emerging markets equity portfolio - morgan stanley · pdf fileshares and 6.62%, net of fees,...

The Universal Institutional Funds, Inc.

The Portfolio is intended to be a funding vehicle for variable annuity contracts and variable life insurance policies offeredby the separate accounts of certain life insurance companies.

Emerging Markets Equity Portfolio

Annual Report – December 31, 2016

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Table of Contents

Expense Example...................................................................................................................................................................... 2

Investment Overview................................................................................................................................................................ 3

Portfolio of Investments............................................................................................................................................................ 6

Statement of Assets and Liabilities ............................................................................................................................................ 9

Statement of Operations........................................................................................................................................................... 10

Statements of Changes in Net Assets......................................................................................................................................... 11

Financial Highlights ................................................................................................................................................................. 12

Notes to Financial Statements................................................................................................................................................... 14

Report of Independent Registered Public Accounting Firm ...................................................................................................... 24

Federal Tax Notice .................................................................................................................................................................... 25

Director and Officer Information ............................................................................................................................................. 26

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As a shareholder of the Emerging Markets Equity Portfolio (the “Portfolio”), you incur two types of costs: (1) insurancecompany charges; and (2) ongoing costs, which may include advisory fees, administration fees, distribution (12b-1) fees andother Portfolio expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in thePortfolio and to compare these costs with the ongoing costs of investing in other mutual funds.This example is based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2016and held for the entire six-month period.Actual Expenses

The table below provides information about actual account values and actual expenses. You may use the information in thistable, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your accountvalue by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in thetable under the heading entitled “Actual Expenses Paid During Period” to estimate the expenses you paid on your accountduring this period.Hypothetical Example for Comparison Purposes

The table below provides information about hypothetical account values and hypothetical expenses based on the Portfolio’sactual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio’s actual return. Thehypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paidfor the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To doso, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the otherfunds.Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any insurancecompany charges. Therefore, the table below is useful in comparing ongoing costs, but will not help you determine the relativetotal cost of owning different funds. In addition, if these insurance company charges were included, your costs would have beenhigher. Beginning Actual Ending Hypothetical Actual Hypothetical Net Expense Account Value Account Value Ending Expenses Paid Expenses Paid Ratio During 7/1/16 12/31/16 Account Value During Period* During Period* Period**

Emerging Markets Equity Portfolio Class I $1,000.00 $1,000.80 $1,019.05 $6.09 $6.14 1.21%***Emerging Markets Equity Portfolio Class II 1,000.00 1,000.00 1,018.80 6.33 6.40 1.26***

* Expenses are calculated using each Portfolio Class’ annualized net expense ratio (as disclosed), multiplied by the average account value over theperiod, and multiplied by 184/366 (to reflect the most recent one-half year period).

** Annualized.***Refer to Note G in the Notes to Financial Statements for discussion of prior period custodian out-of-pocket expenses that were reimbursed in the

current period.

Expense Example (unaudited)Emerging Markets Equity Portfolio

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The Portfolio seeks long-term capital appreciation byinvesting primarily in growth-oriented equity securities ofissuers in emerging market countries.

Performance

For the fiscal year ended December 31, 2016, the Portfoliohad a total return based on net asset value and reinvestmentof distributions per share of 6.74%, net of fees, for Class Ishares and 6.62%, net of fees, for Class II shares. ThePortfolio’s Class I and Class II shares underperformed againstthe Portfolio’s benchmark, the MSCI Emerging Markets NetIndex (the “Index”), which returned 11.19%.

Factors Affecting Performance

• Emerging markets (“EM”) equities outperformeddeveloped market equities in 2016, with the Indexreturning +11.19% versus the MSCI World Index’s returnof +7.51%.(i) Emerging markets were boosted by acombination of both domestic and external factors,contributing to improved investor sentiment: China’sgrowth in such areas as car and residential sales, andindustrial production came in better than expected; Indiapassed important tax reform; Brazil’s senate voted toimpeach former President Dilma Rousseff, creatingoptimism that Acting President Michel Temer may be ableto accomplish critical reform. Externally, the EuropeanCentral Bank kept policy rates unchanged, the Bank ofJapan committed to expanding its monetary base and theU.S. Federal Reserve maintained its dovish monetarypolicy.

• Positive contributors to the Portfolio’s performance duringthe period included our stock selection and underweightallocation to China and our stock selection and overweightallocation to Peru. Stock selection in Pakistan alsocontributed, as did the Portfolio’s zero allocation toMalaysia. Stock selection in India added value, though itwas partially offset by an unfavorable overweightallocation. Stock selection in Panama and Turkey alsocontributed.

• Key detractors from performance included the Portfolio’sstock selection and underweight allocation to Taiwan andRussia, as well as stock selection and a neutral allocation to

Brazil. Stock selection in Korea, Indonesia and SouthAfrica also hampered returns.

• From a sector perspective, stock selection in andunderweight allocations to health care andtelecommunications contributed to returns. Stock selectionin consumer staples and information technology alsoadded to results but gains were partially offset by thenegative impact of an overweight to consumer staples andunderweight to information technology. Stock selection inand an underweight allocation to the energy sectordetracted from results, as did stock selection in financials.

Management Strategies

• The outlook for emerging markets overall finally beganimproving in 2016 after five previously disappointingyears. In a world facing lower economic growth from acombination of demographic pressure, lower trade volumesand a huge increase in debt, we own what we call a “post-China world” portfolio, seeking those pockets of growth incountries where we believe domestic consumer demand isstrong and credit growth is in healthy early stages — andfar from the excess as it has been in China, Brazil andTurkey.

• In our view, the building blocks are in place for recovery inmany EM countries. Markets may still experience someturbulence from the potential for disappointment withChina’s growth or any depreciation of China’s currency anduncertainty about the course of the U.S. presidentialelection, economic outlook and precise path of the FederalReserve.

• From a thematic perspective, we continue to own and seekcompanies benefiting from healthy domestic demand andthe growth of the aging population, where demand is highfor health care and consumer experiences and services,including travel and leisure activities. We also see demandfor financial services in countries with low creditpenetration. We are seeking to minimize the Portfolio’sexposure to countries highly dependent on trade andwhere credit growth has greatly exceeded the pace ofeconomic growth over the past five years. With globaltrade declining as protectionism is becoming morepolitically appealing and geopolitical tension rising in suchareas as the South China Sea and the Middle East, we are

Investment Overview (unaudited)Emerging Markets Equity Portfolio

3

(i) Source: FactSet and Morgan Stanley Investment Management. Emerging marketsand developed markets are represented by the MSCI Emerging Markets Index andMSCI World Index, respectively.





also focused on identifying innovative companiesbenefiting from domestic infrastructure projects anddefense spending.

• We still consider Central and Eastern Europe an attractiveinvestment opportunity. Growth in the region remainshealthy, mostly driven by strong consumption, which hasbeen boosted by rising employment, growing real wagesand increasingly more affordable credit. After years oftightening, fiscal policy is set to loosen, but budget deficitsshould remain below the 3% level. Investment lagged in2016 due to less absorption of European Union funds, butabsorption should accelerate in 2017, driving up publicfixed investment spending and further supporting growth.

• As we have for many years, we remain underweight inChina and countries with decelerating growth or heavydependence on exports such as Russia, Taiwan and Koreain the portfolio. Debt levels in China continue to rise tounprecedented levels and ongoing overcapacity issues andthe continued property downturn will likely lead to furtherweakness in industrial production and related investment.

• We also remain positive on the Philippines. In our view,the Philippines continues to deliver some of the mostattractive well-rounded growth with the business processoutsourcing sector performing well, keeping overallconsumption fairly strong. Growth in Pakistan continuesto pick up with strong consumer demand and increasinginvestment, though exports are weak. We remainoverweight in Mexico, although we are closely monitoringwhat policies the upcoming Trump administration willimplement. There is positive sentiment surrounding theenergy sector and Pemex with the successful bidding ofdeepwater auctions in the early December round, whichwill likely boost foreign direct investment and oilproduction in the medium term. It finally seems like thetide is turning and oil production in Mexico should beginto recover in 2018.

• In Indonesia, we increased our overweight during the thirdquarter on the improving growth outlook and reformmomentum under the Jokowi administration. Turning theeconomy from externally focused on commodities revenuesinward to domestic demand takes time and requiresreform, but Indonesia is slowly heading in that direction.We believe that reform in Brazil is finally moving in theright direction. The deep recession of the past three years isfinally fading and gross domestic growth projections for2017 are expected to turn positive on the face ofimproving consumer and business confidence.

In accordance with SEC regulations, the Portfolio’s performance shown assumes thatall recurring fees (including management fees) were deducted and all dividends anddistributions were reinvested. The performance of Class II shares will vary from theperformance of Class I shares based upon its different inception date and will benegatively impacted by additional fees assessed to that class.

Emerging Markets Equity Portfolio - Class IMSCI Emerging Markets Net Index

4,000

6,000

10,000

8,000

12,000

14,000

16,000

18,000

20,000

Comparison of the Change in Value of a $10,000 InvestmentOver 10 Years

DO

LLA

RS

FISCAL YEAR ENDED DECEMBER 31

06 07 1614 1508 09 10 11 12 13

$11,998

$10,887

KEY

Investment Overview (unaudited) (cont’d)Emerging Markets Equity Portfolio

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Performance Compared to the MSCI EmergingMarkets Net Index(1)

Period Ended December 31, 2016 Total Returns(2)

Average Annual

One Five Ten Since Year Years Years Inception(5)

Portfolio – Class I(3) 6.74% 1.57% 0.85% 5.18%MSCI Emerging Markets

Net Index 11.19 1.28 1.84 5.34Portfolio – Class II(4) 6.62 1.49 0.80 9.49MSCI Emerging Markets

Net Index 11.19 1.28 1.84 10.44

Performance data quoted represents past performance, which is noguarantee of future results, and current performance may be lower orhigher than the figures shown. Performance assumes that all dividends anddistributions, if any, were reinvested. For the most recent month-endperformance figures, please contact the issuing insurance company orspeak with your financial advisor. Investment return and principal value willfluctuate so that Portfolio shares, when redeemed, may be worth more orless than their original cost. Total returns do not reflect the deduction oftaxes that a shareholder would pay on Portfolio distributions or theredemption of Portfolio shares. Performance shown does not reflect feesand expenses imposed by your insurance company’s separate account. Ifperformance information included the effect of these additional charges, thetotal returns would be lower.

(1) The MSCI Emerging Markets Net Index is a free float-adjusted market capitalizationweighted index that is designed to measure equity market performance ofemerging markets. The term “free float” represents the portion of sharesoutstanding that are deemed to be available for purchase in the public equitymarkets by investors. The MSCI Emerging Markets Net Index currently consists of23 emerging market country indices. The performance of the Index is listed inU.S. dollars and assumes reinvestment of net dividends. The Index is unmanagedand its returns do not include any sales charges or fees. Such costs would lowerperformance. It is not possible to invest directly in an index.

(2) Total returns for the Portfolio reflect fees waived and expenses reimbursed, ifapplicable, by the Adviser. Without such waivers and reimbursements, total returnswould have been lower.

(3) Commenced operations on October 1, 1996.(4) Commenced offering on January 10, 2003.(5) For comparative purposes, average annual since inception returns listed for the

Index refers to the inception date or initial offering of the respective share class ofthe Portfolio, not the inception of the Index.

