<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
- ------------------------------------------------------------------------------
ANNUAL REPORT
JUNE 30, 1997
<PAGE>
MORGAN STANLEY FUNDS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Overview and Portfolio of Investments by Fund:
Letter to Shareholders.............................................. 1
Performance Summary................................................. 2
Global Equity Allocation Fund....................................... 3
Global Fixed Income Fund............................................ 15
Asian Growth Fund................................................... 19
American Value Fund................................................. 25
Worldwide High Income Fund.......................................... 30
Latin American Fund................................................. 37
Emerging Markets Fund............................................... 42
Aggressive Equity Fund.............................................. 50
U.S. Real Estate Fund............................................... 55
High Yield Fund..................................................... 60
International Magnum Fund........................................... 64
Government Obligations Money Market Fund............................ 70
Money Market Fund................................................... 73
Statement of Assets and Liabilities................................... 76
Statement of Operations............................................... 78
Statement of Changes in Net Assets.................................... 79
Financial Highlights ................................................. 92
Notes to Financial Statements......................................... 105
Report of Independent Accountants..................................... 111
Additional Information................................................ 112
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholders:
We are pleased to present to you the Morgan Stanley Fund's annual report for
the Fund's fiscal year ended June 30, 1997. This report details the performance
of the Fund's thirteen separate funds. Together, the Morgan Stanley Fund's
separate funds make available to the individual investor the same high-quality,
professional investment management that Morgan Stanley and its affiliates have
been providing to institutional investors for many years.
At this writing, we have begun offering shares in our fourteenth fund, the
Morgan Stanley Value Fund, subadvised by Miller Anderson & Sherrerd, LLP
("MAS"), an affiliate of the Fund's Adviser. This Fund seeks to achieve
above-average return, over a market cycle of three to five years, by investing
in a diversified portfolio of equity securities that are deemed by the
subadviser to be relatively undervalued based on various measures such as
price/earnings ratios and price/book ratios. As we noted in our most recent
semiannual report, we intend to offer additional funds in the coming months,
including the Morgan Stanley Global Equity Fund, which will seek long-term
capital appreciation by investing primarily in equity securities of issuers
throughout the world, including U.S. issuers.
Since our last report, there have been some significant changes in the
organizational structure of your Fund. Van Kampen American Capital Investment
Advisory Corp., an affiliate of Morgan Stanley, has become the Fund's investment
adviser and administrator and, accordingly, has assumed responsibility for the
administrative management of the Fund. Morgan Stanley Asset Management Inc.
("MSAM"), which formerly served the Fund in those roles, now acts as investment
subadviser to each of the funds currently offered, except, as noted above, the
Morgan Stanley Value Fund, which is being subadvised by MAS.
As investment subadviser, MSAM (and, with respect to the Morgan Stanley
Value Fund, MAS) will continue to make the investment decisions and generally
manage the investments for each fund as they did prior to these changes.
Furthermore, there have been no changes to the separate funds' portfolio
management teams as a result of these organizational changes.
As of August 4, 1997, shareholders of the Morgan Stanley Fund will generally
be able to exchange shares among not only the separate funds of the Morgan
Stanley Fund but also among the Van Kampen American Capital family of funds as
well. Together, these funds make available an extensive range of investment
choices across all asset classes so that an investor may invest in a single fund
to meet a specific investment need or allocate assets among different funds as
part of an overall investment strategy.
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.
As always, we sincerely appreciate your support of our Fund.
The Morgan Stanley Funds
August 1997
------------------
1
<PAGE>
MORGAN STANLEY FUNDS, INC.
PERFORMANCE SUMMARY (UNAUDITED)
- --------------------------------------------------------------------------------
JUNE 30, 1997
<TABLE>
<CAPTION>
NET ONE YEAR TOTAL RETURN AVERAGE ANNUAL SINCE INCEPTION
ASSET ------------------------------- --------------------------------------
NET VALUE WITH WITHOUT WITHOUT
INCEPTION ASSETS PER SALES SALES COMPARABLE WITH SALES SALES COMPARABLE
FUNDS DATES (000) SHARE CHARGE CHARGE INDEXES CHARGE CHARGE INDEXES
- --------------- ---------- --------- -------- -------- -------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GLOBAL EQUITY
ALLOCATION
Class A...... 1/4/93 $ 72,704 $ 16.57 14.88% 20.61% 22.27%(1) 14.38% 15.90% 17.15%(1)
Class B...... 8/1/95 38,962 16.15 14.64 19.64 22.27(1) 17.99 19.77 18.29(1)
Class C...... 1/4/93 78,199 16.24 18.69 19.69 22.27(1) 15.04 15.04 17.15(1)
GLOBAL FIXED
INCOME
Class A...... 1/4/93 6,407 9.95 -0.73 4.27 4.48(2) 5.32 6.48 7.80(2)
Class B...... 8/1/95 1,716 9.91 -1.52 3.48 4.48(2) 1.81 3.78 3.15(2)
Class C...... 1/4/93 2,445 9.90 2.48 3.48 4.48(2) 5.64 5.64 7.80(2)
ASIAN GROWTH
Class A...... 6/23/93 175,440 16.62 -6.81 -1.10 0.95(3) 8.29 9.89 13.16(3)
Class B...... 8/1/95 62,786 16.17 -6.79 -1.79 0.95(3) -2.06 0.00 3.94(3)
Class C...... 6/23/93 114,460 16.14 -2.75 -1.79 0.95(3) 9.11 9.11 13.16(3)
AMERICAN VALUE
Class A...... 10/18/93 34,331 17.59 23.19 30.68 20.09(4) 14.39 16.23 15.86(4)
Class B...... 8/1/95 15,331 17.59 24.77 29.77 20.09(4) 19.97 21.72 19.58(4)
Class C...... 10/18/93 32,425 17.59 28.67 29.67 20.09(4) 15.32 15.32 15.86(4)
WORLDWIDE HIGH
INCOME
Class A...... 4/21/94 76,439 14.26 24.10 30.29 8.15(5) 16.56 18.35 7.91(5)
Class B...... 8/1/95 78,340 14.20 24.14 29.14 8.15(5) 22.30 24.02 6.99(5)
Class C...... 4/21/94 41,709 14.21 28.12 29.12 8.15(5) 17.39 17.39 7.91(5)
LATIN AMERICAN
Class A...... 7/6/94 84,401 17.39 48.28 57.32 45.84(6) 17.20 19.10 13.48(6)
Class B...... 8/1/95 14,314 16.99 51.17 56.17 45.84(6) 42.81 44.31 30.08(6)
Class C...... 7/6/94 20,345 17.01 55.04 56.04 45.84(6) 18.10 18.10 13.48(6)
EMERGING
MARKETS
Class A...... 7/6/94 119,022 13.47 6.97 13.54 11.31(7) 2.62 4.66 6.06(7)
Class B...... 8/1/95 35,966 13.24 7.67 12.67 11.31(7) 9.66 11.57 9.26(7)
Class C...... 7/6/94 57,958 13.26 11.66 12.66 11.31(7) 3.87 3.87 6.06(7)
AGGRESSIVE
EQUITY
Class A...... 1/2/96 22,521 16.98 21.51 28.93 14.87(8) 29.20 34.43 17.08(8)
Class B...... 1/2/96 34,382 16.85 23.01 28.01 14.87(8) 31.19 33.53 17.08(8)
Class C...... 1/2/96 9,410 16.83 27.04 28.04 14.87(8) 33.48 33.48 17.08(8)
U.S. REAL
ESTATE
Class A...... 5/1/96 14,827 16.39 27.98 35.75 33.87(9) 28.47 35.17 32.67(9)
Class B...... 5/1/96 7,120 16.36 29.97 34.58 33.87(9) 30.79 33.88 32.67(9)
Class C...... 5/1/96 2,369 16.36 33.56 34.56 33.87(9) 34.05 34.05 32.67(9)
HIGH YIELD
Class A...... 5/1/96 8,980 12.86 12.51 18.12 14.66(10) 10.94 15.67 13.43(10)
Class B...... 5/1/96 8,617 12.86 12.22 17.22 14.66(10) 11.46 14.83 13.43(10)
Class C...... 5/1/96 4,970 12.86 16.21 17.21 14.66(10) 14.82 14.82 13.43(10)
INTERNATIONAL
MAGNUM
Class A...... 7/1/96 21,961 13.91 10.57 17.30 12.84(11) 10.57 17.30 12.84(11)
Class B...... 7/1/96 18,215 13.84 11.40 16.40 12.84(11) 11.40 16.40 12.84(11)
Class C...... 7/1/96 9,156 13.83 15.27 16.27 12.84(11) 15.27 16.27 12.84(11)
GOVERNMENT
OBLIGATIONS
MONEY
MARKET........ 3/12/92 94,768 1.00 N/A 4.53 N/A N/A 3.72 N/A
MONEY MARKET... 8/4/89 138,422 1.00 N/A 4.60 N/A N/A 4.64 N/A
</TABLE>
- --------------------------------------------------------------------------------
YIELD INFORMATION AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDEXES:
<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 Equity Index
(10) CS First Boston High Yield Index
(11) MSCI EAFE Index
(12) IBC's Money Fund Report Averages/ Government
(13) IBC's Money Fund Report Averages/All Taxable
</TABLE>
- --------------------------------------------------------------------------------
YIELD INFORMATION AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
30 DAY
CURRENT
YIELD++
---------
<S> <C>
GLOBAL FIXED INCOME
Class A............................... 3.79%
Class B............................... 3.23
Class C............................... 3.23
WORLDWIDE HIGH INCOME
Class A............................... 7.76%
Class B............................... 7.40
Class C............................... 7.40
HIGH YIELD
Class A............................... 7.24%
Class B............................... 6.84
Class C............................... 6.84
</TABLE>
- --------------------------------------------------------------------------------
YIELD INFORMATION AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<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 PORTFOLIOS:
Government Obligations.
Money Market 4.62% 4.73% 4.63% 4.82%(12)
Money Market................ 4.69 4.80 4.70 5.02(13)
</TABLE>
- --------------------------------------------------------------------------------
+ The current 7 day yield reflects the net investment income generated by the
Fund over the specified 7 day period expressed as an annual percentage.
Expenses accrued for the 7 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 current 30 day yield reflects the net investment income generated by the
Fund over a 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.
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. INVESTMENTS
IN THE GOVERNMENT OBLIGATIONS MONEY MARKET FUND AND MONEY MARKET FUND ARE
NEITHER INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT
THE GOVERNMENT OBLIGATIONS MONEY MARKET FUND AND THE MONEY MARKET FUND WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. PLEASE READ THE
FUND'S PROSPECTUSES CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
- --------------
2
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 1.2%
Canada 4.5%
France 4.3%
Germany 5.3%
Hong Kong 2.0%
Italy 2.8%
Japan 16.1%
Korea 0.7%
Netherlands 1.5%
Singapore 1.8%
Spain 3.0%
Sweden 1.9%
Switzerland 2.1%
United Kingdom 7.3%
United States 43.1%
Other 2.4%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 14.88% 20.61% 14.38% 15.90%
- -----------------------------------------------------------------
Class B+ Shares 14.64% 19.64% 17.99% 19.77%
- -----------------------------------------------------------------
Class C Shares 18.69% 19.69% 15.04% 15.04%
- -----------------------------------------------------------------
MSCI World Index:
Class A & C Shares N/A 22.27% N/A 17.15%
Class B Shares N/A 22.27% N/A 18.29%
- -----------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and 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.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- -------------------------------- ----------- --------------
<S> <C> <C>
General Electric Co. United 1.7%
States
Coca-Cola Co. United 1.6%
States
Microsoft Corp. United 1.3%
States
Morgan Stanley Asia-Pacific
Fund, Inc. United 1.2%
States
Merck & Co., Inc. United 1.2%
States
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ----------------------------- --------- -------------
<S> <C> <C>
Consumer Goods $ 40,454 21.3%
Finance 37,011 19.4%
Services 32,912 17.3%
Capital Equipment 28,015 14.8%
Energy 18,745 9.9%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C>
Global Equity Allocation Fund Class A Global Equity Allocation Fund Class C MSCI World Index
1/4/93 9,525 10,000 10,000
6/30/93 10,563 10,939 11,515
6/30/94 11,516 11,972 12,696
6/30/95 12,286 12,671 14,050
6/30/96 15,311 15,667 16,640
6/30/96 18,467 18,752 20,346
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; all recurring fees (including
management fees) were deducted; and all dividends and distributions were
reinvested. The graph presents the performance of Class A and Class C shares
which have been in existence since the Fund's inception. The performance of
Class B shares will vary based upon the different inception date and the sales
charge and fees assessed to that Class.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 year ended June 30, 1997, the Fund had a total return exclusive of sales
charge of 20.61% for the Class A shares, 19.64% for the Class B shares and
19.69% for the Class C shares, and a total return with sales charge of 14.88%
for the Class A shares, 14.64% for the Class B shares and 18.69% for the Class C
shares, as compared to a total return of 22.27% for the Morgan Stanley Capital
International (MSCI) World Index (the "Index"). For the period from inception
through June 30, 1997, the average annual total return for the Fund exclusive of
sales charge was 15.90% for the Class A shares, 19.77% for the Class B shares,
and 15.04% for the Class C shares and 14.38% for the Class A shares, 17.99% for
the Class B shares, and 15.04% for the Class C shares with sales charge, as
compared to 17.15% for the Index since inception of the Class A and C shares and
18.29% for the Index since inception of the Class B shares.
Driven by liquidity and lower interest rates, global equity markets continued
their inexorable climb during the last year. Our neutral weighting in Japan hurt
portfolio returns, but was somewhat offset by the tilt out of the banking sector
and by the currency hedge against the yen. Within Europe, underweights to the
high flying, very fully valued Dutch and Swiss markets were offset by an
overweight to Spain and some tactical shifts in France and the U.K. During the
year we reduced the U.K. slightly before the election, and increased Italy
1%-2%. 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.
------------------
3
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
In June, we removed the underweight to Japanese banks as they rallied and
investors began to differentiate between high and low quality banks.
Importantly, Japanese real estate has bottomed and the possibility of further
loan securitization and international partnerships is high. From inception to
deletion of the bank tilt (8/23/96-6/26/97), banks returned -10.3%; Japan with
banks returned 2.8%, and Japan ex-banks returned 6.1% for a difference of 335
basis points.
In Asia, our tactical maneuvering in Hong Kong added to returns as we increased
the allocation going into the July 1 handover to China. Our zero weight in
Malaysia added significantly to returns as the market fell precipitously.
Singapore, where we were overweight, disappointed with flat returns, and New
Zealand, an underperformer for most of the year, rallied 13.5% on the back of
interest rate reductions. We have no allocation to New Zealand due to heavy
exposure to NZ Telecom and pulp and paper, and we are benchmark neutral in
Australia. In early July we sold our small positions in Thailand and Korea which
had rallied 35% and 24% respectively, and took the opportunity to exit these
markets while both were cheap. Slow export growth and indications that economic
structural issues will take some time to be worked out diluted our earlier
enthusiasm for these markets.
Our slight underweight in North America was detrimental to overall returns. The
favorable economic environment of moderate growth, falling interest rates and
strong corporate earnings provided much of the momentum for the U.S. market.
During the year, currency hedging added to returns. We reduced the yen hedge to
zero at $/Y127, reinstated it at $/Y113 for a time and then reduced it back to
zero at $/Y113 by June 1997. Unlike the yen, continental European currencies
declined steadily against the dollar, falling by about 5%. In June, we removed
the Deutsche mark and Swiss franc hedges entirely and reduced currency hedges
against the French franc, Dutch guilder, and Spanish peseta. European currencies
should continue to weaken, but the Deutsche mark and the Swiss franc are subject
to periodic EMU related strength. Other European currencies have weakened
substantially and are beginning to gain support from economic recoveries. We
believe the yen is stuck in a trading range: bound by its trade surplus on one
side and low interest rates and weak economic fundamentals on the other.
INVESTMENT OUTLOOK:
Overall, the markets performed exceptionally well over the year, and we are
increasingly uneasy about valuation levels and the rate of change. With few
exceptions, European markets, appear to be in a demand-driven blow-off. Current
valuations leave no room for short term setbacks -- such as earnings
disappointments or further intransigence on pension and tax reform in Germany,
Italy, Spain and France. Since June 30, we have selectively been raising cash to
between 7% and 10%. Most of the monies have been shaved off of European weights
(the Netherlands, France, and the U.K.), and we have pulled back on Asian
markets such as Hong Kong and Singapore. We added a few percentage points to
Italy, a market which has underperformed, is undervalued, and should benefit
from lower short-term interest rates. The U.K. underweight is due to the impact
of sterling strength on profits, continued 1997 earnings downgrades and the
belief that short rates need to rise further.
U.S.
In spite of the U.S. market's upward trend and a very good economic and
corporate backdrop, we remain cautious. Valuations are extended on all measures
and we believe the market's earnings growth expectations of 15% for the next 5
years are unrealistic. Global competition is fierce and foreign competitors have
the advantage of potential cost cutting and much weaker currencies than 6-12
months ago. We remain underweight in the U.S. as the probability of a market
setback increases. We believe that inflationary risk is low, while the converse
of a deflationary slowdown remains.
JAPAN
While it appears that the Japanese economy has withstood the effects of the
April 1 consumption tax hike, it has done so with the aid of the lagged effect
of a weak yen, loose monetary policy, and increased foreign demand. The June
Tankan survey showed that small and medium sized companies -- which employ 75%
of Japanese workers -- are still depressed. Japanese domestic
- --------------
4
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
demand needs to improve in order for the market to broaden beyond the current
focus on a few, over-owned, high-growth exporters. Signs of personal income
growth and improved investment spending are positive. Continued government
fiscal consolidation will not be helpful, but a less splintered LDP may adopt
bolder structural reforms.
EUROPE
In Europe, markets have been focused on economic growth and the likelihood that
neither France nor Germany will achieve the 3% deficit-to-GDP ratio for Economic
and Monetary Union (EMU). The much awaited budget of the new Socialist-led
French government alleviated many fears, as corporate taxes were raised in an
attempt to keep the country on course to join EMU. While German political
squabbling about strict adherence to the 3% level continues, we agree with the
consensus that EMU will go forward, but with a larger number of countries and a
weaker Euro. EMU, though not without its risks, should be very positive for
Europe. Productive capital allowed to flow freely across borders without
currency risk will increase competition for investment and jobs, lower taxes on
capital and improve wage and labor flexibility. We have already seen evidence of
corporate consolidation and government de-regulation in preparation, and we
believe the trend will continue.
ASIA
Asian news has been dominated by the devaluation of the Thai baht and its
contagion to the Philippines, Indonesia, Malaysia, Singapore and most recently
Hong Kong. While parallels to Mexico in 1994 are inevitable, they have limited
validity. Compared to Latin America, Asian average growth rates are much faster
(4.5% versus 7.0%) and levels of indebtedness much lower (99% versus 203%).
Property price levels and current account deficits need to come down, but deep
recessions should not be necessary to maintain stability.
Though disruptive, softening the Asian currency peg to the U.S. dollar is a
long-term policy positive and an indication of financial market maturity. We
have gone to an underweight in the region because of reduced investor flows, the
competitive squeeze on profits, and the high Asian correlation with the U.S. in
market pullbacks. However, many Asian markets, like Malaysia and Singapore are
back at 1990 valuation levels. At a later date, underowned, more competitive,
and ignored -- they will be poised to outperform.
Barton M. Biggs
PORTFOLIO MANAGER
Madhav Dhar
PORTFOLIO MANAGER
Francine J. Bovich
PORTFOLIO MANAGER
Ann D. Thivierge
PORTFOLIO MANAGER
July 1997
------------------
5
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (92.3%)
AUSTRALIA (1.2%)
9,600 Amcor Ltd........................................ $ 64
5,200 Australian Gas Light Co., Ltd.................... 31
14,200 Australian National Industries Ltd............... 17
18,524 Boral Ltd........................................ 58
3,500 Brambles Industries Ltd.......................... 69
28,159 Broken Hill Proprietary Ltd...................... 414
8,110 Burns, Philip & Co., Ltd......................... 15
7,386 Coca-Cola Amatil Ltd............................. 96
16,181 Coles Myer Ltd................................... 84
4,800 CRA Ltd.......................................... 82
(a)10,550 Crown Ltd........................................ 17
16,300 CSR Ltd.......................................... 63
27,800 Fosters Brewing Corp............................. 52
18,051 General Property Trust........................... 36
9,255 Gio Australia Holdings Ltd....................... 29
18,537 Goodman Fielder Ltd.............................. 27
4,900 ICI Australia Ltd................................ 48
(a)3,600 Leighton Holdings Ltd............................ 18
3,926 Lend Lease Corp., Ltd............................ 83
24,389 MIM Holdings Ltd................................. 36
20,137 National Australia Bank Ltd...................... 289
4,346 Newcrest Mining Ltd.............................. 12
27,757 News Corp., Ltd.................................. 133
23,154 Normandy Mining Ltd.............................. 26
11,449 North Broken Hill Peko Ltd....................... 44
13,200 Pacific Dunlop Ltd............................... 39
14,000 Pioneer International Ltd........................ 54
3,300 Plutonic Resources Ltd........................... 10
2,900 Renison Goldfields Consolidated Ltd.............. 11
10,012 Santos Ltd....................................... 42
3,000 Smith (Howard) Ltd............................... 29
1,800 Sons of Gwalia Ltd............................... 7
9,499 Southcorp Holdings Ltd........................... 36
4,800 Tabcorp Holdings Ltd............................. 26
1,098 Westfield Trust.................................. 2
25,100 Westpac Banking Corp. Ltd........................ 151
14,690 WMC Ltd.......................................... 93
--------
2,343
--------
CANADA (4.5%)
5,800 Abitibi-Consolidated, Inc........................ 104
4,600 Agrium, Inc...................................... 53
6,800 Alcan Aluminum Ltd............................... 233
2,100 Avenor, Inc...................................... 41
8,200 Bank of Montreal................................. 320
7,500 Bank of Nova Scotia.............................. 329
13,200 Barrick Gold Corp................................ 287
20,100 BCE, Inc......................................... 559
10,300 Bombardier, Inc., 'A'............................ 233
4,300 CAE Inc.......................................... 34
1,800 Cameco Corp...................................... 68
12,900 Canadian Imperial Bank of Commerce............... 325
(a)3,700 Canadian Natural Resources Ltd................... 96
4,900 Canadian Occidental Petroleum Ltd................ 110
10,800 Canadian Pacific, Ltd............................ 307
2,900 Canadian Tire Corp., 'A'......................... 57
2,900 Cominco Ltd...................................... 77
(a)2,300 Corel Corp....................................... 15
1,900 Cott Corp........................................ 20
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
3,200 Dofasco, Inc..................................... $ 61
5,000 Domtar, Inc...................................... 44
4,900 Echo Bay Mines Ltd............................... 27
1,700 George Weston Ltd................................ 109
(a)7,700 Gulf Canada Resources, Ltd....................... 63
7,600 Imasco, Ltd...................................... 220
5,200 Imperial Oil Ltd................................. 266
5,000 Inco Ltd......................................... 149
1,800 IPL Energy, Inc.................................. 60
9,000 Laidlaw, Inc. 'B'................................ 124
2,200 Loewen Group, Inc................................ 76
4,900 MacMillan Bloedel Ltd............................ 67
2,200 Magna International, Inc., 'A'................... 132
6,000 Methanex Corp.................................... 56
2,500 Molson Companies Ltd., 'A'....................... 42
3,500 Moore Corp. Ltd.................................. 69
(a)4,900 Newbridge Networks Corp.......................... 210
7,600 Noranda, Inc..................................... 164
4,100 Norcen Energy Resources Ltd...................... 98
7,600 Northern Telecom Ltd............................. 685
17,000 Nova Corp........................................ 145
9,800 Petro............................................ 159
7,400 Placer Dome, Inc................................. 120
1,700 Potash Corp. of Saskatchewan Inc................. 128
4,200 Power Corp. of Canada............................ 103
(a)4,100 Provigo, Inc..................................... 23
4,300 Ranger Oil Ltd................................... 40
(a)4,100 Renaissance Energy Ltd........................... 114
(a)4,100 Repap Enterprises, Inc........................... 2
(a)6,000 Rogers Communication, Inc., 'B'.................. 38
9,700 Royal Bank of Canada............................. 439
(a)4,100 Talisman Energy, Inc............................. 126
3,700 Teck Corp., 'B'.................................. 75
11,100 The Seagram Co., Ltd............................. 446
18,000 Thomson Corp..................................... 415
7,500 Transcanada Pipelines, Ltd....................... 151
3,900 Westcoast Energy, Inc............................ 71
--------
8,585
--------
FRANCE (4.3%)
693 Accor S.A........................................ 104
2,750 Alcatel Alsthom.................................. 345
5,324 AXA S.A.......................................... 331
3,902 Banque Nationale de Paris RFD.................... 161
2,077 Banque Paribas................................... 144
750 BIC.............................................. 123
702 Bouygues......................................... 58
(a)482 Canal Plus....................................... 94
810 Carrefour S.A.................................... 589
1,700 Casino Guichard Perrachon........................ 84
25 Chargeurs International S.A...................... 1
500 Cie Bancaire S.A................................. 64
1,867 Cie de Saint-Gobain.............................. 272
67,520 Cie de Suez S.A.................................. 166
2,073 Cie Generale des Eaux............................ 266
5,650 Elf Aquitaine.................................... 610
750 Eridania Beghin-Say S.A.......................... 112
250 Essilor International............................ 67
1,568 Groupe Danone RFD................................ 259
1,239 Havas S.A........................................ 89
1,907 L'Air Liquide.................................... 303
</TABLE>
- --------------
6
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
FRANCE (CONT.)
<TABLE>
<C> <S> <C>
(a)1,342 L'Oreal.......................................... $ 566
2,243 Lafarge Coppee S.A............................... 140
585 Legrand S.A...................................... 103
1,905 LVMH Moet Hennessy Louis Vuitton................. 512
1,231 Lyonnaise des Eaux S.A........................... 124
3,287 Michelin (C.G.D.E.) 'B'.......................... 197
25 Pathe S.A........................................ 5
1,325 Pernod-Ricard.................................... 68
430 Pinault S.A...................................... 207
440 Promodes......................................... 171
1,155 PSA Peugeot Citroen S.A.......................... 112
6,762 Rhone-Poulenc S.A. 'A'........................... 276
60 Sagem............................................ 30
2,036 Sanofi S.A....................................... 200
2,997 Schneider S.A.................................... 160
729 Simco S.A........................................ 58
(a,d)30 Simco S.A. (New)................................. 2
65 Societe Eurafrance S.A........................... 27
1,589 Societe Generale................................. 177
125 Sodexho S.A...................................... 64
2,608 Thomson CSF S.A.................................. 67
4,705 Total S.A. 'B'................................... 476
5,590 Usinor Sacilor................................... 101
680 Worms et Compagnie............................... 40
--------
8,125
--------
GERMANY (5.1%)
900 adidas AG........................................ 101
(a)850 Agiv AG.......................................... 19
4,500 Allianz AG....................................... 962
50 AMB Aachener & Muenchener
Beteiligungs AG................................ 45
10,700 BASF AG.......................................... 395
13,600 Bayer AG......................................... 524
4,550 Bayerische Hypotheken Bank AG.................... 138
4,750 Bayerische Vereinsbank AG........................ 195
(a)1,600 Beiersdorf AG.................................... 86
(a)900 Bilfinger & Berger Bau AG........................ 38
150 Brau und Brunnen AG.............................. 12
550 CKAG Colonia Konz AG............................. 52
1,750 Continental AG................................... 44
9,200 Daimler-Benz AG.................................. 749
2,000 Degussa AG....................................... 106
9,200 Deutsche Bank AG................................. 540
38,770 Deutsche Telekom AG.............................. 953
8,050 Dresdner Bank AG................................. 282
850 Heidelberger Zement AG........................... 82
1,650 Hochtief AG...................................... 74
200 Karstadt AG...................................... 72
(a)1,150 Kloeckner-Humboldt-Deutz AG...................... 11
200 Linde AG......................................... 155
6,950 Lufthansa AG..................................... 134
250 MAN AG........................................... 78
650 Mannesmann AG.................................... 290
2,923 Merck KGAA....................................... 127
(a)1,860 METRO AG......................................... 203
153 Muenchener Rueckversicherungs (Registered)....... 434
300 Preussag AG...................................... 88
6,100 RWE AG........................................... 262
1,110 SAP AG........................................... 223
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
1,350 Schering AG...................................... $ 145
10,300 Siemens AG....................................... 617
(a)50 Starbag AG....................................... 5
750 Thyssen AG....................................... 180
9,050 VEBA AG.......................................... 511
550 Viag AG.......................................... 251
(a)128 Viag AG RFD...................................... 59
550 Volkswagen AG.................................... 417
--------
9,659
--------
HONG KONG (2.0%)
(a)10,000 Applied International Holdings Ltd............... 1
22,600 Bank of East Asia Ltd............................ 94
52,000 Cathay Pacific Airways Ltd....................... 108
37,000 Cheung Kong Holdings Ltd......................... 365
39,500 China Light & Power Co. Ltd...................... 224
28,000 Chinese Estate Holdings Ltd...................... 26
11,200 Giordano Holdings Ltd............................ 8
22,000 Hang Lung Development Corp....................... 40
31,100 Hang Seng Bank Ltd............................... 443
58,697 Hong Kong & China Gas Co......................... 117
3,200 Hong Kong Aircraft Engineering Co., Ltd.......... 12
22,500 Hong Kong Shanghai Hotels........................ 36
187,200 Hong Kong Telecomunications Ltd.................. 447
70,000 Hopewell Holdings Ltd............................ 44
61,000 Hutchison Whampoa Ltd............................ 528
17,000 Hysan Development Co............................. 50
7,000 Johnson Electric Holdings Ltd.................... 21
8,000 Miramar Hotel Investment Ltd..................... 15
30,133 New World Development Co., Ltd................... 180
26,000 Oriental Press Goup.............................. 11
7,000 Peregrine Investment Holdings.................... 14
28,000 Shangri-La Asia Ltd.............................. 34
22,961 Shun Tak Holdings Ltd............................ 14
30,000 South China Morning Post......................... 29
13,000 Stelux Holdings Ltd.............................. 3
38,000 Sun Hung Kai Properties Ltd...................... 457
25,500 Swire Pacific Ltd. 'A'........................... 230
8,000 Television Broadcasting Ltd...................... 36
37,000 Wharf Holdings Ltd............................... 160
6,000 Windsor Industrial............................... 2
4,300 Wing Lung Bank................................... 27
--------
3,776
--------
ITALY (2.8%)
25,672 Assicurazioni Generali S.p.A..................... 467
40,300 Banca Commerciale Italiana....................... 83
15,900 Banco Ambrosiano Veneto.......................... 46
5,660 Benetton Group S.p.A............................. 90
4,700 Cartiere Burgo S.p.A............................. 26
71,000 Credito Italiano S.p.A........................... 130
19,000 Edison S.p.A..................................... 95
222,000 Ente Nazionale Idrocarburi S.p.A................. 1,257
4,500 Falck............................................ 17
93,300 Fiat S.p.A....................................... 336
20,700 Fiat S.p.A. Di Risp NCS.......................... 39
(a)11,000 Impreglio S.p.A.................................. 7
24,600 Istituto Bancario San Paolo di Torina S.p.A...... 179
17,950 Istituto Mobiliare Italiano S.p.A................ 162
118,200 Istituto Nazionale delle Assicurazioni (INA)..... 180
6,800 Italcementi S.p.A................................ 42
</TABLE>
-----------------------
7
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
ITALY (CONT.)
