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The Universal Institutional Funds, Inc.

Mid Cap Growth Portfolio

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.

Semi-Annual Report – June 30, 2016

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Table of Contents

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

Portfolio of Investments............................................................................................................................................................ 3

Statement of Assets and Liabilities ............................................................................................................................................ 5

Statement of Operations........................................................................................................................................................... 6

Statements of Changes in Net Assets......................................................................................................................................... 7

Financial Highlights ................................................................................................................................................................. 8

Notes to Financial Statements................................................................................................................................................... 10

Investment Advisory Agreement Approval ................................................................................................................................ 20

Director and Officer Information ............................................................................................................................... Back Cover

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As a shareholder of the Mid Cap Growth Portfolio (the “Portfolio”), you incur two types of costs: (1) insurance companycharges; and (2) ongoing costs, which may include advisory fees, administration fees, distribution (12b-1) fees and otherPortfolio expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolioand 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 June 30, 2016 andheld 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 1/1/16 6/30/16 Account Value During Period* During Period* Period**

Mid Cap Growth Portfolio Class I $1,000.00 $934.20 $1,019.69 $5.00 $5.22 1.04%Mid Cap Growth Portfolio Class II 1,000.00 934.00 1,019.19 5.48 5.72 1.14

* Expenses are calculated using each Portfolio Class’ annualized net expense ratio (as disclosed), multiplied by the average account value over the period,and multiplied by 182/366 (to reflect the most recent one-half year period).

**Annualized.

Expense Example (unaudited)Mid Cap Growth Portfolio


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Semi-Annual Report – June 30, 2016 (unaudited)

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Pandora Media, Inc. (a)(b) 60,053 $ 748Twitter, Inc. (a) 182,238 3,082Yelp, Inc. (a) 22,576 685Zillow Group, Inc., Class A (a) 42,569 1,560Zillow Group, Inc., Class C (a) 85,138 3,089

16,382

Life Sciences Tools & Services (5.1%)Illumina, Inc. (a) 42,143 5,916

Pharmaceuticals (3.5%)Zoetis, Inc. 86,190 4,091

Professional Services (5.4%)IHS, Inc., Class A (a) 25,034 2,894Verisk Analytics, Inc. (a) 42,318 3,431

6,325

Semiconductors & Semiconductor Equipment (0.7%)NVIDIA Corp. 16,139 759

Software (11.9%)Atlassian Corp., PLC, Class A (United Kingdom) (a) 20,283 525FireEye, Inc. (a) 33,406 550Mobileye N.V. (a)(b) 15,865 732NetSuite, Inc. (a) 11,268 820ServiceNow, Inc. (a) 48,887 3,246Splunk, Inc. (a) 62,092 3,364Tableau Software, Inc., Class A (a) 13,136 643Workday, Inc., Class A (a) 52,491 3,920

13,800

Tech Hardware, Storage & Peripherals (0.3%)3D Systems Corp. (a)(b) 18,041 247Stratasys Ltd. (a) 6,272 144

391

Textiles, Apparel & Luxury Goods (3.9%)Lululemon Athletica, Inc. (Canada) (a) 17,293 1,277Michael Kors Holdings Ltd. (a) 40,769 2,017Under Armour, Inc., Class A (a)(b) 15,620 627Under Armour, Inc., Class C (a) 16,811 612

4,533

Trading Companies & Distributors (0.9%)Fastenal Co. 24,540 1,089

Total Common Stocks (Cost $85,794) 104,508

Preferred Stocks (5.1%)Internet & Catalog Retail (3.8%)

Airbnb, Inc. Series D (a)(d)(e)(f)(acquisition cost — $1,370; acquired 4/16/14) 33,636 3,045

Flipkart Online Services Pvt Ltd. Series D (a)(d)(e)(f)(acquisition cost — $385; acquired 10/4/13) 16,789 1,415

4,460

Software (1.3%)Palantir Technologies, Inc. Series G (a)(d)(e)(f)

(acquisition cost — $455; acquired 7/19/12) 148,616 1,069

Portfolio of InvestmentsMid Cap Growth Portfolio Value Shares (000)

Value Shares (000)

Common Stocks (89.9%)Aerospace & Defense (1.4%)

TransDigm Group, Inc. (a) 5,928 $ 1,563

Air Freight & Logistics (0.4%)XPO Logistics, Inc. (a)(b) 19,551 514

Automobiles (4.5%)Tesla Motors, Inc. (a)(b) 24,738 5,251

Beverages (1.2%)Monster Beverage Corp. (a) 8,572 1,378

Biotechnology (0.9%)Alnylam Pharmaceuticals, Inc. (a) 6,810 378Intrexon Corp. (a) 16,374 403Juno Therapeutics, Inc. (a)(b) 7,738 297

1,078

Capital Markets (0.9%)Affiliated Managers Group, Inc. (a) 7,283 1,025

Communications Equipment (0.7%)Palo Alto Networks, Inc. (a) 6,452 791

Consumer Finance (0.5%)LendingClub Corp. (a)(b) 124,386 535

Diversified Financial Services (7.9%)MSCI, Inc. 42,152 3,251S&P Global, Inc. 54,766 5,874

9,125

Food Products (3.6%)Mead Johnson Nutrition Co. 46,634 4,232

Health Care Equipment & Supplies (6.9%)DexCom, Inc. (a) 18,719 1,485Intuitive Surgical, Inc. (a) 9,878 6,533

8,018

Health Care Technology (5.2%)athenahealth, Inc. (a) 43,972 6,069

Hotels, Restaurants & Leisure (5.4%)Dunkin’ Brands Group, Inc. 78,229 3,413Marriott International, Inc., Class A (b) 43,652 2,901

6,314

Information Technology Services (3.5%)FleetCor Technologies, Inc. (a) 19,684 2,817Gartner, Inc. (a) 13,139 1,280

4,097

Internet & Catalog Retail (1.1%)TripAdvisor, Inc. (a) 8,265 532Zalando SE (Germany) (a)(c) 26,440 700

1,232

Internet Software & Services (14.1%)Autohome, Inc. ADR (China) (a) 10,073 202Dropbox, Inc. (a)(d)(e)(f)

(acquisition cost — $1,380; acquired 5/1/12) 152,532 1,818LinkedIn Corp., Class A (a) 18,138 3,433MercadoLibre, Inc. (Brazil) 12,549 1,765

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





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(a) Non-income producing security.(b) All or a portion of this security was on loan at June 30, 2016.(c) 144A security — Certain conditions for public sale may exist. Unless

otherwise noted, these securities are deemed to be liquid.(d) Security has been deemed illiquid at June 30, 2016.(e) Security cannot be offered for public resale without first being

registered under the Securities Act of 1933 and related rules(“restricted security”). Acquisition date represents the day on which anenforceable right to acquire such security is obtained and is presentedalong with related cost in the security description. The Portfolio hasregistration rights for certain restricted securities. Any costs related tosuch registration are borne by the issuer. The aggregate value ofrestricted securities (excluding 144A holdings) at June 30, 2016,amounts to approximately $7,940,000 and represents 6.8% of netassets.

