<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST Two World Trade Center,
LETTER TO THE SHAREHOLDERS November 30, 1998 New York, New York 10048
DEAR SHAREHOLDER:
The six-month period ended November 30 was a tumultuous one for both U.S. and
foreign financial markets. During this period, stock markets around the world
corrected sharply. In August, the government of Russia defaulted on its debt,
which almost caused the collapse of a major hedge fund in September. In early
October, stock markets rebounded as the Federal Reserve Board and central banks
around the world began an avalanche of interest rate reductions.
For the six-month period under review, long-term interest rates declined from
5.80 percent to 5.08 percent, and the stock market, as measured by the Standard
& Poor's 500 Composite Stock Price Index ("S&P 500"), increased 7.48 percent.
Despite weak results in U.S. manufacturing, the overall economy continued its
pattern of moderate growth.
During these six months, the S&P Financial Index lagged the S&P 500
significantly, declining by 2.03 percent. This was because the S&P Financial
Index had its first negative earnings surprise in many quarters, with third
quarter earnings declining 15 percent as trading losses were incurred in Russia
and elsewhere. Financial services is by nature a highly leveraged business with
long-term debt to capital at 50 percent for the S&P Financial Index versus 29
percent for the S&P Industrial Index.
PERFORMANCE
For the six-month period ending November 30, Morgan Stanley Dean Witter
Financial Services Trust's Class B shares returned -0.42 percent versus a -6.49
percent return for the Lipper Financial Services Index and a 7.48 percent
return for the S&P 500. The Trust's Class A, C and D shares posted returns of
0.00 percent, -0.42 percent and 0.21 percent, respectively, for the six-month
period.
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
LETTER TO THE SHAREHOLDERS November 30, 1998, continued
POSITIONING OF THE FUND
The Fund benefited from its focus on sectors within financial services that are
less exposed to credit risk. These areas included financial-processing stocks,
such as Automatic Data Processing, banks involved in transaction processing,
such as The Bank of New York, and wealth-management companies, such as AIG and
Schwab.
The Fund had 23 percent of its assets in bank stocks at the end of the period,
versus the S&P Financial Index's 44 percent weighting. Half of the banks held
in the portfolio were focused on the wealth management business. The Fund held
20 percent of its assets in insurance stocks versus 22 percent for the Index.
The Fund was overweighted in life insurance, with minimal exposure to property
and casualty insurance. The Fund was overweighted in brokerage firms, at 10
percent versus 3 percent for the Index, and in investment managers at 3 percent
versus 1 percent. In addition, we are focusing on companies, such as Intuit and
CheckFree, that are leaders in the emerging electronic financial services
segment. Financial transactions completed over the Internet cost fractions of
what transactions performed over the phone or in person cost. This significant
cost savings is leading to wider consumer usage, which should continue in the
next five to ten years.
LOOKING AHEAD
We continue to believe that the Fund's focus on the sectors of financial
services that are best positioned to benefit from consolidation, deregulation
and technological progress will serve it well. The Fund should also benefit
from the increased usage of electronic banking that we expect to occur in 1999.
We expect that continued growth in the wealth-management business will also
work in the Fund's favor.
We appreciate your ongoing support of Morgan Stanley Dean Witter Financial
Services Trust and look forward to continuing to serve your investment needs
and objectives.