<TABLE>
<C> <S> <C>
4,650 Italcementi S.p.A. NCS........................... $ 11
19,400 Italgas.......................................... 63
6,565 La Rinascente S.p.A.............................. 36
14,000 Magneti Marelli S.p.A............................ 24
33,500 Mediaset S.p.A................................... 142
14,050 Mediobanca S.p.A................................. 85
(a)83,108 Montedison S.p.A................................. 55
(a)28,900 Montedison S.p.A. Di Risp NCS.................... 19
(a)100,750 Olivetti Group................................... 29
44,640 Parmalat Finanziaria S.p.A....................... 63
45,000 Pirelli S.p.A.................................... 111
8,301 R.A.S............................................ 66
4,100 S.A.I............................................ 32
2,300 Sasib S.p.A...................................... 8
8,500 Sirti S.p.A...................................... 49
21,000 Snia BPD S.p.A................................... 19
42,500 Telecom Italia Di Risp S.p.A..................... 84
182,800 Telecom Italia Mobile S.p.A...................... 592
45,000 Telecom Italia Mobile S.p.A...................... 80
179,200 Telecom Italia S.p.A............................. 537
--------
5,261
--------
JAPAN (16.1%)
1,580 Advantest Corp................................... 121
20,000 Ajinomoto Co., Inc............................... 215
(a)12,000 Aoki Corp........................................ 14
1,600 Aoyama Trading Co., Ltd.......................... 51
39,000 Asahi Bank Ltd................................... 332
12,000 Asahi Breweries Ltd.............................. 179
36,000 Asahi Chemical Industry Co., Ltd................. 215
34,000 Asahi Glass Co................................... 338
70,000 Bank of Tokyo-Mitsubishi......................... 1,405
12,000 Bridgestone Corp................................. 279
15,000 Canon, Inc....................................... 408
7,000 Casio Computer Co., Ltd.......................... 61
19,000 Chiba Bank Ltd................................... 113
12,000 Chugai Pharmaceutical Ltd........................ 108
14,000 Dai Nippon Printing Co., Ltd..................... 317
13,000 Daiei, Inc....................................... 83
12,000 Daikin Industries Ltd............................ 109
12,000 Daiwa House Industry............................. 147
24,000 Daiwa Securities Co., Ltd........................ 189
70 East Japan Railway Co............................ 359
8,000 Ebara Corp....................................... 120
5,100 Fanuc Co......................................... 196
42,000 Fuji Bank........................................ 631
7,000 Fuji Photo Film Ltd.............................. 282
31,000 Fujitsu Ltd...................................... 430
9,000 Furukawa Electric................................ 57
16,000 Hankyu Corp...................................... 88
12,000 Hazama-Gumi...................................... 25
60,000 Hitachi Ltd...................................... 670
16,000 Honda Motor Co................................... 482
38,000 Industrial Bank of Japan......................... 590
7,000 Ito-Yokado Co., Ltd.............................. 406
37,000 Japan Airlines Co................................ 168
30,000 Japan Energy Corp................................ 79
13,000 Joyo Bank........................................ 72
6,000 Jusco Co......................................... 203
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
24,000 Kajima Corp...................................... $ 141
15,900 Kansai Electric Power Co......................... 307
22,000 KAO Corp......................................... 305
19,000 Kawasaki Steel Corp.............................. 62
29,000 Kinki Nippon Railway............................. 177
24,000 Kirin Brewery Co., Ltd........................... 249
24,000 Komatsu Ltd...................................... 195
36,000 Kubota Corp...................................... 176
24,000 Kumagai Gumi Co. Ltd............................. 40
3,600 Kyocera Corp..................................... 286
12,000 Kyowa Hakko Kogyo................................ 90
36,000 Marubeni Corp.................................... 163
3,000 Marui Co......................................... 56
36,000 Matsushita Electric Industries Ltd............... 726
36,000 Mitsubishi Chemical Corp......................... 118
33,000 Mitsubishi Corp.................................. 412
42,000 Mitsubishi Electric Corp......................... 235
26,000 Mitsubishi Estate Co., Ltd....................... 377
65,000 Mitsubishi Heavy Industries Ltd.................. 499
24,000 Mitsubishi Materials Corp........................ 96
22,000 Mitsubishi Trust & Banking Corp.................. 348
36,000 Mitsui & Co...................................... 346
24,000 Mitsui Engineering & Shipbuilding Co., Ltd....... 52
19,000 Mitsui Fudosan Co., Ltd.......................... 262
18,000 Mitsui Trust & Banking Corp...................... 136
13,000 Mitsukoshi Ltd................................... 93
4,000 Murata Manufacturing Co., Ltd.................... 159
(a)8,000 Mycal Corp....................................... 115
21,000 NEC Corp......................................... 293
12,000 NGK Insulators Ltd............................... 132
15,000 Nippon Denko Co., Ltd............................ 359
9,000 Nippon Express Co., Ltd.......................... 72
12,000 Nippon Fire & Marine Insurance Co................ 65
12,000 Nippon Light Metal Co............................ 44
12,000 Nippon Meat Packers, Inc......................... 155
34,000 Nippon Oil Co.................................... 186
133,000 Nippon Steel Corp................................ 425
179 Nippon Telegraph & Telephone ADR................. 1,719
36,000 Nippon Yusen Kabushiki Kaisha.................... 140
45,000 Nissan Motor Co., Ltd............................ 349
70,000 NKK Corp......................................... 150
31,000 Nomura Securities Co., Ltd....................... 428
14,000 Odakyu Electric Railway Co....................... 83
24,000 OJI Paper Co., Ltd............................... 149
53,000 Osaka Gas Co..................................... 152
12,000 Penta-Ocean Construction......................... 39
4,000 Pioneer Electronic Corp.......................... 97
1,000 Rohm Co.......................................... 103
47,000 Sakura Bank Ltd.................................. 360
9,000 Sankyo Co., Ltd.................................. 302
36,000 Sanyo Electric Co., Ltd.......................... 162
3,000 Secom Co......................................... 220
2,300 Sega Enterprises Ltd............................. 76
12,000 Sekisui House Ltd................................ 121
24,000 Sharp Corp....................................... 331
3,000 Shimano, Inc..................................... 63
5,000 Shin-Etsu Chemical Co............................ 133
17,000 Shinizu Corp..................................... 102
5,000 Shiseido Co., Ltd................................ 83
16,000 Shizuoka Bank.................................... 183
</TABLE>
- --------------
8
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
(a)24,000 Showa Denko K.K.................................. $ 63
5,500 Sony Corp........................................ 480
47,000 Sumitomo Bank.................................... 771
48,000 Sumitomo Chemical Co............................. 217
24,000 Sumitomo Corp.................................... 228
16,000 Sumitomo Electric Industries..................... 268
5,000 Sumitomo Forestry................................ 55
43,000 Sumitomo Metal Industries........................ 122
11,000 Sumitomo Metal Mining Co......................... 78
12,000 Sumitomo Osaka Cement Co., Ltd................... 38
24,000 Taisei Corp., Ltd................................ 111
7,000 Taisho Pharmaceutical Co......................... 189
15,000 Takeda Chemical Industries....................... 422
24,000 Teijin Ltd....................................... 113
16,000 Tobu Railway Co.................................. 74
8,600 Tohoku Electric Power............................ 153
36,000 Tokai Bank....................................... 371
36,000 Tokio Marine & Fire Insurance Co................. 471
22,200 Tokyo Electric Power Co.......................... 467
1,000 Tokyo Electron Ltd............................... 48
48,000 Tokyo Gas Co..................................... 133
20,000 Tokyu Corp....................................... 124
16,000 Toppan Printing Co., Ltd......................... 251
36,000 Toray Industries, Inc............................ 257
12,300 Toto Ltd......................................... 151
24,000 Toyobo Ltd....................................... 64
52,000 Toyota Motor Corp................................ 1,534
24,000 Ube Industries Ltd............................... 70
24,000 Yamaichi Securities.............................. 71
22,000 Yasuda Trust & Banking........................... 84
--------
30,517
--------
KOREA (0.7%)
4,440 Cho Hung Bank Co................................. 30
(a)3,990 Commericial Bank of Korea........................ 21
3,080 Daewoo Corp...................................... 25
9,650 Daewoo Heavy Industries.......................... 79
(a)1,330 Daewoo Securities, Co............................ 24
980 Dong-Ah Construction Industrial Co............... 19
(a)4,530 Hanil Bank....................................... 25
(a)1,366 Hyundai Engineering & Construction Co. RFD....... 35
(d)1,090 Hyundai Motor Co., Ltd........................... 36
13,650 Korea Electric Power Corp........................ 407
4,100 Korea First Bank................................. 17
(a,d)100 Korea Mobile Telecommunications Corp.
(Foreign)...................................... 75
(d)3 Korea Mobile Telecommunications Corp............. 2
2,100 L.G. Chemical Ltd................................ 29
(d)2,550 Pohang Iron & Steel Ltd.......................... 261
1,600 Samsung Corp..................................... 22
(d)670 Samsung Display Devices Co....................... 37
(d)1,900 Samsung Electronics Co........................... 213
260 Tong Yang Cement Co.............................. 5
2,009 Yukong Ltd....................................... 49
--------
1,411
--------
NETHERLANDS (1.5%)
11,500 ABN-Amro Holdings N.V............................ 214
700 Akzo Nobel N.V................................... 96
5,800 Elsevier N.V..................................... 97
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
350 Heineken N.V..................................... $ 60
7,011 ING Groep N.V.................................... 323
813 KLM Royal Dutch Airlines N.V..................... 25
1,251 Koninklijke Ahold N.V............................ 106
287 Koninklijke Hoogovens............................ 16
900 Koninklijke KNP BT............................... 20
9,213 Koninklijke PTT Nederland N.V.................... 362
200 Nedlloyd Groep N.V............................... 6
2,900 Phillips Electronics N.V......................... 208
18,800 Royal Dutch Petroleum N.V........................ 979
296 Stork N.V........................................ 12
1,400 Unilever N.V..................................... 295
640 Wolters Kluwer N.V............................... 78
--------
2,897
--------
SINGAPORE (1.8%)
(d)11,000 Amcol Holdings Ltd............................... --
35,000 City Developments Ltd............................ 343
(a)4,000 Creative Technology Ltd.......................... 69
10,000 Cycle & Carriage Ltd............................. 104
41,000 DBS Land Ltd..................................... 130
21,000 Development Bank of Singapore.................... 264
13,000 First Capital Corp............................... 34
13,200 Fraser & Neave Ltd............................... 94
25,000 Hai Sun Hup Group Ltd............................ 18
21,000 Hotel Properties Ltd............................. 36
9,000 Inchcape Bhd..................................... 32
5,000 Jurong Shipyard Ltd.............................. 22
(a)32,000 Keppel Corp...................................... 142
(a)2,750 Keppel Corp. 'A'................................. 12
5,000 Metro Holdings Ltd............................... 16
15,000 NatSteel Ltd..................................... 38
38,000 Neptune Orient Lines Ltd......................... 34
37,920 Oversea-Chinese Banking Corp..................... 392
6,000 Overseas Union Enterprise Ltd.................... 28
14,000 Parkway Holdings Ltd............................. 63
3,000 Robinson & Co. Ltd............................... 16
6,600 Shangri-La Hotel Ltd............................. 20
39,000 Singapore Airlines Ltd. (Foreign)................ 349
8,600 Singapore Press Holdings (Foreign)............... 173
32,000 Singapore Technologies Industrial Corp........... 82
270,000 Singapore Telecommunications Ltd................. 499
15,000 Straits Trading Co., Ltd......................... 33
63,000 United Industrial Corp. Ltd...................... 48
36,000 United Overseas Bank Ltd. (Foreign).............. 370
24,000 United Overseas Land Ltd......................... 32
--------
3,493
--------
SPAIN (3.0%)
340 Acerinox S.A..................................... 64
4,800 Argentaria S.A................................... 269
7,820 Autopistas Concesionaria Espanola S.A............ 106
8,000 Banco Bilbao Vizcaya (Registered)................ 650
6,100 Banco Central Hispanoamericano S.A............... 223
21,900 Banco Santander S.A.............................. 675
400 Corporacion Financiera Alba S.A.................. 51
849 Corporacion Mapfre S.A........................... 45
1,550 Dragados y Construcciones S.A.................... 32
1,300 Ebro Agricolas, Compania de Alimentacion S.A..... 25
550 Empresa Nacional de Cellulosas S.A............... 10
10,000 Empresa Nacional de Electricidad S.A............. 840
</TABLE>
-----------------------
9
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
SPAIN (CONT.)
<TABLE>
<C> <S> <C>
317 Energia y Indsutrias Aragonesas.................. $ 2
(a)4,700 Ercros S.A....................................... 5
400 Fomento de Construcciones y Contratas S.A........ 51
1,300 Gas Natural SDG 'E'.............................. 284
(a)200 Gines Navarro Construction Co.................... 4
35,300 Iberdrola S.A.................................... 446
625 Inmobiliaria Metropolitana Vasco Central S.A..... 23
200 Portland Vaderrivas S.A.......................... 16
11,600 Repsol S.A....................................... 491
1,591 Sociedade General de Aguas
de Barcelona S.A............................... 65
(a)44 Sociedade General de Aguas de Barcelona, S.A.
RFD............................................ 2
1,000 Tabacalera S.A. 'A'.............................. 54
34,600 Telefonica de Espana............................. 1,001
8,100 Union Electrica Fenosa S.A....................... 74
2,400 Uralita S.A...................................... 27
1,376 Vallehermoso S.A................................. 37
650 Viscofan Industria Navarra de Envolturas
Celulosicas S.A................................ 15
348 Zardoya-Otis S.A................................. 46
--------
5,633
--------
SWEDEN (1.9%)
19,000 ABB AB 'A'....................................... 267
1,300 AGA AG 'A'....................................... 18
3,000 AGA AG 'B'....................................... 40
36,266 Astra AB 'A'..................................... 675
4,450 Atlas Copco AB 'A'............................... 116
1,700 Electrolux AB 'B'................................ 123
900 Esselte AB 'A'................................... 21
(a)850 Granges AB....................................... 11
5,000 Hennes & Mauritz AB 'B'.......................... 179
100 Scancem AB....................................... 4
2,100 Securitas AB, 'B'................................ 59
2,700 Skandia Group Forsakrings AB..................... 99
12,700 Skandinaviska Enskilda Banken, 'A'............... 137
3,000 Skanska AB, 'B'.................................. 133
3,000 SKF AB 'B'....................................... 78
7,350 Stora Kopparbergs Bergslags Aktiebolag........... 119
4,600 Svenska Cellulosa AB, 'B'........................ 98
5,000 Svenska Handelsbanken 'A'........................ 160
11,300 Swedish Match AB................................. 38
22,100 Telefonaktiebolaget LM Ericsson.................. 870
3,200 Trelleborg AB, 'B'............................... 52
9,400 Volvo AB, 'B'.................................... 252
--------
3,549
--------
SWITZERLAND (2.1%)
180 Adia S.A. (Bearer)............................... 69
60 Alusuisse-Lonza Holding AG (Registered).......... 62
95 BBC Brown Boveri AG (Bearer)..................... 144
1,850 CS Holding AG (Registered)....................... 238
5 Georg Fischer AG (Bearer)........................ 7
65 Holderbank Financiere Glaris AG, 'B' (Bearer).... 61
(a)65 Merkur Holding AG (Registered)................... 14
385 Nestle S.A. (Registered)......................... 508
630 Novartis AG (Registered)......................... 1,007
16 Roche Holding AG (Bearer)........................ 220
69 Roche Holding AG-Genusshein...................... 624
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
145 Schweizerische Rueckversicherungs-Gesellschaft
(Registered)................................... $ 205
55 SMH AG (Bearer).................................. 31
20 Societe Generale de Surveillance Holding S.A.
(Bearer)....................................... 43
40 Sulzer AG (Registered)........................... 34
(a)750 Swiss Bank Corp. (Registered).................... 201
35 SwissAir AG (Registered)......................... 39
205 Union Bank of Switzerland (Bearer)............... 234
200 Union Bank of Switzerland (Registered)........... 46
465 Zuerich Versicherungs-Gesellschaft
(Registered)................................... 185
--------
3,972
--------
UNITED KINGDOM (7.3%)
18,200 Abbey National plc............................... 249
11,665 Argyll Group plc................................. 67
9,100 Arjo Wiggins Appleton plc........................ 27
6,500 Associated British Foods plc..................... 56
22,589 Barclays plc..................................... 448
14,300 Bass plc......................................... 175
40,266 B.A.T Industries plc............................. 360
57,200 BG plc........................................... 210
9,127 BICC plc......................................... 27
16,856 Blue Circle Industries plc....................... 120
9,055 BOC Group plc.................................... 157
14,300 Boots Co. plc.................................... 168
9,100 BPB Industries plc............................... 49
6,468 British Aerospace plc............................ 144
15,628 British Airways plc.............................. 178
74,927 British Petroleum Co. plc........................ 932
20,800 British Sky Broadcasting Group plc............... 152
26,000 British Steel plc................................ 65
75,400 British Telecommunications plc................... 560
54,606 BTR plc.......................................... 187
3,856 Burmah Castrol plc............................... 65
32,462 Cable & Wireless plc............................. 297
14,335 Cadbury Schweppes plc............................ 128
9,360 Caradon plc...................................... 31
(a)57,200 Centrica plc..................................... 70
11,671 Coats Viyella plc................................ 24
9,056 Commercial Union plc............................. 95
6,500 Courtaulds plc................................... 37
1,272 De La Rue plc.................................... 8
37,700 General Electric plc............................. 225
7,767 GKN plc.......................................... 133
41,600 Glaxo Wellcome plc............................... 861
9,090 Granada Group plc................................ 120
28,572 Grand Metropolitan plc........................... 275
15,600 Great Universal Stores plc....................... 158
10,369 Guardian Royal Exchange plc...................... 47
28,600 Guinness plc..................................... 280
(a)7,768 Hanson plc....................................... 39
16,900 Harrisons & Crosfield plc........................ 31
28,570 HSBC Holdings plc................................ 847
11,700 Imperial Chemical Industries plc................. 163
15,613 Ladbroke Group plc............................... 61
10,400 Land Securities plc.............................. 147
10,400 Lasmo plc........................................ 45
15,600 Legal & General Group plc........................ 106
71,500 Lloyds TSB Group plc............................. 735
</TABLE>
- --------------
10
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
10,418 Lonrho plc....................................... $ 22
45,500 Marks & Spencer plc.............................. 377
7,800 MEPC plc......................................... 64
18,200 National Power plc............................... 158
9,098 North West Water plc............................. 100
10,757 Peninsular & Oriental Steam Navigation Co........ 107
19,478 Pilkington plc................................... 45
26,009 Prudential Corp. plc............................. 254
11,700 Rank Organization plc............................ 74
7,751 Redland plc...................................... 44
18,200 Reed International plc........................... 176
22,100 Reuters Holdings plc............................. 233
7,800 Rexam plc........................................ 33
3,900 RMC Group plc.................................... 63
18,212 Royal & Sun Alliance Insurance Group plc......... 135
6,454 Royal Bank of Scotland plc....................... 60
15,760 RTZ Corp. plc (Registered)....................... 275
20,772 Sainsbury (J) plc................................ 126
2,600 Schroders plc.................................... 71
12,993 Scottish Power plc............................... 84
26,000 Sears plc........................................ 29
8,051 Sedwick Group plc................................ 17
6,500 Slough Estates plc............................... 32
32,448 Smithkline Beecham plc........................... 597
6,476 Southern Electric plc............................ 48
18,185 Tarmac plc....................................... 38
10,354 Taylor Woodrow plc............................... 30
24,742 Tesco plc........................................ 153
9,144 Thames Water plc................................. 105
6,500 Thorn plc........................................ 18
6,517 Thorne EMI plc................................... 117
6,466 TI Group plc..................................... 56
9,100 Unilever plc..................................... 261
42,892 Vodafone Group plc............................... 209
11,700 Zeneca Group plc................................. 387
--------
13,957
--------
UNITED STATES (38.0%)
13,300 Abbott Laboratories.............................. 888
(a)13,000 Airtouch Communications, Inc..................... 356
5,800 Aluminum Co. of America.......................... 437
12,000 American Express Co.............................. 894
10,500 American Home Products Corp...................... 803
11,000 American International Group, Inc................ 1,643
29,500 American Telephone & Telegraph Co................ 1,034
9,300 Amoco Corp....................................... 809
(a)5,800 AMR Corp......................................... 537
(a)3,600 Applied Material, Inc............................ 255
3,100 Atlantic Richfield Co............................ 219
5,800 Automatic Data Processing, Inc................... 273
11,710 Banc One Corp.................................... 567
11,700 BankAmerica Corp................................. 755
1,900 Bankers Trust New York Corp...................... 165
10,800 Bell Atlantic Corp............................... 820
11,700 BellSouth Corp................................... 543
13,220 Boeing Co........................................ 701
14,900 Bristol-Myers Squibb Co.......................... 1,207
4,400 Campbell Soup Co................................. 220
5,800 Caterpillar, Inc................................. 623
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
12,800 Chevron Corp..................................... $ 946
9,700 Chrysler Corp.................................... 318
5,800 Chubb Corp....................................... 388
2,300 CIGNA Corp....................................... 408
(a)10,500 Cisco Systems, Inc............................... 705
9,500 Citicorp......................................... 1,145
44,300 Coca-Cola Co..................................... 2,990
13,600 Columbia HCA/Healthcare Corp..................... 535
11,700 Consolidated Edison Co. of New York, Inc......... 344
5,800 Cooper Industries, Inc........................... 289
5,800 Corning, Inc..................................... 323
4,100 CSX Corp......................................... 228
2,900 Deere & Co....................................... 159
8,600 Dow Chemical Co.................................. 749
(a)2,700 DSC Communications Corp.......................... 60
16,100 Du Pont (EI) de Nemours Co....................... 1,012
11,700 Duke Power Co.................................... 561
4,400 Dun & Bradstreet Corp............................ 116
11,700 Eastman Kodak Co................................. 898
2,200 Edison International............................. 55
9,600 Electronic Data Systems Corp..................... 394
9,048 Eli Lilly & Co................................... 989
7,800 Enron Corp....................................... 318
35,600 Exxon Corp....................................... 2,189
21,300 Federal National Mortgage Association............ 929
8,100 First Data Corp.................................. 356
5,400 Fleet Financial Group, Inc....................... 342
11,700 FPL Group, Inc................................... 539
4,500 Gannett Co., Inc................................. 444
44,300 General Electric Co.............................. 2,896
18,900 General Motors Corp.............................. 1,052
2,100 General RE Corp.................................. 382
5,800 Goodyear Tire & Rubber Co........................ 367
2,300 H&R Block, Inc................................... 74
10,850 H.J. Heinz Co.................................... 501
(a)900 Harrah's Entertainment, Inc...................... 16
17,800 Hewlett-Packard Co............................... 997
11,600 Home Depot, Inc.................................. 800
11,400 Intel Corp....................................... 1,617
11,100 International Business Machines Corp............. 1,001
8,800 International Paper Co........................... 427
6,900 J.C. Penney Co., Inc............................. 360
18,900 Johnson & Johnson................................ 1,217
(a)2,400 Kmart Corp....................................... 29
7,222 Lucent Technologies, Inc......................... 520
14,600 McDonald's Corp.................................. 705
22,100 Merck & Co., Inc................................. 2,287
(a)20,100 Microsoft Corp................................... 2,540
7,900 Minnesota Mining & Manufacturing Co.............. 806
9,000 Mobil Corp....................................... 629
3,500 Monsanto......................................... 151
5,800 Morgan (J.P.) & Co., Inc......................... 605
9,700 Motorola, Inc.................................... 737
11,700 NationsBank Corp................................. 755
4,600 Norfolk Southern Corp............................ 464
12,600 Norwest Corp..................................... 709
(a)7,200 Novell, Inc...................................... 50
2,500 Nucor Corp....................................... 141
(a)15,400 Oracle System Corp............................... 776
9,000 Pacific Gas & Electric Co........................ 218
</TABLE>
-----------------------
11
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------
<C> <S> <C>
UNITED STATES (CONT.)
11,300 Pfizer, Inc...................................... $ 1,350
12,300 Philip Morris Cos., Inc.......................... 546
3,600 PPG Industries, Inc.............................. 209
13,600 Procter & Gamble Co.............................. 1,921
11,600 Public Service Enterprise Group, Inc............. 290
7,200 Rockwell International Corp...................... 425
3,700 Salomon, Inc..................................... 206
13,243 SBC Communications, Inc.......................... 819
9,300 Schering-Plough Corp............................. 445
11,700 Sears, Roebuck & Co.............................. 629
17,600 Southern Co...................................... 385
10,600 Sprint Corp...................................... 558
5,800 Suntrust Banks, Inc.............................. 319
(a)10,300 Tele-Communications, Inc., 'A'................... 153
5,300 Texas Instruments, Inc........................... 446
11,700 Texas Utilities Co............................... 403
4,374 The Limited, Inc................................. 89
11,800 Time Warner, Inc................................. 569
(a)7,000 Toys `R' Us, Inc................................. 245
9,133 Travelers, Inc................................... 576
5,500 Union Pacific Corp............................... 388
(a)6,600 Viacom, Inc. 'B'................................. 198
33,200 Wal-Mart Stores, Inc............................. 1,123
12,609 Walt Disney Co................................... 1,012
3,400 Warner-Lambert Co................................ 422
1,500 Waste Management Inc............................. 48
1,700 Wells Fargo & Co................................. 458
15,600 Westinghouse Electric Corp....................... 361
6,000 Weyerhaeuser Co.................................. 312
9,000 WMX Technologies, Inc............................ 289
7,100 XEROX Corp....................................... 560
--------
72,061
--------
TOTAL COMMON STOCKS (COST $143,451)............................. 175,239
--------
PREFERRED STOCKS (0.2%)
AUSTRALIA (0.0%)
21,599 News Corp., Ltd.................................. 85
--------
GERMANY (0.2%)
4,150 RWE AG........................................... 145
776 SAP AG........................................... 160
--------
305
--------
ITALY (0.0%)
31,500 Fiat S.p.A....................................... 58
--------
UNITED STATES (0.0%)
(a)141 Aetna Life & Casualty 'C'........................ 13
--------
TOTAL PREFERRED STOCKS (COST $410).............................. 461
--------
INVESTMENT COMPANIES (5.1%)
UNITED STATES (5.1%)
(a,g)100,000 Morgan Stanley India Investment Fund, Inc........ 1,294
(g)70,000 Morgan Stanley Africa Investment Fund, Inc....... 1,251
(g)224,333 Morgan Stanley Asia-Pacific Fund, Inc............ 2,355
92,664 The Korea Fund, Inc.............................. 1,367
(g)95,900 The Latin American Discovery Fund, Inc........... 1,894
(g)92,853 The Thai Fund, Inc............................... 1,428
--------
TOTAL INVESTMENT COMPANIES (COST $9,653)........................ 9,589
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
<C> <S> <C>
- --------------------------------------------------------------------------
RIGHTS (0.0%)
FRANCE (0.0%)
(a,d)30 Simco S.A., expiring 7/2/97...................... $ --
--------
ITALY (0.0%)
(a)4,565 Rinascente S.p.A., expiring 7/23/97.............. 1
--------
KOREA (0.0%)
(a,d)31 Samsung Electronics Co., expiring 7/1/97......... 2
--------
SPAIN (0.0%)
(a,d)625 Immobiliaria Metropolitana Vasco Central S.A.,
expiring 7/26/97............................... --
--------
SWITZERLAND (0.0%)
(a)40 Sulzer AG (Resistered), expiring 7/17/97......... --
--------
TOTAL RIGHTS (COST $0).......................................... 3
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ------------
WARRANTS (0.0%)
FRANCE (0.0%)
(a)320 Casino Guichard Perrachon, expiring 12/31/99..... 5
(a)2,073 Compagnie Generale des Eaux, expiring 5/2/01..... 1
(a)5 Sodexho S.A., expiring 6/7/04.................... 1
--------
7
--------
HONG KONG (0.0%)
(a)2,000 Applied International Holdings Ltd., expiring
12/30/99....................................... --
(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........................................ 1
(a)4,400 Stelux Holdings International Ltd., expiring
2/28/98........................................ --
--------
3
--------
ITALY (0.0%)
(a,d)578 La Rinascente S.p.A., expiring 12/31/99.......... --
(a)420 R.A.S. S.p.A. (Savings Shares), expiring
12/31/97....................................... 1
(a)880 R.A.S. S.p.A., expiring 12/31/97................. 2
--------
3
--------
SINGAPORE (0.0%)
(a)6,750 Keppel Land Ltd., expiring 12/12/00.............. 6
--------
SWITZERLAND (0.0%)
(a)45 Roche Holdings, expiring 5/5/98.................. 3
--------
TOTAL WARRANTS (COST $5)........................................ 22
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
UNITS
<C> <S> <C>
- ------------
UNITS (0.0%)
AUSTRALIA (0.0%)
(a)18,212 Westfield Trust (COST $31)....................... 37
--------
</TABLE>
- --------------
12
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
CONVERTIBLE DEBENTURES (0.0%)
FRANCE (0.0%)
FRF 32 Casino Guichard Perrachon 4.50%, 7/12/01......... $ 16
29 Sanofi S.A. 4.00%, 1/1/00........................ 31
1 Sodexho S.A. 6.00%, 6/7/04....................... 4
--------
51
--------
ITALY (0.0%)
ITL 2,125 Mediobanca S.p.A. 6.00%, 12/31/02................ 1
--------
TOTAL CONVERTIBLE DEBENTURES (COST $38)......................... 52
--------
TOTAL FOREIGN & U.S. SECURITIES (97.6%) (COST $153,588)......... 185,403
--------
SHORT-TERM INVESTMENT (4.7%)
REPURCHASE AGREEMENT (4.7%)
UNITED STATES
$ 8,897 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $8,898,
collateralized by $9,420 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $9,050 (COST
$8,897)........................................ 8,897
--------
TOTAL INVESTMENT IN SECURITIES (102.3%) (COST $162,485)......... 194,300
--------
FOREIGN CURRENCY (0.3%)
AUD 18 Australian Dollar................................ 14
ATS 4 Austrian Schilling............................... --
GBP 8 British Pound.................................... 13
CAD 67 Canadian Dollar.................................. 48
DEM 82 Deutsche Mark.................................... 47
FRF 540 French Franc..................................... 92
HKD 213 Hong Kong Dollar................................. 27
INR 98,939 Indonesian Rupiah................................ 41
ITL 362 Italian Lira..................................... --
JPY 8,611 Japanese Yen..................................... 75
NLG 65 Netherlands Guilder.............................. 33
SGD 12 Singapore Dollar................................. 8
KRW 18,262 South Korean Won................................. 21
SEK 329 Swedish Krona.................................... 43
CHF 46 Swiss Franc...................................... 32
--------
TOTAL FOREIGN CURRENCY (COST $498).............................. 494
--------
TOTAL INVESTMENTS (102.6%) (COST $162,983)...................... 194,794
LIABILITIES IN EXCESS OF OTHER ASSETS (-2.6%)................... (4,929)
--------
NET ASSETS (100%)............................................... $189,865
--------
--------
</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.
ADR -- American Depositary Receipt.
NCS -- Non Convertible Shares.
RFD -- Ranked for Dividend.
-----------------------
13
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL EQUITY ALLOCATION FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, 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>
$ 9 $ 9 7/1/97 ESP 1,393 $ 10 $ 1
JPY 3,492 31 7/1/97 $ 30 30 (1)
$ 1,886 1,886 7/2/97 ITL 3,174,993 1,868 (18)
$ 1,879 1,879 7/3/97 CAD 2,593 1,878 (1)
$ 2,241 2,241 7/30/97 DEM 3,861 2,220 (21)
DEM 1,931 1,110 7/30/97 $ 1,150 1,150 40
DEM 1,930 1,109 7/30/97 $ 1,150 1,150 41
$ 400 400 8/18/97 NLG 773 395 (5)
$ 890 890 8/18/97 CHF 1,238 853 (37)
$ 1,478 1,478 8/18/97 CHF 2,113 1,456 (22)
CHF 3,350 2,308 8/18/97 $ 2,358 2,358 50
NLG 2,206 1,129 8/18/97 $ 1,162 1,162 33
$ 7,077 7,077 8/25/97 JPY 803,534 7,072 (5)
JPY 803,534 7,072 8/25/97 $ 7,200 7,200 128
$ 2,193 2,193 8/29/97 DEM 3,764 2,169 (24)
DEM 3,764 2,168 8/29/97 $ 2,198 2,198 30
$ 1,770 1,770 9/15/97 FRF 10,246 1,753 (17)
FRF 21,933 3,753 9/15/97 $ 3,870 3,870 117
ESP 203,563 1,384 9/26/97 $ 1,400 1,400 16
--------- --------- -----
$ 39,887 $ 40,192 $ 305
--------- --------- -----
--------- --------- -----
</TABLE>
- ---------------
CAD -- Canadian Dollar
DEM -- Deutsche Mark
FRF -- French Franc
ITL -- Italian Lira
JPY -- Japanese Yen
NLG -- Netherlands Guilder
ESP -- Spanish Peseta
CHF -- Swiss Franc
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- --------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Consumer Goods................................................................... $ 40,454 21.3%
Finance.......................................................................... 37,011 19.4
Services......................................................................... 32,912 17.3
Capital Equipment................................................................ 28,015 14.8
Energy........................................................................... 18,745 9.9
Materials........................................................................ 13,023 6.9
Investment Companies............................................................. 9,589 5.1
Multi-Industry................................................................... 4,989 2.6
Gold Mines....................................................................... 665 0.3
--------- ---
$ 185,403 97.6%
--------- ---
--------- ---
</TABLE>
- --------------
14
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australian Dollar 1.2%
British Pound 7.2%
Canadian Dollar 2.7%
Danish Krone 2.4%
Deutsche Mark 16.5%
Irish Punt 1.1%
Italian Lira 5.2%
Japanese Yen 11.9%
Spanish Peseta 3.4%
Swedish Krona 7.9%
United States Dollar 30.9%
Other 9.6%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares -0.73% 4.27% 5.32% 6.48%
- -----------------------------------------------------------------
Class B+ Shares -1.52% 3.48% 1.81% 3.78%
- -----------------------------------------------------------------
Class C Shares 2.48% 3.48% 5.64% 5.64%
- -----------------------------------------------------------------
J.P. Morgan Traded
Global Bond Index:
Class A & C Shares N/A 4.48% N/A 7.80%
Class B Shares N/A 4.48% N/A 3.15%
- -----------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and 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.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY CURRENCY NET ASSETS
- -------------------------- ---------------- --------------
<S> <C> <C>
U.S. Treasury Note 7.25%,
5/15/04 U.S. Dollar 15.2%
Bundesobligation 7.00%,
1/13/00 Deutsche Mark 7.6%
United Kingdom 9.50%,
4/18/05 British Pound 7.2%
U.S. Treasury Bond 8.13%,
8/15/19 U.S. Dollar 7.2%
U.S. Treasury Note 5.13%,
11/30/98 U.S. Dollar 5.8%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE CURRENCY DENOMINATIONS
VALUE PERCENT OF
CURRENCY (000) NET ASSETS
- ------------------------------ --------- -------------
<S> <C> <C>
United States Dollar $ 3,262 30.9%
Deutsche Mark 1,737 16.5%
Japanese Yen 1,257 11.9%
Swedish Krona 835 7.9%
British Pound 760 7.2%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C>
J.P. Morgan Traded
Global Fixed Income Fund Class A Global Fixed Income Fund Class C Global Bond Index
1/4/93 9,525 10,000 10,000
6/30/93 10,289 10,653 10,760
6/30/94 10,331 10,733 11,187
6/30/95 11,509 11,833 13,139
6/30/96 12,107 12,362 13,408
6/30/97 12,624 12,792 14,009
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; all recurring fees (including
management fees) were deducted; and all dividends and distributions were
reinvested. The graph presents the performance of Class A and Class C shares
which have been in existence since the Fund's inception. The performance of
Class B shares will vary based upon the different inception date and the sales
charge and fees assessed to that Class.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 year ended June 30, 1997, the Fund had a total return exclusive of sales
charge of 4.27% for the Class A shares, 3.48% for the Class B shares and 3.48%
for the Class C shares, and a total return with sales charge of -0.73% for the
Class A shares, -1.52% for the Class B shares and 2.48% for the Class C shares,
as compared to a total return of 4.48% for the JP Morgan Traded Global Bond
Index (the "Index"). For the period since inception through June 30, 1997, the
average annual total return of the Fund exclusive of sales charge was 6.48% for
the Class A shares, 3.78% for the Class B shares, and 5.64% for the Class C
shares, and 5.32% for the Class A shares, 1.81% for the Class B shares, and
5.64% for the Class C shares with sales charge, as compared to 7.80% for the
Index since inception of Class A and C shares and 3.15% for the Index since
inception of Class B shares.
Global fixed income markets rallied in every country except the United States
during the first half of the calendar year 1997. Ten-year bond yields fell the
most in Italy, about 70 basis points, while they rose fractionally in the United
States. The second quarter was particularly positive for bonds with yields
falling substantially in all countries except Japan. Rallies were lead by
Australia where 10-year yields fell 100 basis points. The continuation of
relatively weak growth triggered easings in central bank policy, while U.S.
rates fell about 40 basis points as a pause in the U.S. economic recovery led
markets to downgrade risks of Fed tightening. 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.
------------------
15
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
Differences in performance within Europe continued to depend on prospects for
European Monetary Union (EMU). The return of the Socialists to power in the
recent French elections increased the probability that Spain and Italy would be
included in the first stage of EMU, and ten-year yields in the high yielding
European countries fell 60-90 basis points. The increased prospects for a wide
EMU, however, also increased fears that the Euro would become a soft currency
and ten-year yields in core countries such as Germany only fell 20-30 basis
points. Japanese bond markets performed poorly in the second quarter as
government officials talked up prospects for the economy and fears of central
bank tightening increased.
Reflecting these concerns over a soft Euro, the Deutsche mark continued to
weaken in the second quarter of 1997, falling 4% against the U.S. dollar,
raising its cumulative loss to 11.6% for the first half of 1997. By contrast,
the Japanese yen rose 8% in the second quarter, 1.4% for the first half of 1997,
completely reversing its earlier weakness, as the current account surplus soared
and government officials jawboned. In the first half of the 1997, the yen is the
only currency up versus the U.S. dollar.
These developments combined for a -1.1% return in the first half of 1997 for the
JP Morgan Global Government Bond Index. Losses were solely attributable to the
rise in the U.S. dollar as all bond markets generated positive returns in local
currency. During the year the Fund benefited from its overweighting of U.K. and
Australian bonds and underweighting of U.S. bonds. An overweighting of the U.S.
dollar versus the European currencies also contributed to returns. These
benefits were offset in part by a small underweighting of the Japanese yen and a
small overweighting of the Australian dollar.
During the second quarter of 1997 several changes were made to the Fund in
response to the shifts in interest and exchange rates. We drew down U.S. cash
holdings to fund an investment in Japanese bonds following a sharp sell-off in
the Japanese market. We also reduced our holdings of U.K. bonds as their surge
immediately after the granting of independence to the Bank of England eliminated
much of the remaining value in that market. Portfolio duration increased by 0.3
years, reflecting the Japanese bond purchases. Currency adjustments consisted of
a partial hedging of Japanese yen exposures following its sharp appreciation to
year-high levels and a shift in European currency exposure from the Spanish
peseta to the Deutsche mark after the former currency appreciated to well above
its Exchange Rate Mechanism central parity.