(f) At June 30, 2016, the Portfolio held fair valued securities valued atapproximately $7,940,000, representing 6.8% of net assets. Thesesecurities have been fair valued as determined in good faith underprocedures established by and under the general supervision of theFund’s Directors.

(g) The fair value and percentage of net assets, $700,000 and 0.6%,respectively, represent the securities that have been fair valued underthe fair valuation policy for international investments as described inNote A-1 within the Notes to the Financial Statements.

(h) At June 30, 2016, the aggregate cost for Federal income taxpurposes approximates the aggregate cost for book purposes. Theaggregate gross unrealized appreciation is approximately$32,200,000 and the aggregate gross unrealized depreciation isapproximately $9,945,000 resulting in net unrealized appreciation ofapproximately $22,255,000.

ADR American Depositary Receipt.CNY — Chinese Yuan RenminbiUSD — United States Dollar

Portfolio Composition*

Percentage ofClassification Total InvestmentsOther** 31.8%Internet Software & Services 14.2Software 13.1Diversified Financial Services 7.9Health Care Equipment & Supplies 6.9Professional Services 5.4Hotels, Restaurants & Leisure 5.4Health Care Technology 5.2Life Sciences Tools & Services 5.1Short-Term Investments 5.0Total Investments 100.0%

* Percentages indicated are based upon total investments (excluding Securities heldas Collateral on Loaned Securities) as of June 30, 2016.

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

Portfolio of Investments (cont’d)Mid Cap Growth Portfolio Value Shares (000)

Software (cont’d)Palantir Technologies, Inc. Series H (a)(d)(e)(f)

(acquisition cost — $102; acquired 10/25/13) 29,092 $ 209Palantir Technologies, Inc. Series H1 (a)(d)(e)(f)

(acquisition cost — $102; acquired 10/25/13) 29,092 209

1,487

Total Preferred Stocks (Cost $2,414) 5,947

Convertible Preferred Stock (0.2%)Internet Software & Services (0.2%)

Dropbox, Inc. Series A (a)(d)(e)(f)(acquisition cost — $132; acquired 5/25/12) (Cost $132) 14,641 175

Notional Amount (000) Call Option Purchased (0.0%)Foreign Currency Option (0.0%)

USD/CNY December 2016 @ CNY 7.60, Royal Bank of Scotland (Cost $57) 12,265 22

Shares Short-Term Investments (9.0%)Securities held as Collateral on Loaned Securities (4.0%)Investment Company (3.2%)

Morgan Stanley Institutional Liquidity Funds — Treasury Securities Portfolio —Institutional Class (See Note H) 3,734,991 3,735

Face Amount (000)

Repurchase Agreements (0.8%)Barclays Capital, Inc., (0.42%,

dated 6/30/16, due 7/1/16; proceeds $863; fully collateralized by a U.S. Government obligation; 2.00% due 8/15/25; valued at $880) $ 863 863

Merrill Lynch & Co., Inc., (0.44%, dated 6/30/16, due 7/1/16; proceeds $35; fully collateralized by a U.S. Government agency security; 4.50% due 4/20/44; valued at $36) 35 35

898

Total Securities held as Collateral on Loaned Securities (Cost $4,633) 4,633

Shares Investment Company (5.0%)

Morgan Stanley Institutional Liquidity Funds — Treasury Securities Portfolio —Institutional Class (See Note H) (Cost $5,847) 5,847,427 5,847

Total Short-Term Investments (Cost $10,480) 10,480

Total Investments (104.2%) (Cost $98,877) Including $11,694 of Securities Loaned (g)(h) 121,132

Liabilities in Excess of Other Assets (-4.2%) (4,847)

Net Assets (100.0%) $116,285






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June 30, 2016Statement of Assets and Liabilities (000)

Assets:Investments in Securities of Unaffiliated Issuers, at Value(1) (Cost $89,295) $111,550Investment in Security of Affiliated Issuer, at Value (Cost $9,582) 9,582

Total Investments in Securities, at Value (Cost $98,877) 121,132Receivable for Investments Sold 495Dividends Receivable 133Receivable for Portfolio Shares Sold 55Receivable from Affiliate 1Other Assets 20

Total Assets 121,836

Liabilities:Collateral on Securities Loaned, at Value 4,633Payable for Portfolio Shares Redeemed 577Payable for Advisory Fees 196Payable for Servicing Fees 67Payable for Professional Fees 21Payable for Custodian Fees 13Payable for Administration Fees 8Payable for Distribution Fees — Class II Shares 7Payable for Transfer Agency Fees 2Other Liabilities 27

Total Liabilities 5,551

NET ASSETS $116,285

Net Assets Consist of:Paid-in-Capital $101,634Accumulated Net Investment Loss (121)Accumulated Net Realized Loss (7,483)Unrealized Appreciation (Depreciation) on:

Investments 22,255

Net Assets $116,285

CLASS I:Net Assets $ 32,332Net Asset Value, Offering and Redemption Price Per Share Applicable to 3,621,116 Outstanding

$0.001 Par Value Shares (Authorized 500,000,000 Shares) $ 8.93

CLASS II:Net Assets $ 83,953Net Asset Value, Offering and Redemption Price Per Share Applicable to 9,587,753 Outstanding

$0.001 Par Value Shares (Authorized 500,000,000 Shares) $ 8.76(1) Including:

Securities on Loan, at Value: $ 11,694



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Six Months Ended June 30, 2016Statement of Operations (000)

Investment Income:Interest from Securities of Unaffiliated Issuers $ 321Income from Securities Loaned — Net 220Dividends from Security of Affiliated Issuer (Note H) 10

Total Investment Income 551

Expenses:Advisory Fees (Note B) 448Distribution Fees — Class II Shares (Note E) 105Servicing Fees (Note D) 89Professional Fees 50Administration Fees (Note C) 48Shareholder Reporting Fees 14Custodian Fees (Note G) 10Transfer Agency Fees (Note F) 5Pricing Fees 3Directors’ Fees and Expenses 2Other Expenses 9

Total Expenses 783

Distribution Fees — Class II Shares Waived (Note E) (63)Waiver of Advisory Fees (Note B) (52)Rebate from Morgan Stanley Affiliate (Note H) (4)

Net Expenses 664

Net Investment Loss (113)

Realized Loss:Investments Sold (6,550)Foreign Currency Transactions —@

Net Realized Loss (6,550)

Change in Unrealized Appreciation (Depreciation):Investments (4,167)

Net Realized Loss and Change in Unrealized Appreciation (Depreciation) (10,717)

Net Decrease in Net Assets Resulting from Operations $(10,830)

@ Amount is less than $500.