Investment Overview (unaudited) (cont’d)Emerging Markets Equity Portfolio

5





Portfolio of InvestmentsEmerging Markets Equity Portfolio

6 The accompanying notes are an integral part of the financial statements.

Value Shares (000)

Common Stocks (98.7%)Argentina (0.9%)

Banco Macro SA ADR 16,568 $ 1,066Grupo Financiero Galicia SA ADR 40,595 1,093

2,159

Austria (0.9%)Erste Group Bank AG (a) 78,300 2,293

Brazil (8.9%)Banco Bradesco SA (Preference) 440,062 3,921BRF SA 214,903 3,186Itau Unibanco Holding SA (Preference) 418,092 4,348Lojas Renner SA 265,846 1,892MercadoLibre, Inc. (b) 17,764 2,774Petroleo Brasileiro SA (a) 329,649 1,716Petroleo Brasileiro SA (Preference) (a) 445,808 2,037Raia Drogasil SA 136,011 2,557

22,431

Chile (0.7%)SACI Falabella 206,803 1,642

China (17.7%)Alibaba Group Holding Ltd. ADR (a) 40,646 3,569Bank of China Ltd. H Shares (c) 9,621,000 4,268China Construction Bank Corp. H Shares (c) 6,248,230 4,810China Machinery Engineering Corp.

H Shares (c) 646,000 410China Mengniu Dairy Co., Ltd. (c) 491,000 946China Mobile Ltd. (c) 500,000 5,300China Overseas Land & Investment Ltd. (c) 218,000 578China Pacific Insurance Group Co., Ltd.

H Shares (c) 583,000 2,034China Unicom Hong Kong Ltd. (c) 962,000 1,120Chongqing Changan Automobile Co., Ltd.

B Shares 215,400 308CRCC High-Tech Equipment Corp., Ltd.

H Shares (c) 1,036,500 416CSPC Pharmaceutical Group Ltd. (c) 970,000 1,036Huadian Power International Corp., Ltd.

H Shares (c) 1,010,000 457JD.com, Inc. ADR (a) 61,872 1,574NetEase, Inc. ADR 3,926 845New Oriental Education & Technology

Group, Inc. ADR (a) 18,024 759PetroChina Co., Ltd. H Shares (c) 1,530,000 1,140Shanghai Jin Jiang International Hotels

Group Co., Ltd. H Shares (c) 1,042,000 275Shenzhen International Holdings Ltd. (c) 371,000 541Shenzhou International Group

Holdings Ltd. (b)(c) 232,000 1,468TAL Education Group ADR (a) 15,191 1,066Tencent Holdings Ltd. (c) 466,700 11,417

44,337

Colombia (0.7%)Cemex Latam Holdings SA (a) 159,311 600Grupo de Inversiones Suramericana SA 71,591 911

Value Shares (000)

Grupo de Inversiones Suramericana SA (Preference) 28,304 $ 349

1,860

Czech Republic (0.9%)Komercni Banka AS 66,493 2,292

Egypt (0.5%)Commercial International Bank Egypt SAE 288,081 1,161

Germany (0.7%)Adidas AG 11,558 1,827

Hong Kong (2.6%)AIA Group Ltd. 507,400 2,863Samsonite International SA 1,237,200 3,534

6,397

Hungary (0.5%)OTP Bank PLC 44,345 1,268

India (8.0%)Ashok Leyland Ltd. 2,216,849 2,616Bharat Financial Inclusion Ltd. (a) 106,969 927Bharat Petroleum Corp., Ltd. 237,602 2,225HDFC Bank Ltd. 92,504 1,803IndusInd Bank Ltd. 152,707 2,493Larsen & Toubro Ltd. 26,088 519Marico Ltd. 355,706 1,365Maruti Suzuki India Ltd. 19,629 1,538Shree Cement Ltd. 12,242 2,657Shriram Transport Finance Co., Ltd. 109,920 1,382Zee Entertainment Enterprises Ltd. 365,662 2,441

19,966

Indonesia (5.4%)Astra International Tbk PT 2,668,200 1,639Bank Mandiri Persero Tbk PT 2,802,700 2,408Bank Negara Indonesia Persero Tbk PT 3,341,600 1,370Bumi Serpong Damai Tbk PT 9,755,200 1,271Link Net Tbk PT 2,911,300 1,113Matahari Department Store Tbk PT 624,400 701Semen Indonesia Persero Tbk PT 2,458,600 1,674Telekomunikasi Indonesia Persero Tbk PT 7,818,400 2,310XL Axiata Tbk PT (a) 6,272,325 1,075

13,561

Korea, Republic of (11.2%)Amorepacific Corp. 5,054 1,345CJ Corp. 9,019 1,396Cosmax, Inc. 6,608 654Coway Co., Ltd. 18,106 1,324Hanwha Techwin Co., Ltd. 20,787 748Hugel, Inc. (a) 4,083 1,085Hyundai Development Co-Engineering &

Construction 46,818 1,742Hyundai Motor Co. 7,086 857Hyundai Wia Corp. 5,410 327Innocean Worldwide, Inc. 12,710 601





Portfolio of Investments (cont’d)Emerging Markets Equity Portfolio

7The accompanying notes are an integral part of the financial statements.

Value Shares (000)

Korea, Republic of (cont’d)Korea Aerospace Industries Ltd. 23,917 $ 1,327Mando Corp. 5,724 1,111NAVER Corp. 3,414 2,191Nexon Co., Ltd. 90,800 1,316Samsung Electronics Co., Ltd. 5,771 8,610Samsung Electronics Co., Ltd. (Preference) 2,065 2,450SK Holdings Co., Ltd. 5,787 1,100

28,184

Mexico (5.8%)Alfa SAB de CV 774,800 959Alsea SAB de CV 384,630 1,099Cemex SAB de CV ADR (a)(b) 403,353 3,239Fomento Economico Mexicano SAB de CV ADR 41,995 3,200Grupo Financiero Banorte SAB de CV Series O 763,112 3,759Grupo Financiero Santander Mexico

SAB de CV ADR 138,558 996Mexichem SAB de CV 591,306 1,342

14,594

Pakistan (1.7%)Lucky Cement Ltd. 247,200 2,046United Bank Ltd. 966,700 2,209

4,255

Panama (0.6%)Copa Holdings SA, Class A 17,428 1,583

Peru (2.3%)Cia de Minas Buenaventura SA ADR 122,874 1,386Credicorp Ltd. 27,020 4,265

5,651

Philippines (3.7%)Ayala Corp. 81,630 1,199BDO Unibank, Inc. 439,320 991DMCI Holdings, Inc. 4,110,950 1,096International Container Terminal Services, Inc. 614,910 890Metro Pacific Investments Corp. 9,941,100 1,332Metropolitan Bank & Trust Co. 1,210,745 1,768SM Investments Corp. 149,574 1,971

9,247

Poland (3.9%)Bank Pekao SA 37,850 1,138Bank Zachodni WBK SA 17,904 1,352CCC SA 36,363 1,769Eurocash SA 96,868 911Jeronimo Martins SGPS SA 115,487 1,792LPP SA 755 1,023Powszechna Kasa Oszczednosci Bank

Polski SA (a) 280,656 1,887

9,872

Russia (3.3%)Gazprom PJSC ADR 599,255 3,026Mail.ru Group Ltd. GDR (a) 66,401 1,219MMC Norilsk Nickel PJSC ADR 73,533 1,235

Value Shares (000)

X5 Retail Group N.V. GDR (a) 41,493 $ 1,346Yandex N.V., Class A (a) 65,266 1,314

8,140

South Africa (5.5%)AVI Ltd. 161,037 1,071Clicks Group Ltd. 130,928 1,101Mondi PLC 109,559 2,224Naspers Ltd., Class N 31,752 4,657Steinhoff International Holdings N.V. H Shares (b) 509,804 2,646Vodacom Group Ltd. 194,061 2,153

13,852

Taiwan (8.7%)Advanced Semiconductor Engineering, Inc. 1,424,000 1,460Catcher Technology Co., Ltd. 205,000 1,425Delta Electronics, Inc. 269,326 1,333E.Sun Financial Holding Co., Ltd. 1,668,000 950Eclat Textile Co., Ltd. 66,649 698Fubon Financial Holding Co., Ltd. 301,000 476Hon Hai Precision Industry Co., Ltd. 723,965 1,891Largan Precision Co., Ltd. 13,000 1,529PChome Online, Inc. 61,485 540Pegatron Corp. 479,000 1,144President Chain Store Corp. 86,000 616Taiwan Mobile Co., Ltd. 263,000 849Taiwan Semiconductor Manufacturing Co., Ltd. 1,260,000 7,096Uni-President Enterprises Corp. 972,965 1,612Yeong Guan Energy Technology Group Co., Ltd. 66,000 211

21,830

Thailand (2.9%)Bangkok Dusit Medical Services PCL (Foreign) 2,263,800 1,460Central Pattana PCL (Foreign) 498,500 790DKSH Holding AG 25,565 1,756Kasikornbank PCL (Foreign) 269,500 1,336Kasikornbank PCL NVDR 10,900 54Minor International PCL (Foreign) 726,830 726Sino-Thai Engineering & Construction PCL

(Foreign) 1,604,600 1,243

7,365

Turkey (0.3%)Arcelik AS 97,185 584Ulker Biskuvi Sanayi AS 34,431 158

742

United States (0.4%)Nien Made Enterprise Co., Ltd. 108,000 1,114

Total Common Stocks (Cost $210,794) 247,623





Portfolio of Investments (cont’d)Emerging Markets Equity Portfolio

8 The accompanying notes are an integral part of the financial statements.

Value Shares (000)

Short-Term Investments (3.3%)Securities held as Collateral on Loaned Securities (2.1%)Investment Company (2.1%)

Morgan Stanley Institutional Liquidity Funds — Government Portfolio —Institutional Class (See Note H) (Cost $5,131) 5,131,011 $ 5,131

Investment Company (1.2%)Morgan Stanley Institutional Liquidity

Funds — Government Portfolio —Institutional Class (See Note H) (Cost $3,014) 3,014,409 3,014

Total Short-Term Investments (Cost $8,145) 8,145

Total Investments (102.0%) (Cost $218,939) Including $9,463 of Securities Loaned (d)(e) 255,768

Liabilities in Excess of Other Assets (-2.0%) (4,953)

Net Assets (100.0%) $250,815

Country assignments and aggregations are based generally on third partyvendor classifications and information, and may be different from theassignments and aggregations under the policies set forth in the Portfolio’sprospectus and/or statement of additional information relating to geographicclassifications.

(a) Non-income producing security.(b) All or a portion of this security was on loan at December 31, 2016.(c) Security trades on the Hong Kong exchange.(d) Securities are available for collateral in connection with an open

foreign currency forward exchange contract.(e) At December 31, 2016, the aggregate cost for federal income tax

purposes is approximately $220,161,000. The aggregate grossunrealized appreciation is approximately $49,566,000 and theaggregate gross unrealized depreciation is approximately$13,959,000, resulting in net unrealized appreciation of approximately$35,607,000.

ADR American Depositary Receipt.GDR Global Depositary Receipt.NVDR Non-Voting Depositary Receipt.PJSC Public Joint Stock Company.

Foreign Currency Forward Exchange Contract:

The Portfolio had the following foreign currency forward exchange contractopen at December 31, 2016:

Contract In to Exchange Unrealized Deliver For Delivery AppreciationCounterparty (000) (000) Date (000)UBS AG EUR 5,047 $5,388 1/19/17 $71

EUR — Euro

Portfolio Composition*

Percentage ofClassification Total InvestmentsOther** 63.0%Banks 22.1Internet Software & Services 9.5Tech Hardware, Storage & Peripherals 5.4Total Investments 100.0%***

* Percentages indicated are based upon total investments (excluding Securities heldas Collateral on Loaned Securities) as of December 31, 2016.

** Industries and/or investment types representing less than 5% of totalinvestments.

***Does not include an open foreign currency forward exchange contract withunrealized appreciation of approximately $71,000.





