<PAGE>
MORGAN STANLEY DEAN WITTER Two World Trade Center,
COMPETITIVE EDGE FUND New York, New York 10048
"BEST IDEAS" PORTFOLIO
LETTER TO THE SHAREHOLDERS November 30, 1998
DEAR SHAREHOLDER:
We are pleased to present the semiannual report of Morgan Stanley Dean Witter
Competitive Edge Fund "Best Ideas" Portfolio for the six-month period ended
November 30, 1998. This report reviews the Fund's most recent performance and
provides an analysis of its portfolio.
FUND PERFORMANCE
Morgan Stanley Dean Witter Competitive Edge Fund "Best Ideas" Portfolio, which
began investing on February 25, 1998, posted a total return of -3.09 percent
(Class B shares) for the six-month period ended November 30, 1998. For the same
period the Lipper Global Fund Index posted a total return of -3.50 percent. In
addition, the Morgan Stanley Capital International World Index (MSCI World
Index), the Fund's benchmark, returned 3.37 percent during this period. The
Fund's Class A, C and D shares returned -2.70 percent, -3.09 percent and -2.60
percent, respectively, over the same period. The performance of the Fund's four
share classes varies because each class has different expenses.
An overweighting in U.S. companies (versus the rest of the world) with market
share domination and earnings visibility into 1999 and beyond positively
impacted the Fund's performance over the period. The underperformance of the
Competitive Edge Fund and the Lipper Global Fund Index versus the MSCI World
Index is primarily due to the latter index's high exposure to the U.S. market.
In addition, the Fund's performance was depressed by weak markets in Japan,
emerging Asia and Latin America.
MARKET OVERVIEW
In general, the world's stock markets displayed tremendous resiliency from the
end of May 1998 through November, albeit with volatility the likes of which
investors had not seen for some time. June and July proved relatively
uneventful until earnings concerns, global currency instability, and fears of
plummeting deflation caused global markets to drop precipitously in August.
Fears subsided somewhat in September, followed
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
LETTER TO THE SHAREHOLDERS November 30, 1998, continued
by an October to November rally that drove global markets up to new highs. A
round of coordinated interest-rate cuts by central banks around the world, as
well as the eventual announcement of long-awaited banking reforms in Japan,
contributed to rebuilding confidence as 1998 came to a close.
THE PORTFOLIO
The Fund invests in stocks from a list compiled by the Morgan Stanley Dean
Witter Equity Research Department, that they believe demonstrate a long-term
sustainable "competitive edge" versus other players in the global arena.
As of November 30, the portfolio manager invested 97 percent of the Fund's
assets in 41 equity positions throughout the world with the remaining 3 percent
held in U.S. commercial paper. Equity holdings in U.S. companies represented
approximately 58 percent of the Fund's total assets, with the remaining balance
diversified throughout 9 other countries. In descending order beginning with
the largest exposure, these are: the U.K., France, the Netherlands, Japan,
Switzerland, Germany, Australia, Sweden and Finland.
A few of the larger positions held in the Fund as of November 30 included: Time
Warner (movies/entertainment) and American Home Products (major
pharmaceuticals) in the U.S.; Unilever (packaged foods) and Diageo (alcoholic
beverages) in the U.K.; Axa (multi-line insurance) and TOTAL (oil
refining/marketing) in France; Heineken (alcoholic beverages) and
Wolters-Kluwer (books/magazines) in the Netherlands; and Fuji Photo
(photographic products) and Sony (consumer electronics and appliances) in
Japan.
LOOKING AHEAD
While the track record of Morgan Stanley Dean Witter Competitive Edge Fund
"Best Ideas" Portfolio is still relatively limited due to its introduction less
than one year ago, it is our view that our large, market-share-dominant
companies should continue to prosper in a continuously expanding global
economy. For investors with a three-to-five year investment horizon, we believe
these competitive leaders will provide global exposure to many of the world's
fastest-growing industries.