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Six Months Ended June 30, 2016 Year Ended (unaudited) December 31, 2015Statements of Changes in Net Assets (000) (000)

Increase (Decrease) in Net Assets:Operations:

Net Investment Loss $ (113) $ (1,300)Net Realized Gain (Loss) (6,550) 3,740Net Change in Unrealized Appreciation (Depreciation) (4,167) (12,057)

Net Decrease in Net Assets Resulting from Operations (10,830) (9,617)

Distributions from and/or in Excess of:Class I:Net Realized Gain (1,536) (9,736)Class II:Net Realized Gain (4,019) (19,692)

Total Distributions (5,555) (29,428)

Capital Share Transactions:(1)

Class I:Subscribed 2,533 9,773Distributions Reinvested 1,536 9,736Redeemed (14,696) (24,704)Class II:Subscribed 2,112 3,967Distributions Reinvested 4,019 19,692Redeemed (9,800) (28,723)

Net Decrease in Net Assets Resulting from Capital Share Transactions (14,296) (10,259)

Total Decrease in Net Assets (30,681) (49,304)Net Assets:

Beginning of Period 146,966 196,270

End of Period (Including Accumulated Net Investment Loss of $(121) and $(8)) $116,285 $146,966(1) Capital Share Transactions:

Class I:Shares Subscribed 288 849Shares Issued on Distributions Reinvested 172 893Shares Redeemed (1,671) (2,145)

Net Decrease in Class I Shares Outstanding (1,211) (403)

Class II:Shares Subscribed 238 357Shares Issued on Distributions Reinvested 459 1,839Shares Redeemed (1,109) (2,522)

Net Decrease in Class II Shares Outstanding (412) (326)







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Class I Six Months Ended June 30, 2016 Year Ended December 31,Selected Per Share Data and Ratios (unaudited) 2015 2014 2013 2012 2011

Net Asset Value, Beginning of Period $ 10.03 $ 12.73 $ 14.41 $ 10.77 $ 11.22 $ 12.12

Income (Loss) from Investment Operations:Net Investment Income (Loss)† (0.01) (0.08) (0.02) (0.05) 0.04 (0.05)Net Realized and Unrealized Gain (Loss) (0.65) (0.50) 0.28 4.03 0.91 (0.80)

Total from Investment Operations (0.66) (0.58) 0.26 3.98 0.95 (0.85)

Distributions from and/or in Excess of:Net Investment Income — — — (0.05) — (0.04)Net Realized Gain (0.44) (2.12) (1.94) (0.29) (1.40) (0.01)

Total Distributions (0.44) (2.12) (1.94) (0.34) (1.40) (0.05)

Net Asset Value, End of Period $ 8.93 $ 10.03 $ 12.73 $ 14.41 $ 10.77 $ 11.22

Total Return ++ (6.58)%# (5.90)% 1.97% 37.49% 8.69% (7.12)%

Ratios and Supplemental Data:Net Assets, End of Period (Thousands) $32,332 $48,467 $66,653 $72,112 $61,552 $64,323Ratio of Expenses to Average Net Assets(1) 1.04%+* 1.05%+ 1.05%+ 1.05%+ 1.05%+ 1.05%+Ratio of Net Investment Income (Loss) to Average

Net Assets(1) (0.12)%+* (0.67)%+ (0.14)%+ (0.39)%+ 0.33%+ (0.42)%+Ratio of Rebate from Morgan Stanley Affiliates to

Average Net Assets 0.01%* 0.00%§ 0.00%§ 0.00%§ 0.00%§ 0.00%§Portfolio Turnover Rate 10%# 25% 44% 49% 29% 32%(1) Supplemental Information on the Ratios to Average Net Assets:

Ratios Before Expense Limitation:Expenses to Average Net Assets 1.14%* 1.10% 1.10% 1.09% 1.06% 1.05%Net Investment Income (Loss) to Average

Net Assets (0.22)%* (0.72)% (0.19)% (0.43)% 0.32% (0.42)%

† Per share amount is based on average shares outstanding.++ 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.+ The Ratios of Expenses and Net Investment Income (Loss) 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 NetAssets.”

§ Amount is less than 0.005%.# Not Annualized.* Annualized.


Financial HighlightsMid Cap Growth Portfolio

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Class II Six Months Ended June 30, 2016 Year Ended December 31,Selected Per Share Data and Ratios (unaudited) 2015 2014 2013 2012 2011

Net Asset Value, Beginning of Period $ 9.85 $ 12.55 $ 14.25 $ 10.64 $ 11.12 $ 12.01

Income (Loss) from Investment Operations:Net Investment Income (Loss)† (0.01) (0.09) (0.03) (0.06) 0.03 (0.06)Net Realized and Unrealized Gain (Loss) (0.64) (0.49) 0.27 3.99 0.89 (0.79)

Total from Investment Operations (0.65) (0.58) 0.24 3.93 0.92 (0.85)

Distributions from and/or in Excess of:Net Investment Income — — — (0.03) — (0.03)Net Realized Gain (0.44) (2.12) (1.94) (0.29) (1.40) (0.01)

Total Distributions (0.44) (2.12) (1.94) (0.32) (1.40) (0.04)

Net Asset Value, End of Period $ 8.76 $ 9.85 $ 12.55 $ 14.25 $ 10.64 $ 11.12

Total Return ++ (6.60)%# (5.99)% 1.84% 37.48% 8.49% (7.17)%

Ratios and Supplemental Data:Net Assets, End of Period (Thousands) $83,953 $98,499 $129,617 $151,317 $157,899 $200,502Ratio of Expenses to Average Net Assets(1) 1.14%+* 1.15%+ 1.15%+ 1.15%+ 1.15%+ 1.15%+Ratio of Net Investment Income (Loss) to Average

Net Assets(1) (0.22)%+* (0.77)%+ (0.24)%+ (0.49)%+ 0.23%+ (0.52)%+Ratio of Rebate from Morgan Stanley Affiliates to

Average Net Assets 0.01%* 0.00%§ 0.00%§ 0.00%§ 0.00%§ 0.00%§Portfolio Turnover Rate 10%# 25% 44% 49% 29% 32%(1) Supplemental Information on the Ratios to Average Net Assets:

Ratios Before Expense Limitation:Expenses to Average Net Assets 1.39%* 1.39% 1.45% 1.44% 1.41% 1.40%Net Investment Loss to Average Net Assets (0.47)%* (1.01)% (0.54)% (0.78)% (0.03)% (0.77)%

† Per share amount is based on average shares outstanding.++ 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.+ The Ratios of Expenses and Net Investment Income (Loss) 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 NetAssets.”