Very truly yours,
[GRAPHIC OMITTED]
CHARLES A. FIUMEFREDDO
Chairman of the Board
2
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
PORTFOLIO OF INVESTMENTS November 30, 1998 (unaudited)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------- ------------------
<S> <C> <C>
COMMON STOCKS (94.5%)
Banks -- Midwest (5.1%)
56,000 Comerica, Inc. ....................... $ 3,612,000
82,500 Fifth Third Bancorp .................. 5,475,937
50,000 Firstar Corp. ........................ 3,662,500
96,000 Northern Trust Corp. ................. 7,740,000
------------
20,490,437
------------
Banks -- Money Center (3.5%)
160,000 Chase Manhattan Corp. ................ 10,150,000
78,000 Citigroup Inc. ....................... 3,914,625
------------
14,064,625
------------
Banks -- North East (9.0%)
217,000 Bank of New York Co., Inc. ........... 7,432,250
238,000 First Union Corp. .................... 14,458,500
45,000 Fleet Financial Group, Inc. .......... 1,875,937
70,000 Mellon Bank Corp. .................... 4,405,625
115,000 State Street Corp. ................... 7,891,875
------------
36,064,187
------------
Banks -- South East (3.7%)
93,000 AmSouth Bancorporation ............... 3,929,250
30,000 Crestar Financial Corp. .............. 1,991,250
100,000 National Commerce
Bancorporation ....................... 1,806,250
51,000 SunTrust Banks, Inc. ................. 3,560,437
40,000 Wachovia Corp. ....................... 3,492,500
------------
14,779,687
------------
Banks -- West (0.7%)
55,000 Zions Bancorporation ................. 2,777,500
------------
Computer Software (2.2%)
51,000 Citrix Systems, Inc.* ................ 4,233,000
75,000 Compuware Corp.* ..................... 4,668,750
------------
8,901,750
------------
Computers -- Equipment (3.8%)
30,000 EMC Corp.* ........................... 2,175,000
45,000 International Business Machines
Corp. ................................ 7,425,000
75,000 Sun Microsystems, Inc.* .............. 5,545,312
------------
15,145,312
------------
Credit Card (5.3%)
73,000 Capital One Financial Corp. .......... 8,030,000
144,000 Providian Financial Corp. ............ 13,221,000
------------
21,251,000
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------- ------------------
<S> <C> <C>
Disability Insurance (1.0%)
100,000 Provident Companies, Inc. ............ $ 3,843,750
------------
Diversified Financial Services (7.5%)
60,000 American Express Co. ................. 6,003,750
50,000 Associates First Capital Corp.
(Class A) ............................ 3,893,750
150,000 Equitable Companies, Inc. ............ 8,287,500
87,000 General Electric Co. ................. 7,873,500
35,000 Transamerica Corp. ................... 3,718,750
------------
29,777,250
------------
E.D.P. Services (1.0%)
50,000 Automatic Data Processing, Inc. ...... 3,850,000
------------
Finance -- Leasing (0.4%)
60,000 CIT Group, Inc. (Class A) ............ 1,683,750
------------
Financial & Data Servicing (8.6%)
100,000 Ceridian Corp.* ...................... 6,506,250
236,000 CheckFree Holdings Corp.* ............ 3,835,000
17,500 Great Plains Software, Inc.* ......... 686,875
215,000 Intuit, Inc.* ........................ 12,443,125
178,750 NOVA Corp.* .......................... 5,686,484
100,000 Paychex, Inc. ........................ 4,975,000
------------
34,132,734
------------
Insurance & Financial Services (1.0%)
62,000 Ambac Financial Group, Inc. .......... 3,782,000
------------
Insurance Brokers/Services (1.6%)
30,000 Aon Corp. ............................ 1,728,750
82,000 Marsh & McLennan Companies,
Inc. ................................. 4,771,375
------------
6,500,125
------------
Internet (3.3%)
44,000 America Online, Inc.* ................ 3,852,750
54,700 Inktomi Corp.* ....................... 7,305,869
10,000 Yahoo! Inc.* ......................... 1,919,375
------------
13,077,994
------------
Investment Bankers/Brokers/
Services (10.2%)
