<PAGE>
MORGAN STANLEY FUNDS
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY GLOBAL FIXED INCOME FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY ASIAN GROWTH FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY AMERICAN VALUE FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY WORLDWIDE HIGH INCOME FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY LATIN AMERICAN FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY EMERGING MARKETS FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY AGGRESSIVE EQUITY FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY U.S. REAL ESTATE FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY HIGH YIELD FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY INTERNATIONAL MAGNUM FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- ------------------------------------------------------------------------------
MORGAN STANLEY MONEY MARKET FUND
- ------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
DECEMBER 31, 1996
<PAGE>
MORGAN STANLEY FUNDS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Overview and Portfolio of Investments by Fund:
President's Letter.................................................. 1
Performance Summary................................................. 3
Global Equity Allocation Fund....................................... 4
Global Fixed Income Fund............................................ 16
Asian Growth Fund................................................... 21
American Value Fund................................................. 26
Worldwide High Income Fund.......................................... 30
Latin American Fund................................................. 36
Emerging Markets Fund............................................... 43
Aggressive Equity Fund.............................................. 49
U.S. Real Estate Fund............................................... 53
High Yield Fund..................................................... 58
International Magnum Fund........................................... 62
Government Obligations Money Market Fund............................ 68
Money Market Fund................................................... 71
Statement of Assets and Liabilities................................... 74
Statement of Operations............................................... 76
Statement of Changes in Net Assets.................................... 77
Financial Highlights ................................................. 90
Notes to Financial Statements......................................... 103
</TABLE>
<PAGE>
PRESIDENT'S LETTER
- --------------------------------------------------------------------------------
Dear Shareholders:
We are pleased to present to you the Morgan Stanley Fund's semi-annual
report for the six-month period ended December 31, 1996. Currently, the Fund
offers shares in thirteen separate funds, including five international and
global equity funds, three U.S. equity funds, three fixed-income funds
(including two global fixed income funds), and two money market funds. Since
June 30, 1996, the Fund has begun offering shares in the International Magnum
Fund as well as the Money Market and Government Obligations Money Market Funds.
The thirteen currently offered funds are as follows:
THE MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND seeks
long-term capital appreciation by investing in common stocks
of U.S. and non-U.S. issuers in accordance with country
weightings determined by the Adviser with stock selection
within each country designed to replicate a broad market
index.
THE MORGAN STANLEY GLOBAL FIXED INCOME FUND seeks to
produce an attractive real rate of return while preserving
capital by investing in fixed income securities of issuers
throughout the world, including U.S. issuers.
THE MORGAN STANLEY ASIAN GROWTH FUND seeks long-term
capital appreciation by investing primarily in common stocks
of Asian issuers, excluding Japan.
THE MORGAN STANLEY AMERICAN VALUE FUND seeks high
long-term total return by investing in undervalued common
stocks of small- to medium-sized corporations.
THE MORGAN STANLEY WORLDWIDE HIGH INCOME FUND seeks high
current income consistent with relative stability and
potential for capital appreciation by investing across three
broad classes: U.S. high yield, emerging country debt and
global fixed income.
THE MORGAN STANLEY LATIN AMERICAN FUND seeks to provide
long-term capital appreciation by investing primarily in
common stocks of Latin American issuers.
THE MORGAN STANLEY EMERGING MARKETS FUND seeks to provide
long-term capital appreciation by investing primarily in
common stocks of emerging country issuers.
THE MORGAN STANLEY AGGRESSIVE EQUITY FUND seeks to provide
capital appreciation by investing primarily in a
non-diversified portfolio of corporate equity and
equity-linked securities.
THE MORGAN STANLEY U.S. REAL ESTATE FUND seeks to provide
above-average current income and long-term capital
appreciation by investing primarily in equity securities of
companies in the U.S. real estate industry, including real
estate investment trusts.
THE MORGAN STANLEY HIGH YIELD FUND seeks to maximize total
return by investing in a diversified portfolio of high yield
income securities that offer a yield above that generally
available on debt securities in the three highest rating
categories of the recognized rating services.
THE MORGAN STANLEY INTERNATIONAL MAGNUM FUND seeks
long-term capital appreciation by investing primarily in
equity securities of non-U.S. issuers within the EAFE universe
of countries.
THE MORGAN STANLEY GOVERNMENT OBLIGATIONS MONEY MARKET
FUND seeks to provide as high a level of current interest
income as is consistent with maintaining liquidity and
stability of principal.
THE MORGAN STANLEY MONEY MARKET FUND seeks to provide as
high a level of current interest income as is consistent with
maintaining liquidity and stability of principal.
Together, the funds make available a range of investment choices so that a
client may invest in a single fund to meet a specific investment need or
allocate assets among different funds within the Morgan Stanley Funds as part of
an overall investment strategy.
Looking ahead to 1997, we plan to continue to broaden our product offerings
and expect to begin offering shares in five additional funds:
THE MORGAN STANLEY GLOBAL EQUITY FUND will seek long-term
capital appreciation by investing primarily in equity
securities of issuers throughout the world, including U.S.
issuers.
THE MORGAN STANLEY EQUITY GROWTH FUND will seek long-term
capital appreciation by investing primarily in growth-oriented
equity securities of medium and large capitalization
companies.
THE MORGAN STANLEY VALUE FUND will seek to achieve
above-average total return over a market cycle of three to
five years, consistent with reasonable risk, by investing
primarily in a diversified
-------------
1
<PAGE>
PRESIDENT'S LETTER
- --------------------------------------------------------------------------------
(CONT.)
portfolio of common stocks and other equity securities which
are deemed by the Adviser to be relatively undervalued based
on various measures such as price/earnings ratios and
price/book ratios.
THE MORGAN STANLEY MID CAP GROWTH FUND will seek to
achieve long-term growth by investing primarily in common
stocks and other equity securities of smaller and medium size
companies which are deemed by the Adviser to offer long-term
growth potential.
THE MORGAN STANLEY EMERGING MARKETS DEBT FUND will seek
high total return by investing primarily in debt securities of
government, government-related and corporate issuers located
in emerging countries.
The Mid Cap Growth and Value Funds will be managed by Miller Anderson &
Sherrerd, LLP, which is affiliated with Morgan Stanley Asset Management Inc.,
the Adviser to the other Morgan Stanley Funds.
The specific results for each fund, together with commentary by each
portfolio manager explaining the strategy and performance results are enclosed
in this report. We hope you find this report informative. We very much
appreciate your support of the Morgan Stanley Funds.
Sincerely,
(SIGNATURE)
Warren J. Olsen
President
February 1997
MORGAN STANLEY GROUP, INC., THE DIRECT PARENT COMPANY OF THE FUND'S INVESTMENT
ADVISER, MORGAN STANLEY ASSET MANAGEMENT INC., RECENTLY ANNOUNCED ITS INTENTION
TO MERGE WITH DEAN WITTER, DISCOVER & CO. IT CURRENTLY IS ANTICIPATED THAT THE
TRANSACTION WILL CLOSE IN MID-1997. THEREAFTER, MORGAN STANLEY ASSET MANAGEMENT
INC. WILL BE A SUBSIDIARY OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
- ---------- 2
<PAGE>
MORGAN STANLEY FUNDS, INC.
PERFORMANCE SUMMARY (UNAUDITED)
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SIX MONTHS TOTAL RETURNS ONE YEAR TOTAL RETURNS
------------------------------------------ ------------------------
NET ASSET WITHOUT WITHOUT
INCEPTION NET ASSETS VALUE PER WITH SALES SALES COMPARABLE WITH SALES SALES
FUNDS DATES (000) SHARE CHARGE CHARGE INDICES CHARGE CHARGE
- ------------------------- --------- ----------- ----------- ------------ ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GLOBAL EQUITY ALLOCATION
Class A................ 1/4/93 $ 64,956 $ 14.24 (1.27)% 3.65% 5.97%(1) 7.79% 13.17%
Class B................ 8/1/95 23,267 13.93 (1.80) 3.20 5.97 (1) 7.20 12.20
Class C................ 1/4/93 68,357 14.00 2.18 3.18 5.97 (1) 11.24 12.24
GLOBAL FIXED INCOME
Class A................ 1/4/93 6,016 10.32 0.90 5.94 5.62 (2) 0.42 5.42
Class B................ 8/1/95 1,813 10.28 0.46 5.46 5.62 (2) (0.36) 4.64
Class C................ 1/4/93 2,624 10.27 4.47 5.47 5.62 (2) 3.64 4.64
ASIAN GROWTH
Class A................ 6/23/93 208,684 16.39 (7.10) (2.47) 0.76 (3) (1.84) 3.06
Class B................ 8/1/95 63,181 16.00 (7.68) (2.82) 0.76 (3) (2.71) 2.29
Class C................ 6/23/93 151,365 15.97 (3.80) (2.82) 0.76 (3) 1.30 2.30
AMERICAN VALUE
Class A................ 10/18/93 23,125 15.11 6.47 11.78 7.95 (4) 16.52 22.33
Class B................ 8/1/95 3,130 15.11 6.34 11.34 7.95 (4) 16.35 21.35
Class C................ 10/18/93 21,945 15.11 10.25 11.25 7.95 (4) 20.33 21.33
WORLDWIDE HIGH INCOME
Class A................ 4/21/94 63,266 13.28 10.86 16.39 4.90 (5) 20.22 26.22
Class B................ 8/1/95 46,600 13.25 10.91 15.91 4.90 (5) 20.20 25.20
Class C................ 4/21/94 34,915 13.26 14.89 15.89 4.90 (5) 24.29 25.29
LATIN AMERICAN
Class A................ 7/6/94 19,581 12.15 4.69 9.91 3.80 (6) 40.37 47.37
Class B................ 8/1/95 3,081 11.91 4.47 9.47 3.80 (6) 41.24 46.24
Class C................ 7/6/94 6,229 11.93 8.44 9.44 3.80 (6) 45.27 46.27
EMERGING MARKETS
Class A................ 7/6/94 72,381 10.69 (14.18) (9.90) (4.95) (7) 1.27 6.32
Class B................ 8/1/95 15,102 10.55 (14.71) (10.22) (4.95) (7) 0.62 5.62
Class C................ 7/6/94 41,157 10.57 (11.09) (10.19) (4.95) (7) 4.55 5.55
AGGRESSIVE EQUITY
Class A................ 1/2/96 8,533 15.03 8.71 14.13 11.70 (8) N/A N/A
Class B................ 1/2/96 5,418 14.96 8.72 13.72 11.70 (8) N/A N/A
Class C................ 1/2/96 5,244 14.95 12.73 13.73 11.70 (8) N/A N/A
U.S. REAL ESTATE
Class A................ 5/1/96 6,565 15.10 15.76 21.53 27.58 (9) N/A N/A
Class B................ 5/1/96 4,567 15.09 18.67 23.67 27.58 (9) N/A N/A
Class C................ 5/1/96 3,000 15.09 22.65 23.65 27.58 (9) N/A N/A
HIGH YIELD
Class A................ 5/1/96 4,694 12.48 5.05 10.28 8.33 (10) N/A N/A
Class B................ 5/1/96 5,608 12.48 4.75 9.75 8.33 (10) N/A N/A
Class C................ 5/1/96 4,493 12.48 8.75 9.75 8.33 (10) N/A N/A
INTERNATIONAL MAGNUM
Class A................ 7/1/96 5,508 12.13 (2.57) 2.29 1.46 (11) N/A N/A
Class B................ 7/1/96 5,465 12.12 (3.07) 1.93 1.46 (11) N/A N/A
Class C................ 7/1/96 5,517 12.12 0.89 1.89 1.46 (11) N/A N/A
GOVERNMENT OBLIGATIONS
MONEY MARKET............ 3/12/92 116,816 1.00 N/A 2.20 N/A N/A 4.47
MONEY MARKET............. 8/4/89 254,854 1.00 N/A 2.26 N/A N/A 4.53
<CAPTION>
AVERAGE ANNUAL SINCE INCEPTION
-----------------------------------------
WITHOUT
COMPARABLE WITH SALES SALES COMPARABLE
FUNDS INDICES CHARGE CHARGE INDICES
- ------------------------- --------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
GLOBAL EQUITY ALLOCATION
Class A................ 13.48%(1) 12.27% 13.64% 15.27%(1)
Class B................ 13.48 (1) 12.27 14.95 13.41 (1)
Class C................ 13.48 (1) 12.79 12.79 15.27 (1)
GLOBAL FIXED INCOME
Class A................ 4.40 (2) 6.43 7.74 9.11 (2)
Class B................ 4.40 (2) 3.80 6.56 5.08 (2)
Class C................ 4.40 (2) 6.87 6.87 9.11 (2)
ASIAN GROWTH
Class A................ 9.18 (3) 9.39 10.91 15.08 (3)
Class B................ 9.18 (3) (3.56) (0.74) 5.21 (3)
Class C................ 9.18 (3) 10.13 10.13 15.08 (3)
AMERICAN VALUE
Class A................ 19.05 (4) 11.60 13.30 14.65 (4)
Class B................ 19.05 (4) 14.39 17.04 18.07 (4)
Class C................ 19.05 (4) 12.39 12.39 14.65 (4)
WORLDWIDE HIGH INCOME
Class A................ 3.62 (5) 14.99 17.08 8.20 (5)
Class B................ 3.62 (5) 21.41 23.99 7.22 (5)
Class C................ 3.62 (5) 16.20 16.20 8.20 (5)
LATIN AMERICAN
Class A................ 21.96 (6) 4.74 6.81 1.52 (6)
Class B................ 21.96 (6) 25.65 28.20 12.22 (6)
Class C................ 21.96 (6) 5.87 5.87 1.52 (6)
EMERGING MARKETS
Class A................ 7.88 (7) (5.60) (3.74) 0.72 (7)
Class B................ 7.88 (7) (3.98) (1.22) 0.83 (7)
Class C................ 7.88 (7) (4.45) (4.45) 0.72 (7)
AGGRESSIVE EQUITY
Class A................ N/A N/A N/A N/A
Class B................ N/A N/A N/A N/A
Class C................ N/A N/A N/A N/A
U.S. REAL ESTATE
Class A................ N/A N/A N/A N/A
Class B................ N/A N/A N/A N/A
Class C................ N/A N/A N/A N/A
HIGH YIELD
Class A................ N/A N/A N/A N/A
Class B................ N/A N/A N/A N/A
Class C................ N/A N/A N/A N/A
INTERNATIONAL MAGNUM
Class A................ N/A N/A N/A N/A
Class B................ N/A N/A N/A N/A
Class C................ N/A N/A N/A N/A
GOVERNMENT OBLIGATIONS
MONEY MARKET............ N/A N/A N/A N/A
MONEY MARKET............. N/A N/A N/A N/A
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDICES:
<C> <S>
(1) MSCI World Index
(2) J.P. Morgan Traded Global Bond Index
(3) MSCI Combined Far East Free ex-Japan Index
(4) Russell 2500 Small Company Index
(5) Lehman Aggregate Bond Index
(6) MSCI Latin America Global Index
(7) IFC Global Total Return Composite Index
(8) Lipper Capital Appreciation Index
(9) NAREIT Index
(10) CS First Boston High Yield Index
(11) MSCI EAFE Index
(12) Donaghue's Government and Agency Report
(13) Donaghue's Money Fund Report
</TABLE>
<TABLE>
<CAPTION>
YIELD INFORMATION AS OF
DECEMBER 31, 1996
-------------------------
30 DAY CURRENT YIELD+
-------------------------
<S> <C>
GLOBAL FIXED INCOME
Class A................. 4.12%
Class B................. 3.57
Class C................. 3.57
WORLDWIDE HIGH INCOME
Class A................. 8.86
Class B................. 8.53
Class C................. 8.53
HIGH YIELD
Class A................. 8.13
Class B................. 7.78
Class C................. 7.78
</TABLE>
<TABLE>
<CAPTION>
7 DAY 7 DAY 30 DAY 30 DAY
CURRENT EFFECTIVE CURRENT COMPARABLE
YIELD++ YIELD++ YIELD+ YIELD+
------------ ------------- ------------ ----------------
<S> <C> <C> <C> <C>
MONEY MARKET FUNDS:
Government Obligations.
Money Market 4.43% 4.53% 4.41% 4.64%(12)
Money Market............... 4.47 4.57 4.43 4.77 (13)
</TABLE>
- --------------------------------------------------------------------------------
+The current 30 day yield reflects the net investment income generated by the
Fund over the specified 30 day period expressed as an annual percentage.
Expenses accrued for the 30 day period include any fees charged to all
shareholders. Yields will fluctuate as market conditions change and are not
necessarily indicative of future performance.
++The 7 day current yield and 7 day effective yield assume an annualization of
the current yield at December 31, 1996 with all dividends reinvested. As with
all money market funds, yields fluctuate as market conditions change and the 7
day yields are not necessarily indicative of future performance.
PAST PERFORMANCE SHOULD NOT BE CONSTRUED AS A GUARANTEE OF FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE READ
THE FUND'S PROSPECTUSES CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
-------------
3
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 2.5%
Brazil 0.9%
Canada 3.9%
France 3.8%
Germany 4.4%
Hong Kong 2.8%
Italy 2.0%
Japan 19.6%
Korea 0.8%
Netherlands 1.6%
Singapore 1.2%
Spain 3.7%
Sweden 2.1%
United Kingdom 5.5%
United States 36.7%
Other 8.5%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -1.27% 3.65% 7.79% 13.17% 12.27% 13.64%
- ---------------------------------------------------------------------------------------
Class B+ Shares -1.80% 3.20% 7.20% 12.20% 12.27% 14.95%
- ---------------------------------------------------------------------------------------
Class C Shares 2.18% 3.18% 11.24% 12.24% 12.79% 12.79%
- ---------------------------------------------------------------------------------------
MSCI World Index:
Class A & C Shares N/A 5.97% N/A 13.48% N/A 15.27%
Class B Shares N/A 5.97% N/A 13.48% N/A 13.41%
- ---------------------------------------------------------------------------------------
</TABLE>
* The returns above with sales charge are calculated using the 4.75% sales
charge for Class A shares, the 5% contingent deferred sales charge for Class
B shares, and the 1% contingent deferred sales charge for Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The Morgan Stanley Capital International (MSCI) World Index is an unmanaged
index which includes securities listed on the stock exchanges of the U.S.,
Europe, Canada, Australia, New Zealand and the Far East and assumes dividends
are reinvested net of withholding tax.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- -------------------------------------- ------------ -------------
<S> <C> <C>
Morgan Stanley Asia-Pacific Fund, Inc. United 1.4%
States
Toyota Motor Corp. Japan 1.4%
General Electric Co. United 1.3%
States
Exxon Corp. United 1.2%
States
Coca-Cola Co. United 1.0%
States
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------- --------- ------------
<S> <C> <C>
Consumer Goods $ 31,126 19.9%
Finance 30,254 19.3%
Services 25,089 16.0%
Capital Equipment 20,669 13.2%
Energy 17,856 11.4%
</TABLE>
The Global Equity Allocation Fund invests in global equity markets, with
emphasis placed upon country rather than stock selection. This approach reflects
an investment philosophy that a diversified selection of securities representing
exposure to each country that we find attractive is, we believe, an effective
way to maximize the return and reduce the risk associated with global investing.
For the six-month period ended December 31, 1996, the Fund had a total return
exclusive of sales charge of 3.65% for the Class A shares, 3.20% for the Class B
shares and 3.18% for the Class C shares, and a total return with sales charge of
- -1.27% for the Class A shares, -1.80% for the Class B shares and 2.18% for the
Class C shares, as compared to a total return of 5.97% for the Morgan Stanley
Capital International (MSCI) World Index (the "Index"). For the one year period
ended December 31, 1996, the Fund had a total return exclusive of sales charge
of 13.17% for the Class A shares, 12.20% for the Class B shares and 12.24% for
the Class C shares and a total return with sales charge of 7.79% for the Class A
shares, 7.20% for the Class B shares and 11.24% for the Class C shares compared
with 13.48% for the Index for the same period. For the period from inception on
January 4, 1993 through December 31, 1996, the average annual total return for
the Fund exclusive of sales charge was 13.64% for the Class A shares and 12.79%
for the Class C shares and 12.27% for the Class A shares with sales charge as
compared to 15.27% for the Index for the same period. For the period from
inception of the offering of Class B shares on August 1, 1995 through December
31, 1996, the average annual total return for the Class B shares exclusive of
sales charge was 14.95% and 12.27% with sales charge as compared to 13.41% for
the Index. Class B shares held prior to May 1, 1995 were renamed Class C shares.
In a volatile six month period for financial assets, the U.S. equity market
continued its strong performance (+11.5%), but ranked 12th in global markets
beaten by fully half of the international markets (in U.S. dollars), notably,
Finland (+30.7%), the UK (+24.1%), Spain (+23.0%), Sweden (+19.6%) and Hong Kong
(+18.1%). Markets were boosted by abundant liquidity provided through loose
monetary policy, moderate economic growth and a benign inflation environment.
Portfolio decisions to overweight Hong Kong and Spain, and to hedge our Japanese
yen and Deutsche mark bloc exposure contributed substantially to performance.
Underweight allocations to the U.S. and Canada detracted from results as both
markets performed well. Opportunistic commitments to emerging markets were mixed
as Brazil performed strongly while the developing Asian positions of Korea and
Thailand woefully underperformed. The Japanese market, was volatile in 1996 with
positive returns in the first half followed by a market sell off in the second
half. On balance, our Japanese market allocations were slightly positive, aided
by our decision in mid-August to sell all exposure to the bank sector.
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MSCI WORLD INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
- ---------- 4
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
"MARKETS WERE BOOSTED BY ABUNDANT LIQUIDITY PROVIDED THROUGH LOOSE MONETARY
POLICY, MODERATE ECONOMIC GROWTH AND A BENIGN INFLATION ENVIRONMENT."
During the period under review, we effected several allocation strategies worth
noting including an increase to our Canadian position and an interim move to
increase cash. Through the year, prospects for Canadian equities and the
Canadian dollar had improved, fueled by declining interest rates, an expanding
economy and lowered political risk. While many of these same factors had
propelled the U.S. equity market to record levels, Canadian equities had yet to
benefit. In mid-December, after a strong second half for global equity markets,
we made a tactical move to increase cash. Market strength in combination with
general financial market euphoria caused us to pause and take profits by
reducing selected country overweights. We trimmed overweight positions back to
moderate overweights in Germany and Hong Kong which had performed well. Germany
had discounted much of the good news on restructuring and the European Monetary
Union while Hong Kong had surged to new highs as fears of the Chinese takeover
subsided.
As of December 31, 1996, the Fund held 8% in cash with an overweight in Asia
ex-Japan, a neutral stance in Japan ex-banks and an underweight in the U.S. and
Europe based on the following observations.
U.S.
Despite a large pullback in July and increased volatility, a benign interest
rate environment further advanced the bull market in U.S. equities. In the eyes
of investors, the economy is soft, inflation is dead and a passive Fed has won a
major credibility battle. Inflation risks have been tempered by a sluggish
economy and a host of new structural paradigms (i.e., globalization, technology,
cheap Third-World labor and demographics). The July episode of panic selling and
steep price declines has once again demonstrated the conviction of U.S.
investors that the right strategy is to buy good stocks on dips.
While we remain underweight in the U.S., we believe that the market may be
driven higher over the near term by powerful liquidity and the perception that
the positive economic backdrop continues. However, U.S. stocks are not cheap,
the market cycle is very long in the tooth, and is vulnerable to strong economic
data and/or an untoward event.
JAPAN
The Japanese market fell in the last two quarters of 1996 as investors
downgraded their expectations for recovery and significant political and
economic reform in 1997. The Japanese authorities now find themselves in a very
difficult situation. The structural problems in the banking and property sectors
remain and the consumption tax hike, needed to reduce the now large budget
deficit, is a significant threat to the economic recovery and to consumer
sentiment.
We believe the negative sentiment in the market is overdone with the overall
picture one of benign inflation and 2.5% to 3.0% GDP growth. Deregulation
measures announced in the retail and telecommunications sector have already had
positive effects on real spending in the economy and we expect financial
deregulation to go through and have similar positive effects on the economy. A
flight to quality by investors has created a two-tier market. A small number of
high quality (i.e. restructured), attractively valued export-related stocks have
significantly outperformed the broader market. These stocks will benefit from
the weaker yen and a pick up in global growth. Domestic companies will suffer
from increased competition, less government support and a weaker yen. Reflecting
this segmentation, we believe bank stocks will continue to underperform.
EUROPE
The brightened prospects for economic growth, European Monetary Union (EMU), and
corporate restructuring underpinned the positive performance of the European
markets in 1996. Europe in local currencies returned nearly 14% for last six
months of the calendar year with many markets reaching all-time highs. Investors
became less skeptical of the viability of the Union as governments presented
budgets to rein in their fiscal deficits and as progress was made on the
outstanding structural issues for EMU. Bond yields, within the core markets and
the periphery, converged sharply, providing further support for equities.
We remain positive on the prospects for earnings and economic growth based on
the lagged effects of a weaker Deutsche mark and aggressive monetary
accommodation. However, investors have
-------------
5
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
begun to discount the benefits of corporate restructuring and an asset
allocation shift into equities. In addition, at current levels many European
markets are increasingly sensitive to events that could upset existing market
perception about who will be "in and out" of monetary union in 1999.
ASIA
In general, investors were concerned that Asian economic growth and a slowdown
in exports were secular and not cyclical in nature. Throughout the year, the
markets belabored under the fear of an upturn in U.S. interest rates, concerns
about persistent current account deficits and political turmoil in several Asian
countries.
We remain overweight in Asia based on expectations that an upturn in global
economic growth should provide a stimulus to export performance, improve trade
balances and produce momentum for earnings growth. An improvement in the trade
and current accounts, together with reduced inflationary pressures, should
produce a climate for monetary easing following several years of tightening. We
are optimistic about the prospects for the Asian markets in 1997.
Barton M. Biggs
PORTFOLIO MANAGER
Madhav Dhar
PORTFOLIO MANAGER
Francine J. Bovich
PORTFOLIO MANAGER
Ann D. Thivierge
PORTFOLIO MANAGER
January 1997
- ---------- 6
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (86.1%)
AUSTRALIA (2.4%)
17,000 Amcor Ltd........................................ $ 109
21,500 Australian National Industries Ltd............... 21
27,838 Boral Ltd........................................ 79
6,700 Brambles Industries Ltd.......................... 131
48,554 Broken Hill Proprietary Ltd...................... 691
14,900 Burns, Philip & Co., Ltd......................... 27
12,777 Coca-Cola Amatil Ltd............................. 136
34,647 Coles Myer Ltd................................... 143
8,000 CRA Ltd.......................................... 126
27,400 CSR Ltd.......................................... 96
61,600 Fosters Brewing Corp............................. 125
21,751 General Property Trust........................... 42
12,723 Gio Australia Holdings Ltd....................... 33
34,863 Goodman Fielder Ltd.............................. 43
(a)5,488 Highlands Gold Ltd. (New)........................ 3
8,700 ICI Australia Ltd................................ 94
7,375 Lend Lease Corp., Ltd............................ 143
42,758 MIM Holdings Ltd................................. 60
36,433 National Australia Bank Ltd...................... 428
8,446 Newcrest Mining Ltd.............................. 34
49,100 News Corp., Ltd.................................. 259
41,934 Normandy Mining Ltd.............................. 58
19,752 North Ltd........................................ 58
27,900 Pacific Dunlop Ltd............................... 71
26,400 Pioneer International Ltd........................ 79
6,151 Renison Goldfields Consolidated Ltd.............. 27
16,800 Santos Ltd....................................... 68
3,600 Sons of Gwalia Ltd............................... 21
20,573 Southcorp Holdings Ltd........................... 65
11,000 Tabcorp Holdings Ltd............................. 52
1,126 Westfield Trust.................................. 2
48,000 Westpac Banking Corp., Ltd....................... 273
27,191 WMC Ltd.......................................... 171
--------
3,768
--------
BRAZIL (0.3%)
(a)243,000 Cia Paulista De Forca e Luz...................... 29
850,000 Cia Siderurgica Nacional......................... 24
800,000 Eletrobras....................................... 286
184,000 Light............................................ 39
(a,d)184,000 Lightpar......................................... 65
(a)17,828 Telesp........................................... 4
--------
447
--------
CANADA (3.9%)
6,100 Alcan Aluminum Ltd............................... 206
1,700 Avenor, Inc...................................... 25
6,400 Bank of Montreal................................. 204
5,900 Bank of Nova Scotia.............................. 198
9,800 Barrick Gold Corp................................ 281
8,600 BCE, Inc......................................... 410
6,600 Bombardier, Inc., 'A'............................ 122
3,100 CAE Inc.......................................... 23
1,500 Cameco Corp...................................... 60
5,200 Canadian Imperial Bank of Commerce............... 230
(a)2,600 Canadian Natural Resources Ltd................... 71
4,800 Canadian Occidental Petroleum Ltd................ 77
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
8,500 Canadian Pacific, Ltd............................ $ 224
3,000 Canadian Tire Corp., 'A'......................... 50
2,400 Cominco Ltd...................................... 60
(a)1,900 Corel Corp....................................... 14
(a)1,200 Cott Corp........................................ 9
2,200 Dofasco, Inc..................................... 42
2,500 Domtar, Inc...................................... 21
2,600 DuPont Canada, Inc., 'A'......................... 61
3,600 Echo Bay Mines Ltd............................... 24
1,600 George Weston Ltd................................ 78
(a)5,600 Gulf Canada Resources, Ltd....................... 41
6,100 Imasco, Ltd...................................... 150
4,500 Imperial Oil Ltd................................. 212
5,900 Inco Ltd......................................... 188
1,300 IPL Energy, Inc.................................. 38
(a)7,100 Laidlaw, Inc. 'B'................................ 83
1,400 Loewen Group, Inc................................ 55
4,100 MacMillan Bloedel Ltd............................ 54
1,900 Magna International, Inc., 'A'................... 106
1,800 Molson Companies Ltd., 'A'....................... 28
2,900 Moore Corp. Ltd.................................. 60
(a)3,900 Newbridge Networks Corp.......................... 111
6,400 Noranda, Inc..................................... 143
3,000 Norcen Energy Resources Ltd...................... 67
6,300 Northern Telecom Ltd............................. 392
(a)13,900 Nova Corp........................................ 123
6,600 Placer Dome, Inc................................. 145
1,100 Potash Corp. of Saskatchewan Inc................. 94
3,300 Power Corp. of Canada............................ 66
(a)3,100 Provigo, Inc..................................... 13
5,000 Ranger Oil Ltd................................... 50
(a)3,600 Renaissance Energy Ltd........................... 123
(a)2,900 Repap Enterprises, Inc........................... 8
(a)5,200 Rogers Communication, Inc., 'B'.................. 38
7,700 Royal Bank of Canada............................. 270
(a)3,100 Talisman Energy, Inc............................. 103
2,600 Teck Corp., 'B'.................................. 60
8,200 The Seagram Co. Ltd.............................. 325
15,600 Thomson Corp..................................... 345
7,900 Transcanada Pipelines, Ltd....................... 138
--------
6,119
--------
FRANCE (3.8%)
543 Accor S.A........................................ 69
1,607 Air Liquide...................................... 251
2,150 Alcatel Alsthom.................................. 173
2,956 AXA S.A.......................................... 188
3,002 Banque Nationale de Paris RFD.................... 116
1,527 Banque Paribas................................... 103
600 BIC.............................................. 90
552 Bouygues......................................... 57
382 Canal Plus....................................... 84
635 Carrefour S.A.................................... 413
1,350 Casino Guichard.................................. 63
(a)25 Chargeurs International S.A...................... 1
393 Cie Bancaire S.A................................. 47
1,467 Cie de Saint-Gobain.............................. 208
2,626 Cie de Suez S.A.................................. 112
1,623 Cie Generale des Eaux............................ 201
</TABLE>
-----------------
7
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FRANCE (CONT.)
<TABLE>
<C> <S> <C>
4,500 Elf Acquitaine................................... $ 410
600 Eridania Beghin-Say S.A.......................... 97
200 Essilor International............................ 61
1,218 Groupe Danone RFD................................ 170
964 Havas S.A........................................ 68
1,793 Lafarge Coppee S.A............................... 108
460 Legrand S.A...................................... 78
1,042 L'Oreal.......................................... 393
1,505 LVMH Moet Hennessy Louis Vuitton................. 420
956 Lyonnaise des Eaux S.A........................... 89
2,587 Michelin (C.G.D.E.) 'B'.......................... 140
(a)25 Pathe S.A........................................ 6
1,050 Pernod-Ricard.................................... 58
330 Pinault S.A...................................... 131
340 Promodes......................................... 96
905 PSA Peugeot Citroen S.A.......................... 102
5,262 Rhone-Poulenc S.A. 'A'........................... 179
35 Sagem............................................ 21
120 Saint Louis...................................... 30
1,586 Sanofi S.A....................................... 158
2,347 Schneider S.A.................................... 109
609 Simco S.A........................................ 53
40 Societe Eurafrance S.A........................... 17
1,189 Societe Generale................................. 129
100 Sodexho S.A...................................... 56
2,058 Thomson CSF S.A.................................. 67
3,705 Total S.A. 'B'................................... 301
5,122 Union des Assurances de Paris.................... 128
4,390 Usinor Sacilor................................... 64
--------
5,915
--------
GERMANY (4.3%)
750 adidas AG........................................ 65
(a)700 Agiv AG.......................................... 10
350 Allianz AG....................................... 630
50 AMB Aachener & Muenchener
Beteiligungs AG................................ 36
8,750 BASF AG.......................................... 335
11,150 Bayer AG......................................... 453
3,750 Bayer Hypotheken Bank AG......................... 113
3,900 Bayer Vereinsbank AG............................. 158
1,300 Beiersdorf AG.................................... 64
750 Bilfinger & Berger Bau AG........................ 28
(a)100 Brau und Brunnen AG.............................. 7
450 CKAG Colonia Konz AG............................. 38
1,450 Continental AG................................... 26
(a)7,550 Daimler-Benz AG.................................. 518
150 Degussa AG....................................... 68
7,550 Deutsche Bank AG................................. 352
5,700 Deutsche Lufthansa AG............................ 77
(a)31,770 Deutsche Telekom AG.............................. 663
6,600 Dresdner Bank AG................................. 197
700 Heidelberger Zement AG........................... 57
1,350 Hochtief AG...................................... 53
150 Karstadt AG...................................... 50
(a)950 Kloeckner-Humboldt-Deutz AG...................... 5
150 Linde AG......................................... 91
200 MAN AG........................................... 48
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
550 Mannesmann AG.................................... $ 237
2,373 Merck KGAA....................................... 85
(a)1,510 METRO AG......................................... 118
103 Muenchener Rueck (Registered).................... 250
250 Preussag AG...................................... 57
5,000 RWE AG........................................... 209
910 SAP AG........................................... 124
1,100 Schering AG...................................... 93
8,450 Siemens AG....................................... 392
(a)50 Starbag AG....................................... 3
600 Thyssen AG....................................... 106
7,400 Veba AG.......................................... 426
450 Viag AG.......................................... 176
(a)128 Viag AG RFD...................................... 50
450 Volkswagen AG.................................... 186
--------
6,654
--------
HONG KONG (2.8%)
(a)18,000 Applied International Holdings Ltd............... 1
16,995 Bank of East Asia Ltd............................ 76
64,000 Cathay Pacific Airways Ltd....................... 101
48,000 Cheung Kong Holdings Ltd......................... 427
40,000 China Light and Power Co., Ltd................... 178
34,256 Chinese Estate Holdings Ltd...................... 38
14,000 Giordano Holdings Ltd............................ 12
27,000 Hang Lung Development Corp....................... 59
41,500 Hang Seng Bank Ltd............................... 504
60,380 Hong Kong & China Gas Co......................... 117
3,200 Hong Kong Aircraft Engineering Co., Ltd.......... 10
27,500 Hong Kong Shanghai Hotels........................ 52
234,322 Hong Kong Telecommunications Ltd................. 377
93,869 Hopewell Holdings Ltd............................ 61
73,000 Hutchison Whampoa Ltd............................ 573
23,000 Hysan Development Co............................. 92
8,500 Johnson Electric Holdings Ltd.................... 24
13,000 Miramar Hotel Investment Ltd..................... 26
33,135 New World Development Co., Ltd................... 224
31,000 Oriental Press Goup.............................. 14
8,300 Peregrine Investment Holdings.................... 14
34,905 Shangri-La Asia Ltd.............................. 52
36,000 Shun Tak Holdings Ltd............................ 24
40,000 South China Morning Post......................... 33
22,000 Stelux Holdings Ltd.............................. 6
48,000 Sun Hung Kai Properties Ltd...................... 588
34,000 Swire Pacific Ltd. 'A'........................... 324
9,000 Television Broadcasting Ltd...................... 36
47,000 Wharf Holdings Ltd............................... 235
7,500 Windsor Industrial............................... 2
3,316 Wing Lung Bank................................... 23
--------
4,303
--------
INDONESIA (0.0%)
(d)11,500 Lippo Bank (Foreign)............................. 11
(d)46,000 Polysindo (Foreign).............................. 26
--------
37
--------
ITALY (2.0%)
16,422 Assicurazioni Generali S.p.A..................... 311
24,300 Banca Commerciale Italiana....................... 44
</TABLE>
- ---------- 8
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
ITALY (CONT.)
<TABLE>
<C> <S> <C>
9,900 Banco Ambrosiano Veneto.......................... $ 24
4,000 Benetton Group S.p.A............................. 51
2,700 Cartiere Burgo S.p.A............................. 12
48,500 Credito Italiano S.p.A........................... 53
13,000 Edison S.p.A..................................... 82
150,000 Ente Nazionale Idrocarburi S.p.A................. 770
2,000 Falck............................................ 8
59,300 Fiat S.p.A....................................... 179
14,700 Fiat S.p.A. Di Risp NCS.......................... 26
(a)6,000 Impreglio S.p.A.................................. 5
16,600 Istituto Bancario San Paolo di Torina S.p.A...... 102
11,700 Istituto Mobiliare Italiano S.p.A................ 100
74,200 Istituto Nazionale delle Assicurazioni (INA)..... 97
4,800 Italcementi S.p.A................................ 27
2,650 Italcementi S.p.A. NCS........................... 6
12,400 Italgas.......................................... 52
9,000 Magneti Marelli S.p.A............................ 11
(a)23,000 Mediaset SpA..................................... 106
8,550 Mediobanca S.p.A................................. 46
(a)78,108 Montedison S.p.A................................. 53
(a)18,900 Montedison S.p.A. Di Risp NCS.................... 12
65,750 Olivetti Group................................... 23
29,640 Parmalat Finanziaria S.p.A....................... 45
35,000 Pirelli S.p.A.................................... 65
6,051 R.A.S............................................ 56
4,565 Rinascente S.p.A................................. 26
2,600 S.A.I............................................ 24
2,300 Sasib S.p.A...................................... 7
5,000 Sirti S.p.A...................................... 30
11,000 Snia BPD S.p.A................................... 11
121,700 Telecom Italia S.p.A............................. 316
30,000 Telecom Italia Di Risp S.p.A..................... 59
125,300 Telecom Italia Mobile S.p.A...................... 317
--------
3,156
--------
JAPAN (19.6%)
2,100 Advantest Corp................................... 98
33,000 Ajinomoto Co., Inc............................... 336
(a)16,000 Aoki Corp........................................ 33
1,600 Aoyama Trading Co., Ltd.......................... 43
16,000 Asahi Breweries Ltd.............................. 166
49,000 Asahi Chemical Industry Co., Ltd................. 278
47,000 Asahi Glass Co................................... 442
16,000 Bridgestone Corp................................. 304
25,000 Canon, Inc....................................... 553
10,000 Casio Computer Co., Ltd.......................... 77
6,000 Chiyoda Corp..................................... 39
16,000 Chugai Pharmaceutical Ltd........................ 134
33,000 Dai Nippon Printing Co., Ltd..................... 578
23,000 Daiei, Inc....................................... 176
16,000 Daikin Industries Ltd............................ 142
16,000 Daiwa House Industry............................. 206
33,000 Daiwa Securities Co., Ltd........................ 293
16,000 DENSO Corp....................................... 385
11,000 Ebara Corp....................................... 143
7,000 Fanuc Co......................................... 224
13,000 Fuji Photo Film Ltd.............................. 429
53,000 Fujitsu Ltd...................................... 494
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
27,000 Furukawa Electric................................ $ 128
33,000 Hankyu Corp...................................... 164
16,000 Hazama-Gumi...................................... 44
82,000 Hitachi Ltd...................................... 765
26,000 Honda Motor Co................................... 743
240 Industrial Bank of Japan......................... 4
11,000 Ito-Yokado Co., Ltd.............................. 479
(a)66,000 Japan Airlines................................... 350
41,000 Japan Energy Corp................................ 112
13,000 Jusco Co......................................... 441
33,000 Kajima Corp...................................... 236
17,500 Kansai Electric Power Co......................... 363
30,000 KAO Corp......................................... 350
84,000 Kawasaki Steel Corp.............................. 242
49,000 Kinki Nippon Railway............................. 306
33,000 Kirin Brewery Co., Ltd........................... 325
33,000 Komatsu Ltd...................................... 271
49,000 Kubota Corp...................................... 237
33,000 Kumagai Gumi Co., Ltd............................ 82
5,000 Kyocera Corp..................................... 312
16,000 Kyowa Hakko Kogyo................................ 122
49,000 Marubeni Corp.................................... 211
10,000 Marui Co......................................... 180
49,000 Matsushita Electric Industries Ltd............... 800
49,000 Mitsubishi Chemical Corp......................... 159
46,000 Mitsubishi Corp.................................. 477
58,000 Mitsubishi Electric Corp......................... 346
35,000 Mitsubishi Estate Co., Ltd....................... 360
90,000 Mitsubishi Heavy Industries Ltd.................. 715
33,000 Mitsubishi Materials Corp........................ 133
49,000 Mitsui & Co...................................... 398
33,000 Mitsui Engineering & Shipbuilding Co., Ltd....... 67
26,000 Mitsui Fudosan Co., Ltd.......................... 260
18,000 Mitsukoshi....................................... 128
6,000 Murata Manufacturing............................. 199
39,000 NEC Corp......................................... 471
16,000 NGK Insulators Ltd............................... 152
32,000 Nippon Express Co., Ltd.......................... 219
16,000 Nippon Fire & Marine Insurance Co................ 73
16,000 Nippon Light Metal Co............................ 66
16,000 Nippon Meat Packers.............................. 207
49,000 Nippon Oil Co.................................... 252
182,000 Nippon Steel Corp................................ 537
49,000 Nippon Yusen Kabushiki Kaisha.................... 222
62,000 Nissan Motor Co., Ltd............................ 360
96,000 NKK Corp......................................... 216
49,000 Nomura Securities Co., Ltd....................... 736
33,000 Odakyu Electric Railway Co....................... 198
33,000 OJI Paper Co., Ltd............................... 209
73,000 Osaka Gas Co..................................... 200
16,000 Penta-Ocean Construction......................... 71
5,000 Pioneer Electronic Corp.......................... 95
1,000 Rohm Co.......................................... 66
16,000 Sankyo Co., Ltd.................................. 453
49,000 Sanyo Electric Co., Ltd.......................... 203
4,000 Secom Co......................................... 242
3,200 Sega Enterprises................................. 108
16,000 Sekisui House Ltd................................ 163
33,000 Sharp Corp....................................... 470
</TABLE>
-----------------
9
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
5,000 Shimano, Inc..................................... $ 85
7,000 Shin-Etsu Chemical Co............................ 128
23,000 Shinizu Corp..................................... 172
7,000 Shiseido Co., Ltd................................ 81
(a)33,000 Showa Denko K.K.................................. 76
8,000 Sony Corp........................................ 524
66,000 Sumitomo Chemical Co............................. 262
33,000 Sumitomo Corp.................................... 260
22,000 Sumitomo Electric Industries..................... 308
7,000 Sumitomo Forestry................................ 85
115,000 Sumitomo Metal Industries........................ 283
16,000 Sumitomo Metal Mining Co......................... 108
17,000 Sumitomo Osaka Cement Co., Ltd................... 56
33,000 Taisei Corp., Ltd................................ 171
25,000 Takeda Chemical Industries....................... 525
33,000 Teijin Ltd....................................... 144
33,000 Tobu Railway Co.................................. 162
11,800 Tohoku Electric Power............................ 234
49,000 Tokio Marine & Fire Insurance Co................. 461
7,000 Tokyo Dome Corp.................................. 122
30,500 Tokyo Electric Power Co.......................... 669
4,000 Tokyo Electron Ltd............................... 123
48,000 Tokyo Gas Co..................................... 130
33,000 Tokyu Corp....................................... 187
23,000 Toppan Printing Co., Ltd......................... 288
49,000 Toray Industries, Inc............................ 303
16,000 Toto Ltd......................................... 182
33,000 Toyobo Ltd....................................... 99
76,000 Toyota Motor Corp................................ 2,185
33,000 Ube Industries Ltd............................... 93
33,000 Yamaichi Securities.............................. 147
--------
30,724
--------
KOREA (0.8%)
(d)4,440 Cho Hung Bank.................................... 36
(d)3,990 Commercial Bank of Korea......................... 26
3,080 Daewoo Corp...................................... 24
9,650 Daewoo Heavy Industries.......................... 60
(a,d)1,330 Daewoo Securities, Co............................ 17
(d)980 Dong-Ah Construction Industrial Co............... 21
(d)4,530 Hanil Bank....................................... 31
(d)1,340 Hyundai Engineering & Construction Co............ 31
(d)1,090 Hyundai Motor Co., Ltd........................... 29
(d)13,650 Korea Electric Power Corp........................ 397
(a,d)4,100 Korea First Bank................................. 21
(d)100 Korea Mobile Telecommunications Corp.
(Foreign)...................................... 100
(d)2,100 L.G. Chemical Ltd................................ 20
(d)2,550 Pohang Iron & Steel Ltd.......................... 146
(a)1,600 Samsung Corp..................................... 19
670 Samsung Display Devices Co....................... 38
(d)1,900 Samsung Electronics Co........................... 113
260 Tong Yang Cement Co.............................. 5
(d)2,009 Yukong Ltd....................................... 38
--------
1,172
--------
MALAYSIA (0.0%)
2,000 Malaysian Mining Corp. Bhd....................... 2
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
NETHERLANDS (1.6%)
2,875 ABN-Amro Holdings N.V............................ $ 187
700 Akzo Nobel N.V................................... 96
5,800 Elsevier N.V..................................... 98
350 Heineken N.V..................................... 62
7,011 ING Groep N.V.................................... 252
813 KLM Royal Dutch Airlines N.V..................... 23
1,251 Koninklijke Ahold N.V............................ 78
278 Koninklijke Hoogovens............................ 12
900 Koninklijke KNP BT............................... 20
9,213 Koninklijke PTT Nederland N.V.................... 351
200 Nedlloyd Groep N.V............................... 5
2,900 Phillips Electronics N.V......................... 118
4,700 Royal Dutch Petroleum N.V........................ 824
289 Stork N.V........................................ 10
1,400 Unilever N.V..................................... 248
640 Wolters Kluwer N.V............................... 85
--------
2,469
--------
SINGAPORE (1.2%)
(d)11,000 Amcol Holdings Ltd............................... --
16,000 City Developments Ltd............................ 144
4,000 Cycle & Carriage Ltd............................. 49
19,000 DBS Land Ltd..................................... 70
13,000 Development Bank of Singapore.................... 176
5,000 First Capital Corp............................... 15
6,200 Fraser & Neave Ltd............................... 64
8,000 Hai Sun Hup Group Ltd............................ 6
9,000 Hotel Properties Ltd............................. 15
4,000 Inchcape Bhd..................................... 14
3,000 Jurong Shipyard Ltd.............................. 15
11,000 Keppel Corp...................................... 86
8,000 Natsteel Ltd..................................... 18
16,000 Neptune Orient Lines Ltd......................... 14
19,600 Oversea-Chinese Banking Corp..................... 244
3,000 Overseas Union Enterprise Ltd.................... 15
6,000 Parkway Holdings Ltd............................. 24
2,000 Robinson & Co., Ltd.............................. 8
3,600 Shangri-La Hotel Ltd............................. 12
25,000 Singapore Airlines Ltd. (Foreign)................ 227
6,600 Singapore Press Holdings (Foreign)............... 130
15,000 Singapore Technologies Industrial Corp........... 38
123,000 Singapore Telecommunications Ltd................. 290
8,000 Straits Trading Co., Ltd......................... 19
29,000 United Industrial Corp. Ltd...................... 24
18,000 United Overseas Bank Ltd......................... 201
--------
1,918
--------
SPAIN (3.7%)
(a)2,022 Aguas De Barcelona............................... 84
(a)28 Aguas De Barcelona RFD........................... --
540 Acerinox S.A..................................... 78
5,800 Argentaria S.A................................... 260
9,820 Autopistas Concesionaria Espanola S.A............ 135
10,300 Banco Bilbao Vizcaya (Registered)................ 556
7,500 Banco Central Hispanoamericano S.A............... 193
7,300 Banco Santander S.A.............................. 467
700 Corporacion Financiera Alba S.A.................. 71
1,250 Corporacion Mapfre S.A........................... 76
</TABLE>
- ----------10
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SPAIN (CONT.)