§ Amount is less than 0.005%.# Not Annualized.* Annualized.


Financial HighlightsMid Cap Growth Portfolio

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The Universal Institutional Funds, Inc. (the “Fund”) is registered under the Investment Company Act of 1940, asamended (the “Act”), as an open-end management investmentcompany. The Fund is comprised of eleven separate active, diversified and non-diversified portfolios (individually re-ferred to as a “Portfolio”, collectively as the “Portfolios”).The Fund applies investment company accounting and reporting guidance.The accompanying financial statements relate to the Mid CapGrowth Portfolio. The Portfolio seeks long-term capitalgrowth by investing primarily in common stocks and otherequity securities. The Portfolio offers two classes of shares –Class I and Class II. Both classes of shares have identical vot-ing rights (except that shareholders of a Class have exclusivevoting rights regarding any matter relating solely to thatClass 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.Effective at the close of business on May 30, 2014, the Portfo-lio suspended offering Class I shares and Class II shares of thePortfolio to new investors. The Portfolio will continue to offerClass I shares and Class II shares of the Portfolio to existingshareholders. The Portfolio may recommence offering Class Ishares and Class II shares of the Portfolio to new investors inthe future. Any such offerings of the Portfolio’s Class I sharesand Class II shares may be limited in amount and may com-mence and terminate without any prior notice.A. Significant Accounting Policies: The following sig-nificant accounting policies are in conformity with U.S. gen-erally accepted accounting principles (“GAAP”). Such policiesare consistently followed by the Fund in the preparation of itsfinancial statements. GAAP may require management tomake estimates and assumptions that affect the reportedamounts and disclosures in the financial statements. Actualresults 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 no

trading 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 pricesare 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) listed options are valued at the last reportedsales price on the exchange on which they are listed (or atthe exchange official closing price if such exchange re-ports an official closing price). If an official closing priceor last reported sales price is unavailable, the listed optionshould be fair valued at the mean between their latest bidand asked price. Unlisted options and swaps are valuedby an outside pricing service approved by the Fund’sBoard of Directors (the “Directors”) or quotes from abroker or dealer; (4) when market quotations are notreadily available, including circumstances under whichMorgan Stanley Investment Management Inc. (the “Ad-viser”) determines 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 se-curities, such valuations may be adjusted to reflect the es-timated fair value of such securities as of the close of theNYSE, as determined in good faith by the Directors orby the Adviser using a pricing service and/or proceduresapproved by the Directors; (5) quotations of foreign port-folio securities, other assets and liabilities and forwardcontracts stated in foreign currency are translated intoU.S. dollar equivalents at the prevailing market ratesprior to the close of the NYSE; (6) investments in mutualfunds, including the Morgan Stanley Institutional Liq-uidity Funds, are valued at the net asset value (“NAV”) as

Notes to Financial Statements

Merrill Corp - MS Universal Institutional Funds Mid Cap Growth Portfolio Semi-Annual Report [Funds] 333...ED [AUX] | pweakly | 23-Aug-16 15:10 | 16-14864-8.ea | Sequence: 1CHKSUM Content: 32763 Layout: 3110 Graphics: No Graphics CLEAN




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of the close of each business day; and (7) short-term debtsecurities with remaining maturities of 60 days or less atthe time of purchase may be valued at amortized cost,unless the Adviser determines such valuation does not re-flect the securities’ market value, in which case these secu-rities will be valued at their fair market value determinedby the Adviser.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 Di-rectors. The Valuation Committee providesadministration and oversight of the Fund’s valuation poli-cies and procedures, which are reviewed at least annuallyby the Directors. These procedures allow the Fund to uti-lize independent pricing services, quotations from securi-ties and 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 income-based valuation approach may also be used inwhich the anticipated future cash flows of the investmentare discounted to calculate fair value. Discounts may alsobe applied due to the nature or duration of any restric-tions on the disposition of the investments. Due to the in-herent uncertainty of valuations of such investments, thefair values may differ significantly from the values thatwould have been used had an active market existed. TheValuation Committee employs various methods for cali-brating these valuation approaches including a regular re-view of valuation methodologies, key inputs andassumptions, transactional back-testing or dispositionanalysis, and reviews of any related market activity.

2. Fair Value Measurement: Financial AccountingStandards Board (“FASB”) Accounting Standards

CodificationTM (“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 exchange-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 June 30, 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 $ 1,563 $ — $ — $ 1,563Air Freight & Logistics 514 — — 514Automobiles 5,251 — — 5,251Beverages 1,378 — — 1,378Biotechnology 1,078 — — 1,078Capital Markets 1,025 — — 1,025Communications

Equipment 791 — — 791Consumer Finance 535 — — 535Diversified Financial

Services 9,125 — — 9,125Food Products 4,232 — — 4,232Health Care

Equipment & Supplies 8,018 — — 8,018

Health Care Technology 6,069 — — 6,069Hotels, Restaurants &

Leisure 6,314 — — 6,314Information Technology

Services 4,097 — — 4,097Internet & Catalog Retail 532 700 — 1,232Internet Software &

Services 14,564 — 1,818 16,382Life Sciences Tools &

Services 5,916 — — 5,916Pharmaceuticals 4,091 — — 4,091Professional Services 6,325 — — 6,325Semiconductors &

Semiconductor Equipment 759 — — 759

Software 13,800 — — 13,800Tech Hardware,

Storage & Peripherals 391 — — 391

Textiles, Apparel & Luxury Goods 4,533 — — 4,533

Trading Companies & Distributors 1,089 — — 1,089

Total Common Stocks 101,990 700 1,818 104,508

Level 2 Level 1 Other Level 3 Unadjusted significant Significant quoted observable unobservable prices inputs inputs TotalInvestment Type (000) (000) (000) (000)Preferred Stocks $ — $ — $ 5,947 $ 5,947

Convertible Preferred Stock — — 175 175

Option Purchased — 22 — 22

Short-Term InvestmentsInvestment Company 9,582 — — 9,582Repurchase Agreements — 898 — 898

Total Short-Term Investments 9,582 898 — 10,480

Total Assets $111,572 $1,620 $7,940 $121,132

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 pe-riod. As of June 30, 2016, the Portfolio did not have anyinvestments transfer between investment levels. AtJune 30, 2016, the fair value of certain securities were ad-justed due to developments which occurred between thetime of the close of the foreign markets on which theytrade and the close of business on the NYSE which re-sulted in their Level 2 classification.Following is a reconciliation of investments in which sig-nificant unobservable inputs (Level 3) were used in deter-mining fair value.

