7,850 Hong Kong & China Gas Co., Ltd., expiring
9/30/99......................................... 1
(a)4,300 Hysan Development Co., Ltd., expiring 4/30/99..... --
----------
1
----------
SINGAPORE (0.0%)
(a)2,400 Asia Food & Properties Ltd., expiring 7/12/02..... --
(a)11,750 Keppei Land Ltd., expiring 12/20/00............... 3
----------
3
----------
THAILAND (0.0%)
(a)6,349 National Finance & Securities PCL, expiring
11/15/99........................................ --
----------
TOTAL WARRANTS (Cost $7)........................................ 4
----------
[Download Table]
NO. OF
UNITS
------------
AUSTRALIA (0.1%)
46,096 General Property Trust............................ 86
38,839 Westfield Trust................................... 86
----------
TOTAL UNITS (Cost $153)......................................... 172
----------
[Download Table]
FACE
AMOUNT
(000)
------------
FIXED INCOME SECURITIES (0.0%)
FRANCE (0.0%)
FRF 62 Casino Guichard-Perrachon, Series XW, 4.50%,
7/12/01......................................... 65
----------
ITALY (0.0%)
ITL 11,200 Mediobanca S.p.A., Series XW 4.50%, 1/01/00....... 7
----------
PORTUGAL (0.0%)
PTE 10 Jeronimo Martins SGPS, Zero coupon, 12/30/04...... 7
----------
TOTAL FIXED INCOME SECURITIES (Cost $39)........................ 79
----------
TOTAL FOREIGN SECURITIES (82.7%) (Cost $190,363)................ 220,574
----------
[Download Table]
FACE
AMOUNT VALUE
(000) (000)
----------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (19.8%)
REPURCHASE AGREEMENTS (19.8%)
$ 43,882 Chase Securities, Inc. 4.45%, dated 12/31/98, due
1/04/99, to be repurchased at $43,887,
collateralized by Federal National Mortgage
Assoc., 4.75%, due 11/14/03, valued at
$44,278......................................... $ 43,882
9,031 Goldman Sachs & Co. 4.70%, dated 12/31/98, due
1/04/99, to be repurchased at $9,035;
collateralized by U.S. Treasury Notes, 5.125%
due 8/31/00, valued at $9,210................... 9,031
----------
TOTAL SHORT-TERM INVESTMENTS (cost $52,913)..................... 52,913
----------
FOREIGN CURRENCY (0.0%)
GBP 57 British Pound..................................... 95
ITL 980 Italian Lira...................................... 1
ESP 55 Spanish Peseta.................................... --
----------
TOTAL FOREIGN CURRENCY (Cost $96)............................... 96
----------
[Download Table]
TOTAL INVESTMENTS (102.5%) (Cost $243,372).................... 273,583
----------
OTHER ASSETS (1.2%)
Cash............................................ $ 73
Due from Broker................................. 1,644
Net Receivable for Daily Variation on Futures
Contracts..................................... 1,025
Dividends Receivable............................ 291
Foreign Withholding Tax Reclaim Receivable...... 97
Receivable for Portfolio Shares Sold............ 55
Interest Receivable............................. 24
Other........................................... 21 3,230
----------
LIABILITIES ( - 3.7%)
Collateral on Securities Loaned................. (9,031)
Investment Advisory Fees Payable................ (300)
Net Unrealized Loss on Foreign Currency Exchange
Contracts..................................... (238)
Payable for Portfolio Shares Redeemed........... (113)
Custodian Fees Payable.......................... (50)
Administrative Fees Payable..................... (37)
Directors' Fees & Expenses Payable.............. (12)
Other Liabilities............................... (104) (9,885)
---------- ----------
NET ASSETS (100%)............................................. $ 266,928
----------
----------
[Download Table]
NET ASSETS CONSIST OF:
Paid in Capital............................................... $ 236,492
Accumulated Net Investment Loss............................... (900)
Accumulated Net Realized Gain................................. 400
Unrealized Appreciation on Investments, Foreign Currency
Translations and Futures Contracts.......................... 30,936
----------
$ 266,928
----------
----------
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
Active International Allocation Portfolio
12
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
AMOUNT
(000)
--------------------------------------------------------------------------
[Download Table]
CLASS A:
--------------------------------------------------------------
NET ASSETS.................................................... $266,832
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 22,414,468 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $11.90
----------
----------
CLASS B:
--------------------------------------------------------------
NET ASSETS.................................................... $96
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 7,968 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $12.12
----------
----------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1998, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars as indicated below:
[Enlarge/Download Table]
IN NET
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
--------------- --------- ----------- --------------- --------- ------------
JPY 247,900 $ 2,200 1/11/99 U.S.$ 2,060 $ 2,060 $ (140)
JPY 121,890 1,082 1/11/99 U.S.$ 1,030 1,030 (52)
U.S.$ 2,731 2,731 1/11/99 JPY 313,493 2,782 51
U.S.$ 485 485 1/11/99 JPY 56,297 500 15
DEM 4,726 2,839 1/19/99 U.S.$ 2,807 2,807 (32)
FRF 875 526 1/19/99 U.S.$ 515 515 (11)
JPY 177,235 1,575 1/19/99 U.S.$ 1,531 1,531 (44)
U.S.$ 1,525 1,525 1/19/99 DEM 2,545 1,529 4
U.S.$ 1,546 1,546 1/19/99 JPY 177,235 1,575 29
U.S.$ 920 920 1/29/99 JPY 105,394 938 18
JPY 105,394 938 1/29/99 U.S.$ 901 901 (37)
FRF 28,454 5,100 2/4/99 U.S.$ 5,110 5,110 10
JPY 296,970 2,644 2/4/99 U.S.$ 2,624 2,624 (20)
U.S.$ 3,287 3,287 2/4/99 JPY 376,413 3,351 64
U.S.$ 1,557 1,557 2/4/99 JPY 180,222 1,604 47
JPY 259,665 2,311 2/4/99 U.S.$ 2,147 2,147 (164)
U.S.$ 4,795 4,795 2/4/99 FRF 27,361 4,904 109
U.S.$ 3,970 3,970 2/4/99 FRF 22,196 3,978 8
JPY 246,459 2,195 2/8/99 U.S.$ 2,142 2,142 (53)
U.S.$ 4,278 4,278 2/8/99 JPY 494,909 4,408 130
JPY 248,451 2,213 2/8/99 U.S.$ 2,142 2,142 (71)
U.S.$ 706 706 2/12/99 ESP 100,104 706 -
U.S.$ 2,154 2,154 2/12/99 GBP 1,301 2,162 8
U.S.$ 18,986 18,986 2/12/99 GBP 11,454 19,032 46
U.S.$ 2,613 2,613 2/12/99 GBP 1,565 2,600 (13)
ESP 47,797 337 2/12/99 U.S.$ 338 338 1
ESP 362,836 2,560 2/12/99 U.S.$ 2,568 2,568 8
GBP 1,586 2,635 2/12/99 U.S.$ 2,661 2,661 26
ITL 4,226,153 2,563 2/12/99 U.S.$ 2,573 2,573 10
U.S.$ 2,555 2,555 2/12/99 ITL 4,254,872 2,580 25
U.S.$ 1,300 1,300 2/12/99 ITL 2,145,000 1,301 1
U.S.$ 1,889 1,889 2/12/99 ESP 270,100 1,906 17
JPY 183,525 1,638 2/26/99 U.S.$ 1,536 1,536 (102)
U.S.$ 671 671 2/26/99 JPY 77,401 691 20
U.S.$ 919 919 2/26/99 JPY 106,124 947 28
SGD 1,614 983 3/3/99 U.S.$ 988 988 5
U.S.$ 986 986 3/3/99 SGD 1,614 983 (3)
SGD 1,465 893 3/8/99 U.S.$ 897 897 4
SGD 173 105 3/8/99 U.S.$ 106 106 1
U.S.$ 895 895 3/8/99 SGD 1,465 893 (2)
IN NET
CURRENCY TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
--------------------------------------------------------------------------------------
U.S.$ 106 106 3/8/99 SGD 173 105 (1)
U.S.$ 693 $ 693 3/9/99 AUD 1,110 $ 681 $ (12)
JPY 730,068 6,530 3/10/99 U.S.$ 6,187 6,187 (343)
U.S.$ 3,495 3,495 3/10/99 JPY 400,883 3,585 90
U.S.$ 2,576 2,576 3/10/99 JPY 296,879 2,655 79
U.S.$ 375 375 3/10/99 JPY 42,638 381 6
SGD 1,465 894 4/7/99 U.S.$ 899 899 5
U.S.$ 897 897 4/7/99 SGD 1,465 894 (3)
--------- --------- -----
$ 109,671 $ 109,433 $ (238)
--------- --------- -----
--------- --------- -----
------------------------------------------------------------
(a) -- Non-income producing security
(c) -- All or a portion of security on loan at December 31, 1998 -- see note
A-11 to financial statements.
(d) -- Security is valued at fair value -- see note A-1 to financial
statements.
AUD -- Australian Dollar
DEM -- German Mark
FRF -- French Franc
JPY -- Japanese Yen
NCS -- Non-Convertible Shares
PCL -- Public Company Limited
PTE -- Portugese Escudo
RFD -- Ranked for Dividend
RNC -- Non-Convertible Savings Shares
SGD -- Singapore Dollar
--------------------------------------------------------------------
FUTURES CONTRACTS:
At December 31,1998, the following futures contracts were open:
[Download Table]
NET
UNREALIZED
NUMBER AGGREGATE APPRECIATION
OF FACE VALUE EXPIRATION (DEPRECIATION)
CONTRACTS (000) DATE (000)
-
---------- ------------ ----------- ---------------
LONG:
Aust All Ord. 17 U.S.$ 758 March-99 $ 30
CAC 40 Index 122 U.S.$ 4,296 March-99 36
FT-SE 100 Index 243 U.S.$23,783 March-99 749
Milan MIB30 Index 9 U.S.$ 1,846 March-99 (32)
Nikkei 225 20 U.S.$ 2,287 March-99 (203)
SHORT:
DAX Index 5 U.S.$ 1,391 March-99 1
TOPIX Index 26 U.S.$ 2,350 March-99 96
-----
$ 677
-----
-----
------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
[Download Table]
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
----------------------------------------------------------------
Capital Equipment...................... $ 21,064 7.9%
Consumer Goods......................... 43,178 16.2
Energy................................. 23,520 8.8
Finance................................ 60,216 22.6
Gold Mines............................. 78 --
Materials.............................. 16,003 6.0
Multi-Industry......................... 5,345 2.0
Services............................... 51,170 19.2
--------- ---
$ 220,574 82.7%
--------- ---
--------- ---
The accompanying notes are an integral part of the financial statements.
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Active International Allocation Portfolio
13
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
OVERVIEW
--------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1998)
--------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Download Table]
Hong Kong 38.4%
India 2.8%
Indonesia 2.8%
Korea 16.3%
Malaysia 5.0%
Pakistan 0.2%
Philippines 4.0%
Singapore 13.3%
Taiwan 17.0%
Thailand 3.5%
Other -3.3%
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Enlarge/Download Table]
ASIAN EQUITY PORTFOLIO-CLASS MSCI ALL COUNTRY FAR EAST FREE EX-JAPAN
A INDEX(1)
7/01/91* $500,000 $500,000
10/31/91 $483,500 $493,080
10/31/92 $684,130 $676,180
12/31/92 $658,030 $630,045
12/31/93 $1,353,595 $1,252,425
12/31/94 $1,139,550 $1,014,350
12/31/95 $1,217,837 $1,083,427
12/31/96 $1,260,340 $1,182,886
12/31/97 $651,722 $644,909
12/31/98 $577,556 $597,250
* Commencement of operations
** 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. 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)
-----------------------------------------
[Download Table]
TOTAL RETURNS(2)
--------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
---------- --------------- ---------------
PORTFOLIO -- CLASS
A..................... - 11.38% - 15.66% 1.94%
PORTFOLIO -- CLASS
B..................... - 11.53 N/A - 22.32
INDEX -- CLASS A...... - 7.39 - 13.77 2.32
INDEX -- CLASS B...... - 7.39 N/A - 18.11
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,
Korea, Singapore, Taiwan and Thailand (includes 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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The investment objective of the Asian Equity Portfolio is to seek long-term
capital appreciation by investing primarily in equity securities which are
traded on recognized exchanges of Hong Kong, Singapore, Malaysia, Thailand,
Indonesia and the Philippines. The Portfolio may also invest in equity
securities traded on markets in Taiwan, South Korea, India, Pakistan, Sri Lanka
and other Asian developing markets which are open for foreign investment. The
Portfolio does not intend to invest in securities which are principally traded
in Japan or in companies organized under the laws of Japan.
For the year ended December 31, 1998, the Portfolio had a total return of
-11.38% for the Class A shares and -11.53% for the Class B shares compared to a
total return of -7.39% for the Morgan Stanley Capital International (MSCI) All
Country Far East Free ex-Japan Index (the "Index"). For the five-year period
ended December 31, 1998, the average annual total return for Class A shares was
-15.66% compared to -13.77% for the Index. From inception on July 1, 1991
through December 31, 1998, the average annual total return of Class A shares was
1.94% compared to 2.32% for the Index. From inception on January 2, 1996 through
December 31, 1998 the average annual total return of Class B shares was -22.32%
compared to -18.11% for the Index.
Asian stock markets performed well in the fourth quarter of 1998 reducing some
of the losses incurred earlier in the year. For the three months ended December
31, 1998, the Portfolio had a total return of 24.38% for the Class A shares and
23.95% for the Class B shares compared to 40.18% for the Index. Key contributors
to the weak relative performance during the fourth quarter were overweight
positions in Taiwan and utilities stocks and underweight positions in banking
and property stocks. This portfolio mix had contributed to relative
out-performance in the second and third quarters. A combination of domestic and
global factors has contributed to the recovery in Asian
------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE INFORMATION CONTAINED IN THIS
OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES
MENTIONED. THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY
THE MSCI ALL-COUNTRY FAR EAST FREE EX-JAPAN INDEX AND ARE FOR INFORMATIONAL
PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S
FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
--------------------------------------------------------------------------------
Asian Equity Portfolio
14
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
OVERVIEW
--------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
stock markets, included domestic monetary and fiscal policy easing, improved
domestic liquidity from current account surpluses, U.S. and European interest
rate cuts, corporate restructuring and currency strengthening relative to the
U.S. dollar.
The International Monetary Fund (IMF) crisis countries of South Korea, Thailand
and Indonesia led the fourth quarter rally just as they had led the downturn in
late 1997. The much-maligned IMF programs, based on tight monetary and fiscal
policy, created significant contractions in domestic consumption and investment.
These contractions led to a swing from current account deficits to current
account surpluses, which stabilized and then strengthened the currencies.
Currency strength allowed the governments to relax monetary and fiscal policy
early in the third quarter with IMF approval. By September, data began to emerge
suggesting that industrial production and some categories of consumption had
bottomed in Korea and Thailand. Interest rates have fallen dramatically, due to
easier monetary policy and falling inflationary expectations. For example,
interest rates fell from over 30% at the peak in Korea to 7% today; interest
rate declines encouraged domestic investors to return to the equity markets,
pushing stocks up. In 1999 easier monetary policy should stimulate some
improvement in domestic consumption as well.
Banking sector reform and re-capitalization will be critical to the resumption
of strong growth across Asia because banks remain the key financial
intermediaries in most countries. Korea has taken the lead in addressing its
banking problems. Korea's program includes forced mergers of troubled banks, the
use of government funds to recapitalize failed banks and purchase non-performing
assets from them and the subsequent liquidation of these assets. Korea has also
benefited from the presence of one of Asia's few domestic bond markets, which
has helped to keep financing available even while the heavy bank reform work was
underway. Thailand has also designed a good recapitalization program although
there have been some disappointments in its implementation. One of the key
elements of the banking package, enhanced foreclosure laws, was delayed until
mid-1999. The Indonesian program has been designed but due to the greater scale
of the banking problems in Indonesia will take longer to implement. Bank
recapitalization will allow the restructuring efforts to move onto the next
phase, corporate level debt restructuring. These initiatives will require some
debt forgiveness and insolvent banks were in no position to take the required
write-downs.
Hong Kong performed well during the fourth quarter but lagged the overall index.
Hong Kong's equity market is particularly sensitive to interest rate movements
due to its heavy weighting of property and financial stocks. Interest rate cuts
in the U.S. and Hong Kong during September and October were very supportive to
the market. In addition, the Hong Kong Monetary Authority (HKMA) purchased
approximately 25% of the free float of most major stocks during its August
market intervention. This technical condition probably exaggerated the market's
move upwards when interest rates began to fall. Due to Hong Kong's decision to
maintain its currency peg to the U.S. dollar even as its neighbors devalued,
companies in Hong Kong have been forced to cut costs to remain competitive. The
resulting deflationary conditions have prevented real interest rates from
falling very far in Hong Kong; cuts in nominal interest rates have been matched
by a fall into outright deflation. The territory has not experienced real
interest rates at these levels for an extended period of time over the last few
decades and this should delay economic recovery and limit stock market gains.
Although we expect further reductions in nominal and real rates in 1999 the
scope for significant declines are limited given the U.S. dollar peg and
deflation. Revenue growth will be hard to come by in 1999 and much of the
earnings growth will be generated from comparisons with 1998 earnings which
include heavy non-recurring provisions. In addition, the HKMA must design a
program for the disposition of its extensive stock holdings. For these reasons,
we entered 1999 underweight Hong Kong equities.
China was the worst performing East Asian market in 1998. This under-performance
reflects the weakness of most of the listed Chinese companies as well as the
challenging economic conditions within China. The Chinese economy is currently
experiencing persistent deflation, oversupply of most manufactured goods,
slowing exports, high real interest rates and bank asset quality problems. The
Chinese government has attempted to deal with these issues through a massive
government-funded infrastructure program. This program helped gross domestic
products growth approach the government's target for 1998 but did not flow
through into corporate earnings and equity performance. The Chinese have begun
to grapple with
--------------------------------------------------------------------------------
Asian Equity Portfolio
15
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
OVERVIEW
--------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
external debt problems recently as well. We expect the Chinese government will
shift from infrastructure spending to real reform as 1999 progresses. Some
interesting values are starting to emerge among the Chinese companies but
earnings visibility remains poor and the flow of news will likely be negative in
the first half of the year.
We have maintained an overweight position in the technology sector in 1998.
These positions primarily consist of electronics companies in Taiwan, Korea and
Singapore. These stocks were more influenced by their local markets during the
fourth quarter than by individual company fundamentals. The Korean companies
outperformed the regional index during the quarter while the Taiwanese companies
under-performed along with Taiwan. Overall, the group under-performed during the
quarter but outperformed for the year. These positions are the result of bottom-
up work at the individual company level. Given the quality of management, market
positions, financial condition and growth prospects of the portfolio of
electronics stocks we hold we believe they should outperform again in 1999.
Malaysia's decision to implement capital controls in early September led to its
removal from the MSCI Free Indexes in December. Shifting securities regulations
have severely limited the ability of most foreign investors to trade over the
past few months. We have a portfolio of sound, primarily consumer-oriented
stocks in Malaysia. The Malaysian government has signaled that it is studying
various proposals to lift the capital controls. We expect some movement on this
during the first half of 1999. We will reexamine our weighting in Malaysia when
the Malaysian authorities introduce their new rules.
Several themes we expect to drive equity performance in 1999 include modest
improvements in domestic consumption in most economies, disinflation in some
countries and deflation in others and the ability of companies to enhance their
own performance through corporate restructuring. Restructurings broadly include
debt restructuring, divestitures, sales of strategic stakes to multinationals,
business unit shutdowns, mergers or staff downsizing. We have seen all of the
above announced in various forms in 1998. The markets have clearly rewarded
companies that adopt Western style restructuring with a focus on enhancing
shareholder value. During 1999 we will be monitoring the progress of the
restructurings announced in 1998 and searching for management teams with the
vision and ability to improve returns to shareholders going forward.
Several risk factors we will be monitoring in 1999 include the performance of
the Japanese economy, the large supply of new offerings and capital raisings we
expect to see in Asia and growth in the developed economies that are the primary
markets for Asian exports. Upside surprises could include successful bank
recapitalization and economic recovery in Japan and stronger than expected
import demand from the U.S. and Europe.