We appreciate your continued support and interest in the Fund and look forward
to serving your investment needs into the next millennium.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO
- -----------------------------------
CHARLES A. FIUMEFREDDO
Chairman of the Board
2
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
PORTFOLIO OF INVESTMENTS November 30, 1998 (unaudited)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------- -------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS (96.9%)
AUSTRALIA (3.0%)
Newspapers
9,887,000 News Corporation Ltd. (Pref.) .......... $ 62,040,925
--------------
FINLAND (2.0%)
Paper & Forest Products
1,600,000 UPM-Kymmene Oyj ........................ 41,955,597
--------------
FRANCE (5.1%)
Multi-Line Insurance
404,000 AXA ................................... 52,278,169
--------------
Oil Refining/Marketing
420,000 Total S.A. (B Shares) .................. 52,130,282
--------------
TOTAL FRANCE ........................... 104,408,451
--------------
GERMANY (4.2%)
Diversified Manufacturing
142,000 MAN AG ................................. 40,336,621
--------------
Motor Vehicles
60,600 Bayerische Motoren Werke (BMW)
AG ..................................... 46,882,419
--------------
TOTAL GERMANY .......................... 87,219,040
--------------
JAPAN (4.6%)
Consumer Electronics/Appliances
660,070 Sony Corp. ............................. 48,292,576
--------------
Photographic Products
1,256,000 Fuji Photo Film Co. .................... 46,915,144
--------------
TOTAL JAPAN ............................ 95,207,720
--------------
NETHERLANDS (4.7%)
Alcoholic Beverages
1,091,000 Heineken NV ............................ 55,484,261
--------------
Books/Magazine
211,900 Wolters Kluwer NV ...................... 40,453,334
--------------
TOTAL NETHERLANDS ...................... 95,937,595
--------------
SWEDEN (2.4%)
Life Insurance
3,500,000 Skandia Forsakrings AB ................. 49,677,419
--------------
Tools/Hardware
29,800 Sandvik AB (B Shares) .................. 549,309
--------------
TOTAL SWEDEN ........................... 50,226,728
--------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------- -------------------
<S> <C> <C>
SWITZERLAND (4.4%)
Building Materials
42,800 Holderbank Financiere Glarus AG
(B Shares) ............................. $ 49,623,188
--------------
Packaged Foods
19,500 Nestle S.A. ........................... 40,572,536
--------------
TOTAL SWITZERLAND ...................... 90,195,724
--------------
UNITED KINGDOM (9.0%)
Alcoholic Beverages
4,457,400 Diageo PLC ............................. 49,911,242
--------------
Banking
1,610,000 HSBC Holdings PLC ...................... 41,279,385
--------------
Industrial Machinery/Components
11,500,000 Siebe PLC .............................. 41,342,937
--------------
Packaged Foods
5,000,000 Unilever PLC ........................... 51,987,877
--------------
TOTAL UNITED KINGDOM .................. 184,521,441
--------------
UNITED STATES (57.5%)
Aerospace
1,256,000 Boeing Co. ............................. 51,025,000
--------------
Air Freight/Delivery Services
910,900 FDX Corp.* ............................. 59,094,637
--------------
Computer Software
1,053,000 Computer Associates
International, Inc. ................... 46,595,250
424,700 Microsoft Corp.* ....................... 51,813,400
--------------
98,408,650
--------------
Computers Communications
733,500 Cisco Systems, Inc.* ................... 55,287,562
--------------
Diversified Financial Services
512,200 American Express Co. ................... 51,252,013
--------------
Electrical Products
696,400 Emerson Electric Co. ................... 45,266,000
