<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
LETTER TO THE SHAREHOLDERS March 31, 1999
Two World Trade Center, New York, New York 10048
DEAR SHAREHOLDER:
This semiannual report to shareholders of Morgan Stanley Dean Witter Fund of
Funds (International Portfolio and Domestic Portfolio) covers the six-month
period ended March 31, 1999.
INTERNATIONAL PORTFOLIO
During the period under review, the international markets remained a source of
concern for investors. The problems that began with the devaluation of the Thai
baht and spread quickly throughout Asia in 1997 and then continued into 1998
have left carnage across Asia. Only recently have the region's markets
displayed signs of recovery. The effects on U.S. investors were fear of
corroding corporate profits and a driving downward of the global equity
markets. The vibrations were felt in Europe and especially Latin America.
By March 1999, however, the momentum had begun to swing in a more-positive
direction in Asia, particularly Japan, whose stock market was up nearly 18
percent during the first three months of 1999. In Europe, the pendulum was also
swinging to the plus side as hopes rose concerning the likelihood that the
United Kingdom would join the European Monetary Union later in the year.
PERFORMANCE AND PORTFOLIO
For the six-month period ended March 31, 1999, Morgan Stanley Dean Witter Fund
of Funds International Portfolio's Class A shares returned 24.12 percent, Class
B shares returned 23.48 percent, Class C shares returned 23.92 percent and
Class D shares returned 24.20 percent. The performance of the Fund's four share
classes varies because of differing expenses. During the same period, the
Morgan Stanley Capital International Europe, Australia, Far East Index returned
22.51 percent and the Lipper International Funds Index returned 16.98 percent.
The International Portfolio was rolled out to investors in November 1997. The
investment objective for the International Portfolio is to seek
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
LETTER TO THE SHAREHOLDERS March 31, 1999, continued
long-term capital appreciation. Since its inception the Portfolio has been able
to invest in four Morgan Stanley Dean Witter international funds: European
Growth, International Small Cap, Japan Fund and Pacific Growth Fund. The
International Portfolio offers investors diversification across many foreign
markets while at the same time cushioning against short-term fluctuations in
each geographical region.
For much of 1998 the International Portfolio was regaining ground lost earlier
in the year from its overweighted position in Japan and the emerging markets of
Asia. The Portfolio's disappointing performance during the first half of 1998,
was caused by our belief that there would be a strong recovery in emerging Asia
and Japan, a conviction that has only been realized in recent months, although
later than expected. As the region's markets began to recover during the second
half of 1998, the Portfolio's performance began picking up. The forward
momentum continued into the first quarter of 1999.
OUTLOOK
Going forward, we anticipate maintaining the Portfolio's current allocations,
with an over- to neutral weight in the Asian-exposed funds and a neutral stance
in the European-exposed funds. We believe that the Asian countries are
experiencing real improvement that goes beyond trading rallies and should
continue to improve over the course of 1999. The signs of recovery in the
commodities markets and the easing monetary policies adopted worldwide should
bring relief where it is most greatly needed, for the heavily battered
economies of the Pacific Rim.
DOMESTIC PORTFOLIO
As the Fund's fiscal year began on September 30, 1998, the domestic markets
were still struggling to recover from a late-summer correction induced by
renewed concerns over international markets and subsequent trouble with some
large hedge funds. By late in the fourth quarter of 1998, the great bull market
saw an amazing rebound, driven by the robust economy and an extra liquidity
boost from the Federal Reserve. The market's scope, however, remained narrow in
1998, with the 100 largest stocks in the Standard & Poor's 500 Composite Stock
Price Index (S&P 500) accounting for 85 percent of its total return. The first
quarter of 1999 ended much the same way it started, with only a few notable
changes. Although the breadth remained tight, there were some surprises to the
upside in the energy and financial services sectors. The first quarter of 1999
will enter the history books as the period the Dow closed above the 10,000
level for the first time on March 29. The first quarter ended with the Dow up
slightly more than 7 percent and the S&P 500 close to 5 percent, while the
technology indexes were up an average 11 percent.