<TABLE>
<C> <S> <C>
99 Corporacion Mapfre S.A. (New).................... $ 4
2,650 Dragados & Construcciones S.A.................... 41
2,200 Ebro Agricolas, Compania de Alimentacion S.A..... 39
950 Empresa Nacional de Cellulosas S.A............... 11
11,700 Empresa Nacional de Electricidad S.A............. 833
317 Energia y Industrias Aragonesas.................. 2
(a)11,300 Ercros S.A....................................... 7
700 Fomento de Construcciones y Contratas S.A........ 65
1,700 Gas Natural SDG 'E'.............................. 395
200 Gines Navarro Construction Co.................... 2
42,700 Iberdrola S.A.................................... 605
1,025 Inmobiliaria Metropolitana Vasco Central S.A..... 38
400 Portland Vaderrivas S.A.......................... 27
13,800 Repsol S.A....................................... 529
1,700 Tabacalera S.A. 'A'.............................. 73
43,000 Telefonica de Espana............................. 999
13,400 Union Electrica Fenosa S.A....................... 144
2,400 Uralita S.A...................................... 19
1,950 Vallehermoso S.A................................. 42
1,050 Viscofan Industria Navarra De Envolturas
Celulosicas S.A................................ 15
418 Zardoya-Otis S.A................................. 49
--------
5,859
--------
SWEDEN (2.1%)
1,900 ABB AB 'A'....................................... 215
1,300 AGA AG 'A'....................................... 20
(a)3,000 AGA AG 'B'....................................... 45
13,600 Astra AB 'A'..................................... 672
4,450 Atlas Copco AB 'A'............................... 108
1,300 Autoliv AB....................................... 57
(a)1,270 Diligentia AB.................................... 20
1,700 Electrolux AB 'B'................................ 99
22,100 Ericsson (LM).................................... 684
900 Esselte AB 'A'................................... 20
1,000 Hennes & Mauritz AB 'B'.......................... 138
100 Scancem AB....................................... 4
2,100 Securitas AB, 'B'................................ 61
2,700 Skandia Group Forsakrings AB..................... 76
12,700 Skandinaviska Enskilda Banken, 'A'............... 130
3,000 Skanska AB, 'B'.................................. 133
3,000 SKF AB 'B'....................................... 71
3,000 Stadshypotek AB.................................. 82
7,350 Stora Kopparbergs Bergslags Aktiebolag........... 101
4,600 Svenska Cellulosa AB, 'B'........................ 93
5,000 Svenska Handelsbanken 'A'........................ 144
(a)11,300 Swedish Match AB................................. 40
3,200 Trelleborg AB, 'B'............................... 42
9,400 Volvo AB, 'B'.................................... 208
--------
3,263
--------
UNITED KINGDOM (5.5%)
11,800 Abbey National plc............................... 155
6,200 Arjo Wiggins Appleton plc........................ 19
4,600 Associated British Foods plc..................... 38
14,791 Barclays plc..................................... 254
9,800 Bass plc......................................... 138
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
27,666 BAT Industries plc............................... $ 229
6,227 BICC plc......................................... 30
11,556 Blue Circle Industries plc....................... 70
5,566 BOC Group plc.................................... 83
9,300 Boots Co. plc.................................... 96
5,800 BPB Industries plc............................... 38
4,468 British Aerospace plc............................ 98
10,028 British Airways plc.............................. 104
37,700 British Gas plc.................................. 145
48,464 British Petroleum Co. plc........................ 582
14,200 British Sky Broadcasting Group plc............... 127
17,600 British Steel plc................................ 48
50,400 British Telecommunications plc................... 341
36,206 BTR plc.......................................... 176
2,656 Burmah Castrol plc............................... 50
21,702 Cable & Wireless plc............................. 180
9,735 Cadbury Schweppes plc............................ 82
7,200 Caradon plc...................................... 29
7,871 Coats Viyella plc................................ 18
5,756 Commercial Union plc............................. 67
4,200 Courtaulds plc................................... 28
1,272 De La Rue plc.................................... 12
4,292 EMI Group (Thorn EMI)............................ 101
24,900 General Electric plc............................. 163
4,967 GKN plc.......................................... 85
27,900 Glaxo Wellcome plc............................... 453
6,326 Granada Group plc................................ 93
18,459 Grand Metropolitan plc........................... 145
10,400 Great Universal Stores plc....................... 109
7,369 Guardian Royal Exchange plc...................... 35
19,100 Guinness plc..................................... 150
44,747 Hanson plc....................................... 62
11,200 Harrisons & Crosfield plc........................ 26
19,370 HSBC Holdings plc................................ 422
7,400 Imperial Chemical Industries plc................. 98
10,413 Ladbroke Group plc............................... 41
6,900 Land Securities plc.............................. 88
7,100 Lasmo plc........................................ 29
(a)10,800 Legal & General Group plc........................ 69
47,200 Lloyds TSB Group plc............................. 348
7,240 Lonrho plc....................................... 16
29,900 Marks & Spencer plc.............................. 251
5,300 MEPC plc......................................... 39
12,400 National Power plc............................... 104
6,800 Peninsular & Oriental Steam Navigation Co........ 69
13,182 Pilkington plc................................... 35
17,309 Prudential Corp. plc............................. 146
(a)7,400 Rank Organisation plc............................ 56
5,251 Redland plc...................................... 33
6,200 Reed International plc........................... 117
14,700 Reuters Holdings plc............................. 189
4,900 Rexam plc........................................ 30
3,000 RMC Group plc.................................... 51
12,312 Royal & Sun Alliance Insurance Group plc......... 94
4,638 Royal Bank of Scotland plc....................... 45
10,300 RTZ Corp. plc (Registered)....................... 165
7,479 Safeway.......................................... 52
13,447 Sainsbury (J) plc................................ 89
</TABLE>
-----------------
11
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
1,900 Schroders plc.................................... $ 49
8,293 Scottish Power plc............................... 50
17,100 Sears plc........................................ 28
4,900 Sedwick Group plc................................ 11
3,900 Slough Estates plc............................... 19
21,269 Smithkline Beecham plc........................... 294
2,500 Southern Electric plc............................ 34
12,785 Tarmac plc....................................... 21
6,554 Taylor Woodrow plc............................... 17
16,642 Tesco plc........................................ 101
6,444 Thames Water plc................................. 68
4,500 Thorn plc........................................ 19
4,566 TI Group plc..................................... 46
5,900 Unilever plc..................................... 143
5,975 United Utilities................................. 64
28,030 Vodafone Group plc............................... 118
7,800 Zeneca Group plc................................. 220
--------
8,637
--------
UNITED STATES (32.1%)
12,800 Abbott Laboratories.............................. 650
(a)1,033 ACNielsen Corp................................... 16
(a)9,100 Airtouch Communications, Inc..................... 230
4,100 Aluminum Co. of America.......................... 261
8,400 American Express Co.............................. 475
5,700 American Home Products Corp...................... 334
7,700 American International Group, Inc................ 834
20,600 American Telephone & Telegraph Co................ 896
6,500 Amoco Corp....................................... 523
(a)4,100 AMR Corp......................................... 361
(a)2,500 Applied Material, Inc............................ 90
2,600 Atlantic Richfield Co............................ 344
4,100 Automatic Data Processing, Inc................... 176
8,210 Banc One Corp.................................... 353
8,200 BankAmerica Corp................................. 818
1,300 Bankers Trust New York Corp...................... 112
7,500 Bell Atlantic Corp............................... 486
8,800 BellSouth Corp................................... 355
8,110 Boeing Co........................................ 863
8,100 Bristol-Myers Squibb Co.......................... 881
6,000 Campbell Soup Co................................. 481
4,100 Caterpillar, Inc................................. 309
5,500 Chevron Corp..................................... 357
6,800 Chrysler Corp.................................... 224
4,100 Chubb Corp....................................... 220
1,600 CIGNA Corp....................................... 219
(a)5,600 Cisco Systems, Inc............................... 356
6,700 Citicorp......................................... 690
31,000 Coca-Cola Co..................................... 1,631
3,100 Cognizant Corp................................... 102
11,100 Columbia HCA/Healthcare Corp..................... 452
8,200 Consolidated Edison Co. of New York, Inc......... 240
4,100 Cooper Industries, Inc........................... 173
4,100 Corning, Inc..................................... 190
2,900 CSX Corp......................................... 123
4,100 CVS Corp......................................... 170
2,000 Deere & Co....................................... 81
6,000 Dow Chemical Co.................................. 470
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
(a)1,900 DSC Communications Corp.......................... $ 34
12,100 Du Pont (EI) de Nemours Co....................... 1,142
8,200 Duke Power Co.................................... 379
3,100 Dun & Bradstreet Corp............................ 74
8,200 Eastman Kodak Co................................. 658
4,200 Edison International............................. 83
4,700 Electronic Data Systems Corp..................... 203
4,948 Eli Lilly & Co................................... 361
5,500 Enron Corp....................................... 237
18,800 Exxon Corp....................................... 1,842
14,900 Federal National Mortgage Association............ 555
6,400 First Data Corp.................................. 234
3,800 Fleet Financial Group, Inc....................... 190
(a)1,180 Footstar, Inc.................................... 29
8,200 FPL Group, Inc................................... 377
3,100 Gannett Co., Inc................................. 232
20,600 General Electric Co.............................. 2,037
13,200 General Motors Corp.............................. 736
1,500 General RE Corp.................................. 237
4,100 Goodyear Tire & Rubber Co........................ 211
1,600 H&R Block, Inc................................... 46
(a)700 Harrah's Entertainment, Inc...................... 14
12,500 Hewlett-Packard Co............................... 628
7,550 H.J. Heinz Co.................................... 270
8,100 Home Depot, Inc.................................. 406
8,000 Intel Corp....................................... 1,048
7,800 International Business Machines Corp............. 1,178
4,100 International Paper Co........................... 166
4,900 J.C. Penney Co., Inc............................. 239
17,200 Johnson & Johnson................................ 856
(a)7,500 Kmart Corp....................................... 78
6,222 Lucent Technologies, Inc......................... 288
10,200 McDonald's Corp.................................. 462
16,300 Merck & Co., Inc................................. 1,292
(a)14,800 Microsoft Corp................................... 1,223
8,200 Minnesota Mining & Manufacturing Co.............. 680
7,100 Mobil Corp....................................... 868
2,500 Monsanto......................................... 97
4,100 Morgan (J.P.) & Co., Inc......................... 400
8,100 Motorola, Inc.................................... 497
8,200 NationsBank Corp................................. 802
3,200 Norfolk Southern Corp............................ 280
8,800 Norwest Corp..................................... 383
(a)5,000 Novell, Inc...................................... 47
1,700 Nucor Corp....................................... 87
(a)10,800 Oracle System Corp............................... 451
12,000 Pacific Gas & Electric Co........................ 252
6,900 Pacific Telesis Group............................ 254
22,400 PepsiCo, Inc..................................... 655
8,300 Pfizer, Inc...................................... 688
10,800 Philip Morris Cos., Inc.......................... 1,216
2,500 PPG Industries, Inc.............................. 140
10,400 Procter & Gamble Co.............................. 1,118
8,100 Public Service Enterprise Group, Inc............. 221
(a)5,000 Rockwell International Corp...................... 304
2,600 Salomon, Inc..................................... 123
9,300 SBC Communications, Inc.......................... 481
6,500 Schering-Plough Corp............................. 421
8,200 Sears, Roebuck & Co.............................. 378
</TABLE>
- ----------12
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
12,300 Southern Co...................................... $ 278
7,400 Sprint Corp...................................... 295
4,100 Suntrust Banks, Inc.............................. 202
(a)1,270 TCI Satellite Entertainment, Inc., 'A'........... 13
(a)12,700 Tele-Communications, Inc., 'A'................... 166
3,700 Texas Instruments, Inc........................... 236
8,200 Texas Utilities Co............................... 334
3,074 The Limited, Inc................................. 56
8,200 Time Warner, Inc................................. 308
(a)4,900 Toys "R" Us, Inc................................. 147
8,533 Travelers, Inc................................... 387
3,900 Union Pacific Corp............................... 234
3,303 Union Pacific Resources Group, Inc............... 97
(a)4,600 Viacom, Inc. 'B'................................. 160
28,800 Wal-Mart Stores, Inc............................. 659
8,809 Walt Disney Co................................... 613
2,400 Warner-Lambert Co................................ 180
1,200 Wells Fargo & Co................................. 324
10,900 Westinghouse Electric Corp....................... 217
8,200 Weyerhaeuser Co.................................. 388
7,400 WMX Technologies, Inc............................ 241
4,900 XEROX Corp....................................... 258
--------
50,227
--------
TOTAL COMMON STOCKS (COST $118,998)............................. 134,670
--------
PREFERRED STOCKS (0.8%)
AUSTRALIA (0.1%)
24,000 News Corp., Ltd.................................. 107
--------
BRAZIL (NON-VOTING STOCKS) (0.6%)
10,000 Aracruz Cellelose................................ 16
7,773,000 Banco Bradesco................................... 56
598,000 Banco do Brasil.................................. 5
331,000 Banespa.......................................... 2
80,000 Brahma........................................... 44
363,000 Brasileira de Petroleo........................... 5
1,293,000 Cemig............................................ 44
27,000 Cesp............................................. 1
405,000 Cevel Alimentos S.A.............................. 4
520,000 CST PNB.......................................... 8
150,000 Eletrobras 'B'................................... 56
85,000 Itaubanco........................................ 37
37,000 Itausa........................................... 28
10,000 Klabin........................................... 9
799,000 Petrobras........................................ 127
8,000 Sadia-Concordia S.A.............................. 6
3,311,000 Telebras PN...................................... 255
416,000 Telesp........................................... 90
19,733,000 Usiminas......................................... 20
2,448 Vale do Rio Doce................................. 47
--------
860
--------
GERMANY (0.1%)
3,400 RWE AG........................................... 114
626 SAP AG........................................... 86
--------
200
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
ITALY (0.0%)
18,500 Fiat S.p.A....................................... $ 30
--------
UNITED STATES (0.0%)
141 Aetna Life & Casualty 'C'........................ 11
--------
TOTAL PREFERRED STOCKS (COST $1,024)............................ 1,208
--------
INVESTMENT COMPANIES (4.6%)
UNITED STATES
(g)95,900 Latin American Discovery Fund, Inc. (The)........ 1,199
(g)70,000 Morgan Stanley Africa Investment Fund, Inc....... 954
(g)224,333 Morgan Stanley Asia-Pacific Fund, Inc............ 2,187
(a,g)100,000 Morgan Stanley India Investment Fund, Inc........ 950
20,800 The Korea Fund, Inc.............................. 312
(g)97,053 The Thai Fund, Inc............................... 1,601
--------
TOTAL INVESTMENT COMPANIES (COST $8,833)........................ 7,203
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)1,412 Cia Paulista De Forca e Luz, expiring 1/13/99
(COST $0)...................................... --
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ------------
WARRANTS (0.0%)
BRAZIL (0.0%)
(a)119,600 Banco do Brasil, Series A, expiring 6/30/01...... --
(a)179,400 Banco do Brasil, Series B, expiring 6/30/06...... --
(a)299,000 Banco do Brasil, Series C, expiring 6/30/11...... 1
--------
1
--------
FRANCE (0.0%)
(a)320 Casino Guichard, expiring 12/31/99............... 4
(a)5 Sodexho S.A., expiring 6/7/04.................... 1
--------
5
--------
HONG KONG (0.0%)
(a)2,000 Applied International Holdings Ltd., expiring
12/30/99....................................... --
(a)8,540 Hong Kong & China Gas Co., expiring 9/30/97...... 5
(a)4,000 Hong Kong Shanghai Hotels, expiring 10/12/98..... 1
(a)1,400 Hysan Development Co., expiring 4/30/98.......... 1
(a)5,300 Oriental Press Group, expiring 10/2/98........... --
(a)1,230 Peregine Investment Holdings Ltd., expiring
5/15/98........................................ --
--------
7
--------
INDONESIA (0.0%)
(a)5,868 Indah Kiat Pulp & Paper (Foreign), expiring
4/13/01........................................ 2
--------
ITALY (0.0%)
(a,d)578 La Rinascente S.p.A., expiring 12/31/99.......... --
(a)880 R.A.S. S.p.A., expiring 12/31/97................. 2
(a)420 R.A.S. S.p.A., (Savings Shares),
expiring 12/31/97.............................. 1
--------
3
--------
</TABLE>
-----------------
13
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- --------------------------------------------------------------------------
<C> <S> <C>
SINGAPORE (0.0%)
(a)6,750 Straits Steamship, expiring 12/12/00............. $ 7
--------
SWITZERLAND (0.0%)
(a)45 Roche Holdings, expiring 5/5/98.................. 1
--------
TOTAL WARRANTS (COST $5)........................................ 26
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- ------------
UNITS (0.0%)
AUSTRALIA (0.0%)
25,986 Westfield Trust (COST $46)....................... 49
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ------------
CONVERTIBLE DEBENTURES (0.0%)
FRANCE (0.0%)
FRF 32 Casino Guichard 4.50%, 7/12/01................... 15
29 Sanofi S.A. 4.00%, 1/1/00........................ 32
1 Sodexho S.A. 6.00%, 6/7/04....................... 5
--------
52
--------
ITALY (0.0%)
ITL 2,125 Mediobanca S.p.A. 6.00%, 12/31/02................ 1
--------
TOTAL CONVERTIBLE DEBENTURES (COST $38)......................... 53
--------
TOTAL FOREIGN & U.S. SECURITIES (91.5%) (COST $128,944)......... 143,209
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (8.1%)
REPURCHASE AGREEMENT (8.1%)
UNITED STATES
$ 12,746 Chase Securities, Inc., 5.95%, dated 12/31/96,
due 1/2/97, to be repurchased at $12,752,
collateralized by $12,180 U.S. Treasury Bonds,
7.25%, due 5/16/15, valued at $12,746 (COST
$12,746)....................................... $ 12,746
--------
TOTAL INVESTMENT IN SECURITIES (99.6%) (COST $141,690).......... 155,955
--------
FOREIGN CURRENCY (0.1%)
ATS 13 Austrian Schilling............................... 1
BEF 3 Belgian Franc.................................... --
BRL 25 Brazilian Real................................... 24
GBP 13 British Pound.................................... 23
CAD 4 Canadian Dollar.................................. 3
FRF 10 French Franc..................................... 2
ITL 4,963 Italian Lira..................................... 3
KRW 11 Korean Won....................................... --
NLG 22 Netherlands Guilder.............................. 13
ESP 2,858 Spanish Peseta................................... 22
CHF 1 Swiss Franc...................................... 1
--------
TOTAL FOREIGN CURRENCY (COST $92)............................... 92
--------
TOTAL INVESTMENTS (99.7%) (COST $141,782)....................... 156,047
OTHER ASSETS IN EXCESS OF LIABILITIES (0.3%).................... 533
--------
NET ASSETS (100%)............................................... $156,580
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value - See note A-1 to financial statements.
(g) -- The Fund is advised by an affiliate.
NCS -- Non Convertible Shares.
RFD -- Ranked for Dividends.
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of forward foreign currency exchange contracts open at December
31, 1996, the Fund is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ----------- --------- ----------- ----------- --------- -----------------
<S> <C> <C> <C> <C> <C>
DEM 9,269 $ 6,034 1/24/97 $ 6,081 $ 6,081 $ 47
$ 974 974 1/24/97 DEM 1,512 984 10
JPY 621,723 5,391 1/30/97 $ 5,525 5,525 134
NLG 3,454 2,005 2/10/97 $ 2,054 2,054 49
FRF 22,357 4,324 2/24/97 $ 4,400 4,400 76
JPY 309,535 2,693 2/24/97 $ 2,759 2,759 66
JPY 554,139 4,837 3/17/97 $ 4,942 4,942 105
--------- --------- -----
$ 26,258 $ 26,745 $ 487
--------- --------- -----
--------- --------- -----
</TABLE>
- ---------------
DEM -- Deutsche Mark
FRF -- French Franc
JPY -- Japanese Yen
NLG -- Netherlands Guilder
- ----------14
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Consumer Goods................................................................... $ 31,126 19.9%
Finance.......................................................................... 30,254 19.3
Services......................................................................... 25,089 16.0
Capital Equipment................................................................ 20,669 13.2
Energy........................................................................... 17,856 11.4
Materials........................................................................ 12,862 8.2
Multi-Industry................................................................... 4,767 3.1
Mining........................................................................... 586 0.4
--------- ---
$ 143,209 91.5%
--------- ---
--------- ---
</TABLE>
-----------------
15
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australian Dollar 1.3%
British Pound 11.3%
Canadian Dollar 7.2%
Danish Krone 3.6%
Deutsche Mark 16.3%
French Franc 3.1%
Irish Punt 1.6%
Italian Lira 5.7%
Japanese Yen 8.0%
Spanish Peseta 2.7%
Swedish Krona 6.0%
United States Dollar 23.4%
Other 9.8%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 0.90% 5.94% 0.42% 5.42% 6.43% 7.74%
- ---------------------------------------------------------------------------------------
Class B+ Shares 0.46% 5.46% -0.36% 4.64% 3.80% 6.56%
- ---------------------------------------------------------------------------------------
Class C Shares 4.47% 5.47% 3.64% 4.64% 6.87% 6.87%
- ---------------------------------------------------------------------------------------
J.P. Morgan Traded
Global Bond Index:
Class A & C Shares N/A 5.62% N/A 4.40% N/A 9.11%
Class B Shares N/A 5.62% N/A 4.40% N/A 5.08%
- ---------------------------------------------------------------------------------------
</TABLE>
* The returns above with sales charge are calculated using the 4.75% sales
charge for Class A shares, the 5% contingent deferred sales charge for Class
B shares, and the 1% contingent deferred sales charge for Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The J.P. Morgan Traded Global Bond Index is an unmanaged index of government
bond issues that includes Australia, Belgium, Canada, Denmark, France, Germany,
Italy, Japan, the Netherlands, Spain, Sweden, the United Kingdom and the United
States excluding withholding tax.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY CURRENCY NET ASSETS
- ------------------------------- ------------------- -------------
<S> <C> <C>
Federal National Mortgage United States 15.4%
Association Dollar
United Kingdom Government Bond British Pound 7.7%
Government of Canada Canadian Dollar 7.2%
Government of Sweden Swedish Krona 6.0%
Buoni Poliennali Del Tes Italian Lira 5.7%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE CURRENCY DENOMINATIONS
VALUE PERCENT OF
CURRENCY (000) NET ASSETS
- --------------------- --------- ------------
<S> <C> <C>
United States Dollar $ 2,441 23.4%
Deutsche Mark 1,706 16.3%
British Pound 1,185 11.3%
Japanese Yen 837 8.0%
Canadian Dollar 755 7.2%
</TABLE>
The Global Fixed Income Fund seeks to produce an attractive real rate of return
while preserving capital by investing in fixed income securities of U.S. and
foreign issuers denominated in U.S. dollars and in other currencies.
For the six-month period ended December 31, 1996, the Fund had a total return
exclusive of sales charge of 5.94% for the Class A shares, 5.46% for the Class B
shares and 5.47% for the Class C shares, and a total return with sales charge of
0.90% for the Class A shares, 0.46% for the Class B shares and 4.47% for the
Class C shares, as compared to a total return of 5.62% for the JP Morgan Traded
Global Bond Index (the "Index"). For the one year period ended December 31,
1996, the Fund had a total return exclusive of sales charge of 5.42% for the
Class A shares, 4.64% for the Class B shares and 4.64% for the Class C shares
and a total return with sales charge of 0.42% for the Class A shares, -0.36% for
the Class B shares and 3.64% for the Class C shares compared with 4.40% for the
Index for the same period. For the period since inception on January 4, 1993
through December 31, 1996, the average annual total return of the Fund exclusive
of sales charge was 7.74% for the Class A shares and 6.87% for the Class C
shares, and 6.43% for the Class A shares with sales charge, as compared to 9.11%
for the Index. For the period from inception of the offering of Class B shares
on August 1, 1995 through December 31, 1996, the average annual total return for
the Class B shares exclusive of sales charge was 6.56% and 3.80% with sales
charge as compared to 5.08% for the Index.
Global bond markets turned in mixed performances in calendar 1996. Early in the
year returns were quite poor across the globe as U.S. 10-year yields rose over
100 basis points on the back of much stronger than expected economic activity.
The second half of the year was a different story with all markets generating
good returns as fears of a U.S. Federal Reserve tightening receded. The
benchmark U.S. market provided a solid backdrop for the rest of the world as
10-year yields fell 40 basis points, partially retracing their first half rise.
Most of the world was not immune to the U.S. market's volatility and only the
high-yielding European bond markets -- Italy, Spain, Sweden -- were able to
produce consistently high returns throughout the year. Measured in local
currency terms, 1996 returns ranged from 3% in the U.S. to 24% in Italy. In U.S.
dollar terms the dispersion was even greater as Japan returned -6% while Italy
returned almost 30%. Country and currency selection were richly rewarded.
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
- ----------16
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
". . . INTO 1997, WE REGARD GLOBAL FIXED INCOME MARKETS AS OFFERING REASONABLE
BUT NOT GREAT VALUE."
There were three truly dominant themes in 1996: a stronger U.S. dollar, superior
European bond performance and a dramatic convergence of intra-European bond
yield spreads as optimism regarding the possibility and breadth of the European
Monetary Union ("EMU") grew. The strength of the dollar detracted over 3% from
returns as the JP Morgan Global Government Bond Index returned 7.6% in local
currency terms but only 4.4% in U.S. dollar terms. Despite the strength of the
dollar, only the Japanese and German bond markets had negative returns in U.S.
dollar terms. The difference between unhedged and hedged returns was even more
dramatic as the currency hedged JP Morgan Traded Global Bond Index returned
8.6%, a whopping 4.2% more than unhedged returns.
The rise in the U.S. dollar over the course of 1996 was steady and undramatic.
Indeed, one of the characteristics of much of 1996 was the low level of foreign
exchange market volatility with much of the volatility occurring in the cross
exchange rates, e.g., Italian lira/Deutschemark, British pound/ Deutschemark.
Faster economic growth in the U.S. and low and falling interest rates abroad
contributed to the dollar's strength. In terms of numbers, the U.S. dollar moved
from 1.43 Deutschemarks to 1.54 (7.7%) and from 103 Japanese yen to 116 (12.6%)
during 1996. The U.S. dollar did weaken versus the Australian dollar (6.8%),
Irish punt (5.6%), Italian lira (4.3%), and British pound (10.2%), significantly
contributing to returns from those countries. The rise of the British pound was
notable as it had been very stable until the fourth quarter of 1996 when it
suddenly appreciated over 9% against both the U.S. dollar and Deutschemark as
U.K economic activity surged.
European bonds far outperformed their U.S. and Japanese counterparts over the
course of 1996. The European component of the Index returned 12% while the U.S.
and Japanese markets returned 3% and 6% respectively, in local currency terms.
This outperformance was driven by falling inflation expectations (Italian,
Spanish and Swedish inflation are at decades lows), central bank easing, fiscal
tightening, and most importantly, positive expectations about EMU.
EMU optimism grew steadily over the course of 1996, but it was not until late in
the third quarter that it became apparent that the Spanish and Italian
governments were moving aggressively to meet the monetary union convergence
criteria. This triggered a major re-rating of these markets and Italian bond
yields subsequently fell 200 basis points, narrowing in yield spread to Germany
by 140 basis points. While Sweden has not stated a desire to participate in
monetary union in 1999, excellent macroeconomic fundamentals allowed its bond
market to generally keep pace with the southern European countries. Italian,
Spanish and Swedish bond markets returned 24%, 22% and 18%, respectively, in
local currency terms for calendar 1996.
The Fund benefited from many of these themes. On the currency front, a
substantial portion of European and Japanese bond holdings were hedged while an
above Index weighting was maintained in the U.S. dollar, British and Irish
currencies for much of the time that they were appreciating. On the bond side,
above Index weightings were maintained in European bonds with the majority of
the overweight concentrated in the higher-yielding Italian, Spanish and Swedish
markets. During the period, we rotated among these countries to take advantage
of the best relative values, but overall the Fund kept an above Index exposure
to these markets at all times. The Fund also benefited from a below Index
weighting of the U.S. and Japanese markets (to the advantage of European bond
holdings). The duration of the Fund has been kept fairly close to the Index much
of the period as country selection rather than duration management was viewed as
the more important decision.
Our overall global fixed income strategy remained broadly unchanged over the
course of the period as the themes that were dominant continued to dominate
later in the period. During the fourth quarter of calendar 1996 we did reduce
our Irish and Japanese bond holdings to fund modest increases in Canadian and
U.K. bonds. Holdings of Irish pounds were also reduced in response to the
outperformance of the U.K. and Irish currencies. Similarly, exposure to dollar
bloc currencies was cut back approximately 4% and European currency holdings
were increased commensurately as the dollar rose. The Fund, however, still
remains slightly overweight in the dollar bloc currencies. The duration of the
Fund at December 31, 1996 was slightly shorter than its benchmark, primarily
-------------
17
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
due to the underweighting of the Japanese bond market. However, the overall
interest-rate sensitivity -- after adjusting for the yield curve, country and
currency exposure -- remained about 10% longer than the Index.
Going forward into 1997, we regard global fixed income markets as offering
reasonable but not great value. Although real interest rates (the key driver to
our relative value driven approach) are below their averages of the 1980s and
1990s, they are still above 3% and inflation continues to be well contained.
Importantly, governments are focused on reducing budget deficits. This process
should help reduce required real interest rates and, while we expect European
and Japanese economies to strengthen over the course of 1997, should allow their
governments to continue following the tight fiscal, easy monetary policy for a
while longer. In addition, EMU should put additional pressure on European
governments to reduce bloated public sectors especially with agreement on the
stability pact. Thus, we see no reason to change our current strategy of
overweighting the high real interest rate markets -- British, Swedish and German
bond markets -- and underweighting the Japanese and U.S. bond markets where real
interest rates are relatively low.
On the foreign exchange front, the U.S. dollar remains well supported by above
average growth (by global standards), quiescent inflation and the Fed's
asymmetric policy stance. However, the Japanese yen has depreciated over 40%
from its 1995 lows and no longer looks overvalued. While current economic and
financial problems will continue to plague Japan, a repeat of 1996 is unlikely.
Therefore, absent the likelihood of dramatic currency moves, we expect to keep
the Fund's current long dollar bloc currency position modest.
J. David Germany
PORTFOLIO MANAGER
Michael B. Kushma
PORTFOLIO MANAGER
Paul F. O'Brien
PORTFOLIO MANAGER
Robert M. Smith
PORTFOLIO MANAGER
January 1997
- ----------18
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
FIXED INCOME SECURITIES (90.2%)
AUSTRALIAN DOLLAR (1.3%)
GOVERNMENT BOND
AUD 150 Government of Australia 9.50%, 8/15/03........... $ 133
-------
BRITISH POUND (11.3%)
CORPORATE BOND
GBP 200 Guaranteed Export Financial Corp. 10.625%,
9/15/01........................................ 382
-------
GOVERNMENT BONDS
100 United Kingdom 10.00%, 9/8/03.................... 194
350 United Kingdom 7.75%, 9/8/06..................... 609
-------
803
-------
TOTAL BRITISH POUND.......................................... 1,185
-------
CANADIAN DOLLAR (7.2%)
GOVERNMENT BONDS
CAD 300 Government of Canada 7.50%, 3/1/01............... 236
500 Government of Canada 7.50%, 12/1/03.............. 395
130 Government of Canada 9.75%, 6/1/21............... 124
-------
TOTAL CANADIAN DOLLAR........................................ 755
-------
DANISH KRONE (3.6%)
GOVERNMENT BOND
DKK 2,000 Kingdom of Denmark 8.00%, 3/15/06................ 374
-------
DEUTSCHE MARK (16.3%)
CORPORATE BOND
DEM 650 Landeskreditbank Baden-Wuerttemberg Financial
6.63%, 8/20/03................................. 448
-------
GOVERNMENT BONDS
150 Deutschland Republic 6.25%, 1/4/24............... 93
800 German Unity Fund 8.00%, 1/21/02................. 592
350 Treuhandanstalt 6.875%, 6/11/03.................. 246
450 Treuhandanstalt 7.50%, 9/9/04.................... 327
-------
1,258
-------
TOTAL DEUTSCHE MARK.......................................... 1,706
-------
FRENCH FRANC (3.1%)
GOVERNMENT BOND
FRF 1,500 French Treasury Bill 7.75%, 4/12/00.............. 322
-------
IRISH PUNT (1.6%)
GOVERNMENT BOND
IEP 100 Government of Ireland 6.25%, 4/1/99.............. 170
-------
ITALIAN LIRA (5.7%)
GOVERNMENT BONDS
ITL 580,000 Buoni Poliennali Del Tes 10.50%, 7/15/00......... 428
230,000 Buoni Poliennali Del Tes 9.50%, 2/1/06........... 173
-------
TOTAL ITALIAN LIRA........................................... 601
-------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
JAPANESE YEN (8.0%)
EUROBONDS
JPY 15,000 European Investment Bank 6.63%, 3/15/00.......... $ 152
27,000 Japan Development Bank 6.50%, 9/20/01............ 283
40,000 World Bank 4.75%, 12/20/04....................... 402
-------
TOTAL JAPANESE YEN........................................... 837
-------
SPANISH PESETA (2.7%)
GOVERNMENT BOND
ESP 30,000 Government of Spain 10.50%, 10/30/03............. 281
-------
SWEDISH KRONA (6.0%)
GOVERNMENT BONDS
SEK 2,200 Government of Sweden 13.00%, 6/15/01............. 416
1,500 Government of Sweden 6.00%, 2/9/05............... 213
-------
TOTAL SWEDISH KRONA.......................................... 629
-------
UNITED STATES DOLLAR (23.4%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (23.4%)
FEDERAL NATIONAL MORTGAGE ASSOCIATION
$ 1,683 Pool # 336411 6.50%, 2/1/26...................... 1,606
-------
U.S. TREASURY BONDS
225 8.13%, 8/15/19................................... 260
90 7.63%, 2/15/25................................... 100
-------
360
-------
U.S. TREASURY NOTES
375 5.13%, 11/30/98.................................. 370
100 7.25%, 5/15/04................................... 105
-------
475
-------
TOTAL UNITED STATES DOLLAR................................... 2,441
-------
TOTAL FIXED INCOME SECURITIES (COST $9,280).................... 9,434
-------
SHORT-TERM INVESTMENT (6.3%)
REPURCHASE AGREEMENT
UNITED STATES DOLLAR
659 Chase Securities, Inc., 5.95%, dated 12/31/96,
due 1/2/97, to be repurchased at $659,
collateralized by $630 U.S. Treasury Bonds,
7.25%, due 5/15/16, valued at $659 (COST
$659).......................................... 659
-------
FOREIGN CURRENCY (1.6%)
DKK 105 Danish Krone..................................... 18
JPY 950 Japanese Yen..................................... 8
ESP 17,920 Spanish Peseta................................... 138
-------
TOTAL FOREIGN CURRENCY (COST $163)............................. 164
-------
TOTAL INVESTMENTS (98.1%) (COST $10,102)....................... 10,257
OTHER ASSETS IN EXCESS OF LIABILITIES (1.9%)................... 196
-------
NET ASSETS (100%).............................................. $10,453
-------
-------
</TABLE>
-----------------
19
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of forward foreign currency exchange contracts open at December
31, 1996, the Fund is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ------------ --------- ----------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 143 $ 143 1/2/97 DEM 222 $ 145 $ 2
JPY 950 8 1/6/97 $ 8 8 --
CAD 70 51 1/15/97 $ 52 52 1
CAD 120 88 1/17/97 $ 90 90 2
DEM 2,460 1,601 1/17/97 $ 1,586 1,586 (15)
GBP 200 343 1/17/97 $ 325 325 (18)
$ 777 777 1/17/97 DEM 1,200 781 4
$ 66 66 1/17/97 GBP 40 69 3
SEK 2,800 411 1/30/97 $ 425 425 14
$ 425 425 1/30/97 DEM 645 420 (5)
$ 488 488 1/30/97 JPY 55,000 477 (11)
DKK 600 102 2/7/97 $ 104 104 2
$ 77 77 2/7/97 DKK 450 77 --
GBP 61 104 2/12/97 $ 102 102 (2)
$ 100 100 2/12/97 GBP 61 104 4
--------- --------- ---
$ 4,784 $ 4,765 $ (19)
--------- --------- ---
--------- --------- ---
</TABLE>
- ---------------
GBP -- British Pound
CAD -- Canadian Dollar
DKK -- Danish Krone
DEM -- Deutsche Mark
JPY -- Japanese Yen
SEK -- Swedish Krona
- ----------20
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
China 0.1%
Hong Kong 35.3%
India 0.2%
Indonesia 5.7%
Korea 4.3%
Malaysia 22.9%
Philippines 4.4%
Singapore 15.3%
Taiwan 3.6%
Thailand 7.7%
Other 0.5%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -7.10% -2.47% -1.84% 3.06% 9.39% 10.91%
- ---------------------------------------------------------------------------------------
Class B+ Shares -7.68% -2.82% -2.71% 2.29% -3.56% -0.74%
- ---------------------------------------------------------------------------------------
Class C Shares -3.80% -2.82% 1.30% 2.30% 10.13% 10.13%
- ---------------------------------------------------------------------------------------
MSCI CFEF
ex-Japan Index:
Class A & C
Shares N/A 0.76% N/A 9.18% N/A 15.08%
Class B
Shares N/A 0.76% N/A 9.18% N/A 5.21%
</TABLE>
* The returns above with sales charge are calculated using the 4.75% sales
charge for Class A shares, the 5% contingent deferred sales charge for Class
B shares, and the 1% contingent deferred sales charge for Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The Morgan Stanley Capital International (MSCI) Combined Far East Free (CFEF)
ex-Japan Index is an unmanaged index of common stocks and includes Indonesia,
Hong Kong, Malaysia, the Philippines, Korea, Taiwan and Thailand (assumes
dividends are reinvested).
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- --------------------------------------- ----------- -------------
<S> <C> <C>
Cheung Kong Holdings Ltd. Hong Kong 4.7%
Hutchison Whampoa Ltd. Hong Kong 4.3%
HSBC Holdings plc Hong Kong 3.6%
New World Development Co., Ltd. Hong Kong 3.5%
Hong Kong Telecommunications Ltd. Hong Kong 3.5%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -------------------- --------- ------------
<S> <C> <C>
Finance $ 157,363 37.1%
Services 116,957 27.6%
Multi-Industry 74,474 17.6%
Energy 26,042 6.1%
Capital Equipment 16,314 3.9%
</TABLE>
The investment objective of the Asian Growth Fund is long-term capital
appreciation through investment in the stock markets of Asia excluding Japan.
The benchmark for investment performance is the Morgan Stanley Capital
International (MSCI) Combined Far East Free ex-Japan Index.
For the six-month period ended December 31, 1996, the Fund had a total return
exclusive of sales charge of -2.47% for the Class A shares, -2.82% for the Class
B shares and -2.82% for the Class C shares, and a total return with sales charge
of -7.10% for the Class A shares, -7.68% for the Class B shares and -3.80% for
the Class C shares, as compared to a total return of 0.76% for the Morgan
Stanley Capital International (MSCI) Combined Far East Free ex-Japan Index (the
"Index"). For the one year period ended December 31, 1996, the Fund had a total
return exclusive of sales charge of 3.06% for the Class A shares, 2.29% for the
Class B shares and 2.30% for the Class C shares and a total return with sales
charge of -1.84% for the Class A shares, -2.71% for the Class B shares and 1.30%
for the Class C shares compared with 9.18% for the Index for the same period.
For the period from inception on June 23, 1993 through December 31, 1996, the
average annual total return for the Fund exclusive of sales charge was 10.91%
for the Class A shares and 10.13% for the Class C shares and 9.39% for the Class
A shares with sales charge, as compared to 15.08% for the Index for the same
period. For the period from inception of the offering of Class B shares on
August 1, 1995 through December 31, 1996, the average annual total return for
the Class B shares exclusive of sales charge was -0.74% and -3.56% with sales
charge as compared to 5.21% for the Index.
PERFORMANCE REVIEW
The Fund underperformed the Index in the last half of 1996. This was
attributable to a large extent to security selection, principally in Malaysia
where stocks such as Genting and Resorts World fell victim to natural disasters
and severely trailed the overall market. The Fund also missed a portion of the
large move in Taiwan, as we did not participate in the speculative frenzy which
seized the financial sector, instead concentrating on the undervalued electronic
stocks. Security selection in Thailand also hampered the Fund's performance. The
effect on the Fund of asset allocation was essentially neutral.
MARKET REVIEW
Asian markets strengthened the modest gains they displayed in 1995, rising 9.2%
in calendar 1996. This increase disguised a huge disparity between the
performance of different markets, however. Most of the markets were up strongly,
led by Taiwan's 38.9% increase, followed by China (+35.1%) and Hong Kong
(+28.9%). Indonesia and Malaysia also posted returns in excess of 20%. This is
in sharp contrast to the performance of other markets in the region, as South
Korea plummeted -38.4% and Thailand tumbled -38.0%.
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MSCI COMBINED FAR EAST FREE EX-JAPAN INDEX AND ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
FUND'S FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE
SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
-------------
21
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
". . . ASIAN MARKETS IN GENERAL, WE BELIEVE, SHOULD CONTINUE TO APPRECIATE."
Despite a series of political confrontations with China in the first quarter,
Taiwan rallied to become the region's best performing market. Lee Teng-Hui
emerged as the country's first democratically elected leader, and relations with
China softened following the live missile exercises that began 1996. Confidence
returned to domestic investors who formed the major component of the rally,
especially in financial stocks. Taiwan's inclusion in the MSCI Regional Index
also impacted the markets, as foreign investors sought exposure to the market.
Investors have remained concerned, however, as the collapse in semiconductor
prices has led to pressure on many of the island's top exporters.
Lessened anxiety over relations with China also spurred the Hong Kong market.
Investor sentiment over the prospects of a smooth transition improved gradually
throughout 1996 and stock prices reacted accordingly. As widely expected,
shipping magnate C.H. Tung was appointed Chief Executive of the Special
Administrative Region that will encompass Hong Kong after the handover. Economic
fundamentals also buoyed the market as the U.S. Federal Reserve resisted raising
interest rates, spurring property prices throughout Hong Kong. China stocks also
benefited from improved relations. The major impetus behind the MSCI China's 35%
move, however, was frantic local buying in the fourth quarter of 1996. The
government brought to a close its 3-year austerity program and cut interest
rates twice in 1996, injecting a large amount of liquidity into the domestic
market. This led to the unusual occurrence of local shares actually trading at a
premium to foreign shares.
The South Korean market was the region's worst performer, losing 38.4% of its
value over 1996 based on the MSCI Index. The current account deficit increased
substantially and is expected to exceed $22 billion in 1996. Exporters suffered
severely as the prices for key Korean exports of semiconductors and
petrochemicals fell sharply. Though the Korean Won devalued throughout 1996, the
comparative weakening of the Yen prevented any consequent gains in Korean
product competitiveness. The situation continued to be exacerbated by the zeal
with which the chaebols have built up capacity, far in excess of any reasonable
expectation of short-term demand. A final blow to the overall market landed at
the end of 1996, as many labor union went on strike following changes to
national labor laws by the Korean government.
The Thai market also suffered a significant decline during 1996. Worries about
the nature and term of the capital inflows mounted throughout the year, leading
to a downgrading of Thai debt by Moody's in May. The Thai central bank responded
to concerns over the stability of the financial sector by imposing stiff new
regulations which severely impacted the short-term profitability of the banks,
which then proceeded to lead the market into its decline. The market suffered
further setbacks as the government of Chuan Leekpai lost a no-confidence motion
in parliament and was replaced by a shaky minority coalition under General
Chavalit's New Aspiration Party. A large and persistent current account deficit
has also plagued the country, as the government has remained firm to their
commitment to maintain the value of the Thai Baht at current levels.
MARKET OUTLOOK
Against the background of an increase in global growth, Asian markets in
general, we believe, should continue to appreciate in 1997. In Hong Kong, strong
corporate earnings growth and liquidity are likely to provide support for the
market despite its recent strength. Stock valuations are no longer cheap, and
will likely remain close to the recent historical average. As the handover to
China becomes reality, China related stocks and red-chips will remain the focus
of the market. Shares of companies listed in China should also come under
increasing interest from both foreign and local investors, and volatility will
remain high. Both markets will be susceptible to China's foreign relations with
the U.S. and Taiwan, and Hong Kong will continue to be vulnerable to changes in
U.S. interest rates (the Chinese government has pledged to keep the Hong Kong
dollar pegged to the U.S. dollar). Shares in Taiwan should benefit from an
improvement in global demand for electronics, as well as improving economic
fundamentals and a benign interest rate environment.
Although it is premature in the near term to envision a sustained fundamental
turnaround in the Korean economy and stock market, with reduction in facilities
investment, de-stocking of inventory levels, and gradual recovery of prices,
improvements should impact the market starting in the second half of 1997. A
reduction in facilities investment during this period of oversupply should help
reduce import growth and in turn shrink the current account deficit, which will
reduce the need for
- ----------22
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
working capital financing and lower market interest rates. However, the
uncertain political situation ahead of this year's presidential election and the
pace of chaebols to focus on production efficiency will determine the speed of a
sustained recovery.
Despite strong upward moves in 1996, the Malaysian market prospective 1997
Price-earnings ratio (18.5 times) is at the low end of the past 5 year
historical range. Whereas gains in 1996 were led by small and medium cap firms,
large cap companies are expected to generate better earnings growth in 1997.
Singapore is likely to trade within a narrow range, though with a definite
upward bias led by small cap electronic stocks.
Indonesia's macroeconomic environment should continue to buoy the stock market
with healthy economic growth and lower inflation. Earnings growth is predicted
to top 20%, yielding a 15 times prospective 1997 Price-earnings ratio.
Parliamentary elections in May should not provide any major surprises, and
concerns over Suharto's health have lessened, though not dissipated. The
Philippines also is expected to retain the high earnings and GDP growth it
enjoyed in 1996. However, stock prices here look fairly valued if not expensive,
and record property prices have raised concerns over the asset quality of some
banks. The market is also vulnerable to increasing uncertainty ahead of the
Presidential elections in 1998, where Ramos, the architect of the country's
economic success, is required to step down under the current constitution.
The market in Thailand is likely to trend sideways as investors await
indications of the future of the economy. The finance sector was forced to
swallow stern medicine by the central bank, and it remains to be seen whether
they will be able to grow out of their current problems. Record low valuations
should provide a floor under the current market level, though institutional
selling and lackluster earnings growth will impede large upside moves in the
immediate future.
PORTFOLIO STRATEGY
In Hong Kong we will continue to look for companies with China interests, as
well as increase our exposure in China itself on a selective basis. Our approach
in Taiwan is to remain with the electronic stocks which maintain very low
valuations, while avoiding the financial stocks which have been driven to
unsustainable Price-earnings ratios. In Korea, while stock valuations are
compelling, lack of fundamental improvements should dictate selective bottom-up
investing in the first half of 1997. Stronger credit banks and domestic plays,
such as telecoms remain attractive.
In Malaysia, the Fund will continue to add to positions which reflect the
changing structure of this dynamic economy. We will increase our exposure to
automotive stocks in Indonesia, especially Astra which has shaken off the
competition from a national car and proceeded to perform strongly. In the
Philippines, the Fund will continue to trim its exposure to the hot property
sector, while in Singapore it will increase its holdings in stocks in the
electronic sector. The incredibly low valuations have made investment in
Thailand very compelling, and we will continue to invest in banks with the
strongest balance sheets.