544,100 General Electric Co. ................... 49,241,050
--------------
94,507,050
--------------
Integrated Oil Companies
689,800 Chevron Corp. ......................... 57,684,525
--------------
Major Banks
1,455,000 Bank of New York Co., Inc. ............ 49,833,750
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
PORTFOLIO OF INVESTMENTS November 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------ ----------------
<S> <C> <C>
Major Chemicals
977,000 Du Pont (E.I.) de Nemours & Co.,
Inc. ..................................... $ 57,398,750
-------------
Major Pharmaceuticals
1,133,300 American Home Products Corp. ............. 60,348,225
586,000 Lilly (Eli) & Co. ....................... 52,556,875
-------------
112,905,100
-------------
Medical Equipment & Supplies
854,300 Medtronic, Inc. .......................... 57,825,431
-------------
Movies/Entertainment
587,000 Time Warner, Inc. ........................ 62,075,250
-------------
Oilfield Services/Equipment
1,237,600 Halliburton Co. .......................... 36,354,500
881,700 Schlumberger, Ltd. ...................... 39,400,969
-------------
75,755,469
-------------
Retail
655,000 Wal-Mart Stores, Inc. .................... 49,329,687
-------------
Semiconductors
507,800 Intel Corp. .............................. 54,620,238
-------------
Services to the Health Industry
1,042,000 Quintiles Transnational Corp.* ........... 51,969,750
-------------
Soft Drinks
1,256,000 Coca-Cola Enterprises, Inc. .............. 47,492,500
-------------
Unregulated Power Generation
1,010,000 AES Corp. (The) * ........................ 46,207,500
-------------
Utilities -- Electric
1,800,000 Southern Co. ............................ 53,100,000
-------------
TOTAL UNITED STATES ...................... 1,185,772,862
-------------
TOTAL COMMON AND
PREFERRED STOCKS
(Identified Cost $1,911,168,712).......... 1,997,486,083
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------- ----------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (2.6%)
U.S. GOVERNMENT AGENCY (a) (2.6%)
$ 52,600 Federal Home Loan Banks 5.15%
due 12/01/98 (Amortized Cost
$52,600,000) ........................... $ 52,600,000
-------------
REPURCHASE AGREEMENT (0.0%)
302 The Bank of New York 4.625%
due 12/01/98 (dated 11/30/98;
proceeds $302,521) (b)
(Identified Cost $302,482) ............. 302,482
-------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $52,902,482) .......... 52,902,482
-------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $1,964,071,194) (c) 99.5% 2,050,388,565
OTHER ASSETS IN EXCESS OF
LIABILITIES ........................ 0.5 11,337,795
----- -------------
NET ASSETS ......................... 100.0% $2,061,726,360
===== ==============
</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 $47,591 U.S. Treasury Note 6.25% due 05/31/99
valued at $47,948; $140,000 U.S. Treasury Note 5.75% due 08/15/03
valued at $148,619 and $107,363 U.S. Treasury Note 6.125% due
07/31/00 valued at $112,026.
(c) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$159,975,768 and the aggregate gross unrealized depreciation is
$73,658,397, resulting in net unrealized appreciation of
$86,317,371.
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT NOVEMBER 30, 1998:
<TABLE>
<CAPTION>
CONTRACTS IN DELIVERY UNREALIZED
TO DELIVER EXCHANGE FOR DATE DEPRECIATION
- --------------------- -------------- ---------- -------------
<S> <C> <C> <C>
SEK 22,138,901 $2,710,078 12/01/98 $ (6,769)
SEK 28,972,236 $3,553,568 12/03/98 (10,524)
--------
Total unrealized depreciation ............... $(17,293)
========
</TABLE>
Currency Abbreviation:
SEK Swedish Krona.