2
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
LETTER TO THE SHAREHOLDERS March 31, 1999, continued
PERFORMANCE
For the six-month period ended March 31, 1999, Morgan Stanley Dean Witter Fund
of Funds Domestic Portfolio's Class A shares returned 19.36 percent, Class B
shares returned 18.88 percent, Class C shares returned 19.36 percent and Class
D shares returned 19.54 percent. The performance of the Fund's four share
classes varies because of differing expenses. During the same period, the S&P
500 Index returned 27.32 percent, the Lipper Flexible Portfolio Funds Index
returned 15.21 percent and the Lehman Brothers Government/Corporate Bond Index
returned --1.07 percent.
PORTFOLIO STRUCTURE
The Domestic Portfolio, which was launched in November 1997, seeks to maximize
total return. The key to the Portfolio is to capitalize on the secular and
cyclical phases of the economy. As particular areas like growth, value, large
cap and small cap tend to go in and out of favor, the Domestic Portfolio seeks
to cushion investors from short-term fluctuations by diversifying across
investment styles, market capitalizations and asset classes. Currently the
Domestic Portfolio may invest in up to 25 Morgan Stanley Dean Witter funds.
Due to the continued underperformance of small- and mid-cap stocks and
value-oriented stocks, the Portfolio's structure was shifted in the fourth
quarter of 1998 by rotating assets out of these areas and increasing its
exposure to large-cap growth funds as well as Information Fund and Natural
Resource Development Securities. During the period under review the Portfolio
eliminated its holdings in Convertible Securities Trust. These shifts
contributed positively to the Portfolio's performance during the first quarter
of 1999.
OUTLOOK
At the midpoint of the Fund's fiscal year, we anticipate continuing the
Domestic Portfolio's current investment strategy in the months ahead. By
diversifying across investment styles, market caps and asset classes, the
Portfolio will seek to provide a cushion against short-term volatile moves in
particular markets or sectors.
The domestic economy continues to be buoyant, and the Fund's management team
believes that going forward a number of factors will only help the financial
markets continue to improve, including the easier monetary policies adopted by
many of the central banks, including the Federal Reserve Board. Overall, we
believe that the Goldilocks economy is not going away any time soon. For the
remainder of 1999, we believe that although volatility will continue, the U.S.
markets will show further improvement as the outlook for corporate profits
brightens.
3
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
LETTER TO THE SHAREHOLDERS March 31, 1999, continued
On May 1, 1999, Mitchell M. Merin was named President of the Morgan Stanley
Dean Witter Funds. Mr. Merin is also the President and Chief Operating Officer
of Asset Management of Morgan Stanley Dean Witter & Co., and President, Chief
Executive Officer and Director of Morgan Stanley Dean Witter Advisors Inc., the
Fund's Investment Manager. He also serves as Chairman, Chief Executive Officer
and Director of the Fund's distributor and transfer agent.
We appreciate your ongoing support of Morgan Stanley Dean Witter Fund of Funds
and look forward to continuing to serve your investment needs and objectives.
Very truly yours,
/s/ Charles A. Fiumefreddo /s/ Mitchell M. Merin
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
4
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS -- INTERNATIONAL
PORTFOLIO OF INVESTMENTS March 31, 1999 (unaudited)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (80.6%)
72,260 Morgan Stanley Dean Witter European Growth Fund Inc. ............ $1,430,756
58,077 Morgan Stanley Dean Witter International SmallCap Fund .......... 481,454
119,711 Morgan Stanley Dean Witter Japan Fund ........................... 914,591
110,601 Morgan Stanley Dean Witter Pacific Growth Fund Inc. ............. 1,244,267
----------
TOTAL COMMON STOCKS
(Identified Cost $3,887,401) .................................... 4,071,068
----------
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -----------
<S> <C> <C>
SHORT-TERM INVESTMENTS (14.8%)
U.S. GOVERNMENT AGENCY (a) (9.9%)
$500 Federal Home Loan Mortgage Corp. 4.82% due 04/01/99
(Amortized Cost $500,000) ....................................... 500,000
----------
REPURCHASE AGREEMENT (4.9%)
250 The Bank of New York 4.875% due 04/01/99 (dated 03/31/99;
proceeds $249,953) (b) (Identified Cost $249,919) ............... 249,919
----------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $749,919) ...................................... 749,919
----------
TOTAL INVESTMENTS
(Identified Cost $4,637,320) (c) .................... 95.4% 4,820,987
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES ...... 4.6 232,784
----- ----------
NET ASSETS .......................................... 100.0% $5,053,771
===== ==========
</TABLE>
- --------------
(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 $21,118 U.S. Treasury Bill 0.00% due 06/17/99 valued at
$20,920; $49,000 U.S. Treasury Bond 8.125% due 05/15/21 valued at $63,542;
$68,000 U.S. Treasury Note 6.875% due 08/31/99 valued at $68,968; $61,000
U.S. Treasury Note 5.75% due 10/31/00 valued at $63,130 and $36,197 U.S.