Looking forward, we would expect many of the developments driving global fixed
income markets to continue. Increasingly, however, we do not believe that the
potential rewards are worth taking significant risks. Although European Monetary
Union including Spain and Italy is now probable, this possibility is now almost
fully priced in by the markets. Increasingly, traditional convergence trades
offer prospects of small additional gain offset by a small but significant
possibility of sizable loss should EMU not take place. Similarly, we expect the
U.S. dollar and U.K. currency to be supported by continued economic strength,
but are concerned that these currencies have already appreciated to levels where
sizable exposures would entail significant risks. Even duration trades now face
conflicting considerations. Although real interest rates are still at attractive
levels, U.S. and Continental European markets have now priced in little or no
monetary tightening over the next two years--a situation that we find worrisome
given the tightness of the U.S. labor market and the growing signs of economic
recovery in Europe.
On balance, we now view most bond markets to be offering fair value with the
important exceptions of Sweden--where we remain attracted by high real interest
rates--and Japan--where very low real interest rates continue to suggest that a
defensive stance is appropriate. The recent sell-off in the United Kingdom has
also resulted in it having one of the highest real interest rates in the world
and we are starting to shift interest rate exposure in that direction. We are
also partially hedging Japanese yen and European currencies, resulting in about
a 6% overweighting of dollar bloc currencies.
J. David Germany
Paul F. O'Brien
PORTFOLIO MANAGER
PORTFOLIO MANAGER
Michael B. Kushma
Robert M. Smith
PORTFOLIO MANAGER
PORTFOLIO MANAGER
July 1997
- --------------
16
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
FIXED INCOME SECURITIES (90.4%)
AUSTRALIAN DOLLAR (1.2%)
GOVERNMENT BOND
AUD 150 Government of Australia 9.75%, 3/15/02........... $ 128
-------
BRITISH POUND (7.2%)
GOVERNMENT BOND
GBP 400 United Kingdom 9.50%, 4/18/05.................... 760
-------
CANADIAN DOLLAR (2.7%)
GOVERNMENT BONDS
CAD 300 Government of Canada 7.50%, 3/1/01............... 232
60 Government of Canada 9.75%, 6/1/21............... 58
-------
TOTAL CANADIAN DOLLAR........................................ 290
-------
DANISH KRONE (2.4%)
GOVERNMENT BOND
DKK 1,500 Kingdom of Denmark 8.00%, 5/15/03................ 256
-------
DEUTSCHE MARK (16.5%)
CORPORATE BONDS
DEM 150 KFW International Finance, Inc. 7.50%, 1/24/00... 93
650 Landeskreditbank Baden-Wuerttemberg Financial
6.63%, 8/20/03................................. 402
-------
495
-------
GOVERNMENT BONDS
1,300 Bundesobligation 7.00%, 1/13/00.................. 803
100 Deutschland Republic 6.25%, 1/4/24............... 56
590 Treuhandanstalt 7.50%, 9/9/04.................... 383
-------
1,242
-------
TOTAL DEUTSCHE MARK.......................................... 1,737
-------
IRISH PUNT (1.1%)
GOVERNMENT BOND
IEP 70 Government of Ireland 8.00%, 8/18/06............. 116
-------
ITALIAN LIRA (5.2%)
GOVERNMENT BONDS
ITL 380,000 Buoni Poliennali Del Tes 10.50%, 7/15/00......... 250
60,000 Buoni Poliennali Del Tes 10.00%, 8/1/03.......... 41
150,000 Buoni Poliennali Del Tes 9.50%, 1/1/05........... 102
230,000 Buoni Poliennali Del Tes 9.50%, 2/1/06........... 158
-------
TOTAL ITALIAN LIRA........................................... 551
-------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
JAPANESE YEN (11.9%)
EUROBONDS
JPY 15,000 European Investment Bank 6.63%, 3/15/00.......... $ 150
30,000 European Investment Bank 3.00%, 9/20/06.......... 273
25,000 Export Import Bank of Japan 4.38%, 10/1/03....... 246
27,000 Japan Development Bank 6.50%, 9/20/01............ 282
30,000 World Bank 4.75%, 12/20/04....................... 306
-------
TOTAL JAPANESE YEN........................................... 1,257
-------
SPANISH PESETA (3.4%)
GOVERNMENT BOND
ESP 50,000 Government of Spain 8.30%, 12/15/98.............. 354
-------
SWEDISH KRONA (7.9%)
GOVERNMENT BONDS
SEK 3,100 Government of Sweden 13.00%, 6/15/01............. 506
2,600 Government of Sweden 6.00%, 2/9/05............... 329
-------
TOTAL SWEDISH KRONA.......................................... 835
-------
UNITED STATES DOLLAR (30.9%)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (30.9%)
U.S. TREASURY BONDS
$ 665 8.13%, 8/15/19................................... 758
40 7.63%, 2/15/25................................... 44
-------
802
-------
U.S. TREASURY NOTES
615 5.13%, 11/30/98.................................. 608
250 6.25%, 10/31/01.................................. 249
1,538 7.25%, 5/15/04................................... 1,603
-------
2,460
-------
TOTAL UNITED STATES DOLLAR................................... 3,262
-------
TOTAL FIXED INCOME SECURITIES (COST $9,641).................... 9,546
-------
FOREIGN CURRENCY (0.0%)
DEM 4 Deutsche Mark.................................... 2
ESP 193 Spanish Peseta................................... 1
-------
TOTAL FOREIGN CURRENCY (COST $3)............................... 3
-------
TOTAL INVESTMENTS (90.4%) (COST $9,644)........................ 9,549
OTHER ASSETS IN EXCESS OF LIABILITIES (9.6%)................... 1,019
-------
NET ASSETS (100%).............................................. $10,568
-------
-------
</TABLE>
-----------------------
17
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GLOBAL FIXED INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, 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 718 $ 412 7/11/97 $ 415 $ 415 $ 3
ITL 180,000 106 7/11/97 $ 106 106 --
JPY 36,250 317 7/11/97 $ 317 317 --
JPY 48,923 428 7/11/97 $ 425 425 (3)
$ 106 106 7/11/97 ITL 180,000 106 --
$ 210 210 7/11/97 JPY 23,981 209 (1)
$ 328 328 7/11/97 JPY 36,250 317 (11)
$ 425 425 7/11/97 DEM 718 412 (13)
DEM 550 316 7/18/97 $ 318 318 2
ITL 175,000 103 7/18/97 $ 104 104 1
$ 103 103 7/18/97 ITL 175,000 103 --
$ 319 319 7/18/97 DEM 550 316 (3)
GBP 32 53 7/25/97 $ 53 53 --
IEP 80 121 7/25/97 $ 121 121 --
SEK 4,550 589 7/25/97 $ 593 593 4
--------- --------- ---
$ 3,936 $ 3,915 $ (21)
--------- --------- ---
--------- --------- ---
</TABLE>
- ---------------
GBP -- British Pound
DEM -- Deutsche Mark
IEP -- Irish Punt
ITL -- Italian Lira
JPY -- Japanese Yen
SEK -- Swedish Krona
- --------------
18
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
China 1.1%
Hong Kong 34.9%
Indonesia 6.9%
Korea 7.6%
Malaysia 15.3%
Philippines 3.9%
Singapore 11.8%
Taiwan 11.4%
Thailand 3.3%
Other 3.8%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares -6.81 % -1.10 % 8.29 % 9.89 %
- -----------------------------------------------------------------------------
Class B+ Shares -6.79 % -1.79 % -2.06 % 0.00 %
- -----------------------------------------------------------------------------
Class C Shares -2.75 % -1.79 % 9.11 % 9.11 %
- -----------------------------------------------------------------------------
MSCI CFEF ex-Japan
Index:
Class A & C Shares N/A 0.95 % N/A 13.16 %
Class B Shares N/A 0.95 % N/A 3.94 %
- -----------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and 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).
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- --------------------------------- --------- --------------
<S> <C> <C>
Cheung Kong Holdings Ltd. Hong Kong 6.4%
HSBC Holdings plc Hong Kong 5.6%
Hutchison Whampoa Ltd. Hong Kong 4.5%
China Resources Enterprises Ltd. Hong Kong 4.3%
Henderson Land Development Co., Hong Kong 3.8%
Ltd.
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ----------------------------- --------- -------------
<S> <C> <C>
Finance $ 136,255 38.6%
Multi-Industry 52,458 14.9%
Capital Equipment 38,279 10.9%
Consumer Goods 34,897 9.9%
Services 28,956 8.2%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C>
Asian Growth Fund Class A Asian Growth Fund Class C MSCI Combined Far East Free ex-Japan Index
6/23/93 9,525 10,000 10,000
6/30/93 9,525 10,000 10,000
6/30/94 12,303 12,705 13,265
6/30/95 13,472 13,951 15,055
6/30/96 14,071 14,459 16,286
6/30/97 13,916 14,200 16,441
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; all recurring fees (including
management fees) were deducted; and all dividends and distributions were
reinvested. The graph presents the performance of Class A and Class C shares
which have been in existence since the Fund's inception. The performance of
Class B shares will vary based upon the different inception date and the sales
charge and fees assessed to that Class.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 year ended June 30, 1997, the Fund had a total return exclusive of sales
charge of -1.10% for the Class A shares, -1.79% for the Class B shares and
- -1.79% for the Class C shares, and a total return with sales charge of -6.81%
for the Class A shares, -6.79% for the Class B shares and -2.75% for the Class C
shares, as compared to a total return of 0.95% for the Morgan Stanley Capital
International (MSCI) Combined Far East Free ex-Japan Index (the "Index"). For
the period from inception through June 30, 1997, the average annual total return
for the Fund exclusive of sales charge was 9.89% for the Class A shares, 0.00%
for the Class B shares, and 9.11% for the Class C shares and 8.29% for the Class
A shares, -2.06% for the Class B shares, and 9.11% for the Class C shares with
sales charge, as compared to 13.16% for the Index since inception of the Class A
and Class C shares and 3.94% for the Index since inception of the Class B
shares.
The individual Asian markets showed a great deal of divergence in 1996. The
greater China markets performed well, with Taiwan (+38.9%), China (+35.1%), and
Hong Kong (+29.0%) showing large gains. This contrasted strongly with Korea and
Thailand which fell -38.4% and -38.0% respectively. Wide variations in
performance continued year-to-date in 1997. The greater China markets led the
way once again, with Taiwan (+26.6% year-to-date), China (+10.3%) and Hong
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.
------------------
19
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
KONG (+8.1%), JOINED BY KOREA WHICH REBOUNDED STRONGLY (+9.7%). IN CONTRAST, THE
SOUTHEAST ASIAN MARKETS OF THAILAND (-37.3%), THE PHILIPPINES (-12.2%) AND
MALAYSIA (-12.2%) REGISTERED SHARP FALLS.
As of June 30, 1997, the Portfolio was overweighted compared to the Index in
Hong Kong (35.8% vs. 33.3%), Korea (7.6% vs. 5.9%), Singapore (11.7% vs. 11.1%)
and China (1.1% vs. 0.8%). It was underweight everywhere else, most notably in
Malaysia (15.0% vs. 18.4%).
After its superb 1996 performance, Hong Kong slipped (-9.5%) in the first
quarter of 1997. The downturn led to significant value in the market, and the
Fund increased its exposure to Hong Kong to 35.8%. This weight stood the Fund in
good stead as the market staged a sharp rebound. Euphoria over China concept
plays and in particular red chips led the way. Sentiment and liquidity further
contributed, as asset injection stories propelled the red chips ever higher
while traditional blue chip stocks languished. The rally culminated in an
all-time high of 15,197 on the Hang Seng Index on June 27, 1997, the last
trading day before the handover. With the handover complete, red chip fever has
subsided and talk of increasing the supply of residential units in Hong Kong has
caused the property sector to weaken. The Fund will be looking to take its Hong
Kong weighting down while shifting towards better value blue chips such as the
major property developers if they weaken further.
The Fund also sharply increased its weight in Taiwan over the past year from
5.1% to 11.3%. Following on a strong 1996 performance of 38.9%, the Taiwan
market continued to surge, up 26.6% for the first half. While the rally in 1996
was driven by the financial sector, in 1997 it was powered primarily by the
electronics sector which surged more than 60% on strong earnings growth in the
second quarter of 1996 alone. The Fund intends to maintain its weighting in this
market as domestic liquidity continues to be high. The position will be trimmed,
however, if the central bank anticipates a further pick up in domestic growth
and moves to tighten liquidity.
The Fund also increased its weight in Korea in 1997 from 4.2% to 8.0% and will
continue to look for good values in that market. The Korean economy appears to
have bottomed as positive export growth generated its first monthly trade
surplus in 30 months. Equally encouraging, there are also signs that the Korean
corporate culture is finally changing. The zealousness with which many Korean
companies pursued market share gains and top line growth is finally beginning to
shift towards interest in the bottom line which should bode well for equity
investors.
The Fund maintained a market weighting in Malaysia through 1996 and participated
in the rally in that market (+24.5%). By contrast, in the second quarter of
1997, the Fund sharply cut its weighting to 15.0%, following a flat first
quarter of 1997. Bank Negara's curbs on property lending and stock market margin
loans in April finally forced the economy to confront its problems with the
impending oversupply in the property market and an infrastructure spending
binge. The subsequent severity of the market fallout indicated an overstretched
market. Although the long term fundamentals for Malaysia remain good, short term
prospects are not promising, especially in the aftermath of the fallout from the
depegging of the Thai baht. The Portfolio is looking to maintain its underweight
in Malaysia barring unforeseen positive developments.
The Fund's weighting in Thailand has also been taken down, from 11.2% to 3%, due
to a combination of Fund sales and a collapsing market. This market has
continued to be a disaster, falling -37.3% this year following a -38.0% decline
last year. Most recently, confidence plummeted as the government resorted to
capital controls and increased interest rates to fend off the currency
speculators. The gloom was further compounded by news of a slowing economy as
the mounting financial crisis resulted in the suspension of 16 finance
companies. The depegging of the Thai baht at the beginning of July is the first
step towards addressing the Thai financial crisis. Recovery, however, will be a
slow and painful process, and the first sharp rally since the Baht broke is
proving hard to sustain. The Fund will selectively continue to seek to acquire
good companies at low prices but it is still too early to bet on the Thai
market.
The Thai financial crisis and the final depegging of the Thai baht have brought
into focus the common ills of the fast growing Southeast Asian nations. Thailand
is further along the economic cycle but the pain it is going through has
heightened investors' wariness about the region in general and is likely to
prove a dampener on the markets in the near term. The collapse in the Thai
market and the correction in Malaysia, Singapore and the Philippines have
brought market valuations back to attractive levels but short term sentiment
remains poor.
- --------------
20
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
In summary, the Fund will continue to selectively seek to move out of more
extended markets like Hong Kong into the more distressed situations in Southeast
Asia.
Ean Wah Chin
PORTFOLIO MANAGER
Kiat Seng Seah
PORTFOLIO MANAGER
JULY 1997
------------------
21
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (96.1%)
CHINA (1.1%)
2,048,000 Guangshen Railway Co., Ltd. 'H'.................. $ 899
3,105,000 Qingling Motors Co., 'H'......................... 1,603
147,000 Shenzhen Fangda Co., Ltd. 'B'.................... 213
(a)5,268,000 Zhejiang Expressway Co., Ltd. 'H'................ 1,278
--------
3,993
--------
HONG KONG (34.9%)
2,270,000 Cheung Kong Holdings Ltd......................... 22,415
432,000 China Merchants Holdings International Co.,
Ltd............................................ 1,344
3,068,000 China Resources Enterprises Ltd.................. 15,048
360,000 Dao Heng Bank Group Ltd.......................... 1,970
433,300 Hang Seng Bank Ltd............................... 6,180
1,517,000 Henderson Land Development Co., Ltd.............. 13,462
651,424 HSBC Holdings plc................................ 19,592
1,826,000 Hutchison Whampoa Ltd............................ 15,792
1,130,000 New World Development Co., Ltd................... 6,739
1,103,000 Ng Fung Hong Ltd................................. 1,651
1,831,000 Shanghai Industrial Holdings Ltd................. 11,392
613,100 Sun Hung Kai Properties Ltd...................... 7,379
--------
122,964
--------
INDONESIA (6.9%)
(a)1,271,000 Astra International (Foreign).................... 5,226
(a,d)3,226,697 Bank International Indonesia (Foreign)........... 2,786
(d)4,194,000 Bank Negara Indonesia (Foreign).................. 2,673
(d)788,000 Bimantara Citra (Foreign)........................ 1,377
(d)419,000 Gudang Garam (Foreign)........................... 1,757
(d)434,700 Hanjaya Mandala Sampoerna (Foreign).............. 1,658
(a,d)1,168,800 Indofood Sukses Makmur (Foreign)................. 2,692
(d)1,263,000 Matahari Putra Prima (Foreign)................... 2,545
(d)1,433,000 Mayora Indah (Foreign)........................... 810
(a,d)478,000 Putra Surya Multidana (Foreign).................. 762
(d)1,307,500 Telekomunikasi (Foreign)......................... 2,137
--------
24,423
--------
KOREA (7.6%)
(a)54,170 Hansol Paper Co.................................. 1,373
(d)114,420 Housing & Commercial Bank (Foreign).............. 2,136
(a)86,079 Kookmin Bank GDR................................. 1,818
(a,d)80,085 Kookmin Bank..................................... 1,477
111,720 Korea Electric Power............................. 3,334
23,980 LG Information & Communication (Foreign)......... 2,970
(d)35,362 Pohang Iron & Steel Ltd. (Foreign)............... 3,622
(d)58,419 Samsung Electronics Co. (Foreign)................ 6,540
(a,e)22,895 Samsung Electronics Co. GDR (New)................ 1,357
(d)136,257 Shinhan Bank Co., Ltd............................ 1,975
--------
26,602
--------
MALAYSIA (15.3%)
303,000 Arab Malaysian Corporation Bhd................... 1,129
3,292,000 Berjaya Group Bhd................................ 4,043
(a)255,000 Berjaya Sports Toto Bhd.......................... 1,202
1,201,000 Commerce Asset Holdings Bhd...................... 3,164
223,000 Dialog Group Bhd................................. 3,225
377,000 Edaran Otomobil Nasional Bhd..................... 3,211
665,400 Genting Bhd...................................... 3,190
880,000 IJM Corp. Bhd.................................... 1,848
521,000 Jaya Tiasa Holdings Bhd.......................... 2,622
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
850,000 Leader Universal Holdings Bhd.................... $ 1,529
(a)62,000 Lityan Bhd....................................... 755
412,500 Malayan Banking Bhd.............................. 4,331
105,000 Malaysian International Shipping (Foreign)....... 273
(a)285,000 Malaysian Pacific Industries Bhd................. 1,242
323,000 Malaysian Resources Corp. Bhd.................... 889
742,000 Multi-Purpose Holdings Bhd....................... 1,041
580,000 Rashid Hussain Bhd............................... 3,677
1,391,000 Resorts World Bhd................................ 4,189
2,696,000 Sime Darby Bhd................................... 8,972
494,000 United Engineers Bhd............................. 3,562
--------
54,094
--------
PHILIPPINES (3.9%)
4,914,296 Ayala Land, Inc. 'B'............................. 4,518
(a)15,431,000 Digital Telecommunications Philippines, Inc...... 1,492
(a)5,118,400 DMCI Holdings, Inc............................... 1,688
(a)2,775,000 Fil-Estate Land, Inc............................. 810
3,048,200 JG Summit Holding 'B'............................ 624
529,365 Manila Electric 'B'.............................. 2,609
7,107,180 SM Prime Holdings, Inc........................... 2,102
--------
13,843
--------
SINGAPORE (11.7%)
239,500 Development Bank of Singapore (Foreign).......... 3,015
574,000 Electronic Resources Ltd......................... 903
431,000 Jurong Shipyard Ltd.............................. 1,869
2,712,000 NatSteel Ltd..................................... 6,905
313,238 Oversea-Chinese Banking Corp. (Foreign).......... 3,243
(a)889,000 Pacific Century Regional Development............. 1,237
642,000 Parkway Holdings Ltd............................. 2,874
415,400 Singapore Press Holdings (Foreign)............... 8,368
2,258,000 SM Summit Holdings Ltd........................... 1,706
(a)1,015,000 Super Coffeemix Manufacturing Ltd................ 845
282,000 United Overseas Bank Ltd. (Foreign).............. 2,900
(a)1,317,600 Want Want Holdings............................... 4,374
1,087,000 Wing Tai Holdings Ltd............................ 3,132
--------
41,371
--------
TAIWAN (11.4%)
(a)1,300,000 Acer, Inc........................................ 4,676
(a)522,000 Asustek Computer, Inc............................ 6,910
(a)288,600 Cathay Life Insurance Co., Ltd................... 1,651
(a)1,005,000 China Development Corp........................... 5,188
851,850 China Steel Corp................................. 901
(a)1,888,900 Compal Electronics, Inc.......................... 7,474
2,578,000 Far Eastern Textile, Ltd......................... 4,052
1,264,400 Formosa Plastics Corp............................ 3,047
1,000,000 Great Wall Enterprises Co........................ 791
(a)701,500 Kuoyang Construction............................. 1,691
1,120,000 Siliconware Precision Industries Co.............. 3,787
--------
40,168
--------
THAILAND (3.3%)
454,300 Bangkok Bank Co., Ltd. (Foreign)................. 3,122
197,000 Big C Supercenter Co., Ltd....................... 62
302,700 Eastern Water Resources Development.............. 351
61,000 ICC International Co., PCL (Foreign)............. 191
5,800 International Cosmetics (Foreign)................ 19
27,000 Matichon Public Co., Ltd......................... 63
</TABLE>
- -----------------------
22
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -----------------------------------------------------------------------------
<C> <S> <C>
THAILAND (CONT.)
(d)219,000 Nation Multimedia Group Public Co., Ltd.
(Foreign)...................................... $ 465
(d)983,000 National Petrochemical Co., Ltd. (Foreign)....... 1,006
44,000 Quality House Co., Ltd. (Foreign)................ 16
267,000 Quality House Co., Ltd........................... 91
93,000 Robinson Department Store Co., Ltd. (Foreign).... 33
539,600 Siam Commercial Bank Co., Ltd. (Foreign)......... 2,208
(a,d)22,000 Sino Thai Engineering & Construction Co., Ltd.
(Foreign)...................................... 61
(a)42,000 Sino Thai Engineering & Construction Co., Ltd.... 117
546,000 Thai Farmer's Bank Public Co. (Foreign).......... 2,318
41,000 Thai Rung Union Car Co., Ltd..................... 148
(d)69,100 Thai Rung Union Car Co., Ltd. (Foreign).......... 249
35,000 Thai Storage Battery Co., Ltd. (Foreign)......... 35
174,900 Thai Theparos Food Product Co., Ltd. (Foreign)... 270
(d)149,000 United Communication Industry (Foreign).......... 615
--------
11,440
--------
TOTAL COMMON STOCKS (COST $303,930)................................ 338,898
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ---------------
RIGHTS (0.1%)
MALAYSIA (0.0%)
(a)239,200 Commerce Asset Holdings Bhd., expiring
7/23/97........................................ 8
(a,d)82,857 Rashid Hussain Bhd., expiring 12/31/02........... --
--------
8
--------
SINGAPORE (0.1%)
(a,d)287,000 Electronic Resources Ltd., expiring 7/21/97...... 191
--------
TOTAL RIGHTS (COST $0)............................................. 199
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ---------------
WARRANTS (0.0%)
INDONESIA (0.0%)
(a)286,818 PT Bank International Indonesia, expiring
1/17/00........................................ 112
--------
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
MALAYSIA (0.0%)
(a,d)149,500 Commerce Asset Holdings Bhd., expiring 6/27/98... $ 23
--------
TOTAL WARRANTS (COST $0)........................................... 135
--------
TOTAL FOREIGN SECURITIES (96.2%) (COST $303,930)................... 339,232
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ---------------
SHORT-TERM INVESTMENT (4.3%)
REPURCHASE AGREEMENT
$ 15,266 Chase Securities, Inc., 5.70%, dated
6/30/97, due 7/1/97, to be repurchased at
$15,268, collateralized by $16,160 U.S.
Treasury Bonds, 5.625%, due 2/15/06, valued at
$15,527 (COST $15,266)......................... 15,266
--------
TOTAL INVESTMENTS IN SECURITIES (100.5%) (COST $319,196)........... 354,498
--------
FOREIGN CURRENCY (0.9%)
HKD 15,383 Hong Kong Dollar................................. 1,986
IDR 889,930 Indonesian Rupiah................................ 366
MYR 904 Malaysian Ringgit................................ 358
PHP 1,403 Philippine Peso.................................. 53
SGD 19 Singapore Dollar................................. 13
KRW 391,442 South Korean Won................................. 441
--------
TOTAL FOREIGN CURRENCY (COST $3,217)............................... 3,217
--------
TOTAL INVESTMENTS (101.4%) (COST $322,413)......................... 357,715
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.4%)...................... (5,029)
--------
NET ASSETS (100%).................................................. $352,686
--------
--------
</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.
GDR -- Global Depositary Receipt.
-----------------------
23
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
ASIAN GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, 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>
$ 1,542 $ 1,542 7/1/97 SGD 2,206 $ 1,542 $ --
$ 363 363 7/2/97 IDR 882,845 363 --
$ 91 91 7/2/97 THB 2365 91 --
THB 319,450 12,110 8/18/97 $ 12,032 12,032 (78)
--------- --------- ---
$ 14,106 $ 14,028 $ (78)
--------- --------- ---
--------- --------- ---
</TABLE>
- ---------------
IDR -- Indonesian Rupiah
SGD -- Singapore Dollar
THB -- Thai Baht
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- ---------------------------------------- -------- --------
<S> <C> <C>
Finance................................. $136,255 38.6%
Multi-Industry.......................... 52,458 14.9
Capital Equipment....................... 38,279 10.9
Consumer Goods.......................... 34,897 9.9
Services................................ 28,956 8.2
Energy.................................. 26,415 7.5
Materials............................... 21,972 6.2
-------- ---
$339,232 96.2%
-------- ---
-------- ---
</TABLE>
- -----------------------
24
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace 1.3%
Banking 9.2%
Building 2.3%
Capital Goods 2.9%
Chemicals 2.7%
Communications 1.0%
Computers 3.9%
Consumer--Durables 6.1%
Consumer--Retail 9.5%
Consumer--Service & Growth 0.4%
Consumer--Staples 3.3%
Energy 9.5%
Entertainment 0.3%
Financial--Diversified 9.4%
Health Care 8.7%
Industrial 2.0%
Insurance 1.3%
Metals 1.7%
Paper & Packaging 2.8%
Services 11.5%
Technology 5.6%
Transportation 2.5%
Utilities 1.1%
Other 1.0%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 23.19% 30.68% 14.39% 16.23%
- -----------------------------------------------------------------
Class B+ Shares 24.77% 29.77% 19.97% 21.72%
- -----------------------------------------------------------------
Class C Shares 28.67% 29.67% 15.32% 15.32%
- -----------------------------------------------------------------
Russell 2500 Small
Company Index:
Class A & C Shares N/A 20.09% N/A 15.86%
Class B Shares N/A 20.09% N/A 19.58%
- -----------------------------------------------------------------
S&P 500 Index:
Class A & C Shares N/A 34.70% N/A 21.74%
Class B Shares N/A 34.70% N/A 29.59%
- -----------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and 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.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER SECTOR NET ASSETS
- ------------------------- ------------------ --------------
<S> <C> <C>
Franklin Resources, Inc. Financial--Diversified 1.8%
Herman Miller, Inc. Consumer--Durables 1.5%
CVS Corp. Consumer--Retail 1.4%
Beckman Instruments, Inc. Health Care 1.3%
CDI Corp. Services 1.3%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------------------------------ --------- -------------
<S> <C> <C>
Services $ 9,437 11.5%
Consumer--Retail 7,792 9.5%
Energy 7,736 9.5%
Financial--Diversified 7,682 9.4%
Banking 7,549 9.2%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C>
American Value Fund Class A American Value Fund Class C Russell 2500 Small Company Index S&P 500 Index
10/18/93 9,525 10,000 10,000 10,000
6/30/94 9,418 9,732 9,409 9,662
6/30/95 10,831 11,219 11,560 12,205
6/30/96 12,717 13,069 14,355 15,376
6/30/97 16,619 16,947 17,239 20,711
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; all recurring fees (including
management fees) were deducted; and all dividends and distributions were
reinvested. The graph presents the performance of Class A and Class C shares
which have been in existence since the Fund's inception. The performance of
Class B shares will vary based upon the different inception date and the sales
charge and fees assessed to that Class.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 year ended June 30, 1997, the Fund had a total return exclusive of sales
charge of 30.68% for the Class A shares, 29.77% for the Class B shares and
29.67% for the Class C shares, and a total return with sales charge of 23.19%
for the Class A shares, 24.77% for the Class B shares and 28.67% for the Class C
shares, as compared to a total return of 20.09% for the Russell 2500 Small
Company Index and 34.70% for the S&P 500 Index. For the period from inception
through June 30, 1997, the
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.
------------------
25
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
AVERAGE ANNUAL TOTAL RETURN OF THE FUND EXCLUSIVE OF SALES CHARGE WAS 16.23% FOR
THE CLASS A SHARES, 21.72% FOR THE CLASS B SHARES, AND 15.32% FOR THE CLASS C
SHARES AND 14.39% FOR THE CLASS A SHARES, 19.97% FOR THE CLASS B SHARES AND
15.32% FOR THE CLASS C SHARES AS COMPARED TO 15.86% AND 21.74% FOR THE RUSSELL
2500 SMALL COMPANY INDEX AND S&P 500 INDEX, RESPECTIVELY, SINCE INCEPTION OF THE
CLASS A AND CLASS C SHARES, AND 19.58% AND 29.59% FOR EACH RESPECTIVE INDEX
SINCE INCEPTION OF CLASS B SHARES.
Both sector and stock selection supported the Fund's second quarter of calendar
1997 performance as well as the fiscal year. Particularly additive was the
overweighting in Financial Services, a sector which outperformed, and our
underweight in Utilities, a sector which underperformed. Individual stocks which
were additive to performance included Everen Capital in the Financials, Dallas
Semiconductor in Technology, Crane, Accustaff, and Airborne Freight in Heavy
Industry and Transportation, and Noble Drilling in the Energy sector. An
underweighting in Technology hurt performance.
At the start of last quarter we reduced our weighting in financials following
the Federal Reserve tightening. Subsequently, we reversed course and added to
financials after news on inflation and economic growth was moderate,
profitability was than expected, and the strength of the dollar helped mitigate
inflation pressures. Importantly, sustained labor productivity gains have
reduced the effect of rising wages on profits and prices.
Looking ahead, the outlook for small and mid cap stocks continues to be
favorable, especially compared to large cap stocks. Earnings growth has been
excellent and future earnings estimates have been revised sharply upwards for
both the last half of calendar 1997 and 1998. In terms of valuation, we are
still able to purchases stocks whose sales and earnings growth exceed their
price-to-earnings ratios. Importantly, real interest rates are well in excess of
three percent, a threshold that has historically been a good indicator of the
future returns of longer duration assets like stocks. While we are concerned
about tightening labor markets, company anecdotes highlight the positive effects
of computer technology on productivity. Technology is being used to streamline
distribution networks and improve inventory management, while simultaneously
expanding capacity without a commensurate increase in employment. We remain
interested in stocks that can leverage their earnings with investments in
technology without being exposed to the rapid product cycles of the companies
that create technology.
Specifically we are maintaining an overweighting in the financial, business
service and oil service sectors and selected retailing stocks. We remain
underweighted in utilities and basic resources.
Gary G. Schlarbaum
PORTFOLIO MANAGER
William B. Gerlach
PORTFOLIO MANAGER
July 1997
- --------------
26
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------
COMMON STOCKS (99.0%)
AEROSPACE (1.3%)
(a)3,500 Coltec Industries, Inc........................... $ 68
(a)7,400 Doncasters plc ADR............................... 171
10,300 Thiokol Corp..................................... 721
2,700 Triumph Group, Inc............................... 84
-------
1,044
-------
BANKING (9.2%)
4,800 AmSouth Bancorp.................................. 182
6,100 Astoria Financial Corp........................... 290
8,200 Comerica, Inc.................................... 558
13,600 Community First Bankshares, Inc.................. 522
14,400 First Hawaiian, Inc.............................. 491
9,200 Greenpoint Financial Corp........................ 612
4,600 MAF Bancorp, Inc................................. 193
13,200 National Commerce Bancorp........................ 290
22,800 North Fork Bancorp., Inc......................... 487
9,300 ONBANCorp, Inc................................... 474
7,919 Peoples Heritage Financial Group, Inc............ 300
14,300 Southtrust Corp.................................. 592
9,600 Summit Bancorp................................... 481
21,500 Trustmark Corp................................... 602
14,800 Union Planters Corp.............................. 768
5,700 UnionBanCal Corp................................. 410
6,500 Wilmington Trust Corp............................ 297
-------
7,549
-------
BUILDING (2.3%)
13,200 Ameron, Inc...................................... 747
10,900 Champion Enterprises, Inc........................ 164
4,300 City National Corp............................... 103
5,600 JLG Industries, Inc.............................. 76
9,300 Southdown, Inc................................... 406
(a)10,700 USG Corp......................................... 391
-------
1,887
-------
CAPITAL GOODS (2.9%)
19,100 Crane Co......................................... 799
18,600 Danka Business Systems plc....................... 760
7,900 Tecumseh Products 'A'............................ 473
(a)7,800 Tower Automotive, Inc............................ 335
-------
2,367
-------
CHEMICALS (2.7%)
26,000 Crompton & Knowles Corp.......................... 579
16,500 Dexter Corp...................................... 528
6,400 Fuller (H.B.) Co................................. 352
17,400 Quaker Chemical Corp............................. 302
12,000 Witco Corp....................................... 455
-------
2,216
-------
COMMUNICATIONS (1.0%)
(a)1,400 ADC Telecom, Inc................................. 47
(a)15,100 General Cable Corp............................... 387
(a)8,700 Hirsch International Corp. 'A'................... 194
10,600 Nextel Communications Inc. 'A'................... 201
-------
829
-------
COMPUTERS (3.9%)
(a)3,300 BMC Software, Inc................................ 183
(a)12,200 Cadence Design Systems, Inc...................... 409
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------
(a)8,500 Ceridian Corp.................................... $ 359
(a)18,600 Gateway 2000, Inc................................ 603
(a)5,400 InaCom Corp...................................... 168
(a)26,500 Overland Data, Inc............................... 143
(a)9,300 Seagate Technology, Inc.......................... 327
(a)12,400 Tech Data Corp................................... 390
(a)18,700 Western Digital Corp............................. 591
-------
3,173
-------
CONSUMER--DURABLES (6.1%)
14,100 A.O. Smith Corp. 'B'............................. 501
24,400 Arvin Industries, Inc............................ 665
5,700 Callaway Golf Co................................. 202
(a)11,100 Furniture Brands International, Inc.............. 215
26,700 Guilford Mills, Inc.............................. 556
33,000 Herman Miller, Inc............................... 1,188
13,200 Interface, Inc................................... 292
(a)13,700 Lear Corp........................................ 608
7,700 MascoTech, Inc................................... 161
19,000 Stanhome, Inc.................................... 625
-------
5,013
-------
CONSUMER--RETAIL (9.5%)
6,800 Brylane, Inc..................................... 262
23,000 CVS Corp......................................... 1,179
6,900 Dean Foods Co.................................... 279
(a)2,900 Designer Holdings Ltd............................ 30
8,800 Family Dollar Stores, Inc........................ 240
(a)4,100 Fred Meyer, Inc.................................. 212
18,600 Hughes Supply, Inc............................... 744
2,300 Jostens, Inc..................................... 62
(a)15,300 Office Depot, Inc................................ 297
22,700 Pier 1 Imports, Inc.............................. 602
5,300 Polo Ralph Lauren Corp........................... 145
13,600 Richfood Holdings, Inc........................... 354
22,200 Ross Stores, Inc................................. 726
10,300 Springs Industries, Inc. 'A'..................... 543
31,600 TJX Companies, Inc............................... 833
(a)7,600 Valassis Communications, Inc..................... 182
8,100 VF Corp.......................................... 686
(a)21,000 Zale Corp........................................ 416
-------
7,792
-------
CONSUMER--SERVICE & GROWTH (0.4%)
4,800 Hertz Corp. 'A'.................................. 173
(a)7,000 Renters Choice, Inc.............................. 139
-------
312
-------
CONSUMER--STAPLES (3.3%)
(a)11,300 Boston Chicken, Inc.............................. 158
6,700 Consolidated Cigar Holdings, Inc................. 186
24,000 DIMON, Inc....................................... 636
3,300 Interstate Bakeries Corp......................... 196
(a)16,000 Standard Commercial Corp......................... 278
19,400 Tyson Foods, Inc. 'A'............................ 371
28,600 Universal Corp................................... 908
-------
2,733
-------
ENERGY (9.5%)
5,400 Apache Corp...................................... 176
1,800 Black Hills Corp................................. 51
</TABLE>
-----------------------
27
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------
<C> <S> <C>
ENERGY (CONT.)