During 1998 we constructed a fairly defensive portfolio emphasizing consumer and
technology companies and utilities while limiting our exposure to banks and
properties. During the fourth quarter we increased our exposure to banks and
properties but as performance reflects we remained underweight these sectors. In
1999 we are focusing more of our research time and company visits on companies
that have the ability to implement sound restructuring programs or are sensitive
to recoveries in domestic consumption. We do not believe that all of Asia's
economic problems have been solved but the trends have certainly improved.
Timothy Jensen
PORTFOLIO MANAGER
Ashutosh Sinha
PORTFOLIO MANAGER
January 1999
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Asian Equity Portfolio
16
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STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
-----------------------------------------------------------------------------
COMMON STOCKS (103.0%)
HONG KONG (38.4%)
324,000 CLP Holdings Ltd.................................. $ 1,614
548,000 China Telecom Ltd................................. 948
587,000 Dairy Farm International Holdings Ltd............. 675
(a)368,000 Hengan International Group Co. Ltd................ 134
(c)920,200 Hong Kong & China Gas Co., Ltd.................... 1,170
267,000 Hong Kong Electric Holdings Ltd................... 810
749,800 Hong Kong Telecommunications Ltd.................. 1,311
431,000 Hutchison Whampoa Ltd............................. 3,046
82,400 HSBC Holdings plc................................. 2,053
495,000 Li & Fung Ltd..................................... 1,025
355,000 New World Development Co., Ltd.................... 894
269,000 SmartTone Telecommunications Holdings Ltd......... 747
374,000 Sun Hung Kai Properties Ltd....................... 2,728
350,500 Swire Pacific Ltd., Class A....................... 1,570
467,700 Television Broadcasts Ltd......................... 1,207
81,000 VTech Holdings Ltd................................ 353
----------
20,285
----------
INDIA (2.8%)
50 Ashok Leyland Ltd................................. --
(d)31,000 Container Corp. of India Ltd...................... 175
36,009 Hero Honda Motors Ltd............................. 461
10 Housing Development Finance Corp., Ltd............ 1
6,300 NIIT Ltd.......................................... 241
21,800 Nestle India Ltd.................................. 234
8,600 Punjab Tractors Ltd............................... 161
14,400 Reckitt & Coleman of India Ltd.................... 127
50 State Bank of India............................... --
80 Tata Engineering & Locomotive Co., Ltd............ --
1,900 Tata Infotech Ltd................................. 63
350 T.V.S. Suzuki Ltd................................. 4
----------
1,467
----------
INDONESIA (2.8%)
537,500 Gudang Garam...................................... 783
65,000 Semen Gresik...................................... 67
159,900 Unilever Indonesia................................ 600
----------
1,450
----------
KOREA (16.0%)
8,330 Hankuk Glass Industry Co., Ltd.................... 174
45,190 Korea Eelectric Power Corp........................ 1,119
15,110 Nong Shim Co., Ltd................................ 869
(d)14,510 Pohang Iron & Steel Co., Ltd...................... 916
(c)20,200 Pohang Iron & Steel Co., Ltd. ADR................. 341
3,938 S1 Corp........................................... 737
17,300 Samsung Electro-Mechanics Co...................... 374
(a)41,373 Samsung Electronics Co............................ 2,775
2,500 Samsung Fire & Marine Insurance Co................ 935
(d)299 SK Telecom Co., Ltd............................... 226
----------
8,466
----------
MALAYSIA (5.0%)
(d)138,000 Amway (Malaysia) Holdings Bhd..................... 198
(d)157,000 Carlsberg Brewery Malaysia Bhd.................... 315
(a,d)93,000 Esso Malaysia Bhd................................. 49
(d)342,000 Guinness Anchor Bhd............................... 241
VALUE
SHARES (000)
-----------------------------------------------------------------------------
(d)326,000 Hap Seng Consolidated Bhd......................... $ 147
(d)159,000 Nestle (Malaysia) Bhd............................. 445
(d)411,000 R.J. Reynolds Bhd................................. 325
(d)170,400 Rothmans of Pall Mall (Malaysia) Bhd.............. 703
(d)12,000 Shell Refining Co. (Malaysia) Bhd................. 9
(d)125,000 Telekom Malaysia Bhd.............................. 230
----------
2,662
----------
PAKISTAN (0.2%)
(d)33,400 Shell Pakistan Ltd................................ 96
----------
PHILIPPINES (4.0%)
134,650 Bank of the Phillipine Islands.................... 286
299,300 La Tondena Distillers, Inc........................ 238
14,260 Manila Electric Co., Class B...................... 46
3,089,700 Music Corp........................................ 254
(c)359,550 San Miguel Corp., Class B......................... 693
(c)3,028,300 SM Prime Holdings, Inc............................ 576
----------
2,093
----------
SINGAPORE (13.3%)
208,000 City Developments Ltd............................. 901
405,000 Natsteel Electronics Ltd.......................... 1,031
68,000 Overseas-Chinese Banking Corp. (Foreign).......... 462
5,000 Rothmans Industries Ltd........................... 30
131,000 Singapore Airlines Ltd. (Foreign)................. 961
5,700 Singapore Ltd. (Foreign).......................... 62
45,000 Singapore Press Holdings Ltd...................... 477
782,000 Singapore Technologies Engineering Ltd............ 730
186,200 United Overseas Bank Ltd. (Foreign)............... 1,196
302,000 Venture Manufacturing (Singapore) Ltd............. 1,153
32,000 Want Want Holdings Ltd............................ 38
----------
7,041
----------
TAIWAN (17.0%)
(a)92,270 Asustek Computer, Inc............................. 862
172,000 Cathay Life Insurance Co., Ltd.................... 555
152,000 China Development Corp............................ 278
(a,d)340,118 Compal Electronics, Inc........................... 1,108
(a)135,560 Compeq Manufacturing Co., Ltd..................... 888
1,311,480 Far East Textile Ltd.............................. 1,071
(a)353,520 Hon Hai Precision Industry........................ 1,953
187,000 President Chain Store Corp........................ 589
(a)329,688 Siliconware Precision Industries Co............... 583
(a)499,850 Taiwan Semiconductor Manufacturing Co............. 1,102
(a)6 United Micro Electronics Corp., Ltd............... --
----------
8,989
----------
THAILAND (3.5%)
66,600 Advanced Info Service PCL (Foreign)............... 396
(d)170,100 BEC World PCL (Foreign)........................... 936
59,100 Delta Electronics (Thailand) PCL (Foreign)........ 312
31,400 PTT Exploration & Production PCL (Foreign)........ 221
----------
1,865
----------
TOTAL COMMON STOCKS (Cost $53,476)............................... 54,414
----------
The accompanying notes are an integral part of the financial statements.
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17
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Institutional Fund, Inc.
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STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
ASIAN EQUITY PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
NO. OF VALUE
RIGHTS (000)
-----------------------------------------------------------------------------
RIGHTS (0.3%)
KOREA (0.3%)
(a,d)763 Samsung Fire & Marine Insurance Co., Expiring
1/14/99 (Cost $0)............................... $ 147
----------
TOTAL FOREIGN SECURITIES (103.3%) (Cost $53,476)................. 54,561
----------
[Download Table]
FACE
AMOUNT
(000)
-------------
SHORT-TERM INVESTMENT (3.4%)
REPURCHASE AGREEMENT (3.4%)
$ 1,778 Goldman Sachs & Co., 4.70%, dated 12/31/98, due
1/04/99, to be repurchased at $1,779,
collateralized by U.S. Treasury Notes, 5.125%,
due 8/31/00, valued at $1,890 (Cost $1,778)..... 1,778
----------
FOREIGN CURRENCY (1.8%)
HKD 321 Hong Kong Dollar.................................. 42
INR 4,931 Indian Rupee...................................... 116
IDR 78,161 Indonesian Rupiah................................. 10
(d)MYR 1,118 Malaysian Ringgit................................. 206
(d)PKR 1,609 Pakistan Rupee.................................... 29
KRW 13 South Korean Won.................................. --
TWD 18,353 Taiwan Dollar..................................... 570
----------
TOTAL FOREIGN CURRENCY (Cost $972)............................... 973
----------
TOTAL INVESTMENTS (108.5%) (Cost $56,226)........................ 57,312
----------
[Download Table]
OTHER ASSETS (0.5%)
Receivable for Investments Sold...................... $ 101
Receivable for Portfolio Shares Sold................. 50
Dividends Receivable................................. 33
Foreign Withholding Tax Reclaim Receivable........... 19
Other................................................ 75 278
----------
LIABILITIES ( - 9.0%)
Bank Overdraft Payable............................... (2,693)
Collateral on Securities Loaned...................... (1,778)
Investment Advisory Fees Payable..................... (70)
Payable for Investments Purchased.................... (44)
Custodian Fees Payable............................... (44)
Payable for Portfolio Shares Redeemed................ (38)
Directors' Fees & Expenses Payable................... (20)
Payable for Foreign Taxes............................ (17)
Administrative Fees Payable.......................... (10)
Distribution Fees Payable............................ (1)
Other Liabilities.................................... (54) (4,769)
---------- ----------
NET ASSETS (100%)................................................ $ 52,821
----------
----------
[Download Table]
NET ASSETS CONSIST OF:
Paid in Capital.................................................. $ 159,789
Accumulated Net Investment Loss.................................. (20)
Accumulated Net Realized Loss.................................... (108,011)
Unrealized Appreciation on Investments and Foreign Currency
Translations (net of accrual for foreign taxes of $1 on
unrealized appreciation on investments)........................ 1,063
----------
NET ASSETS....................................................... $ 52,821
----------
----------
[Download Table]
AMOUNT
(000)
-----------------------------------------------------------------------------
[Download Table]
CLASS A:
-----------------------------------------------------------------
NET ASSETS....................................................... $51,334
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 6,410,658 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $8.01
----------
----------
CLASS B:
-----------------------------------------------------------------
NET ASSETS....................................................... $1,487
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 186,662 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................ $7.97
----------
----------
------------------------------------------------------------
(a) -- Non-income producing security
(c) -- All or a portion of security on loan at December 31, 1998 -- See note
A-11 to financial statements.
(d) -- Investments (totaling $6,501 or 12.3% of net assets at December 31,
1998) were valued at fair value -- see note A-1 to financial
statements.
PCL -- Public Company Limited
------------------------------------------------------------
SUMMARY OF COMMON STOCKS BY INDUSTRY CLASSIFICATION
[Download Table]
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
-----------------------------------------------------------------
Capital Equipment...................... $ 11,390 21.6%
Consumer Goods......................... 10,964 20.8
Energy................................. 5,038 9.5
Finance................................ 11,010 20.8
Materials.............................. 1,431 2.7
Multi-Industry......................... 4,616 8.7
Services............................... 10,112 19.2
-------- -----
$ 54,561 103.3%
-------- -----
-------- -----
The accompanying notes are an integral part of the financial statements.
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Asian Equity Portfolio
18
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--------------------------------------------------------------------------------
OVERVIEW
--------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1998)
--------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Download Table]
Australia 5.4%
Hong Kong 48.2%
Japan 17.4%
Philippines 5.1%
Singapore 16.3%
Taiwan 1.5%
Thailand 4.6%
Other 1.5%
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Enlarge/Download Table]
ASIAN REAL ESTATE PORTFOLIO-CLASS ASIAN REAL ESTATE PORTFOLIO-CLASS
A B
10/01/97* $500,000.00 $100,000.00
12/31/97 $400,400.00 $80,300.00
12/31/98 $353,072.72 $70,238.41
* Commencement of operations
** Minimum investment
GPR LIFE FAR EAST ASIA REAL ESTATE T.R.
INDEX(1)
10/01/97* $500,000.00
12/31/97 $330,450.00
12/31/98 $296,711.06
* Commencement of operations
** 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. The performance of Class B shares will vary based
upon the different fees assessed to that class. The GPR Life Far East Asia Real
Estate T.R. Index value at December 31, 1998 assumes a minimum initial
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, 1998 would
be $59,342.
PERFORMANCE COMPARED TO THE GPR LIFE
FAR EAST ASIA REAL ESTATE T.R. INDEX(1)
-----------------------------------
[Download Table]
TOTAL RETURNS(2)
---------------------------
ONE AVERAGE ANNUAL
YEAR SINCE INCEPTION
---------- ---------------
PORTFOLIO -- CLASS A............. - 11.82% - 24.30%
PORTFOLIO -- CLASS B............. - 12.53 - 24.63
INDEX............................ - 10.21 - 34.15
1. The GPR Life Far East Asia Real Estate T.R. Index is a market capitalization
weighted index of Far East and Asia listed property/real estate securities
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The investment objective of the Asian Real Estate Portfolio is to provide
long-term capital appreciation by investing primarily in equity securities of
companies in the Asian real estate industry whose shares trade on a recognized
stock exchange in Asia and in equity securities of companies organized under the
laws of an Asian country whose business is conducted principally in Asia.
For the year ended December 31, 1998, the Portfolio had a total return of
- 11.82% for Class A shares and - 12.53% for Class B shares compared to
- 10.21% for the GPR Life Far East Asia Real Estate T.R. Index (the "Index").
From inception on October 1, 1997 through December 31, 1998, the average annual
total return was - 24.30% for Class A shares and - 24.63% for Class B shares
compared to - 34.15% for the Index.
MACRO-ECONOMIC BACKDROP
The unexpected strength of the yen caused by the massive unwinding of the
so-called yen-carry trades took away the pressure on most Asian currencies and
reduced the risk premium for non-Japan Asia, as a devaluation of the Chinese
currency, the renminbi, became less likely in the near term. Hong Kong's risk
premium as measured by the interest rate spread between the Hong Kong dollar and
the U.S. dollar shrank from the high of close to 1,000 basis points in the
summer to the current 100-150 basis points. The relative strength of Asian
currencies supported by a stronger yen have allowed Asian central banks to lower
interest rates more aggressively to pump prime their weak economies and ease
corporate debt burdens. It was remarkable that the recent Russian debt crisis
and financial and currency woes in Latin America have done little to cause any
renewed weakness in the Asian currencies. This resilience was primarily due to
the rapid building up of current account surpluses in the Asian "crisis
economies" to the tune of 5-10% of their respective gross domestic
------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE INFORMATION CONTAINED IN THIS
OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES
MENTIONED. THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCIRPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
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Asian Real Estate Portfolio
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OVERVIEW
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ASIAN REAL ESTATE PORTFOLIO (CONT.)
product (GDP) from deficits of roughly equal magnitude merely a year ago. The
Thai baht/U.S. dollar has strengthened from the 39-41 level in the summer to 36
and the Korean won from 1300-1450 to the current 1200. Even the Indonesian
rupiah has risen to 7,500 from 10,000 to 11,000 three months ago despite the
ongoing political crisis and social unrest.
The synchronized global monetary easing led by the Federal Reserve Board's
150-basis point cut in interest rates provided further ammunition for Asian
banks to lower interest rates. The three month inter-bank rates in Hong Kong and
Singapore have now fallen to pre-crisis lows of 5.75% and 1.875%, respectively.
In response to this flood of liquidity, banks have also lowered their prime
lending rates by 100 basis points to 9% in Hong Kong and by 200 basis points to
5.5% in Singapore. The market expects further interest rate cuts to come through
in the near term. Elsewhere throughout Asia, interest rates have similarly
declined substantially in the last quarter.
Meanwhile, the real economy continued to contract in most parts of Asia. The
Hong Kong economy had a negative 7% growth rate in the third quarter, while
Malaysia's was a negative 8.6% in the same period. In the face of the most
severe recession to hit the region in decades, Asia has started to engage in
restructuring and cost cuttings in different forms in efforts to gain
competitiveness. The most notable example is Singapore's S$10.5 billion (US$6.3
billion) cost cutting package that amounts to 7% of the country's GDP. The
measures include a proposed overall wage cut of 15% and a 10% corporate tax
rebate.
In Japan, the government has committed substantial resources to rescue the
ailing economy and the troubled banking sector. A total of 64 trillion yen
(US$533 billion) has been set aside to reform the banking sector, while a fiscal
stimulus package worth 24 trillion yen (US$200 billion) has been proposed to try
to jump start the Japanese economy. Meanwhile, the Chinese economy appears to be
gathering strength in the last quarter, propelled by accelerated public spending
and investments.
REAL ESTATE MARKETS
With the help of declining interest rates and rising stock prices, the
residential markets in Hong Kong and Singapore returned to life again in the
fourth quarter. In Hong Kong, despite the threats of rising unemployment and
high real interest rates, residential transactions were up by more than 66%
month-on-month to 12,800 units in November, amounting to Hong Kong $32.7 billion
(+59%) in value terms. Property launches have also met with renewed enthusiasm,
with Sino Land's mid-range Island Haborview development in urban Kowloon
attracting applications of more than 6,000 for the slightly more than 1,200
units launched. The recent announcement by the Hong Kong Mortgage Corporation
(HKMC) to provide a 15% mortgage guarantee for home purchasers should be
positive for the residential sector, especially in the secondary market. This
scheme effectively raises the mortgage loan-to-value ratio to 85% from the
current 70%. In the office sector, falling capital values have raised initial
rental yields to more realistic levels. The Rating and Valuation Department said
Hong Kong's Grade A office yield increased to 7.3% in the third quarter,
compared with 4.9% at the peak in 1997.
In Singapore, residential sales surged to 1,400 units in November, up from 1,100
units in October and 996 for the whole of third quarter 1998. The strong pick-up
in transaction volume was indeed a surprise and generally reflects strong
pent-up demand and better affordability due to declining interest rates and
sharply lower prices. Banks now appear much more eager to lend for home
purchases and are offering attractive terms and interest rates to lure buyers.
Developers, on the other hand, are withdrawing some of the incentives that were
previously offered to buyers, such as payment of stamp duties. There is also
some evidence that buying interest has slowly spread to the middle to upper
range properties.
Elsewhere, Japan's weak economy continued to take its toll on the residential
market. Housing start fell 12.9% in October, the 22nd straight monthly decline.
In addition, residential real estate values in the greater Tokyo area fell 1.4%
in the third quarter of 1998, according to the Real Estate Research Institute.
REAL ESTATE SECURITIES
Asian real estate shares performed strongly in the fourth quarter, surging by
more than 50% from the August/September low on declining interest rates, foreign
portfolio inflows and improved investor confidence. The robust performance also
reflects better property sales and signs of what seems to be an
earlier-than-expected recovery in the certain markets, such as Hong Kong and
Singapore. The real estate sector has significantly outperformed the broader
Asian equity indices during the period as equity
--------------------------------------------------------------------------------
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OVERVIEW
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ASIAN REAL ESTATE PORTFOLIO (CONT.)
investors rebuilt their positions in interest-rate sensitive sectors. Property
shares in Asia now trade at a narrower discount from a few months ago, with some
high quality issues trading at par or even at a slight premium over the
underlying, marked-to-market net asset value, reflecting expectations of lower
interest rates and funding costs and improving property market conditions.
Japanese real estate shares have also participated in the recent equity market
rally, and in the process reducing the average Price/Net Asset Value discount
from about 35% to 20%.
Given a declining interest rate environment, we have raised Hong Kong to a
slight overweight position and continued to maintain an overweight position in
Singapore. Within these two markets, we have however very much held on to high
quality companies which are able to capitalize on the current depressed property
prices to make good acquisitions. We have also invested in a number of smaller
companies with clean balance sheets, good property assets and significantly
undervalued stock prices. We remain underweight in Japan given the weak real
estate demand and high gearing, but would look to add to our positions on signs
of economic recovery. We have reduced Australia to an underweight position on
account of valuations and increasing new equity supply. We have sold off much of
our positions in the Australian office sector, anticipating a sector de-rating
as supply builds up. The retail sector has, however, performed well on the back
of surprisingly robust retail sales.