Treasury Note 8.75% due 08/15/00 valued at $38,358.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $291,955 and the
aggregate gross unrealized depreciation is $108,288, resulting in net
unrealized appreciation of $183,667.
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS -- DOMESTIC
PORTFOLIO OF INVESTMENTS March 31, 1999 (unaudited)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (84.4%)
46,000 Morgan Stanley Dean Witter American Value Fund .................. $1,669,324
55,860 Morgan Stanley Dean Witter Capital Growth Securities ............ 925,035
283,391 Morgan Stanley Dean Witter Competitive Edge Fund
"Best Ideas" Portfolio .......................................... 3,083,290
21,563 Morgan Stanley Dean Witter Developing Growth Securities ......... 569,683
51,657 Morgan Stanley Dean Witter Dividend Growth Securities Inc. ...... 3,192,387
86,952 Morgan Stanley Dean Witter Growth Fund .......................... 1,513,830
244,337 Morgan Stanley Dean Witter High Yield Securities Inc. ........... 1,409,824
87,431 Morgan Stanley Dean Witter Information Fund ..................... 1,690,035
170,282 Morgan Stanley Dean Witter Mid-Cap Dividend Growth
Securities ...................................................... 1,338,423
91,820 Morgan Stanley Dean Witter Mid-Cap Growth Fund .................. 1,374,553
321,370 Morgan Stanley Dean Witter Natural Resource Development
Securities Inc. ................................................. 3,715,037
8,545 Morgan Stanley Dean Witter Precious Metals & Minerals Trust...... 39,137
142 Morgan Stanley Dean Witter Short-Term Bond Fund ................. 1,355
144,866 Morgan Stanley Dean Witter Special Value Fund ................... 1,347,253
106,106 Morgan Stanley Dean Witter Utilities Fund ....................... 1,947,054
20,633 Morgan Stanley Dean Witter Value-Added Market Series/Equity
Portfolio ....................................................... 743,616
----------
TOTAL COMMON STOCKS
(Identified Cost $23,553,489).................................... 24,559,836
----------
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -----------
<S> <C> <C>
SHORT-TERM INVESTMENTS (15.3%)
U.S. GOVERNMENT AGENCY (a) (10.3%)
$ 3,000 Federal Home Loan Mortgage Corp. 4.82% due 04/01/99
(Amortized Cost $3,000,000)...................................... 3,000,000
----------
REPURCHASE AGREEMENT (5.0%)
1,467 The Bank of New York 4.875% due 04/01/99 (dated 03/31/99;
proceeds $1,467,380) (b) (Identified Cost $1,467,182)............ 1,467,182
----------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $4,467,182)..................................... 4,467,182
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS -- DOMESTIC
PORTFOLIO OF INVESTMENTS March 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $28,020,671) (c)........................ 99.7% $29,027,018
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES .......... 0.3 74,212
----- -----------
NET ASSETS .............................................. 100.0% $29,101,230
===== ===========
</TABLE>
- --------------
(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 $320,933 U.S. Treasury Bill 0.00% due 07/08/99 valued at
$317,142; $197,643 U.S. Treasury Note 5.875% due 11/30/01 valued at
$205,209; $478,000 U.S. Treasury Note 3.625% due 07/15/02 valued at $489,942
and $466,000 U.S. Treasury Note 9.125% due 05/15/99 valued at $484,232.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $1,355,960 and the
aggregate gross unrealized depreciation is $349,613, resulting in net
unrealized appreciation of $1,006,347.