Ean Wah Chin
PORTFOLIO MANAGER
Kiat Seng Seah
PORTFOLIO MANAGER
January 1997
-----------------
23
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (99.1%)
CHINA (0.1%)
(a)259,300 Changchai Co. Ltd. `B'........................... $ 225
947,000 Yizheng Chemical Fibre Co. `H'................... 230
--------
455
--------
HONG KONG (35.3%)
(a)269,000 Asia Satellite Telecommunications Holdings
Ltd............................................ 624
2,091,000 CDL Hotels International Ltd..................... 1,196
2,260,000 Cheung Kong Holdings Ltd......................... 20,089
(a)684,000 Cheung Kong Infrastructure Holdings.............. 1,813
(a)2,643,000 China Resources Beijing Land..................... 1,674
2,596,000 China Resources Enterprises Ltd.................. 5,840
1,805,000 Citic Pacific Ltd................................ 10,478
819,000 Cosco Pacific Ltd................................ 953
(a)180,000 Great Eagle Holdings Ltd......................... 742
(a)25,000 Guangshen Railway Co. Ltd. ADR................... 516
(a)2,781,000 Guangshen Railway Company Ltd. `H'............... 1,205
360,300 Hang Seng Bank Ltd............................... 4,379
353,000 Henderson Land Development Co., Ltd.............. 3,560
213,000 Hong Kong Ferry Holdings......................... 416
143,000 Hong Kong Land Holdings Ltd...................... 398
9,161,600 Hong Kong Telecommunications Ltd................. 14,747
714,224 HSBC Holdings plc................................ 15,283
2,326,000 Hutchison Whampoa Ltd............................ 18,269
(a)1,524,500 Kerry Properties Ltd............................. 4,179
2,188,000 New World Development Co., Ltd................... 14,781
(a)406,000 Shanghai Industrial Holdings Ltd................. 1,480
880,100 Sun Hung Kai Properties Ltd...................... 10,781
1,012,300 Swire Pacific Ltd. `A'........................... 9,652
1,263,000 Wharf Holdings Ltd............................... 6,303
--------
149,358
--------
INDIA (0.2%)
(e)24,500 Hindalco Industries Ltd.......................... 613
(a)24,000 State Bank of India GDR.......................... 420
--------
1,033
--------
INDONESIA (5.7%)
786,000 Astra International (Foreign).................... 2,163
(d)1,936,016 Bank International Indonesia (Foreign)........... 1,906
(a,d)1,618,000 Bank Negara Indonesia............................ 856
(a,d)1,010,000 Daya Guna Samudera (Foreign)..................... 1,176
(d)529,000 Gudang Garam (Foreign)........................... 2,284
(d)769,200 Hanjaya Mandala Sampoerna (Foreign).............. 4,103
(d)2,676,305 Indah Kiat Pulp & Paper (Foreign)................ 1,955
(a,d)1,184,500 Sorini Corp. (Foreign)........................... 552
(d)5,253,500 Telekomunikasi (Foreign)......................... 9,064
--------
24,059
--------
KOREA (4.3%)
58,730 Hanwha Chemical Corp............................. 455
(a,d)81,120 Housing & Commercial Bank (Foreign).............. 1,235
37,632 Hyundai Engineering & Construction Co.
(Foreign)...................................... 873
(a)2,190 Hyundai Engineering & Construction Co. (Foreign)
RFD............................................ 51
(a)41,000 Kookmin Bank GDR................................. 745
55,220 Korea Electric Power (Foreign)................... 1,608
62,830 Korea Mobile Telecommunications Corp. ADR........ 809
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
(d)2,559 Korea Mobile Telecommunications Corp.
(Foreign)...................................... $ 2,555
22,210 LG Information & Communication................... 1,419
16,470 LG Information & Communication (New)............. 1,168
69,600 Pohang Iron & Steel Ltd. ADR..................... 1,409
(a,d)18,848 Samsung Electronics Co. (Foreign)................ 1,116
(a,e)3,534 Samsung Electronics Co. GDR...................... 143
(a,e)18,989 Samsung Electronics Co. GDR (New)................ 772
(d)28,163 Samsung Electronics Co. (New).................... 1,668
(d)136,257 Shinhan Bank Co., Ltd. (Foreign)................. 2,188
--------
18,214
--------
MALAYSIA (22.9%)
583,000 Commerce Asset Holdings Bhd...................... 4,386
134,000 Dialog Group Bhd................................. 1,910
671,000 Edaran Otomobil Nasional Bhd..................... 6,709
1,812,400 Genting Bhd...................................... 12,487
764,000 Hicom Holdings Bhd............................... 2,193
914,000 IJM Corp. Bhd.................................... 2,153
850,000 Leader Universal Holdings Bhd.................... 1,784
1,167,500 Malayan Banking Bhd.............................. 12,944
1,513,000 Malaysian International Shipping (Foreign)....... 4,493
2,157,000 Petronas Gas Bhd................................. 8,968
3,108,000 Renong Bhd....................................... 5,513
1,617,000 Resorts World Bhd................................ 7,363
3,310,000 Sime Darby Bhd................................... 13,041
1,175,000 Telekom Malaysia Bhd............................. 10,468
274,000 United Engineers Bhd............................. 2,474
--------
96,886
--------
PHILIPPINES (4.4%)
1,558,037 Ayala Land, Inc. `B'............................. 1,777
(a)15,431,000 Digital Telecommunications Philippines, Inc...... 1,291
(a)1,975,200 DMCI Holdings, Inc............................... 1,296
17,741,200 JG Summit Holding `B'............................ 4,992
407,204 Manila Electric `B'.............................. 3,329
6,603,125 Petron Corp...................................... 2,235
29,170 Philippine Long Distance Telephone ADR........... 1,603
8,693,480 SM Prime Holdings, Inc........................... 2,248
--------
18,771
--------
SINGAPORE (14.9%)
2,485,000 Comfort Group Ltd................................ 2,202
696,500 Development Bank of Singapore (Foreign).......... 9,407
121,600 Fraser & Neave Ltd............................... 1,251
431,000 Jurong Shipyard Ltd.............................. 2,171
1,182,000 Keppel Corp...................................... 9,207
728,032 Oversea-Chinese Banking Corp. (Foreign).......... 9,053
546,000 Parkway Holdings Ltd............................. 2,146
466,000 Sembawang Corp. Ltd.............................. 2,464
378,000 Singapore Airlines Ltd. (Foreign)................ 3,431
249,400 Singapore Press Holdings (Foreign)............... 4,919
1,321,000 Straits Steamship Land Ltd....................... 4,229
561,000 Straits Trading Co., Ltd......................... 1,363
773,000 United Overseas Bank Ltd. (Foreign).............. 8,618
(a)1,060,000 Want Want Holdings............................... 2,788
--------
63,249
--------
TAIWAN (3.6%)
854,600 Cathay Life Insurance Co., Ltd................... 5,438
6,194,000 China Steel Corp................................. 5,811
</TABLE>
- -----------------
24
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
TAIWAN (CONT.)
(a)716,000 Siliconware Precision Industries Co.............. $ 1,510
1,741,220 Yang Ming Marine Transport....................... 2,305
--------
15,064
--------
THAILAND (7.7%)
(d)465,000 Advance Information Services Co., Ltd.
(Foreign)...................................... 4,352
738,300 Bangkok Bank Co., Ltd. (Foreign)................. 7,139
1,074,144 Finance One Co., Ltd. (Foreign).................. 2,178
(d)481,300 Shinawatra Computer Co., Ltd. (Foreign).......... 5,818
774,600 Siam Commercial Bank Co., Ltd. (Foreign)......... 5,618
856,000 Thai Farmer's Bank Public Co. (Foreign).......... 5,340
198,000 United Communication Industry (Foreign).......... 2,131
--------
32,576
--------
TOTAL COMMON STOCKS (COST $393,180)................................ 419,665
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------
WARRANTS (0.4%)
SINGAPORE (0.4%)
(a)1,457,000 Straits Steamship, expiring 12/12/00............. 1,572
--------
THAILAND (0.0%)
(a,d)103,450 Thai Farmers Bank, expiring 9/15/02.............. --
--------
TOTAL WARRANTS (COST $1,986)....................................... 1,572
--------
TOTAL FOREIGN SECURITIES (99.5%) (COST $395,166)................... 421,237
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
FOREIGN CURRENCY (0.4%)
HKD 3,173 Hong Kong Dollar................................. $ 410
KRW 37,077 Korean Won....................................... 44
MYR 70 Malaysian Ringgit................................ 28
PHP 1,037 Philippines Peso................................. 40
TWD 24,887 Taiwan Dollar.................................... 905
--------
TOTAL FOREIGN CURRENCY (COST $1,426)............................... 1,427
--------
TOTAL INVESTMENTS (99.9%) (COST $396,592).......................... 422,664
OTHER ASSETS IN EXCESS OF LIABILITIES (0.1%)....................... 566
--------
NET ASSETS (100%).................................................. $423,230
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Securities (totaling $40,828 or 9.6% of net assets at December 31,
1996) valued at fair value - see note A-1 to financial statements.
(e) -- 144A Security - certain conditions for public sale may exist.
ADR -- American Depositary Receipt.
GDR -- Global Depositary Receipt.
RFD -- Ranked for Dividend.
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of forward foreign currency exchange contracts open at December
31, 1996, the Fund is obligated to deliver foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR NET UNREALIZED
(000) (000) DATE (000) VALUE (000) GAIN (LOSS) (000)
- ------------- ----- ----------- ------------- ----- -----------------
<S> <C> <C> <C> <C> <C>
$ 97 $ 97 1/3/97 MYR 245 $ 97 $ --
----- ----- -----
----- ----- -----
</TABLE>
- ---------------
MYR -- Malaysian Ringgit
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- ---------------------------------------- -------- --------
<S> <C> <C>
Finance................................. $157,363 37.1%
Services................................ 116,957 27.6
Multi-Industry.......................... 74,474 17.6
Energy.................................. 26,042 6.1
Capital Equipment....................... 16,314 3.9
Consumer Goods.......................... 15,514 3.7
Materials............................... 14,573 3.5
-------- ---
$421,237 99.5%
-------- ---
-------- ---
</TABLE>
-----------------
25
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 2.5%
Banking 10.9%
Building 3.2%
Capital Goods 4.2%
Chemicals 4.2%
Consumer--Durables 5.2%
Consumer--Retail 3.9%
Consumer--Service and Growth 0.2%
Consumer--Staples 4.7%
Energy 6.1%
Entertainment 2.0%
Financial--Diversified 6.5%
Health Care 5.7%
Industrial 1.9%
Insurance 5.7%
Metals 3.8%
Paper & Packaging 2.2%
Restaurants 0.6%
Services 9.5%
Technology 7.1%
Transportation 2.5%
Utilities 6.7%
Other 0.7%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 6.47% 11.78% 16.52% 22.33% 11.60% 13.30%
- ---------------------------------------------------------------------------------------
Class B+ Shares 6.34% 11.34% 16.35% 21.35% 14.39% 17.04%
- ---------------------------------------------------------------------------------------
Class C Shares 10.25% 11.25% 20.33% 21.33% 12.39% 12.39%
- ---------------------------------------------------------------------------------------
Russell 2500 Small
Company Index:
Class A & C
Shares N/A 7.95% N/A 19.05% N/A 14.65%
Class B
Shares N/A 7.95% N/A 19.05% N/A 18.07%
- ---------------------------------------------------------------------------------------
S&P 500 Index:
Class A & C
Shares N/A 11.70% N/A 22.97% N/A 18.38%
Class B
Shares N/A 11.70% N/A 22.97% N/A 24.33%
- ---------------------------------------------------------------------------------------
</TABLE>
* The returns above with sales charge are calculated using the 4.75% sales
charge for Class A shares, the 5% contingent deferred sales charge for Class
B shares, and the 1% contingent deferred sales charge for Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The Russell 2500 Small Company
Index and S&P 500 Index are
unmanaged indices of common
stocks. The S&P 500 Index assumes
dividends are reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ------------------------------- ------------------- -------------
<S> <C> <C>
Greenpoint Financial Corp. Banking 1.8%
Arvin Industries, Inc. Consumer--Durables 1.7%
Ameron, Inc. Building 1.4%
Selective Insurance Group, Inc. Insurance 1.4%
National Fuel Gas Co. Energy 1.4%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------- --------- ------------
<S> <C> <C>
Banking $ 5,272 10.9%
Services 4,586 9.5%
Technology 3,405 7.1%
Utilities 3,221 6.7%
Financial--Diversified 3,124 6.5%
</TABLE>
The American Value Fund invests in domestic small- to medium-sized companies
that our research indicates are undervalued, of high quality, and will reward
the shareholder through high current dividend income. The Fund's disciplined
value approach seeks to outperform the Russell 2500 Small Company Index in the
longer term. We believe our emphasis on high quality companies and high yielding
securities will help the Fund perform particularly well in difficult markets.
The Fund selects companies that can be purchased at bargain prices. Bargains
mostly arise as a result of public overreactions to temporary problems
associated with an otherwise healthy company, or because a company is neglected
and currently out-of-the limelight of investors' interest. Often, these
companies operate as major players in very focused markets and are not widely
followed by the investment community.
For the six-month period ended December 31, 1996, the Fund had a total return
exclusive of sales charge of 11.78% for the Class A shares, 11.34% for the Class
B shares and 11.25% for the Class C shares, and a total return with sales charge
of 6.47% for the Class A shares, 6.34% for the Class B shares and 10.25% for the
Class C shares, as compared to a total return of 7.95% for the Russell 2500
Small Company Index and 11.70% for the S&P 500 Index. For the one year period
ended December 31, 1996, the Fund had a total return exclusive of sales charge
of 22.33% for the Class A shares, 21.35% for the Class B shares and 21.33% for
the Class C shares and a total return with sales charge of 16.52% for the Class
A shares, 16.35% for the Class B shares and 20.33% for the Class C shares as
compared with 19.05% for the Russell 2500 Small Company Index and 22.97% for the
S&P 500 Index for the same period. For the period since inception on October 18,
1993 through December 31, 1996, the average annual total return of the Fund
exclusive of sales charge was 13.30% for the Class A shares and 12.39% for the
Class C shares and 11.60% for the Class A shares with sales charge as compared
to the average annual total return of 14.65% for the Russell 2500 Small Company
Index and 18.38% for the S&P 500 Index for the same period. For the period from
inception of the offering of Class B shares on August 1, 1995 through December
31, 1996, the average annual total return for the Class B shares exclusive of
sales charge was 17.04% and 14.39% with sales charge as compared to 18.07% for
the Russell 2500 Small Company Index and 24.33% for the S&P 500 Index.
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.
- ----------26
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
". . . WE REMAIN COMMITTED TO OUR STRATEGY OF REMAINING FULLY-INVESTED AT ALL
TIMES."
The Fund invests in all economic sectors of the market, and our strategy of
maintaining a well-diversified portfolio is intended to produce consistent and
reliable results over time. Our investment approach combines quantitative and
fundamental research, and is based on the premise that the prices of stocks move
more frequently, and in greater magnitude, than do the fundamentals of the
underlying companies. This discrepancy creates an opportunity for disciplined,
value-oriented investors. Our value approach importantly includes quality and
growth standards which are carefully designed to help avoid "value-traps", where
cheap stocks sometimes remain cheap (or become cheaper) because the company is
run by bad managers or is mired in a hopelessly difficult business environment.
The end result should be a portfolio with below-market valuation and an overall
growth rate as similar as possible to the Russell 2500 benchmark.
Looking forward, we are concerned that the effects of sustained wage and job
growth and rising food and energy prices will push inflation higher in 1997.
Real GDP growth in excess of 3% in the first half of 1997, will likely cause the
Federal Reserve to raise interest rates. While the strength of the dollar will
allow for the importation of lower cost goods and historically high interest
rates will serve to dampen economic growth, we are concerned that inflationary
pressures are building and will continue to carefully monitor the growth of the
economy.
In any case, we remain committed to our strategy of remaining fully-invested at
all times. In the event of higher inflation we would reduce our holdings of
financial service stocks and buy shares of companies in less interest sensitive
groups.
INVESTMENT STRATEGY
While our investment process is driven chiefly by bottom-up considerations, we
also take into account broad macroeconomic trends that influence the outlook for
certain industries. As long as we are not required to pay a premium price in the
stock market, we prefer to invest in industries which are beneficiaries of
favorable secular economic trends or positive changes in competitive conditions.
The two areas we have found most interesting recently are financial services and
aerospace manufacturing.
Though we have reduced our overall weight in financial stocks, we are still
adding to positions of selected asset management and brokerage stocks. Recent
purchases in this sector include Franklin Resources, a mutual fund company, and
additional purchases of United Asset Management, a skilled consolidator of
investment management companies, and Everen Capital, a well-run regional
brokerage concern. Our investment in Everen should benefit from future
regulatory changes making it easier for banks to acquire brokerage companies.
We continue to be interested in aerospace manufacturing. After several years of
little growth, new plane orders are rebounding strongly. We are focusing on
suppliers of parts and services to Boeing. As in many other industries, major
aerospace companies, such as Boeing, are reducing the number of suppliers they
use and are also relying more heavily on outside suppliers for value-added
services such as engineering design and just-in-time delivery of parts and
supplies. In addition to the upswing in the aerospace cycle, this concentration
of suppliers and extra services should create a boom in new business for
well-positioned aerospace supply companies. Our most recent purchase in this
sector is Crane Co.
CONCLUSION
The Fund is designed to outperform small cap indices over the long-term, and to
do so with lower volatility. In times of strong market advances such as the
ebullient bull market of 1996, the Fund should provide good absolute returns but
may not participate fully in speculative rallies. In times of difficult market
environments, we expect the Fund to perform very well, and for the total
long-term result to be measurably better than that of the Russell 2500 Index.
Gary G. Schlarbaum
PORTFOLIO MANAGER
William B. Gerlach
PORTFOLIO MANAGER
January 1997
-------------
27
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------
COMMON STOCKS (99.3%)
AEROSPACE (2.5%)
10,800 AAR Corp......................................... $ 327
8,800 Precision Castparts Corp......................... 437
10,300 Thiokol Corp..................................... 461
-------
1,225
-------
BANKING (10.9%)
13,600 Astoria Financial Corp........................... 501
18,250 First Security Corp.............................. 616
18,500 Greenpoint Financial Corp........................ 874
15,100 Onbankcorp., Inc................................. 560
7,919 Peoples Heritage Financial Group, Inc............ 222
17,000 Susquehanna Bancshares, Inc...................... 589
11,000 T.F. Financial Corp.............................. 179
21,500 Trustmark Corp................................... 548
14,800 Union Planters Corp.............................. 577
14,000 Washington Mutual, Inc........................... 606
-------
5,272
-------
BUILDING (3.2%)
13,200 Ameron, Inc...................................... 681
32,500 Gilbert Associates, Inc. `A'..................... 447
30,000 Ryland Group, Inc................................ 412
-------
1,540
-------
CAPITAL GOODS (4.2%)
13,600 Binks Manufacturing Corp......................... 546
32,900 Cascade Corp..................................... 530
17,900 Starret (L.S.) Co. `A'........................... 508
7,900 Tecumseh Products `A'............................ 453
-------
2,037
-------
CHEMICALS (4.2%)
23,940 Aceto Corp....................................... 334
26,000 Crompton & Knowles Corp.......................... 500
16,500 Dexter Corp...................................... 526
17,400 Quaker Chemical Corp............................. 285
12,000 Witco Corp....................................... 366
-------
2,011
-------
CONSUMER--DURABLES (5.2%)
14,100 A.O. Smith Corp.................................. 421
33,400 Arvin Industries, Inc............................ 827
17,420 Knape & Vogt Manufacturing Co.................... 287
26,000 Oneida Ltd....................................... 468
19,000 Stanhome, Inc.................................... 503
-------
2,506
-------
CONSUMER--RETAIL (3.9%)
9,000 American Greetings Corp. `A'..................... 255
17,800 Guilford Mills, Inc.............................. 474
13,200 Interface, Inc................................... 266
35,000 Lillian Vernon Corp.............................. 429
10,300 Springs Industries, Inc. `A'..................... 443
-------
1,867
-------
CONSUMER--SERVICE & GROWTH (0.2%)
(a)7,000 Renters Choice, Inc.............................. 101
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------
CONSUMER--STAPLES (4.7%)
13,515 Block Drug Co. `A'............................... $ 622
21,000 Coors (Adolph) `B'............................... 399
21,300 International Multifoods Corp.................... 386
8,400 La-Z-Boy, Inc.................................... 248
29,400 Nash Finch Co.................................... 625
-------
2,280
-------
ENERGY (6.1%)
20,300 Ashland Coal, Inc................................ 563
16,200 National Fuel Gas Co............................. 668
14,700 Nicor, Inc....................................... 526
10,000 Parker & Parsley Petroleum Co.................... 367
16,100 Ultramar Diamond Shamrock Corp................... 509
14,000 Washington Gas Light Co.......................... 317
-------
2,950
-------
ENTERTAINMENT (2.0%)
14,400 First Hawaiian, Inc.............................. 504
(a)50,000 OMI Corp......................................... 438
-------
942
-------
FINANCIAL--DIVERSIFIED (6.5%)
25,600 Everen Capital Corp.............................. 573
6,900 FINOVA Group, Inc................................ 443
11,600 GATX Corp........................................ 563
27,400 Manufactured Home Communities, Inc. REIT......... 637
15,000 United Asset Management Co....................... 399
21,000 Wellsford Residential Property Trust REIT........ 509
-------
3,124
-------
HEALTH CARE (5.7%)
17,900 Analogic Corp.................................... 600
9,200 Beckman Instruments, Inc......................... 353
14,000 Bergen Brunswig Corp. `A'........................ 399
30,000 Bindley Western Industries, Inc.................. 581
21,600 Kinetic Concepts, Inc............................ 265
20,500 United Wisconsin Services, Inc................... 538
-------
2,736
-------
INDUSTRIAL (1.9%)
6,500 Barnes Group, Inc................................ 390
41,100 Kaman Corp. `A'.................................. 534
-------
924
-------
INSURANCE (5.7%)
13,600 Argonaut Group, Inc.............................. 418
17,000 Enhance Financial Services Group................. 621
9,300 Provident Companies, Inc......................... 450
17,600 Selective Insurance Group, Inc................... 669
17,250 US Life Corp..................................... 574
-------
2,732
-------
METALS (3.8%)
31,500 Birmingham Steel Corp............................ 599
10,300 Cleveland-Cliffs Iron Co......................... 467
12,700 Commercial Metals Co............................. 383
(a)21,000 Zale Corp........................................ 402
-------
1,851
-------
</TABLE>
- ----------28
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------
<C> <S> <C>
PAPER & PACKAGING (2.2%)
16,500 Ball Corp........................................ $ 429
10,000 P.H. Glatfelter Co............................... 180
10,900 Potlatch Corp.................................... 469
-------
1,078
-------
RESTAURANTS (0.6%)
30,800 Darden Restaurants, Inc.......................... 270
-------
SERVICES (9.5%)
18,200 Angelica Corp.................................... 348
23,600 Bowne & Co....................................... 581
26,200 Cross A.T. Co. `A'............................... 305
40,300 Jackpot Enterprises, Inc......................... 393
22,100 New England Business Services, Inc............... 475
26,800 Ogden Corp....................................... 503
46,500 Piccadilly Cafeterias, Inc....................... 430
27,000 Russ Berrie & Co., Inc........................... 486
17,000 Sbarro, Inc...................................... 433
(a)15,000 Tracor, Inc...................................... 319
14,300 True North Communications, Inc................... 313
-------
4,586
-------
TECHNOLOGY (7.1%)
32,000 Core Industries, Inc............................. 528
13,350 Cubic Corp....................................... 309
23,000 Dallas Semiconductor Corp........................ 529
27,500 Gerber Scientific, Inc........................... 409
23,700 MTS Systems Corp................................. 474
20,400 National Computer Systems, Inc................... 520
16,000 Park Electrochemical Corp........................ 364
2,400 Penn Engineering & Manufacturing Corp............ 49
23,500 Scitex Corp...................................... 223
-------
3,405
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------
TRANSPORTATION (2.5%)
14,000 Airborne Freight Corp............................ $ 327
10,000 Arnold Industries, Inc........................... 159
4,000 Overseas Shipholding Group, Inc.................. 68
23,600 SkyWest, Inc..................................... 327
13,000 Watts Industries, Inc., `B'...................... 310
-------
1,191
-------
UTILITIES (6.7%)
18,100 Central Hudson Gas & Electric Corp............... 568
18,000 Commonwealth Energy Systems...................... 423
10,500 Eastern Entreprises.............................. 371
16,300 Oneok, Inc....................................... 489
13,900 Orange & Rockland Utilities, Inc................. 499
6,500 SJW Corp......................................... 305
9,000 Union Texas Petroleum Holdings, Inc.............. 201
19,600 Washington Water Power Co........................ 365
-------
3,221
-------
TOTAL COMMON STOCKS (COST $39,890)........................... 47,849
-------
TOTAL INVESTMENTS (99.3%) (COST $39,890)..................... 47,849
OTHER ASSETS IN EXCESS OF LIABILITIES (0.7%)................. 351
-------
NET ASSETS (100%)............................................ $48,200
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing.
REIT -- Real Estate Investment Trust.
-----------------
29
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Algeria 1.6%
Argentina 11.1%
Brazil 12.5%
Bulgaria 3.6%
Canada 0.5%
Cayman Islands 1.1%
Colombia 0.5%
Croatia 1.4%
Ecuador 4.0%
Germany 0.3%
Jamaica 2.8%
Kazakhstan 2.1%
Mexico 11.7%
Morocco 0.7%
Panama 3.8%
Philippines 3.4%
Russia 5.2%
United Kingdom 0.5%
United States 27.1%
Venezuela 3.4%
Other 2.7%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 10.86% 16.39% 20.22% 26.22% 14.99% 17.08%
- ---------------------------------------------------------------------------------------
Class B+ Shares 10.91% 15.91% 20.20% 25.20% 21.41% 23.99%
- ---------------------------------------------------------------------------------------
Class C Shares 14.89% 15.89% 24.29% 25.29% 16.20% 16.20%
- ---------------------------------------------------------------------------------------
Lehman Aggregate Bond
Index:
Class A & C Shares N/A 4.90% N/A 3.62% N/A 8.20%
Class B Shares N/A 4.90% N/A 3.62% N/A 7.22%
- ---------------------------------------------------------------------------------------
</TABLE>
* The returns above with sales charge are calculated using the 4.75% sales
charge for Class A shares, the 5% contingent deferred sales charge for Class
B shares, and the 1% contingent deferred sales charge for Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The Lehman Aggregate Bond Index is an unmanaged index comprised of the
Government/Corporate Index, the Mortgage-Backed Securities Index and the
Asset-Backed Securities Index.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ------------------------------ -------------------- -------------
<S> <C> <C>
Federative Republic of Brazil Brazil 6.2%
Ministry of Finance Tranche IV Russia 5.2%
United Mexican States Mexico 5.1%
Government Bond
Hidroelec Piedra Aquila Argentina 4.1%
Republic of Argentina Argentina 4.0%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------- --------- ------------
<S> <C> <C>
Foreign Government &
Agency Obligations $ 67,173 46.4%
Telecommunications 10,517 7.3%
Materials 9,840 6.8%
Broadcast--Radio &
Television 9,699 6.7%
Services 8,900 6.1%
</TABLE>
The Worldwide High Income Fund seeks to offer investors a high current income
consistent with relative stability of principal and potential for capital
appreciation. To achieve this objective, the Fund will invest across three broad
asset classes, namely U.S. high yield, emerging country debt, and global fixed
income.
For the six-month period ended December 31, 1996, the Fund had a total return
exclusive of sales charge of 16.39% for the Class A shares, 15.91% for the Class
B shares and 15.89% for the Class C shares, and a total return with sales charge
of 10.86% for the Class A shares, 10.91% for the Class B shares and 14.89% for
the Class C shares, as compared to a total return of 4.90% for the Lehman
Aggregate Bond Index. For the one year period ended December 31, 1996, the Fund
had a total return exclusive of sales charge of 26.22% for the Class A shares,
25.20% for the Class B shares and 25.29% for the Class C shares and a total
return with sales charge of 20.22% for the Class A shares, 20.20% for the Class
B shares and 24.29% for the Class C shares compared with 3.62% for the Lehman
Aggregate Bond Index for the same period. For the period from inception on April
21, 1994 through December 31, 1996, the Fund had an average annual total return
exclusive of sales charge of 17.08% for the Class A shares and 16.20% for the
Class C shares, and an average annual total return with sales charge of 14.99%
for the Class A shares as compared to an average annual total return of 8.20%
for the Lehman Aggregate Bond Index. For the period from inception of the
offering of Class B shares on August 1, 1995 through December 31, 1996, the
average annual total return for the Class B shares exclusive of sales charge was
23.99% and 21.41% with sales charge as compared to 7.22% for the Lehman
Aggregate Bond Index.
1996 was a stellar year for emerging markets debt. The market experienced a
dramatic re-pricing of credit risk despite a volatile year for U.S. bonds. The
underlying improvement in credit fundamentals finally was recognized by
investors. The inflow of liquidity into this market resulted in a credit spread
tightening of about 400 basis points on average. The average masks a wide
dispersion in performance of various individual countries. Argentina, Mexico and
Brazil lagged the market during the first half of the calendar year and made up
some relative performance during the second half.
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING. YIELDS WILL FLUCTUATE AS MARKET
CONDITIONS CHANGE.
- ----------30
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
"RUSSIA WAS ONE OF OUR SUCCESS STORIES FOR CALENDAR 1996."
The high-yielding, oil exporting countries such as Algeria, Venezuela, Ecuador
and Nigeria steadily outperformed for most of the year and the smaller Brady
countries like Peru and Panama benefited from lower liquidity as their economic
performance improved during 1996.
Greater institutional participation in the market gradually led to a decline in
volatility as long-term investors replaced the trading oriented accounts as the
dominant players in the market. Volatility in the options markets declined
steadily throughout the calendar year to end at roughly 50% of the levels seen
at the beginning of the period.
The market also became more efficient in terms of relative pricing of securities
both within one country as well as across countries. Arbitrage activity made
sure that relative spreads were more closely aligned to levels dictated by bond
fundamentals.
As we look into 1997, we expect the market to benefit from some of the positive
undercurrents that we have experienced in 1996. Emerging markets debt has
finally been accepted as a part of the mainstream global fixed income markets.
Equity-type returns earned in the first few years of its development will
obviously be a thing of the past. Lower and more stable expected returns will be
the norm for the years to come. Lower volatility and low correlations with other
major asset classes will provide the fundamental underpinnings of increased
allocations to this sector. Continued spread tightening to "fair value" will
result in outperformance relative to other fixed income markets in the world.
By our estimates "fair value" on average is another 100 basis points away in
terms of credit spreads. The improvement in individual economic environments
justifies further tightening in credit spreads. Emerging countries are not
vulnerable, to the same extent as in 1994, to a financial shock. We do not
currently see the usual warning signs such as overvalued currencies, excessive
concentration of funding in the short end of the market, vulnerable banking
systems and excessive speculative activity. Potential areas of concern remain
those linked to domestic politics, as some countries face important elections
during second half of 1997. The political landscape at the beginning of calendar
1997 does not signal any major reverses to the climate of a continued commitment
to economic reform. Voter displeasure over the severity of the 1995 recessions
and only slight relief from the recovery so far for the beleaguered consumer
should not result in any reversal in the nature of orthodox economic policies.
To summarize, we believe the emerging debt markets can look forward to a year of
12-18% total return, an outcome fixed income investors should be extremely
comfortable with. Any major corrections, not driven by changes in credit risk
perceptions, should be viewed as opportunities to increase commitments to the
asset class.
The major risk to the story remains a possible tightening of monetary policy by
the Federal Reserve Bank, which could temporarily derail the trend for continued
spread tightening. In that environment, we believe there will be few places to
hide barring cash. Emerging markets fixed income could end up in the
outperforming camp even in a down year. Currently, we do not have sufficient
data to be able to offer reasonable estimates of the probability of such an
event, but it does not seem likely of being more than 20%.
During 1996, we were successful in terms of picking up the major currents in the
markets and employed investment strategies that helped us outperform. We were,
for the most part of 1996 overweight the oil rich, high-yielding sector of
Venezuela, Algeria, Ecuador and Nigeria as we expected these countries to
endeavor to make some progress in stabilization and structural reform as well as
benefit from strong revenues from their oil exporting sectors. Exposures to Peru
and Panama remained at a steady 3-4% of the Fund as we believed that their
improving economic prospects, closure of their Brady restructuring and low
floating stock should buoy asset prices. Argentina and Mexico were underweighted
during the first half of 1996 as the market remained skeptical about the
strength of the economic recoveries and overweighted during the second half as
evidence of their strong rebounds surfaced.
Brazil, remains a solid economic story but was buffeted by political headwinds
as the reform process lost momentum during 1996. The long-term viability of the
Real plan in the absence of fiscal reform
-------------
31
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
remains in doubt and questions emerged within the investment community of the
similarities of Brazil's position with that of Mexico in 1994/1995. An
appreciating currency, emerging trade deficits, a loose fiscal and tight
monetary policy were not healthy signs. In our opinion, the political process is
key to long-term sustainable growth and progress on reducing the fiscal deficit
is vital during 1997. Any delays in tackling this key issue is bound to result
in instability in the foreign exchange, interest rates and other financial
markets of Brazil later during the year.
Russia was one of our success stories for calendar 1996. Cheap assets because of
a murky political situation during the pre-election period prompted us to build
a substantial overweight in the non-performing loans of the sovereign. Our
analysis indicated that whatever the complexion of the new government the
economic situation and future policies could not justify credit spreads in
excess of 2000 basis points. The elections subsequently turned out in favor of
the reformers and market-oriented parties and continued official and IMF
assistance resulted in a dramatic rally in the prices of Russian assets for most
of 1996.
Our non-hard currency exposure was limited for the most part to those situations
where we were receiving high real interest rates and buying undervalued
currencies. Mexico and Turkey's local markets were two profitable investments. A
foray into the South African Rand market did not prove to be profitable as we
misjudged the lack of political will to defend the currency from speculative
attack.
During the first few weeks of 1997, allocations are relatively unchanged other
than an increase in Bulgaria. A lack of alternatives to a currency board and
continued IMF assistance seems to make these assets cheap. Political turbulence
and civil unrest should only strengthen the case of the reformers as the
incumbent Socialist party has allowed the situation to drift to the point of
economic collapse. Fresh elections could improve the caliber of the governing
elites. Delays in the adoption of the IMF program will bring up the issue of a
potential default if no changes to economic policies are made. We believe that
it is in nobody's interest in Bulgaria and outside to precipitate the first
Brady default.
The High Yield market performed also well in calendar 1996 far outpacing high
quality bonds for the period. This performance occurred in the face of ten-year
Treasury yields rising nearly eighty-five basis points over the course of the
year. This infers that the spread to Treasuries narrowed about one hundred basis
points. The strong performance in the high yield market can be traced to the
sound economy as was reflected in the outstanding performance of the stock
market in 1996.
Several factors helped the Fund's performance. The communications sector
performed very well for the period. The entire sector responded favorably when
MFS and Worldcom announced they would merge. We were favorably positioned when
this announcement was made and continued to add to our positions subsequent to
the announcement. This sector also performed well because the securities in it
tend to have bullish characteristics. Many of the securities in the sector are
zero coupon or deferred pay bonds. Thus, in a rallying high yield market, they
tend to outperform.
The cable television sector had a mixed year, performing poorly in the first
half of the year and well in the second half. We added to our positions at wide
spreads and reaped the benefits as spreads narrowed in the second half.
As spreads narrowed over the period, we continually upgraded the quality of the
Fund's high yield portfolio. We believe this will protect the Fund if either the
economy weakens or spreads widen generally. We still believe this is the prudent
position to take in the current market environment.
Robert Angevine
PORTFOLIO MANAGER
Paul Ghaffari
PORTFOLIO MANAGER
January 1997
- ----------32
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
FIXED INCOME SECURITIES (95.8%)
CORPORATE BONDS AND NOTES (38.3%)
ARGENTINA (5.1%)
$ 5,700 Hidroelec Piedra Aguila 10.625%, 10/9/01......... $ 5,899
1,500 Impsa S.A. 11.75%, 3/27/98....................... 1,549
--------
7,448
--------
BRAZIL (1.8%)
2,500 Comtel Brasileira Ltda 10.75%, 9/26/04........... 2,580
--------
CANADA (0.3%)
190 Ivaco, Inc. 11.50%, 9/15/05...................... 189
250 Rogers Communications, Inc. 9.125%, 1/15/06...... 247
--------
436
--------
COLOMBIA (0.5%)
(e,n)1,225 Occidente Y Caribe 0.00%, 3/15/04................ 720
--------
GERMANY (0.3%)
350 Fresenius Medical Care 9.00%, 12/01/06........... 356
--------
JAMAICA (0.7%)
(e)1,000 Mechala Group Jamaica Ltd. 12.75%, 12/30/99...... 1,003
--------
MEXICO (4.0%)
(e)2,000 Cemex S.A. 12.75%, 7/15/06....................... 2,245
(e)2,000 Empresas ICA Sociedad 11.875%, 5/30/01........... 2,133
(n)2,200 Grupo Televisa S.A. 0.00%, 5/15/08............... 1,463
--------
5,841
--------
PHILIPPINES (0.2%)
235 Philippine Long Distance Telephone 9.25%,
6/30/06........................................ 254
--------
UNITED KINGDOM (0.5%)
(n)1,025 Telewest plc. 0.00%, 10/1/07..................... 711
--------
UNITED STATES (24.9%)
795 Advanced Micro Devices, Inc. 11.00%, 8/1/03...... 861
(h)250 Bank UTD Corp. 8.05%, 5/15/98.................... 252
650 Boyd Gaming Corp. 9.25%, 10/1/03................. 635
(n)1,000 Brooks Fiber Properties 0.00%, 3/1/06............ 666
(e,n)420 Brooks Fiber Properties 0.00%, 11/1/06........... 268
275 Cablevision Systems Corp. 9.25%, 11/1/05......... 271
815 Cablevision Systems Corp. 9.875%, 5/15/06........ 835
725 Cleveland Electric Illuminating Co. 9.50%,
5/15/05........................................ 777
150 Cleveland Electric Illuminating Co. 8.375%,
12/1/11........................................ 147
(e)575 Cole National Group 9.875%, 12/31/06............. 589
265 Comcast Cellular Corp., Series A, Zero Coupon,
3/5/00......................................... 190
440 Comcast Cellular Corp., Series B, Zero Coupon,
3/5/00......................................... 317
855 Comcast Corp. 9.375%, 5/15/05.................... 887
185 Comcast Corp. 9.125%, 10/15/06................... 189
500 Comcast Corp. 9.50%, 1/15/08..................... 517
640 Courtyard By Marriott 10.75%, 2/1/08............. 677
270 Digital Equipment Corp. 8.625%, 11/1/12.......... 262
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
$ 429 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10............................. $ 357
1,062 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 977
(n)1,745 Echostar Satellite Broadcast 0.00%, 3/15/04...... 1,315
395 First Nationwide Bank 9.125%, 1/15/03............ 400
(e)365 First Nationwide Bank 10.625%, 10/1/03........... 392
605 Flores & Rucks, Inc. 9.75%, 10/1/06.............. 637
825 Gaylord Container Corp. 11.50%, 5/15/01.......... 879
200 Gaylord Container Corp. 12.75%, 5/15/05.......... 221
805 Grand Casinos, Inc. 10.125%, 12/1/03............. 808
625 HMC Acquisition Properties 9.00%, 12/15/07....... 625
705 Home Holdings, Inc. 8.625%, 12/15/03............. 155
100 Homeside, Inc. 11.25%, 5/15/03................... 112
800 Host Marriott Travel Plaza, Series B, 9.50%,
5/15/05........................................ 834
(e)425 International Home Foods, Inc. 10.375%,
11/1/06........................................ 440
(e)730 ISP Holdings, Inc. 9.00%, 10/15/03............... 739
550 IXC Communications, Inc. 12.50%, 10/1/05......... 605
200 Jet Equipment Trust 11.79%, 6/15/13.............. 238
(e)300 Jet Equipment Trust, Series 1995-D, 11.44%,
11/1/14........................................ 356
950 Lenfest Communications 8.375%, 11/1/05........... 908
(n)1,065 Marcus Cable Co. 0.00%, 12/15/05................. 761
(b)175 Marvel Holding, Inc. 0.00%, 4/15/98.............. 25
(e)375 Maxxam Group Holdings 12.00%, 8/1/03............. 381
(n)1,775 MFS Communications 0.00%, 1/15/06................ 1,296
198 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................ 211
213 Midland Cogeneration Ventures, Series C-94,
10.33%, 7/23/02................................ 227
305 Midland Funding II, Series A, 11.75%, 7/23/05.... 337
(n)2,715 Nextel Communications 0.00%, 8/15/04............. 1,846
(n)990 Norcal Waste Systems 13.00%, 11/15/05............ 1,099
495 Nuevo Energy Co. 9.50%, 4/15/06.................. 521
1,000 Owens-Illinois, Inc. 11.00%, 12/1/03............. 1,113
140 Paging Network, Inc. 10.125%, 8/1/07............. 142
(e)450 Paging Network, Inc. 10.00%, 10/15/08............ 454
(e)305 Parker Drilling Corp. 9.75%, 11/15/06............ 318
190 Quest Diagnostic, Inc. 10.75%, 12/15/06.......... 200
1,185 Revlon Worldwide, Series B, Zero Coupon,
3/15/98........................................ 1,022
865 Rogers Cablesystems, Series B, 10.00%, 3/15/05... 921
800 SD Warren Co., Series B, 12.00%, 12/15/04........ 860
1,095 Southland Corp. 5.00%, 12/15/03.................. 903
205 Station Casinos, Inc. 9.625%, 6/1/03............. 203
800 TCI Communications, Inc. 7.875%, 2/15/26......... 717
(n)680 Teleport Communications 0.00%, 7/1/07............ 468
610 TLC Beatrice International Holdings 11.50%,
10/1/05........................................ 646
</TABLE>
-----------------
33
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
$ (e)360 US Can Corp. 10.125%, 10/15/06................... $ 378
1,790 Viacom, Inc. 8.00%, 7/7/06....................... 1,727
--------
36,114
--------
TOTAL CORPORATE BONDS AND NOTES (COST $53,588).................... 55,463
--------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.8%)
UNITED STATES (0.8%)
(e)500 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1, Class D, 12.75%, 6/15/06........ 518
(e)1,050 DLJ Mortgage Acceptance Corp., Series 1996-CF2,
Class S, IO, 1.64%, 11/12/21................... 96
(e)550 First Home Mortgage Acceptance Corp., Series
1996-B, Class C, 7.93%, 11/1/18................ 466
104 PNC Mortgage Securities Corp., Series 1995-2,
Class B4, REMIC, 7.50%, 9/25/25................ 87
--------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $1,149)........... 1,167
--------
EUROBONDS (20.4%)
ARGENTINA (3.9%)
2,900 Republic of Argentina 8.375%, 12/20/03........... 2,766
(h)3,430 Republic of Argentina, Series L, 6.625%,
3/31/05........................................ 2,981
--------
5,747
--------
BRAZIL (5.6%)
1,350 Comp Brazil De Projectos 12.50%, 12/22/97........ 1,384
(h)4,700 Federative Republic of Brazil Par Bond, Series
Z-L, 4.25%, 4/15/24............................ 2,952
(b,h,u)5,121 Federative Republic of Brazil, Series C, PIK,
8.00%, 4/15/14................................. 3,775
--------
8,111
--------
BULGARIA (1.2%)
(h)3,000 Republic of Bulgaria Discount Bonds, `A', 6.69%,
7/28/24........................................ 1,705
--------
ECUADOR (4.0%)
(h)5,000 Ecuador Par Bond -- U.S. Definitive, 3.25%,
2/28/25........................................ 2,344
(b,h)5,551 Republic of Ecuador Past Due Interest Bond, PIK,
6.50%, 2/27/15................................. 3,412
--------
5,756
--------
MEXICO (2.3%)
MXP 32,143 Banamex Pagare Zero Coupon, 10/9/97.............. 3,346
--------
VENEZUELA (3.4%)
$ (h)5,500 Republic of Venezuela Front Loaded Interest
Reduction Bond, `A', 6.625%, 3/31/07........... 4,916
--------
TOTAL EUROBONDS (COST $26,795).................................... 29,581
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
FOREIGN GOVERNMENT & AGENCY OBLIGATIONS (29.3%)
BRAZIL (3.0%)
$ (h)2,000 Federated Republic of Brazil Debt Conversion
Bond, Series Z-L, 6.563%, 4/15/12.............. $ 1,517
(h)1,000 Federated Republic of Brazil Par Bond, Series
Z-L, 6.50%, 4/15/24............................ 771
2,000 Iochpe-Maxion S.A. 12.375%, 11/8/02.............. 1,980
--------
4,268
--------
BULGARIA (2.3%)
8,750 Bulgaria Front Loaded Interest Reduction Bond
2.25%, 7/28/12................................. 3,363
--------
CAYMAN ISLANDS (1.1%)
ZAR 8,000 National Financiera 17.00%, 2/26/99.............. 1,646
--------
CROATIA (1.4%)
$ (h)2,000 Croatia Government Bond, `B', 6.69%, 7/31/06..... 1,942
--------
JAMAICA (2.1%)
3,000 Government of Jamaica 12.00%, 7/19/99............ 3,000
--------
KAZAKHSTAN (2.1%)
(e)3,000 Republic of Kazakhstan 9.25%, 12/20/99........... 3,030
--------
MEXICO (5.1%)
7,000 United Mexican States 11.375%, 9/15/16........... 7,341
--------
PANAMA (3.8%)
(n)3,750 Republic of Panama Interest Reduction Bond 3.50%,
7/17/14........................................ 2,611
(h)3,750 Republic of Panama Past Due Interest, PIK, 6.75%,
7/17/16........................................ 2,934
--------
5,545
--------
PHILIPPINES (3.2%)
(e)4,500 Republic of the Philippines 8.75%, 10/7/16....... 4,683
--------
RUSSIA (5.2%)
(e)12,264 Ministry of Finance Tranche IV 3.00%, 5/14/03.... 7,504
--------
TOTAL FOREIGN GOVERNMENT & AGENCY OBLIGATIONS
(COST $38,972).................................................. 42,322
--------
LOAN AGREEMENTS (2.3%)
ALGERIA (1.6%)
(r)3,000 Algeria Reprofiled Loan Agreement, `A'........... 2,317
--------
MOROCCO (0.7%)
(l)1,200 Kingdom of Morocco Restructuring and
Consolidation Agreement `A' 1990, 1/1/09,
(Participation: J.P. Morgan)................... 991
--------
TOTAL LOAN AGREEMENTS (COST $2,985)............................... 3,308
--------
YANKEE BONDS (4.7%)
ARGENTINA (2.1%)
1,850 Bridas Corp. 12.50%, 11/15/99.................... 1,979
1,000 Metrogas S.A., Series A, 12.00%, 8/15/00......... 1,103
--------
3,082
--------
BRAZIL (2.1%)
3,000 Tevecap S.A. 12.625%, 11/26/04................... 3,067
--------
</TABLE>
- ----------34
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
CANADA (0.2%)
$ (e)260 Stone Container Corp. 11.50%, 8/15/06............ $ 268
--------
MEXICO (0.3%)
400 Grupo Industrial Durango 12.625%, 8/1/03......... 435
--------
TOTAL YANKEE BONDS (COST $6,495).................................. 6,852
--------
TOTAL FIXED INCOME SECURITIES (COST $129,984)....................... 138,693
--------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- ----------------
EQUITY SECURITIES (1.4%)
PREFERRED STOCK (1.0%)
UNITED STATES (1.0%)
1,387 Time Warner, Inc., `M', PIK...................... 1,505
--------
CONVERTIBLE PREFERRED STOCK (0.4%)
UNITED STATES (0.4%)
6,175 TCI Pacific Communications....................... 570
--------
WARRANTS (0.0%)
COLOMBIA (0.0%)
(a)4,900 Occidente Y Caribe, expiring 3/15/04............. --
--------
TOTAL EQUITY SECURITIES (COST $1,963)............................... 2,075
--------
CALL OPTION (0.1%)
BULGARIA (0.1%)
(a)40,000 Call option on Bulgaria Front Loaded Interest
Reduction Bond, expiring 3/24/97, Strike price
$40.5625 (COST $94)............................ 90
--------
TOTAL FIXED INCOME AND EQUITY SECURITIES............................ 140,858
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (0.6%)
REPURCHASE AGREEMENT (0.6%)
$ 900 Chase Securities, Inc., 5.95%, dated 12/31/96,
due 1/2/97, to be repurchased at $900,
collateralized by $770 U.S. Treasury Bonds,
8.125%, due 8/15/21, valued at $900 (COST
$900).......................................... $ 900
--------
TOTAL INVESTMENTS (97.9%) (COST $132,941)........................... 141,758
OTHER ASSETS IN EXCESS OF LIABILITIES (2.1%)........................ 3,023
--------
NET ASSETS (100%)................................................... $144,781
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
(b) -- Non-income producing -- in default.
(e) -- 144A Security -- certain conditions for public sale may exist.
(h) -- Variable/floating rate security -- rate disclosed is as of December
31, 1996.
(k) -- Under restructuring at December 31, 1996 -- See note A-9 to financial
statements
(l) -- Participation interests were acquired through the financial
institutions as indicated parenthetically.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1996. Maturity date disclosed is the
ultimate maturity date.
(r) -- Issuer is making partial interest payments.
(u) -- 4.00% of 8.00% represents amount paid in cash. Cash payment rate is
low for an initial period and then increases in increments to
maturity. The remainder is Payment in Kind.
IO -- Interest Only.
PIK -- Payment-In-Kind. Income may be received in additional securities or
cash at the discretion of the issuer.
REMIC -- Real Estate Mortgage Investment Conduit.
MXP -- Mexican Peso.
ZAR -- South African Rand.