Kiat Seng Seah
PORTFOLIO MANAGER
January 1999
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Asian Real Estate Portfolio
21
[LOGO] Morgan Stanley Dean Witter
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--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
ASIAN REAL ESTATE PORTFOLIO
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
----------------------------------------------------------------------------
COMMON STOCKS (94.0%)
AUSTRALIA (5.4%)
40,000 Armstrong Jones Retail Fund...................... $ 23
28,000 Centro Properties Group.......................... 48
49,000 IPOH Ltd......................................... 55
21,000 Westfield Trust.................................. 46
--------
172
--------
HONG KONG (48.2%)
31,000 Cheung Kong Holdings Ltd......................... 223
290,000 China Resources Beijing Land..................... 72
(a)880,000 Far East Hotels & Entertainment Ltd.............. 97
27,000 Henderson Land Development Co., Ltd.............. 140
220,000 HKR International Ltd............................ 134
23,000 Hong Kong Land Holdings Ltd...................... 27
240,000 Hopson Development Holdings Ltd.................. 27
26,000 Hysan Development Co., Ltd....................... 39
50,000 New Asia Realty & Trust Co., Class A............. 53
78,000 New World Development Co., Ltd................... 196
270,000 Shun Tak Holdings Ltd............................ 51
248,000 Sino Land Co..................................... 133
42,000 Sun Hung Kai Properties Ltd...................... 306
11,000 Swire Pacific Ltd., Class A...................... 49
--------
1,547
--------
JAPAN (17.4%)
10,000 Daibiru Corp..................................... 64
29,000 Mitsubishi Estate Co., Ltd....................... 260
23,000 Mitsui Fudosan Co., Ltd.......................... 174
18,000 Sumitomo Realty & Development Co., Ltd........... 59
--------
557
--------
PHILIPPINES (5.1%)
319,400 Ayala Land, Inc., Class B........................ 91
(a)640,000 Filinvest Land, Inc.............................. 36
200,000 SM Prime Holdings, Inc........................... 38
--------
165
--------
SINGAPORE (11.8%)
34,000 City Developments Ltd............................ 148
98,000 DBS Land Ltd..................................... 144
40,000 Marco Polo Developments Ltd...................... 42
69,000 Wing Tai Holdings Ltd............................ 44
--------
378
--------
TAIWAN (1.5%)
90,000 Delpha Construction Co., Ltd..................... 49
--------
THAILAND (4.6%)
(d)177,000 MBK Properties & Development PCL................. 102
(d)8,900 Oriental Hotel (Thailand) PCL.................... 47
--------
149
--------
TOTAL COMMON STOCKS (Cost $2,593)................................. 3,017
--------
[Download Table]
FACE
AMOUNT VALUE
(000) (000)
----------------------------------------------------------------------------
CONVERTIBLE DEBENTURE (4.5%)
SINGAPORE (4.5%)
$ 220 Wing Tai Holdings Ltd., 1.50%, 7/15/02 (Cost
$109).......................................... $ 145
--------
TOTAL FOREIGN SECURITIES (98.5%) (Cost $2,702).................... 3,162
--------
FOREIGN CURRENCY (1.5%)
HKD 54 Hong Kong Dollar................................. 7
JPY 119 Japanese Yen..................................... 1
PHP 11 Philippines Peso................................. --
TWD 1,240 Taiwan Dollar.................................... 39
--------
TOTAL FOREIGN CURRENCY (Cost $47)................................. 47
--------
[Download Table]
TOTAL INVESTMENTS (100.0%) (Cost $2,749).................. 3,209
------
OTHER ASSETS (1.3%)
Cash............................................... $ 25
Receivable Due from Adviser........................ 9
Dividends Receivable............................... 5
Interest Receivable................................ 1
Foreign Withholding Tax Reclaim Receivable......... 1 41
-----
LIABILITIES ( - 1.3%)
Custodian Fees Payable............................. (8)
Distribution Fees Payable.......................... (1)
Deferred Foreign Taxes Payable..................... (1)
Other Liabilities.................................. (32) (42)
----- ------
NET ASSETS (100%)......................................... $3,208
------
------
[Download Table]
NET ASSETS CONSIST OF:
Paid in Capital................................................ $5,556
Undistributed Net Investment Income............................ 38
Accumulated Net Realized Loss.................................. (2,845)
Unrealized Appreciation on Investments and Foreign Currency
Translations................................................. 459
------
NET ASSETS..................................................... $3,208
------
------
[Download Table]
CLASS A:
--------------------------------------------------------------
NET ASSETS.................................................... $2,447
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 369,128 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $6.63
------
------
CLASS B:
--------------------------------------------------------------
NET ASSETS.................................................... $761
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 114,203 outstanding $0.001 par value shares
(authorized 500,000,000 shares)............................. $6.66
------
------
------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security valued at fair value -- see note A-1 to financial statements.
PCL -- Public Company Limited
The accompanying notes are an integral part of the financial statements.
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[LOGO] Morgan Stanley Dean Witter
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STATEMENT OF NET ASSETS
DECEMBER 31, 1998
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ASIAN REAL ESTATE PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
[Download Table]
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
--------------------------------------------------------------
Apartment.............................. $ 180 5.6%
Diversified............................ 2,091 65.2
Land................................... 230 7.2
Lodging/Leisure........................ 185 5.7
Office and Industrial.................. 321 10.0
Shopping Center........................ 155 4.8
------- ---
$ 3,162 98.5%
------- ---
------- ---
The accompanying notes are an integral part of the financial statements.
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Asian Real Estate Portfolio
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[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
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OVERVIEW
--------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1998)
--------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Download Table]
Argentina 1.9%
Brazil 7.4%
Chile 1.3%
China 1.3%
Croatia 0.2%
Czechoslovakia 0.4%
Egypt 1.5%
Greece 8.4%
Hong Kong 0.4%
Hungary 4.0%
India 8.9%
Indonesia 1.7%
Israel 6.1%
Korea 12.6%
Malaysia 2.9%
Mexico 11.0%
Pakistan 2.2%
Philippines 1.8%
Poland 4.0%
Russia 1.4%
Singapore 0.2%
South Africa 5.3%
Taiwan 7.2%
Thailand 1.5%
Turkey 2.0%
Venezuela 0.4%
Zimbabwe 0.4%
Other 3.6%
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Enlarge/Download Table]
EMERGING MARKETS PORTFOLIO-CLASS IFC GLOBAL TOTAL RETURN COMPOSITE
A INDEX(1)
9/25/92* $500,000 $500,000
10/31/92 $505,500 $525,300
12/31/92 $511,000 $527,370
12/31/93 $950,000 $880,750
12/31/94 $858,500 $878,950
12/31/95 $748,870 $770,488
12/31/96 $840,157 $831,280
12/31/97 $831,503 $711,409
12/31/98 $620,135 $561,444
* Commencement of operations
** Minimum investment
MSCI EMERGING MARKETS FREE INDEX(1)
9/25/92* $500,000
10/31/92 $530,326
12/31/92 $540,034
12/31/93 $944,178
12/31/94 $875,099
12/31/95 $829,518
12/31/96 $879,546
12/31/97 $777,649
12/31/98 $580,595
* Commencement of operations
** 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. The performance of Class B shares will vary based
upon the different inception dates and fees assessed to that class.
PERFORMANCE COMPARED TO THE IFC GLOBAL
TOTAL RETURN COMPOSITE INDEX AND THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI)
EMERGING MARKETS FREE INDEX(1)
------------------------------------------
[Download Table]
TOTAL RETURNS(2)
---------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
---------- ---------------- ---------------
PORTFOLIO -- CLASS
A..................... - 25.42% - 8.17% 3.49%
PORTFOLIO -- CLASS
B..................... - 25.65 N/A - 6.61
IFC GLOBAL TOTAL
RETURN COMPOSITE INDEX
-- CLASS A............ - 21.08 - 8.69 1.93
MSCI EMERGING MARKETS
FREE INDEX -- CLASS
A..................... - 25.34 - 9.27 2.41
IFC GLOBAL TOTAL
RETURN COMPOSITE INDEX
-- CLASS B............ - 21.08 N/A - 10.88
MSCI EMERGING MARKETS
FREE INDEX -- CLASS
B..................... - 25.34 N/A - 11.44
1. The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (includes dividends). The Morgan
Stanley Capital International (MSCI) Emerging Markets Free Index is a market
capitalization weighted index composed 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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE INFORMATION CONTAINED IN THIS
OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES
MENTIONED. THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW
ARE AS MEASURED BY THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING
MARKETS COUNTRY OR REGIONAL INDICES, ARE FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE.
PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE
PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH
INTERNATIONAL INVESTING.
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Emerging Markets Portfolio
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OVERVIEW
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EMERGING MARKETS PORTFOLIO (CONT.)
The investment objective of the Emerging Markets Portfolio is to provide
long-term capital appreciation by investing in equity securities of emerging
country issuers.
As shown in the performance table beginning with this report, the Portfolio's
performance is also compared to the Morgan Stanley Capital International (MSCI)
Emerging Markets Free Index. For the year ended December 31, 1998, the Portfolio
had a total return of -25.42% for the Class A shares and -25.65% for the Class B
Shares compared to -21.08% for the IFC Global Total Return Composite Index and
-25.34% for the MSCI Emerging Markets Free Index. For the five-year period ended
December 31, 1998 the average annual total return of Class A shares was -8.17%
compared to -8.69% for the IFC Global Total Return Composite Index and -9.27%
for the MSCI Emerging Markets Free Index. From inception on September 25, 1992
through December 31, 1998, the average annual total return for Class A shares
was 3.49% compared to 1.93% for the IFC Global Total Return Composite Index and
2.41% for the MSCI Emerging Markets Free Index. From inception on January 2,
1996 through December 31, 1998, the average annual total return of Class B
shares was -6.61% and -10.88% for the IFC Global Total Return Composite Index
and -11.44% for the MSCI Emerging Markets Free Index.
The financial crises of 1998 have left a legacy of lessons for the emerging
markets as well as for the broader global financial markets. Making sense of all
that took place last year is not an easy task. Nevertheless, in the following
few pages we will attempt to review the critical events that took place in 1998
for the emerging markets, and offer some observations about what we expect in
the year ahead.
While it is true that the currency devaluations of Asia -- the visible starting
point of the malaise that still reverberates in the global economy today -- took
place in 1997, it was not until 1998 that the full fury of the events unleashed
by those depreciating currencies was felt. Numerous events -- both at the global
and at the emerging market level -- took place which shook many investors'
understanding of and faith in financial markets, and a recap of a few of the
more momentous might be helpful:
GLOBAL
1) The Japanese yen, following the collapse of that country's economy, collapsed
into the mid to high 140's (to the U.S. dollar) seemingly on its way to the
160's before staging a startling and largely unexplained rally to the mid
115'ish level. As we write, the yen is now at 109.
2) Both the European and U.S. stock markets collapsed from healthy double digit
gains early in the year, dipped into negative territory by the end of the
summer, only to almost completely climb back to their earlier highs by the
end of the year.
3) The Federal Reserve Bank engineered a controversial rescue of a highly
leveraged hedge fund which, remarkably, threatened the health of the world's
financial markets.
4) No fewer than 37 central banks -- in an almost unprecedented show of
coordination -- executed more than 75 monetary policy easings in the latter
half of 1998 to avert a total meltdown in financial markets.
5) Commodity prices continued their lurching downward spiral as Asian demand
shortfalls further aggravated supply/demand imbalances; oil was particularly
hard hit, as OPEC continued to undergo a secular decline in influence and the
oil industry cartel slowly continued to disintegrate.
EMERGING
1) The Russian currency, economy, and debt markets collapsed as that country
unilaterally announced a de facto debt moratorium and currency devaluation,
singlehandedly triggering a worldwide credit contraction and financial market
panic.
2) Malaysia announced currency controls in a single act of defiance against
market forces that, due to its possible emulation by other governments, cast
a chill throughout emerging markets.
3) Indonesia descended into social and political chaos as riots and mayhem
engulfed that country in the aftermath of its economic crisis, leading to an
eventual departure of longstanding leader Suharto.
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OVERVIEW
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EMERGING MARKETS PORTFOLIO (CONT.)
4) Brazil stared into the abyss of possible economic destruction in the
aftermath of the Russian meltdown, nearly averting a currency collapse with
the help of Messrs. Greenspan and Rubin.
5) Venezuela, in the throes of a steep recession exacerbated by historically low
oil prices, elected a populist, ex-military/failed coup leader as President.
6) Broader Asian markets staged a remarkable early-year recovery, collapsed
again and touched new lows, then staged an even more powerful recovery late
in the year led by currency strengthening throughout the region.
As a whole, 1998 was a volatile year that we would prefer not to repeat.
Importantly, though, the year contained significant bright spots. The chief
positives came from the phenomenal stabilization and recovery of Asian financial
markets toward the latter part of the year, and the continued fiscal discipline
exhibited by the peripheral European markets striving to converge with western
Europe, most notably Greece.
The Asian crisis has been written about and discussed ad infinitum. Here, we
would like simply to point out that the faith placed by Asian citizens in their
host country's financial systems and government policies has been nothing short
of astounding. This faith, together with high domestic savings rates, played a
single-handed role in allowing most battered Asian countries to simultaneously
benefit from lower interest rates and stronger currencies. Early in the year
this confluence of events would scarcely have been imaginable. Simply put, as
foreign capital fled, and most banking systems seized up (and were in many cases
taken over by the government) investors continued to both restrain their
consumption and continue depositing their savings in local currency-denominated
assets in domestic financial institutions. And, as collapsing domestic
consumption and investment triggered a dramatic decline in imports, Asian
countries were able to build up reserve levels through massive current account
surpluses. The resulting recapitalization of the economy and excess supply of
money relative to demand resulted in a historic drop in interest rates in most
of the beleaguered countries -- the primary two examples are South Korea and
Thailand. This achievement has, in our view, singularly restored health to the
capital markets in Asia -- much more so than forward-looking reforms or foreign
investment flows, both of which have been largely disappointing.
Equally impressive is the secular change being witnessed in eastern Europe
(Hungary, Poland, and the Czech Republic) and especially Greece. To briefly
oversimplify, the power of the Euro is exerting a tremendous pull on these
countries to get their respective fiscal houses in order; they must do so to be
accepted into the eurozone when it is their turn. In Greece's case, the
"convergence" story is immediate, and the remarkable performance of that
country's equity market last year is explained by the equally remarkable
performance of the Greek government to control spending and keep a lid on
inflation (the two most important criteria for EMU acceptance). In the eastern
European markets EMU acceptance is further away, but nevertheless those
countries' respective governments (and, equally important, electorates) are
already conducting both fiscal and monetary policy in strict accordance with
their goals of being accepted into the EMU as soon as possible. The relative
resilience of their equity markets last year reflects that underlying
determination.
As a final comment about positive developments witnessed in 1998, we should note
an important secular trend at the micro, or sector, level. That is, an important
positive secular development continued to take place in the technology field,
and both Taiwan and India have continued to exploit this trend (and, to some
extent, Korea). Taiwan has developed into a PC-component manufacturing
powerhouse, and as the trend toward lower cost PC's continues so does the global
outsourcing trend, which directly benefits that sector. As a result, the
"electronics" sector in Taiwan posted solid absolute returns in 1998 while the
broader Taiwanese market ended the year in negative territory. A similar
phenomenon has taken place in India, yet in this case it is in the software
services sector. As programming talent in the U.S. gets more expensive, Indian
companies are increasingly capturing a larger piece of the global software
services expenditure pie due to their cost advantages and abundant supply of
high quality programming talent.
The Portfolio performed in line with the MSCI Emerging Markets Free Index for
the year ended December 31, 1998. On the positive side, our South Korea
(+141.1%) and Thailand (+11.6%) overweights throughout the year contributed
solidly to our performance. Also contributing favorably were our Venezuelan
(-49.2%) and Chilean (-28.5%) underweights, and our strong stock selection in
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OVERVIEW
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EMERGING MARKETS PORTFOLIO (CONT.)
Turkey. Notable detractors were our underweight in Greece (+78.1%) and our
overweight in Pakistan (-56.6%), as well as poor stock selection in Brazil.
For the three months ended December 31, 1998, the Portfolio underperformed the
MSCI Emerging Markets Free Index. Underperformance relative to the indices was
largely driven by our overweight positions in Pakistan (-12.5%), Egypt (-5.6%),
and Brazil (+0.6%). Also negative were our overweight stances in India (-1.6%),
Mexico (+10.5%), Poland (+10.1), and Turkey (+5.3%), our underweight exposure to
Greece (+28.2%), and disappointing stock returns in Asia.
On a positive note, our decision to overweight South Korea (+114.4%) and
Thailand (+54.4%) positively impacted portfolio return. Also favorable were our
underweights in Argentina (+7.3%), Chile (+13.3%), and Peru (-1.1). Strong stock
selection in Brazil, Mexico and Taiwan also contributed significantly to total
return.
OUTLOOK FOR 1999
Given all that has happened to the world and to our asset class in the past few
years, any predictions need to be put forth with a large degree of
circumspection. Let us begin with a broad review of what we think are some of
the important lessons and themes for 1999 coming out of the experience of 1998:
1) Liquidity will be abundant in Europe and the U.S. owing to the generous
monetary easings mentioned earlier and the modest global growth we foresee
for 1999.
2) This developed market liquidity will have great difficulty finding its way
back to the "vulnerable" emerging markets; that is, the reduction in global
financial risk appetites witnessed last year will, in our view, persist for
some time to come.
3) Commodity prices may stop falling, but it will take a marked recovery in
global aggregate demand to lead to a sustained and meaningful recovery in
broad commodity prices; we think this is, at best, a medium to long-term
event.
4) As a result of #2 above, fiscally profligate emerging market governments will
be met with grave skepticism and not likely given the "benefit of the doubt"
by financial markets.
5) The Asian financial market recovery should continue into 1999, and we will
begin to see the beginning of an economic stabilization if not full-scale
recovery.
6) In short, the separation between the "haves" and the "have nots" witnessed in
1998 will persist, and perhaps even widen in 1999; this process in the
emerging markets universe is not unlike what has taken place in the U.S.
stock market between the mega-cap nifty fifty stocks (the haves) and the
small cap or industrial commodity stocks (the have nots).
As a result of the above views, we have chosen to tilt our portfolio toward high
quality markets and sectors with solid fundamental underpinnings, especially
those with endogenously generated underpinnings less vulnerable to exogenous
shocks. The broader regional strategy, therefore, is to overweight peripheral
Europe and Asia, and to underweight Latin America and South Africa. The
overweight in peripheral Europe owes to a continuation of the forces at work
cited above. We are confident Greece will be accepted into EMU, and therefore
that interest rates will converge with those in western Europe. Eastern Europe
we like simply for the strong fiscal discipline they have evidenced, and are
looking for a related fall in interest rates throughout the year. The one
concern we are monitoring is the widening current account deficits in both
Poland and Hungary. Israel is a market that we like not because of the macro
picture but because of a group of Israeli technology companies that offer unique
bottom-up secular earnings growth unmatched in most of our emerging market
universe.
Asia is a region that is tough to get one's arms around; valuations are hard to
ferret out, and earnings outlooks hard to predict. Nevertheless, we are quite
optimistic that the Korean market represents enormous opportunity both for
continued interest rate declines and for enormous earnings growth owing to the
highly leveraged nature of that country's corporate sector. We do not have
dramatic country bets anywhere else in Asia but have a dramatic overweight in
the Taiwanese electronics sector, for reasons mentioned above. India is a market
whose macro outlook is dubious at best but whose market offers up a wide range
of attractive bottom-up stories, especially in the aforementioned software
services sector.
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Emerging Markets Portfolio
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OVERVIEW
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EMERGING MARKETS PORTFOLIO (CONT.)
On the underweight side, Latin America is our biggest bet. We are very concerned
about the macro picture in Brazil. After a visit to the country in November we
fleetingly held a more constructive stance, but events since then have
transpired to make us more negative on the market. While not explicitly calling
for a market collapse, we think odds are high that something breaks in that
country's policy mix this year, most likely in the first half. The combination
of an overvalued exchange rate, gargantuan fiscal deficit, and stubbornly high
current account deficit is an unruly mix that will not likely be tolerated by
financial markets. We would be more underweight the market were it not for our
extremely constructive stance on the secular earnings growth outlook for the
telecommunications sector; within our underweight in Brazil we have a dramatic
overweight in that sector. Elsewhere in the region, we are dramatically
underweight Chile (vulnerable to weak copper price, anemic corporate earnings
growth, and large current account deficit) and solidly underweight Argentina
(solid macro but equities are not cheap and the market is vulnerable to Brazil
collapse). Further, we are underweight Venezuela (overvalued currency, terrible
macro owing to low oil price) and Peru (commodity price-based economy) and
market weight Mexico. As a final note, we are underweight South Africa in large
part due to that country's currency vulnerability to exogenous shocks (e.g.
Brazil), and to the fact that corporate earnings growth, on a secular basis,
should be lackluster.