(a)5,200 Cooper Cameron Corp.............................. $ 243
(a)5,300 Diamond Offshore Drilling, Inc................... 414
10,500 Eastern Enterprises.............................. 364
(a)19,400 ENSCO International Inc.......................... 1,023
16,200 National Fuel Gas Co............................. 679
14,700 Nicor, Inc....................................... 527
(a)40,100 Noble Drilling Corp.............................. 905
16,300 Oneok, Inc....................................... 525
10,000 Parker & Parsley Petroleum Co.................... 354
12,000 Santa Fe International Corp...................... 408
6,300 Sun Co., Inc..................................... 195
7,500 Transocean Offshore, Inc......................... 545
(a)5,800 Tuboscope Vetco International Corp............... 115
8,900 Ultramar Diamond Shamrock Corp................... 290
9,000 Union Texas Petroleum Holdings, Inc.............. 188
(a)6,100 Varco International, Inc......................... 197
14,000 Washington Gas Light Co.......................... 352
(a)4,800 Weatherford Enterra, Inc......................... 185
-------
7,736
-------
ENTERTAINMENT (0.3%)
(a)9,300 Imax Corp........................................ 230
-------
FINANCIAL--DIVERSIFIED (9.4%)
9,500 Bear Stearns Companies, Inc...................... 325
10,500 Capital One Financial Corp....................... 396
13,125 Equity Residential Properties Trust.............. 624
25,600 Everen Capital Corp.............................. 798
3,700 Duke Realty Investment, Inc. REIT................ 150
6,900 FINOVA Group, Inc................................ 528
12,900 First Financial Corp. (Wisconsin)................ 379
20,700 Franklin Resources, Inc.......................... 1,502
11,600 GATX Corp........................................ 670
6,800 Hartford Life, Inc. 'A'.......................... 255
(a)3,100 HealthCare Financial Partners, Inc............... 63
8,000 Kilroy Realty Corp. REIT......................... 202
21,000 Nationwide Financial Services, Inc. 'A'.......... 558
5,000 Paine Webber Group, Inc.......................... 175
3,400 Post Properties, Inc............................. 138
5,100 Torchmark Corp................................... 363
17,600 United Asset Management Co....................... 498
5,250 Wellsford Real Properties Inc.................... 58
-------
7,682
-------
HEALTH CARE (8.7%)
22,500 Beckman Instruments, Inc......................... 1,086
17,500 Bergen Brunswig Corp. 'A'........................ 488
(a)7,300 Biogen, Inc...................................... 247
13,514 Block Drug Co. 'A'............................... 591
(a)8,800 Coherent, Inc.................................... 392
(a)29,200 FPA Medical Management, Inc...................... 692
(a)5,700 Health Care & Retirement Corp.................... 190
11,100 Kinetic Concepts, Inc............................ 200
(a)7,700 Marquette Medical Systems........................ 169
(a)29,200 Nellcor Puritan Bennett, Inc..................... 529
(a)2,600 RoTech Medical Corp.............................. 52
42,300 Sullivan Dental Products, Inc.................... 772
13,600 Universal Health Services, Inc................... 524
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- ----------------------------------------------------------------------
(a)8,500 Vencor, Inc...................................... $ 359
(a)18,400 Wellpoint Health Networks, Inc................... 844
-------
7,135
-------
INDUSTRIAL (2.0%)
6,900 AGCO Corp........................................ 248
19,500 Barnes Group, Inc................................ 578
9,000 PACCAR, Inc...................................... 418
(a)7,800 Precision Drilling Corp.......................... 377
-------
1,621
-------
INSURANCE (1.3%)
6,700 Progressive Corp................................. 583
16,600 Reliance Group Holdings, Inc..................... 197
11,900 Western National Corp............................ 319
-------
1,099
-------
METALS (1.7%)
31,500 Birmingham Steel Corp............................ 488
10,300 Cleveland-Cliffs Iron Co......................... 420
8,800 Precision Castparts Corp......................... 525
-------
1,433
-------
PAPER & PACKAGING (2.8%)
16,500 Ball Corp........................................ 496
(a)14,200 Owens-Illinois, Inc.............................. 440
27,500 P.H. Glatfelter Co............................... 550
10,900 Potlatch Corp.................................... 493
8,700 Schweitzer-Mauduit International, Inc............ 327
-------
2,306
-------
SERVICES (11.5%)
(a)42,100 AccuStaff, Inc................................... 997
18,200 Angelica Corp.................................... 319
(a)14,700 BJ Services Co................................... 788
20,300 Bowne & Co....................................... 708
(a)25,400 CDI Corp......................................... 1,059
(a)5,300 Data Processing Resources Corp................... 124
(a)19,000 Fiserv, Inc...................................... 848
32,000 Journal Register Co.............................. 636
22,100 New England Business Services, Inc............... 582
26,800 Ogden Corp....................................... 583
13,600 McClatchy Newspapers, Inc........................ 399
3,300 New York Times Co., 'A'.......................... 163
27,000 Russ Berrie & Co., Inc........................... 592
(a)13,100 TETRA Technologies, Inc.......................... 324
(a)15,000 Tracor, Inc...................................... 377
14,300 True North Communications, Inc................... 354
(a)11,000 USA Waste Services, Inc.......................... 425
400 Washington Post Co. 'B'.......................... 159
-------
9,437
-------
TECHNOLOGY (5.6%)
8,100 Adobe Systems, Inc............................... 284
(a)10,600 Altera Corp...................................... 535
8,600 Dallas Semiconductor Corp........................ 338
(a)9,100 ESS Technology, Inc.............................. 122
(a)20,700 HMT Technology Corp.............................. 268
20,400 National Computer Systems, Inc................... 543
16,000 Park Electrochemical Corp........................ 421
21,800 Penn Engineering & Manufacturing Corp............ 428
(a)5,400 Solectron Corp................................... 378
</TABLE>
- --------------
28
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AMERICAN VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY (CONT.)
(a)17,400 Symantec Corp.................................... $ 339
7,500 Tektronix, Inc................................... 450
(a)8,600 Teradyne, Inc.................................... 338
6,200 Vishay Intertechnology, Inc...................... 179
-------
4,623
-------
TRANSPORTATION (2.5%)
20,000 Air Express International Corp................... 795
10,900 Airborne Freight Corp............................ 456
10,000 Arnold Industries, Inc........................... 170
(a)10,100 Offshore Logistics, Inc.......................... 191
(a)50,000 OMI Corp......................................... 478
-------
2,090
-------
UTILITIES (1.1%)
6,300 Public Service Co. (Colorado).................... 261
5,300 SJW Corp......................................... 278
19,600 Washington Water Power Co........................ 385
-------
924
-------
TOTAL COMMON STOCKS (COST $68,529)........................... 81,231
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ----------------------------------------------------------------------
SHORT-TERM INVESTMENT (3.0%)
REPURCHASE AGREEMENT (3.0%)
$ 2,523 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $2,523,
collateralized by $2,675 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $2,570 (COST
$2,523)........................................ $ 2,523
-------
TOTAL INVESTMENTS (102.0%) (COST $71,052).................... 83,754
LIABILITIES IN EXCESS OF OTHER ASSETS (-2.0%)................ (1,667)
-------
NET ASSETS (100%)............................................ $82,087
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing.
ADR -- American Depositary Receipt
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
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Algeria 2.9%
Argentina 10.7%
Brazil 13.8%
Bulgaria 8.7%
Canada 0.7%
Cayman Islands 0.9%
Colombia 0.5%
Ecuador 5.8%
Gabon 2.6%
Ivory Coast 3.1%
Jamaica 3.1%
Jordan 1.3%
Mexico 6.7%
Peru 4.3%
Russia 3.7%
United States 24.9%
Venezuela 4.3%
Other 2.0%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 24.10% 30.29% 16.56% 18.35%
- -----------------------------------------------------------------
Class B+ Shares 24.14% 29.14% 22.30% 24.02%
- -----------------------------------------------------------------
Class C Shares 28.12% 29.12% 17.39% 17.39%
- -----------------------------------------------------------------
Lehman Aggregate Bond
Index:
Class A & C Shares N/A 8.15% N/A 7.91%
Class B Shares N/A 8.15% N/A 6.99%
- -----------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and 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.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY COUNTRY NET ASSETS
- ----------------------------------- --------- ---------------
<S> <C> <C>
Republic of Peru Front Loaded
Interest Reduction Bond, 3.25%,
3/7/17 Peru 4.3%
Republic of Bulgaria Stripped
Discount Notes 6.5625% 8/20/97 Bulgaria 3.7%
Federative Republic of Brazil
Credit Linked Enhanced Access Note
9.00% 1/5/99 Brazil 3.4%
Republic of Argentina 11.75%,
2/12/07 Argentina 3.1%
Federative Republic of Brazil
Series C, PlK 8.00%, 4/15/14 Brazil 3.0%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ----------------------------- --------- -------------
<S> <C> <C>
Foreign Government & Agency
Obligations $ 82,630 42.1%
Loan Agreements 15,418 7.9%
Materials 12,074 6.1%
Services 10,924 5.5%
Telecommunications 10,746 5.5%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C>
Worldwide High Income Fund Class A Worldwide High Income Fund Class C Lehman Aggregate Bond Index
4/21/94 $9,525 $10,000 $10,000
6/30/94 $9,797 $10,160 $9,976
6/30/95 $10,470 $10,899 $11,229
6/30/96 $12,524 $12,938 $11,791
6/30/97 $16,318 $16,706 $12,752
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; all recurring fees (including
management fees) were deducted; and all dividends and distributions were
reinvested. The graph presents the performance of Class A and Class C shares
which have been in existence since the Fund's inception. The performance of
Class B shares will vary based upon the different inception date and the sales
charge and fees assessed to that Class.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 year ended June 30, 1997, the Fund had a total return exclusive of sales
charge of 30.29% for the Class A shares, 29.14% for the Class B shares and
29.12% for the Class C shares, and a total return with sales charge of 24.10%
for the Class A shares, 24.14% for the Class B shares and 28.12% for the Class C
shares, as compared to a total return of 8.15% for the Lehman Aggregate Bond
Index. For the period from inception through June 30, 1997, the Fund had an
average annual total return exclusive of sales charge of 18.35% for the Class A
shares, 24.02% for the Class B shares and 17.39% for the Class C shares, and a
total return with sales charge of 16.56% for the Class A shares, 22.30% for
Class B shares and 17.39% for the Class C shares, as compared to 7.91% for the
Lehman Aggregate Bond Index since inception of the Class A and C shares and
6.99% for the Index since inception of the Class B shares.
The second half of the 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 were finally
recognized by investors and the resulting inflow of
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.)
LIQUIDITY INTO THE MARKET RESULTED IN A CREDIT SPREAD TIGHTENING OF ABOUT 250
BASIS POINTS ON AVERAGE. THIS AVERAGE MASKS A WIDE DISPERSION IN PERFORMANCE OF
VARIOUS INDIVIDUAL COUNTRIES. ARGENTINA, MEXICO AND BRAZIL PERFORMED WELL. THE
HIGH-YIELDING, OIL EXPORTING COUNTRIES SUCH AS ALGERIA, VENEZUELA, ECUADOR AND
NIGERIA WERE STELLAR PERFORMERS AS THEY WERE FOR MOST OF THE YEAR AND THE
SMALLER BRADY COUNTRIES LIKE PERU AND PANAMA BENEFITED FROM SCARCITY VALUE 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 1996 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 the
underlying bond fundamentals.
For the first few weeks of the calendar year 1997 the trend of an across the
board tightening of credit spreads continued unabated. Attractive relative
valuations, the stretch for incremental yield and easy global monetary
conditions prompted increases in allocations to emerging market assets. Federal
Reserve Governor Greenspan's comments on the state of credit markets, extended
valuations and mispricing of risk stopped the music suddenly. A correction in
fixed income markets started in late February and lasted for much of March.
The emerging markets didn't surprise by behaving differently during this market
correction. An increase in risk premiums affected all countries and all bonds. A
correction, precipitated by possible Fed action and deepened by redemptions and
a reduction in committed capital tends to affect the broad market. The weight of
money heading for the exits drowns the fundamentals for a while.
During the second quarter of 1997, the emerging debt markets recovered from
their late first quarter correction buoyed by falling U.S. interest rates and a
renewed investor appetite for yield. U.S. interest rates fell by 35 to 40 basis
points across the yield curve. This decline in rates was prompted by signs of
moderating economic growth and the lack of evidence of any inflationary
pressures in the system. These factors reassured investors that the Federal
Reserve would not increase interest rates anytime soon. In addition to the
positive interest rate environment, a confluence of events both fundamental and
technical in nature bolstered the performance of emerging markets debt. On the
fundamental front, improving macro-economic outlooks and rating upgrades by
major U.S. ratings agencies in Argentina, Brazil, the Philippines, Uruguay, and
Venezuela provided support. While on the technical front, a continuation of the
trend of Brady bond retirement and debt buybacks as well as a strong inflow of
funds from non-dedicated or "crossover" investors caused spreads on emerging
markets debt to tighten back to levels not seen since 1993.
During the first half of 1997, Bulgaria, Morocco, and Peru outperformed the
universe of emerging market debt, while the Philippines, Poland, and Nigeria
were the performance laggards. The Fund's overweight positions in Bulgaria and
Morocco as well as underweights in Nigeria, the Philippines and Poland allowed
the Fund to outperform the broad market benchmark by 2.70%.
Bulgarian bonds were the best performing in the emerging country universe during
the second quarter of 1997. The election of a reformist democratic government in
April assured investors that prudent macro-economic policy measures would be
enacted. The new government secured technical and financial help from the IMF
and the World Bank and adopted a policy framework to facilitate the July first
introduction of a currency board monetary system. As prices of Bulgarian Brady
bonds rose, we reduced our exposure to the credit but remained overweight. We
expect continued outperformance next quarter from our Bulgarian positions albeit
at a more gradual pace.
Morocco benefited from an economic recovery following 1995's drought. The
prospect of favorable ratings also buoyed prices. We used the rally to reduce
our allocation to Morocco in the spring and will consider increasing them again
once valuations reach attractive levels again and are consistent with our
expectations for a BB rating. The other outperforming credit, Peru, reacted to
the release of above consensus GDP growth numbers of over 7% for the first 6
months of 1997.
Our value-oriented investment style steered us away from the debt of the
Philippines and Poland which both trade at fully valued levels. Both countries
suffered from their proximity to the turbulence of neighboring currency markets
and both were forced to keep local interest rates high in a defensive move
against possible speculative attacks on their own currencies. We will monitor
both situations closely and may increase our exposure should valuations become
more attractive.
------------------
31
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
Deteriorating political dynamics caused us to avoid Nigerian debt which suffered
from its failed involvement in the unrest in neighboring Sierra Leone. The
Nigerian's inability to install the former civilian government has undermined
political stability in Nigeria. Also, lack of progress on economic reforms has
reduced the prospect of a new IMF agreement and consequently, debt forgiveness.
Our outlook remains cautiously positive. The benign U.S. rate environment,
improving economic fundamentals in the emerging countries and growing investor
interest in the emerging debt asset class should cause risk premiums on emerging
markets debt to come down and prices to rise over the medium term. Over the
short term, however, we will be watching for signs of fatigue as spreads are
near historic lows and we expect some profit taking. Additionally, some emerging
countries in Asia and eastern Europe are experiencing considerable local
currency volatility and we will be monitoring the potential contagion effects on
emerging debt. If the markets can escape the Asian market volatility unscathed,
we should earn low double digit returns over the next 12 months.
We have continued to emphasize the communications industry in the high yield
portion of the Fund. We believe exceptional growth opportunities exist in the
newly deregulated local exchange sector, as well as in selected companies in the
wireless and long distance sectors. Securities which performed strongly included
Nextel Communications, Qwest Communications, and Occidente Y Caribe, a cellular
company based in the Republic of Colombia. Microsoft's Strategic investment in
Comcast led strong gains for our holdings in the cable industry, particularly
Tele-communications, Inc. and Cablevision Systems Corp.
Our overall high yield portfolio structure continues to feature higher average
credit quality compared to market benchmarks. In terms of interest-rate
sensitivity, we have taken steps to reduce our exposure to no longer than the
market benchmark. We believe that there is fair value in the U.S. bond market,
and that historically narrow high-yield credit spreads are supported by strong
fundamentals.
Robert Angevine
PORTFOLIO MANAGER
Paul Ghaffari
PORTFOLIO MANAGER
July 1997
- --------------
32
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
FIXED INCOME SECURITIES (86.7%)
CORPORATE BONDS & NOTES (32.2%)
ARGENTINA(0.8%)
$ 1,500 Impsa S.A. 11.75%, 3/27/98....................... $ 1,559
--------
BRAZIL (2.4%)
(e)4,800 Banco Do Brasil 9.375%, 6/15/07.................. 4,788
--------
CANADA (0.7%)
100 Rogers Cablesystems, 10.125%, 9/1/12............. 107
865 Rogers Cablesystems, Series B, 10.00%, 3/15/05... 936
250 Rogers Communications, Inc. 9.125%,
1/15/06........................................ 252
--------
1,295
--------
COLOMBIA (0.5%)
(n)1,225 Occidente Y Caribe 0.00%, 3/15/04................ 909
--------
ECUADOR (1.6%)
(e)3,000 Consorcio Ecuadoriano 14.00%, 5/1/02............. 3,188
--------
JAMAICA (1.1%)
2,000 Mechala Group Jamaica, Ltd. Series B, 12.75%,
12/30/99....................................... 2,115
--------
MEXICO (3.1%)
(e)2,000 Cemex S.A. 12.75%, 7/15/06....................... 2,318
(e)2,000 Empresas ICA Sociedad Controladora S.A. 11.875%,
5/30/01........................................ 2,185
(n)2,200 Grupo Televisa S.A. 0.00%, 5/15/08............... 1,526
--------
6,029
--------
UNITED STATES (22.0%)
795 Advanced Micro Devices 11.00%, 8/1/03............ 886
660 Amersco Inc., Series 97-A 10.00%,
3/15/04........................................ 677
(e)1,100 Anthem Insurance 9.00%, 4/1/27................... 1,132
(e)870 Big Flower Press 8.875%, 7/1/07.................. 855
(n)1,350 Brooks Fiber Properties 0.00%, 3/1/06............ 920
(n)720 Brooks Fiber Properties 0.00%, 11/1/06........... 469
(e)150 Brooks Fiber Properties 10.00%, 6/1/07........... 153
(e)497 CA FM Lease Trust 8.50%, 7/15/17................. 509
1,115 Cablevision Systems Corp. 9.875%,
5/15/06........................................ 1,187
630 Cleveland Electric Illuminating Co. 8.375%,
12/1/11........................................ 635
(e)850 ComcastCorp. 9.50%, 5/1/07....................... 861
640 Courtyard By Marriott, Series B, 10.75%,
2/1/08......................................... 693
(n)390 Dial Call Communications Series B, 0.00%,
12/15/05....................................... 306
670 Digital Equipment Corp. 8.625%,
11/1/12........................................ 667
419 DR Securitized Lease Trust, Series 1993-K1, Class
A1, 6.66%, 8/15/10............................. 366
1,030 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 968
250 DR Securitized Lease Trust, Series 1994-K1, Class
A2, 8.38%, 8/15/15............................. 232
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
$ (n)500 Echostar Satellite Broadcast 0.00%,
3/15/04........................................ $ 356
(e)300 EES Coke Battery Co., Inc. 9.382%,
4/15/07........................................ 307
370 First Nationwide Bank 9.125%, 1/15/03............ 382
(e)365 First Nationwide Bank 10.625%, 10/1/03........... 401
825 Gaylord Container Corp. 11.50%,
5/15/01........................................ 868
(e)1,280 Globalstar LP/Capital 11.375%, 2/15/04........... 1,282
1,130 Grand Casinos, Inc. 10.125%, 12/1/03............. 1,181
625 HMC Acquisition Properties 9.00%,
12/15/07....................................... 635
(e)785 Horseshoe Gaming L.L.C. 9.375%,
6/15/07........................................ 795
950 Host Marriott Travel, Series B, 9.50%, 5/15/05... 992
(e)1,230 ISP Holdings, Inc. Series B, 9.00%, 10/15/03..... 1,272
635 IXC Communications, Inc. 12.50%,
10/1/05........................................ 726
(e)300 Jet Equipment Trust, Series C-1, 11.79%,
6/15/13........................................ 375
(e)300 Jet Equipment Trust, Series 1995-D, 11.44%,
11/1/14........................................ 374
265 Kmart Corp. 7.75%, 10/1/12....................... 243
350 Kmart Funding Corp. 8.80%, 7/1/10................ 346
188 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................ 201
482 Midland Cogeneration Ventures, Series C-94,
10.33%, 7/23/02................................ 516
305 Midland Funding II, Series A, 11.75%, 7/23/05.... 353
(e)200 Navistar Financial Corp. 9.00%, 6/1/02........... 205
(n)2,550 Nextel Communications 0.00%, 8/15/04............. 1,951
(n)990 Norcal Waste Systems, Inc. 13.00%,
11/15/05....................................... 1,124
660 Nuevo Energy Co. 9.50%, 4/15/06.................. 690
(e)750 Outdoor Systems 8.875%, 6/15/07.................. 728
900 Paramount Communications 8.25%,
8/1/22......................................... 861
(e)620 Qwest Communications International 10.875%,
4/1/07......................................... 673
(e)750 Riggs Capital Trust II 8.875%, 3/15/27........... 763
850 RJR Nabisco, Inc. 8.75%, 4/15/04................. 867
800 SD Warren Co., Series B, 12.00%,
12/15/04....................................... 896
(e)550 Sinclair Broadcast Group 9.00%, 7/15/07.......... 534
710 Snyder Oil Corp. 8.75%, 6/15/07.................. 706
1,345 Southland Corp. 5.00%, 12/15/03.................. 1,143
(e)825 Station Casinos, Inc. 9.75%, 4/15/07............. 816
(e,n)1,990 TCI Satellite Entertainment 0.00%,
2/15/07........................................ 1,184
1,225 Tele-Communications Inc. 9.25%,
1/15/23........................................ 1,275
(n)1,975 Teleport Communications 0.00%, 7/1/07............ 1,427
880 Tenet Healthcare Corp. 8.625%, 1/15/07........... 897
930 TLC Beatrice International Holdings 11.50%,
10/1/05........................................ 1,045
(e,n)350 Transamerican Energy 0.00%, 6/15/02.............. 252
</TABLE>
-----------------------
33
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED STATES (CONT.)
<TABLE>
<C> <S> <C>
$ 1,290 Viacom, Inc. 8.00%, 7/7/06....................... $ 1,255
900 Vintage Petroleum 8.625%, 2/1/09................. 897
--------
43,310
--------
TOTAL CORPORATE BONDS & NOTES (COST $60,490)...................... 63,193
--------
ASSET BACKED SECURITIES (0.8%)
UNITED STATES (0.8%)
(e)499 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1, Class D, 12.75%, 6/15/06........ 538
(e)950 Long Beach Auto Trust 1997-1, Class B, 14.22%,
10/26/03....................................... 963
--------
TOTAL ASSET BACKED SECURITIES (COST $1,463)....................... 1,501
--------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.3%)
UNITED STATES (0.3%)
(e,h)1,045 DLJ Mortgage Acceptance Corp., Series 1996-CF2,
Class S, IO, 1.64%, 11/12/21................... 94
(e)550 First Home Mortgage Acceptance Corp., Series
1996-B, Class C, 7.9289%, 11/1/18.............. 487
(d,f)103 PNC Mortgage Securities Corp. Series 1995-2,
Class B4, REMIC, 7.50%, 9/25/25................ 91
--------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $643)............. 672
--------
EUROBONDS (16.2%)
ARGENTINA (6.3%)
(e)2,500 Acindar Industria Argentina 11.75%,
11/12/98....................................... 2,606
3,500 Acindar Industria Argentina 11.25%,
2/15/04........................................ 3,725
(e)5,500 Republic of Argentina 11.75%, 2/12/07............ 6,134
--------
12,465
--------
BRAZIL (5.0%)
1,350 Comp Brazil De Projertos 12.50%,
12/22/97....................................... 1,377
(h)3,000 Federative Republic of Brazil 6.94%,
4/15/09........................................ 2,631
(n)7,284 Federative Republic of Brazil Series C, PIK
8.00%, 4/15/14................................. 5,857
--------
9,865
--------
BULGARIA (2.5%)
(h)2,250 Republic of Bulgaria Discount Bonds, 'A' 6.563%,
7/28/24........................................ 1,659
(h)4,500 Republic of Bulgaria Past Due Interest Bond
6.56%, 7/28/11................................. 3,254
--------
4,913
--------
VENEZUELA (2.4%)
(h)5,000 Republic of Venezuela Front Loaded Interest
Reduction Bond, 'A' 6.75%, 3/31/07............. 4,652
--------
TOTAL EUROBONDS (COST $28,073).................................... 31,895
--------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
FOREIGN GOVERNMENT & AGENCY OBLIGATIONS (25.8%)
ARGENTINA (2.0%)
$ (e)3,600 City of Buenos Aires 11.25%, 4/11/07............. $ 3,915
--------
BRAZIL (1.3%)
(h)2,000 Federative Republic of Brazil Debt Conversion 'L'
Bond, 6.938%, 4/15/12.......................... 1,655
920 Federative Republic of Brazil 10.125%, 5/15/27... 887
--------
2,542
--------
BULGARIA (2.5%)
8,500 Republic of Bulgaria Front Loaded Interest
Reduction Bond 2.25%, 7/28/12.................. 4,856
--------
CAYMAN ISLANDS (0.9%)
ZAR 8,000 National Financiera 17.00%, 2/26/99.............. 1,763
--------
ECUADOR (2.5%)
$ (h)7,000 Republic of Ecuador Past Due Interest Bond, PIK,
6.44%, 2/28/25................................. 5,005
--------
IVORY COAST (1.2%)
(e,n)6,800 Republic of Ivory Coast Front Loaded Interest
Reduction Bond 0.00%, 12/29/49................. 2,269
--------
JAMAICA (1.5%)
3,000 Government of Jamaica 12.00%, 7/19/99............ 3,000
--------
JORDAN (1.3%)
(e,h)3,000 Kingdom of Jordan 6.75%, 12/23/23................ 2,535
--------
MEXICO (2.7%)
4,800 United Mexican States 11.375%, 9/15/16........... 5,399
--------
PERU (4.3%)
(e,h)14,200 Republic of Peru Front Loaded Interest Reduction
Bond 3.25%, 3/7/17............................. 8,484
--------
RUSSIA (3.7%)
(e)6,764 Ministry of Finance Tranche IV GDR 3.00%,
5/14/03........................................ 4,539
(e)5,000 Ministry of Finance Tranche VI GDR 3.00%,
5/14/06........................................ 2,715
--------
7,254
--------
VENEZUELA (1.9%)
4,000 Republic of Venezuela Discount Bond 'L', 6.75%,
12/18/07....................................... 3,712
--------
TOTAL FOREIGN GOVERNMENT & AGENCY OBLIGATIONS
(COST $47,427).................................................. 50,734
--------
LOAN AGREEMENTS (7.9%)
ALGERIA (2.9%)
(h,r)6,500 Algeria Reprofiled Loan Agreement, 'A', 7.25%,
12/31/00....................................... 5,700
--------
GABON (2.6%)
(h)6,217 Republic of Gabon Syndicated Loan, 6.69%,
4/1/04......................................... 5,067
--------
</TABLE>
- --------------
34
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<C> <S> <C>
IVORY COAST (1.9%)
$ 750 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00............................... $ 315
FRF 35,644 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00............................... 2,874
DEM 2,210 Republic of Ivory Coast Syndicated Loan, Zero
Coupon, 12/31/00............................... 532
--------
3,721
--------
JAMAICA (0.5%)
$ (h)1,000 Republic of Jamaica Syndicated Loan, 6.63%,
12/1/05........................................ 930
--------
TOTAL LOAN AGREEMENTS (COST $14,313).............................. 15,418
--------
YANKEE BONDS (3.5% )
ARGENTINA (1.6%)
1,850 Bridas Corp. 12.50%, 11/15/99.................... 2,028
1,000 Metrogas S.A., Series A, 12.00%, 8/15/00......... 1,115
--------
3,143
--------
BRAZIL (1.7%)
3,000 Tevecap S.A. 12.625%, 11/26/04................... 3,244
--------
MEXICO (0.2%)
400 Grupo Industrial Durango 12.625%,
8/1/03......................................... 450
--------
TOTAL YANKEE BONDS (COST $6,240).................................. 6,837
--------
TOTAL FIXED INCOME SECURITIES (COST $158,649)....................... 170,250
--------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- ----------------
EQUITY SECURITIES (1.8%)
PREFERRED STOCK (1.5%)
UNITED STATES (1.5%)
(e)5,610 Sinclair Capital 11.625%......................... 595
2,084 Time Warner, Inc., 'M', PIK 10.25%............... 2,287
--------
2,882
--------
CONVERTIBLE PREFERRED STOCK (0.3%)
UNITED STATES (0.3%)
6,800 TCI Communications, Inc. 5.00%, 7/31/06.......... 704
--------
NO. OF WARRANTS
WARRANTS (0.0%)
COLOMBIA (0.0%)
(a)4,900 Occidente Y Caribe, expiring 3/15/04............. --
--------
TOTAL EQUITY SECURITIES (COST $3,372)............................... 3,586
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------------
STRUCTURED INVESTMENT (3.4%)
BRAZIL (3.4%)
$ (f)8,000 Salomon Bros. Federative Republic of Brazil
Credit Linked Enhanced Access Note 9.00%,
1/5/99 (COST $6,844)........................... $ 6,768
--------
TOTAL FOREIGN AND U.S. SECURITIES (91.9%) (COST $168,865)........... 180,604
--------
SHORT-TERM INVESTMENTS (7.7%)
DISCOUNT NOTES (6.1%)
BULGARIA (3.7%)
(v)12,750 Republic of Bulgaria Stripped Discount Notes,
6.5625%, 8/20/97............................... 7,329
--------
ECUADOR (1.7%)
(v)6,000 Republic of Ecuador Stripped Discount Notes,
6.4375%, 9/29/97............................... 3,311
--------
MEXICO (0.7%)
(v)1,750 United Mexican States Stripped Discount Notes,
6.375%, 9/9/97................................. 1,268
--------
TOTAL DISCOUNT NOTES.............................................. 11,908
--------
REPURCHASE AGREEMENT (1.6%)
3,146 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $3,146
collateralized by $3,330, U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $3,200.......... 3,146
--------
TOTAL SHORT-TERM INVESTMENTS (COST $13,042)......................... 15,054
--------
TOTAL INVESTMENTS (99.6%) (COST $181,907)........................... 195,658
OTHER ASSETS IN EXCESS OF LIABILITIES (0.4%)........................ 830
--------
NET ASSETS (100%)................................................... $196,488
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security is valued at fair value -- see note A-1 to financial
statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(f) -- Restricted as to public resale. Total value of restricted securities
at June 30, 1997 was $6,859 or 3.49% of net assets (Total cost
$6,926).
(h) -- Variable/floating rate security -- rate disclosed is as of June 30,
1997.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
(r) -- Issuer is making partial interest payments.
(v) -- Yield at time of purchase.
DEM -- Deutsche Mark
FRF -- French Franc
GDR -- Global Depositary Receipt
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
ZAR -- South African Rand
-----------------------
35
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
WORLDWIDE HIGH INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN & U.S. SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- -------------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Foreign Government & Agency Obligations............................................... $ 82,630 42.1%
Loan Agreements....................................................................... 15,418 7.9
Materials............................................................................. 12,074 6.1
Services.............................................................................. 10,924 5.5
Telecommunications.................................................................... 10,746 5.5
Finance............................................................................... 10,522 5.3
Broadcast--Radio & Television......................................................... 8,247 4.2
Multi-Industry........................................................................ 7,065 3.6
Structured Investment................................................................. 6,768 3.4
Consumer Goods........................................................................ 5,065 2.6
Capital Equipment..................................................................... 2,310 1.2
Collateralized Mortgage Obligations & Asset Backed Securities......................... 2,173 1.1
Utilities............................................................................. 1,705 0.9
Energy................................................................................ 1,648 0.8
Technology............................................................................ 1,554 0.8
Insurance............................................................................. 1,132 0.6
Transportation........................................................................ 623 0.3
--------- ---
$ 180,604 91.9%
--------- ---
--------- ---
</TABLE>
- --------------
36
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 6.9%
Brazil 47.3%
Chile 8.2%
Colombia 2.0%
Mexico 27.2%
Peru 2.0%
Venezuela 2.9%
Other 3.5%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 48.28% 57.32% 17.20% 19.10%
- -----------------------------------------------------------------
Class B+ Shares 51.17% 56.17% 42.81% 44.31%
- -----------------------------------------------------------------
Class C Shares 55.04% 56.04% 18.10% 18.10%
- -----------------------------------------------------------------
MSCI Latin America
Global Index:
Class A & C Shares N/A 45.84% N/A 13.48%
Class B Shares N/A 45.84% N/A 30.08%
- -----------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and 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).
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- ----------------------------------- --------- --------------
<S> <C> <C>
CRT 'A' Brazil 12.4%
Telebras Brazil 9.7%
Eletrobras Brazil 6.7%
FEMSA Mexico 5.4%
CEMIG Brazil 4.4%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ----------------------------- --------- -------------
<S> <C> <C>
Telecommunications $ 35,415 29.7%
Energy 22,894 19.2%
Consumer Goods 17,771 14.9%
Materials 14,522 12.2%
Services 12,829 10.8%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C>
Latin American Latin American MSCI Latin America
Fund Class A Fund Class C Global Index
7/6/94 $9,525 $10,000 $10,000
6/30/95 $7,327 $7,542 $8,517
6/30/96 $10,210 $10,532 $10,002
6/30/97 $16,062 $16,434 $14,587
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; all recurring fees (including
management fees) were deducted; and all dividends and distributions were
reinvested. The graph presents the performance of Class A and Class C shares
which have been in existence since the Fund's inception. The performance of
Class B shares will vary based upon the different inception date and the sales
charge and fees assessed to that Class.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The investment objective of the Latin American Fund is to provide long-term
capital appreciation by investing primarily in equity securities of Latin
American issuers.
For the year ended June 30, 1997, the Fund had a total return exclusive of sales
charge of 57.32% for the Class A shares, 56.17% for the Class B shares and
56.04% for the Class C shares, and a total return with sales charge of 48.28%
for the Class A shares, 51.17% for the Class B shares and 55.04% for the Class C
shares, as compared to a total return of 45.84% for the Morgan Stanley Capital
International ("MSCI") Latin America Global Index (the "Index"). For the period
from inception through June 30, 1997, the average annual total return for the
Fund exclusive of sales charge was 19.10% for the Class A shares, 44.31% for the
Class B shares, and 18.10% for the Class C shares and 17.20% for the Class A
shares, 42.81% for the Class B shares, and 18.10% for the Class C shares with
sales charge, as compared to 13.48% for the Index since inception of the Class A
and C shares and 30.08% for the Index since inception of the Class B shares.