- --------------------------------------------------------------------------------
SUMMARY OF FIXED INCOME & EQUITY SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -------------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Foreign Government & Agency Obligations............................................... $ 67,173 46.4%
Telecommunications.................................................................... 10,517 7.3
Materials............................................................................. 9,840 6.8
Broadcast--Radio & Television......................................................... 9,699 6.7
Services.............................................................................. 8,900 6.1
Utilities............................................................................. 6,823 4.7
Multi-Industry........................................................................ 6,596 4.5
Capital Equipment..................................................................... 4,730 3.3
Consumer Goods........................................................................ 4,087 2.8
Finance............................................................................... 3,451 2.4
Loan Agreements....................................................................... 3,308 2.3
Energy................................................................................ 2,695 1.9
Collateralized Mortgage Obligations................................................... 1,167 0.8
Technology............................................................................ 1,123 0.8
Transportation........................................................................ 594 0.4
Insurance............................................................................. 155 0.1
--------- ---
$ 140,858 97.3%
--------- ---
--------- ---
</TABLE>
-----------------
35
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 11.5%
Brazil 42.8%
Chile 3.6%
Colombia 4.4%
Mexico 29.7%
Peru 1.2%
Venezuela 5.1%
Other 1.7%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares 4.69% 9.91% 40.37% 47.37% 4.74% 6.81%
- ---------------------------------------------------------------------------------------
Class B+ Shares 4.47% 9.47% 41.24% 46.24% 25.65% 28.20%
- ---------------------------------------------------------------------------------------
Class C Shares 8.44% 9.44% 45.27% 46.27% 5.87% 5.87%
- ---------------------------------------------------------------------------------------
MSCI Latin America
Global Index:
Class A & C Shares N/A 3.80% N/A 21.96% N/A 1.52%
Class B Shares N/A 3.80% N/A 21.96% N/A 12.22%
- ---------------------------------------------------------------------------------------
</TABLE>
* The returns above with sales charge are calculated using the 4.75% sales
charge for Class A shares, the 5% contingent deferred sales charge for Class
B shares, and the 1% contingent deferred sales charge for Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The MSCI Latin America Global Index is a broad-based market cap weighted
composite index covering at least 60% of markets in Mexico, Argentina, Brazil,
Chile, Colombia, Peru and Venezuela (assumes dividends are reinvested).
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ----------------------------------------- --------- -------------
<S> <C> <C>
Telebras PN Brazil 10.2%
Eletrobras Brazil 7.4%
Telefonica de Argentina S.A. Argentina 5.9%
Cia Anonima Nacional Telefonos de
Venezuela Venezuela 3.7%
Grupo Televisa Mexico 3.6%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------- --------- ------------
<S> <C> <C>
Services $ 10,900 37.7%
Energy 5,031 17.5%
Consumer Goods 3,666 12.7%
Finance 3,184 11.0%
Materials 2,481 8.6%
</TABLE>
The investment objective of the Latin American Fund is to provide long-term
capital appreciation by investing in common stocks of Latin American issuers.
For the six-month period ended December 31, 1996, the Fund had a total return
exclusive of sales charge of 9.91% for the Class A shares, 9.47% for the Class B
shares and 9.44% for the Class C shares, and a total return with sales charge of
4.69% for the Class A shares, 4.47% for the Class B shares and 8.44% for the
Class C shares, as compared to a total return of 3.80% for the Morgan Stanley
Capital International ("MSCI") Latin America Global Index (the "Index"). For the
one year period ended December 31, 1996, the Fund had a total return exclusive
of sales charge of 47.37% for the Class A shares, 46.24% for the Class B shares
and 46.27% for the Class C shares and a total return with sales charge of 40.37%
for the Class A shares, 41.24% for the Class B shares and 45.27% for the Class C
shares compared with 21.96% for the Index. For the period from inception on July
6, 1994 through December 31, 1996, the average annual total return for the Fund
exclusive of sales charge was 6.81% for the Class A shares and 5.87% for the
Class C shares and 4.74% for the Class A shares with sales charge as compared to
1.52% for the Index for the same period. For the period from inception of the
offering of Class B shares on August 1, 1995 through December 31, 1996, the
average annual total return for the Class B shares exclusive of sales charge was
28.20% and 25.65% with sales charge as compared to 12.22% for the Index.
The table below presents the percentage change in the Morgan Stanley Capital
International indices for each respective country, in U.S. dollar terms, as of
December 31, 1996, for the period presented:
<TABLE>
<CAPTION>
3 6 12
MONTHS MONTHS MONTHS
------- ------- --------
<S> <C> <C> <C>
Argentina.......................... 12.7% 4.8% 20.3%
Brazil............................. 7.9% 11.0% 42.5%
Chile.............................. (12.3%) (15.0%) (13.5%)
Colombia........................... 1.5% 7.9% 11.1%
Mexico............................. 0.2% 2.0% 18.0%
Peru............................... (13.2%) (8.5%) (0.5%)
Venezuela.......................... 19.4% 47.8% 131.2%
Latin America...................... 2.8% 3.8% 22.0%
</TABLE>
ARGENTINA
The Argentine market's strong performance reflected a strong economic turnaround
after the gut-wrenching recession in 1995 provoked by the Mexican devaluation.
Despite a huge increase in unemployment as a result of the recession, from
roughly 10% to 17%, the Argentine government
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MSCI LATIN AMERICA GLOBAL INDEX AND ARE FOR INFORMATIONAL
PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
- ----------36
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
demonstrated remarkable determination to keep a steady course of fiscal
discipline. The government even introduced labor reforms late in the year, which
should create more flexibility in the labor markets and thereby, over the
long-term, reduce the structural unemployment problem. Additionally, corporate
profits grew at a robust pace during the year, especially in the second half,
and this boosted the stock market toward year end.
The melodrama in the middle of the year of the departure of respected economic
minister Domingo Cavallo, after five years of superlative stewardship of the
economy, quickly dissipated as his successor Roque Fernandez convinced the
market of his pro-market beliefs. Further, Fernandez' tenure will likely be less
politically turbulent, and this should introduce much needed calm to the
political scenario.
Another interesting development in Argentina in 1996 was the emergence of the
local pension funds as an important institutional investor for the equity
market. We welcome this development for a variety of reasons. First, the private
pension fund system should help increase the low domestic savings rate in
Argentina. Second, more companies will likely utilize equity financing as a
means of raising capital for investments, thereby broadening the market. Third,
local trading volumes will increase and reduce the local market's dependency on
foreign portfolio investment, thereby deepening the local market and reducing
volatility.
Overall, we are encouraged by developments in Argentina. The economy is in the
midst of a sometimes painful process of structural transformation as it opens to
the outside world and increases its exposure both to private participants
domestically and to foreign competition. The government has shown its commitment
to steering the free market course despite occasional adverse shocks, and we
think this bodes well both for future economic activity and also for future
stock market performance.
BRAZIL
Interestingly, despite the Brazilian market's strong performance, during the
course of the year there was very little progress made on critical government
reform items -- notably administrative and social security reform, and fiscal
account improvement -- which were originally thought to be vital. Lack of
tangible progress on these key items, which depend on congress for their
improvement, was more than offset by substantial improvement in a number of key
areas. First, inflation and interest rates continued their downward movement,
finishing the year at annualized rates of roughly 9% and 23%, respectively.
Second, two key privatizations -- first Light, and then Cerj -- took place in
the all-important electric utility sector in the state of Rio de Janeiro. Third,
positive tariff reform in both the telecommunications and the electric utility
sector contributed to a remarkable improvement in corporate earnings growth in
those two sectors, which together comprise over a third of the market's
capitalization. Fourth, positive liberalization of the state oil and gas
monopoly provider, Petrobras, was introduced which considerably improved the
prospects for that company. Fifth, tangible progress was made in preparing state
mining giant CVRD for eventual privatization in the first half of 1997. Sixth,
economic activity was robust enough to allow for selected private sector
companies to grow their earnings at a brisk pace.
Taken together, in a political context in which the government's ability to act
independently of congress on reform items is limited, the Cardoso administration
nevertheless demonstrated a genuine commitment to improving shareholder value
via positive reforms in those areas over which it has independent authority.
Coupled with this commitment, the state level governments have in many cases
been forced or motivated to introduce their own reform and privatization
efforts, which has further enhanced shareholder value.
Needless to say, there are many issues which confront the investor in Brazil
when looking out to 1997. In no particular order, the most pivotal issues which
will affect the market during 1997 are as follows: the Cardoso re-election
effort; the CVRD privatization; fiscal reform efforts; trade balance and foreign
exchange concerns; telecommunications and electric utility regulatory reform;
and economic activity.
-------------
37
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
RE-ELECTION -- the Cardoso administration's effort to amend the constitution to
allow him to run for re-election is probably the most important, and most
proximate, item facing the country and market in 1997. Simply put, if he is able
to run again for president in 1998, the chances are high that he would win.
Owing to Cardoso's huge electoral popularity, the splintered nature of the
opposition parties, and the president's proven ability to "horse trade" behind
closed doors, we are cautiously optimistic that he will secure the necessary
votes for the amendment.
CVRD PRIVATIZATION -- state mining conglomerate CVRD is scheduled to be
privatized sometime in the second quarter of 1997. The successful completion of
the first stage will be of significant psychological importance to the market,
because it will represent the first major privatization of a federal-level
company of national significance, and thereby considerably strengthen the
Cardoso administration's image as a serious, free-market reform oriented
government. We are confident that CVRD will be privatized in the first half of
1997.
FISCAL REFORM -- the fiscal accounts are perhaps one of the most vulnerable
elements of the outlook for 1997. The chief obstacle is congress and, behind
them, state governments. Our general outlook is that fiscal reform will take a
back seat to the re-election issue; upon successful resolution of same, the
government will focus its energies on the vital administrative reform. We are
less optimistic on this front than the above two items, as we think that
congress will slow progress on fiscal reform to a snail's pace.
TRADE BALANCE/FOREIGN EXCHANGE -- the trade balance is an item that looms ahead
with the potential to tip the apple cart. At present rates the trade deficit
will be between 1-2% of GDP next year; hardly distressing levels, but with
interest payments the current account deficit will be a couple percentage points
higher. Although the treasury has sufficient international reserves to defend
the currency for the foreseeable future, we are monitoring this item very
closely. For the time being, we expect the rate of devaluation to trend with
relative inflation differentials between Brazil and the U.S.
TELECOMMUNICATIONS/ELECTRIC UTILITY REGULATORY REFORM -- this area is too
complex to fully describe in these pages, but we are closely analyzing the
pending regulatory, tariff, and privatization announcements over the next year
to assess which shape these two respective sectors will take in the years to
come. We are extremely bullish on the long-term outlook for both sectors, and on
the relative value presently obtained in the stock market therein, but need to
monitor events closely so as to identify how much shareholder value will be
enhanced by government action. The government has thus far showed itself to be
very astute at maximizing shareholder value, and we have no reason to believe
they will cease being so going forward.
ECONOMIC ACTIVITY -- the year ahead should not be particularly exciting from an
economic activity standpoint, although inflation should remain subdued. The
fiscal deficit will keep a lid on economic potential via
higher-than-otherwise-necessary interest rates, and the trade balance pressures
will marginally add to those interest rate pressures. Inflation, on the other
hand, will likely continue to be subdued and settle in at a high single digit
level. Private sector corporate profits, as a result of the aforementioned
factors, will be spotty. Thus, stock picking among the private sector companies
will be of paramount importance in 1997.
In short, we are bullish on the market for 1997. In terms of portfolio
positioning, we have an overweight stance on the electric utility and
telecommunications sectors among the government-owned companies, and an
overweight position in the retail sector among the private sector companies.
CHILE
The MSCI Chile Index declined 16% in 1996, reflecting a combination of
lackluster earnings and tight monetary policy. The Chilean market had a number
of things go wrong last year, all of which contributed to the surprisingly large
decline for the year. First, monetary authorities committed themselves to a
hawkish stance on inflation which, coupled with a rapidly growing economy in the
first part of the year, led to a tight monetary policy for the duration of the
year and caused fixed income investments to be tough competition for the equity
market. Second, corporate earnings were, in most cases, fairly ho-hum. Chile is
in many sectors a mature market and companies are
- ----------38
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
increasingly looking outside their borders for growth opportunities, which take
longer to realize. Third, the all-important electric utility sector suffered
from two unrelated events. First, the price of electricity generation fell
markedly in the second half of the year owing to additional (cheap) supply being
factored into the wholesale price equation. Second, an unprecedented severe
drought affected the supply of reservoir water and, with it, the cost at which
electric utilities generate electricity. As a result, revenues fell and costs
increased, causing a severe deterioration in profits and, consequently, the
stock prices of the entire sector. Fourth, the price of pulp fell dramatically
in 1996, and this adversely affected the profits of a couple of important
companies, CMPC and Copec.
For 1997 we are more optimistic on the Chilean market than we have been in the
past given that market sentiment is extremely negative, the above confluence of
events is not likely to be repeated, and the country is underowned by dedicated
Latin American investors. Nevertheless, we find more attractive long-term
opportunities in other markets, and therefore are still relatively underweight
the market overall.
COLOMBIA
Colombia registered a modest rise during the fourth quarter, primarily a
function of the currency, which appreciated noticeably against the dollar. The
market, however, was able to weather a year plagued with political strife, fear
of economic sanctions from the U.S. and a slowing economy, and still extract
respectable gains. The Portfolio remains overweight Colombia, focusing on a few
names which offer outstanding value and exposure to key sectors in the economy.
MEXICO
The Mexican market's weak fourth quarter performance was due to concerns over
changing accounting practices and lower margins in the banking sector, a
continued sluggish recovery of the Mexican consumer and disappointing corporate
earnings reports. Interest rates remained stable throughout the fourth quarter
but there was a good deal of volatility in the stock market. This was partially
caused by the peso's 4.5% nominal devaluation -- the strongest in any quarter of
1996.
For 1996 overall, the peso actually surprised estimates strengthening over 23%
in real terms. GDP growth at 4.5% was also a positive surprise finishing the
year stronger than expectations at the beginning of the year. Unemployment fell
from 6.4% to below 5%, and the annual inflation rate dropped in half. For 1997,
inflation should fall again from 28% to 18% and real interest rates are expected
to decline slightly. The trade balance is expected to worsen in 1997 but should
remain in surplus. The current account balance will remain in negative territory
but should be easily financed. The peso should weaken in line with inflation for
1997. GDP growth should be similar to that registered in 1996. Political risk
should increase throughout the year as the PRI may lose control of Congress and
will probably lose the mayoral race in Mexico City. Despite the rising political
risk, macroeconomic policy remains very sound and opposition victories by the
PAN will mean more of the same in economic policy terms.
The market continues to look attractive on a valuation basis after a weak fourth
quarter highlighted by underperformance in some of the large cap names. This
will be balanced by a continued weak consumer recovery and uncertainty about
accounting changes in the banking sector and competition in the
telecommunications sector. Under this scenario the Fund is emphasizing the food
and beverage, cement and media sectors.
PERU
Unexpectedly weak economic data exacerbated by a high profile guerrilla incident
led the Peruvian market to experience a sharp correction in the fourth quarter
and to end the year as one of the poorest performing in the region. The
government-induced recession engineered at the end of 1995 to halt a mounting
current account problem extended longer than anticipated and inflation proved
difficult to tackle in 1996, accumulating to a higher figure than in 1995. The
Portfolio reduced its holdings in the country during the third and fourth
quarters, though anticipates a brighter outlook for the economy and market in
1997.
-------------
39
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
VENEZUELA
The Venezuelan market was the star performer in Latin America during 1996,
appreciating by an incredible 131% following the country's dramatic shift to
free-market economic policies. The AGENDA VENEZUELA, a plan launched in April,
eliminated price and exchange controls, reactivated the privatization program
and vowed to address the critical inflation and fiscal problems. The strength in
the price of oil, Venezuela's mainstay, along with surprisingly healthy tax
collections contributed to an unexpected primary surplus of roughly 0.9% for
1996. The fourth quarter saw the successful execution of key asset sales by the
public sector in the telecommunications and banking sectors, though marginally
disappointed on the inflation front, which remained sticky at around the 3% per
month level. The Fund maintained an overweight in the country throughout the
fourth quarter of 1996, emphasizing utility companies, and looks to a 1997 where
recovery of the domestic economy, further progress on inflation and other
reform, and the real appreciation of the exchange rate will benefit stocks.
Overall, we are positive on 1997. GNP growth should be higher and inflation
should be lower throughout the region. Valuations are among the cheapest in the
world. Finally we expect strong earnings growth and a return of capital to the
region.
Robert L. Meyer
PORTFOLIO MANAGER
January 1997
- ----------40
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS (75.2%)
ARGENTINA (11.5%)
(a)12,340 Banco De Galicia ADR............................. $ 299
81,686 Banco del Suquia S.A. 'B'........................ 155
8,670 Quilmes Industrial............................... 70
81,352 Siderar S.A. 'A'................................. 234
(e)6,780 Siderar S.A. ADR................................. 159
6,136 Telecom Argentina S.A. ADR....................... 248
65,621 Telefonica de Argentina S.A. ADR................. 1,698
18,165 YPF S.A. ADR..................................... 459
-------
3,322
-------
BRAZIL (19.7%)
(a,e)8,150 Bompreco Supermercados Norde GDR................. 146
(a,e)1,630 Centrais Electricas de Santa Catarina S.A. GDR... 148
5,169 Cia Energetica de Minas Gerais ADR............... 176
(e)683 Cia Energetica de Minas Gerais GDR............... 23
3,090,000 Cia Paranaense de Energia........................ 33
4,085,000 Eletrobras....................................... 1,462
14,215 Eletrobras ADR................................... 253
259,000 Light............................................ 92
(a)2,972,000 Lightpar......................................... 721
20,985 Multicanal Participacoes S.A. ADR................ 269
3,355 Pao de Acucar ADR................................ 58
(e)6,264 Pao de Acucar ADR................................ 109
16,509,000 Telebras PN...................................... 1,184
10,985 Telebras PN ADR.................................. 840
(a)758,041 Telesp........................................... 164
-------
5,678
-------
CHILE (3.6%)
31,830 Cia Cervecerias Unidas S.A. ADR.................. 513
22,983 Santa Isabel S.A. ADR............................ 520
-------
1,033
-------
COLOMBIA (4.4%)
1,854,625 Banco de Colombia................................ 765
124,219 Bavaria.......................................... 506
-------
1,271
-------
MEXICO (29.7%)
(a)61,335 Banacci 'B'...................................... 129
(a)166,310 Banacci 'L'...................................... 316
163,734 Cemex 'CPO'...................................... 586
28,435 Cemex S.A. de C.V. ADR........................... 204
36,730 Cemex S.A. de C.V. 'B' ADR....................... 143
(a)40,840 Cifra S.A. de C.V. 'B'........................... 50
(a)55,800 Cifra S.A. de C.V. 'C'........................... 68
20,994 Coca-Cola Femsa S.A. ADR......................... 606
(a)8,510 Controladora Comercial Mexicana S.A.............. 152
(a)89,800 Corporation Interamericana de Entretenimiento
S.A............................................ 242
(a)7,967 Desc S.A. de C.V. ADR............................ 175
(a)21,335 Empresas ICA Sociedad Controladora S.A. de
C.V............................................ 312
302,370 Formento Economico Mexicano S.A. 'B'............. 1,035
(a)57,320 Gruma S.A. 'B'................................... 349
108,308 Grupo Carso S.A.................................. 570
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
(e)885 Grupo Carso S.A. ADR............................. $ 9
17,485 Grupo Casa Autrey S.A. ADR....................... 341
(a)178,140 Grupo Financiero Bancomer S.A. 'B'............... 71
(a,e)46,477 Grupo Financiero Bancomer S.A. 'B' ADR........... 378
(a)135,390 Grupo Financiero Banorte S.A. 'B'................ 134
257,655 Grupo Industrial Maseca S.A. de C.V. 'B'......... 325
(a)18,945 Grupo Radio Centro S.A. ADR...................... 130
(a)40,607 Grupo Televisa S.A. GDS.......................... 1,041
(a)36,350 Industrias CH S.A. 'B'........................... 112
(a)55,770 Sears Roebuck de Mexico 'B1'..................... 96
8,630 Telefonos de Mexico 'L' ADR...................... 285
(a)45,845 Tubos de Acero de Mexico S.A. ADR................ 728
-------
8,587
-------
PERU (1.2%)
11,755 Telefonica del Peru S.A. ADR..................... 222
71,625 Telefonica del Peru S.A. 'B'..................... 133
-------
355
-------
VENEZUELA (5.1%)
276,616 C.A. La Electricidad de Caracas.................. 281
38,143 Cia Anonima Nacional Telefonos de Venezuela
ADR............................................ 1,073
31,960 Siderurgica Venezolana Sivensa, Saica S.A.C.A.
ADR............................................ 120
-------
1,474
-------
TOTAL COMMON STOCKS (COST $20,557)................................. 21,720
-------
PREFERRED STOCKS (23.1%)
BRAZIL (NON-VOTING STOCKS) (23.1%)
57,486,142 Banco Bradesco................................... 417
(a,d)8,115,000 Banco Nacional................................... --
(a)3,176,000 Casa Anglo Brasileri S.A......................... 96
11,885,000 Cia Energetica de Minas Gerais................... 405
(a)5,078,000 Cia Paulista de Forca e Luz...................... 464
(a)824,700 Cia Riograndense de Telecommunications........... 634
1,286,000 Coteminas........................................ 410
1,900 Eletrobras ADR................................... 35
1,020,000 Eletrobras 'B'................................... 379
(a)1,860 Globex Utilidades S.A............................ 30
1,200,100 Itaubanco........................................ 520
1,845,000 Lojas Americanas S.A............................. 24
7,760,000 Lojas Arapua S.A................................. 143
18,887,000 Lojas Renner..................................... 873
5,368,000 Petrobras........................................ 855
11,949,383 Telebras PN...................................... 920
706,000 Telesp........................................... 153
15,923 Vale do Rio Doce................................. 307
-------
TOTAL PREFERRED STOCKS (COST $6,501)............................... 6,665
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ---------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)29,508 Cia Paulista de Forca e Luz (COST $0)............ --
-------
TOTAL FOREIGN SECURITIES (98.3%) (COST $27,058).................... 28,385
-------
</TABLE>
-----------------
41
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (4.1%)
REPURCHASE AGREEMENT (4.1%)
$ 1,194 Chase Securities, Inc., 5.95%, dated 12/31/96,
due 1/2/97, to be repurchased at $1,194,
collateralized by $1,025 U.S. Treasury Bonds,
8.125%, due 8/15/21, valued at $1,194 (COST
$1,194)........................................ $ 1,194
-------
TOTAL INVESTMENT IN SECURITIES (102.4%) (COST $28,252)............. 29,579
-------
FOREIGN CURRENCY (0.9%)
ARP 1 Argentine Peso................................... 1
BRL 17 Brazilian Real................................... 16
MXP 125 Mexican Peso..................................... 16
PSS 4 Peruvian Sol..................................... 2
VEB 111,599 Venezuelan Bolivar............................... 234
-------
TOTAL FOREIGN CURRENCY (COST $262)................................. 269
-------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<C> <S> <C>
- ----------------------------------------------------------------------------
TOTAL INVESTMENTS (103.3%) (COST $28,514).......................... $29,848
LIABILITIES IN EXCESS OF OTHER ASSETS (-3.3%)...................... (957)
-------
NET ASSETS (100%).................................................. $28,891
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
ADR -- American Depositary Receipt.
GDR -- Global Depositary Receipt.
GDS -- Global Depositary Shares.
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of forward foreign currency exchange contracts open at December
31, 1996, the Fund is obligated to deliver foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED GAIN
(000) (000) DATE (000) (000) (LOSS) (000)
- ------------- --------- ------------- ------------- --------- -------------------
<S> <C> <C> <C> <C> <C>
BRL 2,040 $ 1,963 1/2/97 $ 1,962 $ 1,962 $ (1)
VEB 111,590 234 1/2/97 234 234 --
--------- --------- ---
$ 2,197 $ 2,196 $ (1)
--------- --------- ---
--------- --------- ---
</TABLE>
- ---------------
BRL -- Brazilian Real
VEB -- Venezuelan Bolivar
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- ---------------------------------------- -------- --------
<S> <C> <C>
Services................................ $ 10,900 37.7%
Energy.................................. 5,031 17.5
Consumer Goods.......................... 3,666 12.7
Finance................................. 3,184 11.0
Materials............................... 2,481 8.6
Capital Equipment....................... 1,671 5.8
Multi-Industry.......................... 1,452 5.0
-------- ---
$ 28,385 98.3%
-------- ---
-------- ---
</TABLE>
- ----------42
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 2.6%
Brazil 14.5%
Bulgaria 1.1%
Chile 0.4%
China 0.5%
Colombia 0.1%
Egypt 1.7%
Hong Kong 10.3%
Hungary 0.6%
India 9.1%
Indonesia 7.5%
Israel 2.5%
Korea 7.4%
Mexico 10.0%
Pakistan 2.8%
Peru 0.3%
Philippines 2.2%
Poland 1.9%
Russia 8.0%
Singapore 0.4%
South Africa 4.1%
Taiwan 2.1%
Thailand 5.0%
Turkey 3.5%
Venezuela 0.3%
Zimbabwe 0.5%
Other 0.6%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
-------------------------------------------------------------
AVERAGE ANNUAL
YTD ONE YEAR SINCE INCEPTION
----------------- ----------------- -----------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares -14.18% -9.90% 1.27% 6.32% -5.60% -3.74%
- ---------------------------------------------------------------------------------------
Class B+ Shares -14.71% -10.22% 0.62% 5.62% -3.98% -1.22%
- ---------------------------------------------------------------------------------------
Class C Shares -11.09% -10.19% 4.55% 5.55% -4.45% -4.45%
- ---------------------------------------------------------------------------------------
IFC Global Total Return
Composite Index:
Class A & C Shares N/A -4.95% N/A 7.88% N/A 0.72%
Class B Shares N/A -4.95% N/A 7.88% N/A 0.83%
- ---------------------------------------------------------------------------------------
</TABLE>
* The returns above with sales charge are calculated using the 4.75% sales
charge for Class A shares, the 5% contingent deferred sales charge for Class
B shares, and the 1% contingent deferred sales charge for Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ Class B shares have been offered since August 1, 1995.
The IFC Global Total Return Composite Index is an unmanaged index of common
stocks and includes developing countries in Latin America, East and South Asia,
Europe, the Middle East and Africa (assuming dividends are reinvested).
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- -------------------------------------- ------------ ---------------
<S> <C> <C>
Telebras PN Brazil 4.3%
Eletrobras Brazil 3.8%
Sasol Ltd. South Africa 2.8%
Telekomunikasi (Foreign) Indonesia 2.4%
Formento Economico Mexicano S.A. Mexico 2.0%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------- --------- ------------
<S> <C> <C>
Finance $ 26,055 20.3%
Services 25,105 19.5%
Consumer Goods 24,216 18.8%
Materials 15,008 11.7%
Energy 14,774 11.5%
</TABLE>
The investment objective of the Emerging Markets Fund is to provide long-term
capital appreciation by investing in common stocks of emerging country issuers.
For the six-month period ended December 31, 1996, the Fund had a total return
exclusive of sales charge of -9.90% for the Class A shares, -10.22% for the
Class B shares and -10.19% for the Class C shares, and a total return with sales
charge of -14.18% for the Class A shares, -14.71% for the Class B shares and
- -11.09% for the Class C shares, as compared to a total return of -4.95% for the
IFC Global Total Return Composite Index for the same period (the "Index"). For
the one year period ended December 31, 1996, the Fund had a total return
exclusive of sales charge 6.32% for the Class A shares, 5.62% for the Class B
shares and 5.55% for the Class C shares and a total return with sales charge of
1.27% for the Class A shares, 0.62% for the Class B shares and 4.55% for the
Class C shares compared to a total return of 7.88% for the Index for the same
peroid. For the period from inception on July 6, 1994 through December 31, 1996,
the average annual total return exclusive of sales charge was -3.74% for the
Class A shares, and -4.45% for the Class C shares, and -5.60% for the Class A
shares with sales charge as compared to 0.72% for the Index for the same period.
For the period from inception of the offering of Class B shares on August 1,
1995 through December 31, 1996, the average annual total return for the Class B
shares exclusive of sales charge was -1.22% and -3.98% with sales charge as
compared to 0.83% for the Index.
Following two weak years, hopes ran high in early 1996 that the emerging markets
would recover. After a relatively strong first half, however, the emerging
markets lost ground in the second half of the year. The first six months of 1996
was dominated by politics as several of the larger emerging markets, notably
Russia, South Korea, India and Taiwan, held successful elections. Fears of
contagion from a decline in the lofty U.S. equity market and concerns of a rise
in U.S. interest rates sapped support from emerging market equities and led to a
weak second half. As always in the emerging market universe, there were major
disparities in performance among the markets (see Chart 1).
Overall, the 3.9% return from the MSCI EMF index was somewhat muted (see Table
1). By region, Latin America out-performed Europe/Middle East and Asia. Three
emerging markets achieved results in excess of 100% for the year -- Russia,
Venezuela and Hungary posted returns of 151.1%, 127.9% and 104.2%, respectively.
The emerging Asian markets offered some of the best and worst to investors.
Taiwan ended the year up 38.9%, and Hong Kong finished the year up 28.9%.
Thailand and Korea, beset with export and liquidity problems, were the worst
performing Emerging
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE IFC GLOBAL TOTAL RETURN REGIONAL OR COUNTRY INDICES AND ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
FUND'S FUTURE PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE
SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
-------------
43
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
CHART 1
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
MSCI Emerging Markets Indices
Performance ($US)
12 Months to December 31, 1996
Korea -38.40%
Thailand -38.00%
South Africa -20.10%
Pakistan -19.40%
Chile -16.40%
Sri Lanka -16.30%
Jordan -11.40%
Israel -3.90%
India -3.80%
Peru -2.80%
Greece 1.40%
Colombia 6.60%
Philippines 15.10%
Mexico 16.10%
Argentina 16.80%
Malaysia 24.50%
Indonesia 25.40%
Hong Kong 28.90%
Turkey 31.90%
Portugal 32.30%
Brazil 38.00%
Taiwan 38.90%
Poland 57.20%
Venezuela 127.90%
</TABLE>
<TABLE>
<CAPTION>
PERFORMANCE VALUATION
1996 12 MONTH TRAILING
% PRICE/EARNINGS
----------- -----------------
<S> <C> <C>
MSCI U.S...................... 21.4 19.3x
MSCI EAFE..................... 4.4 25.8x
MSCI EMF...................... 3.9 16.2x
EMF Asia...................... 1.6 19.1x
EMF Europe/Middle East........ 11.3 13.0x
EMF Latin America............. 18.9 14.1x
</TABLE>
Source: MSCI
Markets of 1996, off 38.0% and 38.4% respectively. India had a very strong first
quarter, rallying 11.5%, but lost virtually all the gain to end the year down
3.8%.
The largest contributors to the Fund's out-performance, relative to the
benchmark, came from Brazil, Turkey, Russia and Hong Kong -- all overweight
positions. Underweights in Thailand, South Africa and Chile also added to
performance. Being underweight Malaysia however and overweight India and Israel
all had negative impacts. Stock selection was extremely positive in Brazil and
Mexico.
There are several reasons to be optimistic about the outlook for the emerging
markets in 1997. First, as a group, the emerging economies are in much better
financial shape than three years ago when the Federal Reserve began to raise
interest rates. Major inroads have been made on inflation, leaving scope for
interest rates to continue to decline in the majority of emerging markets,
despite the path of U.S. rates. Inflation in the OECD economies is expected to
increase during 1997, but in Latin America and emerging Europe it is forecasted
to steadily decline. Only in Asia is there expected to be an increase in
inflation, but even here it is from a very low base. One clear signal of
successful economic strengthening has been the performance of emerging markets
debt. Reacting to the numerous credit upgrades and improved economic management,
emerging market debt was the best performing asset class during 1996. Emerging
market stocks, on the other hand, have lagged both developed markets and debt,
and emerging market equity performance has yet to reflect the fundamental
improvements.
Second, foreign direct investment (FDI) in the emerging markets is running in
excess of $100 billion per annum underpinning future growth prospects for these
economies. Foreign reserves of the emerging economies -- currently around $700
billion -- have doubled since 1993 and are now almost equal to the aggregate
reserves of the industrialized countries. In addition, portfolio flows which, by
nature, have shorter time horizons than FDI have also picked up from the hiatus
following the Mexican peso crisis suggesting confidence is returning. We expect
portfolio flows to total approximately $30 billion in 1997. At their peak in
1993, almost $1 billion per week was being invested in the emerging markets.
Third, on a valuation basis, the emerging markets (see Table 1) sell at a 16.2
times trailing price to earnings ratio, which is lower than 1991 levels of
valuation and compare very favorably with the U.S. and international EAFE
markets. During the last two years, global financial markets have focused on the
bull market in the U.S., but the emerging markets have made tremendous
fundamental progress and are laggards in performance terms.
While the economic picture for the emerging markets overall continues to
improve, there are still hurdles to be overcome in individual countries. Some of
the emerging markets have to make progress on reducing their government deficits
(India, Pakistan, Brazil, and Russia) and on their current account deficits
(Thailand and Turkey). In aggregate, however, the outlook is for continued
progress to be made by all these countries on their deficits. We anticipate that
the emerging markets will do well, relative to other asset classes in 1997,
based on their good value, continued premium earnings growth prospects and their
persistence in improving their economic standing in the world.
Madhav Dhar
PORTFOLIO MANAGER
Marianne L. Hay
PORTFOLIO MANAGER
January 1997
- ----------44
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS (90.4%)
ARGENTINA (2.6%)
36,212 Quilmes Industrial S.A. ADR...................... $ 290
23,327 Telecom Argentina S.A. ADR....................... 942
55,385 Telefonica de Argentina S.A. ADR................. 1,433
28,740 YPF S.A. ADR..................................... 725
--------
3,390
--------
BRAZIL (7.4%)
(a,e)2,900 Bompreco Supermercados Norde GDR................. 52
(a,e)2,140 Centrais Electricas de Santa Catarina S.A. GDR... 194
7,181,000 Eletrobras....................................... 2,571
(a)26,615 Eletrobras ADR................................... 476
(a)414,000 Light............................................ 147
667,000 Lightpar......................................... 162
17,885 Multicanal Participacoes S.A. ADR................ 229
(e)20,381 Pao de Acucar ADR................................ 355
28,258,000 Telebras PN...................................... 2,026
38,615 Telebras PN ADR.................................. 2,954
(a)948,397 Telesp........................................... 205
5,020 Vale do Rio Doce ADR............................. 99
--------
9,470
--------
CHILE (0.4%)
13,655 Cia Cervecerias Unidas S.A. ADR.................. 220
15,509 Santa Isabel S.A ADR............................. 351
--------
571
--------
CHINA (0.5%)
(a)456,000 Guangshen Railway Company Ltd. 'H'............... 197
2,056,000 Yizheng Chemical Fibre Co. 'H'................... 500
--------
697
--------
COLOMBIA (0.1%)
215,412 Banco de Colombia................................ 89
--------
EGYPT (1.7%)
7,916 Ameriyah Cement Co............................... 149
3,443 Commercial International Bank.................... 520
(a)24,250 Commercial International Bank GDR................ 342
9,170 Eastern Tobacco.................................. 142
(a)1,895 Egypt American Bank.............................. 84
(a)5,775 Egyptian Finance & Industrial.................... 183
(a)10,800 General Silo Storage............................. 159
10,475 Helwan Portland Cement........................... 185
(a)1,600 Madinet Housing & Development.................... 181
1,950 North Cairo Flour Mills.......................... 77
7,375 Tora H. Portland Cement.......................... 149
--------
2,171
--------
GREECE (0.0%)
16,500 Aegek............................................ 61
--------
HONG KONG (10.3%)
(a)65,000 Asia Satellite Telecommunications Holdings
Ltd............................................ 151
152,000 Cheung Kong Holdings Ltd......................... 1,351
(a)144,000 Cheung Kong Infrastructure Holdings.............. 382
531,700 China International Marine Containers Ltd........ 619
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
413,000 China Resources Beijing Land..................... $ 261
580,000 China Resources Enterprises Ltd.................. 1,305
259,000 Citic Pacific Ltd................................ 1,503
402,000 Cosco Pacific Ltd................................ 468
6,000 Guangshen Railway Co., Ltd. ADR.................. 124
21,000 Hang Seng Bank Ltd............................... 255
67,000 Henderson Land Development Co., Ltd.............. 676
63,000 Hong Kong Ferry Holdings......................... 123
212,800 Hong Kong Telecommunications Ltd................. 342
214,000 Hutchison Whampoa Ltd............................ 1,681
222,000 New World Development Co., Ltd................... 1,500
(a)33,000 Shanghai Industrial Holdings Ltd................. 120
81,000 Sun Hung Kai Properties Ltd...................... 992
78,000 Swire Pacific Ltd. 'A'........................... 744
(a)1,454,000 Tingyi Holdings Co............................... 381
756,000 Zhenhai Refining and Chemical Co................. 278
--------
13,256
--------
HUNGARY (0.6%)
3,601 BorsodChem Rt. GDR............................... 89
(a)3,300 Cofinec GDR...................................... 99
16,416 MOL Magyar Olaj-es Gazipari Rt. GDR.............. 208
2,490 Pannonplast Rt................................... 92
14,700 Tiszai Vegyi Kombinat Rt......................... 168
(a)15,450 Tiszai Vegyi Kombinat Rt. GDR.................... 177
--------
833
--------
INDIA (9.0%)
12,369 Century Textiles & Industries GDR................ 631
(e)157,950 E.I.D. Parry (India) Ltd. GDR.................... 217
201,600 Great Eastern Shipping GDR....................... 1,104
100,000 Gujarat Ambuja Cement GDR........................ 825
214,816 Gujarat Narmada Valley Fertilizers Co., Ltd...... 832
504,000 Hindustan Development Corp., Ltd................. 151
75,000 India Cements Ltd. GDR........................... 195
22,000 Indian Rayon & Industries GDR.................... 160
(e)108,750 Indo Rama Synthetics Ltd. GDR.................... 761
160,000 ITC Ltd. GDS..................................... 1,339
(e)4,480 JCT Ltd. GDR..................................... 9
230,750 JK Corp. GDR..................................... 231
50,000 Mahindra & Mahindra Ltd. GDR..................... 587
(a,g)186,045 Morgan Stanley India Investment Fund, Inc........ 1,767
58,500 Raymond Ltd. GDR................................. 351
(a)29,250 Raymond Ltd. GDR (New)........................... 176
(a)280,000 Sanghi Polyester Ltd. GDR........................ 455
317,000 SIV Industries GDR............................... 634
23,750 Tata Engineering and Locomotive Co., Ltd. GDR.... 205
282,600 Tube Investments of India Ltd.................... 495
20,000 Tube Investments of India Ltd. (Bonus Shares).... 35
60,550 United Phosphorus Ltd. GDR....................... 424
--------
11,584
--------
INDONESIA (7.5%)
329,000 Astra International (Foreign).................... 906
(d)854,520 Bank International Indonesia (Foreign)........... 841
</TABLE>
-----------------
45
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
INDONESIA (CONT.)
<TABLE>
<C> <S> <C>
(d)456,500 Bimantara Citra (Foreign)........................ $ 609
(a,d)652,500 Daya Guna Samudera (Foreign)..................... 760
(d)288,000 Gudang Garam (Foreign)........................... 1,244
(d)309,000 Hanjaya Mandala Sampoerna (Foreign).............. 1,648
(d)501,203 Indah Kiat Pulp & Paper (Foreign)................ 366
(d)236,996 Sorini Corp. (Foreign)........................... 110
(d)1,797,000 Telekomunikasi (Foreign)......................... 3,100
--------
9,584
--------
ISRAEL (2.5%)
11,250 Elbit Ltd........................................ 81
(a)37,499 Elbit Medical Imaging Ltd........................ 156
(a)37,499 Elbit Systems Ltd................................ 287
680 First International Bank of Israel Ltd. '1'...... 75
4,465 First International Bank of Israel Ltd. '5'...... 515
(a)94,327 Israel Land Development Co., Ltd................. 346
2,100 Koor Industries Ltd.............................. 183
16,500 Koor Industries Ltd. ADR......................... 280
91,800 Osem Investment Ltd.............................. 516
31,800 Super Sol Ltd.................................... 779
--------
3,218
--------
KOREA (7.4%)
(a)37,900 Cho Hung Bank Co., Ltd. GDR...................... 284
(a,d)15,195 Cho Hung Bank Co., Ltd. (Foreign)................ 125
(a,d)2,460 Chosun Brewery Co., Ltd. (Foreign)............... 64
(a)139,960 Hanwha Chemical Corp............................. 1,085
(a,d)30,250 Housing & Commercial Bank (Foreign).............. 460
29,993 Hyundai Engineering & Construction Co.
(Foreign)...................................... 696
(a)29,800 Kookmin Bank GDR................................. 542
(a)20,280 Korea Electric Power (Foreign)................... 590
(a)21,000 Korea Exchange Bank.............................. 190
44,414 Korea Mobile Telecommunications Corp. ADR........ 572
(a)(d)894 Korea Mobile Telecommunications Corp.
(Foreign)...................................... 893
(a)12,180 LG Information & Communication (Foreign)......... 778
(a)2,740 LG Information & Communication (Foreign) (New)... 194
11,070 Pohang Iron & Steel Ltd. ADR..................... 224
(d)2,800 Pohang Iron & Steel Ltd. (Foreign)............... 161
(a,e)15,920 Samsung Electronics Co. GDS...................... 659
(d)16,045 Samsung Electronics Co. (Foreign)................ 950
(a,d)1,315 Samsung Electronics RFD.......................... 78
(d)32,845 Shinhan Bank Co., Ltd. (Foreign)................. 528
(a)18,380 Ssangyong Oil Refining Co........................ 402
--------
9,475
--------
MEXICO (10.0%)
59,220 Apasco S.A. de C.V............................... 406
(a)384,080 Banacci 'B'...................................... 810
(a)193,888 Banacci 'L'...................................... 368
379,782 Cemex 'CPO'...................................... 1,358
68,884 Cemex S.A. de C.V. ADR........................... 495
(a)193,050 Cifra S.A. de C.V. 'B'........................... 236
(a)207,075 Cifra S.A. de C.V. 'C'........................... 252
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
(a)20,780 Desc S.A. de C.V. ADR............................ $ 457
(a)13,315 Empresas ICA Sociedad Controladora S.A. de
C.V............................................ 195
749,010 Formento Economico Mexicano S.A. 'B'............. 2,565
(a)46,202 Gruma S.A. 'B'................................... 281
(a,e)7,475 Gruma S.A. GDR................................... 181
104,805 Grupo Carso S.A.................................. 552
(e)34,750 Grupo Carso S.A. ADR............................. 365
(a)769,142 Grupo Financiero Bancomer S.A. 'B'............... 307
(a,e)139,975 Grupo Financiero Bancomer S.A. 'B' ADR........... 1,137
205,319 Grupo Industrial Maseca S.A. de C.V. 'B'......... 259
(a)87,143 Grupo Televisa S.A. GDR.......................... 2,233
7,363 Pan American Beverages, Inc. 'A'................. 345
--------
12,802
--------
PAKISTAN (2.8%)
720,000 Fauji Fertilizer Co., Ltd........................ 1,212
(a)181,500 Karachi Electric................................. 85
(a)150,000 Nishat Mills Ltd................................. 60
51,870 Pakistan State Oil Co., Ltd...................... 335
(a)2,612,500 Pakistan Telecommunication Co.................... 1,636
(a)399,000 Sui Northern Gas Pipelines....................... 304
--------
3,632
--------
PERU (0.3%)
20,310 Telefonica del Peru S.A. ADR..................... 383
--------
PHILIPPINES (2.2%)
378,637 Ayala Land, Inc. 'B'............................. 432
(a)604,300 DMCI Holdings, Inc............................... 396
2,433,800 JG Summit Holding 'B'............................ 685
97,370 Manila Electric 'B'.............................. 796
8,490 Philippine Long Distance Telephone ADR........... 467
--------
2,776
--------
POLAND (1.9%)
12,500 Bank Rozwoju Eksportu S.A........................ 375
1,296 Bank Slaski S.A.................................. 132
(a)15,750 Debica S.A....................................... 352
1,800 E. Wedel S.A..................................... 88
41,100 Elektrim S.A..................................... 373
(a)8,000 Fabryka Kotlow Rafako S.A........................ 45
48,000 Mostostal-Export................................. 114
69,000 Polifarb Wroclaw S.A............................. 390
32,000 Wielkopolski Bank Kredytowy...................... 216
7,700 Zywiec........................................... 357
--------
2,442
--------
RUSSIA (7.3%)
(a)16,130,000 Edinaya Energetiches............................. 1,468
(a)51,000 Gazprom ADR...................................... 880
(a)10,372,000 Irkutskenergo.................................... 1,374
110,000 Lukoil Holdings.................................. 1,243
(e)6,635 Lukoil Holdings ADR.............................. 303
1,650,000 Moscow Energy (Mosenergo)........................ 1,683
(a)409,000 Rostelekom....................................... 990
(a)600 Storyfirst Communications........................ 1,500
--------
9,441
--------
</TABLE>
- ----------46
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
SINGAPORE (0.4%)
(a)186,000 Want Want Holdings............................... $ 489
--------
SOUTH AFRICA (4.1%)
66 Anglo American Industrial Corp., Ltd............. 2
70,173 Bidvest Group Ltd................................ 364
28,500 Drifontein Consolidation Ltd..................... 300
167,700 Gencor Ltd....................................... 609
(g)34,265 Morgan Stanley Africa Investment Fund, Inc....... 467
302,500 Sasol Ltd........................................ 3,589
--------
5,331
--------
TAIWAN (2.1%)
160,950 Cathay Life Insurance Co., Ltd................... 1,024
363,000 China Steel Corp................................. 341
141,000 Formosa Plastics Corp............................ 354
(a)158,000 Pacific Construction............................. 135
(a)204,000 Siliconware Precision Industries Co.............. 430
279,590 Yang Ming Marine Transport....................... 370
--------
2,654
--------
THAILAND (5.0%)
122,100 Advanced Information Services Co., Ltd.
(Foreign)...................................... 1,143
153,400 Bangkok Bank Co., Ltd. (Foreign)................. 1,483
233,000 Finance One Co., Ltd. (Foreign).................. 473
(d)8,300 Shinawatra Computer Co., Ltd..................... 100
(d)95,140 Shinawatra Computer Co., Ltd. (Foreign).......... 1,150
161,900 Siam Commercial Bank Co., Ltd. (Foreign)......... 1,174
138,000 Thai Farmer's Bank Public Co. (Foreign).......... 861
--------
6,384
--------
TURKEY (3.5%)
380,000 Aksa Akrilik Kimya Sanayii A.S................... 52
2,820,500 Arcelik A.S...................................... 286
4,185,000 Bossa Ticaret Ve Sanayii Isletmeleri T.A.S....... 351
1,545,750 Ege Biracilik Ve Malt Sanayii.................... 331
3,600,000 Erciyas Biracilik Ve Malt Sanayii................ 390
14,150,000 Eregli Demir Ve Celik Fabrikalari T.A.S.......... 1,696
4,389,000 Guney Biraculik Ve Malt Sana..................... 279
7,776,000 Sabah............................................ 100
626,998 Tat Konserve..................................... 94
11,900,000 Turkiye Garanti Bankasi.......................... 538
17,338,000 Yapi Ve Kredi Bankasi A.S........................ 432
--------
4,549
--------
VENEZUELA (0.3%)
11,510 Cia Anonima Nacional Telefonos de Venezuela
ADR............................................ 324
--------
ZIMBABWE (0.5%)
92,200 Delta Corp....................................... 323
258,900 Meikles Africa Ltd............................... 382
--------
705
--------
TOTAL COMMON STOCKS (COST $124,062).................................. 116,311
--------
PREFERRED STOCKS (7.8%)
BRAZIL (NON-VOTING STOCKS) (7.1%)
194,383,584 Banco Bradesco................................... 1,409
(a,d)11,156,000 Banco Nacional................................... --
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
3,435,099 Brahma........................................... $ 1,878
13,195,110 Cia Energetica de Minas Gerais................... 449
2,100 Cia Energetica de Minas Gerais GDR............... 71
790,000 Coteminas........................................ 252
10,400 Eletrobras....................................... 193
4,562,000 Eletrobras 'B'................................... 1,695
166,000 Investimentos Itausa S.A......................... 125
2,465,200 Itaubanco........................................ 1,068
4,660,000 Pao de Acucar.................................... 83
7,427,000 Petrobras........................................ 1,183
7,390,390 Telebras PN...................................... 569
789,000 Telesp........................................... 171
--------
9,146
--------
RUSSIA (0.7%)
(a)450,000 Rostelecom....................................... 832
--------
TOTAL PREFERRED STOCKS (COST $8,813)................................. 9,978
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -----------------
RIGHTS (0.0%)
POLAND (0.0%)
(a)48,000 Mostostal-Export, expiring 3/14/97 (COST $0)..... 2
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -----------------
WARRANTS (0.0%)
THAILAND (0.0%)
(a,d)14,487 Thai Farmer's Bank Public Co., expiring 9/15/02
(COST $14)..................................... --
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------------
FOREIGN GOVERNMENT BONDS (1.1%)
BULGARIA (1.1%)
$ 1,250 Bulgaria Discount Bond, 'A', (Euro) 6.688%,
7/28/24........................................ 710
(d)2,000 Bulgaria Front Loaded Interest Reduction Bond,
'A', 2.25%, 7/28/12............................ 769
--------
TOTAL FOREIGN GOVERNMENT BONDS (COST $1,408)......................... 1,479
--------
CONVERTIBLE DEBENTURE (0.1%)
INDIA (0.1%)
120 Tata Iron & Steel Co. 2.25%, 4/1/99 (COST
$125).......................................... 109
--------
TOTAL FOREIGN SECURITIES (99.4%) (COST $134,422)..................... 127,879
--------
SHORT-TERM INVESTMENT (0.3%)
REPURCHASE AGREEMENT (0.3%)
370 Chase Securities, Inc., 5.95%, dated 12/31/96,
due 1/2/97, to be repurchased at $370,
collateralized by $320 U.S. Treasury Bonds,
8.125%, due 8/15/21, valued at $370 (COST
$370).......................................... 370
--------
TOTAL INVESTMENT IN SECURITIES (99.7%) (COST $134,792)............... 128,249
--------
</TABLE>
-----------------
47
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
(000)
<C> <S> <C>
- -------------------------------------------------------------------------------
FOREIGN CURRENCY (2.1%)
ARP 14 Argentine Peso................................... $ 14
BRL 254 Brazilian Real................................... 244
COP 4,308 Colombian Peso................................... 4
EGP 33 Egyptian Pound................................... 10
HKD 1,770 Hong Kong Dollar................................. 229
IDR 25,850 Indonesian Rupiah................................ 11
KRW 7,198 Korean Won....................................... 9
PKR 20,685 Pakistani Rupee.................................. 516
PHP 224 Philippine Peso.................................. 9
PLZ 56 Polish Zloty..................................... 19
ZAR 7,794 South African Rand............................... 1,666
TWD 856 Taiwan Dollar.................................... 31
TRL 572,500 Turkish Lira..................................... 5
--------
TOTAL FOREIGN CURRENCY (COST $2,767)................................. 2,767
--------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<C> <S> <C>
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.8%) (COST $137,559)........................... $131,016
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.8%)........................ (2,376)
--------
NET ASSETS (100%).................................................... $128,640
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Securities (totaling $13,956 or 10.8% of net assets at December 31,
1996) valued at fair value -- see note A-1 to financial statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(g) -- The Fund is advised by an affiliate.