General risks to our bets would be 1) a return to risk-loving behavior by global
financial markets which would lead to the "vulnerable" emerging markets gaining
access to capital more easily than we expect, and 2) a meaningful near-term
increase in the price of commodities owing to a successful reflation effort by
the developed markets central banks, which would dramatically improve the
current account positions and economic activities of both Latin America and
South Africa. We think either of these scenarios are low-probability ones, but
nevertheless are on vigilant watch for early warning signals of either scenario
proving us wrong. The tenuous Brazil outlook -- and with it the prospect for a
weaker than expected U.S. economy -- as well as the prospect for Japanese
economic activity surprising on the downside (owing to the strong currency and
backup in interest rates) give us some comfort that global aggregate demand will
not be buoyant enough to sharply reverse the trend in commodity prices.
CONCLUSION
Undoubtedly, emerging markets investors have had a difficult few years. Having
said that, we are glimpsing signs that this multi-year bear market may finally
be working its way through. Now that the Brazil shoe has dropped (see below), we
think that may likely be the bottom for our asset class -- barring a meltdown in
the U.S. equity market of course. We believe that most of the risks in the asset
class have either dissipated or have been fully discounted. Further, we believe
that our Portfolio is positioned to take advantage of opportunities arising from
changes in these markets. Not only are our stocks cheap, we believe they are
terrific companies. We are strong believers that sometime in the medium-term, if
not the near term, this asset class, and our Portfolio with it, should be well
on its way to steadily posting the superior returns for which it earned its
"emerging" label.
BRAZIL UPDATE
After a long struggle, the Brazilian government finally bowed to market
pressures and altered its exchange rate regime in mid-January. While details
about specific policy strategy are sketchy, the facts we know are as follows:
1) The currency, the Real, was initially allowed to move to the weak side of its
wide trading band, causing an immediate effective devaluation of roughly 10%.
2) Central bank president Gustavo Franco, widely associated with a staunch
defense of the Real, has resigned; he will be succeeded by his deputy
Francisco Lopes.
3) The currency has subsequently been allowed to float and has traded between
1.60-2.05 real/U.S. dollar. As of January 31, 1999 the real closed at 2.05.
Our thoughts about the implications of this move for Brazil are necessarily
tentative at this stage. The currency move per se is not a bad thing; to the
extent it removes rigidities and price distortions from the economy it can be
argued that, longer-term, it will have been helpful. Further, given that high
interest rates have prevailed in Brazil for some time, leverage in the economy
and financial system is actually quite low. Therefore, the follow-on
reverberations witnessed after the Asian devaluations owing to excessive
leverage should not be repeated in Brazil. Having said
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Emerging Markets Portfolio
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OVERVIEW
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EMERGING MARKETS PORTFOLIO (CONT.)
that, it is too early to tell what inflationary impact the devaluation may have;
there is a possibility, though we think it low, that inflation spirals out of
control. Further, fiscal imbalances are not solved by the devaluation, and these
remain as a major item to be tackled by the Cardoso administration. On the flip
side, a spike in inflation may temporarily ease some of these fiscal pressures.
Overall, we will have to wait and see how subsequent policy strategy and
implementation is handled, and this will greatly determine whether Brazil is
better or worse off post-devaluation.
Taking a step back, though, asset values in the equity market had already
factored in a good portion of the macro vulnerabilities. Our favorite sector,
the telecoms sector, trades at unfathomably cheap levels. In fact it is the
attractiveness of this sector which has prevented us from being more
underweight. Given that these assets can be bought approximately 20% cheaper
than prior to the devaluation, we have added to our position and maintain a
modest underweight.
Robert L. Meyer
PORTFOLIO MANAGER
Andy B. Skov
PORTFOLIO MANAGER
January 1999
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Emerging Markets Portfolio
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[LOGO] Morgan Stanley Dean Witter
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STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
----------------------------------------------------------------------------------
COMMON STOCKS (94.4%)
ARGENTINA (1.9%)
6 Acindar, Class B................................. $ --
355,949 Telecom Argentina ADR............................ 9,788
80,631 Telefonica de Argentina ADR...................... 2,253
92,278 YPF ADR.......................................... 2,578
-----------
14,619
-----------
BRAZIL (7.4%)
(a,d)295,998,880 Banco Nacional (Preferred)....................... 12
6,385,935 Brahma (Preferred)............................... 2,791
84,776 Brahma ADR (Preferred)........................... 800
246,459,966 CEMIG (Preferred)................................ 4,692
165,909 CEMIG ADR (Preferred)............................ 3,158
(e)103,238 CEMIG ADR (Preferred)............................ 1,962
(d)12,714,900 Coteminas........................................ 1,368
(e)98,865 Coteminas ADR.................................... 467
569,337 CRT RFD(Preferred)............................... 205
33,820,856 CRT (Preferred).................................. 12,176
103,021 CVRD, Class A (Preferred)........................ 1,322
190,439 CVRD ADR (Preferred)............................. 2,452
(a)110,109,610 Embratel (Preferred)............................. 1,504
(a)119,019,000 Lojas Arapua (Preferred)......................... 31
(a,e)120,830 Lojas Arapua GDR (Preferred)..................... --
39,236,000 Pao de Acucar (Preferred)........................ 633
33,964 Pao de Acucar ADR................................ 526
57,708 Petrobras (Preferred)............................ 7
(e)59,250 Petrobras ADR (Preferred)........................ 674
(a)52,673,000 Renner Participacoes (Preferred)................. 37
122,109,610 Telebras (Preferred)............................. 14
(a)58,908 Telebras ADR (Preferred Block)................... 4,282
(a)342,767,610 Tele Celular Sul (Preferred)..................... 579
(a)10,850 Tele Celular Sul ADR............................. 189
(a)264,792,610 Tele Centro Sul (Preferred)...................... 2,299
(a)10,477 Tele Centro Sul ADR.............................. 438
(a)442,516,610 Tele Leste Celular (Preferred)................... 256
(a)470,851,610 Telemig Celular (Preferred)...................... 522
(a)11,175 Telemig Celular ADR.............................. 237
(a)271,682,610 Tele Nordeste Celular (Preferred)................ 247
(a)8,975 Tele Nordeste Celular ADR........................ 166
(a)122,109,610 Tele Norte Celular (Preferred)................... 57
(a)122,109,610 Tele Norte Leste (Preferred)..................... 1,526
(a)20,876,000 Telerj Celular, Class B.......................... 492
1 Telesp........................................... --
(a)154,863,610 Telesp Celular (Preferred)....................... 1,141
(a)88,974,299 Telesp Celular, Class B (Preferred).............. 3,910
(a)1,296 Telesp Celular ADR............................... 23
(a)48,915,610 Telesp Participacoes (Preferred)................. 1,113
(a)321,149,610 Tele Sudeste Celular (Preferred)................. 1,356
(a)3,015 Tele Sudeste Celular ADR......................... 62
247,593 Unibanco ADR (Preferred)......................... 3,575
VALUE
SHARES (000)
----------------------------------------------------------------------------------
318,900 Usiminas (Preferred)............................. $ 705
62,535 Usiminas ADR (Preferred)......................... 140
-----------
58,146
-----------
CHILE (1.3%)
120,900 CCU ADR.......................................... 2,327
171,665 Endesa ADR....................................... 1,953
199,845 Enersis ADR...................................... 5,159
67,086 Santa Isabel ADR................................. 444
-----------
9,883
-----------
CHINA (1.3%)
199,265 Huaneng Power International, Inc. ADR............ 2,890
286,436 Yanzhou Coal Mining Co., Ltd. ADR................ 2,166
11,657,000 Zhejiang Expressway Co., Ltd., Class H........... 2,362
16,959,000 Zhenhai Refining & Chemical Co., Ltd., Class H... 2,605
-----------
10,023
-----------
CROATIA (0.2%)
(e)96,000 Pliva d.d. GDR................................... 1,594
-----------
CZECHOSLOVAKIA (0.4%)
(a)127,665 SPT Telecom a.s.................................. 1,951
(a)84,870 SPT Telecom a.s. GDR............................. 1,260
-----------
3,211
-----------
EGYPT (1.5%)
(a)72,514 Al-Ahram Beverages Co............................ 2,095
(a)21,400 Al-Ahram Beverages Co. GDR....................... 607
54 Ameriyah Cement Co............................... 1
1,456 Commercial International Bank.................... 11
106,838 Eastern Tobacco.................................. 2,459
25,200 Egypt Gas Co..................................... 1,870
26,358 Egyptian Finance & Industrial.................... 436
25 Helwan Cement.................................... --
44,853 Industrial & Engineering......................... 635
34,640 Madinet Nasr Housing & Development............... 1,046
10,885 North Cairo Flour Mills Co....................... 125
216,700 Paints & Chemical Industry GDR................... 1,300
74,750 Suez Cement Co. GDR.............................. 1,032
-----------
11,617
-----------
GREECE (8.4%)
19,690 Alpha Credit Bank................................ 2,056
116,040 Attica Enterprises Holdings...................... 1,041
74,610 Hellenic Bottling Co............................. 2,304
961,768 Hellenic Telecommunication Organization.......... 25,601
(a)1,175,960 Hellenic Telecommunication Organization ADR...... 15,581
15,180 Heracles General Cement Co....................... 412
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
Emerging Markets Portfolio
30
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
----------------------------------------------------------------------------------
GREECE (CONT.)
[Download Table]
(a)36,330 Ionian Bank...................................... $ 1,927
53,430 National Bank of Greece.......................... 12,027
(a)51,690 Panafon Hellenic Telecom GDR..................... 1,348
(a)58,180 STET Hellas Telecommunications ADR............... 1,884
14,830 Titan Cement Co.................................. 1,139
-----------
65,320
-----------
HONG KONG (0.4%)
2,028,000 China Telecom Ltd................................ 3,508
-----------
HUNGARY (4.0%)
102,210 MOL Magyar Olaj-es Gazipari Rt................... 2,793
485,504 MOL Magyar Olaj-es Gazipari Rt. GDR
(Registered)................................... 13,412
494,652 Matav Rt......................................... 2,818
(a)260,016 Matav Rt. ADR.................................... 7,751
84,527 OTP Bank Rt...................................... 4,220
-----------
30,994
-----------
INDIA (8.7%)
5,650 Apollo Tyres Ltd................................. 9
433 Associated Cement Cos., Ltd...................... 10
10,850 Bajaj Auto Ltd................................... 133
1,692,600 Bharat Heavy Electricals Ltd..................... 10,466
(d)1,215,900 Container Corp. of India Ltd..................... 6,848
240 Esab India Ltd................................... --
1,900 Federal Bank Ltd................................. 2
49,000 Gujarat Ambuja Cements Ltd....................... 300
570,816 Hero Honda Motors Ltd............................ 7,308
13,000 Hindustan Lever Ltd.............................. 510
(a)170,550 Hindustan Lever Ltd.............................. 6,680
100 Hoechst Marion Roussel Ltd....................... 1
32,377 Housing Development Finance Corp., Ltd........... 1,661
(a,g)60,094 India Magnum Fund Ltd., (The) Class A............ 1,562
88,100 Infosys Technology Ltd........................... 6,137
463,504 ITC Ltd.......................................... 8,185
7,221 Larsen & Toubro Ltd.............................. 27
258,900 Mahanagar Telephone Nigam Ltd.................... 1,117
(a,g)42,697,100 Morgan Stanley Growth Fund....................... 6,032
103,681 MRF Ltd., Class B................................ 3,491
220,000 Saytam Computer Services Ltd..................... 3,768
36,600 Shanti Gears Ltd................................. 46
(a,d)45,000 Sri Venkatesa Mills Ltd.......................... 9
1,231 State Bank of India.............................. 5
2,608 Sudarshan Chemical Industries Ltd................ 3
347,700 Tata Engineering & Locomotive Co., Ltd........... 1,335
146,000 Zee Telefilms Ltd................................ 2,200
-----------
67,845
-----------
VALUE
SHARES (000)
----------------------------------------------------------------------------------
INDONESIA (1.7%)
3,672,341 Gudang Garam..................................... $ 5,348
10,359,855 Indah Kiat Pulp & Paper Corp. (Foreign).......... 2,817
8,871,300 Telekomunikasi Indonesia......................... 2,994
292,995 Telekomunikasi Indonesia ADR..................... 1,904
-----------
13,063
-----------
ISRAEL (6.1%)
1,697,951 Bank Hapoalim Ltd. (Registered).................. 3,076
(a)638,460 Bezeq Israeli Telecommunication Corp., Ltd....... 1,995
(a)103,610 Comverse Technology, Inc......................... 7,356
(a)216,300 Dor Energy 1988 Ltd.............................. 622
212,659 ECI Telecommunications Ltd....................... 7,576
44,613 Elron Electronic Industries Ltd.................. 714
89,690 First International Bank of Israel, Class 5...... 444
(a)15,040 Gilat Satellite Networks Ltd..................... 829
105,815 Koor Industries Ltd.............................. 9,242
(a)17,875 NICE-Systems Ltd................................. 387
(a)104,150 NICE-Systems Ltd. ADR............................ 2,252
(a)134,091 Orbotech Ltd..................................... 6,353
(a)28,020 Orckit Communications Ltd........................ 454
189,254 Supersol Ltd..................................... 470
109,600 Supersol Ltd. ADR................................ 1,343
99,581 Tadiran Telecommunications Ltd................... 1,905
62,295 Teva Pharmaceutical Industries Ltd. ADR.......... 2,535
-----------
47,553
-----------
KOREA (12.6%)
170,430 Hankuk Glass Industry Co., Ltd................... 3,556
736,930 Korea Eelectric Power Corp....................... 18,255
(d)397,113 Pohang Iron & Steel Co., Ltd..................... 25,071
38,614 S1 Corp.......................................... 7,222
556,476 Samsung Electronics Co........................... 37,330
(a)20,256 Samsung Electronics Co. GDR...................... 744
(d)7,924 SK Telecom Co., Ltd.............................. 5,984
-----------
98,162
-----------
MALAYSIA (2.9%)
(d)991,200 Genting Bhd...................................... 1,506
(d)1,506,000 Kuala Lumpur Kepong Bhd.......................... 1,803
(d)527,000 Nestle (Malaysia) Bhd............................ 1,475
(d)1,676,000 Petronas Gas Bhd................................. 2,654
(d)656,000 Rothmans of Pall Mall (Malaysia) Bhd............. 2,706
(d)413,000 Technology Resources Industries Bhd.............. 151
(d)4,610,000 Telekom Malaysia Bhd............................. 8,490
(d)2,794,000 Tenaga Nasional Bhd.............................. 4,014
-----------
22,799
-----------
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
Emerging Markets Portfolio
31
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
----------------------------------------------------------------------------------
MEXICO (9.5%)
655,668 Alfa, Class A.................................... $ 1,848
(a)1,336,164 Banacci, Class B................................. 1,752
(a)966,103 Banacci, Class L................................. 1,113
383,862 Bancomer, Class B................................ 82
(e)277,930 Bancomer, Class C ADR............................ 1,181
739,994 Carso, Class A1.................................. 2,512
37,760 Cemex CPO........................................ 82
919,867 Cemex CPO ADR.................................... 3,909
243,660 Cemex, Class B................................... 602
431,157 Cemex, Class B ADR............................... 2,102
(a)1,293,298 Cifra, Class C................................... 1,578
13,425 Cifra, Class V................................... 16
165,730 Cifra, Class V ADR............................... 2,011
49,885 Desc ADR......................................... 957
312,281 Femsa ADR........................................ 8,315
2,502,579 Kimberly-Clark, Class A.......................... 7,952
90,469 Tamsa ADR........................................ 582
(a)656,439 Televisa CPO GDR................................. 16,206
420,392 Telmex, Class L ADR.............................. 20,468
144,731 TV Azteca ADR.................................... 968
-----------
74,236
-----------
PAKISTAN (2.2%)
(d)31 Crescent Textile Mills Ltd....................... --
(a,d)3,162 D.G. Khan Cement Ltd............................. --
(d)4,626,500 Fauji Fertilizer Co., Ltd........................ 3,855
(d)5,265,900 Hub Power Co..................................... 1,222
(d)1,252,665 Pakistan State Oil Co., Ltd...................... 1,786
(a,d)140,167 Pakistan Telecommunications Corp. GDS............ 4,836
(d)13,449,300 Pakistan Telecommunications Corp., Class A....... 4,650
(a,d)5,627,702 Sui Northern Gas................................. 921
-----------
17,270
-----------
PERU (0.0%)
49 Cementos Lima.................................... --
-----------
PHILIPPINES (1.8%)
1,141,490 Manila Electric Co., Class B..................... 3,668
124,865 Philippine Long Distance Telephone Co............ 3,210
7,200 Philippine Long Distance Telephone Co. ADR....... 186
2,265,560 San Miguel Corp., Class B........................ 4,368
13,629,500 SM Prime Holdings, Inc........................... 2,593
-----------
14,025
-----------
POLAND (4.0%)
70,836 Bank Handlowy W Warszawie........................ 874
57,420 Bank Handlowy W Warszawie GDR.................... 708
30,229 Bank Slaski...................................... 1,567
937,429 BIG Bank Gdanski................................. 841
194,000 BIG Bank Gdanski GDR............................. 2,629
VALUE
SHARES (000)
----------------------------------------------------------------------------------
58,867 BRE Bank......................................... $ 1,358
41,151 Debica........................................... 599
(a,d)33,400 Eastbridge N.V................................... 2,246
563,140 Elektrim......................................... 6,097
(a)25,565 Exbud............................................ 221
(a)150,750 Exbud GDR........................................ 1,301
24,417 Powszechny Bank Kredytowy........................ 522
162,600 Prokom Software GDR.............................. 3,065
(a)1,644,595 Telekomunikacja Polska GDR....................... 8,387
82,556 Wielkopolski Bank Kredytowy...................... 520
-----------
30,935
-----------
RUSSIA (0.9%)
(a,d)592,359 Alliance Cellulose Ltd........................... 668
(a,d)37,259,635 Mustcom.......................................... 4,210
(d)317,851 Russian Telecom Development Corp................. 572
(a,d)990 Storyfirst Communications, Inc., Class C......... 175
(a,d)2,640 Storyfirst Communications, Inc., Class D......... 468
(a,d)3,250 Storyfirst Communications, Inc., Class E......... 576
(a,d)1,331 Storyfirst Communications, Inc., Class F......... 471
-----------
7,140
-----------
SINGAPORE (0.2%)
1,208,000 Want Want Holdings Ltd........................... 1,450
-----------
SOUTH AFRICA (5.2%)
849,610 ABSA Group Ltd................................... 4,024
860,459 Bidvest Group Ltd................................ 6,238
8,080,401 BOE Corp., Ltd., Class N......................... 4,596
1,604,842 BOE Ltd.......................................... 1,038
905,750 Ellerine Holdings Ltd............................ 1,953
2,080,400 FirstRand Ltd.................................... 2,267
159,125 Liberty Life Association of Africa Ltd........... 2,188
113,760 Nedcor Ltd....................................... 1,935
(a)4,436,700 New Africa Investments Ltd., Class N............. 2,712
285,380 Persetel Holdings Ltd............................ 2,316
25,220 Primedia Ltd., Class N........................... 56
600,370 Rembrandt Group Ltd.............................. 3,669
469,990 Sasol Ltd........................................ 1,775
184,550 South African Breweries Ltd...................... 3,105
1,372,254 The Education Investment Corp., Ltd.............. 1,584
2,418,600 Woolworths holdings Ltd.......................... 1,191
-----------
40,647
-----------
TAIWAN (7.2%)
(a)329,000 Arima Computer Corp.............................. 1,716
(a)598,750 Asustek Computer, Inc............................ 5,594
(a)1,414,063 Compal Electronics, Inc.......................... 4,608
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
Emerging Markets Portfolio
32
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
----------------------------------------------------------------------------------
TAIWAN (CONT.)