9

December 31, 2016Statement of Assets and Liabilities (000)

Assets:Investments in Securities of Unaffiliated Issuers, at Value(1) (Cost $210,794) $247,623Investment in Security of Affiliated Issuer, at Value (Cost $8,145) 8,145

Total Investments in Securities, at Value (Cost $218,939) 255,768Foreign Currency, at Value (Cost $365) 367Receivable for Investments Sold 1,041Dividends Receivable 308Receivable for Portfolio Shares Sold 140Unrealized Appreciation on Foreign Currency Forward Exchange Contract 71Tax Reclaim Receivable 73Receivable from Affiliate 1Other Assets 32

Total Assets 257,801

Liabilities:Collateral on Securities Loaned, at Value 5,131Payable for Investments Purchased 726Payable for Advisory Fees 554Deferred Capital Gain Country Tax 159Payable for Custodian Fees 138Payable for Servicing Fees 133Payable for Professional Fees 53Payable for Portfolio Shares Redeemed 18Payable for Administration Fees 17Payable for Directors’ Fees and Expenses 5Payable for Transfer Agency Fees 4Payable for Distribution Fees — Class II Shares 1Other Liabilities 47

Total Liabilities 6,986

NET ASSETS $250,815

Net Assets Consist of:Paid-in-Capital $260,374Accumulated Undistributed Net Investment Income 2,133Accumulated Net Realized Loss (48,428)Unrealized Appreciation (Depreciation) on:

Investments (Net of $156 of Deferred Capital Gain Country Tax) 36,673Foreign Currency Forward Exchange Contracts 71Foreign Currency Translations (8)

Net Assets $250,815

CLASS I:Net Assets $174,423Net Asset Value, Offering and Redemption Price Per Share Applicable to 13,255,407 Outstanding

$0.001 Par Value Shares (Authorized 500,000,000 Shares) $ 13.16

CLASS II:Net Assets $ 76,392Net Asset Value, Offering and Redemption Price Per Share Applicable to 5,824,990 Outstanding

$0.001 Par Value Shares (Authorized 500,000,000 Shares) $ 13.11(1) Including:

Securities on Loan, at Value: $ 9,463


The accompanying notes are an integral part of the financial statements.

Merrill Corp - MS Universal Institutional Funds Emerging Markets Equity Portfolio Annual Report [Funds]...ED [AUX] | pweakly | 16-Feb-17 17:11 | 17-1754-4.ca | Sequence: 1CHKSUM Content: 19936 Layout: 4211 Graphics: No Graphics CLEAN




10

Year Ended December 31, 2016Statement of Operations (000)

Investment Income:Dividends from Securities of Unaffiliated Issuers (Net of $737 of Foreign Taxes Withheld) $ 5,348Income from Securities Loaned — Net 41Dividends from Security of Affiliated Issuer (Note H) 11

Total Investment Income 5,400

Expenses:Advisory Fees (Note B) 2,477Servicing Fees (Note D) 423Custodian Fees (Note G) 371Administration Fees (Note C) 214Distribution Fees — Class II Shares (Note E) 193Professional Fees 128Shareholder Reporting Fees 53Transfer Agency Fees (Note F) 16Pricing Fees 13Directors’ Fees and Expenses 9Other Expenses 31

Total Expenses 3,928

Waiver of Distribution Fees — Class II Shares (Note E) (154)Waiver of Advisory Fees (Note B) (85)Rebate from Morgan Stanley Affiliate (Note H) (4)Reimbursement of Custodian Fees (Note G) (222)

Net Expenses 3,463

Net Investment Income 1,937

Realized Gain (Loss):Investments Sold (Net of $3 of Capital Gain Country Tax) (5,950)Foreign Currency Forward Exchange Contracts 168Foreign Currency Transactions 84

Net Realized Loss (5,698)

Change in Unrealized Appreciation (Depreciation):Investments (Net of Increase in Deferred Capital Gain Country Tax of $156) 21,740Foreign Currency Forward Exchange Contracts 30Foreign Currency Translations (—@)

Net Change in Unrealized Appreciation (Depreciation) 21,770

Net Realized Loss and Change in Unrealized Appreciation (Depreciation) 16,072

Net Increase in Net Assets Resulting from Operations $18,009

@ Amount is less than $500.







11

Year Ended Year Ended December 31, 2016 December 31, 2015Statements of Changes in Net Assets (000) (000)

Increase (Decrease) in Net Assets:Operations:

Net Investment Income $ 1,937 $ 1,758Net Realized Loss (5,698) (16,357)Net Change in Unrealized Appreciation (Depreciation) 21,770 (17,606)

Net Increase (Decrease) in Net Assets Resulting from Operations 18,009 (32,205)

Distributions from and/or in Excess of:Class I:Net Investment Income (925) (1,943)Class II:Net Investment Income (342) (640)

Total Distributions (1,267) (2,583)

Capital Share Transactions:(1)

Class I:Subscribed 20,146 20,395Distributions Reinvested 925 1,943Redeemed (62,883) (61,193)Class II:Subscribed 18,007 14,995Distributions Reinvested 342 640Redeemed (19,821) (20,690)

Net Decrease in Net Assets Resulting from Capital Share Transactions (43,284) (43,910)

Total Decrease in Net Assets (26,542) (78,698)Net Assets:

Beginning of Period 277,357 356,055

End of Period (Including Accumulated Undistributed Net Investment Income of $2,133 and $33) $250,815 $277,357(1) Capital Share Transactions:

Class I:Shares Subscribed 1,547 1,462Shares Issued on Distributions Reinvested 70 133Shares Redeemed (4,833) (4,308)

Net Decrease in Class I Shares Outstanding (3,216) (2,713)

Class II:Shares Subscribed 1,370 1,082Shares Issued on Distributions Reinvested 26 44Shares Redeemed (1,511) (1,500)

Net Decrease in Class II Shares Outstanding (115) (374)







12

Class I Year Ended December 31, 2016(1) 2015 2014 2013 2012

Net Asset Value, Beginning of Period $12.39 $13.98 $14.69 $15.03 $2.53

Income (Loss) from Investment Operations:Net Investment Income(2) 0.10 0.08 0.08 0.08 0.08Net Realized and Unrealized Gain (Loss) 0.73 (1.56) (0.73) (0.24) 2.42

Total from Investment Operations 0.83 (1.48) (0.65) (0.16) 2.50

Distributions from and/or in Excess of:Net Investment Income (0.06) (0.11) (0.06) (0.18) —

Net Asset Value, End of Period $13.16 $12.39 $13.98 $14.69 $15.03

Total Return(3) 6.74% (10.69)% (4.49)% (1.02)% 19.95%

Ratios and Supplemental Data:Net Assets, End of Period (Thousands) $174,423 $204,032 $268,121 $271,285 $302,315Ratio of Expenses to Average Net Assets(9) 1.28%(4)(7) 1.40%(4)(6) 1.42%(4)(5) 1.41%(4)(5) 1.44%(4)(5)

Ratio of Expenses to Average Net Assets Excluding Non Operating Expenses N/A N/A N/A N/A 1.44%(4)

Ratio of Net Investment Income to Average Net Assets(9) 0.74%(4) 0.55%(4) 0.53%(4) 0.57%(4) 0.56%(4)

Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets 0.00%(8) 0.00%(8) 0.00%(8) 0.01% 0.01%Portfolio Turnover Rate 34% 38% 45% 48% 46%(9) Supplemental Information on the Ratios to Average Net Assets:

Ratios Before Expense Limitation:Expenses to Average Net Assets 1.39% 1.64% 1.70% 1.71% 1.65%Net Investment Income to Average Net Assets 0.63% 0.31% 0.25% 0.27% 0.35%

(1) Refer to Note G in the Notes to Financial Statements for discussion of prior period custodian out-of-pocket expenses that were reimbursed in the current period.The amount of the reimbursement was immaterial on a per share basis and did not impact the total return of Class I shares. The Ratio of Expenses to AverageNet Assets and the Ratio of Net Investment Income to Average Net Assets would be unchanged as the reimbursement of custodian fees was offset againstcurrent period expense waivers/reimbursements with no impact to net expenses or net investment income.

(2) Per share amount is based on average shares outstanding.(3) Calculated based on the net asset value as of the last business day of the period. Performance does not reflect fees and expenses imposed by your insurance

company’s separate account. If performance information included the effect of these additional charges, the total return would be lower.(4) The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates

during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”(5) Effective March 1, 2012, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.42% for Class I shares. Prior to

March 1, 2012, the maximum ratio was 1.55% for Class I shares. Prior to July 1, 2011, the maximum ratio was 1.60% for Class I shares.(6) Effective September 30, 2015, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.35% for Class I shares.

Prior to September 30, 2015, the maximum ratio was 1.42% for Class I shares.(7) Effective September 30, 2016, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.25% for Class I shares.

Prior to September 30, 2016, the maximum ratio was 1.35% for Class I shares.(8) Amount is less than 0.005%.


Financial HighlightsEmerging Markets Equity Portfolio

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Class II Year Ended December 31,Selected Per Share Data and Ratios 2016(1) 2015 2014 2013 2012

Net Asset Value, Beginning of Period $12.35 $13.93 $14.64 $14.98 $12.50

Income (Loss) from Investment Operations:Net Investment Income(2) 0.09 0.07 0.07 0.08 0.07Net Realized and Unrealized Gain (Loss) 0.73 (1.55) (0.73) (0.25) 2.41

Total from Investment Operations 0.82 (1.48) (0.66) (0.17) 2.48

Distributions from and/or in Excess of:Net Investment Income (0.06) (0.10) (0.05) (0.17) —

Net Asset Value, End of Period $13.11 $12.35 $13.93 $14.64 $14.98

Total Return(3) 6.62% (10.71)% (4.55)% (1.10)% 19.84%

Ratios and Supplemental Data:Net Assets, End of Period (Thousands) $76,392 $73,325 $87,934 $101,815 $124,551Ratio of Expenses to Average Net Assets(9) 1.33%(4)(7) 1.45%(4)(6) 1.47%(4)(5) 1.46%(4)(5) 1.49%(4)(5)

Ratio of Expenses to Average Net Assets Excluding Non Operating Expenses N/A N/A N/A N/A 1.49%(4)

Ratio of Net Investment Income to Average Net Assets(9) 0.69%(4) 0.50%(4) 0.48%(4) 0.52%(4) 0.51%(4)

Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets 0.00%(8) 0.00%(8) 0.00%(8) 0.01% 0.01%Portfolio Turnover Rate 34% 38% 45% 48% 46%(9) Supplemental Information on the Ratios to Average Net Assets:

Ratios Before Expense Limitation:Expenses to Average Net Assets 1.64% 1.92% 2.05% 2.06% 2.00%Net Investment Income (Loss) to Average Net Assets 0.38% 0.03% (0.10)% (0.08)% (0.00)%(8)

(1) Refer to Note G in the Notes to Financial Statements for discussion of prior period custodian out-of-pocket expenses that were reimbursed in the current period.The amount of the reimbursement was immaterial on a per share basis and did not impact the total return of Class II shares. The Ratio of Expenses to AverageNet Assets and the Ratio of Net Investment Income to Average Net Assets would be unchanged as the reimbursement of custodian fees was offset againstcurrent period expense waivers/reimbursements with no impact to net expenses or net investment income.

(2) Per share amount is based on average shares outstanding.(3) Calculated based on the net asset value as of the last business day of the period. Performance does not reflect fees and expenses imposed by your insurance

company’s separate account. If performance information included the effect of these additional charges, the total return would be lower.(4) The Ratios of Expenses and Net Investment Income reflect the rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley affiliates

during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets.”(5) Effective March 1, 2012, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.47% for Class II shares. Prior to

March 1, 2012, the maximum ratio was 1.60% for Class II shares. Prior to July 1, 2011, the maximum ratio was 1.65% for Class II shares.(6) Effective September 30, 2015, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.40% for Class II shares.