ADR -- American Depositary Receipt.
GDR -- Global Depositary Receipt.
GDS -- Global Depositary Shares.
RFD -- Ranked for Dividend
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of forward foreign currency exchange contracts open at December
31, 1996, the Fund is obligated to deliver foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR NET UNREALIZED
(000) (000) DATE (000) VALUE (000) GAIN (LOSS) (000)
- ----------- ----- ----------- --------------- ----- -----------------
<S> <C> <C> <C> <C> <C>
BRL 185 $ 178 1/2/97 $ 178 $ 178 $ --
----- ----- -----
----- ----- -----
</TABLE>
- ---------------
BRL -- Brazilian Real
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Finance...................................................................... $ 26,055 20.3%
Services..................................................................... 25,105 19.5
Consumer Goods............................................................... 24,216 18.8
Materials.................................................................... 15,008 11.7
Energy....................................................................... 14,774 11.5
Multi-Industry............................................................... 11,296 8.8
Capital Equipment............................................................ 9,646 7.5
Foreign Government Bonds..................................................... 1,479 1.1
Gold Mines................................................................... 300 0.2
--------- ---
$ 127,879 99.4%
--------- ---
--------- ---
</TABLE>
- ----------48
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods/Construction 7.4%
Consumer--Cyclical 31.5%
Consumer--Staples 31.3%
Diversified 7.9%
Energy 0.5%
Finance 11.5%
Materials 0.7%
Technology 3.6%
Other 5.6%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
YTD SINCE INCEPTION+
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 8.71% 14.13% 31.02% 37.55%
- -----------------------------------------------------------------
Class B Shares 8.72% 13.72% 31.68% 36.68%
- -----------------------------------------------------------------
Class C Shares 12.73% 13.73% 35.59% 36.59%
- -----------------------------------------------------------------
Lipper Capital
Appreciation Index N/A 11.70% N/A 22.96%
- -----------------------------------------------------------------
S&P 500 Index N/A 4.27% N/A 14.97%
- -----------------------------------------------------------------
</TABLE>
* The returns above with sales charge are calculated using the 4.75% sales
charge for Class A shares, the 5% contingent deferred sales charge for Class
B shares, and the 1% contingent deferred sales charge for Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ The Fund commenced operations on January 1, 1996.
The Lipper Capital Appreciation Index is a composite of mutual funds managed for
maximum capital gains. The S&P 500 Index is an unmanaged index of common stocks.
The S&P 500 Index assumes dividends are reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ------------------------- ------------------------- -------------
<S> <C> <C>
RJR Nabisco Holdings Consumer--Staples 14.6%
Corp.
HFS, Inc. Consumer--Cyclical 11.2%
Philip Morris Cos., Inc. Consumer--Staples 8.7%
Campbell Soup Co. Consumer--Staples 5.2%
United Technologies Corp. Capital 5.2%
Goods/Construction
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------- --------- ------------
<S> <C> <C>
Consumer--Cyclical $ 6,039 31.5%
Consumer--Staples 6,025 31.3%
Finance 2,193 11.5%
Diversified 1,518 7.9%
Capital
Goods/Construction 1,432 7.4%
</TABLE>
The objective of the Aggressive Equity Fund is to provide capital appreciation
by investing primarily in a non-diversified portfolio of corporate equity and
equity-linked securities. Equity and equity-linked securities include common and
preferred stock, convertible securities, rights and warrants to purchase common
stock, options, futures and specialty securities. The Fund is allowed to sell
securities short.
For the six-month period ended December 31, 1996, the Fund had a total return
exclusive of sales charge of 14.13% for the Class A shares, 13.72% for the Class
B shares, and 13.73% for the Class C shares, and a total return with sales
charge of 8.71% for the Class A shares, 8.72% for the Class B shares, and 12.73%
for the Class C shares, as compared to 11.70% for the Lipper Capital
Appreciation Index and 4.27% for the S&P 500 Index for the same period. For the
period from inception on January 2, 1996 through December 31, 1996, the Fund had
a total return exclusive of sales charge of 37.55% for the Class A shares,
36.68% for the Class B shares and 36.59% for the Class C shares and a total
return with sales charge of 31.02% for the Class A shares, 31.68% for the Class
B shares and 35.59% for the Class C shares compared to 22.96% for the Lipper
Capital Appreciation Index and 14.97% for the S&P 500 Index.
For the latter part of 1996 and going into 1997 the Fund has maintained a
barbell approach with exposure to large capitalization stable growth stocks
(mainly tobacco) at the one extreme, and high beta growth issues (generally mid
capitalization consumer cyclical issues) at the other extreme. Our investment
strategy is to take a substantial position (up to 25% in a single name) when we
have very high conviction in the business fundamentals and stock price potential
of a holding.
Throughout 1996 the largest holding in the Fund has been Philip Morris. By
taking advantage of periodic selling panics caused by ubiquitous news headlines
regarding litigation and political risk, we were able to greatly enhance our
returns in the stock. For example, in April of 1996, with Philip Morris down
about 5% on the year and trading at $85 against a market that was up about 10%,
we took Philip Morris stock to about 22% of the portfolio. By August, the stock
had hit $107 as litigation concerns had eased and investors focused more on the
company's strong growth fundamentals. We had reduced our Philip Morris holding
to about a 4% position when, in early August, the industry had a setback and
lost the first round of a product liability court case. The stock plunged back
into the $80's, a huge overreaction in our view, and we subsequently went back
to about a 15% weighting.
At December 31, 1996, Philip Morris stock at $113 represented about 9% of our
portfolio and RJR represented about 15%. RJR stock has not bounced back as
strongly as Philip Morris; business is strong, estimates are rising and we
believe the company may both raise its dividend and announce a
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.
-------------
49
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
"WHILE WE ARE LARGE CAP MANAGERS . . . AT THE MARGIN WE FEEL THAT THERE ARE
CURRENTLY MANY OPPORTUNITIES IN SECONDARY STOCKS."
major share repurchase in late February/early March. Our combined positions in
Philip Morris, RJR Nabisco and Consolidated Cigar total about 25%. While the
group will clearly be subject to bouts of selling pressure since the industry is
under attack from a number of directions, we nonetheless believe the tobacco
stocks are in the midst of a multi-year trend of upward revaluation. Combined
with strong underlying growth fundamentals, this creates a powerful investment
opportunity which we feel many growth investors are missing.
As we enter 1997, the S&P 500 Index has outperformed the vast majority of active
managers for three consecutive years. Also, the index has outpaced the earnings
growth of the companies whose stocks are in it. One could argue that there are
many positive factors driving the United States markets higher and that these
factors could persist: stable interest rates, solid economic growth without
inflationary pressures, the opening up of emerging markets, the acceptance of
shareholder value as the key motivator of corporate managements, and the huge
flow of cash coming into stocks supported by powerful demographic trends.
Still, there is no doubt that many large cap, "blue chip" stocks, while enjoying
tremendous business fundamentals, have outperformed their own businesses. Take
General Electric as an example; in 1996, the stock was up 40%, while EPS grew
about 15%. Another example would be Merck, a stock up 77% in 1995 and 24% in
1996, with EPS in those two years up only 12% and 20%.
Our guess is that active managers will have an easier time beating the index
this year. This would be more likely to occur if smaller company stocks do well.
While we are large cap managers and continue to feel very comfortable with many
large cap names, at the margin we feel that there are currently many
opportunities in secondary stocks, especially high beta growth issues that have
missed the recent market move, but where fundamentals are intact. Examples
include HFS, Gtech, International Game Technology, Cracker Barrel, Petsmart and
Clear Channel Communications.
HFS is a great example of what we look for in a stock, and it is one of our
largest holdings currently. At $60, the stock has corrected 25% from its
mid-1996 and all-time high. During this period of stock price weakness,
consensus earnings expectations for 1997 have risen about 17% (from $2.20 in EPS
to $2.57). Moreover, we believe strongly that estimates will rise several more
times over the next few months and HFS will earn at least $2.80 per share in
1997. Driven by strong business trends, free cash flow generation and additional
acquisitions, we think HFS will earn $3.50 to $4.00 per share in 1998, up
sharply from 1997 and well above the $3.25 consensus estimate.
HFS is a conglomerate put together by CEO Henry Silverman, following his LBO and
subsequent IPO of several hotel franchises, including Ramada, Howard Johnson and
Days Inn. Since HFS owns management and franchise rights to these brands, as
opposed to bricks and mortar, the company generates significant free cash flow.
Mr. Silverman used this free cash flow to help finance the purchase of other
franchises, beginning two years ago with Century 21 and including Coldwell
Banker, Avis, RCI (the largest timeshare exchange company) and finally PHH, a
company which specializes in corporate relocation. Separately, each business has
solid growth prospects, some great and some only fair. But together, they form a
huge network of customer transactions, access to which the company is selling
back to corporate America. This in turn creates massive additional fee income
for HFS , enhances the market position of its businesses, and gives HFS an
advantage in competing for acquisitions.
At $60, HFS stock trades at 21 times our estimate of 1997 earnings. But free
cash flow is about $0.80 above started earnings, so the multiple of free cash
flow is only 17 times. In other words, the stock's free cash flow yield is 6%.
Looking out to 1998, the free cash flow yield is 7.6%. We think this is
extremely compelling because HFS's savvy and shareholder driven management team
will look to leverage their big free cash flow ($600 million and $800 million in
1997 and 1998, respectively) through additional acquisitions.
Other large holdings include Campbell Soup, United Technologies, K-III and
Loews. At December 31, 1996 the Fund held 39 issues and 6% in cash.
Kurt A. Feuerman
PORTFOLIO MANAGER
January 1997
- ----------50
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (94.4%)
CAPITAL GOODS/CONSTRUCTION (7.4%)
AEROSPACE & DEFENSE (7.4%)
4,400 Gulfstream Aerospace Corp........................ $ 107
7,800 Loral Space & Communications..................... 143
2,900 McDonnell Douglas Corp........................... 186
15,100 United Technologies Corp......................... 996
--------
TOTAL CAPITAL GOODS/CONSTRUCTION.............................. 1,432
--------
CONSUMER--CYCLICAL (31.5%)
BROADCAST--RADIO & TELEVISION (2.9%)
(a)13,400 Clear Channel Communications, Inc................ 484
(a)2,400 Heftel Broadcasting Corp. 'A'.................... 76
--------
560
--------
ENTERTAINMENT & LEISURE (0.4%)
(a)2,600 Family Golf Centers, Inc......................... 78
--------
FOOD SERVICE & LODGING (16.3%)
(a)7,100 Boston Chicken, Inc.............................. 255
(a)4,200 Brinker International, Inc....................... 67
9,100 Cracker Barrel Old Country Store, Inc............ 231
5,100 Einstein/Noah Bagel Corp......................... 152
14,700 Food Lion, Inc. 'B'.............................. 149
(a)36,100 HFS, Inc......................................... 2,157
4,200 Hilton Hotels Corp............................... 110
--------
3,121
--------
LEISURE RELATED (6.6%)
(a)18,200 GTECH Holdings Corp.............................. 582
31,000 International Game Technology.................... 566
(a)5,900 WMS Industries, Inc.............................. 118
--------
1,266
--------
PUBLISHING (4.3%)
(a)76,600 K-III Communications Corp........................ 823
--------
RETAIL--GENERAL (1.0%)
(a)8,400 Petsmart, Inc.................................... 184
400 Stage Stores, Inc................................ 7
--------
191
--------
TOTAL CONSUMER--CYCLICAL...................................... 6,039
--------
CONSUMER--STAPLES (31.3%)
FOOD (5.2%)
12,500 Campbell Soup Co................................. 1,003
--------
HEALTH CARE SUPPLIES & SERVICE (1.5%)
3,700 AETNA, Inc....................................... 296
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
TOBACCO (24.6%)
10,000 Consolidated Cigar Holdings, Inc................. $ 247
14,800 Philip Morris Cos., Inc.......................... 1,667
82,700 RJR Nabisco Holdings Corp........................ 2,812
--------
4,726
--------
TOTAL CONSUMER--STAPLES....................................... 6,025
--------
DIVERSIFIED (7.9%)
DIVERSIFIED (7.9%)
(a)16 Berkshire Hathaway, Inc.......................... 546
8,600 Loews Corp....................................... 810
(a)4,700 U.S. Industries, Inc............................. 162
--------
TOTAL DIVERSIFIED............................................. 1,518
--------
ENERGY (0.5%)
(a)2,000 AES Corp......................................... 93
--------
FINANCE (11.5%)
BANKING (3.6%)
1,500 Citicorp......................................... 154
1,983 Wells Fargo Co................................... 535
--------
689
--------
FINANCIAL SERVICES (4.7%)
2,700 American Express Co.............................. 153
7,800 Franklin Resources, Inc.......................... 533
2,300 Student Loan Marketing Association............... 214
--------
900
--------
INSURANCE (3.2%)
5,900 ACE Ltd.......................................... 355
4,500 PMI Group, Inc................................... 249
--------
604
--------
TOTAL FINANCE................................................. 2,193
--------
MATERIALS (0.7%)
CHEMICALS (0.7%)
3,600 Olin Corp........................................ 136
--------
TECHNOLOGY (3.6%)
COMPUTERS (1.6%)
2,000 International Business Machines Corp............. 302
--------
ELECTRONICS (2.0%)
2,900 Intel Corp....................................... 380
--------
TOTAL TECHNOLOGY.............................................. 682
--------
TOTAL COMMON STOCKS (COST $17,148).............................. 18,118
--------
</TABLE>
-----------------
51
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (5.0%)
REPURCHASE AGREEMENT (5.0%)
$ 957 Chase Securities, Inc., 5.95%, dated 12/31/96,
due 1/2/97, to be repurchased at $957,
collateralized by $940 U.S. Treasury Notes,
6.625%, due 7/31/01, valued at $957 (COST
$957).......................................... $ 957
--------
TOTAL INVESTMENTS (99.4%) (COST $18,105)........................ 19,075
OTHER ASSETS IN EXCESS OF LIABILITIES (0.6%).................... 120
--------
NET ASSETS (100%)............................................... $ 19,195
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
- ----------52
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Apartment 16.2%
Healthcare 7.8%
Land 2.1%
Lodging/Leisure 14.4%
Manufactured Home 5.6%
Office & Industrial 32.3%
Retail 10.4%
Self Storage 2.7%
Other 8.5%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
YTD SINCE INCEPTION+
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 15.76% 21.53% 21.11% 27.15%
- -----------------------------------------------------------------
Class B Shares 18.67% 23.67% 24.28% 29.28%
- -----------------------------------------------------------------
Class C Shares 22.65% 23.65% 28.26% 29.26%
- -----------------------------------------------------------------
NAREIT Index N/A 27.58% N/A 32.33%
- -----------------------------------------------------------------
</TABLE>
* The returns above with sales charge are calculated using the 4.75% sales
charge for Class A shares, the 5% contingent deferred sales charge for Class
B shares, and the 1% contingent deferred sales charge for Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ The Fund commenced operations on May 1, 1996.
The NAREIT Index is an unmanaged market weighted index of tax qualified REITs
listed on the New York Stock Exchange, American Stock Exchange and the NASDAQ
National Market System, including dividends.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- --------------------------------- ----------------- ---------------
<S> <C> <C>
Brandywine Realty Trust REIT Office & 4.8%
Industrial
American General Hospitality Lodging/Leisure 4.0%
Trizec Hahn Corp. Office & 3.9%
Industrial
Meridian Industrial Trust REIT Office & 3.9%
Industrial
Burnham Pacific Property Trust Retail 3.8%
REIT
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
PERCENT OF
INDUSTRY VALUE NET ASSETS
- --------------------- --------- ------------
<S> <C> <C>
Office & Industrial $ 4,568 32.3%
Apartment 2,299 16.2%
Lodging/Leisure 2,044 14.4%
Retail 1,469 10.4%
Healthcare 1,091 7.8%
</TABLE>
The investment objective of the U.S. Real Estate Fund is to provide
above-average current income and long-term capital appreciation by investing
primarily in equity securities of companies in the U.S. real estate industry,
including real estate investment trusts (REITs).
For the six-month period ended December 31, 1996, the Fund had a total return
exclusive of sales charge of 21.53% for the Class A shares, 23.67% for the Class
B shares and 23.65% for the Class C shares, and a total return with sales charge
of 15.76% for the Class A shares, 18.67% for the Class B shares and 22.65% for
the Class C shares, as compared to 27.58% for the National Association of Real
Estate Investment Trusts (NAREIT) Index.
For the period from inception on May 1, 1996 through December 31, 1996, the Fund
had a total return exclusive of sales charge of 27.15% for the Class A shares,
29.28% for the Class B shares and 29.26% for the Class C shares, and a total
return with sales charge of 21.11% for the Class A shares, 24.28% for the Class
B shares and 28.26% for the Class C shares, as compared with 32.33% for the
NAREIT Index.
The U.S. real estate securities markets exceeded the expectations of even the
most optimistic analysts during calendar 1996 in terms of total performance,
growth in assets and other relevant benchmarks. The NAREIT Equity Index (the
"Index") registers a total return of 35.3%, of which approximately 18.9% came in
the fourth quarter (and a full 10.4% in the final month alone). In this report
we would like to examine a number of the major themes that defined this
record-breaking period, to review important developments in each of the major
industry sectors that together comprise the real estate business, and lastly to
review the Fund's position and strategy as we enter the new year 1997.
INVESTMENT THEMES: CALENDAR 1996
The most important theme of calendar 1996 and the one which certainly dominated
the market during the second half of the year was the extraordinary growth of
the real estate sector. Driven by rapid appreciation in share prices and a
record-setting $9.5 billion in securities offerings, the equity market
capitalization of the U.S. REIT industry rose by 53% during 1996 to a year-end
total of $87 billion. Total assets of REITs rose 35% to $125 billion. Some
analysts now estimate that REITs may comprise as much as 20% of the total
commercial real estate owned by institutions in the United States, up from a
fraction just a few years ago. Virtually every major real estate investor
constituency participated in the market in 1996. Pension funds, which had stuck
their toes into the REIT waters for the first time in 1994, came back to REITs
in force during the second half of the year. As we write this letter,
consultants speak of a record number of pending proposals for pension funds
seeking to initiate or expand existing commitments to the REIT industry. Other
institutions, such as insurance companies, came to see REITs as a viable
alternative during 1996. Perhaps the most noteworthy
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.
-------------
53
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
". . . WE CONTINUE TO PURSUE A STRATEGY OF OVER-WEIGHTING THOSE SECTORS THAT
OFFER THE BEST UNDERLYING REAL ESTATE FUNDAMENTALS."
convert was The Prudential Insurance Company, which during September 1996
announced the appointment of a senior REIT executive to restructure their $5.5
billion real estate portfolio, in part through an exchange of direct property
into REIT shares. And last, and perhaps of greatest import, individuals in 1996
discovered, or, we should say, REDISCOVERED REITs. During the 1970's and 1980's,
of course, individual investors were the dominant owners of REIT shares, but
with the growth of the industry during the 1990's, institutions led by dedicated
REIT funds, came to set trends and pricing in the market. That seemed to change
during the second half of 1996, when, following the market turbulence of July,
analysts discovered that REITs had provided a measure of downside protection
while the broader market indices were falling. The rush was on, and during the
following five months investors, including dedicated REIT mutual funds (who
received an estimated $2.7 billion) and non-dedicated mutual funds who
re-allocated their portfolios to include exposure to the sector, invested
heavily in the sector. While it is impossible to tell at this juncture whether
this trend will prove to be long-lasting or short-lived, it has made REITs at
least temporarily a momentum sector, with funds flows into larger capitalization
stocks setting valuation levels for the industry.
The second major theme during 1996 was consolidation. With the proliferation
during the past three years in the number of REITs, a certain natural attrition
was to be expected. During 1996 this process of consolidation finally began to
unfold in a significant way, with 7 completed and 3 announced mergers between
public REITs for a total consideration of $6.1 billion. While the long-term
results of these transactions will not be known for some time, it does appear at
least during the short run that such transactions have had benefits for the
acquiring company and, as expected, for shareholders of the acquired company.
With much less fanfare, 1996 also witnessed a continuation of the sea change in
the consolidation of private real estate companies into public ones through cash
offers or property for share exchanges. The net result of both activities, the
public and the private mergers and acquisitions, is to begin what will
undoubtedly be a multi-year process of consolidating a heretofore highly
fragmented industry.
The third theme, and one of at least technical interest to real estate portfolio
managers, was a significant shift in the composition of the various REIT indices
during 1996. Prior to the most recent year it could be argued with some
conviction that the property type or sector weights within the REIT sector did
not reflect well the composition of the U.S. real estate industry. At the
beginning of 1996, for example, the apartment and retail sectors accounted for
roughly 59.2% of the weight of the NAREIT Equity Index, while the NCREIF Index,
an index of private real estate, gave those same sectors roughly a 49.5%
weighting. Rapid price appreciation in the share prices of office and hotel
companies coupled with a heavy slate of securities offerings in those two
sectors substantially changed that balance, however. As of December 31,
apartment and retail weightings had dropped by 11% (or 6.5 actual percentage
points) in the NAREIT Equity Index while the weights of hotel and office
combined had risen 65% to 19% (or almost 8 percentage points) of the Index. A
preliminary look at expected share offerings for 1997 suggests that we should
see more of the same.
The final theme was an intensification of the debate among industry analysts
between "value" and "growth" styles of investing. Value investors, as the name
implies, focus primarily on underlying property values or cash flow in selecting
securities for investment. Growth investors, by contrast, are more likely to
focus on momentum in earnings or investor sentiment in stock selection. As
alluded to above, 1996 gave reason for optimism to both camps, with the first
half of the year favoring "value" and the second half of the year clearly
favoring the "growth" camp. As dedicated proponents of value investing, we are
clearly biased observers in this ongoing debate, given our approach of selecting
securities that offer the best value relative to their underlying net property
assets. While we believe fervently in the thesis that efficient markets will, in
the long run drive values in the public and private markets to equilibrium, we
acknowledge the powerful nature of the recent funds flow momentum that maintains
prices of some securities at 30% to 50% premiums to net assets. Over the next
twelve months, we will strive to maintain our value discipline, while at the
same time not overlooking "growth" companies that are able to create incremental
underlying share value through superior property skills.
- ----------54
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
SECTOR REVIEW
A year ago, many real estate analysts proclaimed that 1996 would be a year for
stock picking after a year (1995) in which sector selection appeared to have
been dominant. The prevalence of sector selection again in 1996 no doubt came as
a surprise to many in the industry, as sector bets on the office and hotel
sectors again contributed significantly to excess performance. The chart below
outlines the total return performance of the various sectors in the real estate
industry for calendar years 1995 and 1996:
<TABLE>
<CAPTION>
TOTAL PERFORMANCE
--------------------
SECTOR 1995 1996
------------------------------ -------- ---------
<S> <C> <C>
Apartments 12.3% 28.4%
Manufactured Homes 10.7% 34.9%
Strip Centers 7.4% 32.8%
Regional Malls 3.0% 44.6%
Outlet Centers (2.8%) 3.5%
Industrial 15.9% 37.0%
Office 38.8% 51.8%
Self Storage 34.9% 42.0%
Triple Net Lease 31.6% 30.8%
Hotel 30.8% 49.2%
</TABLE>
As we have written in the past, the securities performance of a sector must
reflect in some fashion the performance differentials in the underlying real
estate markets. This was no doubt the case again in 1996, as those sectors that
generated superior returns generally were those that exhibited on balance the
following benign underlying property trends:
- Strengthening tenant demand
- Modest levels of new construction (particularly speculative building)
- Asset values below replacement cost
- High but declining property yields
Certainly this was the case with the full service hotel market and the office
sector, two groups that clearly outperformed during 1996. The outperformance of
the regional mall sector is frankly a bit more difficult to explain insofar as
underlying tenant demand remains spotty at best, competitive retail construction
levels remain robust and property values are in fact declining rather than
firming. It would appear in this case that some of the improvement in regional
mall retail relates to the fact that as bad as conditions are in this market,
they have failed to worsen in 1996, and some of the stronger players now have an
opportunity for the first time to purchase assets on an opportunistic basis.
Self storage, manufactured housing and industrial sectors produced returns that
approximately matched the overall industry. All three markets are generally in
equilibrium today, with a modest upward bias in underlying property values in
the face of continuing steady tenant growth and a resumption of selective new
development. While the fundamentals for these sectors are unlikely to improve
during the next twelve months and may, in certain circumstances, deteriorate, we
expect these groups to be market performers overall. Lastly, the strip shopping
center, apartment and factory outlet sectors clearly underperformed the REIT
market generally, with the outlet REITs bringing up the bottom of industry
performance for the second year in a row. While the circumstances of each sector
differ in important respects, all three suffer from a pace of new construction
that is accelerating and that in most cases match or exceed the level of tenant
demand. All three also suffer from a flattening or in some cases a softening of
private market investor demand, leading to mediocre valuation trends.
-------------
55
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
INVESTMENT STRATEGY
Against this backdrop, we continue to pursue a strategy of over-weighting those
sectors that offer the best underlying real estate fundamentals. Based on our
analysis we categorize the sectors as follows:
<TABLE>
<S> <C>
UNDERPERFORM
Class A Apartments Factory Outlets
Strip Shopping Class B Regional
Centers Malls
Economy Lodging Sunbelt
MARKET PERFORMER
Class B Apartments Industrial
Class A Regional
Self Storage Malls
Suburban Office Midwest
OUTPERFORM
CBD Office Manufactured Housing
Northeast/Pacific
Full-service Hotels Coast
</TABLE>
Within this framework, we will, as discussed above, continue to select those
securities that offer the best value relative to our estimate of their intrinsic
asset value.
Finally, on an administrative note, we had been using the NAREIT Equity Index
(excluding healthcare REITs) as our primary benchmark. During 1996, NAREIT (the
REIT industry association) decided that it would provide calculations for the
NAREIT Equity Index and discontinue providing information for the NAREIT Equity
Index excluding healthcare. As a result we will alter our primary benchmark to
be the NAREIT Equity Index.
Russell Platt
PORTFOLIO MANAGER
Theodore R. Bigman
PORTFOLIO MANAGER
January 1997
- ----------56
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------
COMMON STOCKS (91.5%)
APARTMENT (16.2%)
7,100 Avalon Properties, Inc. REIT..................... $ 204
14,100 Essex Property Trust, Inc. REIT.................. 414
3,500 Evans Withycombe Residential, Inc. REIT.......... 74
18,000 Irvine Apartment Communities, Inc. REIT.......... 450
9,800 Merry Land & Investment Co., Inc. REIT........... 211
16,000 Oasis Residential, Inc. REIT..................... 364
19,800 Paragon Group, Inc. REIT......................... 351
13,700 South West Property Trust REIT................... 231
-------
2,299
-------
HEALTHCARE (7.8%)
(a)1,100 Assisted Living Concepts, Inc.................... 17
500 Healthcare Realty Trust, Inc..................... 13
5,600 LTC Properties, Inc.............................. 104
20,800 Nationwide Health Properties, Inc................ 505
13,600 Omega Healthcare Investors, Inc.................. 452
-------
1,091
-------
LAND (2.1%)
(a)29,500 Atlantic Gulf Communities Corp................... 127
10,000 Newhall Land & Farming Co., LP................... 169
-------
296
-------
LODGING/LEISURE (14.4%)
23,800 American General Hospitality..................... 565
(a)4,200 Bristol Hotel Co................................. 133
4,500 Capstar Hotel Co................................. 88
(a)22,000 Host Marriott Corp............................... 352
(a)31,700 John Q. Hammons Hotels, Inc...................... 269
(a)22,500 Servico, Inc..................................... 363
17,100 Suburban Lodges of America....................... 274
-------
2,044
-------
MANUFACTURED HOME (5.6%)
11,800 Chateau Properties, Inc.......................... 313
17,100 ROC Communities, Inc. REIT....................... 474
-------
787
-------
OFFICE & INDUSTRIAL (32.3%)
INDUSTRIAL (9.1%)
13,000 Eastgroup Properties REIT........................ 356
26,000 Meridian Industrial Trust REIT................... 546
19,900 Pacific Gulf Properties, Inc. REIT............... 388
-------
1,290
-------
OFFICE (10.4%)
17,300 Arden Realty Group, Inc.......................... 480
(a)3,500 Koger Equity, Inc................................ 66
14,000 Parkway Co....................................... 364
24,916 Trizec Hahn Corp................................. 548
-------
1,458
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------
OFFICE & INDUSTRIAL (12.8%)
18,700 Bedford Property Investors, Inc. REIT............ $ 327
34,866 Brandywine Realty Trust REIT..................... 680
8,000 Duke Realty Investment, Inc. REIT................ 308
20,200 Prentiss Properties Trust........................ 505
-------
1,820
-------
TOTAL OFFICE & INDUSTRIAL.................................. 4,568
-------
RETAIL (10.4%)
FACTORY OUTLET CENTER (0.4%)
7,900 FAC Realty, Inc.................................. 53
-------
REGIONAL MALL (4.0%)
4,500 Taubman Center, Inc. REIT........................ 58
17,300 Urban Shopping Centers, Inc. REIT................ 502
-------
560
-------
SHOPPING CENTER (6.0%)
20,800 Alexander Haagen Properties, Inc. REIT........... 307
35,500 Burnham Pacific Property Trust REIT.............. 532
1,500 IRT Property Co.................................. 17
-------
856
-------
TOTAL RETAIL............................................... 1,469
-------
SELF STORAGE (2.7%)
12,700 Shurgard Storage Centers, Inc. 'A' REIT.......... 376
-------
TOTAL COMMON STOCKS (COST $11,020)........................... 12,930
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------
SHORT-TERM INVESTMENT (8.6%)
REPURCHASE AGREEMENT (8.6%)
$ 1,218 Chase Securities, Inc., 5.95%, dated 12/31/96,
due 1/2/97, to be repurchased at $1,218,
collateralized by $1,195 U.S. Treasury Notes,
6.625%, due 7/31/01, valued at $1,218
(COST $1,218).................................. 1,218
-------
TOTAL INVESTMENTS (100.1%) (COST $12,238).................... 14,148
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.1%)................ (16)
-------
NET ASSETS (100%)............................................ $14,132
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing.
REIT -- Real Estate Investment Trust.
-----------------
57
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace & Defense 3.6%
Banking 1.4%
Broadcast--Radio & Television 11.1%
Computers 2.2%
Diversified 3.7%
Energy 2.5%
Environmental Controls 3.6%
Finance 5.6%
Food Service & Lodging 2.9%
Foreign Government Bonds 11.5%
Forest Products & Paper 2.2%
Gaming & Lodging 3.0%
Health Care Supplies &
Services 1.1%
Insurance 0.3%
Materials 1.5%
Multi--Industry 3.2%
Packaging & Container 5.1%
Retail--General 2.5%
Soap & Toiletries 2.0%
Telecommunications 25.6%
Utilities 1.7%
Other 3.7%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
YTD SINCE INCEPTION+
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 5.05% 10.28% 5.36% 10.61%
- -----------------------------------------------------------------
Class B Shares 4.75% 9.75% 4.98% 9.98%
- -----------------------------------------------------------------
Class C Shares 8.75% 9.75% 8.98% 9.98%
- -----------------------------------------------------------------
CS First Boston
High Yield Index N/A 8.33% N/A 9.43%
- -----------------------------------------------------------------
</TABLE>
* The returns above with sales charge are calculated using the 4.75% sales
charge for Class A shares, the 5% contingent deferred sales charge for Class
B shares, and the 1% contingent deferred sales charge for Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
+ The Fund commenced operations on May 1, 1996.
The CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INDUSTRY NET ASSETS
- ------------------------- ------------------------- -------------
<S> <C> <C>
Republic of Argentina Foreign Government Bonds 4.1%
Nextel Communications Telecommunications 4.0%
Viacom, Inc. Broadcast--Radio & 3.5%
Television
Time Warner, Inc. Diversified 3.4%
DR Securitized Lease
Trust Finance 3.2%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------- --------- ------------
<S> <C> <C>
Telecommunications $ 3,800 25.6%
Foreign Government
Bonds 1,705 11.5%
Broadcast--Radio &
Television 1,641 11.1%
Finance 820 5.6%
Packaging & Container 748 5.1%
</TABLE>
The investment objective of the High Yield Fund is to maximize total return by
investing in a diversified portfolio of high yield fixed income securities that
offer a yield above that generally available on debt securities in the four
highest rating categories of the recognized rating services.
For the six-month period ended December 31, 1996, the Fund had a total return
exclusive of sales charge of 10.28% for the Class A shares, 9.75% for the Class
B shares and 9.75% for the Class C shares and a total return with sales charge
of 5.05% for the Class A shares, 4.75% for the Class B shares and 8.75% for the
Class C shares, as compared to 8.33% for the CS First Boston High Yield Index.
For the period from inception on May 1, 1996 through December 31, 1996, the Fund
had total return exclusive of sales charge of 10.61% for the Class A shares,
9.98% for the Class B shares and 9.98% for the Class C shares and a total return
with sales charge of 5.36% for the Class A shares, 4.98% for the Class B shares
and 8.98% for the Class C shares as compared to 9.43% for the CS First Boston
High Yield Index.
The High Yield market performed well for 1996 far outpacing high quality bonds
for the calendar year. This performance occurred in the face of ten-year
Treasury yields rising nearly eighty-five basis points over the course of the
year. This infers that the spread to Treasuries narrowed about one hundred basis
points. The strong performance in the high yield market can be traced to the
sound economy as was reflected in the outstanding performance of the stock
market in 1996.
Several factors helped our Fund outperform the CS First Boston High Yield Index
for the period. The communications sector performed very well for the Fund. The
entire sector responded favorably when MFS and Worldcom announced they would
merge. We were favorably positioned when this announcement was made and
continued to add to our positions subsequent to the announcement. This sector
also performed well because the securities in it tend to have bullish
characteristics. Many of the securities in the sector are zero coupon or
deferred pay bonds. Thus, in a rallying high yield market, they tend to
outperform.
THE PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR INFORMATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS CHANGE.
- ----------58
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
The cable television sector had a mixed return, performing poorly in the first
half of the calendar year and well in the second half. We added to our positions
at wide spreads and reaped the benefits as spreads narrowed in the second half.
Our exposure to emerging markets also continued to add to performance.
As spreads narrowed over the period, we continually upgraded the quality of the
Fund. We believe this will protect the Fund if either the economy weakens or
spreads widen generally. We still believe this is the prudent position to take
in the current market environment.
Robert Angevine
PORTFOLIO MANAGER
Thomas L. Bennett
PORTFOLIO MANAGER
Stephen F. Esser
PORTFOLIO MANAGER
January 1997
-------------
59
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
CORPORATE BONDS AND NOTES (75.1%)
AEROSPACE & DEFENSE (2.4%)
$ (e)300 Jet Equipment Trust, Series 1995-D,
11.44%, 11/1/14................................ $ 356
-------
BANKING (1.4%)
75 First Nationwide Bank 9.125%, 1/15/03............ 76
(e)125 First Nationwide Bank 10.625%, 10/1/03........... 134
-------
210
-------
BROADCAST--RADIO & TELEVISION (10.3%)
70 Cablevision Systems Corp. 9.25%, 11/1/05......... 69
360 Cablevision Systems Corp. 9.875%, 5/15/06........ 369
(n)300 Marcus Cable Co. 0.00% 12/15/05.................. 215
275 Rogers Cablesystems Ltd., 'B', 10.00%, 3/15/05... 293
60 Rogers Communications, Inc. 9.125%, 1/15/06...... 59
530 Viacom, Inc. 8.00%, 7/7/06....................... 511
-------
1,516
-------
COMPUTERS (2.2%)
230 Advanced Micro Devices, Inc. 11.00%, 8/1/03...... 249
80 Digital Equipment Corp. 8.625%, 11/1/12.......... 78
-------
327
-------
DIVERSIFIED (0.2%)
(b)150 Marvel Parent Holdings, Inc. 0.00%, 4/15/98...... 21
-------
ENERGY (2.5%)
135 Flores & Rucks 9.75%, 10/1/06.................... 142
120 Nuevo Energy 9.50%, 4/15/06...................... 126
(e)95 Parker Drilling Co. 9.75%, 11/15/06.............. 99
-------
367
-------
ENVIRONMENTAL CONTROLS (3.6%)
108 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................ 115
125 Midland Funding II, 'A', 11.75%, 7/23/05......... 138
250 Norcal Waste Systems, 'B', 13.00%, 11/15/05...... 278
-------
531
-------
FINANCE (1.4%)
150 HMC Acquisition Properties, 'B', 9.00%,
12/15/07....................................... 150
50 Homeside, Inc. 11.25%, 5/15/03................... 56
-------
206
-------
FOOD SERVICE & LODGING (2.9%)
200 Courtyard By Marriott 10.75%, 2/1/08............. 212
150 Host Marriott Travel Plaza, 'B', 9.50%,
5/15/05........................................ 156
(e)65 International Home Foods 10.375%, 11/1/06........ 67
-------
435
-------
FOREST PRODUCTS & PAPER (2.2%)
305 SD Warren Co., 'B', 12.00%, 12/15/04............. 328
-------
GAMING & LODGING (3.0%)
210 Boyd Gaming Corp. 9.25%, 10/1/03................. 205
195 Grand Casinos, Inc. 10.125%, 12/1/03............. 196
45 Station Casinos, Inc. 9.625%, 6/1/03............. 45
-------
446
-------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
HEALTH CARE SUPPLIES & SERVICES (1.1%)
$ 100 Fresensius Medical Care 9.00%, 12/1/96........... $ 102
60 Quest Diagnostic, Inc. 10.75%, 12/15/06.......... 63
-------
165
-------
INSURANCE (0.3%)
235 Home Holdings, Inc. 8.625%, 12/15/03............. 52
-------
MATERIALS (1.5%)
(e)215 ISP Holdings, Inc. 9.00%, 10/15/03............... 218
-------
MULTI--INDUSTRY (3.2%)
60 Ivaco, Inc. 11.50%, 9/15/05...................... 60
(e)90 Maxxam Group Holdings 12.00%, 8/1/03............. 91
(e)110 Tevecap S.A. 12.625%, 11/26/04................... 112
200 TLC Beatrice International Holdings
11.50%, 10/1/05................................ 212
-------
475
-------
PACKAGING & CONTAINER (5.1%)
250 Gaylord Container Corp. 11.50%, 5/15/01.......... 266
45 Gaylord Container Corp. 12.75%, 5/15/05.......... 49
215 Owens-Illinois, Inc. 11.00%, 12/1/03............. 239
(e)55 Stone Container Corp. 11.50%, 8/15/06............ 57
(e)130 U.S. Can Corp. 10.125%, 10/15/06................. 137
-------
748
-------
RETAIL--GENERAL (2.5%)
(e)160 Cole National Corp., 9.875%, 12/31/06............ 164
250 Southland Corp., 5.00%, 12/15/03................. 206
-------
370
-------
SOAP & TOILETRIES (2.0%)
335 Revlon Worldwide, 'B', Zero Coupon, 3/15/98...... 289
-------
TELECOMMUNICATIONS (25.6%)
(n)300 Brooks Fiber Properties, Inc. 0.00%, 3/1/06...... 200
(e,n)100 Brooks Fiber Properties, Inc. 0.00%, 11/1/06..... 64
215 Comcast Cellular Corp., 'B', Zero Coupon,
3/5/00......................................... 155
105 Comcast Corp. 9.125%, 10/15/06................... 107
310 Comcast Corp., 'A', 9.375%, 5/15/05.............. 322
(n)450 Echostar Satellite Broadcast 0.00%, 3/15/04...... 339
(e)120 Globo Communicacoes 10.50%, 12/20/06............. 120
125 IXC Communications, Inc., 'B', 12.50%, 10/1/05... 137
255 Lenfest Communications 8.375%, 11/1/05........... 244
(n)590 MFS Communications 0.00%, 1/15/06................ 431
(e)160 Net Sat Servicos LTDA 12.75%, 8/5/04............. 167
(n)865 Nextel Communications 0.00%, 8/15/04............. 588
350 Occidente Y Caribe Celular 14.00%, 3/15/04....... 206
80 Paging Network 10.125%, 8/1/07................... 81
135 Paging Network 10.00%, 10/15/08.................. 136
60 Philippines Long Distance Telephone
9.25%, 6/30/06................................. 65
150 TCI Communications, Inc. 7.875%, 2/15/26......... 134
(n)180 Teleport Communications 0.00%, 7/1/07............ 124
(n)260 Telewest plc. 0.00%, 10/1/07..................... 180
-------
3,800
-------
</TABLE>
- ----------60
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------
<C> <S> <C>
UTILITIES (1.7%)
$ 235 Cleveland Electric Illuminating, 'B', 9.50%,
5/15/05........................................ $ 252
-------
TOTAL CORPORATE BONDS AND NOTES (COST $10,901)............... 11,112
-------
ASSET BACKED SECURITIES (5.4%)
AEROSPACE & DEFENSE (1.2%)
(e)175 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1, Class D, 12.75%, 6/15/06........ 181
-------
FINANCE (4.2%)
(e)325 DLJ Mortgage Acceptance Corp., Series 1996-CF2,
Class S, 1.64%, 11/12/21 IO.................... 30
520 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 478
125 First Home Mortgage Acceptance Corp., 1996-B,
Class C, 7.93%, 11/1/18........................ 106
-------
614
-------
TOTAL ASSET BACKED SECURITIES (COST $762).................... 795
-------
FOREIGN GOVERNMENT BONDS (11.5%)
165 Brazil Front Loaded Interest Reduction Bond,
Series 15, 4.50%, 4/15/09...................... 119
(h)190 Federal Republic of Brazil Par Bond, 'Z-L',
5.00%, 4/15/24................................. 119
(h)250 Government of Venezuela Front Loaded Interest
Reduction Bond, 'A', 6.63%, 3/31/07............ 223
(h)90 Republic of Argentina BOCON, Series 2, PIK,
5.375%, 9/1/02................................. 96
(h)800 Republic of Argentina, 'L', 5.25%, 3/31/23....... 506
275 Republic of Colombia 8.70%, 2/15/16.............. 275
(h)500 United Mexican States Discount Bond, 'B', 6.25%,
12/31/19 (Rights Attached)..................... 367
-------
TOTAL FOREIGN GOVERNMENT BONDS (COST $1,522)................. 1,705
-------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- ---------
PREFERRED STOCKS (4.3%)
BROADCAST--RADIO & TELEVISION (0.8%)
1,355 TCI Pacific Communications 5.00%................. 125
-------
DIVERSIFIED (3.5%)
(a)465 Time Warner, Inc., 'M', 10.25%................... 504
-------
TOTAL PREFERRED STOCKS (COST $602)........................... 629
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<C> <S> <C>
- ----------------------------------------------------------------------
WARRANT (0.0%)
TELECOMMUNICATIONS (0.0%)
(a)1,400 Occidente Y Caribe Celular, expiring 3/15/04
(COST $0)...................................... $ --
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------
SHORT-TERM INVESTMENTS (1.7%)
COMMERCIAL PAPER (1.0%)
$ 150 American Express 5.33%, 1/14/97.................. 150
-------
REPURCHASE AGREEMENT (0.7%)
106 Chase Securities, Inc., 5.95%, dated 12/31/96,
due 1/2/97, to be repurchased at $106,
collateralized by $105 U.S. Treasury Notes,
6.625%, due 7/31/01, valued at $106............ 106
-------
TOTAL SHORT-TERM INVESTMENTS (COST $256)..................... 256
-------
TOTAL INVESTMENTS (98.0%) (COST $14,043)..................... 14,497
OTHER ASSETS IN EXCESS OF LIABILITIES (2.0%)................. 298
-------
NET ASSETS (100%)............................................ $14,795
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing.
(b) -- Non-income producing -- in default.
(e) -- 144A Security -- certain conditions for public sale may exist.
(h) -- Variable/Floating rate security -- rate disclosed is as of December
31, 1996.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1996. Maturity date disclosed is the
ultimate matuity date.
IO -- Interest Only.
PIK -- Payment-In-Kind. Income may be received in additional securities or
cash at the discretion of the issuer.
-----------------
61
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 1.3%
Austria 0.4%
Belgium 0.9%
Denmark 1.4%
Finland 1.1%
France 5.3%
Germany 6.4%
Hong Kong 6.2%
Italy 1.7%
Japan 29.3%
Malaysia 3.7%
Netherlands 3.8%
Norway 1.3%
Singapore 2.1%
Spain 2.6%
Sweden 2.3%
Switzerland 4.8%
United Kingdom 7.2%
Other 18.2%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS SINCE INCEPTION (JULY 1,
1996)**
- -------------------------------------------
WITH WITHOUT
SALES SALES
CHARGE* CHARGE
- -------------------------------------------
<S> <C> <C>
Class A Shares -2.57% 2.29%
- -------------------------------------------
Class B Shares -3.07% 1.93%
- -------------------------------------------
Class C Shares 0.89% 1.89%
- -------------------------------------------
MSCI EAFE Index N/A 1.46%
- -------------------------------------------
</TABLE>
* The returns above with sales charge are calculated using the 4.75% sales
charge for Class A shares, the 5% contingent deferred sales charge for Class
B shares, and the 1% contingent deferred sales charge for Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
The Morgan Stanley International (MSCI) EAFE Index is an unmanaged index of
common stocks and includes Europe, Australia and the Far East (assumes dividends
are reinvested net of withholding taxes).
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- --------------------------------------- ----------- -------------
<S> <C> <C>
Gerresheimer Glas AG Germany 1.3%
Sony Corp. Japan 1.0%
Cheung Kong Holdings Ltd. Hong Kong 0.9%
Hutchison Whampoa Ltd. Hong Kong 0.9%
NEC Corp. Japan 0.9%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------- --------- ------------
<S> <C> <C>
Capital Equipment $ 3,851 23.4%
Finance 2,294 13.9%
Consumer Goods 2,270 13.8%
Services 1,985 12.0%
Materials 1,505 9.1%
</TABLE>
The International Magnum Fund seeks long-term capital appreciation by investing
primarily in equity securities of non-U.S. issuers in accordance with the EAFE
country weightings determined by the Adviser. The EAFE countries in which the
Portfolio will invest are those comprising the Morgan Stanley Capital
International (MSCI) EAFE Index, which includes Australia, Japan, New Zealand,
most nations located in Western Europe, and certain developed countries in Asia.
For the six-month period from inception on July 1, 1996 to December 31, 1996,
the Fund had a total return exclusive of sales charge of 2.29% for the Class A
shares, 1.93% for the Class B shares and 1.89% for the Class C shares, and a
total return with sales charge of -2.57% for the Class A shares, -3.07% for the
Class B shares and 0.89% for the Class C shares, as compared to a total return
of 1.46% for Morgan Stanley Capital International (MSCI) EAFE Index (the
"Index").
Europe was the best performer in the EAFE universe for the calendar year with a
return of 21.1%. The European markets benefited from falling interest and
inflation rates, depreciating currencies and continued corporate restructuring,
even as many European governments struggled to cut their budget deficits and
inflation rates in order to qualify for the new European Monetary Union. Spain
(+40.1% for the calendar year) was the strongest performer among the developed
markets for the calendar year, followed by Sweden (+37.2%) and Finland (+33.9%).