[Download Table]
(a)456,000 Compeq Manufacturing Co., Ltd.................... $ 2,986
1,901,000 Far East Textile Ltd............................. 1,552
(a)2,395,000 Hon Hai Precision Industry....................... 13,231
1,261,428 President Chain Store Corp....................... 3,974
(a)3,608,072 Siliconware Precision Industries Co.............. 6,383
(a)4,489,000 Taiwan Semiconductor Manufacturing Co............ 9,892
(a)415,960 Taiwan Semiconductor Manufacturing Co. ADR....... 5,901
-----------
55,837
-----------
THAILAND (1.5%)
629,950 Advanced Info Service PCL (Foreign).............. 3,743
(d)321,100 BEC World PCL (Foreign).......................... 1,767
310,250 Delta Electronics (Thailand) PCL (Foreign)....... 1,639
(a)298,000 PTT Exploration & Production PCL (Foreign)....... 2,099
(a)416,600 Shinawatra Computer Co. PCL (Foreign)............ 1,433
(a)333,300 Siam Cement PCL (Foreign)........................ 733
-----------
11,414
-----------
TURKEY (2.0%)
(e)122,680 Akbank T.A.S..................................... 498
31,243,100 Ege Biracilik.................................... 2,427
21,320,000 Erciyas Biracilik................................ 1,419
1,153,000 Migros (Registered).............................. 1,151
8,107,461 Petrol Ofisi A.S................................. 1,092
(a)42,354,601 Vestel Elektronik Sanayi Ve Ticaret A.S.......... 3,491
494,919,664 Yapi Ve Kredi Bankasi A.S........................ 5,726
-----------
15,804
-----------
VENEZUELA (0.4%)
199,261 CANTV ADR........................................ 3,549
-----------
ZIMBABWE (0.4%)
6,665,249 Delta Corp., Ltd................................. 1,451
290,800 Meikles Africa Ltd............................... 187
1,682,700 Meikles Africa Ltd. ADR.......................... 942
(e)9,900,000 Trans Zambesi Industries Ltd..................... 453
3,800,000 Trans Zambesi Industries Ltd. (Registered)....... 174
-----------
3,207
-----------
OTHER (0.3%)
(g)245,645 Morgan Stanley Africa Investment Fund, Inc....... 2,057
-----------
TOTAL COMMON STOCKS (Cost $931,631).................................. 735,908
-----------
VALUE
SHARES (000)
----------------------------------------------------------------------------------
PREFERRED STOCKS (0.0%)
COLOMBIA (0.0%)
103,207 Bancolombia (Cost $617).......................... $ 139
-----------
[Download Table]
NO. OF
RIGHTS
----------------
RIGHTS (0.0%)
SOUTH AFRICA (0.0%)
(a)415,100 Primedia Ltd..................................... 1
-----------
TAIWAN (0.0%)
(a,d)3,630 Compal Electronics, Inc.......................... --
-----------
TOTAL RIGHTS (Cost $0)............................................... 1
-----------
[Download Table]
NO. OF
WARRANTS
----------------
WARRANTS (0.0%)
THAILAND (0.0%)
(a)1,020,633 Siam Commercial Bank PCL (Foreign) (Cost $0)..... --
-----------
[Download Table]
NO. OF
UNITS
----------------
UNITS (1.6%)
MEXICO (1.5%)
(a)4,218,861 Femsa............................................ 11,444
-----------
RUSSIA (0.1%)
(a,d)1,637 Storyfirst Communications, Inc., First Section,
Tranche I, 25.00%, 1/29/99..................... 290
(a,d)96 Storyfirst Communications, Inc., Second Section,
Tranche I, 25.00%, 1/29/99..................... 17
(a,d)421 Storyfirst Communications, Inc., Tranche II,
26.00%, 1/29/99................................ 75
(a,d)562 Storyfirst Communications, Inc., Tranche IV,
28.00%, 1/29/99................................ 99
(a,d)654 Storyfirst Communications, Inc., Tranche V,
29.00%, 1/29/99................................ 116
(a,d)550 Storyfirst Communications, Inc., Tranche VI,
30.00%, 1/29/99................................ 97
-----------
694
-----------
TOTAL UNITS (Cost $12,862)........................................... 12,138
-----------
[Download Table]
FACE
AMOUNT
(000)
----------------
CONVERTIBLE DEBENTURES (0.1%)
INDIA (0.0%)
INR (d)336 DCM Shriram Industries Ltd., 7.50%, 2/21/02...... 129
-----------
SOUTH AFRICA (0.1%)
ZAR 111 Sasol Ltd. 8.50%, 12/29/49....................... 388
-----------
TOTAL CONVERTIBLE DEBENTURES (Cost $3,421)........................... 517
-----------
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
Emerging Markets Portfolio
33
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
FACE
AMOUNT VALUE
(000) (000)
----------------------------------------------------------------------------------
NON-CONVERTIBLE DEBENTURES (0.6%)
INDIA (0.2%)
INR (d)341 DCM Shriram Industries Ltd., (Floating Rate),
16.50%, 2/21/02................................ $ 172
(d)700 Saurashtra Cement & Chemicals Ltd., 18.00%,
11/27/00....................................... 1,539
-----------
1,711
-----------
RUSSIA (0.4%)
$ (d)21,883 Svyaz Finance Ltd., 17.00%, 8/11/99.............. 3,414
-----------
TOTAL NON-CONVERTIBLE DEBENTURES (Cost $24,748)...................... 5,125
-----------
TOTAL FOREIGN SECURITIES (96.7%)
(Cost $973,279).................................................... 753,828
-----------
SHORT-TERM INVESTMENTS (1.4%)
REPURCHASE AGREEMENT (1.4%)
10,839 Chase Securities, Inc. 4.45%, dated 12/31/98, due
1/04/99 to be repurchased at $10,844,
collaterized by U.S. Treasury Bonds 11.25%, due
2/15/15, valued at $11,060 (Cost $10,839)...... 10,839
-----------
FOREIGN CURRENCY (2.8%)
BRL 5,499 Brazilian Real................................... 4,551
EGP 2,436 Egyptian Pound................................... 714
GRD 540,130 Greek Drachma.................................... 1,930
HKD 1 Hong Kong Dollar................................. --
INR 94,395 Indian Rupee..................................... 2,223
ILS 4,180 Israeli Shekel................................... 1,006
(d)MYR 9,893 Malaysian Ringgit................................ 1,822
MXP 7,594 Mexican Peso..................................... 767
(d)PKR 179,574 Pakistani Rupee.................................. 3,267
PHP 13,739 Philippines Peso................................. 353
PLN 3,294 Polish Zloty..................................... 939
ZAR 10,589 South African Rand............................... 1,798
KRW 110 South Korean Won................................. --
LKR 2 Sri Lankan Rupee................................. --
TWD 60,832 Taiwan Dollar.................................... 1,888
TRL 46,644,701 Turkish Lira..................................... 148
ZWD 99 Zimbabwe Dollar.................................. 3
-----------
TOTAL FOREIGN CURRENCY (Cost $22,144)................................ 21,409
-----------
[Download Table]
VALUE
(000)
----------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.9%) (Cost $1,006,262).......................... $ 786,076
----------
OTHER ASSETS (1.9%)
Receivable for Investments Sold......................... $ 8,639
Dividends Receivable.................................... 2,949
Interest Receivable..................................... 1,589
Receivable for Portfolio Shares Sold.................... 1,503
Foreign Withholding Tax Reclaim Receivable.............. 408
Net Unrealized Gain on Swap Agreements.................. 9
Other................................................... 71 15,168
----------
LIABILITIES (-2.8%)
Payable for Investments Purchased....................... (11,990)
Net Unrealized Loss on Foreign Currency Exchange
Contracts............................................. (3,906)
Investment Advisory Fees Payable........................ (2,724)
Bank Overdraft Payable.................................. (1,204)
Custodian Fees Payable.................................. (592)
Payable for Foreign Taxes............................... (450)
Payable for Portfolio Shares Redeemed................... (349)
Administrative Fees Payable............................. (109)
Directors' Fees & Expenses Payable...................... (97)
Distribution Fees Payable............................... (5)
Other Liabilities....................................... (504) (21,930)
---------- ----------
NET ASSETS (100%)..................................................... $ 779,314
----------
----------
[Download Table]
NET ASSETS CONSIST OF:
Paid in Capital....................................................... $1,394,473
Accumulated Net Investment Loss....................................... (2,499)
Accumulated Net Realized Loss......................................... (388,645)
Unrealized Depreciation on Investments, Foreign Currency Translations
and Swap Agreements (Net of accrual for foreign taxes of $221 on
unrealized appreciation on investments)............................. (224,015)
----------
NET ASSETS............................................................ $ 779,314
----------
----------
[Download Table]
CLASS A:
----------------------------------------------------------------------
NET ASSETS............................................................ $772,115
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 80,820,616 outstanding $0.001 par value Shares
(authorized 500,000,000 shares)..................................... $9.55
----------
----------
CLASS B:
----------------------------------------------------------------------
NET ASSETS............................................................ $7,199
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 752,781 outstanding $0.001 par value Shares
(authorized 500,000,000 shares)..................................... $9.56
----------
----------
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
Emerging Markets Portfolio
34
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1998, the Portfolio is obligated to deliver or is to receive foreign currency
in exchange for U.S. dollars as indicated below:
[Download Table]
NET
CURRENCY IN EXCHANGE UNREALIZED
TO DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
--------------- -------- ----------- -------------- -------- -----------
KRW 11,140,983 $ 9,261 1/04/99 U.S.$ 7,218 $ 7,218 $ (2,043)
PHP 495 13 1/04/99 U.S.$ 13 13 --
PHP 2,528 65 1/04/99 U.S.$ 65 65 --
PHP 1,676 43 1/04/99 U.S.$ 43 43 --
PHP 2,740 70 1/04/99 U.S.$ 70 70 --
PHP 3,256 84 1/04/99 U.S.$ 83 83 (1)
PHP 748 19 1/04/99 U.S.$ 19 19 --
U.S.$ 196 196 1/04/99 CZK 5,826 194 (2)
U.S.$ 982 982 1/04/99 KRW 1,185,933 986 4
U.S.$ 1,480 1,480 1/04/99 KRW 1,968,400 1,636 156
U.S.$ 6,005 6,005 1/04/99 KRW 7,986,650 6,639 634
U.S.$ 1,029 1,029 1/05/99 GRD 291,122 1,040 11
KRW 11,849,920 9,850 1/05/99 U.S.$ 7,796 7,796 (2,054)
KRW 2,202,100 1,830 1/06/99 U.S.$ 1,444 1,444 (386)
KRW 10,094,320 8,387 1/07/99 U.S.$ 6,641 6,641 (1,746)
KRW 1,929,634 1,601 1/31/99 U.S.$ 1,595 1,595 (6)
MYR 12,346 2,274 2/11/99 U.S.$ 2,738 2,738 464
MYR 49,009 9,026 2/11/99 U.S.$ 10,856 10,856 1,830
U.S.$ 13,594 13,594 2/11/99 MYR 61,356 11,299 (2,295)
ZAR 33,043 5,327 6/21/99 U.S.$ 5,626 5,626 299
ZAR 66,147 10,663 6/21/99 U.S.$ 11,253 11,253 590
U.S.$ 563 563 6/21/99 ZAR 3,660 590 27
U.S.$ 2,677 2,677 6/21/99 ZAR 17,615 2,840 163
U.S.$ 3,237 3,237 6/21/99 ZAR 20,814 3,355 118
U.S.$ 2,521 2,521 6/21/99 ZAR 16,166 2,606 85
U.S.$ 6,353 6,353 6/21/99 ZAR 40,935 6,599 246
-------- -------- -----------
$ 97,150 $ 93,244 $ (3,906)
-------- -------- -----------
-------- -------- -----------
------------------------------------------------------------
SWAP AGREEMENTS:
The Portfolio had the following Total Return Swap Agreements open at December
31, 1998:
[Download Table]
UNREALIZED
NOTIONAL APPRECIATION
AMOUNT (DEPRECIATION)
(000) DESCRIPTION (000)
---------- ------------------------------------------------- ---------------
$ (d)3,403 Agreement with Goldman Sachs International
terminating
March 4, 1999 to make quarterly payments equal
to the three month USD-LIBOR plus 2.00% and to
receive quarterly payments equal to the SET
Index converted into USD at the mid-market
rate. $ 106
(d)1,509 Agreement with Goldman Sachs International
terminating
March 3, 1999 to make quarterly payments equal
to the three month USD-LIBOR plus 1.75% and to
receive quarterly payments equal to the SET
Index converted into USD at the mid-market
rate. 45
(d)1,721 Agreement with Goldman Sachs International
terminating
March 5, 1999 to make quarterly payments equal
to the three month USD-LIBOR plus 1.75% and to
receive quarterly payments equal to the SET
Index converted into USD at the mid-market
rate. (10)
(d)3,496 Agreement with Goldman Sachs International
terminating
March 10, 1999 to make quarterly payments equal
to the three month USD-LIBOR plus 2.00% and to
receive quarterly payments equal to the SET
Index converted into USD at the mid-market
rate. (132)
-----
$ 9
-----
-----
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
Emerging Markets Portfolio
35
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Investments (totaling $101,551 or 13.0% of net assets at December 31,
1998) were valued at fair value -- see note A-1 to financial
statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(g) -- The fund is advised by an affiliate.
ADR -- American Depositary Receipt
CZK -- Czech Koruna
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
LIBOR -- London Interbank Offer Rate
PCL -- Public Company Limited
RFD -- Ranked for Dividend
SET -- Securities Exchange of Thailand
Floating Rate -- Interest rate changes on these instruments are based on changes
in a designated base rate. The rates shown are those in effect on
December 31, 1998.
------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
[Download Table]
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
----------------------------------------------------------------
Capital Equipment...................... $ 120,423 15.4%
Consumer Goods......................... 142,563 18.3
Energy................................. 84,611 10.9
Finance................................ 81,765 10.5
Materials.............................. 61,032 7.8
Multi-Industry......................... 34,937 4.5
Services............................... 228,497 29.3
--------- ---
$ 753,828 96.7%
--------- ---
--------- ---
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
Emerging Markets Portfolio
36
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
OVERVIEW
--------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1998)
--------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Download Table]
Belgium 1.2%
Denmark 1.1%
Finland 6.4%
France 9.4%
Germany 11.4%
Ireland 3.0%
Italy 8.2%
Netherlands 5.0%
Norway 1.7%
Spain 5.8%
Sweden 6.9%
Switzerland 14.3%
United Kingdom 23.4%
Other 2.2%
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Enlarge/Download Table]
EURPOEAN EQUITY PORTFOLIO-CLASS
A MSCI EUROPE INDEX(1)
4/02/93* $500,000 $500,000
12/31/93 $645,500 $606,800
12/31/94 $715,750 $620,650
12/31/95 $800,566 $754,835
12/31/96 $979,012 $914,030
12/31/97 $1,154,059 $1,131,569
12/31/98 $1,247,422 $1,454,406
* Commencement of operations
** 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. 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)
-----------------------------------------
[Download Table]
TOTAL RETURNS(2)
--------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
------------ ----------------- -----------------
PORTFOLIO -- CLASS
A..................... 8.09% 14.09% 17.24%
PORTFOLIO -- CLASS
B..................... 7.80 N/A 15.31
INDEX -- CLASS A...... 28.53 19.10 20.23
INDEX -- CLASS B...... 28.53 N/A 24.22
1. The MSCI Europe Index is an unmanaged market value weighted index of common
stocks listed on the stock exchanges of countries in Europe (includes
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The investment objective of the European Equity Portfolio is to seek long-term
capital appreciation through investment in equity securities of European
issuers. Equity securities for this purpose include stocks and stock equivalents
such as securities convertible into common and preferred stocks and securities
having equity characteristics, such as rights and warrants to purchase common
stock.
The approach taken in selecting investments for the Portfolio is oriented to
individual stock selection and is value driven. The initial step in identifying
attractive undervalued securities is the screening of European databases. Stocks
are screened for undervaluation on two primary criteria, cash flow and book
value, and three secondary criteria, earnings, sales and yield. Once stocks have
been selected from this screening process, they are put through detailed
fundamental analysis. Important areas covered during this in-depth study include
the companies' balance sheets and cash flow, franchise, products, management and
the strategic value of the assets.
For the year ended December 31, 1998, the Portfolio had a total return of 8.09%
for the Class A shares and 7.80% for the Class B shares compared to a total
return of 28.53% for the Morgan Stanley Capital International (MSCI) Europe
Index (the "Index"). For the five-year period ended December 31, 1998, the
average annual total return of Class A shares was 14.09% compared to 19.10% for
the Index. From inception on April 2, 1993 through December 31, 1998, the
average annual total return of Class A shares was 17.24% compared to 20.23% for
the Index. From inception on January 2, 1996 through December 31, 1998, the
average annual total return of Class B shares was 15.31% compared to 24.22% for
the Index.
Within the second half of 1998, the Portfolio underperformed the Index. A key
contributing factor to that performance was the continued decline in oil prices,
which, despite a brief spike during the airstrikes on Iraq, reached their lowest
point in real terms since 1972. This decline cut the revenue projections for the
Portfolio's holdings in energy dependent stocks such as British Oil exploration
company Premier Oil (-63%) and French integrated oil concern Total (-22%). Royal
and Sun Alliance also
------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE INFORMATION CONTAINED IN THIS
OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES
MENTIONED. THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE AS MEASURED BY
THE MSCI EUROPE INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE
CONSTRUED AS A GUARANTEE OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE
SHOWN IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISK CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL
INVESTING.
--------------------------------------------------------------------------------
European Equity Portfolio
37
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
OVERVIEW
--------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
suffered a price decline on an absolute basis (-21%), due in large part to a
sharp increase in weather related claims, including from damage wrought by
Hurricane Georges in the U.S., severe flooding in Britain, and a Canadian ice
storm.
Strengthening European currencies also impacted the Portfolio. One of the
Portfolio's largest holdings, Swiss food producer Nestle, rose 2%, held back by
concerns over the weakening U.S. dollar (50% of Nestle revenues are derived in
dollars or dollar-related currencies). Similar considerations weighed on Bayer
(-19%), and BASF (-20%).
In the fourth quarter, this negative performance was mitigated by substantial
gains in the banking sector. A 25 basis point reduction in the Fed Funds rate,
combined with a perception of decreasing risk in the emerging markets, triggered
a revaluation of UBS (+58%), Banco Bilbao Viscaya (+47%), and ING Groep (+35%).
Further, speculation of increased financial concentration and takeover activity
following the introduction of the Euro prompted rises in smaller domestic banks
such as Bank of Scotland (+25%), Bank of Ireland (+20%), and Banca Pop. di
Bergamo (+20%). Gains in the Portfolio in the fourth quarter were not limited to
the banking sector, however, as Telecom Italia (+32%) and Telefonica (+25%) rose
on favorable regulatory news.
OUTLOOK
Following the very narrow rally in Europe in the fourth quarter, 1998 has been
one of the worst years on record for value investors. Importantly, the valuation
anomaly between expensive large caps and undervalued mid caps moved to new
extremes in the fourth quarter. Attracted by their quality franchises and cheap
multiples, the Portfolio has migrated over the last 18 months to mid and smaller
companies. In the recent flight to liquidity, these small/mid cap names have
been shunned by investors, often for reasons unrelated to fundamentals. Although
small/ mid cap valuations re-rated strongly upwards in the spring of 1997, the
valuation gap has widened again in 1998. This has been the principal cause for
our European returns lagging their benchmark last year.
As pure bottom up investors, we do not attempt to market time nor predict the
short term ebbs and flows of the economic cycle. We do understand quality
companies and spend a great deal of time conducting due diligence and testing
our assumptions for cash flow growth under various scenarios. Experience tells
us that owning a portfolio of cheap companies (i.e. low price/cash flow) builds
in a margin of safety for when markets fall on tough times.
The Portfolio has a neutral weighting in banks dominated by medium size regional
retail banks such as Bank of Ireland, Bank of Scotland and Sparebanken,
Nordbanken and Merita in Scandinavia. ABN Amro in the Netherlands and UBS in
Switzerland are the only large trading banks held. In addition to being
expensive, the large European trading banks look vulnerable in the current
volatile financial market environment, having much greater loan exposure to
emerging markets than do U.S. and U.K. banks. The Portfolio is underweight
insurance.
The Portfolio has almost no weighting in technology, a sector typically
characterized by high valuations and boom-bust cycles. European technology also
typically is not at the forefront of technological innovation, nor the low cost
producers. As such we have been underweight and the Portfolio's performance has
been negatively impacted by not owning European technology names like enterprise
software company SAP in Germany or Nokia in Finland.
The Portfolio is overweight cyclicals with an emphasis on less economically
sensitive names or special situations. We have found attractive value in the
European machinery and engineering sector. Our focus has been on companies who
rely more on lucrative recurring service revenues than on original
manufacturing. Elevator manufacturer, Kone in Finland, is an example. The
Portfolio is overweight cement companies within the building materials sector.