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1999 (unaudited)
<TABLE>
<CAPTION>
INTERNATIONAL DOMESTIC
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments in securities, at value
(identified cost $4,637,320 and $28,020,671, respectively) ..... $4,820,987 $ 29,027,018
Cash ............................................................. 217,266 119,036
Receivable for shares of beneficial interest sold ................ 21,510 27,456
Receivable from affiliate ........................................ 19,014 10,008
Deferred organizational expenses ................................. 18,267 18,267
Prepaid expenses and other assets ................................ 13,414 23,480
---------- ------------
TOTAL ASSETS ................................................... 5,110,458 29,225,265
---------- ------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased ...................... 2,341 46,871
Plan of distribution fee ....................................... 3,685 25,611
Organizational expenses .......................................... 18,287 18,267
Accrued expenses and other payables .............................. 32,374 33,286
---------- ------------
TOTAL LIABILITIES .............................................. 56,687 124,035
---------- ------------
NET ASSETS ..................................................... $5,053,771 $ 29,101,230
========== ============
COMPOSITION OF NET ASSETS:
Paid-in-capital .................................................. $4,506,263 $ 26,628,675
Net unrealized appreciation ...................................... 183,667 1,006,347
Accumulated undistributed net investment income (loss) ........... (9,932) 59,874
Accumulated undistributed net realized gain ...................... 373,773 1,406,334
---------- ------------
NET ASSETS ..................................................... $5,053,771 $ 29,101,230
========== ============
CLASS A SHARES:
Net Assets ....................................................... $890,060 $1,053,325
Shares Outstanding (unlimited authorized, $.01 par value) ........ 79,008 95,568
NET ASSET VALUE PER SHARE ...................................... $11.27 $11.02
====== ======
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) .............. $11.89 $11.63
====== ======
CLASS B SHARES:
Net Assets ....................................................... $3,969,868 $26,401,425
Shares Outstanding (unlimited authorized, $.01 par value) ........ 355,894 2,402,199
NET ASSET VALUE PER SHARE ...................................... $11.15 $10.99
====== ======
CLASS C SHARES:
Net Assets ....................................................... $118,867 $1,631,849
Shares Outstanding (unlimited authorized, $.01 par value) ........ 10,618 147,858
NET ASSET VALUE PER SHARE ...................................... $11.19 $11.04
====== ======
CLASS D SHARES:
Net Assets ....................................................... $74,976 $14,631
Shares Outstanding (unlimited authorized, $.01 par value) ........ 6,640 1,327
NET ASSET VALUE PER SHARE ...................................... $11.29 $11.03
====== ======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the six months ended March 31, 1999 (unaudited)
<TABLE>
<CAPTION>
INTERNATIONAL DOMESTIC
- --------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME (LOSS):
INCOME
Dividends ......................................... $ -- $ 670,830
---------- ----------
Interest .......................................... 9,221 57,120
---------- ----------
TOTAL INCOME .................................... 9,221 727,950
---------- ----------
EXPENSES
Plan of distribution fee (Class A shares) ......... 1,028 1,418
Plan of distribution fee (Class B shares) ......... 18,004 129,861
Plan of distribution fee (Class C shares) ......... 121 2,164
Shareholder reports and notices ................... 13,898 33,667
Professional fees ................................. 7,335 7,529
Custodian fees .................................... 4,232 10,338
Transfer agent fees and expenses .................. 3,347 17,510
Organizational expenses ........................... 2,490 2,490
Other ............................................. 1,900 4,266
---------- ----------
TOTAL EXPENSES .................................. 52,355 209,243
Less: amounts waived/reimbursed ................... (33,202) (75,800)
---------- ----------
NET EXPENSES .................................... 19,153 133,443
---------- ----------
NET INVESTMENT INCOME (LOSS) .................... (9,932) 594,507
---------- ----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain on investments .................. 293,409 359,448
Capital gain distributions received ............... 158,776 1,042,426
---------- ----------
NET REALIZED GAIN ............................... 452,185 1,401,874