Japan, the single largest EAFE market in terms of market capitalization, was the
worst performer in U.S. dollar terms among the developed markets for the
calendar year as a whole (-15.5%). Much of Japan's weak performance in U.S.
dollar terms was due to the continued depreciation of the yen, which fell over
11% versus the U.S. dollar. In addition, the Japanese market's losses were
concentrated during the second half of the calendar year, erasing gains from
early in the year. Investors were disappointed by the slow rate of growth in the
country and uncertain economic prospects. In addition, proposed deregulation of
the financial sector, announced in November, contributed to a particularly poor
performance by banking stocks (a sector which the Fund has carefully avoided).
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MSCI EAFE INDEX AND ARE FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE FUND'S FUTURE PERFORMANCE.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK CONSIDERATIONS
ASSOCIATED WITH INTERNATIONAL INVESTING.
- ----------62
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
The Asian markets put in a strong performance during the fourth quarter of 1996,
with the MSCI Pacific Free ex-Japan Index rising 8.5% for the quarter, led by a
surge in Hong Kong, which rose an impressive 12.2% for the quarter. For the
calendar year, the Pacific Free ex-Japan Index rose 20.9% in U.S. dollar terms.
Hong Kong (+33.1%) put in a robust performance for the year as strong corporate
earnings, recovering property prices and easing fears surrounding the colony's
takeover by China in 1997 contributed to positive investor sentiment. Malaysia
(+25.9%) was the second strongest developed market within Asia for the year as
strong domestic liquidity and an improving economic environment fueled sharp
rises particularly in small and mid-cap stocks. In contrast, Singapore (+0.3%
for the year) was the weakest developed market in the Pacific rim, as the
government's real estate anti-speculation measures implemented during the summer
prompted investors to loose faith in the market, which includes a large number
of real-estate related stocks.
The U.S. dollar began 1996 extremely undervalued relative to the Japanese yen
and the Deutschemark block of currencies. In anticipation of dollar
strengthening, we implemented hedges to protect against losses due to the
depreciation of certain currencies in which we are invested. By December, our
hedges had been reduced to 40% of our yen exposure and 75% of our Deutschemark
block exposure. Our hedging strategies contributed favorably to results in 1996
to-date and we plan to continue to hedge these currencies for the foreseeable
future.
During the period we maintained approximately a market weight exposure to Japan
and slowly reduced our overweight in Asia and our underweight in Europe. While
our allocation decision to market weight Japan detracted from results, our
hedges and excellent stock selection in Japan helped us to achieve significant
relative outperformance in that market. Our overweight in Asia and in particular
in Hong Kong was a net positive for the Fund, especially in the fourth quarter
of the calendar year. Finally, we curtailed our cautious stance in Europe, which
benefited the Fund as many European markets rallied strongly during the latter
part of calendar 1996, based on brighter prospects for growth and the long term
benefits of EMU.
Looking ahead, we anticipate that the first quarter of calendar 1997 will be the
most difficult for the Japanese market, as we expect that the Japanese economy
will finally begin to show true signs of a recovery later this year. We believe
that Japanese stocks with strong earnings growth (e.g., international blue chips
and electronics) will significantly outperform the market, and have positioned
our Fund accordingly. Our outlook for Europe is positive but cautious;
valuations in many markets are at or near all-time highs, but momentum --
barring any unforeseen cracks in EMU -- continues to be positive. In Asia
ex-Japan, Hong Kong valuations are high but we expect earnings growth and
liquidity to provide support for the market. In Malaysia, the environment for
large cap stocks is improving, while the outlook for Singapore is less rosy.
Given our near-term concerns about the Japanese market, we have reduced our
allocation to a slight underweight versus the EAFE Index, with the money being
deployed to Europe, which will now represent slightly over half of the Fund. We
remain optimistic about opportunities in Asia ex-Japan and will maintain our
overweight there.
Francine J. Bovich
PORTFOLIO MANAGER
January 1997
-------------
63
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (80.4%)
AUSTRALIA (1.3%)
7,300 Broken Hill Proprietary Co., Ltd................. $ 104
7,700 News Corp., Ltd.................................. 41
12,000 Western Mining Corp. Holdings Ltd................ 75
--------
220
--------
AUSTRIA (0.4%)
1,000 Boehler-Uddeholm AG.............................. 72
--------
BELGIUM (0.9%)
400 Arbed S.A........................................ 43
400 Delhaize Freres et Cie 'Le Lion' S.A............. 24
1,900 G.I.B. Holdings Ltd. VVPR........................ 85
--------
152
--------
DENMARK (1.4%)
1,700 BG Bank A/S...................................... 80
500 Jyske Bank A/S (Registered)...................... 37
2,340 Unidanmark A/S 'A' (Registered).................. 121
--------
238
--------
FINLAND (1.1%)
2,650 Amer-Yhtymae Oy.................................. 55
1,750 Huhtamaki Oy 'I'................................. 81
(a)13,000 Merita Ltd. 'A'.................................. 41
--------
177
--------
FRANCE (5.3%)
2,000 Banque Nationale de Paris........................ 77
240 Bongrain S.A..................................... 93
700 Cie de Saint Gobain.............................. 99
750 Elf Acquitaine S.A............................... 68
540 Eridania Beghin-Say S.A.......................... 87
600 Groupe Danone RFD................................ 84
1,500 Lafarge S.A...................................... 90
370 PSA Peugeot Citroen S.A.......................... 42
(a)700 SGS-Thomson Microelectronics N.V................. 49
1,090 Total S.A. 'B'................................... 89
6,250 Usinor Sacilor................................... 91
--------
869
--------
GERMANY (5.1%)
2,670 BASF AG.......................................... 102
2,200 Bayer AG......................................... 89
45 Buderus AG....................................... 22
2,150 Deutsche Lufthansa AG............................ 29
1,700 Deutsche Telekom AG ADR.......................... 35
9,900 Gerresheimer Glas AG............................. 216
250 Karstadt AG...................................... 83
120 Mannesmann AG.................................... 52
1,600 Veba AG.......................................... 92
300 Volkswagen AG.................................... 124
--------
844
--------
HONG KONG (6.2%)
2,000 Asia Satellite Telecommunications Holdings Ltd... 5
17,000 Cheung Kong Holdings Ltd......................... 151
55,000 China Resources Enterprises Ltd.................. 124
14,000 Citic Pacific Ltd................................ 81
4,000 Hang Seng Bank Ltd............................... 49
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
3,000 Henderson Land Development Co., Ltd.............. $ 30
5,200 Hong Kong & Shanghai Bank Holdings plc........... 111
83,200 Hong Kong Telecommunications Ltd................. 134
19,000 Hutchison Whampoa Ltd............................ 149
13,000 New World Development Co., Ltd................... 88
7,000 Swire Pacific Ltd. 'A'........................... 67
6,000 Wharf Holdings Ltd............................... 30
--------
1,019
--------
ITALY (1.7%)
9,700 Marzotto (Gaetano) & Figli S.p.A................. 63
(a)73,000 Olivetti......................................... 26
9,900 Pirelli S.p.A.................................... 18
30,000 Stet Societa Finanziaria Telefonica S.p.A........ 101
35,000 Telecom Italia S.p.A. Di Risp NCS................ 68
--------
276
--------
JAPAN (29.3%)
9,000 Amada Co., Ltd................................... 70
13,000 Asahi Tec Corp................................... 64
5,000 Canon, Inc....................................... 110
5,000 Dai Nippon Printing Co., Ltd..................... 88
7,000 Daibiru Corp..................................... 65
15,000 Daicel Chemical Industry Ltd..................... 70
7,000 Daifuku Co., Ltd................................. 88
9,000 Daikin Industries Ltd............................ 80
8,000 Daiwa Securities Co., Ltd........................ 71
2,100 FamilyMart....................................... 84
4,000 Fuji Machine Manufacturing Co.................... 106
3,000 Fuji Photo Film Ltd.............................. 99
3,000 Hitachi Credit Corp.............................. 49
14,000 Hitachi Ltd...................................... 131
12,000 Inabata & Co..................................... 73
19,000 Kaneka Corp...................................... 97
4,000 Kurita Water Industries.......................... 81
2,000 Kyocera Ltd...................................... 125
7,000 Kyudenko Co., Ltd................................ 72
4,000 Matsushita Communication Industries.............. 104
7,000 Matsushita Electric Industries Ltd............... 114
26,000 Mitsubishi Chemical Corp......................... 84
7,000 Mitsubishi Estate Co., Ltd....................... 72
15,000 Mitsubishi Heavy Industries Ltd.................. 119
6,000 Mitsumi Electric Co., Ltd........................ 113
3,000 Murata Manufacturing Co., Ltd.................... 100
12,000 NEC Corp......................................... 145
8,000 Nifco, Inc....................................... 84
1,300 Nintendo Corp., Ltd.............................. 93
13 Nippon Telegraph & Telephone Corp. ADR........... 99
16,000 Nissan Motor Co.................................. 93
5,000 Nomura Securities Co., Ltd....................... 75
14,000 Obayashi Corp.................................... 95
9,000 Ricoh Co., Ltd................................... 103
4,000 Rinnai........................................... 80
2,000 Sangetsu Co., Ltd................................ 42
4,000 Sankyo Co., Ltd.................................. 113
10,000 Sanwa Shutter.................................... 75
2,000 Secom Co., Ltd................................... 121
8,000 Sekisui Chemical Co.............................. 81
9,000 Sekisui House Ltd................................ 92
</TABLE>
- ----------64
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
2,000 Shimamura Co., Ltd............................... $ 69
2,400 Sony Corp........................................ 157
16,000 Stanley Electronic Co............................ 94
11,000 Sumitomo Marine & Fire Insurance Co.............. 68
7,000 Suzuki Motor Co., Ltd............................ 64
18,000 Taisei Corp., Ltd................................ 93
2,000 TDK Corp......................................... 130
4,000 Tokyo Electron Ltd............................... 123
22,000 Toshiba Corp..................................... 138
14,000 Tsubakimoto Chain................................ 75
5,000 Yamanuchi Pharmaceutical Co...................... 103
--------
4,834
--------
MALAYSIA (3.7%)
7,000 Commerce Asset Holding Bhd....................... 53
4,000 Edaran Otomobil Nasional Bhd..................... 40
6,000 Genting Bhd...................................... 41
10,000 IJM Corp. Bhd.................................... 24
14,000 IOI Corp. Bhd.................................... 21
4,000 Leader Universal Holdings Bhd.................... 8
12,000 Magnum Corp. Bhd................................. 23
2,000 Malayan Banking Bhd.............................. 22
13,000 Malaysian International Shipping Bhd. (Foreign).. 39
12,000 Petronas Gas Bhd................................. 50
19,000 Renong Bhd....................................... 34
9,000 Resorts World Bhd................................ 41
24,000 Sime Darby Bhd................................... 95
6,000 TA Enterprise Bhd................................ 8
8,000 Tanjong plc...................................... 32
8,000 Telekom Malaysia Bhd............................. 71
1,000 United Engineers Ltd. (Malaysia)................. 9
--------
611
--------
NETHERLANDS (3.8%)
1,528 ABN Amro Holdings N.V............................ 100
1,000 Akzo Nobel N.V................................... 137
2,700 ING Groep N.V.................................... 97
3,300 KLM Royal Dutch Airlines N.V..................... 93
2,000 Koninklijke Van Ommeren N.V...................... 90
2,500 Philips Electronics N.V.......................... 101
--------
618
--------
NORWAY (1.3%)
26,600 Den Norske Bank ASA.............................. 102
2,900 Saga Petroleum ASA 'B'........................... 45
(a)12,200 Storebrand ASA................................... 71
--------
218
--------
PORTUGAL (0.0%)
300 Banco Totta & Acores S.A. 'B' (Registered)....... 6
--------
SINGAPORE (2.0%)
2,000 Development Bank of Singapore Ltd. (Foreign)..... 27
4,000 Keppel Corp., Ltd................................ 31
(a)3,000 Oversea-Chinese Banking Corp., Ltd. (Foreign).... 37
10,000 Sembawang Corp. Ltd.............................. 53
2,000 Singapore Airlines Ltd. (Foreign)................ 18
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
4,000 Singapore Press Holdings (Foreign)............... $ 79
3,000 Straits Steamship Land Ltd....................... 10
4,000 United Overseas Bank Ltd. (Foreign).............. 44
16,000 Want Want Holdings............................... 42
--------
341
--------
SPAIN (2.6%)
7,000 Iberdrola S.A.................................... 99
2,100 Repsol S.A....................................... 81
3,027 Sevillana de Electricidad S.A.................... 34
4,850 Telefonica de Espana S.A......................... 113
12,900 Uralita S.A...................................... 101
--------
428
--------
SWEDEN (2.3%)
600 Electrolux AB 'B'................................ 35
3,600 Nordbanken AB.................................... 109
2,000 Skandia Forsakrings AB........................... 57
3,900 S.K.F. AB 'B'.................................... 92
2,500 Sparbanken Sverige AB 'A'........................ 43
1,600 Svenska Handelsbanken 'A'........................ 46
--------
382
--------
SWITZERLAND (4.8%)
65 Ascom Holding AG (Bearer)........................ 66
50 Bobst AG (Bearer)................................ 68
200 Forbo Holding AG (Registered).................... 81
120 Holderbank Financiere Glaris AG, 'B' (Bearer).... 86
20 Magazine Globus (Registered)..................... 10
130 Nestle S.A. (Registered)......................... 139
(a)53 Novartis AG (Registered)......................... 61
(a)700 Oerlikon-Buehrle Holding AG (Registered)......... 69
40 Schindler Holding AG (Participating
Certificates).................................. 43
60 Schweizerische Industrie-Gesellschaft Holdings
(Registered)................................... 73
150 Sulzer AG (Registered)........................... 87
--------
783
--------
UNITED KINGDOM (7.2%)
6,000 Bass plc......................................... 84
12,461 BAT Industries plc............................... 103
16,000 British Telecommunications plc................... 108
14,700 Calor Group plc.................................. 75
19,700 Courtaulds Textiles plc.......................... 75
4,800 Grand Metropolitan plc........................... 38
12,300 Imperial Tobacco Group plc....................... 79
15,500 John Mowlem & Co. plc............................ 30
6,200 Kwik Save Group plc.............................. 34
7,709 Reckitt & Colman plc............................. 96
18,280 Royal & Sun Alliance Insurance Group plc......... 140
2,800 Southern Electric plc............................ 38
11,000 Tate & Lyle plc.................................. 89
5,100 Unilever plc..................................... 124
15,000 WPP Group plc.................................... 65
--------
1,178
--------
TOTAL COMMON STOCKS (COST $13,170).............................. 13,266
--------
</TABLE>
-----------------
65
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS (1.3%)
GERMANY (1.3%)
295 Dyckerhoff AG.................................... $ 82
1,230 Hornbach Holding AG.............................. 88
1,320 RWE AG........................................... 44
--------
TOTAL PREFERRED STOCKS (COST $195).............................. 214
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ------------
WARRANTS (0.1%)
SINGAPORE (0.1%)
(a)8,000 Straits Steamship Land Ltd., expiring 12/12/00
(COST $10)..................................... 9
--------
TOTAL FOREIGN SECURITIES (81.8%) (COST $13,375)................. 13,489
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ------------
SHORT-TERM INVESTMENT (15.1%)
REPURCHASE AGREEMENT (15.1%)
$ 2,496 Chase Securities, Inc., 5.95%, dated 12/31/96,
due 1/2/97, to be repurchased at $2,497,
collateralized by $2,440 U.S. Treasury Notes,
6.625%, due 7/31/01, valued at $2,496 (COST
$2,496)........................................ 2,496
--------
TOTAL INVESTMENTS IN SECURITIES (96.9%) (COST $15,871).......... 15,985
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
FOREIGN CURRENCY (2.2%)
GBP 1 British Pound.................................... $ 1
DEM 264 Deutsche Mark.................................... 172
HKD 29 Hong Kong Dollar................................. 4
JPY 1,246 Japanese Yen..................................... 11
CHF 223 Swiss Franc...................................... 167
--------
TOTAL FOREIGN CURRENCY (COST $354).............................. 355
--------
TOTAL INVESTMENTS (99.1%) (COST $16,225)........................ 16,340
OTHER ASSETS IN EXCESS OF LIABILITIES (0.9%).................... 150
--------
NET ASSETS (100%)............................................... $16,490
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
ADR -- American Depositary Receipt.
NCS -- Non-Convertible Shares.
RFD -- Ranked for Dividend.
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of forward foreign currency exchange contracts open at December
31, 1996, the Fund is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars or foreign currency as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN EXCHANGE
TO DELIVER VALUE SETTLEMENT FOR VALUE NET UNREALIZED
(000) (000) DATE (000) (000) GAIN (LOSS) (000)
- ------------- --------- ----------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 3 $ 3 1/3/97 GBP 2 $ 3 $ --
CHF 71 53 1/3/97 DEM 53 53 --
BEF 3,554 112 1/24/97 $ 114 114 2
DEM 1,138 741 1/24/97 $ 747 747 6
$ 1,320 1,320 1/24/97 JPY 145,380 1,261 (59)
JPY 282,362 2,449 1/30/97 $ 2,540 2,540 91
NLG 677 393 2/10/97 $ 396 396 3
CHF 774 581 2/10/97 $ 616 616 35
FRF 3,325 643 2/24/97 $ 645 645 2
NLG 100 58 2/24/97 $ 60 60 2
JPY 87,324 762 3/17/97 $ 775 775 13
--------- --------- -----
$ 7,115 $ 7,210 $ 95
--------- --------- -----
--------- --------- -----
</TABLE>
- ---------------
BEF -- Belgian Franc
GBP -- British Pound
DEM -- Deutsche Mark
FRF -- French Franc
JPY -- Japanese Yen
NLG -- Netherlands Guilder
CHF -- Swiss Franc
- ----------66
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1996
(UNAUDITED)
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------------------------------------------------------------ --------- -------------
<S> <C> <C>
Capital Equipment............................................................. $ 3,851 23.4%
Finance....................................................................... 2,294 13.9
Consumer Goods................................................................ 2,270 13.8
Services...................................................................... 1,985 12.0
Materials..................................................................... 1,505 9.1
Energy........................................................................ 781 4.7
Multi-Industry................................................................ 472 2.9
Transportation................................................................ 255 1.5
Gold Mines.................................................................... 76 0.5
--------- ---
$ 13,489 81.8%
--------- ---
--------- ---
</TABLE>
-----------------
67
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Agency Obligations 72.4%
Variable Rate
Obligation 8.6%
Other 19.0%
</TABLE>
<TABLE>
<S> <C> <C>
<CAPTION>
<S> <C> <C>
TOP FIVE HOLDINGS
<CAPTION>
PERCENT OF
SECURITY INSTRUMENT NET ASSETS
- -------------------- ----------------- -------------
<S> <C> <C>
Federal Home Loan Agency Obligation 12.8%
Mortgage
Corporation
Discount Note
5.23%, 1/27/97
Federal National Agency Obligation 12.8%
Mortgage
Association
Discount Note
5.22%, 1/28/97
Federal National Variable Rate 8.6%
Mortgage Obligation
Association Series
97-Y 5.43%, 6/19/97
Federal Home Loan Agency Obligation 8.6%
Mortgage
Corporation
Discount Note
5.20%, 1/3/97
Federal Home Loan Agency Obligation 8.5%
Bank Discount Note
5.22%, 1/16/97
</TABLE>
The investment objective of the Government Obligations Money Market Fund is to
provide as high a level of current interest income exempt from regular Federal
income taxes as is consistent with maintaining liquidity and stability of
principal through investing in high quality municipal money market instruments
earning interest that is except from regular Federal income tax. The Fund will
purchase only securities having a remaining maturity of 397 days or less. Under
normal circumstances, the Fund will invest at least 80% of its assets in
tax-exempt municipal securities. Interest on tax-exempt municipal securities may
be subject to state and local taxes. The Fund is expected to maintain a net
asset value of $1.00 per share. There can be no assurance, however, that the
Fund will be successful in maintaining a net asset value of $1.00 per share.
The seven day yield and seven day effective yield (assumes an annualization of
the current yield with all dividends reinvested) for the Government Obligations
Money Market Fund as of December 31, 1996 were 4.43% and 4.53%, respectively.
The seven day yields are not necessarily indicative of future performance.
Since the Government Obligations Money Market Fund cannot invest in many of the
spread products, such as commercial paper and certificates of deposit, that are
available to the Money Market Fund, we sometimes adjust the weighted average
maturity of the Fund a little more than we do that of the Money Market Fund to
try to capitalize on changes in interest rates.
Toward the latter part of the spring, after several of the non-farm payroll
reports had sent interest rates higher, we chose to use these setbacks as buying
opportunities and took advantage of the higher yields available. We bought
longer dated money market securities for the portfolio to extend its weighted
average maturity.
Just when it seemed that investors were beginning to get comfortable with the
idea that the strength promised in the spring's employment reports had been
real, new data revealed a slowdown. After a robust second quarter, GDP fell to
2.2% in the third quarter. By the time the data had been sorted out the market
had rallied so much that opportunities to extend at attractive levels had been
virtually exhausted.
We increased the percentage of the Fund devoted to floating rate notes issued by
agencies of the Federal government because they provide some yield enhancement
over Treasuries and repurchase agreements. We also added to our holdings of
agency discount notes at the expense of our repurchase agreement and Treasury
bill positions. We did this to take advantage of the higher yields available on
the agency-issued paper.
INVESTMENTS IN SHARES OF THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE IS NO ASSURANCE THAT THE FUND WILL MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS
CHANGE.
- ----------68
<PAGE>
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
We are pleased to report that the Fund continues to meet its goal of providing
as high a level of interest income as is consistent with maintaining liquidity
and stability of principal, and that the Fund holds only high quality securities
with a sizable amount invested in securities rated A1+/P1.
In the coming months the Fund will continue to emphasize performance, quality
and service to its shareholders.
Abigail Jones Feder
PORTFOLIO MANAGER
Kenneth R. Holley
PORTFOLIO MANAGER
Ellen D. Harvey
PORTFOLIO MANAGER
Christian G. Roth
PORTFOLIO MANAGER
Scott F. Richard
PORTFOLIO MANAGER
January 1997
-------------
69
<PAGE>
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
AGENCY OBLIGATIONS (72.4%)
FEDERAL HOME LOAN BANK DISCOUNT NOTES (17.1%)
$ 10,000 5.22%, 1/16/97................................... $ 9,978
10,000 5.22%, 1/23/97................................... 9,968
---------
19,946
---------
FEDERAL HOME LOAN MORTGAGE CORPORATION DISCOUNT NOTES
(38.3%)
10,000 5.20%, 1/3/97.................................... 9,997
10,000 5.23%, 1/17/97................................... 9,977
15,000 5.23%, 1/27/97................................... 14,944
10,000 5.38%, 3/25/97................................... 9,876
---------
44,794
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DISCOUNT NOTES
(17.0%)
15,000 5.22%, 1/28/97................................... 14,941
5,000 5.34%, 3/20/97................................... 4,942
---------
19,883
---------
TOTAL AGENCY OBLIGATIONS (COST $84,623)...................... 84,623
---------
VARIABLE RATE OBLIGATION (8.6%)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (8.6%)
(h)10,000 Series 97-Y, 5.43%, 6/19/97 (COST $10,000)....... 10,000
---------
SHORT-TERM INVESTMENT (19.1%)
REPURCHASE AGREEMENT (19.1%)
22,343 Goldman Sachs, 6.52%, dated 12/31/96, due 1/2/97,
to be repurchased at $22,351, collateralized by
$18,505 U.S. Treasury Bonds, 8.50%, due
2/15/20, valued at $22,343 (COST $22,343)...... 22,343
---------
TOTAL INVESTMENTS (100.1%) (COST $116,966)................... 116,966
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.1%)................ (150)
---------
NET ASSETS (100%)............................................ $ 116,816
---------
---------
</TABLE>
- ---------------
(h) -- Variable/Floating rate security -- rate disclosed is as of December
31, 1996.
- ----------70
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
COMPOSITION OF NET ASSETS (AT DECEMBER 31, 1996)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Commercial Paper 35.9%
Agency Obligations 22.0%
Certificates of Deposit 20.0%
Variable Rate
Obligations 11.8%
Other 10.3%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INSTRUMENT NET ASSETS
- ----------------- ------------------- -------------
<S> <C> <C>
Federal Home Loan Agency Obligation 9.4%
Bank Discount
Notes
Federal Home Loan Agency Obligation 6.8%
Mortgage
Corporation
Discount Notes
Student Loan Variable Rate 5.9%
Marketing Obligation
Association
Federal National Variable Rate 5.9%
Mortgage Obligation
Association
Federal National Agency Obligation 5.8%
Mortgage
Association
Discount Notes
</TABLE>
The investment objective of the Money Market Fund is to provide as high a level
of current interest income as is consistent with maintaining liquidity and
stability of principal by investing in high quality money market instruments
which have remaining maturities of 397 days or less. The Fund is expected to
maintain a net asset value of $1.00 per share. There can be no assurance,
however, that the Fund will be successful in maintaining a net asset value of
$1.00 per share.
The seven day yield and seven day effective yield (which assumes an
annualization of the current yield with all dividends reinvested) for the Fund
as of December 31, 1996 were 4.47% and 4.57%, respectively. As with all money
market funds, the seven day yields are not necessarily indicative of future
performance.
The Fed began 1996 by cutting interest rates (from 5.50% to 5.25% on the 31st of
January). After that, short term interest rates moved higher throughout the
first quarter and for most of the spring. This came as a big surprise to most
money market participants because when the year began they believed that the
economy was very weak. In January, leading economists had predicted that the Fed
would be required to ease interest rates dramatically to stimulate the economy.
Instead, the U.S. economy showed surprising strength, particularly in the
housing and job creation categories. These key components proved that an earlier
series of Fed easings, which had begun in July of 1995, had had the desired
effect.
At the beginning of each spring month the non-farm payroll report resented the
money market with a new shock that sent interest rates higher. Jobs were being
created at an alarmingly rapid rate, and most bondholders sold in furious
fashion. We chose to use many of these setbacks as buying opportunities and took
advantage of the higher yields available. We bought longer dated money market
securities with significant yield spreads over Treasury Bills (such as Yankee
CD's) for the Fund to extend its weighted average maturity.
Around the middle of the summer, the market turned again. Just when it seemed
that investors were beginning to get comfortable with the idea that the strength
promised in the spring's employment reports had been real, new data revealed a
rather severe slowdown. After a robust second quarter GDP fell to a rather
anemic 2.2% in the third quarter. By the time the data had been sorted out the
market had rallied so much that opportunities to extend at attractive levels had
been virtually exhausted.
In addition to the extending we did earlier in the year, we also increased the
percentage of the Fund that is devoted to highly-rated commercial paper. This
came as we decreased our holdings of agency discount notes and treasury bills.
We did this to take advantage of the higher yields available on commercial
paper.
INVESTMENTS IN SHARES OF THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE IS NO ASSURANCE THAT THE FUND WILL MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE AS MARKET CONDITIONS
CHANGE.
-------------
71
<PAGE>
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
As the year drew to a close and the Fed retired with no action imminent, the
economy showed renewed signs of strength and the markets began to contemplate
the possibility of rate hikes in the early part of calendar '97. This led to a
slight backup in rates at the very end of the year.
We are pleased to report that the Fund continues to meet its goal of providing
as high a level of interest income as is consistent with maintaining liquidity
and stability of principal, and that the Fund still holds only high quality
securities with over 80% of assets invested in securities rated A1+/ P1.
Abigail Jones Feder
PORTFOLIO MANAGER
Kenneth R. Holley
PORTFOLIO MANAGER
Ellen D. Harvey
PORTFOLIO MANAGER
Christian G. Roth
PORTFOLIO MANAGER
Scott F. Richard
PORTFOLIO MANAGER
January 1997
- ----------72
<PAGE>
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
AGENCY OBLIGATIONS (22.0%)
FEDERAL HOME LOAN BANK DISCOUNT NOTES (9.4%)
$ 4,435 5.22%, 1/2/97.................................... $ 4,434
9,595 5.23%, 1/9/97.................................... 9,584
10,000 5.22%, 1/30/97................................... 9,958
---------
23,976
---------
FEDERAL HOME LOAN MORTGAGE CORPORATION DISCOUNT NOTES
(6.8%)
9,365 5.20%, 1/3/97.................................... 9,362
8,000 5.23%, 1/27/97................................... 7,970
---------
17,332
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DISCOUNT NOTES (5.8%)
9,880 5.21%, 1/28/97................................... 9,841
5,000 5.37%, 3/20/97................................... 4,942
---------
14,783
---------
TOTAL AGENCY OBLIGATIONS (COST $56,091)...................... 56,091
---------
CERTIFICATES OF DEPOSIT (20.0%)
BANKS (20.0%)
5,000 ABN-AMRO Bank (NY), Yankee, 6.12%, 7/14/97....... 5,000
10,000 Barclay's Bank, Yankee, 5.36%, 2/5/97............ 10,000
10,000 CIBC 5.49%, 1/15/97.............................. 10,000
7,000 Deutsche Bank, Yankee, 5.42%, 2/3/97............. 7,001
10,000 National Westminster Bank 5.42%, 1/6/97.......... 10,000
6,000 Royal Bank Of Canada (NY), Yankee, 6.05%,
6/11/97........................................ 6,000
3,000 Societe Generale Bank 6.18%, 9/8/97.............. 3,000
---------
TOTAL CERTIFICATES OF DEPOSIT (COST $51,001)................. 51,001
---------
COMMERCIAL PAPER (35.9%)
BANKING (6.7%)
5,000 Deutsche Bank 5.47%, 1/23/97..................... 4,983
5,000 Societe Generale 5.32%, 2/20/97.................. 4,963
7,000 Sun Trust Banks 5.30%, 1/6/97.................... 6,995
---------
16,941
---------
ENTERTAINMENT & LEISURE (3.9%)
10,000 The Walt Disney Co. 5.34%, 1/24/97............... 9,966
---------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
FINANCE (21.4%)
$ 3,000 ABN-AMRO North American Finance Corp. 5.58%,
3/6/97......................................... $ 2,970
5,000 ABN-AMRO North American Finance Corp. 5.28%,
5/15/97........................................ 4,902
10,000 Bank of Austvia Finance, Inc. 5.30%, 1/21/97..... 9,971
5,000 FCC National Bank 5.51%, 5/5/97.................. 5,000
10,000 General Electric Credit Corp. 5.27%, 4/18/97..... 9,843
10,000 METLIFE Funding 5.36%, 1/21/97................... 9,970
5,000 Private Export Funding Corp. 5.30%, 2/10/97...... 4,971
7,000 Private Export Funding Corp. 5.31%, 2/20/97...... 6,949
---------
54,576
---------
RETAIL (3.9%)
10,000 JC Penny 5.31%, 2/20/97.......................... 9,926
---------
TOTAL COMMERCIAL PAPER (COST $91,409)........................ 91,409
---------
VARIABLE RATE OBLIGATIONS (11.8%)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (5.9%)
(h)15,000 5.41%, 9/2/97.................................... 15,000
---------
STUDENT LOAN MARKETING ASSOCIATION (5.9%)
(h)15,000 5.57%, 10/30/97.................................. 15,005
---------
TOTAL VARIABLE RATE OBLIGATIONS (COST $30,005)............... 30,005
---------
SHORT-TERM INVESTMENT (10.1%)
REPURCHASE AGREEMENT (10.1%)
25,777 Goldman Sachs, 6.52%, dated 12/31/96, due 1/2/97,
to be repurchased at $25,786, collateralized by
$16,935 U.S. Treasury Bonds, 14.00%, due
1/15/11, valued at $25,777 (COST $25,777)...... 25,777
---------
TOTAL INVESTMENTS (99.8%) (COST $254,283).................... 254,283
OTHER ASSETS IN EXCESS OF LIABILITIES (0.2%)................. 571
---------
NET ASSETS (100%)............................................ $254,854
---------
---------
</TABLE>
- ---------------
(h) -- Variable/Floating rate security -- rate disclosed is as of December
31, 1996.
-----------------
73
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
GLOBAL
EQUITY GLOBAL WORLDWIDE U.S.
ALLO- FIXED ASIAN AMERICAN HIGH LATIN EMERGING AGGRESSIVE REAL
CATION INCOME GROWTH VALUE INCOME AMERICAN MARKETS EQUITY ESTATE
FUND FUND FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in Securities, at
Value* (Note 1) -- See
accompanying portfolios $ 155,955 $10,093 $421,237 $ 47,849 $ 141,758 $ 29,579 $128,249 $ 19,075 $14,148
Foreign Currency at Value 92 164 1,427 -- -- 269 2,767 -- --
Cash 2 1 25 -- 91 -- 291 2 7
Receivable for:
Investments Sold 23 -- 4,359 209 -- 17 304 493 52
Fund Shares Sold 638 35 466 250 469 412 1,351 142 128
Dividends 460 -- 575 114 36 63 226 54 76
Interest 3 251 -- -- 3,058 -- 59 -- --
Security Lending Income 5 -- -- -- -- -- -- -- --
Foreign Withholding Tax Reclaim 39 1 15 -- -- -- 1 -- --
Unrealized Gain on Forward
Foreign Currency Exchange
Contracts 487 -- -- -- -- -- -- -- --
Deferred Organizational Costs 12 12 7 8 48 8 7 43 38
Receivable from Investment
Adviser -- 26 -- -- -- -- 64 13
Securities, at Value, Held as
Collateral for Securities
Loaned 23,511 -- -- -- -- -- -- -- --
Other 8 1 40 2 2 1 3 -- --
---------- ------- -------- -------- --------- -------- -------- ---------- -------
Total Assets 181,235 10,584 428,151 48,432 145,462 30,349 133,258 19,873 14,462
---------- ------- -------- -------- --------- -------- -------- ---------- -------
LIABILITIES:
Payable for:
Investments Purchased 10 -- 105 -- -- 1,261 2,827 624 277
Fund Shares Redeemed 381 -- 1,915 -- 63 82 1,066 -- --
Bank Overdraft 21 72 589 77 -- 11 -- -- --
Dividends Declared 2 1 -- -- 3 -- -- -- --
Investment Advisory Fees 316 -- 1,088 39 257 -- 293 -- --
Administrative Fees 45 3 103 12 33 9 39 5 3
Custody Fees 48 4 196 3 36 34 124 4 5
Professional Fees 20 14 41 11 22 15 28 9 11
Distribution Fees 262 14 671 73 230 34 188 29 18
Shareholder Reporting Expenses 27 2 81 14 26 5 22 5 14
Directors' Fees and Expenses 4 1 12 1 3 1 3 -- --
Securities Lending Expense 6 -- -- -- -- -- -- -- --
Filing and Registration Fees 2 -- -- -- 7 -- -- 1 1
Unrealized Loss on Forward
Foreign Currency Exchange
Contracts -- 19 -- -- -- 1 -- -- --
Deferred Country Tax -- -- 118 -- -- 3 24 -- --
Collateral on Securities Loaned 23,511 -- -- -- -- -- -- -- --
Other -- 1 2 2 1 2 4 1 1
---------- ------- -------- -------- --------- -------- -------- ---------- -------
Total Liabilities 24,655 131 4,921 232 681 1,458 4,618 678 330
---------- ------- -------- -------- --------- -------- -------- ---------- -------
NET ASSETS $ 156,580 $10,453 $423,230 $ 48,200 $ 144,781 $ 28,891 $128,640 $ 19,195 $14,132
---------- ------- -------- -------- --------- -------- -------- ---------- -------
---------- ------- -------- -------- --------- -------- -------- ---------- -------
<CAPTION>
GOVERNMENT
INTER- OBLIGATIONS
HIGH NATIONAL MONEY MONEY
YIELD MAGNUM MARKET MARKET
FUND FUND FUND FUND
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -----------------------------------
ASSETS:
Investments in Securities, at
Value* (Note 1) -- See
accompanying portfolios $14,497 $ 15,985 $ 116,966 $254,283
Foreign Currency at Value -- 355 -- --
Cash 56 1 -- --
Receivable for:
Investments Sold -- -- -- --
Fund Shares Sold 87 51 -- --
Dividends 12 13 -- --
Interest 213 -- 24 1,054
Security Lending Income -- -- -- --
Foreign Withholding Tax Reclaim -- 2 -- --
Unrealized Gain on Forward
Foreign Currency Exchange
Contracts -- 95 -- --
Deferred Organizational Costs 36 63 34 34
Receivable from Investment
Adviser 4 36 -- --
Securities, at Value, Held as
Collateral for Securities
Loaned -- -- -- --
Other -- -- 23 42
------- -------- ----------- --------
Total Assets 14,905 16,601 117,047 255,413
------- -------- ----------- --------
LIABILITIES:
Payable for:
Investments Purchased 55 35 -- --
Fund Shares Redeemed 1 -- -- --
Bank Overdraft -- -- -- --
Dividends Declared -- -- 96 271
Investment Advisory Fees -- -- 24 67
Administrative Fees 3 5 22 41
Custody Fees 2 17 5 13
Professional Fees 11 12 -- 1
Distribution Fees 25 28 48 112
Shareholder Reporting Expenses 11 10 22 23
Directors' Fees and Expenses -- -- 8 9
Securities Lending Expense -- -- -- --
Filing and Registration Fees 1 3 6 22
Unrealized Loss on Forward
Foreign Currency Exchange
Contracts -- -- -- --
Deferred Country Tax -- -- -- --
Collateral on Securities Loaned -- -- -- --
Other 1 1 -- --
------- -------- ----------- --------
Total Liabilities 110 111 231 559
------- -------- ----------- --------
NET ASSETS $14,795 $ 16,490 $ 116,816 $254,854
------- -------- ----------- --------
------- -------- ----------- --------
</TABLE>
- ----------74
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
GLOBAL
EQUITY GLOBAL WORLDWIDE U.S.
ALLO- FIXED ASIAN AMERICAN HIGH LATIN EMERGING AGGRESSIVE REAL
CATION INCOME GROWTH VALUE INCOME AMERICAN MARKETS EQUITY ESTATE
FUND FUND FUND FUND FUND FUND FUND FUND FUND
(000) (000) (000) (000) (000) (000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSETS CONSIST OF:
Capital Stock at Par $ 11 $ 1 $ 26 $ 3 $ 11 $ 2 $ 12 $ 1 $ 1
Paid in Capital in Excess of Par 139,473 10,238 402,508 39,331 133,746 27,428 134,870 17,517 12,036
Undistributed (Distribution in
Excess of) Net Investment
Income (2,527) -- (1,824) (40) 1,316 (77) (719) (31) (17)
Accumulated (Distribution in
Excess of) Net Realized Gain 4,917 82 (3,434) 947 953 216 1,049 738 202
Unrealized Appreciation
(Depreciation) on Investments
and Foreign Currency
Translations** 14,706 132 25,954 7,959 8,755 1,322 (6,572) 970 1,910
---------- ------- -------- -------- --------- -------- -------- ---------- -------
NET ASSETS $ 156,580 $10,453 $423,230 $ 48,200 $ 144,781 $ 28,891 $128,640 $ 19,195 $14,132
---------- ------- -------- -------- --------- -------- -------- ---------- -------
---------- ------- -------- -------- --------- -------- -------- ---------- -------
CLASS A SHARES:
Net Assets $ 64,956 $ 6,016 $208,684 $ 23,125 $ 63,266 $ 19,581 $ 72,381 $ 8,533 $ 6,565
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 4,563 583 12,732 1,531 4,763 1,612 6,769 568 435
Net Asset Value and Redemption
Price Per Share $ 14.24 $ 10.32 $ 16.39 $ 15.11 $ 13.28 $ 12.15 $ 10.69 $ 15.03 $ 15.10
---------- ------- -------- -------- --------- -------- -------- ---------- -------
---------- ------- -------- -------- --------- -------- -------- ---------- -------
Maximum Sales Charge 4.75% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%
Maximum Offering Price Per Share
(Net Asset Value Per Share x
100/95.25) $ 14.95 $ 10.83 $ 17.21 $ 15.86 $ 13.94 $ 12.76 $ 11.22 $ 15.78 $ 15.85
---------- ------- -------- -------- --------- -------- -------- ---------- -------
---------- ------- -------- -------- --------- -------- -------- ---------- -------
CLASS B SHARES:
Net Assets $ 23,267 $ 1,813 $ 63,181 $ 3,130 $ 46,600 $ 3,081 $ 15,102 $ 5,418 $ 4,567
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 1,670 176 3,949 207 3,517 259 1,432 363 302
Net Asset Value and Offering
Price Per Share $ 13.93 $ 10.28 $ 16.00 $ 15.11 $ 13.25 $ 11.91 $ 10.55 $ 14.96 $ 15.09
---------- ------- -------- -------- --------- -------- -------- ---------- -------
---------- ------- -------- -------- --------- -------- -------- ---------- -------
CLASS C SHARES:
Net Assets $ 68,357 $ 2,624 $151,365 $ 21,945 $ 34,915 $ 6,229 $ 41,157 $ 5,244 $ 3,000
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 4,881 255 9,477 1,452 2,633 522 3,894 351 198
Net Asset Value and Offering
Price Per Share $ 14.00 $ 10.27 $ 15.97 $ 15.11 $ 13.26 $ 11.93 $ 10.57 $ 14.95 $ 15.09
---------- ------- -------- -------- --------- -------- -------- ---------- -------
---------- ------- -------- -------- --------- -------- -------- ---------- -------
Investments at Cost, Including
Foreign Currency $ 141,782 $10,102 $396,592 $ 39,890 $ 132,941 $ 28,514 $137,559 $ 18,105 $12,238
---------- ------- -------- -------- --------- -------- -------- ---------- -------
---------- ------- -------- -------- --------- -------- -------- ---------- -------
<CAPTION>
GOVERNMENT
INTER- OBLIGATIONS
HIGH NATIONAL MONEY MONEY
YIELD MAGNUM MARKET MARKET
FUND FUND FUND FUND
(000) (000) (000) (000)
- -----------------------------------
<S> <C> <C> <C> <C>
NET ASSETS CONSIST OF:
Capital Stock at Par $ 1 $ 1 $ 117 $ 255
Paid in Capital in Excess of Par 14,305 16,240 116,798 254,711
Undistributed (Distribution in
Excess of) Net Investment
Income (1) (165) -- --
Accumulated (Distribution in
Excess of) Net Realized Gain 36 204 (99) (112)
Unrealized Appreciation
(Depreciation) on Investments
and Foreign Currency
Translations** 454 210 -- --
------- -------- ----------- --------
NET ASSETS $14,795 $ 16,490 $ 116,816 $254,854
------- -------- ----------- --------
------- -------- ----------- --------
CLASS A SHARES:
Net Assets $ 4,694 $ 5,508 $ 116,816 $254,854
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 377 454 116,915 254,966
Net Asset Value and Redemption
Price Per Share $ 12.48 $ 12.13 $ 1.00 $ 1.00
------- -------- ----------- --------
------- -------- ----------- --------
Maximum Sales Charge 4.75% 4.75% -- --
Maximum Offering Price Per Share
(Net Asset Value Per Share x
100/95.25) $ 13.10 $ 12.73 -- --
------- -------- ----------- --------
------- -------- ----------- --------
CLASS B SHARES:
Net Assets $ 5,608 $ 5,465 -- --
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 450 451 -- --
Net Asset Value and Offering
Price Per Share $ 12.48 $ 12.12 -- --
------- -------- ----------- --------
------- -------- ----------- --------
CLASS C SHARES:
Net Assets $ 4,493 $ 5,517 -- --
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 360 455 -- --
Net Asset Value and Offering
Price Per Share $ 12.48 $ 12.12 -- --
------- -------- ----------- --------
------- -------- ----------- --------
Investments at Cost, Including
Foreign Currency $14,043 $ 16,225 $ 116,966 $254,283
------- -------- ----------- --------
------- -------- ----------- --------
</TABLE>
- ---------------
* Includes repurchase agreements aggregating $12,746,000, $659,000,
$900,000, $1,194,000, $370,000, $957,000, $1,218,000, $106,000,
$2,496,000, $22,343,000 and $25,777,000 for Global Equity Allocation
Fund, Global Fixed Income Fund, Worldwide High Income Fund, Latin
American Fund, Emerging Markets Fund, Aggressive Equity Fund, U.S.
Real Estate Fund, High Yield Fund, International Magnum Fund,
Government Obligations Money Market Fund and Money Market Fund,
respectively.
** Net of accrual for country tax of U.S. $118,000 for Asian Growth Fund,
$3,000 for Latin American Fund and $24,000 for Emerging Markets Fund.
-----------------
75
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
GLOBAL WORLDWIDE U.S.