Holderbank, the Swiss cement company, has a strong defendable franchise. We
expect that with Europe's shift to the left of the political spectrum and given
the underinvestment in infrastructure on the continent (as a result of budget
restraint to meet the Maastricht criteria) demand for cement and aggregates is
likely to exceed GDP growth in the coming years.
We are attracted to the stable cash flows and attractive valuation of European
consumer stocks and remain overweight tobacco. Richemont, Swiss holding company
for Rothmans International and owning luxury good brands like Cartier and
Dunhill, is the Portfolio's largest holding. Other defensive holdings include
Nestle and U.K. household products company Reckitt & Colman.
The timing of the launch of the Euro has coincided with unprecedented financial
market volatility and continued emerging market weakness. Although we see
Economic and Monetary Union (EMU) as a long-term fillip to Europe's sustainable
growth rate, the Euro-zone faces important challenges in its first year. Of
immediate concern is a potentially strengthening Euro and the detrimental impact
that would imply for short-term growth. We believe that a quality mid cap
Portfolio offers the most compelling valuation and long term reward potential.
Robert Sargent
PORTFOLIO MANAGER
January 1999
--------------------------------------------------------------------------------
European Equity Portfolio
38
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
----------------------------------------------------------------------------
COMMON STOCKS (96.9%)
BELGIUM (1.2%)
55 GB INNO AFV...................................... $ 3
41,000 GB INNO BM....................................... 2,147
---------
2,150
---------
DENMARK (1.1%)
21,300 Unidanmark A/S, Class A.......................... 1,924
---------
FINLAND (6.4%)
48,000 Huhtamaki Oyj, Series 1.......................... 1,838
17,750 KCI Konecranes International..................... 806
14,145 Kone Oyj, Class B................................ 1,648
381,750 Merita Ltd., Class A............................. 2,427
97,850 Metra Oyj, Class B............................... 1,700
23,475 Sampo Insurance Co., plc, Class A................ 897
127,300 The Rauma Group.................................. 1,860
---------
11,176
---------
FRANCE (9.4%)
(a)31,000 CNP Assurances................................... 942
16,900 Cie de Saint Gobain.............................. 2,386
31,970 Cie Generale des Establissements Michelin, Class
B (Registered)................................. 1,279
21,400 Elf Aquitaine.................................... 2,474
6,430 Groupe Danone.................................... 1,841
8,441 Lafarge.......................................... 802
46,000 Rhone-Poulenc.................................... 2,368
21,210 Total, Class B................................... 2,148
16,165 Union des Assurances Federales................... 2,146
---------
16,386
---------
GERMANY (10.5%)
70,200 BASF AG.......................................... 2,677
16,600 Bayer AG......................................... 697
24,300 Bayerische Vereinsbank AG........................ 1,922
4,520 Buderus AG....................................... 1,668
19,065 Philipp Holzmann AG.............................. 2,975
5,395 Suedzucker AG.................................... 2,445
37,200 VEBA AG.......................................... 2,204
2,010 Viag AG.......................................... 1,188
30,030 Volkswagen AG.................................... 2,430
---------
18,206
---------
IRELAND (3.0%)
155,544 Bank of Ireland.................................. 3,466
394,000 Greencore Group plc.............................. 1,820
---------
5,286
---------
ITALY (8.2%)
14,685 Banca Popolare Di Bergamo S.p.A.................. 357
230,700 Marzotto (Gaetano) & Figli S.p.A................. 2,546
404,100 Mediaset S.p.A................................... 3,283
779,300 Sogefi S.p.A..................................... 2,121
VALUE
SHARES (000)
----------------------------------------------------------------------------
239,100 Telecom Italia S.p.A............................. $ 2,044
611,505 Telecom Italia S.p.A. (RNC)...................... 3,855
---------
14,206
---------
NETHERLANDS (5.0%)
82,200 ABN Amro Holding N.V............................. 1,730
68,450 Akzo Nobel N.V................................... 3,117
30,736 ING Groep N.V.................................... 1,875
28,600 Philips Electronics N.V.......................... 1,919
---------
8,641
---------
NORWAY (1.7%)
147,490 Sparebanken...................................... 2,872
---------
SPAIN (5.8%)
117,550 Banco Bilbao Vizcaya (Registered)................ 1,845
239,100 Iberdrola........................................ 4,479
42,845 Telefonica....................................... 1,907
165,400 Uralita.......................................... 1,844
---------
10,075
---------
SWEDEN (6.9%)
95,700 Autoliv, Inc..................................... 3,440
70,700 BT Industries AB................................. 1,031
475,900 Nordbanken Holding AB............................ 3,057
141,600 Svedala Intrustri AB............................. 2,064
59,000 Svenska Handelsbanken, Class A................... 2,492
---------
12,084
---------
SWITZERLAND (14.3%)
4,045 Cie Financiere Richemont AG, Class A............. 5,728
4,650 Forbo Holding AG (Registered).................... 2,034
3,310 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 3,924
2,725 Nestle (Registered).............................. 5,941
3,290 SIG Schweizensche Industrie-Gesellschaft Holding
AG (Registered)................................ 1,943
748 Schindler Holding AG (Registered)................ 1,276
(a)5,270 Swisscom AG...................................... 2,209
(a)190 Union Bank of Switzerland AG (Registered)........ 59
6,310 Valora Holding AG................................ 1,709
---------
24,823
---------
UNITED KINGDOM (23.4%)
1,093,400 Aegis Group plc.................................. 1,583
600 Allied Domecq plc................................ 6
(a)67,700 Allied Zurich plc................................ 1,010
268,618 BG plc........................................... 1,695
239,210 Bank of Scotland................................. 2,854
111,100 British Telecommunications plc................... 1,674
312,600 Bunzl plc........................................ 1,222
213,010 Burmah Castrol plc............................... 3,048
192,300 Capital Radio plc................................ 1,872
413,800 Charter plc...................................... 2,272
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
European Equity Portfolio
39
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
----------------------------------------------------------------------------
UNITED KINGDOM (CONT.)
[Download Table]
633,700 Devro plc........................................ $ 1,824
174,683 Diageo plc....................................... 1,988
82,980 Great Universal Stores plc....................... 875
748,100 Halma plc........................................ 1,506
271,200 Imperial Tobacco Group plc....................... 2,906
179,075 Lonrho plc....................................... 980
210,000 Morgan Crucible Co............................... 964
235,200 Premier Farnell plc.............................. 626
4,022,986 Premier Oil plc.................................. 1,071
175,400 RMC Group plc.................................... 2,402
212,132 Reckitt & Colman plc............................. 2,809
271,261 Royal & Sun Alliance Insurance Group plc......... 2,215
528,500 WPP Group plc.................................... 3,216
---------
40,618
---------
TOTAL COMMON STOCKS (Cost $151,918).............................. 168,447
---------
PREFERRED STOCKS (0.9%)
GERMANY (0.9%)
5,480 Dyckerhoff AG.................................... 1,529
1,600 Volkswagen AG.................................... 80
---------
TOTAL PREFERRED STOCKS (Cost $1,490)............................. 1,609
---------
[Download Table]
NO. OF
RIGHTS
------------
RIGHTS (0.0%)
SPAIN (0.0%)
(a)42,845 Telefonica, expiring 1/30/99 (Cost $0)........... 38
---------
TOTAL FOREIGN SECURITIES (97.8%) (Cost $153,408)................. 170,094
---------
[Download Table]
FACE
AMOUNT
(000)
------------
SHORT-TERM INVESTMENT (2.0%)
REPURCHASE AGREEMENT (2.0%)
$ 3,547 Chase Securities, Inc. 4.45%, dated 12/31/98, due
1/4/99, to be repurchased at $3,549,
collateralized by U.S. Treasury Bonds, 11.25%,
due 2/15/15, valued at $3,621
(Cost $3,547).................................. 3,547
---------
FOREIGN CURRENCY (0.0%)
ESP 592 Spanish Peseta (Cost $4)......................... 4
---------
[Download Table]
VALUE
(000)
----------------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%) (Cost $156,959)......................... $173,645
--------
OTHER ASSETS (2.0%)
Receivable for Investments Sold..................... $ 2,611
Dividends Receivable................................ 594
Foreign Withholding Tax Reclaim Receivable.......... 255
Other............................................... 13 3,473
----------
LIABILITIES ( - 1.8%)
Bank Overdraft Payable.............................. (2,612)
Investment Advisory Fees Payable.................... (393)
Payable for Portfolio Shares Redeemed............... (106)
Custodian Fees Payable.............................. (30)
Administrative Fees Payable......................... (27)
Directors' Fees and Expenses Payable................ (13)
Distribution Fees Payable........................... (3)
Other Liabilities................................... (41) (3,225)
---------- --------
NET ASSETS (100%)................................................. $173,893
--------
--------
[Download Table]
NET ASSETS CONSIST OF:
Paid in Capital................................................... $153,005
Overdistributed Net Investment Income............................. (125)
Accumulated Net Realized Gain..................................... 4,315
Unrealized Appreciation on Investments and Foreign Currency
Translations.................................................... 16,698
--------
NET ASSETS........................................................ $173,893
--------
--------
[Download Table]
CLASS A:
------------------------------------------------------------------
NET ASSETS........................................................ $168,712
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 10,710,559 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $15.75
--------
--------
CLASS B:
------------------------------------------------------------------
NET ASSETS........................................................ $5,181
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 329,230 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $15.74
--------
--------
------------------------------------------------------------
(a) -- Non-income producing security
RNC -- Non-convertible savings shares
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
European Equity Portfolio
40
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
EUROPEAN EQUITY PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
------------------------------------------------------------
SUMMARY OF FOREIGN AND U.S. SECURITIES BY INDUSTRY CLASSIFICATION
[Download Table]
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
----------------------------------------------------------------
Capital Equipment.................... $ 19,646 11.3%
Consumer Goods....................... 41,993 24.2
Energy............................... 17,118 9.8
Finance.............................. 34,089 19.6
Materials............................ 25,003 14.4
Multi-Industry....................... 6,141 3.5
Services............................. 26,104 15.0
--------- ---
$ 170,094 97.8%
--------- ---
--------- ---
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
European Equity Portfolio
41
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
OVERVIEW
--------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1998)
--------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Download Table]
Denmark 3.0%
Finland 2.4%
France 30.0%
Ireland 4.6%
Italy 3.1%
Norway 3.5%
Spain 7.2%
Sweden 16.7%
United Kingdom 47.2%
Other -17.7%
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Enlarge/Download Table]
EUROPEAN REAL ESTATE PORTFOLIO-CLASS EUROPEAN REAL ESTATE PORTFOLIO-CLASS
A B
10/01/97* $500,000 $100,000
12/31/97 $476,400 $95,240
12/31/98 $499,029 $99,621
* Commencement of operations
** Minimum investment
GPR LIFE EUROPEAN REAL ESTATE T.R.
INDEX(1)
10/01/97* $500,000
12/31/97 $500,650
12/31/98 $498,647
* Commencement of operations
** 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. The performance of Class B shares will vary based
upon the different fees assessed to that class. The GPR Life European Real
Estate T.R. Index value at December 31, 1998 assumes a minimum initial
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, 1998 would
be $99,729.
PERFORMANCE COMPARED TO THE GPR LIFE
EUROPEAN REAL ESTATE T.R. INDEX(1)
-----------------------------------
[Download Table]
TOTAL RETURNS(2)
---------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
---------- ---------------
PORTFOLIO -- CLASS A................. 4.75% - 0.16%
PORTFOLIO -- CLASS B................. 4.60 - 0.30
INDEX................................ - 0.40 - 0.30
1. The GPR Life European Real Estate T.R. Index is a European market
capitalization weighted index of listed property/real estate securities
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The investment objective of the European Real Estate Portfolio is to provide
current income and long-term capital appreciation by investing primarily in
equity securities of companies in the European real estate industry.
For the year ended December 31, 1998, the Portfolio had a total return of 4.75%
for the Class A shares and 4.60% for the Class B shares compared to -0.40% for
the GPR Life European Real Estate T.R. Index (the "Index"). From inception on
October 1, 1997 through December 31, 1998, the average annual total return of
-0.16% for Class A shares and -0.30% for Class B shares compared to -0.30% for
the Index.
Activity in the European real estate securities markets during 1998 was
dominated by investor anticipation of the January 1, 1999 initiation of the
Euro. The single currency required a harmonization of European interest rates,
which proved highly positive for a number of the markets. As a result, each of
the Euro-countries outperformed the Index. At the same time, three of the five
non-Euro markets underperformed the Index, including the two largest non-Euro
markets, Sweden and the U.K.. Overall, the Index fell -6.1% in ECU terms during
the year, dragged down by the U.K.'s -22.0% return. While we believe the actual
implementation of the currency will continue to favorably affect these markets
through 1999, we expect global economic tightening to serve as the dominant
driving force. As such, we are repositioning the Portfolio toward a more
defensive stance, lightening Scandinavia, increasing France, and adding to the
larger market-cap U.K. positions.
The United Kingdom property shares returned a dismal year. U.K. real estate
securities fell -22.0% for the year, in ECU terms, after posting a negative
performance in 8 of the last 9 months of 1998. This drop in pricing is a result
of a change in growth expectations rather than a reduction in property
------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE INFORMATION CONTAINED IN THIS
OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES
MENTIONED. THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW
ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE
OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE
OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
--------------------------------------------------------------------------------
European Real Estate Portfolio
42
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
OVERVIEW
--------------------------------------------------------------------------------
EUROPEAN REAL ESTATE PORTFOLIO (CONT.)
values. In January 1998, the U.K. majors, 7 of the largest U.K. listed property
companies, were expected to realize a 19.2% increase in net asset value over
1998. At this time, the shares were trading at a 22% premium to net asset value.
Today, growth estimates have fallen to 6.1%, and share premiums have reversed to
a 22% discount. This change in expectations is driven by the anticipated
slowdown in the U.K. and global economies. However, we believe the recent drop
in interest rates by the Bank of England, 150 basis points since October, and
the significant discount to net asset value, provide sufficient downside
protection to warrant an additional allocation to the largest European real
estate securities market. As such, we remain underweight the country overall,
but are significantly adding to our U.K. exposure.
French property stocks were one of the strongest performers in 1998, increasing
31.9% in ECU terms. This performance dwarfed the European Index numbers of
-6.1%. The strong performance is justified by the strength of the French real
estate recovery. According to the property research group at Bourdais, rents in
Paris' central business district have risen 17% over the past year, from
FFr3,000/square meters at end-1997 to FFr3,500/square meters at select prime
locations. Even so, these numbers remain well below the 1990 peak rents of over
FFr4,500/square meters. Furthermore, the currently low vacancy rates of 6.0% for
the total Paris market and 2.7% at La Defense suggest further strengthening in
the rental market. At the same time, investment commitments in 1998 increased
30% over the 1997 figure (FFr30 billion vs. FFr23 billion) pushing property
yields from 6.0% to 5.75% on CBD Paris office. We expect continued investor
demand, along with the recent decline in French interest rates, and further
expected reductions by the European Central Bank in the first quarter of 1999,
to place additional pressure on yields going forward. In other words, rents are
rising, yields are falling, and we are increasing our already overweight
allocation to the French market.
The Swedish property market continues to be our largest disappointment. The
market fell an additional -1.8% in the fourth quarter, dragging the year-end
number to a -17.5% return in ECU terms. We believe this decline was the result
of many factors, the least of which was the underlying real estate market.
First, Sweden's exposure to external trade concerned investors focusing on fears
of a global economic slowdown. Second, the high level of leverage in the Swedish
property companies frightened away many foreign investors. With the slowdown in
global expectations, investors were not as anxious to accept 60-70% debt/total
capitalization numbers. Third, an expectation of safety in numbers is luring
European portfolio managers and pension funds toward the Euro countries.
Uncertainties surrounding the launch of the single currency are expected to have
a relative negative impact on those economies not participating. However, the
direct real estate market remains strong, with prime office capital values
increasing by 13.8% during the first 3 quarters of 1998. Stockholm prime office
vacancies are below 4%, with no new space expected in 1999. At the same time,
property yields are falling, but not as fast as interest rates. The Riksbank has
lowered the short-term rate by 95 basis points in 1998, with further declines
expected in 1999. However, notwithstanding what we believe are strong
fundamentals, we are lowering our heavily overweight position. We believe that
in time the public property market will reflect the direct market returns, but
not until the dust of the Euro initiation settles after the first and possibly
second quarters.
Sweden's Nordic neighbors also delivered less than impressive results for the
year. Over this past year, Finland lost 24.0%, and Norway fell 26.1%. Denmark
was the only Nordic property market to outperform the Index as a whole, climbing
13.4% in ECU terms. These smaller property markets suffer from a number of the
same Euro concerns as Sweden. Only Finland is an initial member in the currency.
Furthermore the limited number of investment alternatives, 1 investible company
in both Finland and Denmark with only 4 options in Norway, are deterring
investors in these risk averse times. In response, we are decreasing our Danish
and Norwegian exposure for the near term, but increasing our holdings in the
Euro protected Finish market.
While Holland's property market performed well in the late fall and early
winter, over the past year it was one of the worst performing Euro-member
markets. The fourth quarter brought a strong 7.7% return, but this was not
enough to bring the market into positive territory for the year. The Dutch real
estate securities market fell -1.3% in ECU terms. The Dutch property market
offers one of the more stable environments for investing, with unemployment,
inflation, GDP growth, and construction all in
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OVERVIEW
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EUROPEAN REAL ESTATE PORTFOLIO (CONT.)
balance. At the same time, we expect a further bonus for the market in the form
of additional interest rate cuts in the first quarter. However, bottom-up
valuations suggest the securities are too expensive following their year-end
run. We continue to believe that better opportunities exist in the peripheral
Euro countries, France and even Scandinavia longer term. Thus, we are
underweight Holland, but keeping a close eye on price fluctuations.
As the governmental capital of the European Union, it is only appropriate that
the Belgian property market should fare well on the eve of the Euro
inauguration. Actually, it was the third highest absolute performer for the
fourth quarter, returning 10.6%, and offered the highest Euro-member return for
1998 overall at 40.2% (only Switzerland posted stronger numbers at 44.6% for the
year), all in ECU terms. The annual performance was sparked by the strong
offering calendar in the first half of the year, while the fourth quarter
offered attractive dividend returns, and a 19.0% total return for the company
Befimmo. However, until the IPO's return, and the EC surrenders its market
influence, we do not expect these numbers to continue. Going forward, we
continue to believe the market is over bought, and maintain an underweight
exposure through our Asticus position listed in Sweden.
Notwithstanding their third quarter decline, the Spanish property stocks
finished the year as one of the high-fliers in Europe, with no intent of landing
in the near future. The market rebounded as investors refocused their attention
on property fundamentals and Euro convergence rather than debt concerns across
the ocean. The result was a 20.9% gain in the fourth quarter, capping-off a
38.8% year in ECU terms. The refocus toward fundamentals was encouraged by the
strong increase in residential pricing. The two largest Spanish companies,
Vallehermoso and Metrovacesa each have active residential development schemes.
Going forward, we expect the pricing transparency derived from a single currency
to further strengthen the market. Thus, we remain overweight the Spanish
property market, and anxiously await further investment possibilities in the
region.
Trailing only Belgium and Spain from the Euro-countries, Italy displayed a
dazzling performance in 1998, and, we believe, promises an encore for 1999. The
total return for the Italian real estate securities market in 1998 was 36.3%,
after an 18.2% fourth quarter, both in ECU terms. The strong finish for the year
was sparked by the distribution of the Unione Immobiliare portfolio to the
shareholders of the insurance company INA, albeit at an expensive level. This
public flotation brought liquidity to a market dominated by small capitalization
companies. The ability to invest in the indirect Italian real estate market has
revived investor interest in the country. We believe this returning interest, as
well as the positive interest rate impact of the Euro should combine for a
bright future in Italian real estate securities. We remain overweight the
market.
The closed end property companies in Germany, Switzerland and Austria each
continued to outperform Europe as a whole, returning -1.2%, 9.3%, and 1.3%
respectively for the quarter, and 24.3%, 44.6%, and 4.3% respectively for the
year, in ECU terms. While these markets would have provided significant
outperformance for our Portfolio, we have continued to underweight these
countries on fundamentals. We do not like the open-ended investment structure
dominating the industry. We believe the nature of these funds create
inefficiencies in property pricing. Furthermore, we believe individual company
valuations within this region are rich. Thus, we remain underweight heading into
the new year.