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
SUMMARY OF INVESTMENTS November 30, 1998 (unaudited)
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ----------------------------------- ----------------------- -------------
<S> <C> <C>
Aerospace ......................... $ 51,025,000 2.5%
Air Freight/Delivery Services...... 59,094,637 2.9
Alcoholic Beverages ............... 105,395,503 5.1
Banking ........................... 41,279,385 2.0
Books/Magazine .................... 40,453,334 2.0
Building Materials ................ 49,623,188 2.4
Computer Software ................. 98,408,650 4.8
Computers Communications .......... 55,287,562 2.7
Consumer
Electronics/Appliances ......... 48,292,576 2.3
Diversified Financial Services..... 51,252,012 2.5
Diversified Manufacturing ......... 40,336,621 2.0
Electrical Products ............... 94,507,050 4.6
Industrial
Machinery/Components ........... 41,342,937 2.0
Integrated Oil Companies .......... 57,684,525 2.8
Life Insurance .................... 49,677,419 2.4
Major Banks ....................... 49,833,750 2.4
Major Chemicals ................... 57,398,750 2.8
Major Pharmaceuticals ............. 112,905,100 5.5
Medical Equipment &
Supplies ....................... 57,825,431 2.8
Motor Vehicles .................... 46,882,419 2.3
Movies/Entertainment .............. 62,075,250 3.0
Multi-Line Insurance .............. 52,278,169 2.5
Newspapers ........................ 62,040,925 3.0
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ----------------------------------- ----------------------- -------------
<S> <C> <C>
Oil Refining/Marketing ............ $ 52,130,282 2.5%
Oilfield Services/Equipment ....... 75,755,469 3.7
Packaged Foods .................... 92,560,413 4.5
Paper & Forest Products ........... 41,955,597 2.0
Photographic Products ............. 46,915,144 2.3
Repurchase Agreement .............. 302,482 0.0
Retail ............................ 49,329,688 2.4
Semiconductors .................... 54,620,238 2.6
Services To The Health
Industry ....................... 51,969,750 2.5
Soft Drinks ....................... 47,492,500 2.3
Tools/Hardware .................... 549,309 0.0
U.S. Government Agency ............ 52,600,000 2.6
Unregulated Power
Generation ..................... 46,207,500 2.2
Utilities - Electric .............. 53,100,000 2.6
--------------
$2,050,388,565 99.5%
==============
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
- -------------------------------- ----------------- -----------
<S> <C> <C>
Common Stocks .................. $1,935,445,158 93.9%
Preferred Stock ................ 62,040,925 3.0
Short-Term Investments ......... 52,902,482 2.6
--------------
$2,050,388,565 99.5%
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1998 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $1,964,071,194)........................................ $2,050,388,565
Receivable for:
Investments sold ...................................................... 10,351,343
Dividends ............................................................. 3,118,584
Shares of beneficial interest sold .................................... 2,130,433
Foreign withholding taxes reclaimed ................................... 1,717,965
Deferred organizational expenses ......................................... 118,824
Prepaid expenses and other assets ........................................ 487,589
--------------
TOTAL ASSETS .......................................................... 2,068,313,303
--------------
LIABILITIES:
Unrealized depreciation on open forward foreign currency contracts ....... 17,293
Payable for:
Shares of beneficial interest repurchased ............................. 2,239,769
Plan of distribution fee .............................................. 1,641,570
Investments purchased ................................................. 1,505,392
Investment management fee ............................................. 1,107,443
Accrued expenses and other payables ...................................... 75,476
--------------
TOTAL LIABILITIES ..................................................... 6,586,943
--------------
NET ASSETS ............................................................ $2,061,726,360
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital .......................................................... $2,086,761,869
Net unrealized appreciation .............................................. 86,382,511
Accumulated net investment loss .......................................... (104,815)
Accumulated net realized loss ............................................ (111,313,205)
--------------
NET ASSETS ............................................................ $2,061,726,360
==============
CLASS A SHARES:
Net Assets ............................................................... $ 116,723,403
Shares Outstanding (unlimited authorized, $.01 par value)................. 11,570,870
NET ASSET VALUE PER SHARE ............................................. $ 10.09
==============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) ...................... $ 10.65
==============
CLASS B SHARES:
Net Assets ............................................................... $1,764,677,572
Shares Outstanding (unlimited authorized, $.01 par value)................. 175,933,851
NET ASSET VALUE PER SHARE ............................................. $ 10.03
==============
CLASS C SHARES:
Net Assets ............................................................... $ 172,120,779
Shares Outstanding (unlimited authorized, $.01 par value)................. 17,160,016
NET ASSET VALUE PER SHARE ............................................. $ 10.03
==============
CLASS D SHARES:
Net Assets ............................................................... $ 8,204,606
Shares Outstanding (unlimited authorized, $.01 par value)................. 811,796
NET ASSET VALUE PER SHARE ............................................. $ 10.11
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the six months ended November 30, 1998 (unaudited)
<TABLE>
<S> <C>
NET INVESTMENT LOSS:
INCOME
Dividends (net of $459,541 foreign withholding tax)................... $ 9,691,867
Interest ............................................................. 2,203,743
-------------
TOTAL INCOME ...................................................... 11,895,610
-------------
EXPENSES
Plan of distribution fee (Class A shares) ............................ 141,618
Plan of distribution fee (Class B shares) ............................ 8,493,043
Plan of distribution fee (Class C shares) ............................ 841,671
Investment management fee ............................................ 6,400,515
Transfer agent fees and expenses ..................................... 1,585,167
Custodian fees ....................................................... 208,306
Registration fees .................................................... 112,223
Professional fees .................................................... 34,014
Shareholder reports and notices ...................................... 27,858
Organizational expenses .............................................. 13,859
Trustees' fees and expenses .......................................... 7,054
Other ................................................................ 35,458
-------------
TOTAL EXPENSES .................................................... 17,900,786
-------------
NET INVESTMENT LOSS ............................................... (6,005,176)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on:
Investments ....................................................... (97,865,288)
Foreign exchange transactions ..................................... (2,605)
-------------
NET LOSS .......................................................... (97,867,893)
-------------
Net change in unrealized appreciation/depreciation on:
Investments ....................................................... 32,824,319
Translation of forward foreign currency contracts, other assets and
liabilities denominated in foreign currencies ................... 89,613
-------------
NET APPRECIATION .................................................. 32,913,932
-------------
NET LOSS .......................................................... (64,953,961)
-------------
NET DECREASE ......................................................... $ (70,959,137)
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FEBRUARY 25, 1998*
MONTHS ENDED THROUGH
NOVEMBER 30, 1998 MAY 31, 1998
------------------- -------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) ......................... $ (6,005,176) $ 4,398,617
Net realized loss .................................... (97,867,893) (13,168,378)
Net change in unrealized appreciation ................ 32,913,932 53,468,579
-------------- --------------
NET INCREASE (DECREASE) ........................... (70,959,137) 44,698,818
Net increase from transactions in shares of beneficial
interest ........................................... 121,598,719 1,966,337,960
-------------- --------------
NET INCREASE ...................................... 50,639,582 2,011,036,778
NET ASSETS:
Beginning of period .................................. 2,011,086,778 50,000
-------------- --------------
END OF PERIOD
(Including a net investment loss of $104,815 and
undistributed net investment income of $5,900,361,
respectively) ..................................... $2,061,726,360 $2,011,086,778
============== ==============
</TABLE>
- ---------------------
* Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
NOTES TO FINANCIAL STATEMENTS November 30, 1998 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Competitive Edge Fund (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company, which currently consists
of two separate Portfolios. The information contained in this report is for the
"Best Ideas" Portfolio (the "Portfolio"). The Portfolio's investment objective
is to provide long term capital growth. The Portfolio seeks to achieve its
objective by investing at least 80% of its net assets in common stocks of U.S.
and non-U.S. companies included on the "Best Ideas" list, a research
compilation assembled and maintained by Morgan Stanley Dean Witter Equity
Research. The Portfolio was organized as a Massachusetts business trust on
October 16, 1997 and had no other operations other than those relating to
organizational matters and the issuance of 1,250 shares of beneficial interest
by each class for $12,500 of each class to Morgan Stanley Dean Witter Advisors
Inc. (the "Investment Manager") to effect the Portfolio's initial
capitalization. The Portfolio commenced operations on February 25, 1998.
The Portfolio offers four classes of shares. 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 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
a security is 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 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; and
9
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
NOTES TO FINANCIAL STATEMENTS November 30, 1998 (unaudited) continued
(4) 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.
Discounts are accreted over the respective life of the 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 Portfolio 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 Portfolio
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 Portfolio 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
transactions. The Portfolio 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.
10
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
NOTES TO FINANCIAL STATEMENTS November 30, 1998 (unaudited) continued
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 Portfolio in the amount of approximately
$140,000 which will be 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 Portfolio pays the
Investment Manager a management fee, accrued daily and payable monthly, by
applying the following annual rates to the net assets of the Fund determined as
of the close of each business day: 0.65% of the portion of the daily net assets
not exceeding $1.5 billion and 0.625% of the portion of daily net assets
exceeding $1.5 billion.