84,000 Lehman Brothers Holdings, Inc. ....... 4,194,750
190,000 Merrill Lynch & Co., Inc. ............ 14,250,000
197,000 Paine Webber Group, Inc. ............. 8,052,375
250,000 Schwab (CHARLES) Corp. ............... 14,093,750
------------
40,590,875
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
PORTFOLIO OF INVESTMENTS November 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ---------- --------------
<S> <C> <C>
Investment Managers (3.1%)
205,000 Federated Investors, Inc. (Class B) $ 3,446,563
150,000 Franklin Resources, Inc. ............... 6,412,500
60,000 Kansas City Southern Industries,
Inc. ................................... 2,561,250
-----------
12,420,313
-----------
Life Insurance (10.2%)
36,000 AEGON N.V. (Netherlands) ............... 3,857,749
210,000 AFLAC Inc. ............................. 7,743,750
60,000 American General Corp. ................. 4,226,250
62,500 Mony Group Inc.* ....................... 1,933,594
201,500 Nationwide Financial Services,
Inc. (Class A) ......................... 9,697,188
58,000 Protective Life Corp. .................. 2,258,375
84,000 ReliaStar Financial Corp. .............. 3,948,000
90,000 SunAmerica Inc. ........................ 7,132,500
-----------
40,797,406
-----------
Mortgage Related (4.0%)
55,000 Fannie Mae ............................. 4,001,250
170,000 Freddie Mac ............................ 10,285,000
15,000 LandAmerica Financial Group,
Inc. ................................... 919,687
20,000 MGIC Investment Corp. .................. 878,750
-----------
16,084,687
-----------
Multi-Line Insurance (3.6%)
70,000 American International Group,
Inc. ................................... 6,580,000
60,000 Chubb Corp. ............................ 4,203,750
100,000 St. Paul Companies, Inc. ............... 3,525,000
-----------
14,308,750
-----------
Non-U.S. Banks (1.0%)
164,000 Argentaria Corporacion Bancaria
de Espana S.A. (Spain) ................. 3,813,426
-----------
On Line Trade (1.0%)
142,000 E*TRADE Group, Inc.* ................... 3,834,000
-----------
Reinsurers (2.0%)
35,000 General Re Corp. ....................... 8,172,500
-----------
Savings & Loan Associations (0.8%)
150,000 TeleBanc Financial Corp.* .............. 3,365,625
-----------
Specialty Insurers (0.9%)
100,000 Mutual Risk Management Ltd.
(Bermuda) .............................. 3,668,750
-----------
TOTAL COMMON STOCKS
(Identified Cost $330,516,181).......... 377,178,433
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------- ---------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (3.9%)
U.S. GOVERNMENT AGENCY (a) (3.9%)
$ 15,500 Federal Home Loan Banks 5.15%
due 12/01/98 (Amortized Cost
$15,500,000) .......................... $ 15,500,000
------------
REPURCHASE AGREEMENT (0.0%)
227 The Bank of New York
4.625% due 12/01/98
(dated 11/30/98; proceeds
$227,394) (b)
(Identified Cost $227,365) ............ 227,365
------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $15,727,365).......... 15,727,365
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $346,243,546) (c) 98.4% 392,905,798
OTHER ASSETS IN EXCESS OF
LIABILITIES ...................... 1.6 6,293,140
----- -----------
NET ASSETS ....................... 100.0% $399,198,938
===== ============
</TABLE>
- --------------------------------
* Non-income producing security.
(a) Security was purchased on a discount basis. The interest rate
shown has been adjusted to reflect a money market equivalent
yield.
(b) Collateralized by $55,000 U.S. Treasury Bond 10.00% due 05/15/10
valued at $70,465, $23,207 U.S. Treasury Note 6.00% due 07/31/02
valued at $24,694, $72,000 U.S. Treasury Note 5.75% due 10/31/02
valued at $75,021 and $58,918 U.S. Treasury Note 5.50% due
01/31/03 valued at $61,778.
(c) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$48,932,795 and the aggregate gross unrealized depreciation is
$2,270,543, resulting in net unrealized appreciation of
$46,662,252.