Theodore R. Bigman
PORTFOLIO MANAGER
Daniel A. Policy
PORTFOLIO MANAGER
January 1999
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STATEMENT OF NET ASSETS
DECEMBER 31, 1998
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EUROPEAN REAL ESTATE PORTFOLIO
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
------------------------------------------------------------------------------
COMMON STOCKS (117.7%)
DENMARK (3.0%)
20,240 EjendomsSelskabet Norden A/S..................... $ 1,081
--------
FINLAND (2.4%)
(a)148,500 Sponda Oyj....................................... 871
--------
FRANCE (30.0%)
9,209 Groupe Financement Construction.................. 1,096
25,718 Klepierre........................................ 2,623
7,580 Silic............................................ 1,409
9,210 Simco (RFD)...................................... 836
7,580 Societe Fonciere Lyonnaise....................... 1,191
29,016 Sophia........................................... 1,233
16,322 Unibail.......................................... 2,381
--------
10,769
--------
IRELAND (4.6%)
(a)3,286,950 Dunloe Ewart plc................................. 1,666
--------
ITALY (3.1%)
918,180 Immobiliare Metanopoli S.p.A..................... 1,127
--------
NORWAY (3.5%)
(a)132,990 Avantor ASA...................................... 700
(a)386,720 Choice Hotels Scandinavia ASA.................... 544
--------
1,244
--------
SPAIN (7.2%)
179,260 Vallehermoso..................................... 2,567
--------
SWEDEN (16.7%)
(a)122,956 Asticus AB....................................... 1,208
126,000 Castellum AB..................................... 1,370
140,400 Diligentia AB.................................... 988
72,130 Fastighets AB Tornet............................. 1,056
149,920 Piren AB......................................... 954
432,000 Platzer Bygg AB, Class B......................... 437
--------
6,013
--------
UNITED KINGDOM (47.2%)
228,950 British Land Co. plc............................. 1,703
718,200 Buford Holdings plc.............................. 1,171
332,910 Capital Shopping Centers plc..................... 1,867
18,300 Chelsfield plc................................... 75
234,360 Freeport Leisure plc............................. 1,466
625,020 Grantchester Holdings plc........................ 1,456
353,400 Great Portland Estates plc....................... 1,158
238,190 Hammerson plc.................................... 1,365
137,570 Land Securities plc.............................. 1,772
200,820 MEPC plc......................................... 1,336
801.894 NHP plc.......................................... 2,001
VALUE
SHARES (000)
------------------------------------------------------------------------------
382,176 Town Centre Securities plc....................... $ 385
1,024,160 Wates City of London Properties plc.............. 1,210
--------
16,965
--------
TOTAL COMMON STOCKS (Cost $43,012).................................. 42,303
--------
[Download Table]
NO. OF
WARRANTS
---------------
WARRANTS (0.0%)
FRANCE (0.0%)
(a)6,800 Societe Fonciere Lyonnaise (Cost $0)............. 7
--------
TOTAL FOREIGN SECURITIES (117.7%) (Cost $43,012).................... 42,310
--------
[Download Table]
FACE
AMOUNT
(000)
---------------
FOREIGN CURRENCY (0.0%)
GBP -- British Pound.................................... 1
FRF 1 French Franc..................................... --
ITL 10 Italian Lira..................................... --
--------
TOTAL FOREIGN CURRENCY (Cost $1).................................... 1
--------
TOTAL INVESTMENTS (117.7%) (Cost $43,013)........................... 42,311
--------
[Download Table]
OTHER ASSETS (1.1%)
Receivable for Investments Sold..................... $ 221
Dividends Receivable................................ 144
Foreign Withholding Tax Reclaim Receivable.......... 19
Other............................................... 1 385
----------
LIABILITIES ( - 18.8%)
Bank Overdraft Payable.............................. (6,617)
Investment Advisory Fees Payable.................... (64)
Custodian Fees Payable.............................. (8)
Administrative Fees Payable......................... (5)
Directors' Fees & Expenses Payable.................. (1)
Distribution Fees Payable........................... (2)
Other Liabilities................................... (46) (6,743)
---------- --------
NET ASSETS (100%)................................................. $ 35,953
--------
--------
[Download Table]
NET ASSETS CONSIST OF:
Paid in Capital................................................... $ 42,773
Overdistributed Net Investment Income............................. (583)
Accumulated Net Realized Loss..................................... (5,542)
Unrealized Depreciation on Investments and Foreign Currency
Translations.................................................... (695)
--------
NET ASSETS........................................................ $ 35,953
--------
--------
The accompanying notes are an integral part of the financial statements.
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STATEMENT OF NET ASSETS
DECEMBER 31, 1998
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EUROPEAN REAL ESTATE PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
AMOUNT
(000)
----------------------------------------------------------------------------
[Download Table]
CLASS A:
------------------------------------------------------------------
NET ASSETS........................................................ $33,422
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 3,488,413 outstanding $0.001 par value Shares
(authorized 500,000,000 shares)................................. $9.58
--------
--------
CLASS B:
------------------------------------------------------------------
NET ASSETS........................................................ $2,531
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 263,335 outstanding $0.001 par value Shares
(authorized 500,000,000 shares)................................. $9.61
--------
--------
------------------------------------------------------------
(a) -- Non-income producing security
PLC -- Public Limited Company
RFD -- Ranked for Dividend
------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
[Download Table]
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
------------------------------------------------------------------
Diversified............................ $ 10,439 29.0%
Land................................... 2,854 7.9
Lodging/Leisure........................ 6,401 17.8
Office & Industrial.................... 9,436 26.3
Shopping Centers....................... 13,180 36.7
-------- -----
$ 42,310 117.7%
-------- -----
-------- -----
The accompanying notes are an integral part of the financial statements.
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European Real Estate Portfolio
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[LOGO] Morgan Stanley Dean Witter
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OVERVIEW
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GLOBAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1998)
--------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Download Table]
Australia 0.7%
Belgium 1.8%
Bermuda 0.4%
Canada 2.4%
Denmark 0.1%
Finland 1.3%
France 6.4%
Germany 5.5%
Ireland 1.8%
Italy 3.0%
Japan 7.5%
Netherlands 4.3%
New Zealand 0.5%
Portugal 0.8%
Spain 3.0%
Sweden 1.5%
Switzerland 10.1%
United Kingdom 10.1%
United States 32.8%
Other 6.0%
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Enlarge/Download Table]
GLOBAL EQUITY PORTFOLIO-CLASS
A MSCI WORLD NET INDEX(1)
7/15/92* $500,000 $500,000
10/31/92 $467,500 $482,000
12/31/92 $455,813 $475,879
12/31/93 $703,145 $604,750
12/31/94 $752,000 $635,450
12/31/95 $892,323 $767,115
12/31/96 $1,096,041 $870,522
12/31/97 $1,356,351 $1,007,716
12/31/98 $1,554,378 $1,252,994
* Commencement of operations
** 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. 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 NET INDEX(1)
-----------------------------------------
[Download Table]
TOTAL RETURNS(2)
------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
---------- ----------------- -----------------
PORTFOLIO -- CLASS A.... 14.60% 17.20% 19.18%
PORTFOLIO -- CLASS B.... 14.15 N/A 19.80
INDEX -- CLASS A........ 24.34 15.68 15.27
INDEX -- CLASS B........ 24.34 N/A 17.63
1. The MSCI World Net 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 (includes
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Global Equity Portfolio is managed with the objective of obtaining long-term
capital appreciation by investing in equity securities of issuers throughout the
world, including U.S. issuers. Investments may also be made with discretion in
emerging markets.
For the year ended December 31, 1998, the Portfolio had a total return of 14.60%
for the Class A shares and 14.15% for the Class B shares compared to a total
return of 24.34% for the Morgan Stanley Capital International (MSCI) World Net
Index (the "Index"). For the five-year period ended December 31, 1998, the
Portfolio had a total return of 17.20% for the Class A shares compared to 15.68%
for the Index. From inception on July 15, 1992 through December 31, 1998, the
average annual total return of Class A shares was 19.18% compared to 15.27% for
the Index. From inception on January 2, 1996 through December 31, 1998, the
average annual total return of Class B shares was 19.80% compared to 17.63% for
the Index.
Within the second half of 1998, stock selection in Europe was the largest
contributor to the Portfolio's underperformance. One of the Portfolio's largest
holdings, Swiss food producer Nestle, rose 2%, held back by concerns over the
weakening U.S. dollar affecting revenues and profits (50% of Nestle revenues are
derived in dollars or dollar-related currencies). Rallying European currencies
also weighed heavily on export oriented companies such as Bayer ( - 19%), as
well as BASF ( - 20%) which suffered further on the announcement of proposed
changes in the structure of German corporate tax. These losses were mitigated by
strong performance in the telecoms sector, where increased penetration of mobile
phones in Southern Europe sparked a rally in Telecom Italia (+32%).
The Portfolio's U.S. portion also underperformed the Index, rising 5.2% against
the Index's 10.5% return. World oil prices, despite a brief spike during the
U.S.
------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE INFORMATION CONTAINED IN THIS
OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES
MENTIONED. THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW
ARE FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE
OF THE PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE
OF FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
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OVERVIEW
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GLOBAL EQUITY PORTFOLIO (CONT.)
air-raids on Iraq, continued to fall sharply, leading to a collapse in the share
prices of Ocean Energy (-67%) and contract driller Noble Drilling ( - 46%).
These losses were mitigated by sharp increases in the prices of stocks like
Houghton Mifflin (+49%), which benefited from increased sales of school
textbooks, and Comsat (+27%), which announced it was being taken over by
Lockheed. Philip Morris (+36%) also gained as the tide of tobacco liability
lawsuits appeared to have peaked.
In Asia, the Portfolio outperformed the Index, notably in Japan where the
Portfolio returned 21.0% against a 7.9% Index return. Strong U.S. sales allowed
consumer products maker Kao Corp to rise 47%, while higher than expected profits
also prompted gains in Fujisawa Pharmaceutical (+52%). Both companies also
benefited as investors sought shares insulated from the domestic economy.
OUTLOOK
Overall the Portfolio is defensively positioned for a continuation of volatile
financial market conditions in 1999. The three largest surprises for investors
in 1998 were slower than expected global growth (1.8% versus consensus of 3.5%),
lower than expected global inflation (1.3% versus consensus of 2.3%), and
finally as a result of the former, weaker than expected earnings. The slowdown
in global growth occurring outside the U.S., in particular in Japan, but
increasingly in Europe suggests caution is warranted. Indeed, despite aggressive
global easing in monetary policy, led by the Federal Reserve, it seems a near
certainty that earnings expectations for 1999 are far too optimistic.
Consistent with our cautionary view on global growth, the Portfolio's largest
sector exposure and overweight remains consumer defensive staples at 21%.
Utilities, telecoms and food retailing are also overweighted. Telecom Italia is
our largest telecom holding. The Portfolio is underweight banks with a strong
emphasis on regional bank franchises like Bank of Ireland, and Nordbanken. In
contrast, the Portfolio has overweighted re-insurance and financial guaranty
companies, such as MBIA, Scor, and Enhance Financial due to compelling valuation
levels.
The Portfolio remains underweight in the U.S. and Japan. Many of our U.S.
holdings reached fair value in the last 12 months and have been sold. Our
holdings are concentrated in the mid cap segment of the U.S. market where value
is most attractive following an unprecedented narrowing in U.S. market
leadership in 1998. We have found selective value in Japanese pharmaceuticals
like Fujisawa which is cheap relative to its global peer group. Kao, with its
core household products business, and NTT lend defensiveness. The challenge in
Japan remains finding management who have embraced concepts such as return on
capital and maximizing shareholder value. Finding cheap companies is not the
problem, rather it is finding high quality cheap companies that is more
difficult. Portfolio weightings in Europe have risen gradually through 1998,
funded by reductions in the U.S. In particular, Switzerland, UK, Ireland and
Germany are overweighted as a result of our stock selection.
1998 has been a difficult year for value managers. This is starkly illustrated
by the performance gulf between the MSCI World Growth Index up 25% for the year
and the MSCI Value Index up 14% for the year (with the World Index rising 24%).
While we know that a value strategy outperforms both growth and the Index over
long periods of time, value can and has underperformed growth during times of
economic uncertainty as investors pay more for the perception of stable
earnings. Similarly, the narrowing leadership associated with manias or stock
bubbles can also disadvantage a value style like during the nifty fifty of the
early 70's or the internet/technology bubble which drove S&P 500 Index
performance in 1998. Of note, the S&P 500's performance was narrower than in all
but one of the past 10 years. While the S&P 500 returned 28.5% for the year, the
median return of all stocks in the Index was just 6.6%. 10 growth stocks
accounted for 41% of the S&P 500's 1998 performance. Microsoft, GE, Wal Mart,
Lucent, Cisco, and Intel top the list of growth stocks dominating performance.
Our disciplined value process ensures that we do not get swept up into such
manias, highlighted by the fantastic valuations currently ascribed to internet
shares.
The flight to growth and liquidity in 1998 has also meant that the large
cap/midcap valuation premium has reached historic proportions. We expect that
patient exploitation of this valuation anomaly should be rewarded over time. The
Portfolio is a value Portfolio and reflects our bottom-up value discipline. The
price to cash flow ratio of the Portfolio is less than 9 times versus 14.2 times
for the Index. This provides some comfort in what seems, after the fourth
quarter rally, once again an expensive equity world.
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OVERVIEW
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GLOBAL EQUITY PORTFOLIO (CONT.)
Recent additions to the Portfolio include:
LION NATHAN (New Zealand) enjoys a dominant position, along with Fosters, in the
Australasian brewing market. The stock generates substantial free cash flow with
capital spending below depreciation and is currently undervalued due to concern
over recent market share losses in Australia, and management turnover. The stock
is underpinned by its valuation and an attractive dividend yield.
MICHELIN (France) is currently one of the top three global tire producers. While
the company has been all about margins in the past, the management are now
saying that a 15% return on equity is the target, with the margin becoming a
means to this end, rather than an end in itself. Management seem to be fairly
advanced in their thinking in terms of return on capital employed, and this is
very important as Michelin has never in the past been run on asset efficiency.
From an external perspective, the three Majors do seem to be playing a more
profit-oriented game now that they have a clear lead over the second tier in
terms of market share. Consolidation has come in the Original Equipment
Manufacturer which should no longer need to be subsidised by the Auto Makers, a
fact that has helped the smaller players in the past.
POTASH CORPORATION OF SASKATCHEWAN (Canada) is the world's lowest cost and
highest reserved producer of potash and one of the world's most efficient
producers of phosphate and nitrogen, the other key fertilizer applications. The
company is renowned for its supply management and is generating substantial free
cash flow.
SWISSCOM (Switzerland) is the previously state owned Telecom PTT, which was
recently floated in an initial public offering of the shares on October 5, 1998.
The company is active in the operation and maintenance of the major voice,
mobile and data network in Switzerland. Swisscom benefits from high market
shares and high margins in its mobile business.
Frances Campion
PORTFOLIO MANAGER
January 1999
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Global Equity Portfolio
49
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STATEMENT OF NET ASSETS
DECEMBER 31, 1998
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GLOBAL EQUITY PORTFOLIO
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
--------------------------------------------------------------------------
COMMON STOCKS (93.2%)
AUSTRALIA (0.7%)
739,100 CSR Ltd........................................... $ 1,807
----------
BELGIUM (1.8%)
22,700 Delhaize-Le Lion.................................. 1,996
47,100 G.I.B. Holdings Ltd............................... 2,453
----------
4,449
----------
BERMUDA (0.4%)
38,100 Terra Nova (Bermuda) Holdings Ltd., Class A....... 962
----------
CANADA (2.4%)
39,250 Potash Corp. of Saskatchewan, Inc................. 2,515
154,107 TELUS Corp........................................ 3,259
----------
5,774
----------
DENMARK (0.1%)
5,860 Danisco A/S....................................... 318
----------
FINLAND (1.3%)
54,700 Pohjola Insurance Co., Class B.................... 2,982
11,700 Valmet Oyj........................................ 156
----------
3,138
----------
FRANCE (6.4%)
4,560 Bongrain.......................................... 2,040
19,750 Cie Generale des Establissements Michelin, Class B
(Registered).................................... 790
29,066 Elf Aquitaine..................................... 3,359
17,000 Groupe Danone..................................... 4,866
730 Pernod Ricard..................................... 47
21,000 Rhone-Poulenc, Class A............................ 1,080
47,750 Scor.............................................. 3,157
----------
15,339
----------
GERMANY (4.7%)
97,090 BASF AG........................................... 3,702
40,620 Bayer AG.......................................... 1,705
3,470 Karstadt AG....................................... 1,816
62,950 VEBA AG........................................... 3,728
5,420 Volkswagen AG..................................... 438
----------
11,389
----------
IRELAND (1.8%)
81,507 Bank of Ireland................................... 1,812
69,200 Clondalkin Group plc.............................. 494
342,981 Green Property plc................................ 1,939
----------
4,245
----------
ITALY (3.0%)
305,000 Mediaset S.p.A.................................... 2,472
760,913 Telecom Italia S.p.A. (RNC)....................... 4,786
----------
7,258
----------
VALUE
SHARES (000)
--------------------------------------------------------------------------
JAPAN (7.5%)
80,000 Fuji Photo Film Ltd............................... $ 2,977
111,000 Fujisawa Pharmaceutical Co., Ltd.................. 1,574
199,000 Hitachi Ltd....................................... 1,234
263 Japan Tobacco, Inc................................ 2,633
182,000 Kao Corp.......................................... 4,113
140,000 Nichido Fire & Marine Insurance Co., Ltd.......... 689
270 Nippon Telegraph & Telephone Corp................. 2,086
86,000 Sumitomo Marine & Fire Insurance Co., Ltd......... 546
26,000 TDK Corp.......................................... 2,380
----------
18,232
----------
NETHERLANDS (4.3%)
119,912 ABN Amro Holding N.V.............................. 2,522
39,600 Benckiser N.V., Class B........................... 2,594
3,565 Hollandsche Beton Groep N.V....................... 44
60,172 ING Groep N.V..................................... 3,669
22,700 Philips Electronics N.V........................... 1,523
----------
10,352
----------
NEW ZEALAND (0.5%)
477,400 Lion Nathan Ltd................................... 1,214
----------
PORTUGAL (0.8%)
57,170 Cimpor SGPS....................................... 1,826
----------
SPAIN (3.0%)
210,700 Iberdrola......................................... 3,936
75,400 Telefonica........................................ 3,348
----------
7,284
----------
SWEDEN (1.5%)
404,200 Nordbanken Holding AB............................. 2,596
71,500 Skandia Forsakrings AB............................ 1,095
----------
3,691
----------
SWITZERLAND (10.1%)
760 ABB AG (Bearer)................................... 892
620 Ascom Holdings AG (Bearer)........................ 972
370 Bobst AG (Bearer)................................. 459
4,781 Cie Financiere Richemont AG, Class A.............. 6,770
2,500 Forbo Holding AG (Registered)..................... 1,094
2,330 Holderbank Financiere Glarus AG, Class B
(Bearer)........................................ 2,762
3,170 Nestle (Registered)............................... 6,911
2,500 SIG Schweizensche Industrie-Gesellschaft Holding
AG (Registered)................................. 1,476
(a)7,240 Swisscom AG....................................... 3,035
----------
24,371
----------
UNITED KINGDOM (10.1%)
35,100 Allied Domecq plc................................. 324
1,286,062 BTR plc........................................... 2,653
The accompanying notes are an integral part of the financial statements.
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Global Equity Portfolio
50
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
--------------------------------------------------------------------------
UNITED KINGDOM (CONT.)