Under the terms of the Agreement, in addition to managing the Portfolio's
investments, the Investment Manager maintains certain of the Portfolio'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 Portfolio 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
Portfolio.
3. PLAN OF DISTRIBUTION
Shares of the Portfolio are distributed by Morgan Stanley Dean Witter
Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager.
The Portfolio has adopted a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Act. The Plan provides that the Portfolio 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
11
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
NOTES TO FINANCIAL STATEMENTS November 30, 1998 (unaudited) continued
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 Portfolio 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 Portfolio that such excess
amounts, including carrying charges, totaled $87,686,438 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
Portfolio 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 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 Portfolio that for the six months ended
November 30, 1998, it received contingent deferred sales charges from certain
redemptions of the Portfolio's Class A shares, Class B
12
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
NOTES TO FINANCIAL STATEMENTS November 30, 1998 (unaudited) continued
shares and Class C shares of $13,693, $2,358,706 and $152,077, respectively and
received $227,196 in front-end sales charges from sales of the Portfolio's
Class A shares. The respective shareholders pay such charges which are not an
expense of the Portfolio.
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 $1,128,987,418 and $912,074,981, respectively.
For the six months ended November 30, 1998, the Fund incurred brokerage
commissions of $1,125,461 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 receivable for investments
sold and payable for investments purchased included unsettled trades with
Morgan Stanley & Co., Inc. of $10,334,050 and $1,505,392, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Portfolio's transfer agent.
5. 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 Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $11,472,000 during fiscal 1998.
As of May 31, 1998, the Portfolio had temporary book/tax differences primarily
attributable to post-October losses and capital loss deferrals on wash sales.
6. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Portfolio 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 Portfolio 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 counter parties to meet the terms of their
contracts.
At November 30, 1998, there were outstanding forward contracts used to
facilitate settlement of foreign currency denominated portfolio transactions.
13
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
NOTES TO FINANCIAL STATEMENTS November 30, 1998 (unaudited) continued
7. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FEBRUARY 25, 1998*
MONTHS ENDED THROUGH
NOVEMBER 30, 1998 MAY 31, 1998
---------------------------------- -----------------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
--------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
CLASS A
Sold ............................ 1,342,052 $ 13,104,192 11,592,880 $ 116,824,084
Redeemed ........................ (1,127,177) (10,512,240) (238,135) (2,486,285)
---------- -------------- ---------- --------------
Net increase -- Class A ......... 214,875 2,591,952 11,354,745 114,337,799
---------- -------------- ---------- --------------
CLASS B
Sold ............................ 28,323,041 279,714,421 167,749,918 1,699,075,476
Redeemed ........................ (17,763,296) (165,460,473) (2,377,063) (24,804,561)
----------- -------------- ----------- --------------
Net increase -- Class B ......... 10,559,745 114,253,948 165,372,855 1,674,270,915
----------- -------------- ----------- --------------
CLASS C
Sold ............................ 2,877,181 28,134,006 17,653,992 178,479,819
Redeemed ........................ (2,771,834) (26,465,737) (600,572) (6,271,272)
----------- -------------- ----------- --------------
Net increase -- Class C ......... 105,347 1,668,269 17,053,420 172,208,547
----------- -------------- ----------- --------------
CLASS D
Sold ............................ 367,774 3,787,987 519,814 5,520,699
Redeemed ........................ (77,042) (703,437) -- --
----------- -------------- ----------- --------------
Net increase -- Class D ......... 290,732 3,084,550 519,814 5,520,699
----------- -------------- ----------- --------------
Net increase in Fund ............ 11,170,699 $ 121,598,719 194,300,834 $1,966,337,960
=========== ============== =========== ==============
</TABLE>
- ---------------
* Commencement of operations.