Prior to September 30, 2015, the maximum ratio was 1.47% for Class II shares.(7) Effective September 30, 2016, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.30% for Class II shares.

Prior to September 30, 2016, the maximum ratio was 1.40% for Class II shares.(8) Amount is less than 0.005%.


Financial HighlightsEmerging Markets Equity Portfolio

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The Universal Institutional Funds, Inc. (the “Fund”) is regis-tered under the Investment Company Act of 1940, as amended(the “Act”), as an open-end management investment company.The Fund is comprised of eleven separate active, diversified andnon-diversified portfolios (individually referred to as a “Portfo-lio”, collectively as the “Portfolios”). The Fund applies invest-ment company accounting and reporting guidance.The accompanying financial statements relate to the Emerg-ing Markets Equity Portfolio. The Portfolio seeks long-termcapital appreciation by investing primarily in growth-orientedequity securities of issuers in emerging market countries.Effective June 30, 2016, Morgan Stanley Investment Manage-ment Limited (“MSIM Limited”) is no longer a Sub-Adviserto the Portfolio.The Portfolio offers two classes of shares — Class I andClass II. Both classes of shares have identical voting rights (ex-cept that shareholders of a Class have exclusive voting rightsregarding any matter relating solely to that Class of shares),dividend, liquidation and other rights.The Fund is intended to be the funding vehicle for variableannuity contracts and variable life insurance policies offeredby the separate accounts of certain life insurance companies.A. Significant Accounting Policies: The following significant accounting policies are in conformity with U.S.generally accepted accounting principles (“GAAP”). Suchpolicies are consistently followed by the Fund in the prepara-tion of its financial statements. GAAP may require manage-ment to make estimates and assumptions that affect thereported amounts and disclosures in the financial statements.Actual results may differ from those estimates.1. Security Valuation: (1) An equity portfolio security

listed or traded on an exchange is valued at its latest re-ported sales price (or at the exchange official closing priceif such exchange reports an official closing price), and ifthere were no sales on a given day and if there is no offi-cial exchange closing price for that day, the security is val-ued at the mean between the last reported bid and askedprices if such bid and asked prices are available on the rel-evant exchanges; (2) all other equity portfolio securitiesfor which over-the-counter (“OTC”) market quotationsare readily available are valued at the latest reported salesprice (or at the market official closing price if such mar-ket reports an official closing price), and if there was notrading in the security on a given day and if there is noofficial closing price from relevant markets for that day,the security is valued at the mean between the last re-ported bid and asked prices if such bid and asked prices

are available on the relevant markets. Listed equity securi-ties not traded on the valuation date with no reported bidand asked prices available on the exchange are valued atthe mean between the current bid and asked prices ob-tained from one or more reputable brokers or dealers. Anunlisted equity security that does not trade on the valua-tion date and for which bid and asked prices from the rel-evant markets are unavailable is valued at the meanbetween the current bid and asked prices obtained fromone or more reputable brokers or dealers. In cases where asecurity is traded on more than one exchange, the secu-rity is valued on the exchange designated as the primarymarket; (3) certain portfolio securities may be valued byan outside pricing service/vendor approved by the Fund’sBoard of Directors (the “Directors”). The pricing serv-ice/vendor may employ a pricing model that takes intoaccount, among other things, bids, yield spreads, and/orother market data and specific security characteristics. Al-ternatively, if a valuation is not available from an outsidepricing service/vendor, and the security trades on an ex-change, the security may be valued at its latest reportedsale price (or at the exchange official closing price if suchexchange reports an official closing price), prior to thetime when assets are valued. If there are no sales on agiven day and if there is no official exchange closing pricefor that day, the security is valued at the mean betweenthe last reported bid and asked prices if such bid andasked prices are available in the relevant exchanges;(4) when market quotations are not readily available, in-cluding circumstances under which Morgan Stanley In-vestment Management Inc. (the “Adviser”) or MSIMLimited and Morgan Stanley Investment ManagementCompany (“MSIM Company”) (together, the “ Sub-Advisers”), each a whole owned subsidiary of MorganStanley, determine that the closing price, last sale price orthe mean between the last reported bid and asked pricesare not reflective of a security’s market value, portfolio se-curities are valued at their fair value as determined ingood faith under procedures established by and under thegeneral supervision of the Directors. Occasionally, devel-opments affecting the closing prices of securities andother assets may occur between the times at which valua-tions of such securities are determined (that is, close ofthe foreign market on which the securities trade) and theclose of business of the New York Stock Exchange(“NYSE”). If developments occur during such periodsthat are expected to materially affect the value of such securities, such valuations may be adjusted to reflect theestimated fair value of such securities as of the close of

Notes to Financial Statements

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the NYSE, as determined in good faith by the Directorsor by the Adviser using a pricing service and/or proce-dures approved by the Directors; (5) quotations of for-eign portfolio securities, other assets and liabilities andforward contracts stated in foreign currency are translatedinto U.S. dollar equivalents at the prevailing market ratesprior to the close of the NYSE; and (6) investments inmutual funds, including the Morgan Stanley InstitutionalLiquidity Funds, are valued at the net asset value(“NAV”) as of the close of each business day.The Directors have responsibility for determining ingood faith the fair value of the investments, and the Di-rectors may appoint others, such as the Fund’s Adviser ora valuation committee, to assist the Directors in deter-mining fair value and to make the actual calculationspursuant to the fair valuation methodologies previouslyapproved by the Directors. Under procedures approvedby the Directors, the Fund’s Adviser has formed a Valua-tion Committee whose members are approved by the Directors. The Valuation Committee provides adminis-tration and oversight of the Fund’s valuation policies andprocedures, which are reviewed at least annually by theDirectors. These procedures allow the Fund to utilize in-dependent pricing services, quotations from securitiesand financial instrument dealers, and other marketsources to determine fair value.The Fund has procedures to determine the fair value of se-curities and other financial instruments for which marketprices are not readily available. Under these procedures,the Valuation Committee convenes on a regular and adhoc basis to review such securities and considers a numberof factors, including valuation methodologies and signifi-cant unobservable valuation inputs, when arriving at fairvalue. The Valuation Committee may employ a market-based approach which may use related or comparable as-sets or liabilities, recent transactions, market multiples,book values, and other relevant information for the invest-ment to determine the fair value of the investment. An in-come-based valuation approach may also be used in whichthe anticipated future cash flows of the investment are dis-counted to calculate fair value. Discounts may also be ap-plied due to the nature or duration of any restrictions onthe disposition of the investments. Due to the inherentuncertainty of valuations of such investments, the fair val-ues may differ significantly from the values that wouldhave been used had an active market existed. The Valua-tion Committee employs various methods for calibratingthese valuation approaches including a regular review of

valuation methodologies, key inputs and assumptions,transactional back-testing or disposition analysis, and reviews of any related market activity.

2. Fair Value Measurement: Financial AccountingStandards Board (“FASB”) Accounting Standards Codifi-cationTM (“ASC”) 820, “Fair Value Measurement”(“ASC 820”), defines fair value as the value that the Fundwould receive to sell an investment or pay to transfer a li-ability in a timely transaction with an independent buyerin the principal market, or in the absence of a principalmarket, the most advantageous market for the investmentor liability. ASC 820 establishes a three-tier hierarchy todistinguish between (1) inputs that reflect the assump-tions market participants would use in valuing an asset orliability developed based on market data obtained fromsources independent of the reporting entity (observableinputs) and (2) inputs that reflect the reporting entity’sown assumptions about the assumptions market partici-pants would use in valuing an asset or liability developedbased on the best information available in the circum-stances (unobservable inputs) and to establish classifica-tion of fair value measurements for disclosure purposes.Various inputs are used in determining the value of theFund’s investments. The inputs are summarized in thethree broad levels listed below.

• Level 1 – unadjusted quoted prices in active marketsfor identical investments

• Level 2 – other significant observable inputs (includ-ing quoted prices for similar investments, interestrates, prepayment speeds, credit risk, etc.)

• Level 3 – significant unobservable inputs includingthe Fund’s own assumptions in determining the fairvalue of investments. Factors considered in makingthis determination may include, but are not limitedto, information obtained by contacting the issuer,analysts, or the appropriate stock exchange (for ex-change-traded securities), analysis of the issuer’s fi-nancial statements or other available documents and,if necessary, available information concerning othersecurities in similar circumstances

The inputs or methodology used for valuing securities arenot necessarily an indication of the risk associated withinvesting in those securities and the determination of thesignificance of a particular input to the fair value meas-urement in its entirety requires judgment and considersfactors specific to each security.

Notes to Financial Statements (cont’d)





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The following is a summary of the inputs used to valuethe Portfolio’s investments as of December 31, 2016.

Level 2 Level 1 Other Level 3 Unadjusted significant Significant quoted observable unobservable prices inputs inputs TotalInvestment Type (000) (000) (000) (000)Assets:Common Stocks

Aerospace & Defense $ 2,075 $ — $— $ 2,075Airlines 1,583 — — 1,583Auto Components 1,438 — — 1,438Automobiles 4,342 — — 4,342Banks 52,160 3,139 — 55,299Beverages 3,200 — — 3,200Biotechnology 1,085 — — 1,085Chemicals 1,342 — — 1,342Construction &

Engineering 2,671 1,243 — 3,914Construction Materials 10,216 — — 10,216Consumer Finance 2,309 — — 2,309Diversified Consumer

Services 1,825 — — 1,825Diversified Financial

Services 4,267 — — 4,267Diversified

Telecommunication Services 4,543 — — 4,543

Electronic Equipment, Instruments & Components 4,753 — — 4,753

Food & Staples Retailing 8,323 — — 8,323Food Products 6,973 — — 6,973Health Care Providers &

Services — 1,460 — 1,460Hotels, Restaurants &

Leisure 1,374 726 — 2,100Household Durables 5,668 — — 5,668Independent Power

and Renewable Electricity Producers 457 — — 457

Industrial Conglomerates 6,522 — — 6,522Insurance 4,897 — — 4,897Internet & Direct

Marketing Retail 1,574 — — 1,574Internet Software &

Services 23,869 — — 23,869Machinery 3,032 — — 3,032Media 7,699 — — 7,699Metals & Mining 2,832 — — 2,832Multi-line Retail 4,235 — — 4,235

Level 2 Level 1 Other Level 3 Unadjusted significant Significant quoted observable unobservable prices inputs inputs TotalInvestment Type (000) (000) (000) (000)Common Stocks (cont’d)

Oil, Gas & Consumable Fuels $ 10,144 $ — $— $ 10,144

Paper & Forest Products 2,224 — — 2,224Personal Products 3,364 — — 3,364Pharmaceuticals 1,036 — — 1,036Professional Services 1,756 — — 1,756Real Estate

Management & Development 1,849 790 — 2,639

Semiconductors & Semiconductor Equipment 8,556 — — 8,556

Software 1,316 — — 1,316Tech Hardware,

Storage & Peripherals 13,629 — — 13,629Textiles, Apparel &

Luxury Goods 10,319 — — 10,319Transportation

Infrastructure 1,431 — — 1,431Wireless

Telecommunication Services 9,377 — — 9,377

Total Common Stocks 240,265 7,358 — 247,623Short-Term Investments

Investment Company 8,145 — — 8,145

Foreign Currency Forward Exchange Contract — 71 — 71

Total Assets $248,410 $7,429 $— $255,839

Transfers between investment levels may occur as themarkets fluctuate and/or the availability of data used inan investment’s valuation changes. The Portfolio recog-nizes transfers between the levels as of the end of the period. As of December 31, 2016, securities with a totalvalue of approximately $155,925,000 transferred fromLevel 2 to Level 1. Securities that were valued using othersignificant observable inputs at December 31, 2015 werevalued using unadjusted quoted prices at December 31,2016. At December 31, 2015, the fair value of certain securities were adjusted due to developments which occurred between the time of the close of the foreignmarkets on which they trade and the close of business onthe NYSE which resulted in their Level 2 classification.