Net change in unrealized depreciation ............. 547,219 3,027,719
---------- ----------
NET GAIN ........................................ 999,404 4,429,593
---------- ----------
NET INCREASE ...................................... $ 989,472 $5,024,100
========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FOR THE SIX NOVEMBER 25, 1997* FOR THE SIX NOVEMBER 25, 1997*
MONTHS ENDED THROUGH MONTHS ENDED THROUGH
MARCH 31, 1999 SEPTEMBER 30, 1998 MARCH 31, 1999 SEPTEMBER 30, 1998
---------------- -------------------- ---------------- -------------------
(unaudited) (unaudited)
INTERNATIONAL DOMESTIC
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) ......... $ (9,932) $ 12,159 $ 594,507 $ 358,368
Net realized gain (loss) ............. 452,185 (78,412) 1,401,874 563,900
Net change in unrealized
depreciation ....................... 547,219 (363,552) 3,027,719 (2,021,372)
----------- ----------- ------------ -----------
NET INCREASE (DECREASE) . 989,472 (429,805) 5,024,100 (1,099,104)
----------- ----------- ------------ -----------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income
Class A shares ...................... -- (444) (47,405) (7,838)
Class B shares ...................... -- (18,372) (697,012) (89,059)
Class C shares ...................... -- (670) (45,091) (6,042)
Class D shares ...................... -- (114) (493) (61)
Net realized gain
Class A shares ...................... -- -- (27,008) --
Class B shares ...................... -- -- (499,329) --
Class C shares ...................... -- -- (32,843) --
Class D shares ...................... -- -- (260) --
----------- ----------- ------------ -----------
TOTAL DIVIDENDS AND
DISTRIBUTIONS .................... -- (19,600) (1,349,441) (103,000)
----------- ----------- ------------ -----------
Net increase (decrease) from
transactions in shares of
beneficial interest ................ 110,701 4,353,003 (1,984,648) 28,563,323
----------- ----------- ------------ -----------
NET INCREASE ....................... 1,100,173 3,903,598 1,690,011 27,361,219
NET ASSETS:
Beginning of period .................. 3,953,598 50,000 27,411,219 50,000
----------- ----------- ------------ -----------
END OF PERIOD $ 5,053,771 $ 3,953,598 $ 29,101,230 $27,411,219
=========== =========== ============ ===========
Undistributed net investment
income (loss) ...................... $ (9,932) -- $ 59,874 $ 255,368
=========== =========== ============ ===========
</TABLE>
- --------------
* Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Fund of Funds (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a non-diversified,
open-end management investment company. The Fund will invest in Class D shares
of other open-end management investment companies that are either members of
the Morgan Stanley Dean Witter Family of Funds or managed by an investment
advisor that is an affiliate of Morgan Stanley Dean Witter Advisors Inc. (the
"Investment Manager") (individually, an "Underlying Fund" and collectively, the
"Underlying Funds").
The Fund, which consists of two separate portfolios ("Portfolios"),
International and Domestic, was organized as a Massachusetts business trust on
July 3, 1997 and had no operations other than those relating to organizational
matters and the issuance of 10,000 shares of beneficial interest for $100,000
to the Investment Manager to effect the Fund's initial capitalization. Each
Portfolio issued 5,000 shares (1,250 per class) of beneficial interest for
$50,000 ($12,500 per class). The Fund commenced operations on November 25,
1997.
The investment objectives of each Portfolio are as follows:
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
International Seeks long-term capital appreciation by investing in a
selection of Underlying Funds which invest their assets
primarily in the international equity markets.
- --------------------------------------------------------------------------------
Domestic Seeks to maximize total investment return through capital
growth and income by investing in a selection of Underlying
Funds which invest their assets primarily in the U.S. equity
and fixed-income markets.
- --------------------------------------------------------------------------------
Each Portfolio 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.
11
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited) continued
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) Investments are valued at the net asset
value per share of each Underlying Fund determined as of the close of the New
York Stock Exchange on valuation date; and (2) 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 INVESTMENT -- 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.
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. 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.