ConvertibleCommon Preferred PreferredStocks Stocks Stocks(000) (000) (000)

Beginning Balance $ 4,278 $6,152 $210Purchases — — —Sales (2,498) — —Amortization of discount — — —Transfers in — — —Transfers out — — —Corporate actions — — —Change in unrealized

appreciation (depreciation) (857) (205) (35)Realized gains (losses) 895 — —

Ending Balance $ 1,818 $5,947 $175

Net change in unrealized appreciation (depreciation) from investments still held as of June 30, 2016 $ (366) $ (205) $ (35)



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The following table presents additional information about valuation techniques and inputs used for investments that aremeasured at fair value and categorized within Level 3 as of June 30, 2016. Various valuation techniques were used in the val-uation of certain investments and weighted based on the level of significance.

Fair Value at Impact to June 30, 2016 Valuation Unobservable Valuation from an (000) Technique Input Range Selected Value increase in input

Internet & Catalog RetailPreferred Stocks $3,045 Discounted Cash Weighted Average Flow Cost of Capital 16.0% 18.0% 17.0% Decrease Perpetual Growth Rate 3.0% 4.0% 3.5% Increase Market Comparable Enterprise Value/ Companies Revenue 8.8x 14.5x 12.0x Increase Discount for Lack of Marketability 20.0% 20.0% 20.0% Decrease $1,415 Discounted Cash Weighted Average Flow Cost of Capital 16.5% 18.5% 17.6% Decrease

Perpetual Growth Rate 3.5% 4.5% 4.0% Increase Market Comparable Enterprise Value/ Companies Revenue 1.8x 3.6x 2.7x Increase Discount for Lack of Marketability 20.0% 20.0% 20.0% Decrease

Internet Software & ServicesCommon Stock $1,818 Discounted Cash Weighted Average Flow Cost of Capital 18.0% 20.0% 19.0% Decrease Perpetual Growth Rate 2.5% 3.5% 3.0% Increase Convertible Preferred Stock $175 Market Comparable Enterprise Value/ Companies Revenue 5.9x 16.2x 9.6x Increase Discount for Lack of Marketability 20.0% 20.0% 20.0% Decrease

SoftwarePreferred Stock $1,487 Market Transaction Pending Precedent Method Transaction $7.40 $7.40 $7.40 Increase Discounted Cash Flow Weighted Average Cost of Capital 16.5% 18.5% 17.5% Decrease Perpetual Growth Rate 2.5% 3.5% 3.0% Increase Market Comparable Enterprise Value/ Companies Revenue 7.8x 14.8x 14.5x Increase Discount for Lack of Marketability 20.0% 20.0% 20.0% Decrease

3. Repurchase Agreements: The Portfolio may enterinto repurchase agreements under which the Portfoliolends cash and takes possession of securities with anagreement that the counterparty will repurchase such se-curities. In connection with transactions in repurchaseagreements, a bank as custodian for the Portfolio takespossession of the underlying securities which are held ascollateral, with a market value at least equal to theamount of the repurchase transaction, including principaland accrued interest. To the extent that any repurchasetransaction exceeds one business day, the value of the col-

lateral is marked-to-market on a daily basis to determinethat the value of the collateral does not decrease belowthe repurchase price plus accrued interest as earned. Ifsuch a decrease occurs, additional collateral will be re-quested and, when received, will be added to the accountto maintain full collateralization. In the event of defaulton the obligation to repurchase, the Portfolio has theright to liquidate the collateral and apply the proceeds insatisfaction of the obligation. In the event of default orbankruptcy by the counterparty to the agreement, realiza-tion of the collateral proceeds may be subject to cost and






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delays. The Portfolio, along with other affiliated invest-ment companies, may utilize a joint trading account forthe purpose of entering into repurchase agreements.

4. Foreign Currency Translation and Foreign Investments: The books and records of the Portfolioare maintained in U.S. dollars. Foreign currency amountsare translated into U.S. dollars as follows:— investments, other assets and liabilities at the prevail-

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

the prevailing rates of exchange on the dates of suchtransactions.

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 portionof the results of operations arising as a result of changesin the foreign exchange rates from the fluctuations arisingfrom changes in the market prices of securities held at pe-riod end. Similarly, the Portfolio does not isolate the ef-fect of changes in foreign exchange rates from thefluctuations arising from changes in the market prices ofsecurities sold during the period. Accordingly, realizedand unrealized foreign currency gains (losses) on invest-ments in securities are included in the reported net real-ized and unrealized gains (losses) on investmenttransactions and balances. However, pursuant to U.S.Federal income tax regulations, gains and losses from cer-tain foreign currency transactions and the foreign cur-rency portion of gains and losses realized on sales andmaturities of foreign denominated debt securities aretreated as ordinary income for U.S. Federal income taxpurposes.Net realized gains (losses) on foreign currency transac-tions represent net foreign exchange gains (losses) fromforeign currency forward exchange contracts, dispositionof foreign currencies, currency gains (losses) realized be-tween the trade and settlement dates on securities trans-actions, 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.

5. 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 whichthe derivative instrument relates, risks that the transac-tions may not be liquid and risks arising from margin re-quirements. The use of derivatives involves risks that aredifferent from, and possibly greater than, the risks associ-ated with other portfolio investments. Derivatives mayinvolve the use of highly specialized instruments that re-quire investment techniques and risk analyses differentfrom those associated with other portfolio investments.All of the Portfolio’s holdings, including derivative instru-ments, are marked-to-market each day with the change invalue reflected in unrealized appreciation (depreciation).Upon disposition, a realized gain or loss is recognized.