17

Following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value.

Common Stock (000)

Beginning Balance $1,090Purchases —Sales (696)Amortization of discount —Transfers in —Transfers out —Corporate actions —Change in unrealized appreciation (depreciation) (32)Realized gains (losses) (362)

Ending Balance $ —

Net change in unrealized appreciation (depreciation) from investments still held as of December 31, 2016 $ —

3. Foreign Currency Translation and Foreign In-vestments: The books and records of the Portfolio aremaintained in U.S. dollars. Foreign currency amounts aretranslated into U.S. dollars as follows:— investments, other assets and liabilities at the pre-

vailing rate of exchange on the valuation date;— investment transactions and investment income at

the prevailing rates of exchange on the dates ofsuch transactions.

Although the net assets of the Portfolio are presented atthe foreign exchange rates and market values at the closeof the period, the Portfolio does not isolate that portion ofthe results of operations arising as a result of changes inthe foreign exchange rates from the fluctuations arisingfrom changes in the market prices of securities held at period end. Similarly, the Portfolio does not isolate the effect of changes in foreign exchange rates from the fluctu-ations arising from changes in the market prices of securi-ties sold during the period. Accordingly, realized andunrealized foreign currency gains (losses) on investmentsin securities are included in the reported net realized andunrealized gains (losses) on investment transactions andbalances. However, pursuant to U.S. federal income taxregulations, gains and losses from certain foreign currencytransactions and the foreign currency portion of gains andlosses realized on sales and maturities of foreign denomi-nated debt securities are treated as ordinary income forU.S. federal income tax purposes.Net realized gains (losses) on foreign currency transac-tions represent net foreign exchange gains (losses) fromforeign currency forward exchange contracts, disposition

of foreign currencies, currency gains (losses) realized between the trade and settlement dates on securitiestransactions, and the difference between the amount ofinvestment income and foreign withholding taxesrecorded on the Portfolio’s books and the U.S. dollarequivalent amounts actually received or paid. Net unreal-ized currency gains (losses) from valuing foreign currencydenominated assets and liabilities at period end exchangerates are reflected as a component of unrealized apprecia-tion (depreciation) in the Statement of Assets and Liabili-ties. The change in unrealized currency gains (losses) onforeign currency translations for the period is reflected inthe Statement of Operations.Foreign security and currency transactions may involvecertain considerations and risks not typically associatedwith those of U.S. dollar denominated transactions as aresult of, among other factors, fluctuations of exchangerates in relation to the U.S. dollar, the possibility of lowerlevels of governmental supervision and regulation of for-eign securities markets and the possibility of political oreconomic instability.Governmental approval for foreign investments may berequired in advance of making an investment under cer-tain circumstances in some countries, and the extent offoreign investments in domestic companies may be sub-ject to limitation in other countries. Foreign ownershiplimitations also may be imposed by the charters of indi-vidual companies to prevent, among other concerns, vio-lations of foreign investment limitations. As a result, anadditional class of shares (identified as “Foreign” in thePortfolio of Investments) may be created and offered forinvestment. The “local” and “foreign shares” market val-ues may differ. In the absence of trading of the foreignshares in such markets, the Portfolio values the foreignshares at the closing exchange price of the local shares.

4. Derivatives: The Portfolio may, but is not required to,use derivative instruments for a variety of purposes, in-cluding hedging, risk management, portfolio manage-ment or to earn income. Derivatives are financialinstruments whose value is based, in part, on the value ofan underlying asset, interest rate, index or financial in-strument. Prevailing interest rates and volatility levels,among other things, also affect the value of derivative in-struments. A derivative instrument often has risks similarto its underlying asset and may have additional risks, in-cluding imperfect correlation between the value of thederivative and the underlying asset, risks of default by thecounterparty to certain transactions, magnification oflosses incurred due to changes in the market value of thesecurities, instruments, indices or interest rates to which






18

the derivative instrument relates, risks that the transactionsmay not be liquid and risks arising from margin require-ments. The use of derivatives involves risks that are differ-ent from, and possibly greater than, the risks associatedwith other portfolio investments. Derivatives may involvethe use of highly specialized instruments that require investment techniques and risk analyses different fromthose associated with other portfolio investments. All ofthe Portfolio’s holdings, including derivative instruments,are marked-to-market each day with the change in valuereflected in unrealized appreciation (depreciation). Upondisposition, a realized gain or loss is recognized.Certain derivative transactions may give rise to a form ofleverage. Leverage magnifies the potential for gain andthe risk of loss. Leverage associated with derivative trans-actions may cause the Portfolio to liquidate portfolio positions when it may not be advantageous to do so tosatisfy its obligations or to meet earmarking or segrega-tion requirements, pursuant to applicable Securities andExchange Commission rules and regulations, or maycause the Portfolio to be more volatile than if the Portfo-lio had not been leveraged. Although the Adviser and/orSub-Advisers seek to use derivatives to further the Portfo-lio’s investment objectives, there is no assurance that theuse of derivatives will achieve this result.Following is a description of the derivative instrumentsand techniques that the Portfolio used during the periodand their associated risks:Foreign Currency Forward Exchange Contracts:In connection with its investments in foreign securities,the Portfolio also entered into contracts with banks, bro-kers or dealers to purchase or sell securities or foreign cur-rencies at a future date. A foreign currency forwardexchange contract (“currency contract”) is a negotiatedagreement between the contracting parties to exchange aspecified amount of currency at a specified future time ata specified rate. The rate can be higher or lower than thespot rate between the currencies that are the subject ofthe contract. Currency contracts may be used to protectagainst uncertainty in the level of future foreign currencyexchange rates or to gain or modify exposure to a particu-lar currency. To the extent hedged by the use of currencycontracts, the precise matching of the currency contractamounts and the value of the securities involved will notgenerally be possible because the future value of such se-curities in foreign currencies will change as a consequenceof market movements in the value of those securities be-tween the date on which the contract is entered into andthe date it matures. Furthermore, such transactions may

reduce or preclude the opportunity for gain if the valueof the currency should move in the direction opposite tothe position taken. There is additional risk to the extentthat currency contracts create exposure to currencies inwhich the Portfolio’s securities are not denominated.Unanticipated changes in currency prices may result inpoorer overall performance for the Portfolio than if it hadnot entered into such contracts. The use of currency con-tracts involves the risk of loss from the insolvency orbankruptcy of the counterparty to the contract or the fail-ure of the counterparty to make payments or otherwisecomply with the terms of the contract. A currency con-tract is marked-to-market daily and the change in marketvalue is recorded by the Portfolio as unrealized gain orloss. The Portfolio records realized gains (losses) when thecurrency contract is closed equal to the difference betweenthe value of the currency contract at the time it wasopened and the value at the time it was closed.FASB ASC 815, “Derivatives and Hedging” (“ASC 815”),is intended to improve financial reporting about derivativeinstruments by requiring enhanced disclosures to enableinvestors to better understand how and why the Portfoliouses derivative instruments, how these derivative instru-ments are accounted for and their effects on the Portfolio’sfinancial position and results of operations.The following tables set forth the fair value of the Portfo-lio’s derivative contracts by primary risk exposure as ofDecember 31, 2016. Asset Derivatives Statement of Assets and Primary Risk Value Liabilities Location Exposure (000)Foreign Currency Unrealized Appreciation on

Forward Foreign Currency Forward Exchange Contract Exchange Contract Currency Risk $71

The following tables set forth by primary risk exposurethe Portfolio’s realized gains (losses) and change in unreal-ized appreciation (depreciation) by type of derivative con-tract for the year ended December 31, 2016 inaccordance with ASC 815.

Realized Gain (Loss) Derivative ValuePrimary Risk Exposure Type (000)Currency Risk Foreign Currency

Forward Exchange Contracts $168

Change in Unrealized Appreciation (Depreciation) Derivative ValuePrimary Risk Exposure Type (000)Currency Risk Foreign Currency

Forward Exchange Contracts $30






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At December 31, 2016, the Portfolio’s derivative assetsand liabilities are as follows:

Gross Amounts of Assets and Liabilities Presented in the Statement of Assets and Liabilities

Assets(a) Liabilities(a)Derivatives (000) (000)Foreign Currency Forward

Exchange Contract $71 $—

(a) Absent an event of default or early termination, OTC derivativeassets and liabilities are presented gross and not offset in theStatement of Assets and Liabilities.

The Portfolio typically enters into International Swapsand Derivatives Association, Inc. Master Agreements(“ISDA Master Agreements”) or similar master agree-ments (collectively, “Master Agreements”) with its con-tract counterparties for certain OTC derivatives in orderto, among other things, reduce its credit risk to counter-parties. ISDA Master Agreements include provisions forgeneral obligations, representations, collateral and eventsof default or termination. Under an ISDA Master Agree-ment, the Portfolio typically may offset with the coun-terparty certain OTC derivative financial instruments’payables and/or receivables with collateral held and/orposted and create one single net payment (close-out netting) in the event of default, termination and/or po-tential deterioration in the credit quality of the counter-party. Various Master Agreements govern the terms ofcertain transactions with counterparties, including trans-actions such as swap, forward, repurchase and reverse re-purchase agreements. These Master Agreements typicallyattempt to reduce the counterparty risk associated withsuch transactions by specifying credit protection mecha-nisms and providing standardization that improves legalcertainty. Cross-termination provisions under MasterAgreements typically provide that a default in connec-tion with one transaction between the Portfolio and acounterparty gives the non-defaulting party the right toterminate any other transactions in place with the de-faulting party to create one single net payment dueto/due from the defaulting party and may be a feature incertain Master Agreements. In the event the Portfolio ex-ercises its right to terminate a Master Agreement after acounterparty experiences a termination event as definedin the Master Agreement, the return of collateral withmarket value in excess of the Portfolio’s net liability maybe delayed or denied.

The following tables present derivative financial instru-ments that are subject to enforceable netting arrange-ments as of December 31, 2016.

Gross Amounts Not Offset in the Statement of Assets and Liabilities

Gross Asset Derivatives Presented in Net Statement of Amount Assets and Financial Collateral (not less Liabilities Instrument Received than $0)Counterparty (000) (000) (000) (000)

UBS AG $71 $— $— $71

For the year ended December 31, 2016, the approximateaverage monthly amount outstanding for each derivativetype is as follows:Foreign Currency Forward Exchange Contracts:Average monthly principal amount . . . . . . . . . . . . . $6,211,000

5. Securities Lending: The Portfolio lends securities toqualified financial institutions, such as broker-dealers, toearn additional income. Any increase or decrease in thefair value of the securities loaned that might occur andany interest earned or dividends declared on those securi-ties during the term of the loan would remain in thePortfolio. The Portfolio would receive cash or securities ascollateral in an amount equal to or exceeding 100% ofthe current fair value of the loaned securities. The collat-eral is marked-to-market daily by State Street Bank andTrust Company (“State Street”), the securities lendingagent, to ensure that a minimum of 100% collateral cov-erage is maintained.Based on pre-established guidelines, the securities lendingagent invests any cash collateral that is received in an af-filiated money market portfolio and repurchase agree-ments. Securities lending income is generated from theearnings on the invested collateral and borrowing fees,less any rebates owed to the borrowers and compensationto the lending agent, and is recorded as “Income from Se-curities Loaned — Net” in the Portfolio’s Statement ofOperations. Risks in securities lending transactions arethat a borrower may not provide additional collateralwhen required or return the securities when due, and thatthe value of the short-term investments will be less thanthe amount of cash collateral plus any rebate that is required to be returned to the borrower.