E. 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.
F. ORGANIZATIONAL AND PREPAID EXPENSES -- The Investment Manager incurred the
organizational expenses of the Fund in the amount of approximately $50,000
($25,000 per Portfolio) which will be reimbursed for
12
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited) continued
the full amount thereof, exclusive of amounts waived of $13,466 ($6,733 per
Portfolio). 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 no investment
management fee. However, the Fund, through its investments in the Underlying
Funds, will pay its pro rata share of the management or advisory or
sub-advisory fees to the Investment Manager and/or Sub-Advisors or Advisor of
the Underlying Funds.
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.
The Investment Manager has agreed to assume all operating expenses (except for
plan of distribution fees) until such time as the respective Portfolio has $50
million in net assets or November 30, 1999, whichever occurs first. At March
31, 1999, included in the Statements of Assets and Liabilities are receivables
from an affiliate which represent expense reimbursements due to the Portfolios.
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
13
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited) continued
(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 International and Domestic that such
excess amounts, including carrying charges, totaled $911,187 and $2,020,647,
respectively at March 31, 1999.
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 broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the six months ended March 31, 1999, the distribution fee
was accrued for International and Domestic Class A shares and Class C shares at
the annual rate of 0.23% and 0.20%, and 0.22% and 0.25%, respectively.
The Distributor has informed International and Domestic that for the six months
ended March 31, 1999, it received contingent deferred sales charges from
certain redemptions of the Fund's shares as follows: Class B shares -- $7,751
and $33,579, respectively; and Class C shares -- $98 and $1,116, respectively;
and received $5,468 and $4,076, respectively, 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 March 31, 1999
aggregated $4,743,992 and $4,864,266, respectively, for International and
$36,344,997 and $37,166,987, respectively, for Domestic.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Funds transfer agent.
14
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited) continued
5. SHARES OF BENEFICIAL INTEREST
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX NOVEMBER 25, 1997*
MONTHS ENDED THROUGH
MARCH 31, 1999 SEPTEMBER 30, 1998
----------------------------- -------------------------
(unaudited)
INTERNATIONAL
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
CLASS A
Sold ................................... 307,475 $ 3,138,893 67,277 $ 699,140
Reinvestment of dividends and
distributions ......................... -- -- 45 444
Redeemed ............................... (294,071) (3,062,439) (2,968) (29,427)
-------- ------------- ------ ----------
Net increase (decrease) -- Class A ..... 13,404 76,454 64,354 670,157
-------- ------------- ------ ----------
CLASS B
Sold ................................... 106,032 1,122,285 397,997 3,985,486
Reinvestment of dividends and
distributions ......................... -- -- 1,770 17,435
Redeemed ............................... (109,169) (1,134,857) (41,986) (424,650)
-------- ------------- ------- ----------
Net increase (decrease) -- Class B ..... (3,137) (12,572) 357,781 3,578,271
-------- ------------- ------- ----------
CLASS C
Sold ................................... 3,149 34,641 11,806 118,681
Reinvestment of dividends and
distributions ......................... -- -- 68 670
Redeemed ............................... (4,201) (45,039) (1,454) (14,900)
-------- ------------- ------- ----------
Net increase (decrease) -- Class C ..... (1,052) (10,398) 10,420 104,451
-------- ------------- ------- ----------
CLASS D
Sold ................................... 5,377 57,217 1 10
Reinvestment of dividends and
distributions ......................... -- -- 12 114
-------- ------------- ------- ----------
Net increase -- Class D ................ 5,377 57,217 13 124
-------- ------------- ------- ----------
Net increase (decrease) in Fund ........ 14,592 $ 110,701 432,568 $4,353,003