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1998 (unaudited)
<TABLE>
<S> <C>
ASSETS :
Investments in securities, at value
(identified cost $346,243,546) .................................. $392,905,798
Receivable for:
Investments sold ............................................... 13,866,886
Shares of beneficial interest sold ............................. 518,911
Dividends ...................................................... 205,085
Foreign withholding taxes reclaimed ............................ 38,102
Deferred organizational expenses .................................. 39,591
Prepaid expenses and other assets ................................. 112,706
------------
TOTAL ASSETS ................................................... 407,687,079
------------
LIABILITIES:
Payable for:
Investments purchased .......................................... 4,717,561
Shares of beneficial interest repurchased ...................... 3,162,087
Plan of distribution fee ....................................... 326,550
Investment management fee ...................................... 246,844
Accrued expenses .................................................. 35,099
------------
TOTAL LIABILITIES .............................................. 8,488,141
------------
NET ASSETS ..................................................... $399,198,938
============
COMPOSITION OF NET ASSETS:
Paid-in-capital ................................................... $316,206,173
Net unrealized appreciation ....................................... 46,664,513
Net investment loss ............................................... (44,021)
Accumulated undistributed net realized gain ....................... 36,372,273
------------
NET ASSETS ..................................................... $399,198,938
============
CLASS A SHARES:
Net Assets ........................................................ $ 3,177,497
Shares Outstanding (unlimited authorized, $.01 par value) ......... 220,124
NET ASSET VALUE PER SHARE ...................................... $ 14.44
============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) .............. $ 15.24
============
CLASS B SHARES:
Net Assets ........................................................ $387,004,587
Shares Outstanding (unlimited authorized, $.01 par value) ......... 27,019,418
NET ASSET VALUE PER SHARE ...................................... $ 14.32
============
CLASS C SHARES:
Net Assets ........................................................ $ 7,441,429
Shares Outstanding (unlimited authorized, $.01 par value) ......... 519,771
NET ASSET VALUE PER SHARE ...................................... $ 14.32
============
CLASS D SHARES:
Net Assets ........................................................ $ 1,575,425
Shares Outstanding (unlimited authorized, $.01 par value) ......... 109,594
NET ASSET VALUE PER SHARE ...................................... $ 14.38
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998 (unaudited)
<TABLE>
<S> <C>
NET INVESTMENT LOSS:
INCOME
Interest ............................................................ $ 1,971,148
Dividends (net of $18,303 foreign withholding tax) .................. 1,746,339
-------------
TOTAL INCOME ..................................................... 3,717,487
-------------
EXPENSES
Plan of distribution fee (Class A shares) ........................... 3,700
Plan of distribution fee (Class B shares) ........................... 1,879,170
Plan of distribution fee (Class C shares) ........................... 32,340
Investment management fee ........................................... 1,445,687
Transfer agent fees and expenses .................................... 245,885
Registration fees ................................................... 55,929
Shareholder reports and notices ..................................... 32,273
Professional fees ................................................... 27,664
Custodian fees ...................................................... 21,474
Trustees' fees and expenses ......................................... 6,780
Organizational expenses ............................................. 6,123
Other ............................................................... 4,483
-------------
TOTAL EXPENSES ................................................... 3,761,508
-------------
NET INVESTMENT LOSS .............................................. (44,021)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on:
Investments ...................................................... 7,622,159
Foreign exchange transactions .................................... 65
-------------
NET GAIN ......................................................... 7,622,224
-------------
Net change in unrealized appreciation on:
Investments ...................................................... (10,477,624)
Translation of other assets and liabilities denominated in foreign
currencies ..................................................... 2,167
-------------
NET DEPRECIATION ................................................. (10,475,457)
-------------
NET LOSS ......................................................... (2,853,233)
-------------
NET DECREASE ........................................................ $ (2,897,254)
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
NOVEMBER 30, 1998 MAY 31, 1998*
------------------- ----------------
<S> <C> <C>
(unaudited)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss .................................. $ (44,021) $ (1,014,831)