20

The Portfolio has the right under the lending agreementto recover the securities from the borrower on demand.The following table presents financial instruments thatare subject to enforceable netting arrangements as of December 31, 2016.

Gross Amounts Not Offset in the Statement of Assets and Liabilities Gross Asset AmountsPresented in Statement of Net Amount Assets and Financial Collateral (not less Liabilities Instrument Received than $0) (000) (000) (000) (000) $9,463(b) $— $(9,463)(c)(d) $0

(b) Represents market value of loaned securities at period end.

(c) The Portfolio received cash collateral of approximately $5,131,000,which was subsequently invested in Morgan Stanley InstitutionalLiquidity Funds as reported in the Portfolio of Investments. Inaddition, the Portfolio received non-cash collateral of approximately$4,695,000 in the form of U.S. Government obligations, which thePortfolio cannot sell or repledge, and accordingly are not reflectedin the Portfolio of Investments.

(d) The actual collateral received is greater than the amount shownhere due to overcollateralization.

FASB Accounting Standards Update No. 2014-11 (“ASUNo. 2014-11”), “Transfers & Servicing (Topic 860): Repur-chase-to-Maturity Transactions, Repurchase Financings, andDisclosures”, is intended to provide increased transparencyabout the types of collateral pledged in securities lending trans-actions and other similar transactions that are accounted for assecured borrowing.The following table displays a breakdown of transactionsaccounted for as secured borrowings, the gross obligationsby class of collateral pledged, and the remaining contractualmaturity of those transactions as of December 31, 2016.

Remaining Contractual Maturity of the Agreements Between

Overnight and 30 & Continuous <30 days 90 days >90 days Total

(000) (000) (000) (000) (000)Securities Lending

TransactionsCommon Stocks $ 5,131 $— $— $— $ 5,131

Total Borrowings $5,131 $— $— $— $5,131

Gross amount of recognized liabilities for securities lending transactions $5,131

6. Indemnifications: The Fund enters into contracts thatcontain a variety of indemnifications. The Fund’s maxi-mum exposure under these arrangements is unknown.However, the Fund has not had prior claims or losses

pursuant to these contracts and expects the risk of loss tobe remote.

7. Security Transactions, Income and Expenses:Security transactions are accounted for on the trade date(date the order to buy or sell is executed). Realized gainsand losses on the sale of investment securities are deter-mined on the specific identified cost method. Dividendincome and other distributions are recorded on the ex-dividend date (except for certain foreign dividends whichmay be recorded as soon as the Portfolio is informed ofsuch dividends) net of applicable withholding taxes. In-terest income is recognized on the accrual basis exceptwhere collection is in doubt. Discounts are accreted andpremiums are amortized over the life of the respective se-curities. Most expenses of the Fund can be directly attrib-uted to a particular Portfolio. Expenses which cannot bedirectly attributed are apportioned among the Portfoliosbased upon relative net assets or other appropriate meth-ods. Income, expenses (other than class specific expenses)and realized and unrealized gains or losses are allocated toeach class of shares based upon their relative net assets.Settlement and registration of foreign securities transac-tions may be subject to significant risks not normally as-sociated with investments in the United States. In certainmarkets, ownership of shares is defined according to en-tries in the issuer’s share register. It is possible that a Portfolio holding these securities could lose its share reg-istration through fraud, negligence or even mere over-sight. In addition, shares being delivered for sales andcash being paid for purchases may be delivered before theexchange is complete. This may subject the Portfolio tofurther risk of loss in the event of a failure to completethe transaction by the counterparty.

8. Dividends and Distributions to Shareholders:Dividend income and distributions to shareholders arerecorded on the ex-dividend date. Dividends from net investment income, if any, are declared and paid annu-ally. Net realized capital gains, if any, are distributed atleast annually.

B. Advisory/Sub-Advisory Fees: The Adviser, a wholly-owned subsidiary of Morgan Stanley, provides the Portfoliowith advisory services under the terms of an Investment Advisory Agreement, paid quarterly, at the annual rate basedon the daily net assets as follows: First $500 Next $500 Next $1.5 Over $2.5 million million billion billion 0.95% 0.85% 0.80% 0.75%






21

Effective September 30, 2016, the Portfolio’s annual ratebased on the daily net assets was reduced and is as follows: First $500 Next $500 Next $1.5 Over $2.5 million million billion billion 0.85% 0.75% 0.70% 0.65%For the year ended December 31, 2016, the advisory fee rate(net of waivers/rebate) was equivalent to an annual effectiverate of 0.89% of the Portfolio’s average daily net assets.The Adviser has agreed to reduce its advisory fee and/or re-imburse the Portfolio so that total annual portfolio operatingexpenses, excluding certain investment related expenses,taxes, interest and other extraordinary expenses (includinglitigation), will not exceed 1.35% for Class I shares and1.40% for Class II shares. Effective September 30, 2016, theAdviser has agreed to reduce its advisory fee and/or reim-burse the Portfolio so that total annual portfolio operatingexpenses will not exceed 1.25% for Class I shares and 1.30%for Class II shares. The fee waivers and/or expense reimburse-ments will continue for at least one year from the date of thePortfolio’s prospectus or until such time as the Directors actto discontinue all or a portion of such waivers and/or reim-bursements when they deem such action is appropriate. Forthe year ended December 31, 2016, approximately $85,000of advisory fees were waived pursuant to this arrangement.The Adviser has entered into a Sub-Advisory Agreement withthe Sub-Advisers, each a wholly-owned subsidiary of MorganStanley. The Sub-Advisers provide the Portfolio with advisoryservices subject to the overall supervision of the Adviser andthe Fund’s Officers and Directors. The Adviser pays the Sub-Advisers on a monthly basis a portion of the net advisory feesthe Adviser receives from the Portfolio.C. Administration Fees: The Adviser also serves as Ad-ministrator to the Fund and provides administrative servicespursuant to an Administration Agreement for an annual fee,accrued daily and paid monthly, of 0.08% of the Portfolio’saverage daily net assets.Under a Sub-Administration Agreement between the Adminis-trator and State Street, State Street provides certain administra-tive services to the Fund. For such services, the Administratorpays State Street a portion of the fee the Administrator receivesfrom the Portfolio.D. Servicing Fees: The Fund accrues daily and pays quar-terly a servicing fee of up to 0.17% of the average daily value ofshares of the Portfolio held in an insurance company’s account.Certain insurance companies have entered into a servicingagreement with the Fund to provide administrative and othercontract-owner related services on behalf of the Portfolio.E. Distribution Fees: Morgan Stanley Distribution, Inc.(“MSDI” or the “Distributor”), a wholly-owned subsidiary of

the Adviser and Sub-Advisers and an indirect subsidiary ofMorgan Stanley, serves as the Distributor of the Portfolio andprovides the Portfolio’s Class II shareholders with distributionservices pursuant to a Distribution Plan (the “Plan”) in accor-dance with Rule 12b-1 under the Act. Under the Plan, thePortfolio is authorized to pay the Distributor a distributionfee, which is accrued daily and paid monthly, at an annualrate of 0.25% of the Portfolio’s average daily net assets attrib-utable to Class II shares. The Distributor has agreed to waive0.20% of the 0.25% distribution fee that it may receive. Thisfee waiver will continue for at least one year or until suchtime as the Directors act to discontinue all or a portion ofsuch waiver when they deem such action is appropriate. Forthe year ended December 31, 2016, this waiver amounted toapproximately $154,000.F. Dividend Disbursing and Transfer Agent: TheFund’s dividend disbursing and transfer agent is Boston Fi-nancial Data Services, Inc. (“BFDS”). Pursuant to a TransferAgency Agreement, the Fund pays BFDS a fee based on thenumber of classes, accounts and transactions relating to thePortfolios of the Fund.G. Custodian Fees: State Street (the “Custodian”) serves asCustodian for the Fund in accordance with a CustodianAgreement. The Custodian holds cash, securities, and otherassets of the Fund as required by the Act. Custody fees arepayable monthly based on assets held in custody, investmentpurchases and sales activity and account maintenance fees,plus reimbursement for certain out-of-pocket expenses.In December 2015, the Fund’s Custodian announced that ithad identified inconsistencies in the way in which clients wereinvoiced for out-of-pocket expenses from 1998 untilNovember 2015. The dollar amount difference between whatwas charged and what should have been charged, plus interest,was paid back to the Portfolio in September 2016 as a reim-bursement. The Custodian reimbursed the Portfolio directly,which was recognized as a change in accounting estimate andwas reflected as “Reimbursement of Custodian Fees” in theStatement of Operations. Pursuant to the expense limitationsdescribed in Note B, the Portfolio has experienced waiver of ad-visory fees during the current period. Accordingly, the reim-bursement of out-of-pocket custodian expenses in the currentperiod resulted in the reduction in the current period waiver ofadvisory fees.H. Security Transactions and Transactions with Affiliates: For the year ended December 31, 2016, purchasesand sales of investment securities for the Portfolio, other thanlong-term U.S. Government securities and short-term invest-ments, were approximately $90,497,000 and $130,012,000,respectively. There were no purchases and sales of long-term






22

U.S. Government securities for the year ended December 31,2016.The Portfolio invests in the Institutional Class of the MorganStanley Institutional Liquidity Funds (the “Liquidity Funds”),an open-end management investment company managed bythe Adviser, both directly and as a portion of the securitiesheld as collateral on loaned securities. Advisory fees paid bythe Portfolio are reduced by an amount equal to its pro-ratashare of the advisory and administration fees paid by the Port-folio due to its investment in the Liquidity Funds. For theyear ended December 31, 2016, advisory fees paid were re-duced by approximately $4,000 relating to the Portfolio’s investment in the Liquidity Funds.A summary of the Portfolio’s transactions in shares of the Liquidity Funds during the year ended December 31, 2016 isas follows: Value ValueDecember 31, Purchases Dividend December 31, 2015 at Cost Sales Income 2016 (000) (000) (000) (000) (000) $9,417 $65,335 $66,607 $11 $8,145

During the year ended December 31, 2016, the Portfolio incurred approximately $4,000 in brokerage commissionswith Morgan Stanley & Co., LLC, an affiliate of the Adviser/Administrator, Sub-Advisers and Distributor, forportfolio transactions executed on behalf of the Portfolio.The Portfolio is permitted to purchase and sell securities(“cross-trade”) from and to other Morgan Stanley Funds aswell as other funds and client accounts for which the Adviseror an affiliate of the Adviser serves as investment adviser, pur-suant to procedures approved by the Directors in compliancewith Rule 17a-7 under the Act (the “Rule”). Each cross-tradeis executed at the current market price in compliance with pro-visions of the Rule. For the year ended December 31, 2016,the Portfolio did not engage in any cross-trade transactions.The Portfolio has an unfunded Deferred Compensation Plan(the “Compensation Plan”), which allows each independentDirector to defer payment of all, or a portion, of the fees he orshe receives for serving on the Board of Directors. Each eligibleDirector generally may elect to have the deferred amounts cred-ited with a return equal to the total return on one or more ofthe Morgan Stanley funds that are offered as investment op-tions under the Compensation Plan. Appreciation/depreciationand distributions received from these investments are recordedwith an offsetting increase/decrease in the deferred compensa-tion obligation and do not affect the NAV of the Portfolio.