Overall the Latin American equity markets enjoyed a remarkable six months since
January 1. The favorable performance was the result of a confluence of factors,
particularly positive momentum on the privatization front in Brazil, a
broadening of the economic recovery in Mexico, and an end to the drought in
Chile. 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.
------------------
37
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
ARGENTINA
Argentina did not contain any particularly market-impacting news during the
period, and advanced largely in sympathy with the region. The strong economic
recovery, led by construction and mining, continues to accelerate and this has
provided a sound backdrop for the equity market. There has been little evidence
of a consumer recovery and, with unemployment hovering in the high teens, we do
not expect to see a robust turnaround in the near future. Our overall outlook
remains for the recovery to continue and center on infrastructure and fixed
investment, for the political environment to remain benign, and the equity
market to move more or less in line with the region.
BRAZIL
Brazil again propelled the region, both on the news front as well as the
performance front. Setting the tone for the first half of 1997 was the
successful privatization of mining giant CVRD to a private consortium at a 20%
premium to the minimum price. Another boost was the positive change in tariffs
for both the telecommunications and electric utility industries; this measure
not only should favorably impact profitability in both sectors, but is also a
positive step toward eventual privatization. On the political reform front,
there was not much tangible progress, but industry level improvements as well as
local liquidity factors -- i.e. a flow of local money from fixed income funds to
equity funds -- dominated the market's performance.
Looking ahead, we think the Brazilian market has perhaps verged on getting ahead
of itself. While we continue to be extremely bullish on the positive fundamental
developments in core segments of the economy, we are beginning to get the sense
that perhaps valuation and sentiment levels have reached the point where too
much good news is "being priced in." As such, we have modestly cut back on our
weighting in the market, and have a market weight position; that market weight
position is represented by stock specific ideas, as we are actually underweight
most of the blue chip "Bras" stocks.
CHILE
Chile, interestingly, is out of step with the rest of the region even though its
stock market has performed in line. The Chilean economy is in the midst of a
Chile-style "slowdown" (i.e. GDP growth of 5-6%) from an unsustainably brisk
pace last year, as the monetary authorities have engineered a soft landing. As a
result, interest rates have in fact been loosened this year in order to pick up
the economic pace and to acknowledge that inflationary pressures have been
contained. This easing of monetary policy has provided a favorable climate for
equity performance, notwithstanding the fact that overall earnings growth in the
market is lackluster.
Another important item driving the market, and in particular affecting the
all-important electric utility sector (roughly 35% of the total market
capitalization), has been the drought. The drought has had the effect of raising
costs for certain electric generators, thereby dampening profits. As the drought
ended in the second quarter due to a deluge of rain (in fact there were,
ironically enough, floods) the electric utility sector stocks surged as
investors' concerns eased.
COLOMBIA
Colombia was the laggard in the region during the latter part of the first half
of 1997, as its market is the least correlated with the region and boasted the
best performance going in to the second quarter. Further, economic growth
continued to surprise on the downside as the government's efforts to dampen
stubborn inflationary pressures has slowed economic activity. While valuation
levels are still the cheapest in the region, we feel that the country warrants a
discount owing to its uncertain economic outlook and political woes.
MEXICO
Mexico staged a dramatic turnaround late in the first half of 1997. After having
fallen precipitously on the back of disappointing first quarter corporate
earnings published in April, sentiment subsequently reversed itself as a) signs
of a broadening of the economic recovery began to emerge, and b) investors began
to realize that the congressional and mayoral elections in July would be a
benign event. These two processes restored confidence to the market and it paced
the region in the latter part of the first half of 1997.
- --------------
38
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
We feel strongly that Mexico has made great strides to restore balance to its
fiscal, trade, and current accounts. The economy is on a solid footing,
employment levels are picking up, and the consumer is (albeit slowly)
recovering. Further, the political arena has opened up considerably. Free,
democratic elections will take place in July in what is widely viewed to be the
fairest electoral process Mexico has seen in this century. Although an opening
up of the political arena is not without risks, we believe that it is healthy
for the long-run sustainability of the economic program.
PERU
Peru had a strong finish to the first half of 1997, stemming in large part from
a dramatic turnaround in the economy as well as from a dramatic end to the
hostage crisis. GDP growth is expected to recover quite strongly from the
slowdown in 1996, and this should bode well for earnings growth. However, the
economy suffers from a natural resource dependence which makes it vulnerable to
commodity price swings, and the political scenario is relatively uncertain.
President Fujimori, while enjoying a short spurt in popularity after the
successful rescue of the hostages, continues to plummet in popularity ratings
and this has engendered a decline in confidence in the country. We continue to
underweight the market.
VENEZUELA
After lagging in the first quarter, Venezuela played catch-up and paced the
region in the second quarter. Strong first quarter earnings by bellwether
telephone stock CANTV buoyed the market, and this was subsequently followed by a
successful resolution of the long-awaited "severance program," which will entail
short-term costs for private and government companies, but is a long-term
positive as it helps liberalize the labor markets. Overall we are constructive
on the Venezuelan market as the government appears genuinely committed to
following through on its reform program.
Robert L. Meyer
PORTFOLIO MANAGER
Andy B. Skov
PORTFOLIO MANAGER
July 1997
------------------
39
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
COMMON STOCKS (78.8%)
ARGENTINA (6.9%)
(a)604,405 Acindar.......................................... $ 1,548
216,577 Banco del Suquia................................. 843
(a)15,557 Disco ADR........................................ 616
5,499 Quilmes ADR...................................... 56
39,015 Quilmes Industrial ADR........................... 454
269,077 Siderar 'A'...................................... 1,103
(e)10,470 Siderar ADR...................................... 340
8,585 Telecom Argentina ADR............................ 451
36,271 Telefonica de Argentina ADR...................... 1,256
50,695 YPF ADR.......................................... 1,559
--------
8,226
--------
BRAZIL (29.6%)
84,100 Brahma ADR....................................... 1,288
23,059 CEMIG ADR........................................ 1,161
(e)683 CEMIG ADR........................................ 35
(a)9,835,918 CRT 'A'.......................................... 14,800
12,910 CVRD ADR......................................... 288
8,850,000 Eletrobras....................................... 4,949
63,195 Eletrobras ADR................................... 1,763
10,020 Eletrobras 'B' ADR............................... 298
19,723,000 Ericsson Telecomunicacoes........................ 1,172
780,000 Iven............................................. 533
1,317,000 Lightpar......................................... 525
(e)10,410 Lojas Arupua ADR................................. 173
30,050 Pao de Acucar ADR................................ 689
17,568,000 Telebras......................................... 2,382
27,081 Telebras ADR..................................... 4,110
30,250 Unibanco GDR..................................... 1,123
--------
35,289
--------
CHILE (8.2%)
20,250 Andina 'B' ADR................................... 423
76,455 CCU ADR.......................................... 1,677
51,085 Chilectra ADR.................................... 1,470
14,793 Enersis ADR...................................... 526
(a)32,805 Quinenco ADR..................................... 607
139,263 Santa Isabel ADR................................. 4,492
30,360 Unimarc ADR...................................... 569
--------
9,764
--------
COLOMBIA (2.0%)
2,676,443 Banco de Colombia................................ 981
193,250 Bavaria.......................................... 1,387
--------
2,368
--------
MEXICO (27.2%)
(a)272,607 Banacci 'B'...................................... 701
(a)166,310 Banacci 'L'...................................... 388
(a)399,810 Bancomer 'B'..................................... 193
(a,e)14,306 Bancomer 'B' ADR................................. 139
(a)448,015 Banorte 'B'...................................... 467
85,398 Carso 'A1'....................................... 595
552,354 Cemex CPO........................................ 2,402
28,435 Cemex CPO ADR.................................... 247
112,980 Cemex 'B'........................................ 553
102,320 Cemex 'B' ADR.................................... 985
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
70,645 Cifra 'B'........................................ $ 132
86,907 Cifra 'B' ADR.................................... 159
111,590 Cifra 'C'........................................ 179
24,155 Coca-Cola Femsa ADR.............................. 1,247
(a)1 Desc ADR......................................... --
(e)23,400 FEMSA ADR........................................ 139
1,059,645 FEMSA 'B'........................................ 6,319
38,250 Grupo Modelo 'C'................................. 265
16,065 Hylsamex GDR..................................... 480
1,278,645 Kimberly 'A'..................................... 5,126
175,725 Maseca 'B'....................................... 192
60,750 Maseca 'B' ADR................................... 1,002
22,025 Panamco.......................................... 724
462,930 Soriana 'B'...................................... 1,164
(a)29,265 TAMSA ADR........................................ 540
96,075 Telemex ADR...................................... 4,588
(a)114,849 Televisa CPO ADR................................. 3,489
--------
32,415
--------
PERU (2.0%)
66,725 Banco Weise ADR.................................. 433
8,010 Credicorp Ltd.................................... 176
431,857 Ferreyros........................................ 497
21,140 Luz Del Sur...................................... 25
46,200 Tel Peru 'B' ADR................................. 1,210
--------
2,341
--------
VENEZUELA (2.9%)
35,632 CANTV ADR........................................ 1,537
1,139,084 Electricidad de Caracas.......................... 1,825
7,785 Mavesa ADR....................................... 79
--------
3,441
--------
TOTAL COMMON STOCKS (COST $81,747)................................. 93,844
--------
PREFERRED STOCKS (17.7%)
BRAZIL (NON-VOTING STOCKS) (17.7%)
(a,d)8,115,000 Banco Nacional................................... --
3,012,000 Brahma........................................... 2,294
77,444,200 CEMIG............................................ 3,992
3,397,000 Coteminas........................................ 1,325
3,163,771 CPFL............................................. 526
41,187 CVRD............................................. 911
(a,d)31,997 CVRD 'B' ADR..................................... --
1,572,000 Eletrobras 'B'................................... 937
56,805,300 Lojas Arapua..................................... 923
24,618,000 Lojas Renner..................................... 1,262
13,872,000 Petrobras........................................ 3,853
33,506,383 Telebras......................................... 5,082
--------
TOTAL PREFERRED STOCKS (COST $19,314).............................. 21,105
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ---------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a)121 Lojas Arapua, expiring 12/31/97 (COST $0)........ --
--------
TOTAL FOREIGN SECURITIES (96.5%) (COST $101,061)................... 114,949
--------
</TABLE>
- --------------
40
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
LATIN AMERICAN FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------------
SHORT-TERM INVESTMENT (4.0%)
REPURCHASE AGREEMENT (4.0%)
$ 4,769 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $4,770,
collateralized by $5,050 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $4,852 (COST
$4,769)........................................ $ 4,769
--------
TOTAL INVESTMENT IN SECURITIES (100.5%) (COST $105,830)............ 119,718
--------
FOREIGN CURRENCY (0.1%)
ARP 14 Argentine Peso................................... 15
COP 37,481 Colombian Peso................................... 34
MXP 740 Mexican Peso..................................... 93
VEB 2,254 Venezuelan Bolivar............................... 5
--------
TOTAL FOREIGN CURRENCY (COST $147)................................. 147
--------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<C> <S> <C>
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (100.6%) (COST $105,977)......................... $119,865
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.6%)...................... (805)
--------
NET ASSETS (100%).................................................. $119,060
--------
--------
</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
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
INDUSTRY (000) ASSETS
- ---------------------------------------- -------- --------
<S> <C> <C>
Telecommunications...................... $ 35,415 29.7%
Energy.................................. 22,894 19.2
Consumer Goods.......................... 17,771 14.9
Materials............................... 14,522 12.2
Services................................ 12,829 10.8
Finance................................. 5,446 4.6
Capital Equipment....................... 3,075 2.6
Multi-Industry.......................... 2,997 2.5
-------- ---
$114,949 96.5%
-------- ---
-------- ---
</TABLE>
-----------------------
41
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 2.4%
Brazil 16.8%
Bulgaria 0.4%
Chile 0.6%
China 0.3%
Egypt 1.5%
Hong Kong 2.5%
Hungary 0.4%
India 9.2%
Indonesia 4.7%
Israel 2.1%
Korea 6.0%
Malaysia 1.1%
Mexico 11.0%
Pakistan 3.3%
Peru 0.5%
Poland 1.5%
Russia 8.1%
Singapore 0.4%
South Africa 7.2%
Taiwan 4.0%
Thailand 4.9%
Turkey 4.1%
United States 1.4%
Venezuela 0.2%
Zimbabwe 0.8%
Other 4.6%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 6.97% 13.54% 2.62% 4.66%
- -----------------------------------------------------------------
Class B+ Shares 7.67% 12.67% 9.66% 11.57%
- -----------------------------------------------------------------
Class C Shares 11.66% 12.66% 3.87% 3.87%
- -----------------------------------------------------------------
IFC Global Total
Return Composite
Index:
Class A & C Shares N/A 11.31% N/A 6.06%
Class B Shares N/A 11.31% N/A 9.26%
- -----------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and 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).
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- ------------------------------- ------------ ---------------
<S> <C> <C>
CRT Brazil 3.0%
Telebras Brazil 2.9%
Telemex 'L' ADR Mexico 2.8%
Eletrobras Brazil 2.5%
FEMSA Mexico 2.4%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ----------------------------- --------- -------------
<S> <C> <C>
Consumer Goods $ 41,477 19.4%
Services 40,458 19.0%
Finance 35,032 16.5%
Energy 25,925 12.2%
Multi-Industry 20,185 9.5%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C>
IFC Global Retail Return Composite
Emerging Markets Fund Class A Emerging Markets Fund Class C Index
7/6/94 $9,525 $10,000 $10,000
6/30/95 $8,422 $8,688 $9,868
6/30/96 $9,614 $9,942 $10,698
6/30/97 $10,915 $11,201 $11,908
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; all recurring fees (including
management fees) were deducted; and all dividends and distributions were
reinvested. The graph presents the performance of Class A and Class C shares
which have been in existence since the Fund's inception. The performance of
Class B shares will vary based upon the different inception date and the sales
charge and fees assessed to that Class.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The investment objective of the Emerging Markets Fund is to provide long-term
capital appreciation by investing primarily in equity securities of emerging
country issuers.
For the year ended June 30, 1997, the Fund had a total return exclusive of sales
charge of 13.54% for the Class A shares, 12.67% for the Class B shares and
12.66% for the Class C shares, and a total return with sales charge of 6.97% for
the Class A shares, 7.67% for the Class B shares and 11.66% for the Class C
shares, as compared to a total return of 11.31% for the IFC Global Total Return
Composite Index (the "Index") for the same period. For the period from inception
through June 30, 1997, the average annual total return exclusive of sales charge
was 4.66% for the Class A shares, 11.57% for the Class B shares, and 3.87% for
the Class C shares, and 2.62% for the Class A shares, 9.66% for the Class B
shares and 3.87% for the Class C shares with sales charge, as compared to 6.06%
for the Index since inception of the Class A and C shares and 9.26% for the
Index since inception of the Class B shares.
The fiscal year was volatile, with returns ranging from -60.9% in Thailand to
110.9% in Venezuela. Latin America continued its outperformance during the year.
All markets in the region were up during this period. Brazil, up 74.0% during
the twelve months, remains the anchor in the region. Privatization and strong
earnings growth underpinned the region's 42.9% return in U.S. Dollar
THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE AS
MEASURED BY THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS
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.
- --------------
42
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
terms over the twelve months. While we remain optimistic about the positive
impact that privatization will have in the region, we are concerned that the
market may be anticipating too much good news on the horizon, and are lightening
up our exposure to Brazil. Going forward, our exposure in Brazil will be
concentrated in those stocks that have compelling valuations, superior
management expertise or limited downside risk to a macro shock. We continue to
like Mexico, where falling interest rates and a stable peso contribute to a
solid economic recovery. Positive news on the consumer front further supports
this market.
Asia continues to convulse with macro-economic imbalances created by
overinvestment, growth of current account deficits and inflexible exchange
rates. In May, a speculative attack on the Thai baht prompted officials to raise
interest rates precipitously and to institute a two-tiered currency system,
further diminishing badly needed inflows of foreign capital to this market.
The Bank of Thailand moved to a managed float of the baht in July. The value of
the Thai baht would be set by market forces, but the flotation would be managed
by the authorities. The baht peg to a basket of currencies has been
discontinued. We hedged our Thai currency exposure in May as we believed that
the Thai market represented value but we also believed that a devaluation was in
the offing. The hedge was put on when the baht traded at 26. It subsequently
went to 20 and finally to 29. We removed 50% of our hedge when the baht devalued
and took off the remaining hedge when the IMF stepped in. We achieved a return
of approximately 12% on the hedges. We believe that the Thai market has bottomed
and that this event is bullish for the stock market, although bearish for the
economy. Our projection for the baht level in the near term is in the 31-32
area. Possible next steps include a financial sector restructuring package and
the elimination of the two tier foreign exchange system. Thailand needs foreign
capital flows to finance its economic recovery and these controls are hampering
capital inflows. Also, as the currency stabilizes the need for these controls
should disappear.
Further in the region, markets like Malaysia (-12.2% calendar year-to-date and
- -5.5% for the 12 months) and the Philippines (-12.2% calendar year-to-date and
- -16.9% for the 12 months) have suffered as fears of Thai style property and
finance problems led to sell-offs. We are significantly underweight Malaysia and
are out of the Philippines, which has positively impacted portfolio performance.
With these two markets 20-25% off their highs, we are re-examining our extreme
underweight in these countries.
In Russia, falling interest rates and significant progress on both the economic
restructuring and tax reform fronts supported the market. Russia was up 44.5%
during the second quarter of 1997 and 109.9% for the 12 months. Lower rates are
luring local investors, further boosting returns. The inclusion of Russia in the
IFC's investable index also favorably impacted performance. We favor energy and
electric utility stocks in this market, as valuations remain attractive and
growth prospects long-term are solid.
India has shaken off the malaise of political instability and is refocussed on
the business of market liberalization and reform. Tax cuts, lower interest rates
and the new coalition government have brought local and
------------------
43
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
foreign investors into the market, which is up 36.4% so far this year. The
market has been led so far by a select few companies, but with easing rates and
projected pick-ups in industrial production, we expect to see an increasing
breadth in advances. Pakistan has followed its political rival. Similar problems
have led to similar opportunities. The market continues to rise on the back of
low valuations and stabilizing politics. We will continue to raise our weight in
Pakistan, mainly through Pakistan Telecom, as we expect some positive
developments on tariff rates.
We expect a continuation of the strong performance of the emerging markets into
the second half of the year. The themes which we expect
will contribute favorably to overall performance include: attractive valuations
with strong earnings growth, declining inflation and interest rates,
accelerating FDI flows, and synchronized economic growth.
Madhav Dhar
PORTFOLIO MANAGER
Robert L. Meyer
PORTFOLIO MANAGER
July 1997
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
MSCI Emerging Markets Indices
Performance ($US)
3 Months to June 30, 1997
% Change
THAILAND -60.4%
CZECH -21.5%
KOREA -20.6%
PHILIPP -16.9%
PAKISTAN -15.5%
MALAYSIA -5.5%
POLAND -5.3%
SOUTHAFR 0.1%
INDIA 5.4%
CHILE 8.9%
INDONESIA 14.7%
JORDAN 16.7%
PERU 24.4%
HONGKONG 25.7%
ARGENTINA 27.0%
TAIWAN 29.0%
ISRAEL 30.3%
CHINA 32.1%
MEXICO 32.5%
SRILANKA 34.4%
GREECE 40.2%
COLOMBIA 40.4%
PORTUGAL 42.9%
TURKEY 46.7%
BRAZIL 66.6%
HUNGARY 82.8%
RUSSIA 109.9%
VENEZUELA 110.9%
</TABLE>
- --------------
44
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS (82.4%)
ARGENTINA (2.4%)
(a)12,975 Nortel Inversora ADR............................. $ 352
36,212 Quilmes ADR...................................... 371
10,847 Telecom Argentina ADR............................ 569
81,130 Telefonica Argentina ADR......................... 2,809
35,145 YPF ADR.......................................... 1,081
--------
5,182
--------
BRAZIL (6.3%)
77,330 Brahma ADR....................................... 1,184
(a,e)2,140 Celesc GDS....................................... 297
(a)389,600 CRT 'A'.......................................... 586
5,020 CVRD ADR......................................... 112
5,517,000 Eletrobras....................................... 3,085
9,140 Eletrobras ADR................................... 271
35,990 Eletrobras ADR................................... 1,004
927,000 Lightpar......................................... 369
(e)14,225 Lojas Arupua ADR................................. 236
1,960 Pao de Acucar.................................... 45
(e)14,961 Pao de Acucar ADR................................ 340
9,198,000 Telebras......................................... 1,247
20,845 Telebras ADR..................................... 3,163
(a)550,397 Telesp........................................... 162
34,420 Unibanco GDR..................................... 1,278
--------
13,379
--------
CHILE (0.6%)
16,645 CCU ADR.......................................... 365
8,290 Enersis ADR...................................... 295
18,649 Santa Isabel ADR................................. 601
--------
1,261
--------
CHINA (0.3%)
412,000 Guangshen Railway Co. Ltd. 'H'................... 181
6,000 Guangshen Railway Co. Ltd. ADR................... 131
696,000 Zhenhai Refining & Chemical Co., Ltd............. 252
--------
564
--------
COLOMBIA (0.0%)
215,412 Banco de Colombia................................ 79
--------
EGYPT (1.5%)
7,916 Ameriyah Cement Co............................... 193
34,430 Commercial International Bank.................... 720
(a)24,250 Commercial International Bank GDR................ 506
9,170 Eastern Tobacco.................................. 232
(a)1,895 Egypt American Bank.............................. 75
5,775 Egyptian Finance & Industrial.................... 345
10,800 General Silo Storage............................. 281
10,475 Helwan Portland Cement........................... 222
3,200 Madinet Housing & Development.................... 226
1,950 North Cairo Flour Mills.......................... 102
7,375 Tora H. Portland Cement.......................... 187
--------
3,089
--------
HONG KONG (2.5%)
82,000 Cheung Kong Holdings Ltd......................... 810
(a)338,000 China Everbright Ltd. -- IHD Pacific Ltd......... 1,010
778,000 China Resources Beijing Land..................... 577
272,000 China Resources Enterprises Ltd.................. 1,334
50,000 Hutchison Whampoa Ltd............................ 432
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
68,000 New World Development Co., Ltd................... $ 406
130,000 Shanghai Industrial Holdings Ltd................. 809
--------
5,378
--------
HUNGARY (0.4%)
(a)3,601 BorsodChem Rt. GDR............................... 140
(a)16,416 MOL Magyar Olaj-es Gazipari Rt. GDR.............. 365
1,790 Pannonplast Rt................................... 90
(a)12,850 Tiszai Vegyi Kombinat Rt. GDR.................... 220
--------
815
--------
INDIA (9.2%)
413,150 Automotive Axles Ltd............................. 548
181,400 Bharat Heavy Electricals Ltd..................... 1,960
12,369 Century Textiles & Industries GDR................ 656
(a)75,000 Container Corp. of India Ltd..................... 1,095
50 E.I.D. Parry Ltd. GDR............................ --
(e)150,000 E.I.D. Parry Ltd. GDR............................ 375
201,600 Great Eastern Shipping GDR....................... 1,613
100,000 Gujarat Ambuja Cement GDR........................ 1,163
214,816 Gujarat Narmada Valley Fertilizers Co., Ltd.
GDR............................................ 537
504,000 Hindustan Development Corp. Ltd. GDR............. 126
24,400 Hoechst Shering Agrevo Ltd....................... 460
12,500 Housing Development Finance Corp., Ltd........... 1,426
75,000 India Cements Ltd. GDR........................... 244
13,700 Indian Rayon & Industries GDR.................... 173
(d,e)108,750 Indo Rama Synthetics Ltd. GDR.................... 544
152,000 ITC Ltd.......................................... 2,389
145,000 ITC Ltd. GDS..................................... 2,647
4,320 JCT Ltd. GDR..................................... 7
(e)160 JCT Ltd. GDR..................................... --
230,750 JK Corp. GDR..................................... 121
150,000 Mahanagar Telephone Nigam, Ltd................... 1,273
50,000 Mahindra & Mahindra Ltd. GDR..................... 744
100,000 Philips India Ltd................................ 243
21,150 Rane Madras Ltd.................................. 151
(a)27,750 Raymond Ltd. GDR................................. 120
(a)280,000 Sanghi Polyester Ltd. GDR........................ 147
317,000 SIV Industries GDR............................... 127
302,600 Tube Investments of India Ltd. GDR............... 265
60,550 United Phosphorus Ltd. GDR....................... 394
--------
19,548
--------
INDONESIA (4.7%)
(a)648,000 Astra International (Foreign).................... 2,664
(a,d)1,424,202 Bank International Indonesia (Foreign)........... 1,230
(d)1,998,000 Bank Negara Indonesia (Foreign).................. 1,273
(d)456,500 Bimantara Citra (Foreign)........................ 798
(d)248,000 Gudang Garam (Foreign)........................... 1,040
(a,d)309,000 Hanjaya Mandala Sampoerna (Foreign).............. 1,179
(d)501,203 Indah Kiat Pulp & Paper (Foreign)................ 294
(a,d)226,800 Indofood Sukses Makmur (Foreign)................. 522
(a,d)476,000 Matahari Putra Prima (Foreign)................... 959
99,000 Mayora Indah (Foreign)........................... 56
41,000 Putra Surya Multidana (Foreign).................. 65
--------
10,080
--------
ISRAEL (2.1%)
(a)112,600 Bank Hapoalim Ltd................................ 234
1 Elbit Medical Imaging Ltd........................ --
37,500 Elbit Systems Ltd................................ 448
</TABLE>
-----------------------
45
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
ISRAEL (CONT.)
<TABLE>
<C> <S> <C>
680 First International Bank of Israel Ltd. '1'...... $ 98
893 First International Bank of Israel Ltd. '5'...... 688
8,600 Koor Industries Ltd.............................. 761
16,500 Koor Industries Ltd. ADR......................... 291
91,800 Osem Investment Ltd.............................. 487
467,800 Super Sol Ltd.................................... 1,501
--------
4,508
--------
KOREA (6.0%)
37,900 Cho Hung Bank Co., Ltd. GDR...................... 275
15,195 Cho Hung Bank Co., Ltd. (Foreign)................ 101
(a)19,760 Hansol Paper Co.................................. 501
(a)657 Hanwha Chemical Corp............................. 5
(a,d)47,810 Housing & Commercial Bank, Korea................. 892
(a)30,592 Hyundai Engineering & Construction Co.
(Foreign)...................................... 785
(a,d)31,292 Kookmin Bank..................................... 577
(a)37,775 Kookmin Bank GDR................................. 798
45,097 Korea Electric Power Corp........................ 1,346
25,600 Korea Exchange Bank.............................. 169
13,920 LG Information & Communication Ltd............... 1,724
11,070 Pohang Iron & Steel Co., Ltd. ADR................ 354
(d)10,026 Pohang Iron & Steel Co., Ltd..................... 1,027
(a,e)16,184 Samsung Electronics Co. GDS (New)................ 908
(d)23,691 Samsung Electronics Co. (Foreign)................ 2,652
(d)49,945 Shinhan Bank Co., Ltd. (Foreign)................. 724
--------
12,838
--------
MALAYSIA (1.1%)
214,000 Commerce Asset Holdings Bhd...................... 564
125,000 Genting Bhd...................................... 599
52,000 Rashid Hussain Bhd............................... 330
174,000 Resorts World Bhd................................ 524
45,000 United Engineers Bhd............................. 324
--------
2,341
--------
MEXICO (11.0%)
44,710 Apasco........................................... 320
(a)266,176 Banacci 'B'...................................... 685
(a)193,888 Banacci 'L'...................................... 453
600,692 Bancomer 'B'..................................... 290
(a,e)93,470 Bancomer 'B' ADR................................. 911
103,755 Carso 'A1'....................................... 723
29,110 Carso ADR........................................ 410
293,969 Cemex CPO........................................ 1,279
63,369 Cemex CPO ADR.................................... 550
64,440 Cemex 'B'........................................ 315
87,780 Cemex 'B' ADR.................................... 845
15,004 Cifra 'A'........................................ 28
122,675 Cifra 'C'........................................ 196
15,226 Desc ADR......................................... 443
851,140 FEMSA 'B'........................................ 5,076
(a)36,726 Gruma 'B'........................................ 170
(a,e)3,953 Gruma ADR........................................ 73
299,297 Kimberly 'A'..................................... 1,200
107,474 Maseca 'B'....................................... 118
125,040 Telemex 'L' ADR.................................. 5,971
(a)113,787 Televisa CPO GDR................................. 3,457
--------
23,513
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
PAKISTAN (3.3%)
1,042,000 Fauji Fertilizer Co., Ltd........................ $ 2,049
(a)453,400 Hub Power Co..................................... 459
(a)181,500 Karachi Electric................................. 54
(a)150,000 Nishat Mills Ltd................................. 74
96,870 Pakistan State Oil Co., Ltd...................... 780
3,492,500 Pakistan Telecommunication Co.................... 2,657
(a)1,300,850 Sui Northern Gas Pipelines....................... 1,022
--------
7,095
--------
PERU (0.5%)
39,045 Tele Peru 'B' ADR................................ 1,022
--------
POLAND (1.5%)
(a)16,340 Agros Holdings S.A. 'D'.......................... 413
(a)8,300 Bank of Handlowy W Warszawie S.A................. 88
12,500 Bank Rozwoju Eksportu S.A........................ 262
(a)6,436 Bank Slaski S.A.................................. 460
223,822 Big Bank Inicjatyw............................... 269
15,750 Debica S.A....................................... 324
1,800 E. Wedel S.A..................................... 97
77,100 Elektrim S.A..................................... 671
(a)34,700 Exbud S.A........................................ 350
94,000 Polifarb Wroclaw S.A............................. 352
--------
3,286
--------
RUSSIA (7.6%)
(a)11,618,000 Edinaya Energetiches............................. 4,205
(a)23,900 Gazprom ADR...................................... 396
(a)1,622,000 Irkutskenergo.................................... 552
(a)110,000 Lukoil Holdings Co............................... 2,159
(a)14,000 Lukoil Holdings Co. ADR.......................... 1,105
(a)1,377,000 Moscow Energy (Mosenergo)........................ 1,929
(a)354,200 Rostelekom....................................... 1,374
(a,d,f)600 Storyfirst Communications........................ 1,500
42,000 Surgutneftegaz ADR............................... 2,248
(a)6,000 Tatneft ADR...................................... 639
--------
16,107
--------
SINGAPORE (0.4%)
(a)223,200 Want Want Holdings............................... 741
--------
SOUTH AFRICA (7.1%)
43,200 Amalgamated Banks of South Africa................ 310
110,800 Barlow Ltd....................................... 1,205
33,502 Bidvest Group Ltd................................ 258
13,300 De Beers Centenary AG............................ 491
4,100 Dreifontein Consolidation Ltd.................... 28
146,500 Ellerine Holdings, Ltd........................... 1,043
106,800 First National Bank Holdings, Ltd................ 918
(a)11,058 Foodcorp Limited................................. 84
300,600 Gencor Ltd....................................... 1,385
182,400 Illovo Sugar Ltd................................. 418
98,600 Malbak Ltd....................................... 156
2,454 New Clicks Holdings Ltd.......................... 3
90,000 Persetel Holdings Ltd............................ 633
246,000 Rembrandt Group Ltd.............................. 2,624
241,700 Reunert Ltd...................................... 828
349,100 Sasol Ltd........................................ 4,578
16,258 South African Druggists Ltd...................... 136
--------
15,098
--------
</TABLE>
- --------------
46
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
TAIWAN (4.0%)
(a)254,000 Acer, Inc........................................ $ 914
(a)202,500 Asustek Computer, Inc............................ 2,681
(a)98,000 China Development Corp........................... 506
(a)383,500 Compal Electronics, Inc.......................... 1,517
827,000 Far Eastern Textile, Ltd......................... 1,300
153,690 Formosa Plastics Corp............................ 370
(a)203,740 Kuoyang Construction............................. 491
203,000 Siliconware Precision Industries Co.............. 686
--------
8,465
--------
THAILAND (4.8%)
32,000 Advanced Information Services Co. Ltd............ 279
125,100 Advanced Information Services Co., Ltd.
(Foreign)...................................... 893
356,500 Bangkok Bank Co., Ltd. (Foreign)................. 2,450
5,000 Banpu Public Co., Ltd (Foreign).................. 73
88,700 Central Pattana Public Co., Ltd.................. 123
127,000 Industrial Finance (Foreign)..................... 162
(a)19,000 Lanna Lignite Public Co., Ltd.................... 134
3,000 Lanna Lignite Public Co., Ltd (Foreign).......... 20
95,000 National Finance & Securities Co................. 60
183,000 National Finance & Securities Co., Ltd.
(Foreign)...................................... 115
201,700 National Petrochemical Public Co., Ltd........... 206
(d)30,700 National Petrochemical Public Co., Ltd.
(Foreign)...................................... 31
5,000 Shinawatra Computer Co. Ltd...................... 35
(d)126,440 Shinawatra Computer Co., Ltd. (Foreign).......... 874
15,550 Siam Cement Co., Ltd. (Foreign).................. 269
324,800 Siam Commercial Bank Co. Ltd. (Foreign).......... 1,329
(a)537,300 Thai Farmers Bank Public Co., Ltd (Foreign)...... 2,282
43,000 Tipco Asphalt Public Company Ltd................. 224
141,000 United Communication Industry.................... 582
(d)9,000 United Communication Industry (Foreign).......... 37
--------
10,178
--------
TURKEY (4.1%)
5,388,750 Arcelik A.S...................................... 726
5,306,500 Bossa Ticaret ve Sanayii Isletmeleri A.S......... 120
1,545,750 Ege Biracilik Ve Malt Sanayii.................... 359
5,670,000 Erciyas Biracilik Ve Malt Sanayii................ 678
12,391,000 Eregli Demir Ve Celik Fabrikalari A.S............ 2,065
1,333,000 Guney Biraculik Ve Malt Sana..................... 75
(a)53,109,383 Turkiye Garanti Bankasi.......................... 2,002
(a)4,075,000 Vestel Elektronik Sanayii ve Ticaret A.S......... 228
(a)105,904,330 Yapi Ve Kredi Bankasi A.S........................ 2,424
--------
8,677
--------
VENEZUELA (0.2%)
75,000 C.A. La Electricidad de Caracas.................. 120
9,195 CANTV ADR........................................ 397
--------
517
--------
ZIMBABWE (0.8%)
550,450 Delta Corp....................................... 845
339,900 Meikles Africa Ltd............................... 836
--------
1,681
--------
TOTAL COMMON STOCKS (COST $160,489)..................................