Net realized gain .................................... 7,622,224 36,711,229
Net change in unrealized appreciation ................ (10,475,457) 52,567,299
------------- ------------
NET INCREASE (DECREASE) ........................... (2,897,254) 88,263,697
------------- ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares .................................... -- (3,881)
Class B shares .................................... -- (455,578)
Class C shares .................................... -- (2,430)
Class D shares .................................... -- (1,110)
Net realized gain
Class A shares .................................... -- (10,962)
Class B shares .................................... -- (3,673,879)
Class C shares .................................... -- (12,423)
Class D shares .................................... -- (2,737)
------------- ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ................. -- (4,163,000)
------------- ------------
Net increase from transactions in shares of beneficial
interest ........................................... 24,302,188 117,042,732
------------- ------------
NET INCREASE ...................................... 21,404,934 201,143,429
NET ASSETS:
Beginning of period .................................. 377,794,004 176,650,575
------------- ------------
END OF PERIOD
(Including a net investment loss of $44,021 and $0,
respectively) ..................................... $ 399,198,938 $377,794,004
============= ============
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
NOTES TO FINANCIAL STATEMENTS November 30, 1998 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Financial Services Trust (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company. The Fund's investment
objective is long-term capital appreciation. The Fund seeks to achieve its
objective by investing at least 65% of its total assets in the equity
securities of companies in the financial services and financial services
related industries. The Fund was organized as a Massachusetts business trust on
November 8, 1996 and commenced operations on February 26, 1997. On July 28,
1997, the Fund commenced offering three additional classes of shares, with the
then current shares designated as Class B shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year,
six years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price
(in cases where securities are traded on more than one exchange, the security
is valued on the exchange designated as the primary market pursuant to
procedures adopted by the Trustees); (2) all other portfolio securities for
which over-the-counter market quotations are readily available are valued at
the latest available bid price prior to the time of valuation; (3) when market
quotations are not readily available, including circumstances under which it is
determined by Morgan Stanley Dean Witter Advisors Inc. ("the Investment
Manager") that sale or bid prices are not reflective of a security's market
value, portfolio securities are valued at their fair value as determined in
good faith under procedures established by and under the general supervision of
the Trustees (valuation of debt securities for which market quotations are not
readily available may be based upon current market prices of securities which
are comparable in coupon, rating and maturity or an appropriate matrix
utilizing similar factors); (4) certain portfolio
8
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
NOTES TO FINANCIAL STATEMENTS November 30, 1998 (unaudited) continued
securities may be valued by an outside pricing service approved by the
Trustees. The pricing service may utilize a matrix system incorporating
security quality, maturity and coupon as the evaluation model parameters,
and/or research and evaluations by its staff, including review of broker-dealer
market price quotations, if available, in determining what it believes is the
fair valuation of the portfolio securities valued by such pricing service; and
(5) short-term debt securities having a maturity date of more than sixty days
at time of purchase are valued on a mark-to-market basis until sixty days prior
to maturity and thereafter at amortized cost based on their value on the 61st
day. Short-term debt securities having a maturity date of sixty days or less at
the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date
except for certain dividends on foreign securities which are recorded as soon
as the Fund is informed after the ex-dividend date. Discounts are accreted over
the life of the respective securities. Interest income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date
such items are recognized. Distribution fees are charged directly to the
respective class.
D. FOREIGN CURRENCY TRANSLATION -- The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities, other assets and liabilities and forward foreign
currency contracts are translated at the exchange rates prevailing at the end
of the period; and (2) purchases, sales, income and expenses are translated at
the exchange rates prevailing on the respective dates of such transactions. The
resultant exchange gains and losses are included in the Statement of Operations
as realized and unrealized gain/loss on foreign exchange transactions. Pursuant
to U.S. Federal income tax regulations, certain foreign exchange gains/losses
included in realized and unrealized gain/loss are included in or are a
reduction of ordinary income for federal income tax purposes. The Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the changes in the market prices of
the securities.
E. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward
foreign currency contracts which are valued daily at the appropriate exchange
rates. The resultant unrealized exchange gains and losses are included in the
Statement of Operations as unrealized gain/loss on foreign exchange
9
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
NOTES TO FINANCIAL STATEMENTS November 30, 1998 (unaudited) continued
transactions. The Fund records realized gains or losses on delivery of the
currency or at the time the forward contract is extinguished (compensated) by
entering into a closing transaction prior to delivery.
F. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which
may differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
H. ORGANIZATIONAL EXPENSES -- The Investment Manager incurred the
organizational expenses of the Fund in the amount of approximately $61,100
which have been reimbursed for the full amount thereof. Such expenses have been
deferred and are being amortized on the straight-line method over a period not
to exceed five years from the commencement of operations.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.75% to the net assets of the Fund determined as of the close
of each business day.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services,
heat, light, power and other utilities provided to the Fund.
10
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
NOTES TO FINANCIAL STATEMENTS November 30, 1998 (unaudited) continued
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 1.0% of
the average daily net assets of Class B; and (iii) Class C -- up to 1.0% of the
average daily net assets of Class C. In the case of Class A shares, amounts
paid under the Plan are paid to the Distributor for services provided. In the
case of Class B and Class C shares, amounts paid under the Plan are paid to the
Distributor for (1) services provided and the expenses borne by it and others
in the distribution of the shares of these Classes, including the payment of
commissions for sales of these Classes and incentive compensation to, and
expenses of, Morgan Stanley Dean Witter Financial Advisors and others who
engage in or support distribution of the shares or who service shareholder
accounts, including overhead and telephone expenses; (2) printing and
distribution of prospectuses and reports used in connection with the offering
of these shares to other than current shareholders; and (3) preparation,
printing and distribution of sales literature and advertising materials. In
addition, the Distributor may utilize fees paid pursuant to the Plan, in the
case of Class B shares, to compensate Dean Witter Reynolds Inc. ("DWR"), an
affiliate of the Investment Manager and Distributor, and other selected
broker-dealers for their opportunity costs in advancing such amounts, which
compensation would be in the form of a carrying charge on any unreimbursed
expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. The Distributor has advised the Fund that such excess amounts,
including carrying charges, totaled $14,268,809 at November 30, 1998.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected
11
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
NOTES TO FINANCIAL STATEMENTS November 30, 1998 (unaudited) continued
broker-dealer representatives may be reimbursed in the subsequent calendar
year. For the six months ended November 30, 1998, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.25% and
1.0%, respectively.
The Distributor has informed the Fund that for the six months ended November
30, 1998, it received contingent deferred sales charges from certain
redemptions of the Fund's Class B shares and Class C shares of $629,793 and
$6,237, respectively and received $36,361 in front-end sales charges from sales
of the Fund's Class A shares. The respective shareholders pay such charges
which are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the six months ended November 30, 1998
aggregated $460,400,405 and $443,849,123, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$69,593,287 and $80,452,747, respectively.
For the six months ended November 30, 1998, the Fund incurred brokerage
commissions of $18,272 with DWR for portfolio transactions executed on behalf
of the Fund. At November 30, 1998, the Fund's receivable for investments sold
included unsettled trades with DWR of $1,475,079.
For the six months ended November 30, 1998, the Fund incurred brokerage
commissions of $102,533 with Morgan Stanley & Co., Inc., an affiliate of the
Investment Manager and Distributor, for portfolio transactions executed on
behalf of the Fund. At November 30, 1998, the Fund's payable for investments
purchased included unsettled trades with Morgan Stanley & Co. of $850,881.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At November 30, 1998, the Fund
had transfer agent fees and expenses payable of approximately $500.