I. Federal Income Taxes: It is the Portfolio’s intention tocontinue to qualify as a regulated investment company anddistribute all of its taxable and tax-exempt income. Accord-ingly, no provision for federal income taxes is required in thefinancial statements.The Portfolio may be subject to taxes imposed by countries inwhich it invests. Such taxes are generally based on incomeand/or capital gains earned or repatriated. Taxes are accruedbased on net investment income, net realized gains and netunrealized appreciation as such income and/or gains areearned. Taxes may also be based on transactions in foreigncurrency and are accrued based on the value of investmentsdenominated in such currency.FASB ASC 740-10, “Income Taxes — Overall”, sets forth aminimum threshold for financial statement recognition of thebenefit of a tax position taken or expected to be taken in a taxreturn. Management has concluded there are no significantuncertain tax positions that would require recognition in thefinancial statements. If applicable, the Portfolio recognizes in-terest accrued related to unrecognized tax benefits in “InterestExpense” and penalties in “Other Expenses” in the Statementof Operations. The Portfolio files tax returns with the U.S.Internal Revenue Service, New York and various states. Eachof the tax years in the four-year period ended December 31,2016, remains subject to examination by taxing authorities.The tax character of distributions paid may differ from thecharacter of distributions shown in the Statements of Changesin Net Assets due to short-term capital gains being treated asordinary income for tax purposes. The tax character of distri-butions paid during fiscal years 2016 and 2015 was as follows: 2016 Distributions 2015 Distributions Paid From: Paid From: Ordinary Long-Term Ordinary Long-Term Income Capital Gain Income Capital Gain (000) (000) (000) (000) $1,267 $— $2,583 $—

The amount and character of income and gains to be distrib-uted are determined in accordance with income tax regula-tions which may differ from GAAP. These book/taxdifferences are either considered temporary or permanent innature.Temporary differences are attributable to differing book andtax treatments for the timing of the recognition of gains(losses) on certain investment transactions and the timing ofthe deductibility of certain expenses.






23

Permanent differences, primarily due to differing treatmentsof gains (losses) related to foreign currency transactions andon certain equity securities designated as issued by passive for-eign investment companies and foreign capital gain tax, re-sulted in the following reclassifications among thecomponents of net assets at December 31, 2016: Accumulated Undistributed Accumulated Net Investment Net Realized Paid-in- Income Loss Capital (000) (000) (000) $1,430 $(1,430) $—

At December 31, 2016, the components of distributable earn-ings for the Portfolio on a tax basis were as follows: Undistributed Undistributed Ordinary Long-Term Income Capital Gain (000) (000) $2,230 $—

At December 31, 2016, the Portfolio had available for federalincome tax purposes unused short-term and long-term capitallosses of approximately $11,706,000 and $12,115,000 respec-tively, that do not have an expiration date.In addition, at December 31, 2016, the Portfolio had avail-able for federal income tax purposes unused capital losseswhich will expire on the indicated dates: Amount (000) Expiration $23,383 December 31, 2017

To the extent that capital loss carryforwards are used to offsetany future capital gains realized during the carryover period asprovided by U.S. federal income tax regulations, no capitalgains tax liability will be incurred by the Portfolio for gains re-alized and not distributed. To the extent that capital gains areoffset, such gains will not be distributed to the shareholders.J. Credit Facility: As of April 4, 2016, the Fund and otherMorgan Stanley funds participated in a $150,000,000 com-mitted, unsecured revolving line of credit facility (the “facil-ity”) with State Street. This facility is to be used for temporaryemergency purposes or funding of shareholder redemption re-quests. The interest rate on borrowings is based on the federalfunds rate or one month libor rate plus a spread. The facilityalso has a commitment fee of 0.25% per annum based on theunused portion of the facility. During the year ended December 31, 2016, the Portfolio did not have any borrow-ings under the facility.K. Other: At December 31, 2016, the Portfolio had recordowners of 10% or greater. Investment activities of these share-holders could have a material impact on the Portfolio. The ag-gregate percentage of such owners was 46.0%.

L. Accounting Pronouncements: In December 2016,FASB issued Accounting Standards update 2016-19 — Tech-nical Corrections and Improvements (“ASU 2016-19”),which is effective for interim periods for all entities beginningafter December 15, 2016. ASU 2016-19 includes an amend-ment to Topic 820, Fair Value Measurement, which clarifiesthe difference between a valuation approach and a valuationtechnique when applying the guidance in that Topic. Thatamendment also requires an entity to disclose when there hasbeen a change in either or both a valuation approach and/or avaluation technique. The transition guidance for the amend-ment must be applied prospectively because it could poten-tially involve the use of hindsight that includes fair valuemeasurements. Although still evaluating the potential impactsof ASU 2016-19 to the Portfolio, management expects thatthe impact of the Portfolio’s adoption will be limited to addi-tional financial statement disclosures.In October 2016, the Securities and Exchange Commission(“SEC”) issued a new rule, Investment Company ReportingModernization, which, among other provisions, amends Reg-ulation S-X to require standardized, enhanced disclosures,particularly related to derivatives, in investment company fi-nancial statements. Compliance with the guidance is effectivefor financial statements filed with the SEC on or after August 1, 2017; adoption will have no effect on the Portfolio’snet assets or results of operations. Although still evaluatingthe potential impacts of the Investment Company ReportingModernization to the Portfolio, management expects that theimpact of the fund’s adoption will be limited to additional fi-nancial statement disclosures.






24

To the Shareholders and Board of Directors ofThe Universal Institutional Funds, Inc. — Emerging Markets Equity Portfolio

We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of EmergingMarkets Equity Portfolio (one of the portfolios constituting The Universal Institutional Funds, Inc.) (the “Portfolio”) as ofDecember 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets foreach of the two years in the period then ended and the financial highlights for each of the five years in the period then ended.These financial statements and financial highlights are the responsibility of the Portfolio’s management. Our responsibility is toexpress an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financialstatements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Portfolio’sinternal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Portfolio’s internal control over financial reporting. Accordingly, we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financialhighlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overallfinancial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2016, bycorrespondence with the custodian and others or by other appropriate auditing procedures where replies from others were notreceived. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, thefinancial position of Emerging Markets Equity Portfolio (one of the portfolios constituting The Universal Institutional Funds,Inc.) at December 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the twoyears in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity withU.S. generally accepted accounting principles.

Boston, MassachusettsFebruary 17, 2017

Report of Independent Registered Public Accounting Firm

Merrill Corp - MS Universal Institutional Funds Emerging Markets Equity Portfolio Annual Report [Funds]...ED [AUX] | pweakly | 16-Feb-17 17:11 | 17-1754-4.fa | Sequence: 1CHKSUM Content: 23291 Layout: 5045 Graphics: 63324 CLEAN

JOB: 17-1754-4 CYCLE#;BL#: 6; 0 TRIM: 8.25" x 10.75" COMPOSITECOLORS: Black, ~note-color 2, ~note-color 3 GRAPHICS: Ernst_Young_sig.eps V1.5



25

For federal income tax purposes, the following information is furnished with respect to the distributions paid by the Portfolioduring its taxable year ended December 31, 2016. For corporate shareholders 2.02% of the dividends qualified for the dividendsreceived deduction.For federal income tax purposes, the following information is furnished with respect to the Portfolio’s earnings for its taxable yearended December 31, 2016. When distributed, certain earnings may be subject to a maximum tax rate of 15% as provided for bythe Jobs and Growth Tax Relief Reconciliation Act of 2003. The Portfolio designated up to a maximum of approximately$3,726,000 as taxable at this lower rate.The Portfolio intends to pass through foreign tax credits of approximately $707,000 and has derived net income from sourceswithin foreign countries amounting to approximately $6,034,000.In January, the Portfolio provides tax information to shareholders for the preceding calendar year.

Federal Tax Notice (unaudited)

Merrill Corp - MS Universal Institutional Funds Emerging Markets Equity Portfolio Annual Report [Funds]...ED [AUX] | pweakly | 16-Feb-17 17:11 | 17-1754-4.fa | Sequence: 2CHKSUM Content: 29762 Layout: 25902 Graphics: No Graphics CLEAN




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Independent Directors: Number of Portfolios in Fund Complex Overseen Position(s) Length of by Name, Age and Address of Held with Time Principal Occupation(s) During Past 5 Years Independent Other DirectorshipsIndependent Director Registrant Served* and Other Relevant Professional Experience Director** Held by Independent Director***

Frank L. Bowman (72)c/o Perkins Coie LLPCounsel to the IndependentDirectors30 Rockefeller PlazaNew York, NY 10112

Director SinceAugust2006

President, Strategic Decisions, LLC (consulting) (sinceFebruary 2009); Director or Trustee of various MorganStanley Funds (since August 2006); Chairperson of theCompliance and Insurance Committee (since October 2015);formerly, Chairperson of the Insurance Sub- Committee ofthe Compliance and Insurance Committee (2007-2015);served as President and Chief Executive Officer of theNuclear Energy Institute (policy organization) (February2005- November 2008); retired as Admiral, U.S. Navy afterserving over 38 years on active duty including 8 years asDirector of the Naval Nuclear Propulsion Program in theDepartment of the Navy and the U.S. Department of Energy(1996-2004); served as Chief of Naval Personnel (July1994-September 1996) and on the Joint Staff as Director ofPolitical Military Affairs (June 1992-July 1994); knighted asHonorary Knight Commander of the Most Excellent Order ofthe British Empire; awarded the Officier de l‘Orde National duMérite by the French Government; elected to the NationalAcademy of Engineering (2009).

90 Director of BP p.l.c.; Director of Naval andNuclear Technologies LLP; Director Emeritusof the Armed Services YMCA; Director of theU.S. Naval Submarine League; Member ofthe National Security Advisory Council of theCenter for U.S. Global Engagement and amember of the CNA Military Advisory Board;Chairman of the charity J Street Cup Golf;Trustee of Fairhaven United MethodistChurch; and Director of other various non-profit organizations.

Kathleen A. Dennis (63)c/o Perkins Coie LLPCounsel to the IndependentDirectors30 Rockefeller PlazaNew York, NY 10112


President, Cedarwood Associates (mutual fund and investmentmanagement consulting) (since July 2006); Chairperson of theLiquidity and Alternatives Sub-Committee of the InvestmentCommittee (since October 2006) and Director or Trustee ofvarious Morgan Stanley Funds (since August 2006); formerly,Senior Managing Director of Victory Capital Management(1993-2006).

91 Director of various non-profit organizations.

Nancy C. Everett (61)c/o Perkins Coie LLPCounsel to the IndependentDirectors30 Rockefeller PlazaNew York, NY 10112

Director SinceJanuary2015

Chief Executive Officer, Virginia Commonwealth UniversityInvestment Company (since November 2015); Owner, OBIR,LLC (institutional investment management consulting) (sinceJune 2014); formerly, Managing Director, BlackRock Inc.(February 2011-December 2013); and Chief ExecutiveOfficer, General Motors Asset Management (a/k/a PromarkGlobal Advisors, Inc.) (June 2005-May 2010).

91 Member of Virginia CommonwealthUniversity School of Business Foundation;formerly, Member of Virginia CommonwealthUniversity Board of Visitors (2013-2015);Member of Committee on Directors forEmerging Markets Growth Fund, Inc. (2007-2010); Chairperson of Performance EquityManagement, LLC (2006-2010); andChairperson, GMAM Absolute ReturnStrategies Fund, LLC (2006-2010).

Jakki L. Haussler (59)c/o Perkins Coie LLPCounsel to the IndependentDirectors30 Rockefeller PlazaNew York, NY 10112


Chairman and Chief Executive Officer, Opus Capital Group(since January 1996); formerly, Director, Capvest VentureFund, LP (May 2000-December 2011); Partner, AdenaVentures, LP (July 1999-December 2010); Director, TheVictory Funds (February 2005-July 2008).