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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 po-sitions 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 Portfolio had not been leveraged. Although the Adviserseeks to use derivatives to further the Portfolio’s invest-ment objectives, there is no assurance that the use of de-rivatives will achieve this result.Following is a description of the derivative instrumentsand techniques that the Portfolio used during the periodand their associated risks:Options: With respect to options, the Portfolio is sub-ject to equity risk, interest rate risk and foreign currencyexchange risk in the normal course of pursuing its invest-ment objectives. If the Portfolio buys an option, it buys alegal contract giving it the right to buy or sell a specificamount of the underlying instrument or foreign currency,or futures contract on the underlying instrument or for-eign currency, at an agreed-upon price typically in ex-change for a premium paid by the Portfolio. ThePortfolio may purchase and/or sell put and call options.Purchasing call options tends to increase the Portfolio’sexposure to the underlying (or similar) instrument. Pur-chasing put options tends to decrease the Portfolio’s expo-sure to the underlying (or similar) instrument. Whenentering into purchased option contracts, the Portfoliobears the risk of interest or exchange rates or securitiesprices moving unexpectedly, in which case, the Portfoliomay not achieve the anticipated benefits of the purchasedoption contracts; however the risk of loss is limited to thepremium paid. Purchased options are reported as part of“Total Investments in Securities” in the Statement of As-sets and Liabilities. Premium paid for purchasing optionswhich expired are treated as realized losses. If the Portfo-lio sells an option, it sells to another party the right tobuy from or sell to the Portfolio a specific amount of theunderlying instrument or foreign currency, or futurescontract on the underlying instrument or foreign cur-rency, at an agreed-upon price typically in exchange for apremium received by the Portfolio. When options arepurchased OTC, the Portfolio bears the risk that thecounterparty that wrote the option will be unable or un-willing to perform its obligations under the option con-tract. Options may also be illiquid and the Portfolio mayhave difficulty closing out its position. A decision as to

whether, when and how to use options involves the exercise of skill and judgment and even a well-conceivedoption transaction may be unsuccessful because of marketbehavior or unexpected events. The prices of options canbe highly volatile and the use of options can lower totalreturns.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 table sets forth the fair value of the Portfo-lio’s derivative contracts by primary risk exposure as ofJune 30, 2016. Asset Derivatives Statement of Assets and Primary Risk Value Liabilities Location Exposure (000)Option Purchased Investments, at Value (Call Option Purchased) Currency Risk $22(a)

(a)Amounts are included in Investments in Securities in the Statementof Assets and Liabilities.

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 six months ended June 30, 2016 inaccordance with ASC 815.

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

(Options Purchased) $(95)(b)

(b)Amounts are included in Investments Sold in the Statement of Operations.

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

(Options Purchased) $(359)(c)

(c)Amounts are included in Investments in the Statement of Operations.

At June 30, 2016, the Portfolio’s derivative assets and lia-bilities are as follows:

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

Assets(d) Liabilities(d)Derivatives (000) (000)Option Purchased $22(a) $—

(a)Amounts are included in Investments in Securities in the Statementof Assets and Liabilities.






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(d)Absent an event of default or early termination, OTC derivative assetsand liabilities are presented gross and not offset in the Statement ofAssets 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 counter-party certain OTC derivative financial instruments’payables and/or receivables with collateral held and/orposted and create one single net payment (close-out net-ting) in the event of default, termination and/or potentialdeterioration in the credit quality of the counterparty.Various Master Agreements govern the terms of certaintransactions with counterparties, including transactionssuch as swap, forward, repurchase and reverse repurchaseagreements. These Master Agreements typically attemptto reduce the counterparty risk associated with suchtransactions by specifying credit protection mechanismsand providing standardization that improves legal cer-tainty. Cross-termination provisions under Master Agree-ments typically provide that a default in connection withone transaction between the Portfolio and a counterpartygives the non-defaulting party the right to terminate anyother transactions in place with the defaulting party tocreate one single net payment due to/due from the de-faulting party and may be a feature in certain MasterAgreements. In the event the Portfolio exercises its rightto terminate a Master Agreement after a counterparty ex-periences a termination event as defined in the MasterAgreement, the return of collateral with market value inexcess of the Portfolio’s net liability may be delayed or denied.The following table presents derivative financial instru-ments that are subject to enforceable netting arrange-ments as of June 30, 2016.

Gross Amounts Not Offset in the Statement of Assets and Liabilities

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

Scotland $22 $— $— $22

For the six months ended June 30, 2016, the approxi-mate average monthly amount outstanding for each de-rivative type is as follows:Options Purchased:Average monthly notional amount . . . . . . . . . . . . . 24,325,000

6. 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 re-quired to be returned to the borrower.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 ofJune 30, 2016.

Gross Amounts Not Offset in the Statement of Assets and Liabilities Gross Asset Amounts Presented in Statement of Net Amount Assets and Financial Collateral (not less Liabilities Instrument Received than $0) (000) (000) (000) (000) $11,694(e) $— $(11,694)(f)(g) $0

(e)Represents market value of loaned securities at period end.(f) The Portfolio received cash collateral of approximately $4,633,000,

which was subsequently invested in Repurchase Agreements andMorgan Stanley Institutional Liquidity Funds as reported in the Port-folio of Investments. In addition, the Portfolio received non-cash col-lateral of approximately $7,159,000 in the form of U.S. Government






17

obligations, which the Portfolio cannot sell or repledge, and accord-ingly are not reflected in the Portfolio of Investments.

(g)The actual collateral received is greater than the amount shown heredue to overcollateralization.

The Portfolio has adopted the disclosure provisions ofFASB Accounting Standards Update No. 2014-11 (“ASUNo. 2014-11”), “Transfers & Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Fi-nancings, and Disclosures”. ASU No. 2014-11 is in-tended to provide increased transparency about the typesof collateral pledged in securities lending transactions andother similar transactions that are accounted for as se-cured borrowing.The following table displays a breakdown of transactionsaccounted for as secured borrowings, the gross obligations by class of collateral pledged, and the remain-ing contractual maturity of those transactions as ofJune 30, 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 $ 4,633 $— $— $— $ 4,633

Total Borrowings $4,633 $— $— $— $4,633

Gross amount ofrecognized liabilitiesfor securities lendingtransactions $4,633

7. Restricted Securities: The Portfolio invests in unreg-istered or otherwise restricted securities. The term “re-stricted securities” refers to securities that are unregisteredor are held by control persons of the issuer and securitiesthat are subject to contractual restrictions on their resale.As a result, restricted securities may be more difficult tovalue and the Portfolio may have difficulty disposing ofsuch assets either in a timely manner or for a reasonableprice. In order to dispose of an unregistered security, thePortfolio, where it has contractual rights to do so, mayhave to cause such security to be registered. A consider-able period may elapse between the time the decision ismade to sell the security and the time the security is regis-tered so that the Portfolio could sell it. Contractual re-strictions on the resale of securities vary in length andscope and are generally the result of a negotiation be-tween the issuer and acquirer of the securities. The Port-folio would, in either case, bear market risks during that

period. Restricted securities are identified in the Portfolioof Investments.