GLOBAL FIXED ASIAN AMERICAN HIGH LATIN EMERGING REAL
EQUITY INCOME GROWTH VALUE INCOME AMERICAN MARKETS AGGRESSIVE ESTATE
ALLOCATION FUND FUND FUND FUND FUND FUND EQUITY FUND
FUND SIX SIX SIX SIX SIX SIX FUND SIX
SIX MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS SIX MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1996 31, 1996 31, 1996 31, 1996 31, 1996 31, 1996 31, 1996 31, 1996 31, 1996
(000) (000) (000) (000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 1,379 $ -- $ 3,628 $ 664 $ 87 $ 234 $ 1,056 $ 119 $ 144
Interest 247 339 186 32 7,537 58 151 33 25
Less Foreign Taxes Withheld (83) (7) (564) -- -- -- (57) -- --
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Total Income 1,543 332 3,250 696 7,624 292 1,150 152 169
---------- -------- -------- -------- --------- -------- -------- ---------- --------
EXPENSES:
Investment Advisory Fees
Basic Fee 733 42 2,210 186 467 186 892 66 45
Less: Fees Waived (156) (42) (2) (86) (3) (133) (186) (66) (45)
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Investment Advisory Fees -- Net 577 -- 2,208 100 464 53 706 -- --
Administrative Fees 238 18 610 63 174 52 215 24 13
Custody Fees 100 9 444 9 42 80 275 17 21
Filing and Registration Fees 3 -- 1 -- 8 1 2 1 1
Directors' Fees and Expenses 5 2 11 2 3 1 5 1 1
Professional Fees 28 9 53 11 21 13 38 11 6
Shareholder Reports 46 8 148 26 44 9 34 19 10
Security Lending Fees 11 -- -- -- -- -- -- -- --
Distribution Fees
Class A 78 8 282 26 69 26 109 9 5
Class B 95 8 293 14 189 14 66 20 16
Class C 326 14 789 103 163 30 212 19 11
Amortization of Organizational
Costs 31 31 28 44 11 50 50 72 32
Blue Sky Fees 29 22 25 14 19 14 19 29 9
Country Tax Expense -- -- -- -- -- -- 27 -- --
Overdraft Expense -- 1 13 -- 10 6 22 22 --
Other 5 3 9 3 9 4 8 2 3
Expenses Reimbursed by Adviser -- (42) -- -- -- -- -- (86) (38)
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Expenses 1,572 91 4,914 415 1,226 353 1,788 160 90
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Investment Income (Loss) (29) 241 (1,664) 281 6,398 (61) (638) (8) 79
---------- -------- -------- -------- --------- -------- -------- ---------- --------
NET REALIZED GAIN (LOSS) ON:
Investments 2,937 149 734 1,871 4,293 5,068 4,119 1,403 421
Foreign Currency Transactions 2,349 57 (102) -- (1,573) (32) (63) -- --
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Realized Gain (Loss) 5,286 206 632 1,871 2,720 5,036 4,056 1,403 421
---------- -------- -------- -------- --------- -------- -------- ---------- --------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 540 190 (11,830) 2,801 9,431 (2,339) (19,453) 696 1,701
Foreign Currency Translations (670) (24) 36 -- (6) (5) 31 -- --
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Change in Unrealized
Appreciation/ Depreciation (130) 166 (11,794) 2,801 9,425 (2,344) (19,422) 696 1,701
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Realized Gain (Loss) and Change
in Unrealized
Appreciation/Depreciation 5,156 372 (11,162) 4,672 12,145 2,692 (15,366) 2,099 2,122
---------- -------- -------- -------- --------- -------- -------- ---------- --------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 5,127 $ 613 $(12,826) $ 4,953 $ 18,543 $ 2,631 $(16,004) $ 2,091 $ 2,201
---------- -------- -------- -------- --------- -------- -------- ---------- --------
---------- -------- -------- -------- --------- -------- -------- ---------- --------
<CAPTION>
GOVERNMENT
HIGH OBLIGATIONS MONEY
YIELD INTERNATIONAL MONEY MARKET
FUND MAGNUM MARKET FUND
SIX FUND FUND SIX
MONTHS JULY 1, 1996* SIX MONTHS MONTHS
ENDED TO ENDED ENDED
DECEMBER DECEMBER 31, DECEMBER DECEMBER
31, 1996 1996 31, 1996 31, 1996
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -----------------------------------
INVESTMENT INCOME:
Dividends $ 25 $ 71 $ -- $ --
Interest 623 47 3,335 5,818
Less Foreign Taxes Withheld -- (8) -- --
-------- ----- ---------- --------
Total Income 648 110 3,335 5,818
-------- ----- ---------- --------
EXPENSES:
Investment Advisory Fees
Basic Fee 47 63 275 444
Less: Fees Waived (47) (63) (64) (91)
-------- ----- ---------- --------
Investment Advisory Fees -- Net -- -- 211 353
Administrative Fees 18 24 66 104
Custody Fees 9 37 11 24
Filing and Registration Fees 1 3 -- 13
Directors' Fees and Expenses 1 1 3 3
Professional Fees 6 17 22 21
Shareholder Reports 8 10 20 20
Security Lending Fees -- -- -- --
Distribution Fees
Class A 5 5 224 442
Class B 22 20 -- --
Class C 19 23 -- --
Amortization of Organizational
Costs 32 34 7 7
Blue Sky Fees 8 9 19 30
Country Tax Expense -- -- -- --
Overdraft Expense -- -- -- --
Other 2 2 14 35
Expenses Reimbursed by Adviser (24) (50) -- --
-------- ----- ---------- --------
Net Expenses 107 135 597 1,052
-------- ----- ---------- --------
Net Investment Income (Loss) 541 (25) 2,738 4,766
-------- ----- ---------- --------
NET REALIZED GAIN (LOSS) ON:
Investments 103 29 -- --
Foreign Currency Transactions -- 187 -- --
-------- ----- ---------- --------
Net Realized Gain (Loss) 103 216 -- --
-------- ----- ---------- --------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 540 114 -- --
Foreign Currency Translations -- 96 -- --
-------- ----- ---------- --------
Change in Unrealized
Appreciation/ Depreciation 540 210 -- --
-------- ----- ---------- --------
Net Realized Gain (Loss) and Change
in Unrealized
Appreciation/Depreciation 643 426 -- --
-------- ----- ---------- --------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 1,184 $ 401 $ 2,738 $ 4,766
-------- ----- ---------- --------
-------- ----- ---------- --------
</TABLE>
- ---------------
* Commencement of operations
- ----------76
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GLOBAL EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED
(UNAUDITED) JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (29) $ 364
Net Realized Gain 5,286 11,649
Change in Unrealized
Appreciation/Depreciation (130) 9,778
----------------- -------------
Net Increase in Net Assets
Resulting from Operations 5,127 21,791
----------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (2,356) (1,295)
Class B (759) (69)
Class C (2,093) (1,106)
----------------- -------------
(5,208) (2,470)
----------------- -------------
Net Realized Gain:
Class A (2,099) (1,591)
Class B (751) (96)
Class C (2,262) (1,624)
----------------- -------------
(5,112) (3,311)
----------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (10,320) (5,781)
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 24,527 58,409
Distributions Reinvested 9,826 5,268
Redeemed (14,097) (21,216)
----------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 20,256 42,461
----------------- -------------
Total Increase in Net Assets 15,063 58,471
NET ASSETS -- Beginning of Period 141,517 83,046
----------------- -------------
NET ASSETS -- End of Period
(Including undistributed
(distributions in excess of) net
investment income of $(2,527) and
$2,710, respectively) $ 156,580 $ 141,517
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 450 1,702
Distributions Reinvested 293 197
Redeemed (498) (960)
----------------- -------------
Net Increase in Class A Shares
Outstanding 245 939
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 6,615 $ 23,872
Distributions Reinvested 4,157 2,639
Redeemed (7,226) (13,331)
----------------- -------------
Net Increase $ 3,546 $ 13,180
----------------- -------------
----------------- -------------
Class B:
---------------------
Shares:
Subscribed 595 1,017
Distributions Reinvested 106 12
Redeemed (53) (7)
----------------- -------------
Net Increase in Class B Shares
Outstanding 648 1,022
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 8,467 $ 14,112
Distributions Reinvested 1,475 158
Redeemed (769) (100)
----------------- -------------
Net Increase $ 9,173 $ 14,170
----------------- -------------
----------------- -------------
Class C:
---------------------
Shares:
Subscribed 659 1,482
Distributions Reinvested 300 186
Redeemed (427) (575)
----------------- -------------
Net Increase in Class C Shares
Outstanding 532 1,093
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 9,445 $ 20,425
Distributions Reinvested 4,194 2,471
Redeemed (6,102) (7,785)
----------------- -------------
Net Increase $ 7,537 $ 15,111
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
</TABLE>
-----------------
77
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED
(UNAUDITED) JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 241 $ 772
Net Realized Gain 206 489
Change in Unrealized
Appreciation/Depreciation 166 (513)
------- -------------
Net Increase in Net Assets
Resulting from Operations 613 748
------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (132) (771)
Class B (28) (21)
Class C (45) (399)
In Excess of Net Investment Income:
Class A -- (23)
Class B -- (1)
Class C -- (12)
------- -------------
Net Decrease in Net Assets
Resulting from Distributions (205) (1,227)
------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 1,828 8,720
Distributions Reinvested 160 676
Redeemed (3,659) (14,258)
------- -------------
Net Decrease in Net Assets
Resulting from Capital Share
Transactions (1,671) (4,862)
------- -------------
Total Decrease in Net Assets (1,263) (5,341)
NET ASSETS -- Beginning of Period 11,716 17,057
------- -------------
NET ASSETS -- End of Period
(Including undistributed
(distributions in excess of) net
investment income of $0 and $(36),
respectively) $ 10,453 $ 11,716
------- -------------
------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 49 589
Distributions Reinvested 10 50
Redeemed (224) (975)
------- -------------
Net Decrease in Class A Shares
Outstanding (165) (336)
------- -------------
------- -------------
Dollars:
Subscribed $ 496 $ 5,929
Distributions Reinvested 106 507
Redeemed (2,267) (9,791)
------- -------------
Net Decrease $ (1,665) $ (3,355)
------- -------------
------- -------------
Class B:
---------------------
Shares:
Subscribed 34 150
Distributions Reinvested 2 1
Redeemed (5) (6)
------- -------------
Net Increase in Class B Shares
Outstanding 31 145
------- -------------
------- -------------
Dollars:
Subscribed $ 341 $ 1,496
Distributions Reinvested 21 14
Redeemed (47) (63)
------- -------------
Net Increase $ 315 $ 1,447
------- -------------
------- -------------
Class C:
---------------------
Shares:
Subscribed 98 130
Distributions Reinvested 3 15
Redeemed (133) (443)
------- -------------
Net Decrease in Class C Shares
Outstanding (32) (298)
------- -------------
------- -------------
Dollars:
Subscribed $ 991 $ 1,295
Distributions Reinvested 33 155
Redeemed (1,345) (4,404)
------- -------------
Net Decrease $ (321) $ (2,954)
------- -------------
------- -------------
- -----------------------------------------------------------------------
</TABLE>
- -------- 78
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
ASIAN GROWTH FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED
(UNAUDITED) JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Loss $ (1,664) $ (1,844)
Net Realized Gain 632 5,364
Change in Unrealized of
Appreciation/Depreciation (11,794) 9,465
----------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Operations (12,826) 12,985
----------------- -------------
DISTRIBUTIONS:
Net Realized Gain:
Class A (4,142) --
Class B (1,284) --
Class C (3,096) --
----------------- -------------
Net Decrease in Net Assets
Resulting From Distributions (8,522) --
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 64,726 241,482
Distributions Reinvested 8,035 --
Redeemed (97,115) (103,699)
----------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Capital
Share Transactions (24,354) 137,783
----------------- -------------
Total Increase (Decrease) in Net
Assets (45,702) 150,768
NET ASSETS -- Beginning of Period 468,932 318,164
----------------- -------------
NET ASSETS -- End of Period
(Including distributions in excess
of net investment income of $1,824
and $160, respectively) $ 423,230 $ 468,932
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 2,345 7,522
Distributions Reinvested 243 --
Redeemed (4,320) (3,936)
----------------- -------------
Net Increase (Decrease) in Class A
Shares Outstanding (1,732) 3,586
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 38,533 $ 127,388
Distributions Reinvested 3,930 --
Redeemed (71,094) (65,894)
----------------- -------------
Net Increase (Decrease) $ (28,631) $ 61,494
----------------- -------------
----------------- -------------
Class B:
---------------------
Shares:
Subscribed 944 3,225
Distributions Reinvested 77 --
Redeemed (216) (81)
----------------- -------------
Net Increase in Class B Shares
Outstanding 805 3,144
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 15,200 $ 54,005
Distributions Reinvested 1,210 --
Redeemed (3,463) (1,375)
----------------- -------------
Net Increase $ 12,947 $ 52,630
----------------- -------------
----------------- -------------
Class C:
---------------------
Shares:
Subscribed 683 3,629
Distributions Reinvested 184 --
Redeemed (1,405) (2,229)
----------------- -------------
Net Increase (Decrease) in Class C
Shares Outstanding (538) 1,400
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 10,993 $ 60,089
Distributions Reinvested 2,895 --
Redeemed (22,558) (36,430)
----------------- -------------
Net Increase (Decrease) $ (8,670) $ 23,659
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
</TABLE>
-----------------
79
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
AMERICAN VALUE FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED
(UNAUDITED) JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 281 $ 666
Net Realized Gain 1,871 2,783
Change in Unrealized
Appreciation/Depreciation 2,801 3,203
------- -------------
Net Increase in Net Assets
Resulting from Operations 4,953 6,652
------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (186) (443)
Class B (14) (17)
Class C (98) (209)
In Excess of Net Investment Income:
Class A -- (12)
Class B -- (1)
Class C -- (10)
------- -------------
(298) (692)
------- -------------
Net Realized Gain:
Class A (1,554) (331)
Class B (209) (20)
Class C (1,482) (252)
------- -------------
(3,245) (603)
------- -------------
Net Decrease in Net Assets
Resulting from Distributions (3,543) (1,295)
------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 6,104 18,813
Distributions Reinvested 3,134 900
Redeemed (5,800) (16,260)
------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 3,438 3,453
------- -------------
Total Increase in Net Assets 4,848 8,810
NET ASSETS -- Beginning of Period 43,352 34,542
------- -------------
NET ASSETS -- End of Period
(Including distributions in excess
of net investment income of $40 and
$23, respectively) $ 48,200 $ 43,352
------- -------------
------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 222 515
Distributions Reinvested 112 42
Redeemed (148) (816)
------- -------------
Net Increase (Decrease) in Class A
Shares Outstanding 186 (259)
------- -------------
------- -------------
Dollars:
Subscribed $ 3,283 $ 7,053
Distributions Reinvested 1,666 573
Redeemed (2,184) (11,471)
------- -------------
Net Increase (Decrease) $ 2,765 $ (3,845)
------- -------------
------- -------------
Class B+:
---------------------
Shares:
Subscribed 30 174
Distributions Reinvested 15 3
Redeemed (8) (7)
------- -------------
Net Increase in Class B Shares
Outstanding 37 170
------- -------------
------- -------------
Dollars:
Subscribed $ 444 $ 2,376
Distributions Reinvested 218 36
Redeemed (113) (93)
------- -------------
Net Increase $ 549 $ 2,319
------- -------------
------- -------------
Class C:
---------------------
Shares:
Subscribed 161 685
Distributions Reinvested 84 21
Redeemed (241) (334)
------- -------------
Net Increase in Class C Shares
Outstanding 4 372
------- -------------
------- -------------
Dollars:
Subscribed $ 2,377 $ 9,384
Distributions Reinvested 1,250 291
Redeemed (3,503) (4,696)
------- -------------
Net Increase $ 124 $ 4,979
------- -------------
------- -------------
- -----------------------------------------------------------------------
</TABLE>
- -------- 80
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
WORLDWIDE HIGH INCOME FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED
(UNAUDITED) JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 6,398 $ 8,304
Net Realized Gain 2,720 4,060
Change in Unrealized
Appreciation/Depreciation 9,425 (637)
----------------- -------------
Net Increase in Net Assets
Resulting from Operations 18,543 11,727
----------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (2,885) (3,806)
Class B (1,822) (1,176)
Class C (1,532) (2,325)
----------------- -------------
(6,239) (7,307)
----------------- -------------
Net Realized Gain:
Class A (2,320) --
Class B (1,708) --
Class C (1,292) --
----------------- -------------
(5,320) --
----------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (11,559) (7,307)
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 55,931 103,978
Distributions Reinvested 7,679 3,981
Redeemed (21,574) (43,317)
----------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 42,036 64,642
----------------- -------------
Total Increase in Net Assets 49,020 69,062
NET ASSETS -- Beginning of Period 95,761 26,699
----------------- -------------
NET ASSETS -- End of Period
(Including undistributed net
investment income of $1,316 and
$1,157, respectively) $ 144,781 $ 95,761
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 2,479 4,713
Distributions Reinvested 280 190
Redeemed (1,322) (2,858)
----------------- -------------
Net Increase in Class A Shares
Outstanding 1,437 2,045
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 32,405 $ 56,635
Distributions Reinvested 3,686 2,294
Redeemed (17,406) (34,479)
----------------- -------------
Net Increase $ 18,685 $ 24,450
----------------- -------------
----------------- -------------
Class B:
---------------------
Shares:
Subscribed 1,363 2,125
Distributions Reinvested 157 44
Redeemed (107) (65)
----------------- -------------
Net Increase in Class B Shares
Outstanding 1,413 2,104
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 17,826 $ 25,745
Distributions Reinvested 2,065 538
Redeemed (1,420) (797)
----------------- -------------
Net Increase $ 18,471 $ 25,486
----------------- -------------
----------------- -------------
Class C:
---------------------
Shares:
Subscribed 437 1,792
Distributions Reinvested 147 95
Redeemed (208) (656)
----------------- -------------
Net Increase in Class C Shares
Outstanding 376 1,231
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 5,700 $ 21,598
Distributions Reinvested 1,928 1,149
Redeemed (2,748) (8,041)
----------------- -------------
Net Increase $ 4,880 $ 14,706
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
</TABLE>
-----------------
81
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
LATIN AMERICAN FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED
(UNAUDITED) JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (61) $ 163
Net Realized Gain 5,036 752
Change in Unrealized
Appreciation/Depreciation (2,344) 5,112
----------------- -------------
Net Increase in Net Assets
Resulting from Operations 2,631 6,027
----------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (118) (18)
Class B (17) --
Class C (13) --
----------------- -------------
(148) (18)
----------------- -------------
Net Realized Gain:
Class A (2,192) --
Class B (360) --
Class C (727) --
----------------- -------------
(3,279) --
----------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (3,427) (18)
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 20,558 19,885
Distributions Reinvested 3,304 15
Redeemed (21,697) (10,130)
----------------- -------------
Net Increase in Net Assets
Resulitng from Capital Share
Transactions 2,165 9,770
----------------- -------------
Total Increase in Net Assets 1,369 15,779
NET ASSETS -- Beginning of Period 27,522 11,743
----------------- -------------
NET ASSETS -- End of Period
(Including undistributed
(distribution in excess of) net
investment income of $(77) and
$132, respectively) $ 28,891 $ 27,522
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,406 1,373
Distributions Reinvested 187 1
Redeemed (1,462) (737)
----------------- -------------
Net Increase in Class A Shares
Outstanding 131 637
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 18,365 $ 14,772
Distributions Reinvested 2,244 15
Redeemed (19,259) (7,673)
----------------- -------------
Net Increase $ 1,350 $ 7,114
----------------- -------------
----------------- -------------
Class B:
---------------------
Shares:
Subscribed 79 169
Distributions Reinvested 30 --
Redeemed (14) (5)
----------------- -------------
Net Increase in Class B Shares
Outstanding 95 164
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 1,012 $ 1,858
Distributions Reinvested 353 --
Redeemed (189) (52)
----------------- -------------
Net Increase $ 1,176 $ 1,806
----------------- -------------
----------------- -------------
Class C:
---------------------
Shares:
Subscribed 92 316
Distributions Reinvested 60 --
Redeemed (176) (224)
----------------- -------------
Net Increase (Decrease) in Class C
Shares Outstanding (24) 92
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 1,181 $ 3,255
Distributions Reinvested 707 --
Redeemed (2,249) (2,405)
----------------- -------------
Net Increase (Decrease) $ (361) $ 850
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
</TABLE>
- -------- 82
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED
(UNAUDITED) JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (638) $ 465
Net Realized Gain (Loss) 4,056 (518)
Change in Unrealized
Appreciation/Depreciation (19,422) 14,532
----------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Operations (16,004) 14,479
----------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (290) (142)
Class B (52) --
Class C (45) --
----------------- -------------
(387) (142)
----------------- -------------
Net Realized Gain:
Class A (871) --
Class B (182) --
Class C (503) --
----------------- -------------
(1,556) --
----------------- -------------
In Excess of Net Realized Gain:
Class A -- (3)
Class C -- (2)
----------------- -------------
-- (5)
----------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (1,943) (147)
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 48,703 141,283
Distributions Reinvested 1,855 133
Redeemed (72,838) (35,217)
----------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Capital
Share Transactions (22,280) 106,199
----------------- -------------
Total Increase (Decrease) in Net
Assets (40,227) 120,531
NET ASSETS -- Beginning of Period 168,867 48,336
----------------- -------------
NET ASSETS -- End of Period
(Including undistributed
(distributions in excess of) net
investment income of $(719) and
$306, respectively.) $ 128,640 $ 168,867
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 3,063 9,551
Distributions Reinvested 104 13
Redeemed (5,919) (2,502)
----------------- -------------
Net Increase (Decrease) in Class A
Shares Outstanding (2,752) 7,062
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 34,354 $ 106,764
Distributions Reinvested 1,103 131
Redeemed (66,556) (27,528)
----------------- -------------
Net Increase (Decrease) $ (31,099) $ 79,367
----------------- -------------
----------------- -------------
Class B:
---------------------
Shares:
Subscribed 634 883
Distributions Reinvested 21 --
Redeemed (96) (10)
----------------- -------------
Net Increase in Class B Shares
Outstanding 559 873
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 6,962 $ 9,848
Distributions Reinvested 224 --
Redeemed (1,028) (116)
----------------- -------------
Net Increase $ 6,158 $ 9,732
----------------- -------------
----------------- -------------
Class C:
---------------------
Shares:
Subscribed 671 2,245
Distributions Reinvested 50 --
Redeemed (481) (703)
----------------- -------------
Net Increase in Class C Shares
Outstanding 240 1,542
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 7,387 $ 24,671
Distributions Reinvested 528 2
Redeemed (5,254) (7,573)
----------------- -------------
Net Increase $ 2,661 $ 17,100
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
</TABLE>
-----------------
83
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 JANUARY 2, 1996* TO
(UNAUDITED) JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (8) $ 27
Net Realized Gain 1,403 943
Change in Unrealized
Appreciation/Depreciation 696 274
------- -------
Net Increase in Net Assets from
Operations 2,091 1,244
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (13) (17)
Class B (5) (6)
Class C (5) (7)
------- -------
(23) (30)
------- -------
Net Realized Gain:
Class A (711) --
Class B (454) --
Class C (440) --
------- -------
(1,605) --
------- -------
Net Decrease in Net Assets
Resulting from Distributions (1,628) (30)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscibed 8,219 9,793
Distributions Reinvested 1,037 10
Redeemed (914) (627)
------- -------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 8,342 9,176
------- -------
Total Increase in Net Assets 8,805 10,390
NET ASSETS -- Beginning of Period 10,390 --
------- -------
NET ASSETS -- End of Period
(Including undistributed
(distributions in excess of) net
investment income of $(31) and $0,
respectively.) $ 19,195 $ 10,390
------- -------
------- -------
- -----------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 199 410
Distributions Reinvested 36 1
Redeemed (41) (37)
------- -------
Net Increase in Class A Shares
Outstanding 194 374
------- -------
------- -------
Dollars:
Subscibed $ 2,973 $ 5,351
Distributions Reinvested 522 9
Redeemed (595) (479)
------- -------
Net Increase $ 2,900 $ 4,881
------- -------
------- -------
Class B:
---------------------
Shares:
Subscribed 178 170
Distributions Reinvested 18 --
Redeemed (2) (1)
------- -------
Net Increase in Class B Shares
Outstanding 194 169
------- -------
------- -------
Dollars:
Subscribed $ 2,639 $ 2,086
Distributions Reinvested 263 --
Redeemed (31) (11)
------- -------
Net Increase $ 2,871 $ 2,075
------- -------
------- -------
Class C:
---------------------
Shares:
Subscribed 175 190
Distributions Reinvested 17 --
Redeemed (21) (10)
------- -------
Net Increase in Class C Shares
Outstanding 171 180
------- -------
------- -------
Dollars:
Subscribed $ 2,607 $ 2,356
Distributions Reinvested 252 1
Redeemed (288) (137)
------- -------
Net Increase $ 2,571 $ 2,220
------- -------
------- -------
- -----------------------------------------------------------------------------
* Commencement of operations.
</TABLE>
- -------- 84
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
U.S. REAL ESTATE FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 MAY 1, 1996* TO
(UNAUDITED) JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 79 $ 32
Net Realized Gain 421 --
Change in Unrealized
Appreciation/Depreciation 1,701 210
------- ------
Net Increase in Net Assets
Resulting from Operations 2,201 242
------- ------
DISTRIBUTIONS:
Net Investment Income:
Class A (58) (5)
Class B (34) (4)
Class C (24) (4)
------- ------
(116) (13)
------- ------
Net Realized Gain:
Class A (100) --
Class B (71) --
Class C (48) --
------- ------
(219) --
------- ------
Net Decrease in Net Assets
Resulting from Distributions (335) (13)
------- ------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 6,356 5,578
Distributions Reinvested 148 1
Redeemed (46) --
------- ------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 6,458 5,579
------- ------
Total Increase in Net Assets 8,324 5,808
NET ASSETS -- Beginning of Period 5,808 --
------- ------
NET ASSETS -- End of Period
(Including undistributed
(distributions in excess of) net
investment income of $(17) and $19,
respectively.) $ 14,132 $ 5,808
------- ------
------- ------
- -------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 285 146
Distributions Reinvested 6 --
Redeemed (2) --
------- ------
Net Increase in Class A Shares
Outstanding 289 146
------- ------
------- ------
Dollars:
Subscribed $ 3,883 $ 1,753
Distributions Reinvested 93 1
Redeemed (30) --
------- ------
Net Increase $ 3,946 $ 1,754
------- ------
------- ------
Class B:
---------------------
Shares:
Subscribed 125 175
Distributions Reinvested 2 --
Redeemed -- --
------- ------
Net Increase in Class B Shares
Outstanding 127 175
------- ------
------- ------
Dollars:
Subscribed $ 1,709 $ 2,116
Distributions Reinvested 36 --
Redeemed (6) --
------- ------
Net Increase $ 1,739 $ 2,116
------- ------
------- ------
Class C:
---------------------
Shares:
Subscribed 56 142
Distributions Reinvested 1 --
Redeemed (1) --
------- ------
Net Increase in Class C Shares
Outstanding 56 142
------- ------
------- ------
Dollars:
Subscribed $ 764 $ 1,709
Distributions Reinvested 19 --
Redeemed (10) --
------- ------
Net Increase $ 773 $ 1,709
------- ------
------- ------
- -------------------------------------------------------------------------
* Commencement of operations.
</TABLE>
-----------------
85
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
HIGH YIELD FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 MAY 1, 1996* TO
(UNAUDITED) JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 541 $ 110
Net Realized Gain (Loss) 103 (3)
Change in Unrealized
Appreciation/Depreciation 540 (86)
------- -------
Net Increase in Net Assets
Resulting from Operations 1,184 21
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (205) (38)
Class B (188) (27)
Class C (167) (27)
------- -------
(560) (92)
------- -------
Net Realized Gain:
Class A (20) --
Class B (24) --
Class C (20) --
------- -------
(64) --
------- -------
Net Decrease in Net Assets
Resulting from Distributions (624) (92)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 3,718 10,709
Distributions Reinvested 78 6
Redeemed (205) --
------- -------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 3,591 10,715
------- -------
Total Increase in Net Assets 4,151 10,644
NET ASSETS -- Beginning of Period 10,644 --
------- -------
NET ASSETS -- End of Period
(Including undistributed
(distributions in excess of) net
investment income of $(1) and $18,
respectively.) $ 14,795 $ 10,644
------- -------
------- -------
- -------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 55 327
Distributions Reinvested 4 --
Redeemed (10) --
------- -------
Net Increase in Class A Shares
Outstanding 49 327
------- -------
------- -------
Dollars:
Subscribed $ 666 $ 3,930
Distributions Reinvested 45 5
Redeemed (121) --
------- -------
Net Increase $ 590 $ 3,935
------- -------
------- -------
Class B:
---------------------
Shares:
Subscribed 163 287
Distributions Reinvested 2 --
Redeemed (2) --
------- -------
Net Increase in Class B Shares
Outstanding 163 287
------- -------
------- -------
Dollars:
Subscribed $ 2,004 $ 3,443
Distributions Reinvested 20 1
Redeemed (30) --
------- -------
Net Increase $ 1,994 $ 3,444
------- -------
------- -------
Class C:
---------------------
Shares:
Subscribed 85 278
Distributions Reinvested 1 --
Redeemed (4) --
------- -------
Net Increase in Class C Shares
Outstanding 82 278
------- -------
------- -------
Dollars:
Subscribed $ 1,048 $ 3,336
Distributions Reinvested 13 --
Redeemed (54) --
------- -------
Net Increase $ 1,007 $ 3,336
------- -------
------- -------
- -------------------------------------------------------------------------
* Commencement of operations.
</TABLE>
- -------- 86
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM FUND
<TABLE>
<CAPTION>
JULY 1, 1996* TO
DECEMBER 31, 1996
(UNAUDITED)
(000)
<S> <C>
- --------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Loss $ (25)
Net Realized Gain 216
Change in Unrealized
Appreciation/Depreciation 210
-------
Net Increase in Net Assets
Resulting from Operations 401
-------
DISTRIBUTIONS:
Net Investment Income:
Class A (52)
Class B (45)
Class C (43)
-------
(140)
-------
Net Realized Gain:
Class A (4)
Class B (4)
Class C (4)
-------
(12)
-------
Net Decrease in Net Assets
Resulting from Distributions (152)
-------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 16,366
Distributions Reinvested 50
Redeemed (175)
-------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 16,241
-------
Total Increase in Net Assets 16,490
NET ASSETS -- Beginning of Period --
-------
NET ASSETS -- End of Period
(Including distributions in excess
of net investment income of $165) $ 16,490
-------
-------
- --------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 459
Distributions Reinvested 1
Redeemed (6)
-------
Net Increase in Class A Shares
Outstanding 454
-------
-------
Dollars:
Subscribed $ 5,480
Distributions Reinvested 14
Redeemed (73)
-------
Net Increase $ 5,421
-------
-------
Class B:
---------------------
Shares:
Subscribed 452
Distributions Reinvested 1
Redeemed (2)
-------
Net Increase in Class B Shares
Outstanding 451
-------
-------
Dollars:
Subscribed $ 5,413
Distributions Reinvested 18
Redeemed (27)
-------
Net Increase $ 5,404
-------
-------
Class C:
---------------------
Shares:
Subscribed 460
Distributions Reinvested 1
Redeemed (6)
-------
Net Increase in Class C Shares
Outstanding 455
-------
-------
Dollars:
Subscribed $ 5,473
Distributions Reinvested 18
Redeemed (75)
-------
Net Increase $ 5,416
-------
-------
- --------------------------------------------------------
* Commencement of operations.
</TABLE>
-----------------
87
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED
(UNAUDITED) JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 2,738 $ 4,114
Net Realized Loss -- (99)
----------------- -------------
Net Increase in Net Assets
Resulting from Operations 2,738 4,015
----------------- -------------
DISTRIBUTIONS:
Net Investment Income (2,738) (4,114)
Net Realized Gain -- (12)
----------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (2,738) (4,126)
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 162,299 1,373,640
Distributions Reinvested 1,763 3,511
Redeemed (193,224) (1,298,567)
----------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Capital
Share Transactions (29,162) 78,584
----------------- -------------
Total Increase (Decrease) in Net
Assets (29,162) 78,473
NET ASSETS -- Beginning of Period 145,978 67,505
----------------- -------------
NET ASSETS -- End of Period $ 116,816 $ 145,978
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Shares:
Subscribed 162,299 1,373,640
Distributions Reinvested 1,763 3,511
Redeemed (193,224) (1,298,567)
----------------- -------------
Net Increase (Decrease) in Shares
Outstanding (29,162) 78,584
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
</TABLE>
- -------- 88
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED
(UNAUDITED) JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 4,766 $ 7,849
Net Realized Loss -- (100)
----------------- -------------
Net Increase in Net Assets
Resulting from Operations 4,766 7,749
----------------- -------------
DISTRIBUTIONS:
Net Investment Income (4,766) (7,849)
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 340,994 1,390,774
Distributions Reinvested 3,331 7,425
Redeemed (260,444) (1,398,641)
----------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Capital
Share Transactions 83,881 (442)
----------------- -------------
Total Increase (Decrease) in Net
Assets 83,881 (542)
NET ASSETS -- Beginning of Period 170,973 171,515
----------------- -------------
NET ASSETS -- End of Period $ 254,854 $ 170,973
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Shares:
Subscribed 340,994 1,390,774
Distributions Reinvested 3,331 7,425
Redeemed (260,444) (1,398,641)
----------------- -------------
Net Increase (Decrease) in Shares
Outstanding 83,881 (442)
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
</TABLE>
-----------------
89
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GLOBAL EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.75 $ 12.60 $ 11.99 $ 11.09
------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.05 0.19 0.12 0.10
Net Realized and Unrealized Gain 0.48 2.82 0.67 0.90
------- ------------- ------------- -------------
Total From Investment Operations 0.53 3.01 0.79 1.00
------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income (0.55) (0.39) -- (0.03)
In Excess of Net Investment Income -- -- (0.05) --
Net Realized Gain (0.49) (0.47) (0.13) (0.07)
------- ------------- ------------- -------------
Total Distributions (1.04) (0.86) (0.18) (0.10)
------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 14.24 $ 14.75 $ 12.60 $ 11.99
------- ------------- ------------- -------------
------- ------------- ------------- -------------
TOTAL RETURN (1) 3.65% 24.62% 6.69% 9.02%
------- ------------- ------------- -------------
------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 64,956 $ 63,706 $ 42,586 $ 33,425
Ratio of Expenses to Average Net
Assets 1.70%** 1.70% 1.70% 1.70%
Ratio of Net Investment Income (Loss)
to Average Net Assets 0.39%** 0.71% 1.01% 0.98%
Portfolio Turnover Rate 23% 44% 39% 30%
Average Commission Rate # $ 0.0069 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.03 $ 0.10 $ 0.04 $ 0.09
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.93%** 2.06% 2.03% 2.58%
Net Investment Income (Loss) to
Average Net Assets 0.16%** 0.35% 0.68% 0.10%
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------
SIX MONTHS ENDED
JANUARY 4, 1993* DECEMBER 31, 1996 AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993 (UNAUDITED) JUNE 30, 1996
<S> <C> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 14.46 $ 13.01
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.04 (0.13) 0.30
Net Realized and Unrealized Gain 1.05 0.59 1.98
------- ------- -------
Total From Investment Operations 1.09 0.46 2.28
------- ------- -------
DISTRIBUTIONS
Net Investment Income -- (0.50) (0.35)
In Excess of Net Investment Income -- -- --
Net Realized Gain -- (0.49) (0.48)
------- ------- -------
Total Distributions -- (0.99) (0.83)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 11.09 $ 13.93 $ 14.46
------- ------- -------
------- ------- -------
TOTAL RETURN (1) 10.90% 3.20% 18.08%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 10,434 $ 23,267 $ 14,786
Ratio of Expenses to Average Net
Assets 1.70%** 2.45%** 2.45%**
Ratio of Net Investment Income (Loss)
to Average Net Assets 1.04%** (0.35)%** 0.45%**
Portfolio Turnover Rate 14% 23% 44%
Average Commission Rate # N/A $ 0.0069 N/A
- -----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.08 $ 0.08 $ 0.22
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.65%** 2.68%** 2.81%**
Net Investment Income (Loss) to
Average Net Assets (0.91)%** (0.58)%** 0.09%**
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.49 $ 12.43 $ 11.90 $ 11.05
------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.03) 0.12 0.04 0.06
Net Realized and Unrealized Gain 0.49 2.75 0.65 0.86
------- ------------- ------------- -------------
Total From Investment Operations 0.46 2.87 0.69 0.92
------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income (0.46) (0.33) -- --
In Excess of Net Investment Income -- -- (0.03) --
Net Realized Gain (0.49) (0.48) (0.13) (0.07)
------- ------------- ------------- -------------
Total Distributions (0.95) (0.81) (0.16) (0.07)
------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 14.00 $ 14.49 $ 12.43 $ 11.90
------- ------------- ------------- -------------
------- ------------- ------------- -------------
TOTAL RETURN (1) 3.18% 23.65% 5.84% 8.34%
------- ------------- ------------- -------------
------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 68,357 $ 63,025 $ 40,460 $ 29,892
Ratio of Expenses to Average Net
Assets 2.45%** 2.45% 2.45% 2.45%
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.36)%** (0.04)% 0.25% 0.23%
Portfolio Turnover Rate 23% 44% 39% 30%
Average Commission Rate # $ 0.0069 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.02 $ 1.16 $ 0.05 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.68%** 2.81% 2.78% 3.34%
Net Investment Income (Loss) to
Average Net Assets (0.58)%** (0.40)% (0.08)% (0.66)%
<CAPTION>
JANUARY 4, 1993*
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01
Net Realized and Unrealized Gain 1.04
-------
Total From Investment Operations 1.05
-------
DISTRIBUTIONS
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
-------
Total Distributions --
-------
NET ASSET VALUE, END OF PERIOD $ 11.05
-------
-------
TOTAL RETURN (1) 10.50%
-------
-------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,995
Ratio of Expenses to Average Net
Assets 2.45%**
Ratio of Net Investment Income (Loss)
to Average Net Assets 0.29%**
Portfolio Turnover Rate 14%
Average Commission Rate # N/A
- -----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 4.40%**
Net Investment Income (Loss) to
Average Net Assets (1.66)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged. For the period ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.07% of the trade amount.
- -------------
90
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GLOBAL FIXED INCOME FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.94 $ 10.23 $ 9.53 $ 10.55
------ ------ ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.24 0.53 0.56 0.52
Net Realized and Unrealized Gain
(Loss) 0.35 (0.01) 0.50 (0.42)
------ ------ ------------- -------------
Total From Investment Operations 0.59 0.52 1.06 0.10
------ ------ ------------- -------------
DISTRIBUTIONS
Net Investment Income (0.21) (0.79) (0.36) (0.50)
In Excess of Net Investment Income -- (0.02) -- (0.12)
Net Realized Gain -- -- -- (0.47)
In Excess of Net Realized Gain -- -- -- (0.03)
------ ------ ------------- -------------
Total Distributions (0.21) (0.81) (0.36) (1.12)
------ ------ ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 10.32 $ 9.94 $ 10.23 $ 9.53
------ ------ ------------- -------------
------ ------ ------------- -------------
TOTAL RETURN (1) 5.94% 5.20% 11.41% 0.41%
------ ------ ------------- -------------
------ ------ ------------- -------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,016 $ 7,432 $ 11,092 $ 10,369
Ratio of Expenses to Average Net
Assets 1.45%** 1.45% 1.45% 1.45%
Ratio of Net Investment Income to
Average Net Assets 4.63%** 5.02% 5.84% 4.70%
Portfolio Turnover Rate 73% 223% 169% 168%
- -----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.08 $ 0.07 $ 0.07 $ 0.11
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.84%** 2.16% 2.22% 2.48%
Net Investment Income to Average
Net Assets 3.15%** 4.31% 5.07% 3.67%
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------
SIX MONTHS ENDED
JANUARY 4, 1993* DECEMBER 31, 1996 AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993 (UNAUDITED) JUNE 30, 1996
<S> <C> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 9.91 $ 10.24
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.25 0.25 0.64
Net Realized and Unrealized Gain
(Loss) 0.55 0.29 (0.26)
------ ------ ------
Total From Investment Operations 0.80 0.54 0.38
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.25) (0.17) (0.69)
In Excess of Net Investment Income -- -- (0.02)
Net Realized Gain -- -- --
In Excess of Net Realized Gain -- -- --
------ ------ ------
Total Distributions (0.25) (0.17) (0.71)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.55 $ 10.28 $ 9.91
------ ------ ------
------ ------ ------
TOTAL RETURN (1) 8.02% 5.46% 3.76%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,633 $ 1,813 $ 1,440
Ratio of Expenses to Average Net
Assets 1.45%** 2.20%** 2.20%**
Ratio of Net Investment Income to
Average Net Assets 5.00%** 3.88%** 3.38%**
Portfolio Turnover Rate 55% 73% 223%
- -----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07 $ 0.10 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.88%** 3.59%** 3.57%**
Net Investment Income to Average
Net Assets 3.57%** 2.40%** 2.01%**
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.90 $ 10.20 $ 9.54 $ 10.56
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.22 0.37 0.49 0.43
Net Realized and Unrealized Gain
(Loss) 0.32 0.08 0.47 (0.40)
------ ------ ------ ------
Total From Investment Operations 0.54 0.45 0.96 0.03
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.17) (0.73) (0.30) (0.44)
In Excess of Net Investment Income -- (0.02) -- (0.11)
Net Realized Gain -- -- -- (0.47)
In Excess of Net Realized Gain -- -- -- (0.03)
------ ------ ------ ------
Total Distributions (0.17) (0.75) (0.30) (1.05)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.27 $ 9.90 $ 10.20 $ 9.54
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN (1) 5.47% 4.47% 10.24% (0.25)%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 2,624 $ 2,844 $ 5,965 $ 5,407
Ratio of Expenses to Average Net
Assets 2.20%** 2.20% 2.20% 2.20%
Ratio of Net Investment Income to
Average Net Assets 3.88%** 4.35% 5.09% 3.95%
Portfolio Turnover Rate 73% 223% 169% 168%
- -----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.08 $ 0.06 $ 0.08 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.59%** 2.87% 2.97% 3.29%
Net Investment Income to Average
Net Assets 2.40%** 3.68% 4.32% 2.86%
<CAPTION>
JANUARY 4, 1993*
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.21
Net Realized and Unrealized Gain
(Loss) 0.55
------
Total From Investment Operations 0.76
------
DISTRIBUTIONS
Net Investment Income (0.20)
In Excess of Net Investment Income --
Net Realized Gain --
In Excess of Net Realized Gain --
------
Total Distributions (0.20)
------
NET ASSET VALUE, END OF PERIOD $ 10.56
------
------
TOTAL RETURN (1) 7.61%
------
------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,120
Ratio of Expenses to Average Net
Assets 2.20%**
Ratio of Net Investment Income to
Average Net Assets 4.25%**
Portfolio Turnover Rate 55%
- -----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.63%**
Net Investment Income to Average
Net Assets 2.82%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
-----------------
91
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
ASIAN GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.15 $ 16.42 $ 15.50 $ 12.00
----------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.03) (0.04) -- (0.03)
Net Realized and Unrealized Gain
(Loss) (0.40) 0.77 1.43 3.53
----------------- ------------- ------------- -------------
Total From Investment Operations (0.43) 0.73 1.43 3.50
----------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Realized Gain (0.33) -- (0.49) --
In Excess of Net Realized Gain -- -- (0.02) --
----------------- ------------- ------------- -------------
Total Distributions (0.33) -- (0.51) --
----------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 16.39 $ 17.15 $ 16.42 $ 15.50
----------------- ------------- ------------- -------------
----------------- ------------- ------------- -------------
TOTAL RETURN (1) (2.47)% 4.45% 9.50% 29.17%
----------------- ------------- ------------- -------------
----------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 208,684 $ 248,009 $ 178,667 $ 138,212
Ratio of Expenses to Average Net
Assets 1.85%** 1.88% 1.90% 1.90%
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.39)%** (0.16)% 0.04% (0.24)%
Portfolio Turnover Rate 29% 38% 34% 34%
Average Commission Rate # $ 0.0105 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Loss $ 0.00 -- -- $ 0.03
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.85%** 1.88% 1.90% 2.17%
Net Investment Income (Loss) to
Average Net Assets (0.39)%** (0.16)% 0.04% (0.51)%
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------
SIX MONTHS ENDED
JUNE 23, 1993* DECEMBER 31, 1996 AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993 (UNAUDITED) JUNE 30, 1996
<S> <C> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.00 $ 16.81 $ 16.51
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss -- (0.07) (0.03)
Net Realized and Unrealized Gain
(Loss) -- (0.41) 0.33
------- ------- -------
Total From Investment Operations -- (0.48) 0.30
------- ------- -------
DISTRIBUTIONS
Net Realized Gain -- (0.33) --
In Excess of Net Realized Gain -- -- --
------- ------- -------
Total Distributions -- (0.33) --
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 12.00 $ 16.00 $ 16.81
------- ------- -------
------- ------- -------
TOTAL RETURN (1) 0.00% (2.82)% 1.82%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 11,770 $ 63,181 $ 52,853
Ratio of Expenses to Average Net
Assets 1.90%** 2.60%** 2.61%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.81)%** (1.14)%** (0.52)%**
Portfolio Turnover Rate 0% 29% 38%
Average Commission Rate # N/A $ 0.0105 N/A
- -----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Loss $ 0.01 $ 0.00 --
Ratios Before Expense Limitation:
Expenses to Average Net Assets 11.83%** 2.60%** 2.61%**
Net Investment Income (Loss) to
Average Net Assets (10.74)%** (1.14)%** (0.52)%**
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.78 $ 16.19 $ 15.40 $ 12.00
----------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.10) (0.13) (0.12) (0.10)
Net Realized and Unrealized Gain
(Loss) (0.38) 0.72 1.42 3.50
----------------- ------------- ------------- -------------
Total From Investment Operations (0.48) 0.59 1.30 3.40
----------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Realized Gain (0.33) -- (0.49) --
In Excess of Net Realized Gain -- -- (0.02) --
----------------- ------------- ------------- -------------
Total Distributions (0.33) -- (0.51) --
----------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 15.97 $ 16.78 $ 16.19 $ 15.40
----------------- ------------- ------------- -------------
----------------- ------------- ------------- -------------
TOTAL RETURN (1) (2.82)% 3.64% 8.71% 28.33%
----------------- ------------- ------------- -------------
----------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 151,365 $ 168,070 $ 139,497 $ 116,889
Ratio of Expenses to Average Net
Assets 2.60%** 2.63% 2.63% 2.65%
Ratio of Net Investment Loss to
Average Net Assets (1.14)%** (0.94)% (0.77)% (0.99)%
Portfolio Turnover Rate 29% 38% 34% 34%
Average Commission Rate # $ 0.0105 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Loss $ 0.00 -- -- $ 0.03
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.60%** 2.63% 2.65% 2.92%
Net Investment Loss to Average Net
Assets (1.14)%** (0.94)% (0.77)% (1.26)%
<CAPTION>
JUNE 23, 1993*
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss --
Net Realized and Unrealized Gain
(Loss) --
------
Total From Investment Operations --
------
DISTRIBUTIONS
Net Realized Gain --
In Excess of Net Realized Gain --
------
Total Distributions --
------
NET ASSET VALUE, END OF PERIOD $ 12.00
------
------
TOTAL RETURN (1) 0.00%
------
------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 8,491
Ratio of Expenses to Average Net
Assets 2.65%**
Ratio of Net Investment Loss to
Average Net Assets (1.56)%**
Portfolio Turnover Rate 0%
Average Commission Rate # N/A
- -----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Loss $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 12.64%**
Net Investment Loss to Average Net
Assets (11.55)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged. For the period ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.54% of the trade amount.