175,442
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
PREFERRED STOCKS (11.0%)
BRAZIL (NON-VOTING STOCKS) (10.5%)
41,968,584 Banco Bradesco................................... $ 423
(a,d)11,156,000 Banco Nacional................................... 1
4,609,099 Brahma........................................... 3,511
65,899,110 CEMIG............................................ 3,397
31,430 CEMIG ADR........................................ 1,582
(a)3,780,500 CRT.............................................. 5,689
1,256,000 Coteminas........................................ 490
1,697,000 Eletrobras 'B'................................... 1,012
1,948,200 Itaubanco........................................ 1,091
12,437,000 Lojas Arapua S.A................................. 202
6,448,000 Lojas Renner S.A................................. 331
(a)4,660,000 Pao de Acucar.................................... 106
8,858,000 Petrobras........................................ 2,460
11,381,390 Telebras......................................... 1,726
734,661 Telesp........................................... 240
--------
22,261
--------
RUSSIA (0.5%)
(a)450,000 Rostelekom....................................... 1,125
--------
TOTAL PREFERRED STOCKS (COST $18,578)................................ 23,386
--------
INVESTMENT COMPANIES (1.4%)
UNITED STATES (1.4%)
(g)34,265 Morgan Stanley Africa Investment Fund, Inc....... 612
(a,g)186,045 Morgan Stanley India Investment Fund, Inc........ 2,407
--------
TOTAL INVESTMENT COMPANIES (COST $2,379)............................. 3,019
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- -----------------
RIGHTS (0.0%)
BRAZIL (0.0%)
(a,d)130,370 CRT.............................................. 30
--------
INDONESIA (0.0%)
(a,d)451,083 Indah Kiat Pulp & Paper, expiring 7/11/02........ 79
--------
MALAYSIA (0.0%)
(a,d)42,800 Commerce Asset Holdings Bhd., expiring 7/23/97... 3
(a,d) Rashid Hussain Bhd., expiring 12/31/02........... --
--------
TOTAL RIGHTS (COST $0)............................................... 112
--------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- -----------------
WARRANTS (0.1%)
INDONESIA (0.0%)
(a)126,596 Bank International Indonesia, expiring 1/17/00... 49
(a,d)80,192 Indah Kiat Pulp & Paper, expiring 7/11/02........ 14
--------
63
--------
MALAYSIA (0.0%)
(a,d)26,750 Commerce Asset Holdings Bhd., expiring 7/23/97... --
--------
</TABLE>
-----------------------
47
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
THAILAND (0.1%)
(a)88,000 Thai Farmers Bank Public Co., Ltd, expiring
9/30/99........................................ $ 26
(a)102,487 Thai Farmers Bank Public Co., Ltd, expiring
9/15/02........................................ 45
--------
71
--------
TOTAL WARRANTS (COST $120)........................................... 134
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- -----------------
FOREIGN GOVERNMENT BONDS (0.4%)
BULGARIA (0.4%)
$ (n)750 Bulgaria Front Loaded Interest Reduction Bond,
'A' 2.25%, 7/28/24............................. 428
400 Bulgaria Discount Bonds, 'A' (Euro) 6.563%,
7/28/24........................................ 295
--------
TOTAL FOREIGN GOVERNMENT BONDS (COST $495)........................... 723
--------
CONVERTIBLE DEBENTURE (0.1%)
INDIA (0.0%)
(a)120 Tata Iron & Steel Co. 2.25%, 4/1/99.............. 112
--------
SOUTH AFRICA (0.1%)
(a)14,600 Sasol 8.50%, 12/15/2099.......................... 182
--------
TOTAL CONVERTIBLE DEBENTURES (COST $306)............................. 294
--------
TOTAL FOREIGN SECURITIES (95.4%) (COST $182,367)..................... 203,110
--------
SHORT-TERM INVESTMENT (4.7%)
REPURCHASE AGREEMENT (4.7%)
9,936 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $9,938,
collateralized by $10,520 U.S. Treasury Bonds,
5.625%, due 2/15/06, value at $10,108 (COST
$9,936)........................................ 9,936
--------
TOTAL INVESTMENT IN SECURITIES (100.1%) (COST $192,303).............. 213,046
--------
</TABLE>
<TABLE>
<CAPTION>
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------------
FOREIGN CURRENCY (1.6%)
ARP 14 Argentine Peso................................... $ 14
BRL 745 Brazilian Real................................... 692
COP 7,025 Colombian Peso................................... 6
EGP 6 Egyptian Pound................................... 2
HKD 356 Hong Kong Dollar................................. 46
INR 60,094 Indian Rupee..................................... 1,679
IDR 147,154 Indonesian Rupiah................................ 61
MYR 27 Malaysian Ringgit................................ 11
MXP 245 Mexican Peso..................................... 31
PHP 343 Philippine Peso.................................. 13
PLZ 954 Polish Zloty..................................... 290
ZAR 4 South African Rand............................... 1
KRW 91,547 South Korean Won................................. 103
TWD 9,787 Taiwan Dollar.................................... 352
THB 4,960 Thai Baht........................................ 191
TRL 2,088,265 Turkish Lira..................................... 14
VEB 12,177 Venezuelan Bolivar............................... 25
--------
TOTAL FOREIGN CURRENCY (COST $3,537)................................. 3,531
--------
TOTAL INVESTMENTS (101.7%) (COST $195,840)........................... 216,577
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.7%)........................ (3,631)
--------
NET ASSETS (100%).................................................... $212,946
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Securities valued at fair value -- see note A-1 to financial
statements.
(e) -- 144A Security -- certain conditions for public sale may exist.
(f) -- Restricted as to public resale. Total value of restricted securities
at June 30, 1997 was $1,500 or 0.70% of net assets (Total cost
$1,500).
(g) -- The Fund is advised by an affiliate.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
- --------------
48
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, 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>
$ 344 $ 344 7/1/97 ZAR 1,552 $ 342 $ (2)
$ 182 182 7/1/97 ZAR 823 181 (1)
$ 303 303 7/2/97 THB 7,841 303 --
THB 10,728 407 8/18/97 $ 400 400 (7)
THB 50,782 1,925 8/18/97 $ 1,900 1,900 (25)
$ 925 925 8/19/97 THB 24,929 945 20
THB 54,917 2,081 8/19/97 $ 2,040 2,040 (41)
THB 42,767 1,602 9/16/97 $ 1,613 1,613 11
THB 76,873 2,881 9/16/97 $ 2,897 2,897 16
--------- --------- -----
$ 10,650 $ 10,621 $ (29)
--------- --------- -----
--------- --------- -----
</TABLE>
- ---------------
THB -- Thai Baht
ZAR -- South African Rand
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ----------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Consumer Goods............................................................... $ 41,477 19.4%
Services..................................................................... 40,458 19.0
Finance...................................................................... 35,032 16.5
Energy....................................................................... 25,925 12.2
Multi-Industry............................................................... 20,185 9.5
Materials.................................................................... 20,033 9.4
Capital Equipment............................................................ 19,249 9.0
Foreign Government Bonds..................................................... 723 0.4
Gold Mines................................................................... 28 0.0
--------- ---
$ 203,110 95.4%
--------- ---
--------- ---
</TABLE>
-----------------------
49
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Goods 13.1%
Consumer--Cyclical 31.8%
Consumer--Staples 13.0%
Diversified 12.0%
Energy 1.3%
Finance 19.4%
Materials 1.0%
Services 2.9%
Technology 0.4%
Other 5.1%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 21.51% 28.93% 29.20% 34.43%
- -----------------------------------------------------------------
Class B Shares 23.01% 28.01% 31.19% 33.53%
- -----------------------------------------------------------------
Class C Shares 27.04% 28.04% 33.48% 33.48%
- -----------------------------------------------------------------
Lipper Capital
Appreciation Index N/A 14.87% N/A 17.08%
- -----------------------------------------------------------------
S&P 500 Index N/A 34.70% N/A 30.11%
- -----------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and 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 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.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER INDUSTRY NET ASSETS
- ----------------------- ---------------------- --------------
<S> <C> <C>
HFS, Inc. Consumer - Cyclical 18.6%
Philip Morris Cos.,
Inc. Consumer - Staples 7.1%
United Technologies
Corp. Capital Goods 6.2%
Berkshire Hathaway,
Inc. Diversified 4.5%
Coca-Cola Enterprises, Consumer - Staples 3.9%
Inc.
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ----------------------------- --------- -------------
<S> <C> <C>
Consumer - Cyclical $ 21,109 31.8%
Finance 12,839 19.4%
Capital Goods 8,717 13.1%
Consumer - Staples 8,653 13.0%
Diversified 7,945 12.0%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C> <C>
Aggressive Equity Aggressive Equity Aggressive Equity Lipper Capital
Fund Class A Fund Class B Fund Class C Appreciation Index S&P 500 Index
1/2/96 $9,500 $10,000 $10,000 $10,000 $10,000
6/30/96 11,480 11,518 11,910 10,950 11,009
6/30/97 14,801 14,984 15,378 12,578 14,744
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; the deferred sales charge was deducted
from the value of the investment of $10,000 in Class B shares; all recurring
fees (including management fees) were deducted; and all dividends and
distributions were reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 year ended June 30, 1997, the Fund had a total return exclusive of sales
charge of 28.93% for the Class A shares, 28.01% for the Class B shares, and
28.04% for the Class C shares, and a total return with sales charge of 21.51%
for the Class A shares, 23.01% for the Class B shares, and 27.04% for the Class
C shares, as compared to 14.87% for the Lipper Capital Appreciation Index and
34.70% for the S&P 500 Index for the same period. For the period from inception
through June 30, 1997, the Fund had a total return exclusive of sales charge of
34.43% for the Class A shares, 33.53% for the Class B shares and 33.48% for the
Class C shares and a total return with sales charge of 29.20% for the Class A
shares, 31.19% for the Class B shares and 33.48% for the Class C shares compared
to 17.08% for the Lipper Capital Appreciation Index and 30.11% for the S&P 500
Index.
Our investment style is to concentrate quite heavily when our conviction in a
security is high and we believe the growth fundamentals of a company are very
strong. We also concentrate when positive earnings surprise vis-a-vis consensus
expectations is likely. But it is not a "surprise" if the stock is already owned
in virtually every growth portfolio and has surged. We tend to feel more
comfortable with stocks that may be temporarily under a cloud but where growth
fundamentals remain intact. We refer to this as "headline" risk as opposed to
earnings risk.
Since late 1996, we have felt that many of the high quality, large
capitalization growth stocks are not attractive investments, favoring instead
higher beta, less well established growth company stocks where growth is rapid
and the price/earnings ratio to growth rate is reasonable. Our call was either
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.
- --------------
50
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
WRONG OR PAINFULLY EARLY. IN BOTH THE FIRST AND SECOND QUARTERS OF 1997, MANY OF
THE LARGEST CAPITALIZATION STOCKS MOVED SHARPLY HIGHER, TYPICALLY WITHOUT ANY
UPWARD EARNINGS ESTIMATE REVISIONS AND SOMETIMES IN THE FACE OF DOWNWARD
REVISIONS. THE FOLLOWING STATISTICS ILLUSTRATE THIS POINT.
<TABLE>
<CAPTION>
P/E ON
RECENT PROJECTED AVERAGE P/E
% GAIN IN FIRST ESTIMATE SUSTAINABLE 1997 -------------------------------
HALF 1997 REVISIONS GROWTH RATE EARNINGS 1994 1995 1996
--------------- --------- --------------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GE.............................. 33% Up 13% 26.0 14.9 15.8 19.4
Merck........................... 28% Down 14% 26.9 15.4 19.6 23.2
Coca Cola....................... 28% Flat 18% 40.1 24.3 26.5 32.1
Gillette........................ 22% Down 18% 36.4 21.9 24.9 39.1
Disney.......................... 14% Down 18% 29.4 21.7 20.2 32.8
</TABLE>
Many factors are driving the powerful bull market in U.S. stocks, including
strong corporate profit growth, sustained low inflation, moderate interest rates
and increased shareholder orientation among corporate managements. But what is
driving the strong performance of the blue chip stocks versus the broader equity
market? There are a variety of possible factors, but the explosion in passive
index investing is likely the most important. Active managers in U.S. stocks
underperformed index funds by a wide margin in 1994, 1995, 1996 and again in
calendar 1997 (year-to-date). This has led to a perverse situation in which
larger cap means better due to money flows. This is further compounded by the
buying power of price momentum investors who are purchasing blue chips on the
basis of the strong uptrends in stock prices.
We do not know where all this will lead, but one thing is clear: stocks cannot
rise faster than the underlying companies' growth rates over the long term. Our
best guess is that the blue chips will begin to flatten out as investors accept
more risk for greater reward. Our largest holding at June 30, HFS, represents
the type of stock we think will outperform over the next 12-18 months.
HFS, a consumer services and franchising company that recently announced a
merger with direct marketer CUC International, is trading at about 25 times
projected 1997 earnings, with a near-term growth rate of 30% plus and a
sustainable growth rate, we think, of 20-25%. The balance sheet, pro forma for
the merger, is underleveraged and free cash flow generation is extremely strong.
Consensus earnings estimates should rise over the next 12 months. Looking out 18
months, we could see HFS trading, conservatively, at 20-25 times projected 1999
earnings, within a range of $82-102 (up 32-65%). But a much higher multiple is
conceivable given the price/earnings to growth ratios enjoyed by the blue chip
growth stocks. Other names in the Portfolio at June that fit into this category
of high beta/low P/E ratio to growth include: Clear Channel Communications,
Gtech, K-III Communications and Cracker Barrel.
Our second largest holding at June 30 was Philip Morris. After taking profits
and downsizing our big tobacco bet in early 1997, shareholders may wonder why we
added to it again in the second quarter. The tobacco stocks have once again
drifted to huge P/E discounts to their true peer group of stocks--consumer
products, food, beverage and drug stocks. The result is that the tobacco stocks
appear to be in a "win-win" position, much like last year when they had sold off
in the spring and again in the autumn on litigation fears. The current fear is
that the recently proposed $368 billion global settlement will not make it
through Congress without more pain being inflicted on the industry. Our view is
that, as usual, the industry is in a much stronger position in this battle than
what is portrayed in the media. We say this for several reasons:
- - Consumers have been warned for 30 years, and the product cannot be made
illegal since it creates gigantic tax revenues and prohibition would lead to
a black market. Combining income and excise taxes, Philip Morris is the
largest taxpayer in America.
- - Despite all the noise in the media, plaintiffs continue to have a very hard
time battling the deep-pocketed cigarette industry. After winning a case last
August, the plaintiffs lost the next two cases. The industry has never paid a
dime to plaintiffs. Hence, while health advocates and other anti-tobacco
activists scream about wanting the industry to feel more pain, the
plaintiffs' bar and state attorneys general want the deal to go through.
- - Finally, and importantly, business is strong and we expect solid EPS growth
in 1998 and beyond.
Our third largest holding at June 30 was United Technologies, a global
multi-industry company with interests in jet engines (Pratt and Whitney), air
conditioning (Carrier), elevators (Otis), automotive
------------------
51
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
parts (UT Automotive) and helicopters (Sikorsky). Like our other multi-industry
holdings--Allied Signal, Textron and ITT Industries--United Technologies
provides some cyclical exposure to the Portfolio. But these companies are really
"growth cyclicals" benefiting from increased international demand, rising profit
margins due to restructuring and substantial free cash flow generation. We
believe each of these companies is executing a GE-type transformation from
cyclical to stable growth company. We expect United Technologies and Allied
Signal to each grow in excess of 15% compounded over the next 3-5 years, with
Textron growing about 15%. ITT is a cheaper, turnaround play but fundamentals
are strong.
Kurt A. Feuerman
PORTFOLIO MANAGER
July 1997
- --------------
52
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
COMMON STOCKS (94.9%)
CAPITAL GOODS (13.1%)
AEROSPACE & DEFENSE (13.1%)
17,500...... Boeing Co........................................ $ 929
(a)11,000... Litton Industries, Inc........................... 532
10,400...... McDonnell Douglas Corp........................... 712
21,700...... Textron, Inc..................................... 1,440
14,100...... Thiokol Corp..................................... 987
49,600...... United Technologies Corp......................... 4,117
--------
8,717
--------
CONSUMER--CYCLICAL (31.8%)
BROADCAST--RADIO & TELEVISION (1.9%)
(a)20,400... Clear Channel Communications, Inc................ 1,255
--------
FOOD SERVICE & LODGING (20.7%)
34,200...... Cracker Barrel Old Country Store, Inc............ 907
(a)212,700.. HFS, Inc......................................... 12,337
10,500...... McDonald's Corp.................................. 507
--------
13,751
--------
LEISURE RELATED (3.9%)
(a)61,500... GTECH Holdings Corp.............................. 1,983
34,700...... International Game Technology.................... 616
--------
2,599
--------
PUBLISHING (2.8%)
(a)126,100.. K-III Communications Corp........................ 1,513
6,700....... Time Warner, Inc................................. 323
--------
1,836
--------
RETAIL--GENERAL (2.5%)
24,200...... Home Depot, Inc.................................. 1,668
--------
TOTAL CONSUMER--CYCLICAL...................................... 21,109
--------
CONSUMER--STAPLES (13.0%)
BEVERAGES (3.9%)
113,700..... Coca-Cola Enterprises, Inc....................... 2,615
--------
HEALTH CARE SUPPLIES & SERVICES (2.0%)
12,900...... AETNA, Inc....................................... 1,321
--------
TOBACCO (7.1%)
106,300..... Philip Morris Cos., Inc.......................... 4,717
--------
TOTAL CONSUMER--STAPLES....................................... 8,653
--------
DIVERSIFIED (12.0%)
DIVERSIFIED (12.0%)
17,000...... Allied Signal, Inc............................... 1,428
(a)63 Berkshire Hathaway, Inc.......................... 2,974
27,000 ITT Industries, Inc.............................. 695
19,700 Loews Corp....................................... 1,972
45,500 Viad Corp........................................ 876
--------
7,945
--------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- --------------------------------------------------------------------------
ENERGY (1.3%)
COAL, GAS, & OIL (1.3%)
(a)11,000 Diamond Offshore Drilling, Inc................... $ 859
--------
FINANCE (19.4%)
BANKING (7.0%)
15,000 BankAmerica Corp................................. 968
2,600 Chase Manhattan Corp............................. 252
10,300 Citicorp......................................... 1,242
8,133 Wells Fargo Co................................... 2,192
--------
4,654
--------
FINANCIAL SERVICES (4.4%)
14,000 American Express Co.............................. 1,043
7,700 Franklin Resources, Inc.......................... 559
10,100 Student Loan Marketing Association............... 1,283
--------
2,885
--------
INSURANCE (8.0%)
14,200 ACE Ltd.......................................... 1,049
21,700 CMAC Investment Corp............................. 1,036
(a)14,800 CNA Financial Corp............................... 1,560
13,100 MGIC Investment Corp............................. 628
7,500 Progressive Corp................................. 653
15,600 USF&G Corp....................................... 374
--------
5,300
--------
TOTAL FINANCE................................................. 12,839
--------
MATERIALS (1.0%)
CHEMICALS (1.0%)
11,000 Du Pont (EI) de Nemours Co....................... 692
--------
SERVICES (2.9%)
BUSINESS SERVICES (1.0%)
8,300 Xerox Corp....................................... 655
--------
TRANSPORTATION (1.9%)
(a)6,900 AMR Corp......................................... 638
(a)17,400 U.S. Airways Group Inc........................... 609
--------
1,247
--------
TOTAL SERVICES................................................ 1,902
--------
TECHNOLOGY (0.4%)
ELECTRONICS (0.4%)
8,600 Watkins Johnson Co............................... 264
--------
TOTAL COMMON STOCKS (COST $59,265)............................ 62,980
--------
</TABLE>
-----------------------
53
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
AGGRESSIVE EQUITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENT (7.6%)
REPURCHASE AGREEMENT (7.6%)
$ 5,014 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $5,015,
collaterallized by $5,310 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $5,102 (COST
$5,014)........................................ $ 5,014
--------
TOTAL INVESTMENTS (102.5%) (COST $64,279)....................... 67,994
LIABILITIES IN EXCESS OF OTHER ASSETS (-2.5%)................... (1,681)
--------
NET ASSETS (100%)............................................... $ 66,313
--------
--------
</TABLE>
- ---------------
(a) -- Non-income producing.
SECURITIES SOLD SHORT (NOTE A-6)
<TABLE>
<C> <S> <C>
VALUE
SHARES (000)
- ----------- ---------
98,300 CUC International, Inc. (TOTAL PROCEEDS $2,301) $ 2,537
---------
---------
</TABLE>
- --------------
54
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Apartment 19.7%
Healthcare 9.7%
Land 2.2%
Lodging/Leisure 12.5%
Manufactured Homes 6.6%
Office & Industrial 21.2%
Retail 15.2%
Self Storage 1.3%
Other 11.6%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 27.98% 35.75% 28.47% 35.17%
- -----------------------------------------------------------------
Class B Shares 29.97% 34.58% 30.79% 33.88%
- -----------------------------------------------------------------
Class C Shares 33.56% 34.56% 34.05% 34.05%
- -----------------------------------------------------------------
NAREIT Equity Index N/A 33.87% N/A 32.67%
- -----------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and 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 NAREIT Equity 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.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER INDUSTRY NET ASSETS
- -------------------------- ---------------- -------------
<S> <C> <C>
Chateau Properties, Inc.
REIT Manufactured 4.8%
Homes
American General
Hospitality Corp. Lodging/Leisure 4.5%
Nationwide Health
Properties, Inc. Healthcare 3.9%
Essex Property Trust, Inc.
REIT Apartment 3.5%
Urban Shopping Centers, 3.4%
Inc. REIT Retail
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------------------------------ --------- -------------
<S> <C> <C>
Office & Industrial $ 5,177 21.2%
Apartment 4,783 19.7%
Retail 3,700 15.2%
Lodging/Leisure 3,039 12.5%
Healthcare 2,351 9.7%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C>
U.S. Real Estate Fund Class A U.S. Real Estate Fund Class B U.S. Real Estate Fund Class C NAREIT Equity Index
05/1/96 $9,525 $10,000 $10,000 $10,000
6/30/96 9,965 9,954 10,372 10,354
6/30/97 13,528 13,669 14,067 13,885
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; the maximum deferred sales charge was
deducted from the value of the investment of $10,000 in Class B shares; all
recurring fees (including management fees) were deducted; and all dividends and
distributions were reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 year ended June 30, 1997, the Fund had a total return exclusive of sales
charge of 35.75% for the Class A shares, 34.58% for the Class B shares and
34.56% for the Class C shares, and a total return with sales charge of 27.98%
for the Class A shares, 29.97% for the Class B shares and 33.56% for the Class C
shares, as compared to 33.87% for the National Association of Real Estate
Investment Trusts (NAREIT) Equity Index. For the period from inception through
June 30, 1997, the Fund had an average annual total return exclusive of sales
charge of 35.17% for the Class A shares, 33.88% for the Class B shares and
34.05% for the Class C shares, and a total return with sales charge of 28.47%
for the Class A shares 30.79%, for the Class B shares and 34.05% for the Class C
shares, as compared with 32.67% for the NAREIT Equity Index.
Valuations in the REIT market have gone through some interesting gyrations
during the first half of 1997. The Morgan Stanley REIT Index ("RMS") which
measures the performance of REITs on a continuous basis--as opposed to the Index
which measures performance on a month-end basis-- rose approximately 4% through
the beginning of the year and climbed to a high on March 12. RMS proceeded to
hit its low on April 25 following a decline throughout the month. This
represented a decline of more than 8.5% from its mid-March peak. Since that low,
RMS has proceeded straight up, gaining 9.9% and achieving new highs through
quarter-end.
The decline in the early part of the second quarter resulted from a combination
of the correction in the broad equity market as well as a significant amount of
new equity issuance. We did not expect to see strong appreciation until this
supply was absorbed. In fact, in the face of declining valuations in the period
from mid-March through April, REITs continued to raise capital and raised in
excess of $3.5 billion of equity in 25 separate offerings.
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.
------------------
55
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
Some observers were disappointed to see the REIT market fall along with the
broad equity market in March and April. Our reaction is that REITs have not lost
their defensive characteristics. However, REIT stocks can only retain their
defensive characteristics if their stock prices reflect the underlying value of
their real estate. In the fourth quarter of last year, a number of stocks,
particularly some of the larger cap names, had traded to levels that were at
quite significant premiums to their underlying asset values. These were the
stocks that were most penalized during the correction. We continue to believe
that REITs should be viewed as a separate asset class, distinct from stocks and
bonds, providing diversification within a portfolio. Clearly there is some
correlation to other financial assets but as demonstrated by on-going analysis
provided by NAREIT the correlation continues to wane. This research affirms our
basic theory that real estate stocks will move based on underlying real estate
value.
As suggested above, new equity issuance in the REIT market continues at a torrid
pace. Through June 30, 1997 REITs had raised almost $10 billion in new equity.
This continues a theme of more real estate moving into the control of the public
markets. With a private institutional real estate market of approximately $1
trillion and equity capitalization at $110 billion, REITs continue to capture a
bigger share of the pie. We see continued equity issuance by existing REITs as
proceeds have primarily been used to pay for the acquisition of individual
properties, portfolios of properties and entire companies. One wildcard in the
growth potential of the assets held by public companies is the exchange of
property for shares by the institutional owners of real estate. In the second
quarter we saw a beginning of this trend as Meridian Industrial Trust entered
into transactions providing both an insurance company and a corporate pension
fund with shares in exchange for industrial properties.
After a dearth of initial public offerings over the course of the last two
years, there were 8 IPOs in the first two quarters raising in excess of $2
billion (this does not include two IPOs concluded immediately after the end of
June). The majority of capital raised was for office companies. We expect to see
a continuance of these IPOs as a result of the arbitrage between the private and
public real estate markets. The sectors that will feature the most new issuance
will be those in which it is not hard to assemble a meaningful collection of
assets combined with public market valuations that provide premium pricing.
At December 31, 1996 we provided our investment strategy for overweighting and
underweighting asset classes and geographic regions and thought it would be
appropriate to look at calendar 1997 year-to-date total returns in each sector
according to the Index. It is interesting to note that once again sector bets on
the office and hotel sectors contributed to excess performance, despite
prognosticators claiming that after 1996 REITs had moved to a stock picker's
game. We have been surprised by the continued strength in the strip center and
regional mall segments of retail and have continued to underweight the retail
sector.
<TABLE>
<CAPTION>
TOTAL PERFORMANCE
YEAR TO DATE CALENDAR
SECTOR 1997
- ---------------------------------------------------------- -------------------------
<S> <C>
Apartments................................................ 6.2%
Manufactured Homes........................................ 3.6%
Strip Centers............................................. 7.5%
Regional Malls............................................ 7.6%
Outlet Centers............................................ -4.2%
Industrial................................................ 1.7%
Office.................................................... 5.4%
Self Storage.............................................. -1.2%
Triple Net Lease.......................................... 3.4%
Hotel..................................................... 11.8%
Healthcare................................................ 2.7%
Overall................................................... 5.7%
</TABLE>
From the perspective of the Fund, approximately 65% of the outperformance since
December 31 was as a result of stock selection and the remainder was from sector
allocation. The largest
- --------------
56
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
contributions from a sector allocation perspective were: overweighting of
hotels, underweighting of self storage, and underweighting of outlet centers. As
we have discussed previously, real estate cycles in the physical property
markets tend to last a long time, however, valuations in the public markets
continue to fluctuate and as a result we had some modest movements in the Fund.
The most significant top-down adjustments were increasing the weighting in the
multifamily sector since valuations were beaten down, and decreasing the
weighting in the office and industrial sectors as we took profits on some office
stocks and reduced industrial positions due to stock valuations continuing to
move far above underlying value.
The following chart provides a summary of the largest contributors to the
performance of the Fund both from a top-down and bottom-up perspective, along
with the rationales for the positions.
<TABLE>
<CAPTION>
FUND POSITION SECTOR RATIONALE
- ---------------------------------- ------------------------ -----------------------------------------
<S> <C> <C>
BOTTOM-UP
Essex Properties.................. Apartments Attractive Pacific markets
Chateau Properties................ Manufactured Homes Favorable risk-return
Urban Shopping Centers............ Regional Malls High-end retail continues to improve
Pacific Gulf Properties........... Industrial Small cap with Pacific-focus
Meridian Industrial Trust......... Industrial Small cap growth story
Extended Stay of America.......... Hotels Momentum investors exit
TOP-DOWN
Overweighting..................... Hotels Lack of new supply at upper-end
Underweighting.................... Self storage Public market premiums excessive
Underweighting.................... Outlet centers Sector continues to worsen
</TABLE>
Russell Platt
PORTFOLIO MANAGER
Theodore R. Bigman
PORTFOLIO MANAGER
July 1997
------------------
57
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
COMMON STOCKS (86.9%)
APARTMENT (19.7%)
2,500 Amli Residential Properties Trust REIT........... $ 59
13,700 Associated Estates Realty Corp. REIT............. 322
21,500 Avalon Properties, Inc. REIT..................... 615
20,200 Bay Apartment Communities, Inc. REIT............. 747
1,500 Columbus Realty Trust REIT....................... 34
26,700 Essex Property Trust, Inc. REIT.................. 858
13,400 Gables Residential Trust REIT.................... 338
18,800 Merry Land & Investment Co., Inc. REIT........... 408
15,900 Oasis Residential, Inc. REIT..................... 374
18,900 Security Capital Atlantic, Inc................... 452
2,600 Summit Properties, Inc. REIT..................... 54
(a)47,451 Wellsford Properties Inc......................... 522
-------
4,783
-------
HEALTHCARE (9.7%)
6,900 Alexandria Real Estate Equities, Inc. REIT....... 151
(a)15,600 ARV Assisted Living, Inc......................... 172
7,500 Health Care Property Investors, Inc. REIT........ 264
1,600 LTC Properties, Inc.............................. 29
43,200 Nationwide Health Properties, Inc................ 950
24,000 Omega Healthcare Investors, Inc.................. 785
-------
2,351
-------
LAND (1.9%)
45,424 Atlantic Gulf Communities Corp................... 289
(a)9,700 Catellus Development Corp........................ 176
-------
465
-------
LODGING/LEISURE (12.5%)
44,500 American General Hospitality Corp................ 1,101
(a)26,100 Extended Stay of America, Inc.................... 411
(a)24,500 Host Marriott Corp............................... 437
(a)31,700 John Q. Hammons Hotels, Inc...................... 293
(a)15,400 Servico, Inc..................................... 229
13,300 Starwood Lodging Trust REIT...................... 568
-------
3,039
-------
MANUFACTURED HOMES (6.6%)
41,148 Chateau Properties, Inc. REIT.................... 1,178
18,100 Manufactured Home Communities, Inc. REIT......... 417
-------
1,595
-------
OFFICE & INDUSTRIAL (20.7%)
INDUSTRIAL (3.3%)
2,750 EastGroup Properties, Inc. REIT.................. 55
8,800 Meridian Industrial Trust REIT................... 207
25,000 Pacific Gulf Properties, Inc. REIT............... 550
-------
812
-------
OFFICE (16.1%)
20,400 Arden Realty Group, Inc.......................... 530
14,500 Beacon Properties Corp. REIT..................... 484
6,400 Boston Properties, Inc........................... 176
39,466 Brandywine Realty Trust REIT..................... 799
500 Brookfield Properties Corp....................... 6
(a)19,900 Brookfield Properties Corp. Installment
Receipts....................................... 139
15,600 CarrAmerica Realty Corp. REIT.................... 449
10,400 Cornerstone Properties, Inc. REIT................ 160
24,400 Great Lakes REIT, Inc............................ 401
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -----------------------------------------------------------------------
10,600 Koger Equity, Inc................................ $ 193
27,216 Trizec Hahn Corp................................. 582
-------
3,919
-------
OFFICE & INDUSTRIAL (1.3%)
6,400 Kilroy Realty Corp. REIT......................... 162
6,200 Prentiss Properties Trust REIT................... 159
-------
321
-------
TOTAL OFFICE & INDUSTRIAL..................................... 5,052
-------
RETAIL (14.5%)
REGIONAL MALL (9.8%)
44,100 First Union Real Estate Investments REIT......... 623
30,200 Taubman Center, Inc. REIT........................ 400
25,700 Urban Shopping Centers, Inc. REIT................ 819
32,500 Westfield America, Inc. REIT..................... 548
-------
2,390
-------
SHOPPING CENTER (4.7%)
11,300 Alexander Haagen Properties, Inc. REIT........... 184
40,500 Burnham Pacific Property Trust REIT.............. 557
6,200 Federal Realty Investment Trust REIT............. 167
2,700 IRT Property Co.................................. 32
900 Price, Inc. REIT................................. 33
200 Ramco-Gershenson Properties Trust REIT........... 4
11,900 Western Investment Real Estate Trust REIT........ 165
-------
1,142
-------
TOTAL RETAIL.................................................. 3,532
-------
SELF STORAGE (1.3%)
11,000 Shurgard Storage Centers, Inc. 'A' REIT.......... 308
-------
TOTAL COMMON STOCKS (COST $19,346)............................ 21,125
-------
PREFERRED STOCKS (1.0%)
LAND (0.3%)
(d,f)8,207 Atlantic Gulf Communities Corp................... 82
-------
RETAIL (0.7%)
SHOPPING CENTER (0.7%)
5,500 First Washington Realty Trust, Inc. 'A'.......... 168
-------
TOTAL PREFERRED STOCKS (COST $236)............................ 250
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
CONVERTIBLE BONDS (0.5%)
OFFICE (0.5%)
$ 224 Brookfield Properties Corp. 6.00%, 2/14/07
(COST $86)..................................... 125
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ----------
WARRANTS (0.0%)
LAND (0.0%)
(a,d)5,724 Atlantic Gulf Communities Class A, expiring
6/23/04........................................ --
(a,d)5,724 Atlantic Gulf Communities Class B, expiring
6/23/04........................................ --
(a,d)5,724 Atlantic Gulf Communities Class C, expiring
6/23/04........................................ --
-------
--
-------
TOTAL WARRANTS (COST $0)...................................... --
-------
</TABLE>
- --------------
58
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
U.S. REAL ESTATE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.7%)
REPURCHASE AGREEMENT (2.7%)
$ 665 Chase Securities Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $665,
collateralized by $705 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $677
(COST $665).................................... $ 665
-------
TOTAL INVESTMENTS (91.1%) (COST $20,333)...................... 22,165
OTHER ASSETS IN EXCESS OF LIABILITIES (8.9%).................. 2,151
-------
NET ASSETS (100%)............................................. $24,316
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
(f) -- Restricted as to public resale. Total value of restricted securities
at June 30, 1997 was $82 or 0.34% of net assets. (Total cost $82)
REIT -- Real Estate Investment Trust.
-----------------------
59
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Aerospace & Defense 3.6%
Banking 1.5%
Broadcast--Radio & Television 9.3%
Business Services 0.8%
Chemicals 1.4%
Coal, Gas & Oil 1.1%
Computers 2.0%
Consumer Staples 1.4%
Diversified 1.0%
Electrical Equipment 0.6%
Energy 3.9%
Entertainment 3.7%
Environmental Controls 2.7%
Finance 9.4%
Food Service & Lodging 1.7%
Foreign Government Bonds 7.6%
Forest Products & Paper 2.5%
Gaming & Lodging 3.5%
Health Care Supplies &
Services 1.0%
Insurance 1.5%
Multi-Industry 2.0%
Packaging & Container 1.2%
Retail--General 2.3%
Telecommunications 17.6%
Utilities 1.2%
Other 15.5%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS**
---------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
----------------- -----------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 12.51% 18.12% 10.94% 15.67%
- -----------------------------------------------------------------
Class B Shares 12.22% 17.22% 11.46% 14.83%
- -----------------------------------------------------------------
Class C Shares 16.21% 17.21% 14.82% 14.82%
- -----------------------------------------------------------------
CS First Boston High
Yield Index N/A 14.66% N/A 13.43%
- -----------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and 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 CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY SECTOR NET ASSETS
- -------------------- ----------------------- ---------------
<S> <C> <C>
Time Warner, Inc. Entertainment 3.7%
Nextel
Communications Telecommunications 3.1%
Viacom, Inc. Broadcast--Radio & 2.6%
Television
Teleport
Communications Telecommunications 2.4%
Norcal Waste Systems Environmental Controls 2.3%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ------------------------------ --------- -------------
<S> <C> <C>
Telecommunications $ 3,980 17.6%
Finance 2,114 9.4%
Broadcast - Radio & Television 2,099 9.3%
Foreign Government Bonds 1,707 7.6%
Energy 888 3.9%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C>
CS First Boston High Yield
High Yield Fund Class A High Yield Fund Class B High Yield Fund Class C Index
5/1/96 $9,500 $10,000 $10,000 $10,000
6/30/96 9,553 9,521 9,921 10,501
6/30/97 11,284 11,346 11,746 12,040
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; the maximum deferred sales charge was
deducted from the value of the investment of $10,000 in Class B shares; all
recurring fees (including management fees) were deducted; and all dividends and
distributions were reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 year ended June 30, 1997, the Fund had a total return exclusive of sales
charge of 18.12% for the Class A shares, 17.22% for the Class B shares and
17.21% for the Class C shares and a total return with sales charge of 12.51% for
the Class A shares, 12.22% for the Class B shares and 16.21% for the Class C
shares, as compared to 14.66% for the CS First Boston High Yield Index. For the
period from inception through June 30, 1997, the Fund had an average annual
total return exclusive of sales charge of 15.67% for the Class A shares, 14.83%
for the Class B shares and 14.82% for the Class C shares and a total return with
sales charge of 10.94% for the Class A shares, 11.46% for the Class B shares and
14.82% for the Class C shares as compared to 13.43% for the CS First Boston High
Yield Index.