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

9. 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 securities. Most expenses of the Fund can be directly at-tributed to a particular Portfolio. Expenses which cannotbe directly attributed are apportioned among the Portfo-lios based upon relative net assets or other appropriatemethods. Income, expenses (other than class specific ex-penses) and realized and unrealized gains or losses are al-located to each class of shares based upon their relativenet assets.

10. Dividends and Distributions to Shareholders:Dividend income and distributions to shareholders arerecorded on the ex-dividend date. Dividends from net in-vestment income, if any, are declared and paid annually.Net realized capital gains, if any, are distributed at leastannually.

B. Advisory Fees: The Adviser, a wholly-owned subsidiaryof Morgan Stanley, provides the Portfolio with advisory serv-ices under the terms of an Investment Advisory Agreement,paid quarterly, at the annual rate based on the daily net assetsas follows: First $500 Next $500 Over $1 million million billion 0.75% 0.70% 0.65%

For the six months ended June 30, 2016, the advisory fee rate(net of waivers/rebate) was equivalent to an annual effectiverate of 0.66% of the Portfolio’s average daily net assets.The Adviser has agreed to reduce its advisory fee and/or reim-burse the Portfolio so that total annual portfolio operating ex-penses, excluding certain investment related expenses, taxes,






18

interest and other extraordinary expenses (including litiga-tion), will not exceed 1.05% for Class I shares and 1.15% forClass 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 six months ended June 30, 2016, approximately $52,000of advisory fees were waived pursuant to this arrangement.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 Admin-istrator and State Street, State Street provides certain adminis-trative services to the Fund. For such services, theAdministrator pays State Street a portion of the fee the Ad-ministrator receives from 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 ofthe Adviser and an indirect subsidiary of Morgan Stanley,serves as the Distributor of the Portfolio and provides thePortfolio’s Class II shareholders with distribution services pur-suant to a Distribution Plan (the “Plan”) in accordance withRule 12b-1 under the Act. Under the Plan, the Portfolio isauthorized to pay the Distributor a distribution fee, which isaccrued daily and paid monthly, at an annual rate of 0.25% ofthe Portfolio’s average daily net assets attributable to Class IIshares. The Distributor has agreed to waive 0.15% of the0.25% distribution fee that it may receive. This fee waiver willcontinue for at least one year or until such time as the Direc-tors act to discontinue all or a portion of such waiver whenthey deem such action is appropriate. For the six monthsended June 30, 2016, this waiver amounted to approximately$63,000.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.H. Security Transactions and Transactions with Affiliates: For the six months ended June 30, 2016, pur-chases and sales of investment securities for the Portfolio,other than long-term U.S. Government securities and short-term investments, were approximately $11,980,000 and$30,843,000, respectively. There were no purchases and salesof long-term U.S. Government securities for the six monthsended June 30, 2016.The Portfolio invests in the Institutional Class of the MorganStanley Institutional Liquidity Funds – Treasury SecuritiesPortfolio (the “Liquidity Funds”), an open-end managementinvestment company managed by the Adviser, both directlyand as a portion of the securities held as collateral on loanedsecurities. Advisory fees paid by the Portfolio are reduced byan amount equal to its pro-rata share of the advisory and ad-ministration fees paid by the Portfolio due to its investmentsin the Liquidity Funds. For the six months ended June 30,2016, advisory fees paid were reduced by approximately$4,000 relating to the Portfolio’s investment in the LiquidityFunds.A summary of the Portfolio’s transactions in shares of the Liq-uidity Funds during the six months ended June 30, 2016 is asfollows: Value Value December 31, Purchases Dividend June 30, 2015 at Cost Sales Income 2016 (000) (000) (000) (000) (000) $16,116 $34,205 $40,739 $10 $9,582

During the six months ended June 30, 2016, the Portfolio in-curred less than $500 in brokerage commissions with MorganStanley & Co., LLC, an affiliate of the Adviser/Administratorand Distributor, for portfolio transactions executed on behalfof 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 withprovisions of the Rule. For the six months ended June 30,2016, the Portfolio did not engage in any cross-trade transactions.






19

The Portfolio has an unfunded Deferred CompensationPlan (the “Compensation Plan”), which allows each inde-pendent Director to defer payment of all, or a portion, ofthe fees he or she receives for serving on the Board of Direc-tors. Each eligible Director generally may elect to have thedeferred amounts credited with a return equal to the totalreturn on one or more of the Morgan Stanley funds that areoffered as investment options under the CompensationPlan. Appreciation/depreciation and distributions receivedfrom these investments are recorded with an offsetting increase/decrease in the deferred compensation obligationand 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. Accordingly, no provision for Federal income taxes is requiredin the financial 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 a min-imum threshold for financial statement recognition of the ben-efit of a tax position taken or expected to be taken in a taxreturn. Management has concluded that there are no significantuncertain tax positions that would require recognition in the fi-nancial statements. If applicable, the Portfolio recognizes inter-est 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. In-ternal Revenue Service, New York and various states. Each ofthe tax years in the four-year period ended December 31, 2015,remains subject to examination by taxing authorities.The tax character of distributions paid may differ from thecharacter of distributions shown in the Statements ofChanges in Net Assets due to short-term capital gains beingtreated as ordinary income for tax purposes. The tax charac-ter of distributions paid during fiscal years 2015 and 2014was as follows: 2015 Distributions 2014 Distributions Paid From: Paid From: Ordinary Long-Term Ordinary Long-Term Income Capital Gain Income Capital Gain (000) (000) (000) (000) $— $29,428 $4,356 $24,928

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.Permanent differences, primarily due to differing treatmentsof gains (losses) related to foreign currency transactions, taxadjustments on partnership investments held and sold by thePortfolio and a net operating loss, resulted in the following reclassifications among the components of net assets at De-cember 31, 2015: Accumulated Accumulated Net Undistributed Investment Net Realized Paid-in- Loss Gain Capital (000) (000) (000) $1,299 $697 $(1,996)

At December 31, 2015, 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) $— $5,555

J. Credit Facility: As of April 4, 2016, the Fund and otherMorgan Stanley funds participate in a $150,000,000 commit-ted, unsecured revolving line of credit facility (the “facility”)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 period endedJune 30, 2016, the Fund did not have any borrowings underthe facility.

K. Other: At June 30, 2016, the Portfolio had record ownersof 10% or greater. Investment activities of these shareholderscould have a material impact on the Portfolio. The aggregatepercentage of such owners was 54.2%.