[Download Table]
83,800 Bank of Ireland................................... $ 1,836
126,200 Blue Circle Industries plc........................ 651
158,150 Burmah Castrol plc................................ 2,263
224,688 Christian Salvesen plc............................ 340
219,290 English China Clays plc........................... 595
211,300 Imperial Tobacco Group plc........................ 2,264
241,400 Matthews (Bernard) plc............................ 466
(a,d)653,333 Pentos plc........................................ --
331,191 Reckitt & Colman plc.............................. 4,386
285,777 Royal & Sun Alliance Insurance Group plc.......... 2,334
660,600 WPP Group plc..................................... 4,020
360,100 Wolseley plc...................................... 2,277
----------
24,409
----------
UNITED STATES (32.8%)
29,600 Albertson's, Inc.................................. 1,885
33,950 Aluminum Company of America....................... 2,531
150,500 American Stores Co................................ 5,559
(a)73,700 BJ's Wholesale Club, Inc.......................... 3,413
95,900 Boise Cascade Corp................................ 2,973
61,450 Borg-Warner Automotive, Inc....................... 3,430
134,250 COMSAT Corp....................................... 4,833
(a)139,300 Cadiz, Inc........................................ 1,062
(a,d)22,000 Cadiz, Inc. (Restricted Shares)................... 168
53,500 Chase Manhattan Bank.............................. 3,641
(a)232,050 Data General Corp................................. 3,814
68,900 Enhance Financial Services Group, Inc............. 2,067
65,250 Finova Group, Inc................................. 3,520
(a)127,200 GenRad, Inc....................................... 2,003
30,300 Georgia Pacific Group............................. 1,774
46,800 Goodrich (BF) Co.................................. 1,679
143,100 Houghton Mifflin Co............................... 6,762
23,350 IBP, Inc.......................................... 680
(a)83,000 InteliData Technologies Corp...................... 109
72,130 MBIA, Inc......................................... 4,729
36,900 Mellon Bank Corp.................................. 2,537
(a)86,000 Noble Drilling Corp............................... 1,113
(a)147,815 Ocean Energy, Inc................................. 933
120,100 Penncorp Financial Group, Inc..................... 120
66,150 Pharmacia & Upjohn, Inc........................... 3,746
147,300 Philip Morris Cos., Inc........................... 7,881
31,000 Tecumseh Products Co., Class A.................... 1,445
67,700 UST Corp.......................................... 1,595
87,300 Unicom Corp....................................... 3,367
(a)135,400 WorldCorp, Inc.................................... 19
----------
79,388
----------
TOTAL COMMON STOCKS (Cost $195,608)........................... 225,446
----------
VALUE
SHARES (000)
--------------------------------------------------------------------------
PREFERRED STOCKS (0.8%)
GERMANY (0.8%)
38,660 Volkswagen AG (Cost $1,125)....................... $ 1,925
----------
[Download Table]
NO. OF
RIGHTS
----------
RIGHTS (0.0%)
SPAIN (0.0%)
(a)75,400 Telefonica, expiring 1/30/99 (Cost $0)............ 67
----------
TOTAL FOREIGN & U.S. SECURITIES (94.0%)
(Cost $196,733)............................................. 227,438
----------
[Download Table]
FACE
AMOUNT
(000)
----------
SHORT-TERM INVESTMENT (5.8%)
REPURCHASE AGREEMENT (5.8%)
$ 13,990 Chase Securities, Inc. 4.45%, dated 12/31/98, due
1/04/99, to be repurchased at $13,997,
collateralized by U.S. Treasury Bonds, 11.25%,
due 12/15/15 valued at $14,274 (Cost $13,990)... $ 13,990
----------
FOREIGN CURRENCY (0.0%)
FRF 123 French Franc (Cost $22)........................... 22
----------
TOTAL INVESTMENTS (99.8%)(Cost $210,745)...................... 241,450
----------
[Download Table]
OTHER ASSETS (0.4%)
Dividends Receivable.................................. $ 444
Receivable for Portfolio Shares Sold.................. 422
Foreign Withholding Tax Reclaim Receivable............ 83
Interest Receivable................................... 2
Other................................................. 8 959
----------
LIABILITIES ( - 0.2%)
Investment Advisory Fees Payable...................... (400)
Administrative Fees Payable........................... (25)
Payable for Investments Purchased..................... (22)
Custodian Fees Payable................................ (12)
Distribution Fees Payable............................. (7)
Directors' Fees and Expenses Payable.................. (7)
Bank Overdraft Payable................................ (3)
Other Liabilities..................................... (62) (538)
---------- --------
NET ASSETS (100%)................................................... $241,871
--------
--------
The accompanying notes are an integral part of the financial statements.
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Global Equity Portfolio
51
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
AMOUNT
(000)
------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital......................................... $204,207
Overdistributed Net Investment Income................... (6)
Accumulated Net Realized Gain........................... 6,959
Unrealized Appreciation on Investments and Foreign
Currency Translations................................. 30,711
--------
NET ASSETS.............................................. $241,871
--------
--------
[Download Table]
CLASS A:
------------------------------------------------------------------
NET ASSETS........................................................ $228,748
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 11,031,229 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $20.74
--------
--------
CLASS B:
------------------------------------------------------------------
NET ASSETS........................................................ $13,123
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 636,107 outstanding $0.001 par value shares
(authorized 500,000,000 shares)................................. $20.63
--------
--------
------------------------------------------------------------
(a) -- Non-income producing security
(d) -- Security is valued at fair value -- see note A-1 to financial
statements.
RNC -- Non-Convertible Savings Shares
------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
[Download Table]
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
-------------------------------------------------------------------
Capital Equipment...................... $ 16,871 7.0%
Consumer Goods......................... 65,572 27.1
Energy................................. 17,586 7.3
Finance................................ 45,409 18.8
Materials.............................. 25,511 10.5
Multi-Industry......................... 2,653 1.1
Services............................... 53,836 22.2
--------- ---
$ 227,438 94.0%
--------- ---
--------- ---
The accompanying notes are an integral part of the financial statements.
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Global Equity Portfolio
52
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
OVERVIEW
--------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1998)
--------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Download Table]
Australia 1.6%
Belgium 0.4%
Canada 3.2%
Denmark 1.6%
Finland 0.6%
France 11.5%
Germany 7.3%
Hong Kong 1.8%
Italy 4.2%
Japan 17.8%
Netherlands 4.4%
New Zealand 0.4%
Portugal 0.3%
Singapore 0.9%
Spain 2.7%
Sweden 2.8%
Switzerland 8.7%
United Kingdom 24.2%
Other 5.6%
COMPARISON OF THE CHANGE IN VALUE OF A $500,000** INVESTMENT
---------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Download Table]
INTERNATIONAL EQUITY
PORTFOLIO-CLASS A MSCI EAFE INDEX(1)
8/04/89* $500,000 $500,000
10/31/90 $505,380 $417,750
10/31/91 $541,635 $446,800
10/31/92 $516,940 $387,750
12/31/92 $524,830 $393,450
12/31/93 $769,000 $521,500
12/31/94 $864,150 $562,100
12/31/95 $965,860 $625,111
12/31/96 $1,155,555 $662,930
12/31/97 $1,316,293 $674,730
12/31/98 $1,557,175 $809,676
* Commencement of operations
** 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. 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)
-----------------------------------------
[Download Table]
TOTAL RETURNS(2)
------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
ONE YEAR FIVE YEARS SINCE INCEPTION
---------- ----------------- -----------------
PORTFOLIO -- CLASS A.... 18.30% 15.14% 12.83%
PORTFOLIO -- CLASS B.... 18.13 N/A 16.76
INDEX -- CLASS A........ 20.00 9.19 5.45
INDEX -- CLASS B........ 20.00 N/A 9.00
1. The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (includes dividends net of withholding
taxes).
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.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The investment objective of the International Equity Portfolio is long-term
capital appreciation through investment primarily in equity securities of
non-U.S. issuers. Equity securities for this purpose include common stocks and
equivalents, such as securities convertible into common stocks, and securities
having common stock characteristics, such as rights and warrants to purchase
common stocks.
For the year ended December 31, 1998, the Portfolio had a total return of 18.30%
for the Class A shares and 18.13% for the Class B shares compared to 20.00% for
the Morgan Stanley Capital International (MSCI) EAFE Index (the "Index"). For
the five-year period ended December 31, 1998, the average annual total return of
Class A shares was 15.14% compared to 9.19% for the Index. From inception on
August 4, 1989 through December 31, 1998, the average annual total return of
Class A shares was 12.83% compared to 5.45% for the Index. From inception on
January 2, 1996 through December 31, 1998, the average annual total return of
Class B shares was 16.76% compared to 9.00% for the Index.
Market behavior in the final quarter of 1998 was somewhat perplexing with
markets almost regaining all-time highs in the face of a deteriorating economic
outlook, a torrent of corporate profit warnings and worrying signs of a change
in the political landscape in Europe with Mr. Lafontaine's socialist bent. There
is clear empirical evidence of a sharp slowdown in industrial production in
Germany and the U.K. while the economic news in Japan goes from bad to worse.
The structural imbalances in the U.S. are as apparent as ever with U.S.
households actually dis-saving in the face of a burgeoning current account
deficit. U.S. growth is being fueled by consumer spending which in turn seems
dangerously dependent on an escalating stock market.
With the benefit of hindsight we were too slow to appreciate the calming effect
of the policy response of
------------------------------------------------------------
CERTAIN INFORMATION APPEARING IN THIS INVESTMENT OVERVIEW IS UNAUDITED.
ACCORDINGLY, THE REPORT OF INDEPENDENT ACCOUNTANTS APPEARING ELSEWHERE IN THIS
REPORT DOES NOT EXTEND TO THIS INFORMATION. THE INFORMATION CONTAINED IN THIS
OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL THE SECURITIES
MENTIONED. THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
--------------------------------------------------------------------------------
International Equity Portfolio
53
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
OVERVIEW
--------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
lower interest rates from the Fed and the European central banks and were
surprised at investors' willingness to uphold the falling bond yield/rising
equity prices paradigm, even in the face of mounting deflationary forces. As a
result we missed an opportunity to add to our holdings in financials and
consequently paid the price in the fourth quarter performance.
However, the Japanese experience is a salutary reminder that this relationship
of falling bond yields/rising equity prices does not hold in a world of price
deflation and corporate profits recession and where monetary and fiscal stimulus
have proven to be ineffective weapons. We therefore see the fall in short-term
rates in the U.S. and Europe as nothing more than a temporary panacea and it
does nothing to prevent the disinflationary forces unleashed from structural
over-capacity in Japan and South East Asia reverberating throughout the globe.
Having missed the fourth quarter rally we see little rationale for changing our
defensive stance now. With consensus European earnings estimates of 12%+ for
both 1999 and 2000 continuing to look wildly optimistic we remain extremely
cautious and continue to cover companies which we believe have resilient cash
flow streams and low capital intensity. We therefore envisage no major change to
our large overweight position in the household goods and beverage & tobacco
sectors. While these sectors will not be totally immune to global slowdown they
should fare much better than companies with high operational leverage exposed to
tradable goods.
Likewise we are unlikely to change our large underweight position in the
financial sector. We flatly disagree with the market view that banks are no
longer cyclical, high teen return on equity's are sustainable and surplus
capital can be reinvested at current rates of return. To our mind banks are 20
to 1 leveraged plays on the economy and will therefore not be immune to a global
economic slowdown.
The U.K. is the one market where industrial stocks appear to be discounting a
recession with valuations back to levels last seen in 1991/1992 and we are
finding compelling value among some of the building material stocks in
particular (RMC, Blue Circle). Liquidity is, however, a major constraint with
many of these stocks now falling into the mid cap category.
In Japan, we think the current appreciation of the yen is unsustainable for any
length of time as it is an outright threat to any hope of economic recovery in
Japan. Having reduced our exposure to the blue chip exporters early last year in
favor of quality domestic franchise stocks (e.g. Koa, Central Japan Railway,
Japan Tobacco, Takefuji) we may now look to reweight back towards some of the
quality exporters (e.g. Rohm, Pioneer, Sony) which are now starting to offer
exceptional value after the yen induced period of relative and absolute
underperformance. The situation with the recapitalization of the banks remains
as clear as mud and it would be foolhardy to commit funds before one can be sure
that the injection of public funds will not result in massive dilution. Evidence
that banks are going to start to reprice for credit risk is also a necessary
precondition to improving the economic viability of the banking sector.
Dominic Caldecott
PORTFOLIO MANAGER
January 1999
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International Equity Portfolio
54
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (93.0%)
AUSTRALIA (1.6%)
1,540,750 Brambles Industries Ltd.......................... $ 37,528
6,910,300 Fosters Brewing Group Ltd........................ 18,715
-----------
56,243
-----------
BELGIUM (0.4%)
238,050 G.I.B. Holdings Ltd.............................. 12,469
-----------
CANADA (3.2%)
534,980 Potash Corp. of Saskatchewan, Inc................ 34,285
(a)2,675,300 Renaissance Energy Ltd........................... 30,373
2,149,800 TELUS Corp....................................... 45,458
-----------
110,116
-----------
DENMARK (1.6%)
43,050 Danisco A/S...................................... 2,334
198,800 Den Danske Bank.................................. 26,707
264,108 Unidanmark A/S, plc Class A (Registered)......... 23,861
-----------
52,902
-----------
FINLAND (0.6%)
342,400 Huhtamaki Oyj, Series 1.......................... 13,114
1,318,967 Merita Ltd., plc, Class A........................ 8,385
-----------
21,499
-----------
FRANCE (11.5%)
347,060 Alcatel Alsthom.................................. 42,481
293,100 Assurances Generales de France (Bearer).......... 17,508
12,760 Bongrain......................................... 5,709
219,182 Cie de Saint Gobain.............................. 30,947
556,300 Elf Aquitaine.................................... 64,310
(c)393,515 France Telecom................................... 31,266
207,996 Groupe Danone.................................... 59,554
1,455,970 Rhone-Poulenc, Class A........................... 74,934
293,254 Schneider........................................ 17,790
154,686 Scor............................................. 10,228
249,500 Total, Class B................................... 25,271
1,142,298 Usinor Sacilor................................... 12,684
-----------
392,682
-----------
GERMANY (5.9%)
1,058,300 BASF AG.......................................... 40,365
709,700 Bayer AG......................................... 29,795
36,950 Karstadt AG...................................... 19,338
1,298,120 RWE AG........................................... 71,678
7,670 Varta AG......................................... 1,247
(c)65,610 Viag AG.......................................... 38,787
-----------
201,210
-----------
HONG KONG (1.8%)
14,554,155 Hong Kong Land Holdings Ltd...................... 17,174
15,741,837 Jardine Strategic Holdings, Inc.................. 22,826
VALUE
SHARES (000)
--------------------------------------------------------------------------------
(c)3,561,600 Swire Pacific Ltd., Class A...................... $ 15,952
6,842,500 Swire Pacific Ltd., Class B...................... 4,548
-----------
60,500
-----------
ITALY (4.2%)
(c)5,842,300 Mediaset S.p.A................................... 47,460
15,380,487 Telecom Italia S.p.A. (RNC)...................... 96,972
-----------
144,432
-----------
JAPAN (17.8%)
(c)2,807,000 Aisin Seiki Co., Ltd............................. 30,968
679,600 Aoyama Trading Co., Ltd.......................... 19,030
747,000 Canon, Inc....................................... 15,986
(c)3,522 Central Japan Railway Co......................... 18,663
316,000 Chudenko Corp.................................... 6,749
1,604,000 Daibiru Corp..................................... 10,234
288,000 Daiichi Pharmaceutical Co. Ltd................... 4,872
1,211,000 Eisai Co., Ltd................................... 23,608
1,536,000 Fuji Photo Film Ltd.............................. 57,166
816,000 Fujisawa Pharmaceutical Co., Ltd................. 11,570
2,887,000 Hitachi Ltd...................................... 17,908
4,539 Japan Tobacco, Inc............................... 45,450
3,144,000 Kao Corp......................................... 71,043
(c)3,899,000 NEC Corp......................................... 35,932
3,547,000 Nichido Fire & Marine Insurance Co., Ltd......... 17,444
8,349 Nippon Telegraph & Telephone Corp................ 64,513
729,000 Ono Pharmaceutical Co., Ltd...................... 22,804
34,000 Rohm Co.......................................... 3,100
3,034,000 Shionogi & Co., Ltd.............................. 22,234
34,800 Sony Corp........................................ 2,538
(c)4,132,000 Sumitomo Marine & Fire Insurance Co., Ltd........ 26,216
31,000 TDK Corp......................................... 2,838
306,400 Takefuji Corp.................................... 22,400
(c)2,201,000 Toyo Seikan Kaisha Ltd........................... 37,408
(c)565,000 Yamanouchi Pharmaceutical Co..................... 18,224
-----------
608,898
-----------
NETHERLANDS (4.4%)
996,500 Akzo Nobel N.V................................... 45,384
502,750 Buhrmann N.V..................................... 8,998
148,400 CSM N.V.......................................... 8,569
826,060 Hollandsche Beton Groep N.V...................... 10,208
620,739 ING Groep N.V.................................... 37,859
561,000 Philips Electronics N.V.......................... 37,652
-----------
148,670
-----------
NEW ZEALAND (0.4%)
5,607,200 Lion Nathan Ltd.................................. 14,260
(a)392,500 Smith City Group Ltd............................. -
-----------
14,260
-----------
PORTUGAL (0.3%)
291,410 Cimentos de Portugal............................. 9,299
-----------
The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
International Equity Portfolio
55
[LOGO] Morgan Stanley Dean Witter
Institutional Fund, Inc.
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
--------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CONT.)
--------------------------------------------------------------------------------
[Download Table]
VALUE
SHARES (000)
--------------------------------------------------------------------------------
SINGAPORE (0.9%)
(c)446,090 Singapore Press Holdings Ltd..................... $ 4,840
3,760,000 United Overseas Bank Ltd. (Foreign).............. 24,155
-----------
28,995
-----------
SPAIN (2.7%)
3,879,500 Iberdrola........................................ 72,666
463,481 Telefonica....................................... 20,633
-----------
93,299
-----------
SWEDEN (2.8%)
1,201,800 ForeningsSparbanken AB........................... 31,174
(c)75 Mandamus AB (units).............................. 1
(c)4,999,800 Nordbanken Holding AB............................ 32,114
1,539,600 Svenska Cellulosa AB, Class B.................... 33,661
-----------
96,950
-----------
SWITZERLAND (8.7%)
48,457 Cie Financiere Richemont AG, Class A............. 68,614
22,540 Forbo Holding AG (Registered).................... 9,861
20,531 Holderbank Financiere Glarus AG, Class B
(Bearer)....................................... 24,341
44,645 Nestle (Registered).............................. 97,330
11,524 Schindler Holding AG (Participating
Certificates).................................. 18,485
(a)104,370 Swisscom AG (Registered)......................... 43,757
117,715 Union Bank of Switzerland AG (Registered)........ 36,220
-----------
298,608
-----------
UNITED KINGDOM (24.2%)
6,217,500 Aggreko plc...................................... 18,828
1,436,200 Allied Domecq plc................................ 13,250
(a)1,419,069 Allied Zurich plc................................ 21,167
2,675,400 BG plc........................................... 16,882
18,444,799 BTR plc.......................................... 38,055
3,289,567 Bank of Scotland................................. 39,244
16,492,100 Billiton plc..................................... 32,722
5,222,514 Blue Circle Industries plc....................... 26,937
1,528,069 British American Tobacco plc..................... 13,437
2,718,700 British Telecommunications plc................... 40,960
6,869,300 Bunzl plc........................................ 26,859
3,328,000 Burmah Castrol plc............................... 47,620
6,217,500 Christian Salvesen plc........................... 9,414
2,164,600 Commercial Union plc............................. 33,891
2,800,800 Diageo plc....................................... 31,875
3,566,128 English China Clays plc.......................... 9,672
2,846,900 Great Universal Stores plc....................... 30,008
1,870,200 Imperial Tobacco Group plc....................... 20,039
5,026,451 John Mowlem & Co. plc............................ 8,238
2,497,750 Lonrho Africa plc................................ 2,327
2,745,950 Lonrho plc....................................... 15,031
2,408,068 National Westminster Bank plc.................... 46,437
4,241,700 Premier Farnell plc.............................. 11,292
VALUE
SHARES (000)
--------------------------------------------------------------------------------
2,751,700 RMC Group plc.................................... $ 37,680
3,433,500 Racal Electronic plc............................. 19,881
4,146,202 Reckitt & Colman plc............................. 54,913
668 Rolls-Royce plc.................................. 3
3,781,700 Royal & Sun Alliance Insurance Group plc......... 30,879
2,561,902 Tate & Lyle plc.................................. 14,109
13,668,200 WPP Group plc.................................... 83,178
515,900 Williams plc..................................... 2,929
4,878,100 Wolseley plc..................................... 30,842
-----------
828,599
-----------
TOTAL COMMON STOCKS (Cost $2,569,254).............................. 3,179,631
-----------
PREFERRED STOCKS (1.4%)
GERMANY (1.4%)
949,500 Volkswagen AG (Cost $19,272)..................... 47,299
-----------
[