======== ============= ======= ==========
<CAPTION>
FOR THE PERIOD
FOR THE SIX NOVEMBER 25, 1997*
MONTHS ENDED THROUGH
MARCH 31, 1999 SEPTEMBER 30, 1998
---------------------------- -----------------------------
(unaudited)
DOMESTIC
----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ --------------- ------------- ---------------
<S> <C> <C> <C> <C>
CLASS A
Sold ................................... 8,829 $ 94,901 195,957 $ 1,986,330
Reinvestment of dividends and
distributions ......................... 6,261 67,433 724 7,325
Redeemed ............................... (59,303) (641,924) (58,150) (627,694)
------- ------------ ------- ------------
Net increase (decrease) -- Class A ..... (44,213) (479,590) 138,531 1,365,961
------- ------------ ------- ------------
CLASS B
Sold ................................... 197,307 2,084,597 2,941,410 29,850,040
Reinvestment of dividends and
distributions ......................... 94,800 1,020,047 7,843 79,375
Redeemed ............................... (407,441) (4,308,067) (432,970) (4,524,346)
-------- ------------ --------- ------------
Net increase (decrease) -- Class B ..... (115,334) (1,203,423) 2,516,283 25,405,069
-------- ------------ --------- ------------
CLASS C
Sold ................................... 7,587 80,573 208,500 2,140,619
Reinvestment of dividends and
distributions ......................... 6,917 74,495 564 5,713
Redeemed ............................... (42,728) (457,456) (34,232) (354,110)
-------- ------------ --------- ------------
Net increase (decrease) -- Class C ..... (28,224) (302,388) 174,832 1,792,222
-------- ------------ --------- ------------
CLASS D
Sold ................................... -- -- 1 10
Reinvestment of dividends and
distributions ......................... 70 753 6 61
-------- ------------ --------- ------------
Net increase -- Class D ................ 70 753 7 71
-------- ------------ --------- ------------
Net increase (decrease) in Fund ........ (187,701) $ (1,984,648) 2,829,653 $ 28,563,323
======== ============ ========= ============
</TABLE>
- --------------
* Commencement of operations.
6. FEDERAL INCOME TAX STATUS
Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. The International Portfolio incurred and will elect to defer
net capital losses of approximately $4,000 during fiscal 1998.
As of September 30, 1998, the International Portfolio had temporary book/tax
differences attributable to post-October losses and capital loss deferrals on
wash sales.
15
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
INTERNATIONAL
--------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
-------------------- ------------------- ------------------- -------------------
1999** 1998* 1999** 1998* 1999** 1998* 1999** 1998*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:++
Net asset value, beginning of
period .......................... $ 9.08 $ 10.00 $ 9.03 $ 10.00 $ 9.03 $ 10.00 $ 9.09 $ 10.00
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from investment
operations: .....................
Net investment income (loss)..... 0.01 0.05 (0.03) 0.03 0.01 0.04 0.03 0.14
Net realized and unrealized
gain (loss) ..................... 2.18 (0.88) 2.15 (0.91) 2.15 (0.92) 2.17 (0.96)
------- ------- ------- ------- ------- ------- ------- -------
Total income (loss) from
investment operations ........... 2.19 (0.83) 2.12 (0.88) 2.16 (0.88) 2.20 (0.82)
------- ------- ------- ------- ------- ------- ------- -------
Less dividends from net
investment income ............... -- (0.09) -- (0.09) -- (0.09) -- (0.09)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period ... $ 11.27 $ 9.08 $ 11.15 $ 9.03 $ 11.19 $ 9.03 $ 11.29 $ 9.09
======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (1)+ ................ 24.12% (8.36)% 23.48% (8.87)% 23.92% (8.87)% 24.20% (8.26)%
RATIOS TO AVERAGE NET
ASSETS (2)(3)(4)(5):
Expenses ......................... 0.23% 0.25% 1.00% 0.94% 0.20% 0.92% 0.00% 0.00%
Net investment income (loss) ..... 0.17% 1.01% (0.60)% 0.32% 0.20% 0.34% 0.40% 1.26%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands ....................... $ 890 $ 596 $ 3,970 $ 3,241 $ 119 $ 105 $ 75 $ 11
Portfolio turnover rate (1) ...... 116% 135% 116% 135% 116% 135% 116% 135%
</TABLE>
- -------------
* For the period November 25, 1997 (commencement of operations) through
September 30, 1998.