Nature, Extent and Quality of Services

The Board reviewed and considered the nature and extent of the investment advisory services provided by the Adviser (asdefined herein) under the advisory agreement, including portfolio management, investment research and equity and fixedincome securities trading. The Board also reviewed and considered the nature and extent of the non-advisory, administrativeservices provided by the Adviser under the administration agreement, including accounting, operations, clerical, bookkeeping,compliance, business management and planning, legal services and the provision of supplies, office space and utilities at theAdviser’s expense. The Board also considered the Adviser’s investment in personnel and infrastructure that benefits the Portfolio.(The advisory and administration agreements together are referred to as the “Management Agreement.”) The Board alsoconsidered that the Adviser serves a variety of other investment advisory clients and has experience overseeing service providers.The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliatedadvisers as reported to the Board by Broadridge Financial Solutions, Inc. (“Broadridge”).

The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and otherkey personnel of the Adviser who provide the administrative and advisory services to the Portfolio. The Board determined thatthe Adviser’s portfolio managers and key personnel are well qualified by education and/or training and experience to perform theservices in an efficient and professional manner. The Board concluded that the nature and extent of the advisory andadministrative services provided were necessary and appropriate for the conduct of the business and investment activities of thePortfolio and supported its decision to approve the Management Agreement.

Performance, Fees and Expenses of the Portfolio

The Board reviewed the performance, fees and expenses of the Portfolio compared to its peers, as determined by Broadridge, andto appropriate benchmarks where applicable. The Board discussed with the Adviser the performance goals and the actual resultsachieved in managing the Portfolio. When considering a fund’s performance, the Board and the Adviser place emphasis ontrends and longer-term returns (focusing on one-year, three-year and five-year performance, as of December 31, 2015, or sinceinception, as applicable). When a fund underperforms its benchmark and/or its peer group average, the Board and the Adviserdiscuss the causes of such underperformance and, where necessary, they discuss specific changes to investment strategy orinvestment personnel. The Board noted that the Portfolio’s performance was below its peer group average for the one-, three-and five-year periods. The Board discussed with the Adviser the level of the advisory and administration fees (together, the“management fee”) for this Portfolio relative to comparable funds and/or other accounts advised by the Adviser and/or comparedto its peers as determined by Broadridge. In addition to the management fee, the Board also reviewed the Portfolio’s totalexpense ratio. When a fund’s management fee and/or its total expense ratio are higher than its peers, the Board and the Adviserdiscuss the reasons for this and, where appropriate, they discuss possible waivers and/or caps. The Board noted that thePortfolio’s contractual management fee and total expense ratio were higher than but close to its peer group averages and theactual management fee was higher than its peer group average. After discussion, the Board concluded that the Portfolio’s(i) performance was acceptable; (ii) management fee was acceptable; and (iii) total expense ratio was competitive with its peergroup average.

Economies of Scale

The Board considered the size and growth prospects of the Portfolio and how that relates to the Portfolio’s total expense ratioand particularly the Portfolio’s management fee rate, which includes breakpoints. In conjunction with its review of the Adviser’sprofitability, the Board discussed with the Adviser how a change in assets can affect the efficiency or effectiveness of managingthe Portfolio and whether the management fee level is appropriate relative to current and projected asset levels and/or whetherthe management fee structure reflects economies of scale as asset levels change. The Board has determined that its review of theactual and/or potential economies of scale of the Portfolio supports its decision to approve the Management Agreement.

Profitability of the Adviser and Affiliates

The Board considered information concerning the costs incurred and profits realized by the Adviser and its affiliates during thelast year from their relationship with the Portfolio and during the last two years from their relationship with the Morgan Stanley

Investment Advisory Agreement Approval (unaudited)

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Fund Complex and reviewed with the Adviser the cost allocation methodology used to determine the profitability of the Adviserand affiliates. The Board has determined that its review of the analysis of the Adviser’s expenses and profitability supports itsdecision to approve the Management Agreement.

Other Benefits of the Relationship

The Board considered other direct and indirect benefits to the Adviser and/or its affiliates derived from their relationship withthe Portfolio and other funds advised by the Adviser. These benefits may include, among other things, fees for trading,distribution and/or shareholder servicing and for transaction processing and reporting platforms used by securities lendingagents, and research received by the Adviser generated from commission dollars spent on funds’ portfolio trading. The Boardreviewed with the Adviser these arrangements and the reasonableness of the Adviser’s costs relative to the services performed. TheBoard has determined that its review of the other benefits received by the Adviser or its affiliates supports its decision to approvethe Management Agreement.

Resources of the Adviser and Historical Relationship Between the Portfolio and the Adviser

The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations underthe Management Agreement. The Board also reviewed and considered the historical relationship between the Portfolio and theAdviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviserfor managing the Portfolio’s operations and the Board’s confidence in the competence and integrity of the senior managers andkey personnel of the Adviser. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligationsunder the Management Agreement and that it is beneficial for the Portfolio to continue its relationship with the Adviser.

Other Factors and Current Trends

The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Fund’s ChiefCompliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhereto high ethical standards in the conduct of the Portfolio’s business.

General Conclusion

After considering and weighing all of the above factors, with various written materials and verbal information presented by theAdviser, the Board concluded that it would be in the best interest of the Portfolio and its shareholders to approve renewal of theManagement Agreement for another year. In reaching this conclusion the Board did not give particular weight to any singlepiece of information or factor referenced above. The Board considered these factors and information over the course of the yearand in numerous meetings, some of which were in executive session with only the independent Board members and theircounsel present. It is possible that individual Board members may have weighed these factors, and the information presented,differently in reaching their individual decisions to approve the Management Agreement.

Investment Advisory Agreement Approval (unaudited) (cont’d)

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Director and Officer Information



UIFMCGSAN1555394 EXP. 08.31.17

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-CSRand N-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 alsorequest copies of these materials, upon payment of a duplicating fee, by electronic request at the SEC’s email address ([email protected]) or by writingthe Public Reference Room of the SEC, 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.

DirectorsFrank L. BowmanKathleen A. DennisNancy C. EverettJakki L. HausslerJames F. HigginsDr. Manuel H. JohnsonJoseph J. KearnsMichael F. KleinMichael E. Nugent, Chair of the BoardW. Allen ReedFergus Reid

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

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

OfficersJohn H. GernonPresident and Principal Executive OfficerStefanie V. Chang YuChief Compliance OfficerJoseph C. BenedettiVice PresidentMary E. MullinSecretaryFrancis J. SmithTreasurer and Principal Financial Officer

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

Counsel to the Independent DirectorsKramer Levin Naftalis & Frankel LLP1177 Avenue of the AmericasNew York, New York 10036

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

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