- -------------
92
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AMERICAN VALUE FUND
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED YEAR ENDED OCTOBER 18, 1993*
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 TO JUNE 30, 1994
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.63 $ 12.89 $ 11.70 $ 12.00
------- ------------- ------------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.13 0.27 0.27 0.17
Net Realized and Unrealized Gain
(Loss) 1.57 1.94 1.44 (0.30)
------- ------------- ------------- -------
Total from Investment Operations 1.70 2.21 1.71 (0.13)
------- ------------- ------------- -------
DISTRIBUTIONS
Net Investment Income (0.13) (0.27) (0.28) (0.17)
In Excess of Net Investment Income -- (0.01) -- --
Net Realized Gain (1.09) (0.19) (0.24) --
------- ------------- ------------- -------
Total Distributions (1.22) (0.47) (0.52) (0.17)
------- ------------- ------------- -------
NET ASSET VALUE, END OF PERIOD $ 15.11 $ 14.63 $ 12.89 $ 11.70
------- ------------- ------------- -------
------- ------------- ------------- -------
TOTAL RETURN (1) 11.78% 17.41% 15.01% (1.12)%
------- ------------- ------------- -------
------- ------------- ------------- -------
RATIOS AND SUPPLEMENTAL DATA
Net assets, End of Period (000's) $ 23,125 $ 19,674 $ 20,675 $ 10,717
Ratio of Expenses to Average Net
Assets 1.50%** 1.50% 1.50% 1.50%**
Ratio of Net Investment Income to
Average Net Assets 1.68%** 1.90% 2.29% 2.14%**
Portfolio Turnover Rate 17% 41% 23% 17%
Average Commission Rate # $ 0.0499 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.03 $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.89%** 1.81% 1.96% 2.48%**
Net Investment Income to Average
Net Assets 1.29%** 1.59% 1.83% 1.16%**
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996
<S> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.63 $ 13.37
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.07 0.15
Net Realized and Unrealized Gain
(Loss) 1.57 1.46
------- ------
Total from Investment Operations 1.64 1.61
------- ------
DISTRIBUTIONS
Net Investment Income (0.07) (0.15)
In Excess of Net Investment Income -- (0.01)
Net Realized Gain (1.09) (0.19)
------- ------
Total Distributions (1.16) (0.35)
------- ------
NET ASSET VALUE, END OF PERIOD $ 15.11 $ 14.63
------- ------
------- ------
TOTAL RETURN (1) 11.34% 12.29%
------- ------
------- ------
RATIOS AND SUPPLEMENTAL DATA
Net assets, End of Period (000's) $ 3,130 $ 2,485
Ratio of Expenses to Average Net
Assets 2.25%** 2.25%**
Ratio of Net Investment Income to
Average Net Assets 0.93%** 1.18%**
Portfolio Turnover Rate 17% 41%
Average Commission Rate # $ 0.0499 N/A
- ------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.03 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.64%** 2.61%**
Net Investment Income to Average
Net Assets 0.54%** 0.82%**
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED YEAR ENDED OCTOBER 18, 1993*
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 TO JUNE 30, 1994
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.64 $ 12.89 $ 11.69 $ 12.00
------- ------------- ------------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.07 0.16 0.17 0.11
Net Realized and Unrealized Gain
(Loss) 1.56 1.94 1.44 (0.31)
------- ------------- ------------- -------
Total from Investment Operations 1.63 2.10 1.61 (0.20)
------- ------------- ------------- -------
DISTRIBUTIONS
Net Investment Income (0.07) (0.15) (0.17) (0.11)
In Excess of Net Investment Income -- (0.01) -- --
Net Realized Gain (1.09) (0.19) (0.24) --
------- ------------- ------------- -------
Total Distributions (1.16) (0.35) (0.41) (0.11)
------- ------------- ------------- -------
NET ASSET VALUE, END OF PERIOD $ 15.11 $ 14.64 $ 12.89 $ 11.69
------- ------------- ------------- -------
------- ------------- ------------- -------
TOTAL RETURN (1) 11.25% 16.50% 14.13% (1.70)%
------- ------------- ------------- -------
------- ------------- ------------- -------
RATIOS AND SUPPLEMENTAL DATA
Net assets, End of Period (000's) $ 21,945 $ 21,193 $ 13,867 $ 7,237
Ratio of Expenses to Average Net
Assets 2.25%** 2.25% 2.25% 2.25%**
Ratio of Net Investment Income to
Average Net Assets 0.93%** 1.17% 1.54% 1.39%**
Portfolio Turnover Rate 17% 41% 23% 17%
Average Commission Rate # $ 0.0499 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.03 $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.64%** 2.58% 2.71% 3.28%**
Net Investment Income to Average
Net Assets 0.54%** 0.84% 1.08% 0.36%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
-----------------
93
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
WORLDWIDE HIGH INCOME FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED YEAR ENDED APRIL 21, 1994*
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.47 $ 11.57 $ 12.17 $ 12.00
------- ------------- ------------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.66 1.36 1.26 0.18
Net Realized and Unrealized Gain
(Loss) 1.34 0.80 (0.52) 0.16
------- ------------- ------------- -------
Total From Investment Operations 2.00 2.16 0.74 0.34
------- ------------- ------------- -------
DISTRIBUTIONS
Net Investment Income (0.68) (1.26) (1.22) (0.17)
Net Realized Gain (0.51) -- (0.12) --
------- ------------- ------------- -------
Total Distributions (1.19) (1.26) (1.34) (0.17)
------- ------------- ------------- -------
NET ASSET VALUE, END OF PERIOD $ 13.28 $ 12.47 $ 11.57 $ 12.17
------- ------------- ------------- -------
------- ------------- ------------- -------
TOTAL RETURN (1) 16.39% 19.61% 6.87% 2.86%
------- ------------- ------------- -------
------- ------------- ------------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 63,266 $ 41,493 $ 14,819 $ 6,857
Ratio of Expenses to Average Net
Assets 1.55%** 1.55% 1.55% 1.55%**
Ratio of Net Investment Income to
Average Net Assets 10.67%** 11.95% 11.53% 8.29%**
Portfolio Turnover Rate 66% 220% 178% 19%
- -------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.00 $ 0.02 $ 0.05 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.55%** 1.69% 1.97% 3.23%**
Net Invesment Income to Average Net
Assets 10.67%** 11.81% 11.11% 6.61%**
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
--------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 AUGUST 1, 1995+
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) TO JUNE 30, 1996
<S> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.44 $ 11.63
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.56 1.18
Net Realized and Unrealized Gain
(Loss) 1.38 0.72
------- -------
Total From Investment Operations 1.94 1.90
------- -------
DISTRIBUTIONS
Net Investment Income (0.62) (1.09)
Net Realized Gain (0.51) --
------- -------
Total Distributions (1.13) (1.09)
------- -------
NET ASSET VALUE, END OF PERIOD $ 13.25 $ 12.44
------- -------
------- -------
TOTAL RETURN (1) 15.91% 17.07%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 46,600 $ 26,174
Ratio of Expenses to Average Net
Assets 2.30%** 2.30%**
Ratio of Net Investment Income to
Average Net Assets 9.92%** 12.06%**
Portfolio Turnover Rate 66% 220%
- --------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.00 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.30%** 2.47%**
Net Invesment Income to Average Net
Assets 9.92%** 11.89%**
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED YEAR ENDED APRIL 21, 1994*
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.45 $ 11.58 $ 12.16 $ 12.00
------- ------------- ------------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.63 1.30 1.17 0.17
Net Realized and Unrealized Gain
(Loss) 1.31 0.77 (0.50) 0.15
------- ------------- ------------- ------
Total From Investment Operations 1.94 2.07 0.67 0.32
------- ------------- ------------- ------
DISTRIBUTIONS
Net Investment Income (0.62) (1.20) (1.13) (0.16)
Net Realized Gain (0.51) -- (0.12) --
------- ------------- ------------- ------
Total Distributions (1.13) (1.20) (1.25) (0.16)
------- ------------- ------------- ------
NET ASSET VALUE, END OF PERIOD $ 13.26 $ 12.45 $ 11.58 $ 12.16
------- ------------- ------------- ------
------- ------------- ------------- ------
TOTAL RETURN (1) 15.89% 18.71% 6.20% 2.62%
------- ------------- ------------- ------
------- ------------- ------------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 34,915 $ 28,094 $ 11,880 $ 6,081
Ratio of Expenses to Average Net
Assets 2.30%** 2.30% 2.30% 2.30%**
Ratio of Net Investment Income to
Average Net Assets 9.92%** 11.40% 10.72% 7.54%**
Portfolio Turnover Rate 66% 220% 178% 19%
- -------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.00 $ 0.04 $ 0.05 $ 0.06
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.30%** 2.44% 2.74% 4.00%**
Net Invesment Income to Average Net
Assets 9.92%** 11.26% 10.28% 5.84%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
- -------------
94
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
LATIN AMERICAN FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------- -----------------
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED JULY 6, 1994* DECEMBER 31, 1996
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 (UNAUDITED)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.63 $ 9.08 $ 12.00 $ 12.45
------- ------------- ------------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) -- 0.10 (0.02) (0.06)
Net Realized and Unrealized Gain
(Loss) 1.24 3.47 (2.70) 1.22
------- ------------- ------------- -------
Total From Investment Operations 1.24 3.57 (2.72) 1.16
------- ------------- ------------- -------
DISTRIBUTIONS
Net Investment Income (0.09) (0.02) -- (0.07)
Net Realized Gain (1.63) -- -- (1.63)
Paid in Capital -- -- (0.20) --
------- ------------- ------------- -------
Total Distributions (1.72) (0.02) (0.20) (1.70)
------- ------------- ------------- -------
NET ASSET VALUE, END OF PERIOD $ 12.15 $ 12.63 $ 9.08 $ 11.91
------- ------------- ------------- -------
------- ------------- ------------- -------
TOTAL RETURN (1) 9.91% 39.35% (23.07)% 9.47%
------- ------------- ------------- -------
------- ------------- ------------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 19,581 $ 18,701 $ 7,658 $ 3,081
Ratio of Expenses to Average Net
Assets 2.10%** 2.11% 2.46%** 2.85%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.19)%** 1.18% (0.44)%** (0.94)%**
Portfolio Turnover Rate 149% 131% 107% 149%
Average Commission Rate # $ 0.0005 N/A N/A $ 0.0005
- ---------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.01 $ 0.09 $ 0.13 $ 0.06
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.02%** 3.28% 4.30%** 3.77%**
Net Investment Income (Loss) to
Average Net Assets (1.11)%** 0.01% (2.26)%** (1.86)%**
Ratio of Expenses to Average Net
Assets excluding Country Tax
Expense 2.10%** 2.10% 2.10%** 2.85%**
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1996
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.58
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.03
Net Realized and Unrealized Gain
(Loss) 2.84
------
Total From Investment Operations 2.87
------
DISTRIBUTIONS
Net Investment Income --
Net Realized Gain --
Paid in Capital --
------
Total Distributions --
------
NET ASSET VALUE, END OF PERIOD $ 12.45
------
------
TOTAL RETURN (1) 29.26%
------
------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 2,041
Ratio of Expenses to Average Net
Assets 2.87%**
Ratio of Net Investment Income (Loss)
to Average Net Assets 0.88%**
Portfolio Turnover Rate 131%
Average Commission Rate # N/A
- --------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.89%**
Net Investment Income (Loss) to
Average Net Assets (0.14)%**
Ratio of Expenses to Average Net
Assets excluding Country Tax
Expense 2.85%**
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED JULY 6, 1994*
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.43 $ 8.99 $ 12.00
------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.05) 0.04 (0.08)
Net Realized and Unrealized Gain
(Loss) 1.20 3.40 (2.73)
------- ------ ------
Total From Investment Operations 1.15 3.44 (2.81)
------- ------ ------
DISTRIBUTIONS
Net Investment Income (0.02) -- --
Net Realized Gain (1.63) -- --
Paid in Capital -- -- (0.20)
------- ------ ------
Total Distributions (1.65) -- (0.20)
------- ------ ------
NET ASSET VALUE, END OF PERIOD $ 11.93 $ 12.43 $ 8.99
------- ------ ------
------- ------ ------
TOTAL RETURN (1) 9.44% 38.26% (23.83)%
------- ------ ------
------- ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,229 $ 6,780 $ 4,085
Ratio of Expenses to Average Net
Assets 2.85%** 2.86% 3.20%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.94)%** 0.42% (1.16)%**
Portfolio Turnover Rate 149% 131% 107%
Average Commission Rate # $ 0.0005 N/A N/A
- -----------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.05 $ 0.12 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.77%** 4.06% 5.20%**
Net Investment Loss to Average Net
Assets (1.86)%** (0.78)% (3.16)%**
Ratio of Expenses to Average Net
Assets excluding Country Tax
Expense 2.85%** 2.85% 2.85%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
+ The Fund began offering Class B shares on August 1, 1995
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged. For the period ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.32% of the trade amount.
-----------------
95
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------- -----------------
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED JULY 6, 1994* DECEMBER 31, 1996
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 (UNAUDITED)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.06 $ 10.61 $ 12.00 $ 11.94
------- ------------- ------------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.02) 0.05 0.05 (0.06)
Net Realized and Unrealized Gain
(Loss) (1.18) 1.44 (1.44) (1.16)
------- ------------- ------------- -------
Total from Investment Operations (1.20) 1.49 (1.39) (1.22)
------- ------------- ------------- -------
DISTRIBUTIONS
Net Investment Income (0.04) (0.04) -- (0.04)
Net Realized Gain (0.13) -- -- (0.13)
------- ------------- ------------- -------
Total Distributions (0.17) (0.04) -- (0.17)
------- ------------- ------------- -------
NET ASSET VALUE, END OF PERIOD $ 10.69 $ 12.06 $ 10.61 $ 10.55
------- ------------- ------------- -------
------- ------------- ------------- -------
TOTAL RETURN (1) (9.90)% 14.16% (11.58)% (10.22)%
------- ------------- ------------- -------
------- ------------- ------------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 72,381 $ 114,850 $ 26,091 $ 15,102
Ratio of Expenses to Average Net
Assets 2.22%** 2.16% 2.33%** 2.97%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.61)%** 0.93% 0.81%** (1.36)%**
Portfolio Turnover Rate 42% 42% 32% 42%
Average Commission Rate # $ 0.0004 N/A N/A $ 0.0004
- ---------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.01 $ 0.02 $ 0.04 $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.47%** 2.56% 3.10%** 3.22%**
Net Investment Income (Loss) to
Average Net Assets (0.86)%** 0.53% 0.04%** (1.61)%**
Ratio of Expenses to Average Net
Assets excluding Country Tax
Expense 2.15%** 2.15% 2.15%** 2.90%**
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1996
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.91
-------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01
Net Realized and Unrealized Gain
(Loss) 1.02
-------
Total from Investment Operations 1.03
-------
DISTRIBUTIONS
Net Investment Income --
Net Realized Gain --
-------
Total Distributions --
-------
NET ASSET VALUE, END OF PERIOD $ 11.94
-------
-------
TOTAL RETURN (1) 9.45%
-------
-------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 10,416
Ratio of Expenses to Average Net
Assets 2.91%**
Ratio of Net Investment Income (Loss)
to Average Net Assets 0.30%**
Portfolio Turnover Rate 42%
Average Commission Rate # N/A
- --------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.31%**
Net Investment Income (Loss) to
Average Net Assets (0.10)%**
Ratio of Expenses to Average Net
Assets excluding Country Tax
Expense 2.90%**
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED JULY 6, 1994*
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.93 $ 10.53 $ 12.00
------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.07) (0.01) --
Net Realized and Unrealized Gain
(Loss) (1.15) 1.41 (1.47)
------- ------------- -------------
Total from Investment Operations (1.22) 1.40 (1.47)
------- ------------- -------------
DISTRIBUTIONS
Net Investment Income (0.01) -- --
Net Realized Gain (0.13) -- --
------- ------------- -------------
Total Distributions (0.14) -- --
------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 10.57 $ 11.93 $ 10.53
------- ------------- -------------
------- ------------- -------------
TOTAL RETURN (1) (10.19)% 13.30% (12.25)%
------- ------------- -------------
------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 41,157 $ 43,601 $ 22,245
Ratio of Expenses to Average Net
Assets 2.97%** 2.91% 3.08%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1.36)%** (0.11)% 0.06%**
Portfolio Turnover Rate 42% 42% 32%
Average Commission Rate # $ 0.0004 N/A N/A
- -----------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.01 $ 0.03 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.22%** 3.34% 3.90%**
Net Investment Loss to Average Net
Assets (1.61)%** (0.54)% (0.76)%**
Ratio of Expenses to Average Net
Assets excluding Country Tax
Expense 2.90%** 2.90% 2.90%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged. For the period ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.36% of the trade amount.
- -------------
96
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------- -----------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JANUARY 2, 1996* TO DECEMBER 31, 1996 JANUARY 2, 1996* TO
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 (UNAUDITED) JUNE 30, 1996
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.40 $ 12.00 $ 14.38 $ 12.00
------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.02 0.06 (0.02) 0.03
Net Realized and Unrealized Gain 1.99 2.40 1.97 2.39
------- ------ ------- ------
Total From Investment Operations 2.01 2.46 1.95 2.42
------- ------ ------- ------
DISTRIBUTIONS
Net Investment Income (0.03) (0.06) (0.02) (0.04)
Net Realized Gain (1.35) -- (1.35) --
------- ------ ------- ------
Total Distributions (1.38) (0.06) (1.37) (0.04)
------- ------ ------- ------
NET ASSET VALUE, END OF PERIOD $ 15.03 $ 14.40 $ 14.96 $ 14.38
------- ------ ------- ------
------- ------ ------- ------
TOTAL RETURN (1) 14.13% 20.52% 13.72% 20.18%
------- ------ ------- ------
------- ------ ------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 8,533 $ 5,382 $ 5,418 $ 2,426
Ratio of Expenses to Average Net
Assets 1.50%** 2.03%** 2.25%** 2.67%**
Ratio of Net Investment Income
(Loss) to Average Net Assets 0.27%** 1.22%** (0.48)%** 0.43%**
Portfolio Turnover Rate 139% 204% 139% 204%
Average Commission Rate # $ 0.0542 N/A $ 0.0542 N/A
- --------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income (Loss) $ 0.16 $ 0.06 $ 0.08 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.81%** 3.26%** 4.56%** 3.79%**
Net Investment (Loss) to Average
Net Assets (2.04)%** (0.01)%** (2.79)%** (0.69)%**
Ratio of Expenses to Average Net
Assets excluding Dividend Expense
on Securities Sold Short. 1.50%** 1.50%** 2.25%** 2.25%**
<CAPTION>
CLASS C
-----------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 JANUARY 2, 1996* TO
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996
<S> <C> <C>
- ------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.37 $ 12.00
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.02) 0.03
Net Realized and Unrealized Gain 1.97 2.38
------- ------
Total From Investment Operations 1.95 2.41
------- ------
DISTRIBUTIONS
Net Investment Income (0.02) (0.04)
Net Realized Gain (1.35) --
------- ------
Total Distributions (1.37) (0.04)
------- ------
NET ASSET VALUE, END OF PERIOD $ 14.95 $ 14.37
------- ------
------- ------
TOTAL RETURN (1) 13.73% 20.10%
------- ------
------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 5,244 $ 2,582
Ratio of Expenses to Average Net
Assets 2.25%** 2.67%**
Ratio of Net Investment Income
(Loss) to Average Net Assets (0.48)%** 0.44%**
Portfolio Turnover Rate 139% 204%
Average Commission Rate # $ 0.0542 N/A
- -------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income (Loss) $ 0.08 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 4.56%** 3.80%**
Net Investment (Loss) to Average
Net Assets (2.79)%** (0.69)%**
Ratio of Expenses to Average Net
Assets excluding Dividend Expense
on Securities Sold Short. 2.25%** 2.25%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
-----------------
97
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
U.S. REAL ESTATE FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------- -------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 MAY 1, 1996* TO DECEMBER 31, 1996 MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 (UNAUDITED) JUNE 30, 1996
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.52 $ 12.00 $ 12.52 $ 12.00
------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.20 0.08 0.05 0.07
Net Realized and Unrealized Gain 2.79 0.48 2.89 0.48
------- ------ ------- ------
Total From Investment Operations 2.99 0.56 2.94 0.55
------- ------ ------- ------
DISTRIBUTIONS
Net Investment Income (0.17) (0.04) (0.13) (0.03)
Net Realized Gain (0.24) -- (0.24) --
------- ------ ------- ------
Total Distributions (0.41) (0.04) (0.37) (0.03)
------- ------ ------- ------
NET ASSET VALUE, END OF PERIOD $ 15.10 $ 12.52 $ 15.09 $ 12.52
------- ------ ------- ------
------- ------ ------- ------
TOTAL RETURN (1) 21.53% 4.63% 23.67% 4.54%
------- ------ ------- ------
------- ------ ------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,565 $ 1,829 $ 4,567 $ 2,197
Ratio of Expenses to Average Net
Assets 1.55%** 1.55%** 2.30%** 2.30%**
Ratio of Net Investment Income to
Average Net Assets 2.30%** 4.11%** 1.55%** 3.35%**
Portfolio Turnover Rate 73% 0% 73% 0%
Average Commission Rate # $ 0.0570 N/A $ 0.0570 N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.16 $ 0.08 $ 0.06 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.37%** 5.58%** 4.12%** 6.34%**
Net Investment Income to Average
Net Assets 0.48%** 0.08%** (0.27)%** (0.69)%**
<CAPTION>
CLASS C
-------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996
<S> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.52 $ 12.00
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.06 0.07
Net Realized and Unrealized Gain 2.88 0.48
------- ------
Total From Investment Operations 2.94 0.55
------- ------
DISTRIBUTIONS
Net Investment Income (0.13) (0.03)
Net Realized Gain (0.24) --
------- ------
Total Distributions (0.37) (0.03)
------- ------
NET ASSET VALUE, END OF PERIOD $ 15.09 $ 12.52
------- ------
------- ------
TOTAL RETURN (1) 23.65% 4.54%
------- ------
------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 3,000 $ 1,782
Ratio of Expenses to Average Net
Assets 2.30%** 2.30%**
Ratio of Net Investment Income to
Average Net Assets 1.55%** 3.39%**
Portfolio Turnover Rate 73% 0%
Average Commission Rate # $ 0.0570 N/A
- ------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.08 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 4.12%** 6.32%**
Net Investment Income to Average
Net Assets (0.27)%** (0.63)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged.
- -------------
98
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
HIGH YIELD FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------- -------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 MAY 1, 1996* TO DECEMBER 31, 1996 MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 (UNAUDITED) JUNE 30, 1996
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.92 $ 12.00 $ 11.93 $ 12.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.56 0.13 0.51 0.12
Net Realized and Unrealized Gain
(Loss) 0.63 (0.09) 0.62 (0.09)
------ ------ ------ ------
Total From Investment Operations 1.19 0.04 1.13 0.03
------ ------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.58) (0.12) (0.53) (0.10)
Net Realized Gain (0.05) -- (0.05) --
------ ------ ------ ------
Total Distributions (0.63) (0.12) (0.58) (0.10)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 12.48 $ 11.92 $ 12.48 $ 11.93
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN (1) 10.28% 0.29% 9.75% 0.21%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 4,694 $ 3,907 $ 5,608 $ 3,421
Ratio of Expenses to Average Net
Assets 1.25%** 1.25%** 2.00%** 2.00%**
Ratio of Net Investment Income to
Average Net Assets 9.21%** 6.85%** 8.45%** 6.08%**
Portfolio Turnover Rate 42% 10% 42% 10%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07 $ 0.04 $ 0.07 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.39%** 3.51%** 3.14%** 4.25%**
Net Investment Income to Average
Net Assets 8.07%** 4.59%** 7.32%** 3.83%**
<CAPTION>
CLASS C
-------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 1996 MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996
<S> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.93 $ 12.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.51 0.12
Net Realized and Unrealized Gain
(Loss) 0.62 (0.09)
------ ------
Total From Investment Operations 1.13 0.03
------ ------
DISTRIBUTIONS
Net Investment Income (0.53) (0.10)
Net Realized Gain (0.05) --
------ ------
Total Distributions (0.58) (0.10)
------ ------
NET ASSET VALUE, END OF PERIOD $ 12.48 $ 11.93
------ ------
------ ------
TOTAL RETURN (1) 9.75% 0.21%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 4,493 $ 3,316
Ratio of Expenses to Average Net
Assets 2.00%** 2.00%**
Ratio of Net Investment Income to
Average Net Assets 8.46%** 6.07%**
Portfolio Turnover Rate 42% 10%
- ------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.14%** 4.25%**
Net Investment Income to Average
Net Assets 7.32%** 3.82%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
-----------------
99
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
INTERNATIONAL MAGNUM FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------------- ----------------- -----------------
JULY 1, 1996* TO JULY 1, 1996* TO JULY 1, 1996* TO
DECEMBER 31, 1996 DECEMBER 31, 1996 DECEMBER 31, 1996
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.00 $ 12.00 $ 12.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.03 (0.03) (0.03)
Net Realized and Unrealized Gain 0.24 0.26 0.26
------- ------- -------
Total From Investment Operations 0.27 0.23 0.23
------- ------- -------
DISTRIBUTIONS
Net Investment Income (0.13) (0.10) (0.10)
Net Realized Gain (0.01) (0.01) (0.01)
------- ------- -------
Total Distributions (0.14) (0.11) (0.11)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 12.13 $ 12.12 $ 12.12
------- ------- -------
------- ------- -------
TOTAL RETURN (1) 2.29% 1.93% 1.89%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 5,508 $ 5,465 $ 5,517
Ratio of Expenses to Average Net
Assets 1.65%** 2.40%** 2.40%**
Ratio of Net Investment Income (Loss)
to Average Net Assets 0.13%** (0.62)%** (0.62)%**
Portfolio Turnover Rate 7% 7% 7%
Average Commission Rate # $ 0.0411 $ 0.0411 $ 0.0411
- -------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income (Loss) $ 0.36 $ 0.08 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.42%** 4.17%** 4.17%**
Net Investment Loss to Average Net
Assets (1.79)%** (2.54)%** (2.54)%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred
sales charges. Total returns for periods of less than one year are not
annualized.
# For fiscal years beginning on or after September 1, 1995, a portfolio
is required to disclose the average commission rate per share it paid
for trades on which commissions were charged. For the period ended
December 31, 1996, the average commission rate paid on trades on which
commissions were charged was 0.42% of the trade amount.
- -------------
100
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.0220 0.0464 0.0448 0.0243 0.0246
Net Realized and Unrealized Gain
(Loss) -- (0.0011) -- 0.0011 0.0002
-------- ------------- ------------- ------------- -------------
Total From Investment Operations 0.0220 0.0453 0.0448 0.0254 0.0248
-------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income (0.0220) (0.0464) (0.0448) (0.0243) (0.0246)
Net Realized Gain -- (0.0001) -- (0.0011) (0.0002)
-------- ------------- ------------- ------------- -------------
Total Distributions (0.0220) (0.0465) (0.0448) (0.0254) (0.0248)
-------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------------- ------------- ------------- -------------
-------- ------------- ------------- ------------- -------------
TOTAL RETURN 2.20% 4.72% 4.58% 2.45% 2.51%
-------- ------------- ------------- ------------- -------------
-------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 116,816 $ 145,978 $ 67,505 $ 102,551 $ 101,736
Ratio of Expenses to Average Net
Assets 0.95%** 0.95% 0.95% 0.95% 0.95%
Ratio of Net Investment Income to
Average Net Assets 4.57%** 4.68% 4.61% 2.40% 2.50%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.10%** 1.24% 1.12% 1.22% 1.19%
Net Investment Income to Average
Net Assets 4.46%** 4.39% 4.44% 2.13% 2.26%
<CAPTION>
MARCH 12, 1992*
TO JUNE 30,
SELECTED PER SHARE DATA AND RATIOS 1992
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
---------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.0094
Net Realized and Unrealized Gain
(Loss) --
---------------
Total From Investment Operations 0.0094
---------------
DISTRIBUTIONS
Net Investment Income (0.0094)
Net Realized Gain --
---------------
Total Distributions (0.0094)
---------------
NET ASSET VALUE, END OF PERIOD $ 1.00
---------------
---------------
TOTAL RETURN 0.94%
---------------
---------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 269,627
Ratio of Expenses to Average Net
Assets 0.95%**
Ratio of Net Investment Income to
Average Net Assets 3.07%**
- --------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.29%**
Net Investment Income to Average
Net Assets 2.73%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations.
** Annualized
-----------------
101
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1996 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED) JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.0224 0.0463 0.0446 0.0246 0.0243
Net Realized and Unrealized Gain
(Loss) -- (0.0006) 0.0001 -- 0.0001
-------- ------------- ------------- ------------- -------------
Total From Investment Operations 0.0224 0.0457 0.0447 0.0246 0.0244
-------- ------------- ------------- ------------- -------------
DISTRIBUTIONS
Net Investment Income (0.0224) (0.0463) (0.0446) (0.0246) (0.0243)
Net Realized Gain -- -- (0.0001) -- (0.0001)
-------- ------------- ------------- ------------- -------------
Total Distributions (0.0224) (0.0463) (0.0447) (0.0246) (0.0244)
-------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------------- ------------- ------------- -------------
-------- ------------- ------------- ------------- -------------
TOTAL RETURN 2.26% 4.72% 4.55% 2.49% 2.47%
-------- ------------- ------------- ------------- -------------
-------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 254,854 $ 170,973 $ 171,515 $ 176,599 $ 156,310
Ratio of Expenses to Average Net
Assets 0.98%** 0.98% 0.98% 0.98% 0.98%
Ratio of Net Investment Income to
Average Net Assets 4.04%** 4.65% 4.45% 2.45% 2.44%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 0.97%** 1.22% 1.18% 1.19% 1.20%
Net Investment Income to Average
Net Assets 3.97%** 4.41% 4.25% 2.24% 2.22%
<CAPTION>
YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1992
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
-------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.0402
Net Realized and Unrealized Gain
(Loss) --
-------------
Total From Investment Operations 0.0402
-------------
DISTRIBUTIONS
Net Investment Income (0.0402)
Net Realized Gain --
-------------
Total Distributions (0.0402)
-------------
NET ASSET VALUE, END OF PERIOD $ 1.00
-------------
-------------
TOTAL RETURN 4.11%
-------------
-------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 190,034
Ratio of Expenses to Average Net
Assets 0.98%
Ratio of Net Investment Income to
Average Net Assets 3.97%
- --------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.27%
Net Investment Income to Average
Net Assets 3.68%
</TABLE>
- --------------------------------------------------------------------------------
** Annualized
- -------------
102
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
Morgan Stanley Fund, Inc. (the "Fund") was incorporated under the laws of
Maryland on August 14, 1992 and commenced operations on January 4, 1993. The
Fund is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company which offers redeemable shares of
diversified and non-diversified investment portfolios. As of December 31, 1996,
the Fund had thirteen separate active investment portfolios: Morgan Stanley
Global Equity Allocation Fund, Morgan Stanley Global Fixed Income Fund, Morgan
Stanley Asian Growth Fund, Morgan Stanley American Value Fund, Morgan Stanley
Worldwide High Income Fund, Morgan Stanley Latin American Fund, Morgan Stanley
Emerging Markets Fund, Morgan Stanley Aggressive Equity Fund, Morgan Stanley
U.S. Real Estate Fund, Morgan Stanley High Yield Fund, Morgan Stanley
International Magnum Fund, Morgan Stanley Government Obligations Money Market
Fund and Morgan Stanley Money Market Fund (referred to herein respectively as
"Global Equity Allocation Fund", "Global Fixed Income Fund", "Asian Growth
Fund", "American Value Fund", "Worldwide High Income Fund", "Latin American
Fund", "Emerging Markets Fund", "Aggressive Equity Fund", "U.S. Real Estate
Fund", "High Yield Fund", "International Magnum Fund", "Government Obligations
Money Market Fund" and "Money Market Fund" individually a "Portfolio" and
collectively as the "Portfolios"). The Fund currently offers three classes of
shares (with the exception of the Government Obligations Money Market and Money
Market Funds), Class A, Class B and Class C shares. Class A shares are sold with
a front-end sales charge of up to 4.75%. Class B shares are sold with a
contingent deferred sales charge on redemptions made within 6 years of purchase
which declines annually from 5% for redemptions made in year one, down to 1% in
year six. The contingent deferred sales charge is based on the lesser of the
current market value of the shares redeemed or the total cost of such shares.
Class B shares will automatically convert to Class A shares after the seventh
year following purchase. Class C shares are sold with a contingent deferred
sales charge of 1% for shares that are redeemed within one year of purchase,
based on the lesser of the current market value of the shares redeemed or the
total cost of such shares. All three classes of shares have identical voting,
dividend, liquidation and other rights. The Fund began offering the current
Class B shares on August 1, 1995. Class B shares held prior to May 1, 1995 were
renamed Class C shares. On July 16, 1996, The Board of Directors of the PCS Cash
Fund, Inc. approved an Agreement and Plan of Reorganization and Liquidation by
and between the PCS Cash Fund, Inc. (comprised of the PCS Government Obligations
Money Market Portfolio, PCS Money Market Portfolio and PCS Tax-Free Money Market
Portfolio) and Morgan Stanley Fund, Inc. On September 26, 1996, all or
substantially all of the PCS Cash Fund, Inc. assets and liabilities were
transferred to Morgan Stanley Fund, Inc. in exchange for shares of Morgan
Stanley Fund, Inc.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures on the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average of the mean between the current bid and asked prices obtained from
reputable brokers. Bonds and other fixed income securities may be valued
according to the broadest and most representative market. In addition, bonds and
other fixed income securities may be valued on the basis of prices provided by a
pricing service which are based primarily on institutional size trading in
similar groups of securities. Debt securities purchased with remaining
maturities of 60 days or less are valued at amortized cost, if it approximates
market value. Securities owned by the Government Obligations Money Market and
Money Market Funds are stated at amortized cost, which approximates market
value. All other securities and assets for which market values are not readily
available, including restricted securities, are valued at fair value as
determined in good faith by the Board of Directors, although the actual
calculations may be done by others.
2. TAXES: It is each portfolio's intention to qualify as a regulated investment
company and distribute all of its taxable income. Accordingly, no provision for
Federal income taxes is required in the financial statements. A portfolio may be
subject to taxes imposed by countries in which it invests. Such taxes are
generally based on income and/or capital gains earned or repatriated. Taxes are
accrued and applied to net investment income, net realized capital gains and net
unrealized appreciation as the income and/or capital gains is earned.
At June 30, 1996, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by
regulations, through the indicated expiration dates:
<TABLE>
<CAPTION>
EXPIRATION DATE
JUNE 30,
(000)
--------------------
PORTFOLIOS 2000 2003 2004
- --------------------------------------- ------ ---- ------
<S> <C> <C> <C>
Global Fixed Income.................... $ -- $110 $ --
Latin American......................... 1,310 -- --
Emerging Markets....................... -- -- 1,033
</TABLE>
-------------
103
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
To the extent that capital loss carryforwards are used to offset any future net
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by a Portfolio for gains realized and not distributed. To the extent that
capital gains are so offset, such gains will not be distributed to shareholders.
Net capital and net currency losses incurred after October 31, and within the
taxable year are deemed to arise on the first business day of the Portfolio's
next taxable year. For the period from November 1, 1995 to June 30, 1996 certain
Portfolios incurred and elected to defer until July 1, 1996 for U.S. Federal
income tax purposes net currency losses of approximately:
<TABLE>
<CAPTION>
CURRENCY
LOSSES
PORTFOLIO (000)
- --------------------------------------- --------
<S> <C>
Global Fixed Income.................... $ 113
Asian Growth........................... 158
Latin American......................... 15
Emerging Markets....................... 80
</TABLE>
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the underlying
securities, with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records
of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances. However, pursuant to U.S. Federal income
tax regulations, the foreign currency portion of gains and losses realized on
sales and maturities of foreign denominated debt securities are treated as
ordinary income for U.S. Federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from forward foreign currency exchange
contracts, disposition of foreign currencies, currency gains or losses realized
between the trade and settlement dates on securities transactions, and the
difference between the amount of investment income and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net unrealized currency gains (losses) from valuing foreign
currency denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on the
Statement of Assets and Liabilities. The change in net unrealized currency gains
(losses) for the period is reflected on the Statement of Operations.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibly lower level of
governmental supervision and regulation of foreign securities markets and the
possibility of political or economic instability.
Prior governmental approval for foreign investments may be required under
certain circumstances in some countries, and the extent of foreign investment in
domestic companies may be subject to limitations in other countries. Foreign
ownership limitations also may be imposed by the charters of individual
companies to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as "Foreign"
in the Portfolio of Investments) may be created and offered for investment. The
"local" and "foreign" shares' market values may vary.
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter
into forward foreign currency exchange contracts to attempt to protect
securities and related receivables and payables against changes in future
foreign currency exchange rates. A forward currency exchange contract is an
agreement between two parties to buy or sell currency at a set price on a future
date. The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is marked-to-market daily using the forward rate,
and the change in market value is recorded by the Portfolio as realized gain or
loss. The Portfolio records realized gains or losses when the contract is
closed, equal to
- -----------------
104
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
the difference between the value of the contract at the time it was opened and
the value of the contract at the time it was closed. Risks may arise upon
entering into these contracts from the potential inability of couterparties to
meet the terms of their contracts, but is generally limited to the amount of
unrealized gain on the contracts, if any, at the date of default. Risks may also
arise from the unanticipated movements in the value of a foreign currency
relative to the U.S. dollar.
6. SHORT SALES: The Aggressive Equity Fund may sell securities short. A short
sale is a transaction in which the Portfolio sells securities it may or may not
own, but has borrowed, in anticipation of a decline in the market price of the
securities. The Portfolio is obligated to replace the borrowed securities at the
market price at the time of replacement. The Portfolio may have to pay a premium
to borrow the securities as well as pay dividends or interests payable on the
securities until they are replaced. The Portfolio's obligation to replace the
securities borrowed in connection with a short sale will generally be secured by
collateral deposited with the broker that consists of cash, U.S. Government
securities or other liquid, high grade debt obligations. In addition, the
Portfolio will place in a segregated account with its Custodian an amount of
cash, U.S. Government securities or other liquid high grade debt obligations
equal to the difference, if any, between (1) the market value of the securities
sold at the time they were sold short and (2) any cash, U.S. Government
securities or other liquid high grade debt obligations deposited as collateral
with the broker in connection with the short sale (not including the proceeds of
the short sale.) Short sales by the Portfolio involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from the purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases cannot exceed the total amount
invested.
7. PURCHASED OPTIONS: Certain Portfolios may purchase call or put options on
their portfolio securities. A Portfolio may purchase call options to protect
against an increase in the price of a security it anticipates purchasing. A
Portfolio may purchase put options on securities which it holds to protect
against decline in the value of the security. Risks may arise from an imperfect
correlation between the change in market value of the securities held by the
Portfolio and the prices of options relating to the securities purchased or sold
by the Portfolio and from the possible lack of a liquid secondary market for an
option. The maximum exposure to loss for any purchased option is limited to the
premium initially paid for the option.
8. SECURITY LENDING: Certain Portfolios may lend its investment securities to
qualified institutional investors who borrow securities in order to complete
certain transactions. By lending its investment securities, a Portfolio attempts
to increase its net investment income through the receipt of interest on the
loan. Any gain or loss in the market price of the securities loaned that might
occur and any interest earned or dividends declared during the term of the loan
would be for the account of the Portfolio. Risks of delay in recovery of the
securities or even loss of rights in the collateral may occur should the
borrower of the securities fail financially. Risks may also arise to the extent
that the value of the collateral decreases below the value of the securities
loaned.
Portfolios that lend securities receive cash, securities issued or guaranteed by
the U.S. Government or letters of credit as collateral in an amount equal to or
exceeding 100% of the current market value of the loaned securities. Any cash
received as collateral is invested in interest bearing repurchase agreements
with approved counterparties. A portion of the interest received on the
repurchase agreements is retained by the Portfolio and the remainder is rebated
to the borrower of the securities. The net amount of interest earned and
interest rebated is included in the Statement of Operations as interest income.
The value of loaned securities and related collateral outstanding at December
31, 1996 is as follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- --------------------------------------- --------------- ----------
<S> <C> <C>
Global Equity Allocation............... $ 22,000 $ 23,511
</TABLE>
At December 31, 1996, the Fund had invested the cash collateral in a repurchase
agreement with Goldman Sachs. Such repurchase agreement was collateralized by
U.S. Treasury obligations.
Morgan Stanley Trust Company administers the security lending program and has
received fees for its services in the amount of $11,594 for the six months ended
December 31, 1996.
9. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: Each
Portfolio may make forward commitments to purchase or sell securities. Payment
and delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not exceeding 120 days) after
the date of the transaction. Additionally each Portfolio may purchase securities
on a when-issued or delayed-delivery basis. Securities purchased on a
when-issued or delayed delivery basis are purchased for delivery beyond the
normal settlement date at a stated price and yield, and no income accrues to the
Portfolio on such securities prior to delivery. When the Portfolio enters into a
purchase transaction on a when-issued or delayed basis, it establishes a
segregated account in which it maintains liquid assets in an amount at least
equal in value to the Portfolio's commitments to purchase such securities.
Purchasing securities on a forward commitment or when issued or delayed-delivery
basis may involve a risk that the market price at the time of delivery may be
lower than the agreed upon purchase price, in which case there could be an
unrealized loss at the time of delivery.
-------------
105
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
10. ORGANIZATIONAL COSTS: The organizational costs of the Portfolios are being
amortized on a straight line basis over a period of five years beginning with
each Portfolio's commencement of operations. Morgan Stanley Asset Management,
Inc. has agreed that in the event any of its initial shares in a Portfolio which
comprised the Fund at its inception are redeemed, the proceeds on redemption
will be reduced by the pro-rata portion of any unamortized organizational costs
in the same proportion as the number of shares redeemed bears to the initial
shares held at the same time of redemption.
11. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Dividend income
is recorded on the ex-dividend date (except for certain foreign dividends which
may be recorded as soon as the Fund is informed of such dividends) net of
applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on the accrual basis except where
collection is in doubt. Discounts and premiums on securities purchased are
amortized according to the effective yield method over their respective lives.
Most expenses of the Fund can be directly attributed to a particular portfolio.
Expenses which cannot be directly attributed are apportioned among the
Portfolios based upon relative net assets. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses are allocated to
each class of shares based upon their relative net assets. Distributions from
the Portfolios are recorded on the ex-distribution date.
Certain Portfolios own shares of real estate investment trusts ("REITs") which
report information on the source of their distributions annually. A portion of
distributions received from REITs during the year is estimated to be a return of
capital and is recorded as a reduction of their cost.
The amount and the character of income and capital gain distributions to be paid
by the Fund are determined in accordance with Federal income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing book and tax treatment for foreign
currency transactions, net operating losses, foreign taxes on net realized
gains, deductibility of interest expense on short sales and gains on certain
securities of corporations designated as "passive foreign investment companies".
Permanent book and tax basis differences relating to shareholder distributions
may result in reclassification among undistributed net investment income (loss),
accumulated net realized gain (loss) and paid in capital.
Permanent book and tax basis differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income for the purpose
of calculating net investment income (loss) per share in the Financial
Highlights.
B. ADVISER: Morgan Stanley Asset Management Inc. (the "Adviser" or "MSAM"), a
wholly owned subsidiary of Morgan Stanley Group, Inc., provides the Fund with
investment advisory services at a fee paid quarterly (monthly for the Government
Obligations Money Market and Money Market Funds) and calculated at the annual
rates of average daily net assets indicated below. The Adviser has agreed to
reduce advisory fees payable to it and to reimburse the Portfolios, if
necessary, if the annual operating expenses, as defined, expressed as a
percentage of average daily net assets, exceed the maximum ratios indicated as
follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
PORTFOLIO ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
- --------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
Global Equity Allocation............... 1.00% 1.70% 2.45%
Global Fixed Income.................... 0.75% 1.45% 2.20%
Asian Growth........................... 1.00% 1.90% 2.65%
American Value......................... 0.85% 1.50% 2.25%
Worldwide High Income.................. 0.75% 1.55% 2.30%
Latin American......................... 1.25% 2.10% 2.85%
Emerging Markets....................... 1.25% 2.15% 2.90%
Aggressive Equity...................... 0.90% 1.50% 2.25%
U.S. Real Estate....................... 1.00% 1.55% 2.30%
High Yield............................. 0.75% 1.25% 2.00%
International Magnum................... 1.00% 1.65% 2.40%
Government Obligations Money Market.... 0.45% 0.95% N/A
Money Market........................... 0.45% 0.98% N/A
</TABLE>
C. ADMINISTRATOR: MSAM also provides the Fund with administrative services
pursuant to an administrative agreement for a monthly fee which on an annual
basis equals 0.25% of the average daily net assets of each Portfolio, plus
reimbursement of out-of-pocket expenses. Under an agreement between MSAM and The
Chase Manhattan Bank ("Chase"), through its affiliate Chase Global Funds
Services Company ("CGFSC"), Chase provides certain administrative services to
the Fund. Chase is compensated for such services by MSAM from the fee it
receives from the Fund.
D. DISTRIBUTOR: Through December 31, 1996, Morgan Stanley & Co. Incorporated, a
wholly-owned subsidiary of Morgan Stanley Group Inc. and an affiliate of MSAM,
serves as the distributor of the Fund's shares and provides all classes of each
Portfolio with the distribution services pursuant to separate Distribution Plans
in accordance with Rule 12b-1 under the Investment Company Act of 1940 as
amended. Effective January 1, 1997, Van Kampen American Capital Distributors,
Inc. serves as the Distributor of the Fund's shares. The Distributor is entitled
to receive from the Portfolios a distribution fee, which is accrued daily and
paid quarterly, of up to 1.00% on an annualized basis, of the average daily net
assets attributable to the Class B and
- -----------------
106
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
Class C shares of each Portfolio with the exception of Government Obligations
Money Market and Money Market Funds which accrue daily and pay monthly, of up to
0.50% on an annualized basis, of the average daily net assets.
The Distributor may receive a contingent deferred sales charge for certain
purchases of Class A, Class B and Class C shares of each Portfolio redeemed
within one to six years following such purchase. For the six months ended
December 31, 1996, Morgan Stanley & Co. Incorporated has advised the Fund that
it earned initial sales charges of $659,000 for Class A shares and deferred
sales charges of $345,000 and $81,000 for Class B shares and Class C shares,
respectively.
E. CUSTODIANS: Morgan Stanley Trust Company ("MSTC"), a wholly owned subsidiary
of Morgan Stanley Group, Inc., acts as custodian for the Fund's assets held
outside the United States in accordance with a custodian agreement. Custodian
fees are computed and payable monthly based on assets held, investment purchases
and sales activity, an account maintenance fee, plus reimbursement for certain
out-of-pocket expenses.
For the six months ended December 31, 1996, the following portfolios incurred
custody fees and had amounts payable to MSTC at December 31, 1996:
<TABLE>
<CAPTION>
MSTC CUSTODY
FEES CUSTODY FEES
INCURRED PAYABLE TO MSTC
FUND (000) (000)
- --------------------------------------- ------------ ---------------
<S> <C> <C>
Global Equity Allocation............... $ 96 $ 47
Global Fixed Income.................... 6 2
Asian Growth........................... 438 193
Worldwide High Income.................. 32 27
Latin American......................... 75 35
Emerging Markets....................... 222 100
International Magnum................... 32 15
</TABLE>
In addition, for the six months ended December 31, 1996, certain portfolios
earned interest income and/or incurred interest expense in amounts not exceeding
$16,500 per portfolio on balances maintained with MSTC.
F. PURCHASES AND SALES: For the six months ended December 31, 1996, purchases
and sales of investment securities other than long-term U.S. Government
securities and short term investments were:
<TABLE>
<CAPTION>
PURCHASES SALES
FUND (000) (000)
- --------------------------------------- --------- --------
<S> <C> <C>
Global Equity Allocation............... $ 39,008 $ 31,584
Global Fixed Income.................... 6,993 7,452
Asian Growth........................... 123,914 139,743
American Value......................... 9,089 7,303
Worldwide High Income.................. 113,615 76,464
Latin American......................... 41,777 42,640
Emerging Markets....................... 56,794 60,052
Aggressive Equity...................... 24,694 18,479
U.S. Real Estate....................... 11,369 5,908
High Yield............................. 9,237 4,792
International Magnum................... 13,992 646
</TABLE>
Purchases and sales of long term U.S. Government securities during the six
months ended December 31, 1996 occurred in the Global Fixed Income Fund and
totaled $454,000 and $284,000, respectively.
G. OTHER: At December 31, 1996, the net assets of certain Portfolios were
substantially comprised of foreign denominated securities and currency. Changes
in currency exchange rates will affect the U.S. dollar value of, and investment
income from, such securities.
Foreign denominated assets and liabilities, including Portfolio securities and
foreign currency holdings, were translated at the following exchange rates as of
December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Argentine Peso................ 0.99980 = $1.00
Australian Dollar............. 1.25945 = $1.00
Austrian Shilling............. 10.82800 = $1.00
Brazilian Real................ 1.03890 = $1.00
British Pound................. 0.58391 = $1.00
Canadian Dollar............... 1.36940 = $1.00
Colombian Peso................ 1,006.10000 = $1.00
Danish Krone.................. 5.88950 = $1.00
Deutche Mark.................. 1.53840 = $1.00
Egyptian Pound................ 3.38800 = $1.00
French Franc.................. 5.18500 = $1.00
Greek Dramcha................. 246.46000 = $1.00
Hong Kong Dollar.............. 7.73400 = $1.00
Indian Rupee.................. 35.75000 = $1.00
Indonesian Rupiah............. 2,361.00000 = $1.00
Israeli Shekel................ 3.24090 = $1.00
Italian Lira.................. 1,516.00000 = $1.00
Japanese Yen.................. 115.76000 = $1.00
Korean Won.................... 842.50000 = $1.00
Malaysian Ringgit............. 2.52500 = $1.00
Mexican Peso.................. 7.86700 = $1.00
Moroccan Dhiram............... 8.73870 = $1.00
Netherlands Guilder........... 1.72710 = $1.00
Pakistani Rupee............... 40.07990 = $1.00
Peruvian Sol.................. 2.60800 = $1.00
Philippine Peso............... 26.26000 = $1.00
Polish Zloty.................. 2.86490 = $1.00
Portuguese Escudo............. 155.00000 = $1.00
Singapore Dollar.............. 1.39880 = $1.00
South African Rand............ 4.67600 = $1.00
Spanish Peseta................ 129.76000 = $1.00
Swedish Krona................. 6.81260 = $1.00
Swiss Franc................... 1.33800 = $1.00
Taiwan Dollar................. 27.48000 = $1.00
Thai Baht..................... 25.64100 = $1.00
Turkish Lira.................. 108,300.00000 = $1.00
Venezuelan Bolivar............ 475.76000 = $1.00
</TABLE>
For the six months ended December 31, 1996, Asian Growth Fund, Latin American
Fund, Emerging Markets Fund and International Magnum Fund incurred approximately
$216,000, $1,000, $40,000 and $15,000, respectively, as brokerage commissions
with Morgan Stanley & Co. Incorporated, an affiliated broker/dealer.
-------------
107
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
At December 31, 1996 the Global Equity Allocation Fund and Emerging Markets Fund
owned shares of an affiliated fund for which the Fund earned dividend income of
approximately $93,000 and $5,000, respectively.
At December 31, 1996, cost and unrealized appreciation (depreciation) for U.S.
Federal income tax purposes of the investments of each Portfolio were:
<TABLE>
<CAPTION>
NET
APPRECIATION
COST APPREC. (DEPREC.) (DEPRECIATION)
FUND (000) (000) (000) (000)
- --------------------------------------- -------- ------- ----------- ---------------
<S> <C> <C> <C> <C>
Global Equity Allocation............... $141,690 $22,043 $ (7,778) $ 14,265
Global Fixed Income.................... 9,939 222 (68) 154
Asian Growth........................... 395,166 63,510 (37,439) 26,071
American Value......................... 39,890 8,914 (955) 7,959
Worldwide High Income.................. 132,941 10,264 (1,447) 8,817
Latin American......................... 28,252 2,445 (1,118) 1,327
Emerging Markets....................... 134,792 16,219 (22,762) (6,543)
Aggressive Equity...................... 18,105 1,388 (418) 970
U.S. Real Estate....................... 12,238 1,984 (74) 1,910
High Yield............................. 14,043 702 (248) 454
International Magnum................... 15,871 994 (880) 114
Government Obligations Money Market.... 116,966 -- -- --
Money Market........................... 254,283 -- -- --
</TABLE>
- -----------------
108
<PAGE>
MORGAN STANLEY FUNDS
- --------------------------------------------------------------------------------
DIRECTORS
Barton M. Biggs
CHAIRMAN OF THE BOARD
Chairman and Director, Morgan Stanley Asset Management Inc.
and Morgan Stanley Asset Management Limited;
Managing Director, Morgan Stanley & Co. Incorporated;
Director, Morgan Stanley Group Inc.
Frederick B. Whittemore
VICE-CHAIRMAN OF THE BOARD
Advisory Director, Morgan Stanley & Co.
Incorporated
Warren J. Olsen
DIRECTOR AND PRESIDENT
Principal, Morgan Stanley Asset Management Inc. and
Morgan Stanley & Co. Incorporated
John D. Barrett II
Chairman and Director, Barrett Associates, Inc.
Gerard E. Jones
Partner, Richards & O'Neil LLP
Andrew McNally IV
Chairman and Chief Executive Officer, Rand McNally
Samuel T. Reeves
Chairman of the Board and CEO, Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer, LumeLite Corporation
Frederick O. Robertshaw
Of Counsel, Bryan, Cave
INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
DISTRIBUTOR
Van Kampen American Capital Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
(effective January 1, 1997)
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
The Chase Manhattan Bank
770 Broadway
New York, NY 10003
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
DIVIDEND DISBURSING AND TRANSFER AGENT
Access Investor Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
OFFICERS
James W. Grisham
VICE PRESIDENT
Michael F. Klein
VICE PRESIDENT
Douglas W. Kugler
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Lorraine Truten
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
James R. Rooney
TREASURER
Joanna M. Haigney
ASSISTANT TREASURER
Karl O. Hartmann
ASSISTANT SECRETARY
- --------------------------------------------------------------------------------
FOR INFORMATION ON HOW TO INVEST, PLEASE CONTACT YOUR ACCOUNT REPRESENTATIVE OR
THE FUND AT (800) 282-4404.
THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY WHEN PRECEDED OR ACCOMPANIED BY
PROSPECTUSES OF THE MORGAN STANLEY FUND, INC. WHICH DESCRIBES IN DETAIL EACH OF
THE INVESTMENT FUNDS' INVESTMENT POLICIES, FEES AND EXPENSES. PLEASE READ THE
PROSPECTUSES CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
<PAGE>
- --------------------------------------------------------------------------------