91 Director of Cincinnati Bell Inc. and Member,Audit Committee and CompensationCommittee; Director of Northern KentuckyUniversity Foundation and Member,Investment Committee; Member of ChaseCollege of Law Transactional Law PracticeCenter Board of Advisors; Director of BestTransport; Director of Chase College of LawBoard of Visitors; formerly, Member,University of Cincinnati FoundationInvestment Committee; Member, MiamiUniversity Board of Visitors (2008-2011);Trustee of Victory Funds (2005-2008) andChairman, Investment Committee(2007-2008) and Member, Service ProviderCommittee (2005-2008).

Director and Officer Information (unaudited)





27

Independent Directors (cont’d): Number of Portfolios in Fund Complex Overseen Position(s) Length of by Name, Age and Address of Held with Time Principal Occupation(s) During Past 5 Years Independent Other DirectorshipsIndependent Director Registrant Served* and Other Relevant Professional Experience Director** Held by Independent Director***

Dr. Manuel H. Johnson (67)c/o Johnson SmickInternational, Inc.220 I Street, N.E. — Suite 200Washington, D.C. 20002

Director Since July1991

Senior Partner, Johnson Smick International, Inc. (consultingfirm); Chairperson of the Investment Committee (sinceOctober 2006) and Director or Trustee of various MorganStanley Funds (since July 1991); Co-Chairman and a founderof the Group of Seven Council (G7C) (international economiccommission); formerly, Chairperson of the Audit Committee(July 1991-September 2006), Vice Chairman of the Board ofGovernors of the Federal Reserve System and AssistantSecretary of the U.S. Treasury.

91 Director of NVR, Inc. (home construction).

Joseph J. Kearns (74)c/o Kearns & Associates LLC46 E Peninsula Center #385Rolling Hills Estates,CA 90274-3712


President, Kearns & Associates LLC (investmentconsulting); Chairperson of the Audit Committee (sinceOctober 2006) and Director or Trustee of various MorganStanley Funds (since August 1994); formerly, DeputyChairperson of the Audit Committee (July 2003-September2006) and Chairperson of the Audit Committee of variousMorgan Stanley Funds (since August 1994); CFO of theJ. Paul Getty Trust.

93 Director of Electro Rent Corporation(equipment leasing). Prior to December 31,2013, Director of The Ford FamilyFoundation.

Michael F. Klein (58)c/o Perkins Coie LLPCounsel to the IndependentDirectors30 Rockefeller PlazaNew York, NY 10112


Managing Director, Aetos Capital, LLC (since March 2000);Co-President, Aetos Alternatives Management, LLC (sinceJanuary 2004) and Co-Chief Executive Officer of AetosCapital LLC (since August 2013); Chairperson of the FixedIncome Sub-Committee of the Investment Committee (sinceOctober 2006) and Director or Trustee of various MorganStanley Funds (since August 2006); formerly, ManagingDirector, Morgan Stanley & Co. Inc. and Morgan StanleyDean Witter Investment Management, President, variousMorgan Stanley Funds (June 1998-March 2000) andPrincipal, Morgan Stanley & Co. Inc. and Morgan StanleyDean Witter Investment Management (August1997-December 1999).

90 Director of certain investment fundsmanaged or sponsored by Aetos Capital,LLC; Director of Sanitized AG and SanitizedMarketing AG (specialty chemicals).

Patricia Maleski (56)c/o Perkins Coie LLPCounsel to the IndependentDirectors30 Rockefeller PlazaNew York, NY 10112


Management Director, JPMorgan Asset Management(2013-2016); President, JPMorgan Funds (2010-2013),Chief Administrative Officer, JPMorgan Funds (2004-2010),Treasurer, JPMorgan Funds (2003-2004, 2008-2010), andVice President and Board Liaison, JPMorgan Funds(2001-2004); Managing Director, J.P. Morgan InvestmentManagement Inc. (2001-2013); Vice President of Finance,Pierpont Group (1996-2001); Vice President, Bank of NewYork (1995-1996); Senior Audit Manager, Price Waterhouse,LLP (1982-1995).

91 None

Michael E. Nugent (80)522 Fifth AvenueNew York, NY 10036

Chair ofthe BoardandDirector

Chair oftheBoardssince July2006 andDirectorsince July1991

Chair of the Boards of various Morgan Stanley Funds (sinceJuly 2006); Chairperson of the Closed-End Fund Committee(since June 2012) and Director or Trustee of variousMorgan Stanley Funds (since July 1991); formerly,Chairperson of the Insurance Committee (until July 2006);General Partner, Triumph Capital, L.P. (private investmentpartnership) (1988-2013).

92 None.

Director and Officer Information (unaudited) (cont’d)


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28

Independent Directors (cont’d): Number of Portfolios in Fund Complex Overseen Position(s) Length of by Name, Age and Address of Held with Time Principal Occupation(s) During Past 5 Years Independent Other DirectorshipsIndependent Director Registrant Served* and Other Relevant Professional Experience Director** Held by Independent Director***

* This is the earliest date the Director began serving the Morgan Stanley Funds. Each Director serves an indefinite term, until his or her successor is elected.** The Fund Complex includes (as of December 31, 2016) all open-end and closed-end funds (including all of their portfolios) advised by Morgan Stanley Investment

Management Inc. (the “Adviser”) and any funds that have an adviser that is an affiliated person of the Adviser (including, but not limited to, Morgan Stanley AIP GP LP).*** This includes any directorships at public companies and registered investment companies held by the Director at any time during the past five years.

Executive Officers: Position(s) Length Held with of Time Name, Age and Address of Executive Officer Registrant Served**** Principal Occupation(s) During Past 5 Years

**** This is the earliest date the officer began serving the Morgan Stanley Funds. Each officer serves a one-year term, until his or her successor is elected and qualifies.

Fergus Reid (84)c/o Joe Pietryka, Inc.85 Charles Colman Blvd.Pawling, NY 12564

Director SinceJune1992

Chairman, Joe Pietryka, Inc.; Chairperson of theGovernance Committee and Director or Trustee of variousMorgan Stanley Funds (since June 1992).

92 Formerly, Trustee and Director of certaininvestment companies in the JP MorganFund Complex managed by JP MorganInvestment Management Inc. (1987-2012).

John H. Gernon (53)522 Fifth AvenueNew York, NY 10036

President andPrincipalExecutiveOfficer

SinceSeptember2013

President and Principal Executive Officer of the Equity and Fixed Income Funds and the MorganStanley AIP Funds (since September 2013) and the Liquidity Funds and various money marketfunds (since May 2014) in the Fund Complex; Managing Director of the Adviser; Head of Product(since 2006).

Timothy J. Knierim (58)522 Fifth AvenueNew York, NY 10036

ChiefComplianceOfficer

SinceDecember2016

Managing Director of the Adviser and various entities affiliated with the Adviser; Chief ComplianceOfficer of various Morgan Stanley Funds and the Adviser (since December 2016) and ChiefCompliance Officer of Morgan Stanley AIP GP LP (since 2014). Formerly, Managing Director andDeputy Chief Compliance Officer of the Adviser (2014-2016); and formerly, Chief ComplianceOfficer of Prudential Investment Management, Inc. (2007-2014).

Francis J. Smith (51) 522 Fifth AvenueNew York, NY 10036

Treasurer andPrincipalFinancialOfficer

Treasurersince July2003 andPrincipalFinancialOfficer sinceSeptember2002

Managing Director of the Adviser and various entities affiliated with the Adviser; Treasurer (since July2003) and Principal Financial Officer of various Morgan Stanley Funds (since September 2002).

Mary E. Mullin (49) 522 Fifth AvenueNew York, NY 10036

Secretary SinceJune 1999

Executive Director of the Adviser; Secretary of various Morgan Stanley Funds (since June 1999).

W. Allen Reed (69)c/o Perkins Coie LLPCounsel to the IndependentDirectors30 Rockefeller PlazaNew York, NY 10112


Chairperson of the Equity Sub-Committee of the InvestmentCommittee (since October 2006) and Director or Trustee ofvarious Morgan Stanley Funds (since August 2006);formerly, President and CEO of General Motors AssetManagement; Chairman and Chief Executive Officer of theGM Trust Bank and Corporate Vice President of GeneralMotors Corporation (August 1994-December 2005).

91 Director of Legg Mason, Inc.; formerly,Director of the Auburn University Foundation(2010-2015).

Director and Officer Information (unaudited) (cont’d)



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Adviser and AdministratorMorgan Stanley Investment Management Inc.522 Fifth AvenueNew York, New York 10036

Sub-AdviserMorgan Stanley Investment Management Company23 Church Street16-01 Capital Square, Singapore 049481

DistributorMorgan Stanley Distribution, Inc.522 Fifth AvenueNew York, New York 10036

Dividend Disbursing and Transfer AgentBoston Financial Data Services, Inc.2000 Crown Colony DriveQuincy, Massachusetts 02169

CustodianState Street Bank and Trust CompanyOne Lincoln StreetBoston, Massachusetts 02111

Legal CounselDechert LLP1095 Avenue of the AmericasNew York, New York 10036

Counsel to the Independent DirectorsPerkins Coie LLP30 Rockefeller PlazaNew York, New York 10112

Independent Registered Public Accounting FirmErnst & Young LLP200 Clarendon StreetBoston, Massachusetts 02116

UIFEMEANN1693438 EXP. 02.28.18

Reporting to Shareholders

Each Morgan Stanley fund provides a complete schedule of portfolio holdings in its semi-annual and annual reports within 60 days of the end of the fund’ssecond and fourth fiscal quarters. The semi-annual and annual reports are filed electronically with the Securities and Exchange Commission (SEC) onForm N-CSRS and Form N-CSR, respectively. Morgan Stanley also delivers the semi-annual and annual reports to fund shareholders and makes thesereports available on its public website, www.morganstanley.com/im. Each Morgan Stanley fund also files a complete schedule of portfolio holdings with theSEC for the fund’s first and third fiscal quarters on Form N-Q. Morgan Stanley does not deliver the reports for the first and third fiscal quarters toshareholders, nor are the reports posted to the Morgan Stanley public website. You may, however, obtain the Form N-Q filings (as well as the Form N-CSR andN-CSRS filings) by accessing the SEC’s website, www.sec.gov. You may also review and copy them at the SEC’s Public Reference Room in Washington, DC.Information on the operation of the SEC’s Public Reference Room may be obtained by calling the SEC toll free at 1 (800) SEC-0330. You can also requestcopies of these materials, upon payment of a duplicating fee, by electronic request at the SEC’s email address ([email protected]) or by writing the PublicReference Room of the SEC, 100 F Street, NE, Washington, DC 20549-0102.

Proxy Voting Policies and Procedures and Proxy Voting Record

You may obtain a copy of the Fund’s Proxy Voting Policy and Procedures and information regarding how the Fund voted proxies relating to portfoliosecurities during the most recent twelve-month period ended June 30, without charge, upon request, by calling toll free 1 (800) 548-7786 or by visiting ourwebsite at www.morganstanley.com/im. This information is also available on the SEC’s website at www.sec.gov.

This report is submitted for the general information of the shareholders of the Portfolio. For more detailed information about the Portfolio, its fees andexpenses and other pertinent information, please read its Prospectus. The Fund’s Statement of Additional Information contains additional information aboutthe Portfolio, including its Directors. It is available, without charge, by calling 1 (800) 548-7786.

This report is not authorized for distribution to prospective investors in the Portfolio unless preceded or accompanied by an effectiveProspectus. Read the Prospectus carefully before investing.

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