14
<PAGE>
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a beneficial interest outstanding
throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FEBRUARY 25, 1998*
MONTHS ENDED THROUGH
NOVEMBER 30, 1998 MAY 31, 1998
------------------------ --------------------
(unaudited)
<S> <C> <C>
CLASS B SHARES ++
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................... $ 10.35 $ 10.00
---------- -------------
Income (loss) from investment operations:
Net investment income (loss) .......................... (0.03) 0.03
Net realized and unrealized gain (loss) ............... (0.29) 0.32
---------- -------------
Total income (loss) from investment operations ......... (0.32) 0.35
---------- -------------
Net asset value, end of period ......................... $ 10.03 $ 10.35
========== =============
TOTAL RETURN + ......................................... (3.09)%(1) 3.50%(1)
RATIOS TO AVERAGE NET ASSETS :
Expenses ............................................... 1.85 %(2)(3) 1.88%(2)
Net investment income (loss) ........................... (0.65)%(2)(3) 0.92%(2)
SUPPLEMENTAL DATA :
Net assets, end of period, in thousands ................ $1,764,678 $1,711,433
Portfolio turnover rate ................................ 48 %(1) 19%(1)
</TABLE>
- -------------
* Commencement of operations.
++ 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 COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FEBRUARY 25, 1998*
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 ................... $ 10.37 $ 10.00
-------- -----------
Income (loss) from investment operations:
Net investment income ................................. -- 0.05
Net realized and unrealized gain (loss) ............... (0.28) 0.32
-------- -----------
Total income (loss) from investment operations ......... (0.28) 0.37
-------- -----------
Net asset value, end of period ......................... $ 10.09 $ 10.37
======== ===========
TOTAL RETURN+ .......................................... (2.70)%(1) 3.70%(1)
RATIOS TO AVERAGE NET ASSETS :
Expenses ............................................... 1.10 %(2)(3) 1.13%(2)
Net investment income .................................. 0.10 %(2)(3) 1.66%(2)
SUPPLEMENTAL DATA :
Net assets, end of period, in thousands ................ $116,723 $117,750
Portfolio turnover rate ................................ 48 %(1) 19%(1)
CLASS C SHARES ++
SELECTED PER SHARE DATA
Net asset value, beginning of period ................... $ 10.35 $ 10.00
-------------- -----------
Income (loss) from investment operations:
Net investment income (loss) .......................... (0.03) 0.03
Net realized and unrealized gain (loss) ............... (0.29) 0.02
-------------- -----------
Total income (loss) from investment operations ......... (0.32) 0.35
-------------- -----------
Net asset value, end of period ......................... $ 10.03 $ 10.35
============== ===========
TOTAL RETURN+ .......................................... (3.09)%(1) 3.50%(1)
RATIOS TO AVERAGE NET ASSETS :
Expenses ............................................... 1.85 %(2)(3) 1.88%(2)
Net investment income (loss) ........................... (0.65)%(2)(3) 0.91%(2)
SUPPLEMENTAL DATA :
Net assets, end of period, in thousands ................ $172,121 $176,497
Portfolio turnover rate ................................ 48 %(1) 19%(1)
</TABLE>
- --------------
* Commencement of operations.
++ 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 COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX FEBRUARY 25, 1998*
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 ................... $ 10.38 $ 10.00
------- --------
Income (loss) from investment operations:
Net investment income ................................. 0.02 0.08
Net realized and unrealized gain (loss) ............... (0.29) 0.30
------- --------
Total income (loss) from investment operations ......... (0.27) 0.38
------- --------
Net asset value, end of period ......................... $ 10.11 $ 10.38
======= ========
TOTAL RETURN+ .......................................... (2.60)%(1) 3.80%(1)
RATIOS TO AVERAGE NET ASSETS :
Expenses ............................................... 0.85 %(2)(3) 0.92%(2)
Net investment income .................................. 0.35 %(2)(3) 2.94%(2)
SUPPLEMENTAL DATA :
Net assets, end of period, in thousands ................ $8,205 $ 5,407
Portfolio turnover rate ................................ 48 %(1) 19%(1)
</TABLE>
- --------------
* Commencement of operations.
++ 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>
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
Mark Bavoso
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 Stanely 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
COMPETITIVE EDGE FUND
"BEST IDEAS" PORTFOLIO
SEMIANNUAL REPORT
NOVEMBER 30, 1998