** For the six months ended March 31, 1999 (unaudited).
++ 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) If the Fund had borne all of its expenses that were reimbursed or waived by
the Investment Manager, the annualized expense and net investment loss
ratios would have been 1.66% and (1.26)%, respectively, for the six months
ended March 31, 1999 and 6.16% and (4.90)%, respectively, for the period
ended September 30, 1998, for Class A shares; 2.43% and (2.03)%,
respectively, for the six months ended March 31, 1999 and 6.91% and
(5.65)%, respectively, for the period ended September 30, 1998, for Class B
shares; 1.63% and (1.23)%, respectively, for the six months ended March 31,
1999 and 6.91% and (5.65)%, respectively, for the period ended September
30, 1998, for Class C shares; and 1.43% and (1.03)%, respectively, for the
six months ended March 31, 1999 and 5.91% and (4.65)%, respectively, for
the period ended September 30, 1998, for Class D shares.
(4) Does not include any expenses incurred as a result of investment in the
Underlying Funds.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
MORGAN STANLEY DEAN WITTER FUND OF FUNDS
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
DOMESTIC
-------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
------------------- ------------------- ------------------- -------------------
1999** 1998* 1999** 1998* 1999** 1998* 1999** 1998*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:++
Net asset value, beginning of
period ............................. $ 9.72 $ 10.00 $ 9.67 $ 10.00 $ 9.67 $ 10.00 $ 9.74 $ 10.00
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from investment
operations:
Net investment income .............. 0.27 0.21 0.21 0.14 0.25 0.13 0.26 0.22
Net realized and unrealized
gain (loss) ........................ 1.60 (0.44) 1.61 (0.42) 1.61 (0.41) 1.63 (0.43)
------- ------- ------- ------- ------- ------- ------- -------
Total income (loss) from
investment operations .............. 1.87 (0.23) 1.82 (0.28) 1.86 (0.28) 1.89 (0.21)
------- ------- ------- ------- ------- ------- ------- -------
Less dividends and distributions
from:
Net investment income .............. (0.36) (0.05) (0.29) (0.05) (0.28) (0.05) (0.39) (0.05)
Net realized gain .................. (0.21) -- (0.21) -- (0.21) -- (0.21) --
------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions ...................... (0.57) (0.05) (0.50) (0.05) (0.49) (0.05) (0.60) (0.05)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period ...... $ 11.02 $ 9.72 $ 10.99 $ 9.67 $ 11.04 $ 9.67 $ 11.03 $ 9.74
======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (1)+ ................... 19.36% (2.33)% 18.88% (2.83)% 19.36% (2.83)% 19.54% (2.13)%
RATIOS TO AVERAGE NET
ASSETS (2)(3)(4)(5):
Expenses ............................ 0.22% 0.22% 1.00% 0.92% 0.25% 0.92% 0.00% 0.00%
Net investment income ............... 4.80% 2.21% 4.02% 1.51% 4.77% 1.51% 5.02% 2.43%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands .......................... $ 1,053 $ 1,359 $26,401 $24,338 $ 1,632 $ 1,702 $ 15 $ 12
Portfolio turnover rate (1) ......... 139% 227% 139% 227% 139% 227% 139% 227%
</TABLE>
- --------------
* For the period November 25, 1997 (commencement of operations) through
September 30, 1998.
** For the six months ended March 31, 1999 (unaudited).
++ 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) If the Fund had borne all of its expenses that were reimbursed or waived by
the Investment Manager, the annualized expense and net investment income
ratios would have been 0.62% and 4.40%, respectively, for the six months
ended March 31, 1999 and 1.15% and 1.28%, respectively, for the period
ended September 30, 1998, for Class A shares; 1.40% and 3.62%,
respectively, for the six months ended March 31, 1999 and 1.90% and 0.53%,
respectively, for the period ended September 30, 1998, for Class B shares;
0.65% and 4.37%. respectively, for the six months ended March 31, 1999 and
1.90% and 0.53%, respectively, for the period ended September 30, 1998, for
Class C shares; and 0.40% and 4.62%, respectively, for the six months ended
March 31, 1999 and 0.90% and 1.53%, respectively, for the period ended
September 30, 1998, for Class D shares.
(4) Does not include any expenses incurred as a result of investment in the
Underlying Funds.
(5) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
17