12
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
NOTES TO FINANCIAL STATEMENTS November 30, 1998 (unaudited) continued
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
NOVEMBER 30, 1998 MAY 31, 1998*
------------------------------- ----------------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold ................................................ 256,329 $ 3,739,270 300,963 $ 4,241,757
Reinvestment of dividends and distributions ......... -- -- 1,064 13,954
Repurchased ......................................... (191,976) (2,872,766) (146,256) (2,205,269)
-------- ------------- -------- --------------
Net increase -- Class A ............................. 64,353 866,504 155,771 2,050,442
-------- ------------- -------- --------------
CLASS B SHARES
Sold ................................................ 6,159,039 87,470,573 19,573,073 253,166,642
Reinvestment of dividends and distributions ......... -- -- 293,365 3,846,011
Repurchased ......................................... (4,878,862) (67,622,067) (11,707,449) (147,225,462)
---------- ------------- ----------- --------------
Net increase -- Class B ............................. 1,280,177 19,848,506 8,158,989 109,787,191
---------- ------------- ----------- --------------
CLASS C SHARES
Sold ................................................ 243,407 3,468,060 381,780 5,334,663
Reinvestment of dividends and distributions ......... -- -- 1,101 14,425
Repurchased ......................................... (91,182) (1,238,724) (15,335) (211,713)
---------- ------------- ----------- --------------
Net increase -- Class C ............................. 152,225 2,229,336 367,546 5,137,375
---------- ------------- ----------- --------------
CLASS D SHARES
Sold ................................................ 203,909 2,667,714 159,352 2,256,843
Reinvestment of dividends and distributions ......... -- -- 46 610
Repurchased ......................................... (99,912) (1,309,872) (153,801) (2,189,729)
---------- ------------- ----------- --------------
Net increase -- Class D ............................. 103,997 1,357,842 5,597 67,724
---------- ------------- ----------- --------------
Net increase in Fund ................................ 1,600,752 $ 24,302,188 8,687,903 $ 117,042,732
========== ============= =========== ==============
</TABLE>
- ---------------
* For Class A, C and D shares, for the period July 28, 1997 (issue date)
through May 31, 1998.
13
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
NOTES TO FINANCIAL STATEMENTS November 30, 1998 (unaudited) continued
6. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward
contracts") to facilitate settlement of foreign currency denominated portfolio
transactions or to manage foreign currency exposure associated with foreign
currency denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk
of an unfavorable change in the foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
At November 30, 1998, there were no outstanding forward contracts.
14
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR FEBRUARY 26, 1997*
MONTHS ENDED ENDED THROUGH
NOVEMBER 30, 1998++ MAY 31, 1998**++ MAY 31, 1997
------------------------ ------------------ -------------------
(unaudited)
<S> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA
Net asset value, beginning of period ................... $ 14.38 $ 10.05 $ 10.00
---------- ---------- ------------
Income (loss) from investment operations:
Net investment income (loss) .......................... -- ( 0.05) 0.01
Net realized and unrealized gain (loss) ............... ( 0.06) 4.58 0.04
---------- ---------- ------------
Total income (loss) from investment operations ......... ( 0.06) 4.53 0.05
---------- ---------- ------------
Less dividends and distributions from:
Net investment income ................................. -- ( 0.02) --
Net realized gain ..................................... -- ( 0.18) --
---------- ---------- ------------
Total dividends and distributions ...................... -- ( 0.20) --
---------- ---------- ------------
Net asset value, end of period ......................... $ 14.32 $ 14.38 $ 10.05
========== ========== ============
TOTAL RETURN+ .......................................... ( 0.42)%(1) 45.25 % 0.50%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.96 %(2)(3) 1.98 % 2.23%(2)
Net investment income (loss) ........................... ( 0.03)%(2)(3) ( 0.38)% 0.64%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $387,005 $370,181 $176,651
Portfolio turnover rate ................................ 126 %(1) 99 % 17%(1)
</TABLE>
- -------------
* Commencement of operations.
** Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund held prior to that date have been designated Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX JULY 28, 1997*
MONTHS ENDED THROUGH
NOVEMBER 30, 1998 MAY 31, 1998
------------------------ ------------------
(unaudited)
<S> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA
Net asset value, beginning of period ................... $ 14.44 $ 11.51
------- -------
Income from investment operations:
Net investment income ................................. 0.05 0.04
Net realized and unrealized gain (loss) ............... ( 0.05) 3.13
------- -------
Total income from investment operations ................ -- 3.17
------- -------
Less dividends and distributions from:
Net investment income ................................. -- ( 0.06)
Net realized gain ..................................... -- ( 0.18)
------- -------
Total dividends and distributions ...................... -- ( 0.24)
------- -------
Net asset value, end of period ......................... $ 14.44 $ 14.44
======= =======
TOTAL RETURN+ .......................................... 0.00 %(1) 27.74 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.21 %(2)(3) 1.23 %(2)
Net investment income .................................. 0.72 %(2)(3) 0.34 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $3,177 $2,249
Portfolio turnover rate ................................ 126 %(1) 99 %
CLASS C SHARES++
SELECTED PER SHARE DATA
Net asset value, beginning of period ................... $ 14.38 $ 11.51
----------------- ------------
Income (loss) from investment operations:
Net investment loss ................................... -- ( 0.05)
Net realized and unrealized gain (loss) ............... ( 0.06) 3.13
----------------- ------------
Total income (loss) from investment operations ......... ( 0.06) 3.08
----------------- ------------
Less dividends and distributions from:
Net investment income ................................. -- ( 0.03)
Net realized gain ..................................... -- ( 0.18)
----------------- ------------
Total dividends and distributions ...................... -- ( 0.21)
----------------- ------------
Net asset value, end of period ......................... $ 14.32 $ 14.38
================= ============
TOTAL RETURN+ .......................................... ( 0.42)%(1) 26.95 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................... 1.96 %(2)(3) 1.96 %(2)
Net investment loss .................................... ( 0.03)%(2)(3) ( 0.42)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................ $7,441 $5,284
Portfolio turnover rate ................................ 126 %(1) 99 %
</TABLE>
- --------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX JULY 28, 1997*
MONTHS ENDED THROUGH
NOVEMBER 30, 1998 MAY 31, 1998
---------------------- ---------------
(unaudited)
<S> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA
Net asset value, beginning of period ............. $ 14.35 $ 11.51
---------- --------
Income from investment operations:
Net investment income ........................... 0.05 0.08
Net realized and unrealized gain (loss) ......... ( 0.02) 3.01
---------- --------
Total income from investment operations .......... 0.03 3.09
---------- --------
Less dividends and distributions from:
Net investment income ........................... -- ( 0.07)
Net realized gain ............................... -- ( 0.18)
---------- --------
Total dividends and distributions ................ -- ( 0.25)
---------- --------
Net asset value, end of period ................... $ 14.38 $ 14.35
========== ========
TOTAL RETURN+ .................................... 0.21%(1) 27.03%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... 0.96%(2)(3) 0.94%(2)
Net investment income ............................ 0.97%(2)(3) 0.63%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .......... $ 1,575 $ 80
Portfolio turnover rate .......................... 126%(1) 99%
</TABLE>
- --------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
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18
<PAGE>
(This page has been left blank intentionally.)
19
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Michelle Kaufman
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records
of the Fund without examination by the independent accountants and
accordingly they do not express an opinion thereon.
This report is submitted for the general information of shareholders
of the Fund. For more detailed information about the Fund, its officers
and trustees, fees, expenses and other pertinent information, please see
the prospectus of the Fund.
This report is not authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an effective prospectus.
MORGAN STANLEY
DEAN WITTER
FINANCIAL SERVICES
TRUST
[graphic]
SEMIANNUAL REPORT
NOVEMBER 30, 1998