We have continued to emphasize the communications industry in our high yield
portfolio. We believe exceptional growth opportunities exist in the newly
deregulated local exchange sector, as well as in selected companies in the
wireless and long distance sectors. Securities which performed
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.
- --------------
60
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
STRONGLY INCLUDED NEXTEL COMMUNICATIONS, QWEST COMMUNICATIONS, AND OCCIDENTE Y
CARIBE, A CELLULAR COMPANY BASED IN THE REPUBLIC OF COLOMBIA. MICROSOFT'S
STRATEGIC INVESTMENT IN COMCAST LED TO STRONG GAINS FOR OUR HOLDINGS IN THE
CABLE INDUSTRY, PARTICULARLY TELE-COMMUNICATIONS, INC. AND CABLEVISION SYSTEMS
CORP. IN THE EMERGING MARKETS ARENA, OUR INVESTMENTS IN U.S. DOLLAR-DOMINATED
SOVEREIGN AND CORPORATE BONDS CONTINUED TO OUTPERFORM. WE REDUCED BOTH THE CABLE
AND EMERGING MARKET SECTORS ON STRENGTH IN THE SECOND QUARTER.
Our overall portfolio structure continues to feature higher average credit
quality compared to market benchmarks. In terms of interest-rate sensitivity, we
have taken steps to reduce our exposure to no longer than that of market
benchmark. We believe that there is fair value in the U.S. bond market, and that
historically narrow high-yield credit spreads are supported by strong
fundamentals.
Robert Angevine
PORTFOLIO MANAGER
Thomas L. Bennett
PORTFOLIO MANAGER
Stephen F. Esser
PORTFOLIO MANAGER
July 1997
------------------
61
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
CORPORATE BONDS AND NOTES (64.2%)
AEROSPACE & DEFENSE (2.8%)
$ (e)200 Jet Equipment Trust, Series 1994-C1,
11.79%, 6/15/13................................ $ 253
(e)300 Jet Equipment Trust, Series 1995-D,
11.44%, 11/1/14................................ 374
-------
627
-------
BANKING (1.5%)
95 First Nationwide Holdings 9.125%, 1/15/03........ 98
225 First Nationwide Holdings 10.625%, 10/1/03....... 247
-------
345
-------
BROADCAST -- RADIO & TELEVISION (8.1%)
410 Cablevision Systems Corp. 9.875%, 5/15/06........ 437
(e)110 Comcast Cellular Corp. 9.50%, 5/1/07............. 111
(n)170 Echostar Satellite Broadcast 0.00%, 3/15/04...... 121
200 Paramount Communications 8.25%, 8/1/22........... 191
150 Rogers Cablesystems Ltd., 'B', 10.00%, 3/15/05... 162
60 Rogers Communications, Inc. 9.125%, 1/15/06...... 61
(e)165 TV Azteca S.A. 10.50%, 2/15/07................... 169
600 Viacom, Inc. 8.00%, 7/7/06....................... 584
-------
1,836
-------
BUSINESS SERVICES (0.8%)
(e)205 Outdoor Systems 8.875%, 6/15/07.................. 199
-------
CHEMICALS (1.4%)
315 ISP Holdings, Inc., Series B 9.00%, 10/15/03..... 326
-------
COAL, GAS & OIL (1.1%)
255 Snyder Oil Corp. 8.75%, 6/15/07.................. 254
-------
COMPUTERS (2.0%)
230 Advanced Micro Devices 11.00%, 8/1/03............ 257
190 Digital Equipment Corp. 8.625%, 11/1/12.......... 189
-------
446
-------
CONSUMER STAPLES (1.4%)
300 RJR Nabisco, Inc. 8.75%, 4/15/04................. 306
-------
DIVERSIFIED (1.0%)
225 Kmart Funding Corp. 8.80%, 7/1/10................ 223
-------
ELECTRICAL EQUIPMENT (0.6%)
(e)125 EES Coke Battery Co., Inc. 9.382%, 4/15/07....... 128
-------
ENERGY (3.9%)
240 Nuevo Energy Co. 9.50%, 4/15/06.................. 251
325 Quezon Power Ltd., 8.86%, 6/15/17................ 325
(e,n)130 Transamerican Energy 0.00%, 6/15/02.............. 93
220 Vintage Petroleum 8.625%, 2/1/09................. 219
-------
888
-------
ENVIRONMENTAL CONTROLS (2.7%)
103 Midland Cogeneration Ventures, Series C-91,
10.33%, 7/23/02................................ 109
(n)450 Norcal Waste Systems, 'B', 13.00%, 11/15/05...... 511
-------
620
-------
FINANCE (2.4%)
140 Amersco Inc., Series 97-A, 10.00%, 3/15/04....... 144
150 HMC Acquisition Properties,'B', 9.00%,
12/15/07....................................... 152
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -----------------------------------------------------------------------
$ (e)75 Navistar Financial Corp. 9.00%, 6/1/02........... $ 77
(e)170 Riggs Capital Trust II 8.875%, 3/15/27........... 173
-------
546
-------
FOOD SERVICE & LODGING (1.7%)
200 Courtyard By Marriott 10.75%, 2/1/08............. 216
150 Host Marriott Travel Plaza, 'B', 9.50%,
5/15/05........................................ 157
-------
373
-------
FOREST PRODUCTS & PAPER (2.5%)
(e)215 Asia Pulp & Paper Company Ltd. 12.00%, 12/29/49.. 220
305 SD Warren Co.,'B', 12.00%, 12/15/04.............. 341
-------
561
-------
GAMING & LODGING (3.5%)
445 Grand Casinos, Inc. 10.125%, 12/1/03............. 465
320 Station Casinos Inc. 10.125%, 3/15/06............ 323
-------
788
-------
HEALTH CARE SUPPLIES & SERVICES (1.0%)
220 Tenet Healthcare Corp. 8.625%, 1/15/07........... 224
-------
INSURANCE (1.5%)
(e)325 Anthem Insurance 9.00%, 4/1/27................... 335
-------
MULTI--INDUSTRY (2.0%)
(e)210 Multicanal S.A. 10.50%, 2/1/07................... 226
200 TLC Beatrice International Holdings 11.50%,
10/1/05........................................ 224
-------
450
-------
PACKAGING & CONTAINER (1.2%)
250 Gaylord Container Corp. 11.50%, 5/15/01.......... 263
-------
RETAIL--GENERAL (2.3%)
95 Kmart Corp. 7.75%, 10/1/12....................... 87
500 Southland Corp. 5.00%, 12/15/03.................. 425
-------
512
-------
TELECOMMUNICATIONS (17.6%)
(n)495 Brooks Fiber Properties, Inc. 0.00%, 3/1/06...... 337
(n)375 Brooks Fiber Properties, Inc. 0.00%, 11/1/06..... 244
(n)185 Dial Call Communications 0.00%, 12/15/05......... 145
(e)360 Globalstar LP/Capital 11.375%, 2/15/04........... 361
175 IXC Communications, Inc., 'B', 12.50%, 10/1/05... 200
100 Net Sat Servicos LTDA 12.75%, 8/5/04............. 109
(n)910 Nextel Communications 0.00%, 8/15/04............. 696
(n)400 Occidente Y Caribe 0.00%, 3/15/04................ 297
(e)190 Qwest Communications International 10.875%,
4/1/07......................................... 207
(e,n)645 TCI Satellite Entertainment 0.00%, 2/15/07....... 384
420 Tele-Communications Inc. 9.25%, 1/15/23.......... 437
25 Tele-Communications Inc. 8.75%, 2/15/23.......... 25
(n)745 Teleport Communications 0.00%, 7/1/07............ 538
-------
3,980
-------
UTILITIES (1.2%)
120 Cleveland Electric Illuminating 8.375%, 12/1/11.. 121
125 Midland Funding II, 'A', 11.75%, 7/23/05......... 145
-------
266
-------
TOTAL CORPORATE BONDS AND NOTES (COST $13,984)................ 14,496
-------
</TABLE>
- --------------
62
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
HIGH YIELD FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- -----------------------------------------------------------------------
<C> <S> <C>
ASSET BACKED SECURITIES (6.8%)
AEROSPACE & DEFENSE (0.8%)
$ 175 Aircraft Lease Portfolio Securitization Ltd.,
Series 1996-1, Class D, 12.75%, 6/15/06........ $ 188
-------
FINANCE (6.0%)
(e)248 CA FM Lease Trust 8.50%, 7/15/17................. 254
(e,h)323 DLJ Mortgage Acceptance Corp., Series 1996-CF2,
Class S, 1.64%, 11/12/21 IO.................... 29
150 DR Securitized Lease Trust, Series 1993-K1, Class
A2, 7.43%, 8/15/18............................. 125
504 DR Securitized Lease Trust, Series 1994-K1, Class
A1, 7.60%, 8/15/07............................. 474
100 DR Securitized Lease Trust, Series 1994-K1, Class
A2, 8.375%, 8/15/15............................ 93
(e)125 First Home Mortgage Acceptance Corp., Series
1996-B, Class C, 7.929%, 11/1/18............... 111
(e)250 Long Beach Auto Trust 1997-1, Class B, 14.22%,
10/26/03....................................... 254
-------
1,340
-------
TOTAL ASSET BACKED SECURITIES (COST $1,468)................... 1,528
-------
FOREIGN GOVERNMENT BONDS (7.6%)
BONDS (7.3%)
(h)350 Brazil Front Loaded Interest Reduction Bond,
Series 15, 4.50%, 4/15/09...................... 274
(n)625 Republic of Argentina 5.50%, 3/31/23............. 434
(h)90 Republic of Argentina BOCON, Series 2, PIK,
5.375%, 9/1/02................................. 106
245 Republic of Colombia 8.70%, 2/15/16.............. 249
(h)500 Republic of Venezuela, Series W-A, 6.75%,
3/31/20........................................ 394
(h)250 United Mexican States Discount Bond, 'B', 6.25%,
12/31/19....................................... 193
-------
1,650
-------
LOAN AGREEMENTS (0.3%)
(v)75 Russia Interest Arrears Note, 12/31/99........... 57
-------
TOTAL FOREIGN GOVERNMENT BONDS (COST $1,576).................. 1,707
-------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
- ----------
CONVERTIBLE PREFERRED STOCK (1.2%)
BROADCAST--RADIO & TELEVISION (1.2%)
2,540 TCI Pacific Communications 5.00%, 7/31/06 (COST
$231).......................................... 263
-------
PREFERRED STOCKS (4.7%)
ENTERTAINMENT (3.7%)
755 Time Warner, Inc., 'M', 10.25%................... 829
-------
FINANCE (1.0%)
(e)2,150 Sinclair Capital, 11.625%........................ 228
-------
TOTAL PREFERRED STOCKS (COST $997)............................ 1,057
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<C> <S> <C>
- -----------------------------------------------------------------------
WARRANTS (0.0%)
TELECOMMUNICATIONS (0.0%)
(a,d,e)1,600 Occidente Y Caribe, expiring 3/15/04 (COST $0)... $ --
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ----------
RIGHTS (0.0%)
FOREIGN GOVERNMENT (0.0%)
(a,d)2,500 Republic of Venezuela, expiring 3/31/20.......... --
(a,d)500,000 United Mexican States, expiring 12/31/19......... --
-------
TOTAL RIGHTS (COST $0)........................................ --
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
<C> <S> <C>
- ----------
SHORT-TERM INVESTMENTS (14.8%)
COMMERCIAL PAPER (12.1%)
$ 500 Case Equipment Loan Trust 5.58%, 8/7/97.......... 496
500 Eiger Capital Corp. 5.54%, 7/15/97............... 499
500 J.C. Penney Inc. 5.45%, 8/11/97.................. 497
500 Monsanto Co. 5.60%, 7/8/97....................... 499
500 Pacific Gas & Electric 5.57%, 8/1/97............. 498
250 RR Donnelly & Sons Corp. 5.53%, 7/8/97........... 250
-------
2,739
-------
REPURCHASE AGREEMENT (2.7%)
615 Chase Securities Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $615,
collateralized by $655 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $629............ 615
-------
TOTAL SHORT-TERM INVESTMENTS (COST $3,354).................... 3,354
-------
TOTAL INVESTMENTS (99.3%) (COST $21,610)...................... 22,405
OTHER ASSETS IN EXCESS OF LIABILITIES (0.7%).................. 162
-------
NET ASSETS (100%)............................................. $22,567
-------
-------
</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.
(h) -- Variable/Floating rate securities -- rate disclosed is as of June 30,
1997.
(n) -- Step Bond -- coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1997. Maturity date disclosed is the
ultimate maturity date.
(v) -- When-issued security -- see note A-9 to financial statements.
IO -- Interest Only.
PIK -- Payment-In-Kind. Income may be received in additional securities or
cash at the discretion of the issuer.
-----------------------
63
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Australia 3.0%
Austria 0.6%
Belgium 0.5%
Denmark 1.3%
Finland 1.9%
France 6.4%
Germany 8.5%
Hong Kong 3.6%
Italy 2.1%
Japan 28.0%
Malaysia 1.9%
Netherlands 4.6%
New Zealand 0.2%
Norway 1.2%
Singapore 1.9%
Spain 2.9%
Sweden 3.3%
Switzerland 7.1%
United Kingdom 12.5%
Other 8.5%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS
SINCE INCEPTION
(JULY 1, 1996)**
-----------------
WITH WITHOUT
SALES SALES
CHARGE* CHARGE
- -------------------------------------------
<S> <C> <C>
Class A Shares 10.57% 17.30%
- -------------------------------------------
Class B Shares 11.40% 16.40%
- -------------------------------------------
Class C Shares 15.27% 16.27%
- -------------------------------------------
MSCI EAFE Index N/A 12.84%
- -------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and 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).
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
ISSUER COUNTRY NET ASSETS
- ---------------------------------- --------- ---------------
<S> <C> <C>
Buderus AG Germany 1.4%
Volkswagen AG Germany 1.3%
Nestle S.A. (Registered) Switzerland 1.0%
Sony Corp. Japan 1.0%
Sulzer AG (Registered) Switzerland 1.0%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SECTORS
VALUE PERCENT OF
SECTOR (000) NET ASSETS
- ----------------------------- --------- -------------
<S> <C> <C>
Capital Equipment $ 13,097 26.5%
Consumer Goods 10,089 20.5%
Finance 6,784 13.8%
Materials 5,300 10.7%
Services 4,739 9.6%
</TABLE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C>
International Magnum International Magnum International Magnum
Fund - Class A Fund - Class B Fund - Class C MSCI EAFE Index
7/1/96 $9,500 $10,000 $10,000 $10,000
6/30/97 11,173 11,140 11,527 11,284
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; the maximum deferred sales charge was
deducted from the value of the investment of $10,000 in Class B and Class C
shares; all recurring fees (including management fees) were deducted; and all
dividends and distributions were reinvested.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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 year ended June 30, 1997, the Fund had a total return exclusive of sales
charge of 17.30% for the Class A shares, 16.40% for the Class B shares and
16.27% for the Class C shares, and a total return with sales charge of 10.57%
for the Class A shares, 11.40% for the Class B shares and 15.27% for the Class C
shares, as compared to a total return of 12.84% for the Morgan Stanley Capital
International (MSCI) EAFE Index (the "Index").
The International Magnum Fund completed its first full year on June 30, 1997.
Overall, the Fund got off to a successful start, outperforming the benchmark
MSCI EAFE Index. Our relative outperformance was attributable to strong stock
selection, particularly in Europe and Japan, as well as to our currency hedging
strategies which protected our investors from the decline in value of several of
the major currencies in which we are invested.
During the Fund's first year, we witnessed several important trends in the
market. First, the European markets experienced an extended rally, buoyed by low
interest rates, devaluing currencies, and a flurry of corporate restructurings.
European companies are increasingly looking at ways to increase shareholder
value, and are using techniques well-known in the U.S. such as spinning off
unprofitable businesses, reducing staffing levels, closing antiquated or
unprofitable
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.
- --------------
64
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
plants and refocusing businesses. The Fund benefited from exposure to many
restructuring companies, as the changes these companies are making have just
begun to be realized in their respective share prices.
The second theme during the past year has been the unfulfilled promise of a
Japanese economic recovery. Over the past few years, the Japanese economy has
been struggling to emerge from its slump while the Japanese banks have been
struggling with various scandals and the threat of deregulation. Although the
past few months have seen clear signs of improvement in the Japanese economy and
in the Japanese market, the recovery is far from robust. As a result of these
two factors, the Fund has held no investments in banks, instead favoring the
blue chip export oriented companies like Sony and NEC that were immune to many
of the gyrations of the local economy. These globally competitive, world class
companies significantly outperformed the broader Japanese market during the past
year and contributed to the Fund's overall outperformance.
Finally, the Asian markets have faced increasingly challenging times, as a
slowdown in exports from the region and recent currency turmoil have wreaked
havoc on several of the markets particularly during the first half of 1997.
Several Southeast Asian currencies, including the Thai baht and Malaysian
ringgit, have recently come under pressure from speculators and have been either
freed or loosened from their ties to the U.S. dollar and/or other currencies. As
a result, these markets, some of which enjoyed strong returns in 1996, fell
precipitously during 1997. In sharp contrast to the majority of the Asian
markets was Hong Kong, which has continued to rally on the back of enthusiasm
surrounding the handover to Chinese control on July 1, 1997. Our Fund has
maintained an overweight in Hong Kong while we have pared back on exposure to
the other Asian nations.
Overall, the markets have performed extremely well over the past year and
particularly through the first half of 1997. Looking ahead, however, we are
increasingly cautious as valuations look extended in the majority of markets
around the world. Nonetheless, we will continue to endeavor to uncover stocks
with value and monitor market conditions to adjust our portfolio of securities
accordingly.
Francine J. Bovich
PORTFOLIO MANAGER
July 1997
------------------
65
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------
COMMON STOCKS (90.1%)
AUSTRALIA (3.0%)
25,927 Amcor Ltd........................................ $ 172
28,800 Broken Hill Proprietary Co., Ltd................. 424
14,100 Commonwealth Bank of Australia................... 170
8,200 Lend Lease Corp. Ltd............................. 174
11,600 National Australia Bank Ltd...................... 166
35,640 News Corp., Ltd.................................. 171
35,200 WMC Ltd.......................................... 222
-------
1,499
-------
AUSTRIA (0.6%)
3,300 Boehler-Uddeholm AG.............................. 256
380 Radex-Heraklith Industriebet AG.................. 16
-------
272
-------
BELGIUM (0.5%)
5,300 G.I.B. Holdings Ltd.............................. 254
-------
DENMARK (1.3%)
6,100 BG Bank A/S...................................... 337
5,740 Unidanmark A/S 'A' (Registered).................. 323
-------
660
-------
FINLAND (1.9%)
(a)7,150 Amer-Yhtymae Oy.................................. 129
4,500 Huhtamaki Oy 'I'................................. 194
550 Kone Oy 'B'...................................... 66
39,200 Merita Ltd. 'A'.................................. 131
25,000 Rautaruukki Oy................................... 262
7,600 Valmet Oy........................................ 131
-------
913
-------
FRANCE (6.4%)
1,000 Alcatel Alsthom.................................. 125
3,100 Banque Nationale de Paris........................ 128
640 Bongrain S.A..................................... 250
2,600 Cie de Saint Gobain.............................. 379
2,900 Elf Aquitaine S.A................................ 313
1,640 Eridania Beghin-Say S.A.......................... 246
1,900 Groupe Danone RFD................................ 314
4,400 Lafarge S.A...................................... 274
5,400 Legris Industries S.A............................ 255
(a)2,500 SGS-Thomson Microelectronics N.V................. 198
3,900 Total S.A. 'B'................................... 394
14,650 Usinor Sacilor................................... 264
-------
3,140
-------
GERMANY (7.1%)
7,100 BASF AG.......................................... 262
6,600 Bayer AG......................................... 254
1,240 Buderus AG....................................... 689
15,500 Gerresheimer Glas AG............................. 260
19,300 Lufthansa AG..................................... 371
220 Mannesmann AG.................................... 98
(a)1,800 Metro AG......................................... 196
5,600 Veba AG.......................................... 316
860 Viag AG.......................................... 393
870 Volkswagen AG.................................... 660
-------
3,499
-------
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------
HONG KONG (3.6%)
35,000 Cheung Kong Holdings Ltd......................... $ 345
45,000 China Resources Enterprises Ltd.................. 221
21,000 Dao Heng Bank Group Ltd.......................... 115
19,000 Henderson Land Development Co., Ltd.............. 169
10,000 Hong Kong & Shanghai Bank Holdings plc........... 301
28,000 Hutchison Whampoa Ltd............................ 242
17,000 New World Development Co., Ltd................... 101
31,000 Shanghai Industrial Holdings Ltd................. 193
9,000 Sun Hung Kai Properties Ltd...................... 108
-------
1,795
-------
ITALY (2.1%)
34,000 Editoriale L'Expresso S.p.A...................... 113
22,300 Marzotto (Gaetano) & Figli S.p.A................. 187
(a)25,300 Olivetti......................................... 7
97,000 Sogefi S.p.A..................................... 245
72,000 Stet Societa Finanziaria Telefonica S.p.A........ 250
125,000 Telecom Italia S.p.A............................. 248
-------
1,050
-------
JAPAN (28.0%)
23,000 Amada Co., Ltd................................... 203
31,000 Asahi Tec Corp................................... 151
14,000 Canon, Inc....................................... 381
10,000 Dai Nippon Printing Co., Ltd..................... 226
40,000 Daicel Chemical Industries Ltd................... 155
15,000 Daifuku Co., Ltd................................. 198
20,000 Daikin Industries Ltd............................ 182
4,190 Family Mart...................................... 206
10,000 Fuji Machine Manufacturing Co.................... 362
9,000 Fuji Photo Film Ltd.............................. 362
15,000 Fujitec Co., Ltd................................. 178
28,000 Fujitsu Ltd...................................... 389
50,000 Furukawa Electric................................ 318
10,000 Hitachi Credit Corp.............................. 194
38,000 Hitachi Ltd...................................... 424
13,000 Inabata & Co..................................... 89
36,000 Kaneka Corp...................................... 226
10,000 Kurita Water Industries.......................... 266
4,700 Kyocera Ltd...................................... 373
18,000 Kyudenko Co., Ltd................................ 152
8,000 Lintec........................................... 146
19,000 Matsushita Electric Industries Ltd............... 383
50,000 Mitsubishi Chemical Corp......................... 163
13,000 Mitsubishi Estate Co., Ltd....................... 188
47,000 Mitsubishi Heavy Industries Ltd.................. 361
14,000 Mitsumi Electric Co., Ltd........................ 334
9,000 Murata Manufacturing Co., Ltd.................... 358
30,000 NEC Corp......................................... 419
13,000 Nifco, Inc....................................... 136
4,000 Nintendo Corp., Ltd.............................. 335
1,000 Nippon Pillar Packing............................ 9
39 Nippon Telegraph & Telephone Corp................ 374
27,000 Nissan Motor Co.................................. 209
12,000 Nissha Printing.................................. 138
30,000 Obayashi Corp.................................... 201
32,000 Ricoh Co., Ltd................................... 419
7,000 Rinnai........................................... 150
5,000 Sangetsu Co., Ltd................................ 105
13,000 Sankyo Co. Ltd................................... 437
</TABLE>
- --------------
66
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
JAPAN (CONT.)
<TABLE>
<C> <S> <C>
25,000 Sanwa Shutter.................................... $ 227
15,000 Sekisui Chemical Co.............................. 152
20,000 Sekisui House Ltd................................ 202
3,000 Shimamura Co., Ltd............................... 107
5,600 Sony Corp........................................ 488
12,000 Sumitomo Marine & Fire Insurance Co.............. 98
18,000 Suzuki Motor Co., Ltd............................ 228
44,000 Taisei Corp., Ltd................................ 204
6,000 TDK Corp......................................... 440
8,500 Tokyo Electron Ltd............................... 407
56,000 Toshiba Corp..................................... 360
13,000 Toyota Motor Corp................................ 383
24,000 Tsubakimoto Chain................................ 147
8,000 Yamaha Corp...................................... 147
12,000 Yamanuchi Pharmaceutical Co...................... 323
-------
13,813
-------
MALAYSIA (1.9%)
73,000 Berjaya Group Bhd................................ 90
16,000 Berjaya Sports Toto Bhd.......................... 75
16,000 Commerce Asset Holding Bhd....................... 42
2,000 Dialog Group Bhd................................. 29
5,000 Edaran Otomobil Nasional Bhd..................... 43
6,000 Genting Bhd...................................... 29
4,000 Lityan Holdings Bhd.............................. 49
17,000 Magnum Corp. Bhd................................. 26
13,000 Malayan Banking Bhd.............................. 136
17,000 Malaysian Resources Corp. Bhd.................... 47
16,000 Rashid Hussain Bhd............................... 101
9,000 Resorts World Bhd................................ 27
40,000 Sime Darby Bhd................................... 133
14,000 United Engineers Ltd............................. 101
-------
928
-------
NETHERLANDS (4.6%)
13,600 ABN Amro Holding N.V............................. 253
2,900 Akzo Nobel N.V................................... 398
8,300 ING Groep N.V.................................... 383
4,200 KLM Royal Dutch Airlines N.V..................... 130
2,400 Koninklijke Bijenkorf Beheer..................... 168
4,700 Koninklijke Van Ommeren N.V...................... 183
12,700 N.V. Koninklijke KNP BT.......................... 289
6,500 Phillips Electronics N.V......................... 466
-------
2,270
-------
NEW ZEALAND (0.2%)
1,840 Fletcher Challenge Forest........................ 3
46,000 Fletcher Challenge Paper......................... 113
-------
116
-------
NORWAY (1.2%)
24,300 Den Norske Bank ASA.............................. 95
25,400 Saga Petroleum ASA 'B'........................... 444
(a)11,800 Storebrand ASA................................... 70
-------
609
-------
SINGAPORE (1.9%)
18,000 Datacraft Asia Ltd............................... 57
6,000 Development Bank of Singapore Ltd. (Foreign)..... 76
52,000 Electronic Resources Ltd......................... 82
<CAPTION>
VALUE
SHARES (000)
<C> <S> <C>
- -------------------------------------------------------------------------
44,000 NatSteel Ltd..................................... $ 112
7,600 Oversea-Chinese Banking Corp., Ltd. (Foreign).... 79
(a)34,000 Pacific Century Regional Development............. 47
10,000 Parkway Holdings Ltd............................. 45
58,000 SM Summit Holdings Ltd........................... 44
5,000 Singapore Press Holdings (Foreign)............... 101
71,000 Super Coffeemix Manufacturing Ltd................ 59
8,000 United Overseas Bank Ltd. (Foreign).............. 82
(a)19,200 Want Want Holdings............................... 64
22,000 Wing Tai Holdings Ltd............................ 63
-------
911
-------
SPAIN (2.9%)
3,900 Banco Bilbao Vizcaya............................. 317
25,100 Iberdrola S.A.................................... 317
13,400 Telefonica de Espana S.A......................... 388
34,400 Uralita S.A...................................... 384
-------
1,406
-------
SWEDEN (3.3%)
5,500 Esselte AB 'B'................................... 129
12,200 Nordbanken AB.................................... 410
3,900 Pharmacia & Upjohn, Inc. Depositary Shares....... 132
6,400 S.K.F. AB 'B'.................................... 166
5,300 Skandia Forsakrings AB........................... 195
9,000 Sparbanken Sverige AB 'A'........................ 200
10,100 Spectra-Physics AB 'A'........................... 182
6,400 Svenska Handelsbanken 'A'........................ 205
-------
1,619
-------
SWITZERLAND (7.1%)
(a)65 Ascom Holding AG (Bearer)........................ 91
(a)110 Baloise Holdings Ltd............................. 262
190 Bobst AG (Bearer)................................ 323
880 Forbo Holding AG (Registered).................... 380
410 Holderbank Financiere Glaris AG, 'B' (Bearer).... 387
390 Nestle S.A. (Registered)......................... 514
163 Novartis AG (Registered)......................... 261
1,080 Oerlikon-Buehrle Holding AG (Registered)......... 127
80 Schindler Holding AG (Participating
Certificates).................................. 100
85 Schindler Holding AG (Registered)................ 109
140 Schweizerische Industrie-Gesellschaft Holding AG
(Registered)................................... 208
550 Sulzer AG (Registered)........................... 471
790 Valora Holding AG (Registered)................... 168
270 Zuerich Versicherungs-Gesellschaft Holdings
(Registered)................................... 107
-------
3,508
-------
UNITED KINGDOM (12.5%)
30,400 Associated British Foods plc..................... 262
29,061 BAT Industries plc............................... 260
19,600 Bank of Scotland................................. 126
26,500 Bass plc......................................... 324
32,500 BG plc........................................... 119
37,400 British Telecommunications plc................... 278
23,050 Burmah Castrol plc............................... 390
55,122 Christian Salvesen plc........................... 259
64,400 Courtaulds Textiles plc.......................... 329
46,000 Grand Metropolitan plc........................... 443
61,300 Imperial Tobacco Group plc....................... 394
</TABLE>
-----------------------
67
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------
<C> <S> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<C> <S> <C>
38,300 John Mowlem & Co. plc............................ $ 79
66,300 Kwik Save Group plc.............................. 334
12,700 Peninsular & Oriental Steam Navigation Co........ 126
5,400 Premier Farnell plc.............................. 42
32,600 Racal Electronics plc............................ 130
31,068 Reckitt & Coleman plc............................ 464
44,097 Royal & Sun Alliance Insurance Group plc......... 326
32,700 Scottish Hydro-Electric plc...................... 226
13,600 Southern Electric plc............................ 100
52,850 Tate & Lyle plc.................................. 393
15,900 Unilever plc..................................... 455
68,600 WPP Group plc.................................... 280
-------
6,139
-------
TOTAL COMMON STOCKS (COST $40,461).............................. 44,401
-------
PREFERRED STOCKS (1.4%)
GERMANY (1.4%)
725 Dyckerhoff AG.................................... 263
3,200 Hornbach Holding AG.............................. 267
340 Suedzucker AG.................................... 182
-------
TOTAL PREFERRED STOCKS (COST $610).............................. 712
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
RIGHTS
<C> <S> <C>
- ------------
RIGHTS (0.0%)
MALAYSIA (0.0%)
(a,d)5,600 Commerce Asset Holdings Bhd., expiring 7/23/97... --
-------
SINGAPORE (0.0%)
(a,d)26,000 Electronic Resources Ltd., expiring 7/21/97...... 17
-------
SWITZERLAND (0.0%)
(a,d)330 Sulzer Media, expiring 7/17/97................... --
-------
TOTAL RIGHTS (COST $0).......................................... 17
-------
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
<C> <S> <C>
- ------------
WARRANTS (0.0%)
MALAYSIA (0.0%)
(a,d)3,500 Commerce Asset Holdings Bhd., expiring 7/23/97... --
(a,d)2,285 Rashid Hussain Bhd., expiring 12/31/02........... --
-------
TOTAL WARRANTS (COST $0)........................................ --
-------
TOTAL FOREIGN SECURITIES (91.5%) (COST $41,071)................. 45,130
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<C> <S> <C>
- -------------------------------------------------------------------------
SHORT-TERM INVESTMENT (17.5%)
REPURCHASE AGREEMENT (17.5%)
$ 8,624 Chase Securities, Inc., 5.70%, dated 6/30/97, due
7/1/97, to be repurchased at $8,625,
collateralized by $9,130 U.S. Treasury Bonds,
5.625%, due 2/15/06, valued at $8,772 (COST
$8,624)........................................ $ 8,624
-------
TOTAL INVESTMENTS IN SECURITIES (109%) (COST $49,695)........... 53,754
-------
FOREIGN CURRENCY (0.3%)
ATS 19 Austrian Schilling............................... 2
BEF 727 Belgian Franc.................................... 20
FRF 564 French Franc..................................... 96
ITL 10,064 Italian Lira..................................... 6
JPY 3,355 Japanese Yen..................................... 29
MYR 3 Malaysian Ringgit................................ 1
ESP 1,299 Spanish Peseta................................... 9
-------
TOTAL FOREIGN CURRENCY (COST $164).............................. 163
-------
TOTAL INVESTMENTS (109.3%) (COST $49,859)....................... 53,917
LIABILITIES IN EXCESS OF OTHER ASSETS (-9.3%)................... (4,585)
-------
NET ASSETS (100%)............................................... $49,332
-------
-------
</TABLE>
- ---------------
(a) -- Non-income producing.
(d) -- Security valued at fair value -- see note A-1 to financial statements.
RFD -- Ranked for Dividend.
- --------------
68
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
INTERNATIONAL MAGNUM FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE INFORMATION:
Under the terms of foreign currency contracts open at June 30, 1997, 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>
$ 45 $ 45 7/02/97 GBP 27 $ 45 $ --
CHF 117 80 8/18/97 $ 80 80 --
CHF 1,203 828 8/18/97 $ 846 846 18
FRF 325 56 8/18/97 $ 56 56 --
NLG 1,442 738 8/18/97 $ 758 758 20
$ 200 200 8/18/97 CHF 285 197 (3)
$ 250 250 8/18/97 NLG 484 248 (2)
JPY 364,376 3,207 8/25/97 $ 3,260 3,260 53
BEF 4,100 115 8/29/97 $ 116 116 1
DEM 1,101 634 8/29/97 $ 643 643 9
DEM 814 469 8/29/97 $ 475 475 6
$ 70 70 8/29/97 BEF 2,481 69 (1)
$ 300 300 8/29/97 DEM 515 297 (3)
FRF 4,501 770 9/15/97 $ 794 794 24
$ 200 200 9/15/97 FRF 1,158 198 (2)
--------- --------- -----
$ 7,962 $ 8,082 $ 120
--------- --------- -----
--------- --------- -----
</TABLE>
- ---------------
BEF -- Belgian Franc
GBP -- British Pound
DEM -- Deutsche Mark
FRF -- French Franc
JPY -- Japanese Yen
NLG -- Netherlands Guilder
CHF -- Swiss Franc
- --------------------------------------------------------------------------------
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION (UNAUDITED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
- ------------------------------------------------------------------------------ --------- -------------
<S> <C> <C>
Capital Equipment............................................................. $ 13,097 26.5%
Consumer Goods................................................................ 10,089 20.5
Finance....................................................................... 6,784 13.8
Materials..................................................................... 5,300 10.7
Services...................................................................... 4,739 9.6
Energy........................................................................ 2,871 5.8
Multi-Industry................................................................ 2,027 4.1
Gold Mines.................................................................... 223 0.5
--------- ---
$ 45,130 91.5%
--------- ---
--------- ---
</TABLE>
-----------------------
69
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Agency Obligations 87.0%
Other 13.0%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INSTRUMENT NET ASSETS
- ------------------------ --------------- --------------
<S> <C> <C>
Federal National
Mortgage Association
Discount Note 5.52%,
7/18/97 Agency 10.5%
Obligation
Federal Home Loan
Mortgage Corporation
Discount Note 5.42%,
7/21/97 Agency 10.5%
Obligation
Federal Home Loan Bank
Discount Note 5.56%,
9/2/97 Agency 10.4%
Obligation
Federal National
Mortgage Association
Discount Note 5.59%,
10/20/97 Agency 10.4%
Obligation
Federal National
Mortgage Association
Debenture Series 97 AD,
5.69%, 11/13/97 Agency 5.3%
Obligation
</TABLE>
The investment objective of the Government Obligations Money Market Fund is to
provide as high a level of current interest income as is consistent with
maintaining liquidity and stability of principal through investing primarily in
short-term U.S. Treasury bills, notes and other obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, and repurchase
agreements related to such obligations. Purchases of portfolio securities must
satisfy strict credit quality standards imposed by the Fund in accordance with
applicable law. 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 current 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 June 30, 1997 were 4.62% and
4.73%, respectively. The seven day yields are not necessarily indicative of
future performance.
The first fiscal quarter began with the market reacting to weaker economic data
than had been released earlier in 1996. Market sentiment shifted to a positive
tone and the market rallied. After a robust second quarter, GDP fell to a rather
anemic 2.2% in the third quarter. As the calendar 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 1997. This led to a slight backup in rates at the
very end of the year.
After 14 months of steady policy, the Federal Reserve increased the target for
the federal funds rate the last week of March. The increase of 25 basis points
to a 5.50% Fed Funds target was expected and in fact was priced into the market.
Federal Reserve Chairman Alan Greenspan presented his view on the economy during
scheduled testimony to Congress earlier in the month of March. Clearly at that
time, he felt that the economy was continuing to accelerate at a rapid pace and
that a preemptive increase in the funds rate was necessary to stave off
inflation.
In the fourth fiscal quarter interest rates reversed the trend of the previous
quarter by declining 25 to 40 basis points across the yield curve. Following the
March increase in the funds rate, the market began to adjust to expectations of
a slower rate of growth in the economy. When the May Federal Open Market
Committee meeting passed with no change in rates, the market took it as a sign
that further rate increases would not be necessary, and the economy seemed to be
slowing on its own.
In managing the Government Obligations Money Market Fund, we work to maximize
the yield but are also conscious of changes in the relative asset size. The Fund
began the fiscal year very short which is how it remained for most of the first
half of the year. In January the weighted average maturity lengthened to 71 days
which was primarily the result of a decrease in assets. The Fund rolled down the
curve until April when it extended to 80 days. This maturity structure was
consistent positioning based on our outlook on the yield curve and relative
value. During the last two months of the 1997 fiscal year, the curve became very
flat. Therefore, for the remainder of the 1997 fiscal year we allowed the Fund
to shorten ending the year with a 44 day weighted average maturity.
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.
- --------------
70
<PAGE>
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
With no protection against possible Federal Reserve tightening now built into
the front of the yield curve, we find less value than we did earlier in the
year. While we agree that the economy is growing more slowly, the unemployment
rate is low and factory utilization high. We remain concerned that tight labor
markets could push inflation higher and the economy could reaccelerate, either
of which would prompt further action from the Federal Reserve. Finally, anchored
by a 5.5% funds rate, the entire curve has flattened, offering less opportunity
to enhance returns by rolling down the curve.
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.
Abigail Jones Feder
PORTFOLIO MANAGER
Ellen D. Harvey
PORTFOLIO MANAGER
Christian G. Roth
PORTFOLIO MANAGER
Scott F. Richard
PORTFOLIO MANAGER
July 1997
------------------
71
<PAGE>
MORGAN STANLEY
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
AGENCY OBLIGATIONS (87.0%)
FEDERAL HOME LOAN BANK DISCOUNT NOTES (15.7%)
$ 5,000 5.42%, 8/14/97................................... $ 4,967
10,000 5.56%, 9/2/97.................................... 9,903
---------
14,870
---------
FEDERAL HOME LOAN MORTGAGE CORPORATION DISCOUNT NOTES
(25.2%)
10,000 5.42%, 7/21/97................................... 9,970
5,000 5.44%, 8/1/97.................................... 4,977
4,000 5.53%, 8/5/97.................................... 3,978
5,000 5.43%, 8/6/97.................................... 4,973
---------
23,898
---------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (46.1%)
DISCOUNT NOTES (40.8%)
5,000 5.53%, 7/2/97.................................... 4,999
10,000 5.52%, 7/18/97................................... 9,974
4,500 5.41%, 7/24/97................................... 4,484
5,000 5.53%, 8/11/97................................... 4,968
4,500 5.42%, 8/28/97................................... 4,461
10,000 5.59%, 10/20/97.................................. 9,828
---------
38,714
---------
DEBENTURE (5.3%)
5,000 5.69%, Series 97 AD, 11/13/97.................... 5,000
---------
TOTAL AGENCY OBLIGATIONS (COST $82,482)...................... 82,482
---------
REPURCHASE AGREEMENT (13.2%)
12,495 Goldman Sachs, 5.82%, dated 6/30/97, due 7/1/97,
to be repurchased at $12,497, collateralized by
$12,450 U.S. Treasury Bonds, 6.875%, due
8/15/25 valued at $12,830 (COST $12,495)....... 12,495
---------
TOTAL INVESTMENTS (100.2%) (COST $94,977).................... 94,977
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.2%)................ (209)
---------
NET ASSETS (100%)............................................ $ 94,768
---------
---------
</TABLE>
- --------------
72
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1997)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Commercial Paper 41.8%
Agency Obligations 2.2%
Certificates of Deposit 22.0%
Variable Rate
Obligations 21.7%
Other 12.3%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS
PERCENT OF
SECURITY INSTRUMENT NET ASSETS
- ----------------- -------------------- --------------
<S> <C> <C>
Student Loan
Marketing
Association
5.42%, 10/30/97 Variable Rate 10.8%
Obligation
Federal Home Loan
Mortgage
Corporation
5.36%, 9/2/97 Variable Rate 10.8%
Obligation
Norwest
Financial, Inc.
5.60%, 7/1/97 Commercial Paper 7.2%
Asset Backed
Capital Finance
5.66%, 7/22/97 Commercial Paper 7.2%
Dun & Bradstreet
Corp. 5.67%,
7/29/97 Commercial Paper 7.2%
</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 current yield and seven day effective yield (which assumes an
annualization of the current yield with all dividends reinvested) for the Fund
as of June 30, 1997 were 4.69% and 4.64%, respectively. As with all money market
funds, the seven day yields are not necessarily indicative of future
performance.
After 14 months of steady policy, the Federal Reserve increased the target for
the Federal Funds rate the last week of the first quarter of 1997. The increase
of 25 basis points to a 5.50% Fed Funds target was expected and in fact was
priced into the market. Federal Reserve Chairman Alan Greenspan presented his
view on the economy during scheduled testimony to Congress earlier in the month
of March. Clearly at that time, he felt that the economy was continuing to
accelerate at a rapid pace and that a preemptive increase in the funds rate was
necessary to stave off inflation.
In the second quarter of 1997, interest rates reversed the trend of the first
quarter by declining 25 to 40 basis points across the yield curve. Following the
March increase in the funds rate, the market began to adjust to expectations of
a slower rate of growth in the economy. When the May Federal Open Market
Committee meeting passed with no change in rates, the market took it as a sign
that further rate increases would not be necessary, and the economy seemed to be
slowing on its own.
We increased the weighted average maturity of the Fund in April when rates were
higher. We then took the opportunity to reduce the overall maturity later in the
second quarter when rates fell. The Fund has been positioned defensively since
this change and ended the first half of 1997 with a weighted average maturity of
37 days.
With no protection against possible Federal Reserve tightening now built into
the front of the yield curve, we find less value than we did earlier in the
year. While we agree that the economy is growing more slowly, the unemployment
rate is low and factory utilization high. We remain concerned that
tight labor markets could push inflation higher and the economy could
reaccelerate, either of which would prompt further action from the Federal
Reserve. Finally, anchored by a 5.50% funds rate, the entire curve has
flattened, offering less opportunity to enhance returns by rolling down the
curve.
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.
------------------
73
<PAGE>
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OVERVIEW (CONT.)
We are pleased to report that the Portfolio 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 Portfolio still holds only
high quality securities with over 90% of assets invested in securities rated
A1+/P1.
Abigail Jones Feder
PORTFOLIO MANAGER
Ellen D. Harvey
PORTFOLIO MANAGER
Christian G. Roth
PORTFOLIO MANAGER
Scott F. Richard
PORTFOLIO MANAGER
July 1997
- --------------
74
<PAGE>
MORGAN STANLEY
MONEY MARKET FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
AGENCY OBLIGATIONS (2.2%)
FEDERAL HOME LOAN MORTGAGE CORPORATION DISCOUNT NOTES
(2.2%)
$ 3,000 5.98%, 4/8/98 (COST $2,995)...................... $ 2,995
---------
CERTFICATES OF DEPOSIT (22.0%)
BANKS (22.0%)
5,000 ABN-AMRO Bank (NY), Yankee, 6.12%, 7/14/97....... 5,000
2,500 ANZ (Delaware), Inc. 5.88%, 10/28/97............. 2,500
5,000 Credit Suisse (First Boston) 6.25%, 4/8/98....... 5,000
5,000 Deutsche Bank AG, Yankee, 5.85%, 3/13/98......... 5,000
2,500 Natwest plc, Yankee, 5.89%, 10/2/97.............. 2,500
5,000 Rabobank Nederland, Yankee, 6.20%, 4/10/98....... 4,998
3,000 Societe Generale Bank 6.16%, 9/8/97.............. 3,000
2,500 Sun Trust Banks 5.85%, 10/22/97.................. 2,500
---------
TOTAL CERTIFICATES OF DEPOSITS (COST $30,498)................ 30,498
---------
COMMERCIAL PAPER (41.8%)
AUTOMOBILES (3.6%)
5,000 Daimler-Benz AG 5.42%, 8/4/97.................... 4,974
---------
FINANCE (31.0%)
10,000 Asset Backed Capital Finance 5.66%, 7/22/97...... 9,967
6,000 Asset Securitization Corp. 5.63%, 7/1/97......... 6,000
6,000 CIT Group Holdings, Inc. 5.54%, 7/28/97.......... 5,975
6,000 John Deere Capital Inc. 5.58%, 7/3/97............ 5,998
10,000 Norwest Financial, Inc. 5.60%, 7/1/97............ 10,000
5,000 UBS Finance (Delaware) 6.20%, 7/1/97............. 5,000
---------
42,940
---------
<CAPTION>
FACE AMORTIZED
AMOUNT COST
(000) (000)
<C> <S> <C>
- ------------------------------------------------------------------------
SERVICES (7.2%)
$ 10,000 Dun & Bradstreet Corp. 5.67%, 7/29/97............ $ 9,956
---------
TOTAL COMMERCIAL PAPER (COST $57,870)........................ 57,870
---------
VARIABLE RATE OBLIGATIONS (21.7%)
FEDERAL HOME LOAN MORTGAGE CORPORATION (10.8%)
(h)15,000 Federal Home Loan Mortgage 5.36%, 9/2/97......... 15,000
---------
STUDENT LOAN MARKETING ASSOCIATION (10.9%)
(h)15,000 Student Loan Marketing Association 5.42%,
10/30/97....................................... 15,002
---------
TOTAL VARIABLE RATE OBLIGATIONS (COST $30,002)............... 30,002
---------
REPURCHASE AGREEMENT (11.8%)
16,375 Goldman Sachs, 5.82%, dated 6/30/97, due 7/1/97,
to be repurchased at $16,378, collateralized by
$16,378 U.S. Treasury Bonds, 11.625%, due
11/15/04 valued at $16,815 (COST $16,375)...... 16,375
---------
TOTAL INVESTMENTS (99.5%) (COST $137,740).................... 137,740
OTHER ASSETS IN EXCESS OF LIABILITIES (0.5%)................. 682
---------
NET ASSETS (100%)............................................ $138,422
---------
---------
</TABLE>
- ---------------
(h) -- Variable or floating rate security -- rate disclosed is as of June 30,
1997.
-----------------------
75
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
JUNE 30, 1997
<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 $ 194,300 $ 9,546 $354,498 $ 83,754 $195,658 $119,718 $ 213,046 $ 67,994 $22,165
Foreign Currency 494 3 3,217 -- -- 147 3,531 -- --
Cash 9 679 -- -- 127 1,438 1,164 271 258
Receivable for:
Investments Sold 10,009 132 4,268 426 368 3,757 2,785 1,932 992
Securities Sold Short -- -- -- -- -- -- -- 2,301 --
Fund Shares Sold 1,974 63 549 2,286 2,176 2,859 1,280 1,315 988
Dividends 416 -- 245 91 48 297 674 54 87
Interest 2 214 -- -- 3,968 1 21 1 3
Security Lending Income 8 -- -- -- -- -- -- -- --
Foreign Withholding Tax Reclaim 53 3 21 -- -- -- 1 -- --
Net Unrealized Gain on Foreign
Currency Exchange Contracts 305 -- -- -- -- -- -- -- --
Deferred Organizational Costs 6 6 5 5 6 7 6 37 21
Due from Broker -- -- -- -- -- -- -- 1,155 --
Receivable from Investment Adviser -- 3 -- -- -- -- -- -- --
Securities, at Value, Held as
Collateral for Securities Loaned 29,822 -- -- -- -- -- -- -- --
Other 3 -- 26 -- 64 -- -- -- --
--------- ------- -------- -------- -------- -------- --------- ---------- -------
Total Assets 237,401 10,649 362,829 86,562 202,415 128,224 222,508 75,060 24,514
--------- ------- -------- -------- -------- -------- --------- ---------- -------
LIABILITIES:
Payable for:
Investments Purchased 15,821 -- 6,159 2,881 3,750 8,067 3,812 5,303 103
Securities Sold Short, at Value
(Proceeds -- $2,301) -- -- -- -- -- -- -- 2,537 --
Fund Shares Redeemed 1,091 6 1,760 1,053 1,354 367 4,210 684 1
Bank Overdraft 9 -- 316 284 -- 298 -- -- --
Dividends Declared -- -- -- -- -- -- -- -- --
Investment Advisory Fees 337 -- 862 96 327 176 472 85 20
Administrative Fees 43 3 73 16 40 28 50 13 5
Custody Fees 75 6 179 8 57 82 265 12 17
Professional Fees 45 27 91 27 49 31 61 22 22
Distribution Fees 211 9 365 77 227 73 201 70 20
Shareholder Reporting Expenses 55 4 151 29 47 12 47 14 7
Directors' Fees and Expenses 5 1 16 2 5 1 5 -- 1
Securities Lending Expense 18 -- -- -- -- -- -- -- --
Filing and Registration Fees 4 -- -- 2 12 11 4 6 2
Deferred Country Tax -- -- 93 -- -- 18 406 -- --
Collateral on Securities Loaned 29,822 -- -- -- -- -- -- -- --
Net Unrealized Loss on Foreign
Currency Exchange Contracts -- 21 78 -- -- -- 29 -- --
Other -- 4 -- -- 59 -- -- 1 --
--------- ------- -------- -------- -------- -------- --------- ---------- -------
Total Liabilities 47,536 81 10,143 4,475 5,927 9,164 9,562 8,747 198
--------- ------- -------- -------- -------- -------- --------- ---------- -------
NET ASSETS $ 189,865 $10,568 $352,686 $ 82,087 $196,488 $119,060 $ 212,946 $ 66,313 $24,316
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
<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 $22,405 $53,754 $ 94,977 $137,740
Foreign Currency -- 163 -- --
Cash -- -- -- --
Receivable for:
Investments Sold 771 94 -- --
Securities Sold Short -- -- -- --
Fund Shares Sold 149 1,197 -- --
Dividends 42 92 -- --
Interest 326 1 38 1,020
Security Lending Income -- -- -- --
Foreign Withholding Tax Reclaim -- 30 -- --
Net Unrealized Gain on Foreign
Currency Exchange Contracts -- 120 -- --
Deferred Organizational Costs 19 29 -- --
Due from Broker -- -- -- --
Receivable from Investment Adviser -- -- 4 69
Securities, at Value, Held as
Collateral for Securities Loaned -- -- -- --
Other -- -- 1 1
------- ------- ---------- --------
Total Assets 23,712 55,480 95,020 138,830
------- ------- ---------- --------
LIABILITIES:
Payable for:
Investments Purchased 709 5,356 -- --
Securities Sold Short, at Value
(Proceeds -- $2,301) -- -- -- --
Fund Shares Redeemed 176 417 -- --
Bank Overdraft 183 225 -- --
Dividends Declared -- -- 94 149
Investment Advisory Fees 12 12 -- --
Administrative Fees 5 11 9 12
Custody Fees 7 44 4 9
Professional Fees 22 25 44 56
Distribution Fees 25 45 66 114
Shareholder Reporting Expenses 4 6 26 48
Directors' Fees and Expenses -- -- 4 7
Securities Lending Expense -- -- -- --
Filing and Registration Fees 2 7 -- --
Deferred Country Tax -- -- -- --
Collateral on Securities Loaned -- -- -- --
Net Unrealized Loss on Foreign
Currency Exchange Contracts -- -- -- --
Other -- -- 5 13
------- ------- ---------- --------
Total Liabilities 1,145 6,148 252 408
------- ------- ---------- --------
NET ASSETS $22,567 $49,332 $ 94,768 $138,422
------- ------- ---------- --------
------- ------- ---------- --------
</TABLE>
- ------------------
76
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
JUNE 30, 1997 (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 $ 12 $ 1 $ 22 $ 5 $ 14 $ 7 $ 16 $ 4 $ 2
Paid in Capital in Excess of Par 147,222 10,700 327,144 63,598 173,493 96,171 181,049 59,979 20,569
Undistributed (Distributions in
Excess of) Net Investment Income 2,666 (63) (1,153) (1) 311 (11) (659) -- 55
Accumulated (Distributions in
Excess of) Net Realized Gain
(Loss) 7,878 48 (8,456) 5,783 8,928 9,027 12,215 2,851 1,858
Unrealized Appreciation
(Depreciation) on Investments and
Foreign Currency Translations** 32,087 (118) 35,129 12,702 13,742 13,866 20,325 3,479 1,832
--------- ------- -------- -------- -------- -------- --------- ---------- -------
NET ASSETS $ 189,865 $10,568 $352,686 $ 82,087 $196,488 $119,060 $ 212,946 $ 66,313 $24,316
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
CLASS A SHARES:
Net Assets $ 72,704 $ 6,407 $175,440 $ 34,331 $ 76,439 $ 84,401 $ 119,022 $ 22,521 $14,827
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 4,388 644 10,554 1,951 5,362 4,855 8,838 1,326 905
Net Asset Value and Redemption
Price Per Share $ 16.57 $ 9.95 $ 16.62 $ 17.59 $ 14.26 $ 17.39 $ 13.47 $ 16.98 $ 16.39
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
Maximum Sales Charge 5.75% 4.75% 5.75% 5.75% 4.75% 5.75% 5.75% 5.75% 5.75%
Maximum Offering Price Per Share
(Net Asset Value Per Share X
100-maximum sales charge) $ 17.58 $ 10.45 $ 17.64 $ 18.66 $ 14.97 $ 18.45 $ 14.29 $ 18.02 $ 17.39
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
CLASS B SHARES:
Net Assets $ 38,962 $ 1,716 $ 62,786 $ 15,331 $ 78,340 $ 14,314 $ 35,966 $ 34,382 $ 7,120
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 2,412 173 3,884 872 5,515 842 2,716 2,041 435
Net Asset Value and Offering Price
Per Share*** $ 16.15 $ 9.91 $ 16.17 $ 17.59 $ 14.20 $ 16.99 $ 13.24 $ 16.85 $ 16.36
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
CLASS C SHARES:
Net Assets $ 78,199 $ 2,445 $114,460 $ 32,425 $ 41,709 $ 20,345 $ 57,958 $ 9,410 $ 2,369
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 4,814 247 7,093 1,844 2,935 1,196 4,372 559 145
Net Asset Value and Offering Price
Per Share*** $ 16.24 $ 9.90 $ 16.14 $ 17.59 $ 14.21 $ 17.01 $ 13.26 $ 16.83 $ 16.36
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
Investments at Cost, Including
Foreign Currency $ 162,983 $ 9,644 $322,413 $ 71,052 $181,907 $105,977 $ 195,840 $ 64,279 $20,333
--------- ------- -------- -------- -------- -------- --------- ---------- -------
--------- ------- -------- -------- -------- -------- --------- ---------- -------
<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 $ 18 $ 3 $ 95 $ 139
Paid in Capital in Excess of Par 21,471 44,357 94,764 138,382
Undistributed (Distributions in
Excess of) Net Investment Income 38 767 -- --
Accumulated (Distributions in
Excess of) Net Realized Gain
(Loss) 245 21 (91) (99)
Unrealized Appreciation
(Depreciation) on Investments and
Foreign Currency Translations** 795 4,184 -- --
------- ------- ---------- --------
NET ASSETS $22,567 $49,332 $ 94,768 $138,422
------- ------- ---------- --------
------- ------- ---------- --------
CLASS A SHARES:
Net Assets $ 8,980 $21,961 $ 94,768 $138,422
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 698 1,579 94,859 138,521
Net Asset Value and Redemption
Price Per Share $ 12.86 $ 13.91 $ 1.00 $ 1.00
------- ------- ---------- --------
------- ------- ---------- --------
Maximum Sales Charge 4.75% 5.75% -- --
Maximum Offering Price Per Share
(Net Asset Value Per Share X
100-maximum sales charge) $ 13.50 $ 14.76 -- --
------- ------- ---------- --------
------- ------- ---------- --------
CLASS B SHARES:
Net Assets $ 8,617 $18,215 -- --
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 670 1,317 -- --
Net Asset Value and Offering Price
Per Share*** $ 12.86 $ 13.84 -- --
------- ------- ---------- --------
------- ------- ---------- --------
CLASS C SHARES:
Net Assets $ 4,970 $ 9,156 -- --
Shares Issued and Outstanding
($.001 par value) (Authorized
2,625,000,000) 386 662 -- --
Net Asset Value and Offering Price
Per Share*** $ 12.86 $ 13.83 -- --
------- ------- ---------- --------
------- ------- ---------- --------
Investments at Cost, Including
Foreign Currency $21,610 $49,859 $ 94,977 $137,740
------- ------- ---------- --------
------- ------- ---------- --------
</TABLE>
- ---------------
* Includes repurchase agreements aggregating $8,897,000, $15,266,000,
2,523,000, $3,146,000, $4,769,000, $9,936,000, $5,014,000, $665,000,
$615,000, $8,624,000, $12,495,000 and $16,375,000 for Global Equity
Allocation 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, respectively.
** Net of accrual for country tax of U.S. $93,000 for Asian Growth Fund
and $401,000 for Emerging Markets Fund.
*** Redemption price may be subject to a contingent deferred sales charge.
-----------------------
77
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
GLOBAL GLOBAL WORLDWIDE U.S.
EQUITY FIXED ASIAN AMERICAN HIGH LATIN EMERGING AGGRESSIVE REAL
ALLOCATION 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>
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 3,489 $ -- $ 6,912 $ 1,309 $ 170 $ 893 $ 3,086 $ 295 $ 476
Interest 259 632 340 82 16,119 106 467 116 78
Security Lending 107 -- -- -- -- -- -- -- --
Less Foreign Taxes Withheld (254) (10) (963) -- -- -- (160) -- --
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Total Income 3,601 622 6,289 1,391 16,289 999 3,393 411 554
---------- -------- -------- -------- --------- -------- -------- ---------- --------
EXPENSES:
Investment Advisory Fees 1,557 79 4,057 432 1,086 572 1,955 245 145
Less: Fees Waived (293) (79) -- (135) -- (248) (331) (204) (145)
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Investment Advisory Fees 1,264 -- 4,057 297 1,086 324 1,624 41 --
Administrative Fees 473 34 1,080 139 388 151 445 76 42
Custody Fees 224 17 682 18 77 191 581 34 44
Filing and Registration Fees 5 -- 1 4 13 11 6 8 2
Directors' Fees and Expenses 8 2 21 3 7 3 9 2 2
Professional Fees 95 30 207 38 84 45 107 28 21
Shareholder Reports 92 11 262 47 77 20 76 30 4
Security Lending Fees 23 -- -- -- -- -- -- -- --
Dividend Expense for Securities
Sold Short -- -- -- -- -- -- -- 1 --
Distribution Fees
Class A 160 16 509 58 152 81 229 28 19
Class B 238 16 602 43 491 45 180 105 45
Class C 679 26 1,424 233 351 87 465 55 22
Amortization of Organizational
Costs 37 37 31 46 52 51 52 78 49
Blue Sky Fees 44 35 69 36 39 40 47 36 30
Country Tax Expense 3 -- -- -- -- 57 58 -- --
Interest Expense 1 3 64 -- 23 18 37 21 --
Other 10 3 28 5 14 6 15 3 2
Expenses Reimbursed by Adviser -- (44) -- -- -- -- -- -- (8)
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Expenses 3,356 186 9,037 967 2,854 1,130 3,931 546 274
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Investment Income (Loss) 245 436 (2,748) 424 13,435 (131) (538) (135) 280
---------- -------- -------- -------- --------- -------- -------- ---------- --------
NET REALIZED GAIN (LOSS) ON:
Investments 8,119 113 (4,389) 6,719 10,103 14,026 15,276 3,674 2,077
Foreign Currency Transactions 5,051 (2) (415) -- (741) (45) (283) -- --
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Realized Gain (Loss) 13,170 111 (4,804) 6,719 9,362 13,981 14,993 3,674 2,077
---------- -------- -------- -------- --------- -------- -------- ---------- --------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 18,089 (60) (2,600) 7,544 14,410 10,222 7,857 3,365 1,622
Foreign Currency Translations (838) (24) (19) -- 2 (22) (382) -- --
Securities Sold Short -- -- -- -- -- -- -- (160) --
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Change in Unrealized
Appreciation/ Depreciation 17,251 (84) (2,619) 7,544 14,412 10,200 7,475 3,205 1,622
---------- -------- -------- -------- --------- -------- -------- ---------- --------
Net Realized Gain (Loss) and Change
in Unrealized
Appreciation/Depreciation 30,421 27 (7,423) 14,263 23,774 24,181 22,468 6,879 3,699
---------- -------- -------- -------- --------- -------- -------- ---------- --------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 30,666 $ 463 $(10,171) $ 14,687 $ 37,209 $ 24,050 $ 21,930 $ 6,744 $ 3,979
---------- -------- -------- -------- --------- -------- -------- ---------- --------
---------- -------- -------- -------- --------- -------- -------- ---------- --------
<CAPTION>
GOVERNMENT
HIGH INTERNATIONAL MONEY MONEY
YIELD MAGNUM MARKET MARKET
FUND FUND FUND FUND
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
- -----------------------------------
INVESTMENT INCOME:
Dividends $ 54 $ 498 $ -- $ --
Interest 1,454 175 6,529 10,791
Security Lending -- -- -- --
Less Foreign Taxes Withheld -- (65) -- --
-------- ------ ---------- --------
Total Income 1,508 608 6,529 10,791
-------- ------ ---------- --------
EXPENSES:
Investment Advisory Fees 113 168 542 882
Less: Fees Waived (113) (168) (392) (579)
-------- ------ ---------- --------
Net Investment Advisory Fees -- -- 150 303
Administrative Fees 42 73 123 194
Custody Fees 17 97 25 46
Filing and Registration Fees 2 -- -- --
Directors' Fees and Expenses 2 2 1 5
Professional Fees 21 39 86 122
Shareholder Reports 1 6 23 45
Security Lending Fees -- -- -- --
Dividend Expense for Securities
Sold Short -- -- -- --
Distribution Fees
Class A 13 21 604 981
Class B 57 68 -- --
Class C 43 58 -- --
Amortization of Organizational
Costs 49 68 41 41
Blue Sky Fees 26 36 60 103
Country Tax Expense -- -- -- --
Interest Expense -- 1 -- --
Other 1 2 41 92
Expenses Reimbursed by Adviser (12) (33) -- --
-------- ------ ---------- --------
Net Expenses 262 438 1,154 1,932
-------- ------ ---------- --------
Net Investment Income (Loss) 1,246 170 5,375 8,859
-------- ------ ---------- --------
NET REALIZED GAIN (LOSS) ON:
Investments 312 33 8 13
Foreign Currency Transactions -- 737 -- --
-------- ------ ---------- --------
Net Realized Gain (Loss) 312 770 8 13
-------- ------ ---------- --------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 881 4,060 -- --
Foreign Currency Translations -- 124 -- --
Securities Sold Short -- -- -- --
-------- ------ ---------- --------
Change in Unrealized
Appreciation/ Depreciation 881 4,184 -- --
-------- ------ ---------- --------
Net Realized Gain (Loss) and Change
in Unrealized
Appreciation/Depreciation 1,193 4,954 8 13
-------- ------ ---------- --------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 2,439 $ 5,124 $ 5,383 $ 8,872
-------- ------ ---------- --------
-------- ------ ---------- --------
</TABLE>
- --------------
78
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>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 245 $ 364
Net Realized Gain 13,170 11,649
Change in Unrealized
Appreciation/Depreciation 17,251 9,778
------------- -------------
Net Increase in Net Assets from
Operations 30,666 21,791
------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (2,358) (1,295)
Class B (759) (69)
Class C (2,093) (1,106)
------------- -------------
(5,210) (2,470)
------------- -------------
Net Realized Gain:
Class A (2,101) (1,591)
Class B (751) (96)
Class C (2,262) (1,624)
------------- -------------
(5,114) (3,311)
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (10,324) (5,781)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 54,525 58,409
Distributions Reinvested 9,826 5,268
Redeemed (36,345) (21,216)
------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 28,006 42,461
------------- -------------
Total Increase in Net Assets 48,348 58,471
NET ASSETS -- Beginning of Year 141,517 83,046
------------- -------------
NET ASSETS -- End of Year (Including
undistributed net investment income
of $2,666 and $2,710, respectively) $ 189,865 $ 141,517
------------- -------------
------------- -------------
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,091 1,702
Distributions Reinvested 293 197
Redeemed (1,314) (960)
------------- -------------
Net Increase in Class A Shares
Outstanding 70 939
------------- -------------
------------- -------------
Dollars:
Subscribed $ 16,569 $ 23,872
Distributions Reinvested 4,157 2,639
Redeemed (19,605) (13,331)
------------- -------------
Net Increase $ 1,121 $ 13,180
------------- -------------
------------- -------------
Class B:
---------------------
Shares:
Subscribed 1,444 1,017
Distributions Reinvested 106 12
Redeemed (160) (7)
------------- -------------
Net Increase in Class B Shares
Outstanding 1,390 1,022
------------- -------------
------------- -------------
Dollars:
Subscribed $ 21,138 $ 14,112
Distributions Reinvested 1,475 158
Redeemed (2,336) (100)
------------- -------------
Net Increase $ 20,277 $ 14,170
------------- -------------
------------- -------------
Class C:
---------------------
Shares:
Subscribed 1,160 1,482
Distributions Reinvested 300 186
Redeemed (995) (575)
------------- -------------
Net Increase in Class C Shares
Outstanding 465 1,093
------------- -------------
------------- -------------
Dollars:
Subscribed $ 16,818 $ 20,425
Distributions Reinvested 4,194 2,471
Redeemed (14,404) (7,785)
------------- -------------
Net Increase $ 6,608 $ 15,111
------------- -------------
------------- -------------
- -------------------------------------------------------------------
</TABLE>
-----------------------
79
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>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 436 $ 772
Net Realized Gain 111 489
Change in Unrealized
Appreciation/Depreciation (84) (513)
------- -------------
Net Increase in Net Assets
Resulting from Operations 463 748
------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (218) (771)
Class B (46) (21)
Class C (74) (399)
In Excess of Net Investment Income:
Class A (41) (23)
Class B (9) (1)
Class C (14) (12)
------- -------------
Net Decrease in Net Assets
Resulting from Distributions (402) (1,227)
------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 4,760 8,720
Distributions Reinvested 335 676
Redeemed (6,304) (14,258)
------- -------------
Net Decrease in Net Assets
Resulting from Capital Share
Transactions (1,209) (4,862)
------- -------------
Total Decrease in Net Assets (1,148) (5,341)
NET ASSETS -- Beginning of Year 11,716 17,057
------- -------------
NET ASSETS -- End of Year (Including
distributions in excess of net
investment income of $(63) and
$(36), respectively) $ 10,568 $ 11,716
------- -------------
------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
--------------------
Shares:
Subscribed 256 589
Distributions Reinvested 22 50
Redeemed (382) (975)
------- -------------
Net Decrease in Class A Shares
Outstanding (104) (336)
------- -------------
------- -------------
Dollars:
Subscribed $ 2,529 $ 5,929
Distributions Reinvested 225 507
Redeemed (3,839) (9,791)
------- -------------
Net Decrease $ (1,085) $ (3,355)
------- -------------
------- -------------
Class B:
--------------------
Shares:
Subscribed 100 150
Distributions Reinvested 4 1
Redeemed (76) (6)
------- -------------
Net Increase in Class B Shares
Outstanding 28 145
------- -------------
------- -------------
Dollars:
Subscribed $ 999 $ 1,496
Distributions Reinvested 41 14
Redeemed (758) (63)
------- -------------
Net Increase $ 282 $ 1,447
------- -------------
------- -------------
Class C:
--------------------
Shares:
Subscribed 123 130
Distributions Reinvested 7 15
Redeemed (170) (443)
------- -------------
Net Decrease in Class C Shares
Outstanding (40) (298)
------- -------------
------- -------------
Dollars:
Subscribed $ 1,232 $ 1,295
Distributions Reinvested 69 155
Redeemed (1,707) (4,404)
------- -------------
Net Decrease $ (406) $ (2,954)
------- -------------
------- -------------
- -----------------------------------------------------------------------
</TABLE>
- -----------
80
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>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment (Loss) $ (2,748) $ (1,844)
Net Realized Gain (Loss) (4,804) 5,364
Change in Unrealized
Appreciation/Depreciation (2,619) 9,465
----------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Operations (10,171) 12,985
----------------- -------------
DISTRIBUTIONS:
Net Realized Gain:
Class A (33) --
Class B (10) --
Class C (24) --
In Excess of Net Realized Gain:
Class A (4,110) --
Class B (1,274) --
Class C (3,072) --
----------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (8,523) --
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 114,562 241,482
Distributions Reinvested 8,035 --
Redeemed (220,149) (103,699)
----------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Capital
Share Transactions (97,552) 137,783
----------------- -------------
Total Increase (Decrease) in Net
Assets (116,246) 150,768
NET ASSETS -- Beginning of Year 468,932 318,164
----------------- -------------
NET ASSETS -- End of Year (Including
net investment loss of $(1,153) and
$(160), respectively) $ 352,686 $ 468,932
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 4,724 7,522
Distributions Reinvested 243 --
Redeemed (8,877) (3,936)
----------------- -------------
Net Increase (Decrease) in Class A
Shares Outstanding (3,910) 3,586
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 77,015 $ 127,388
Distributions Reinvested 3,930 --
Redeemed (144,501) (65,894)
----------------- -------------
Net Increase (Decrease) $ (63,556) $ 61,494
----------------- -------------
Class B:
---------------------
Shares:
Subscribed 1,466 3,225
Distributions Reinvested 77 --
Redeemed (803) (81)
----------------- -------------
Net Increase in Class B Shares
Outstanding 740 3,144
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 23,406 $ 54,005
Distributions Reinvested 1,210 --
Redeemed (12,628) (1,375)
----------------- -------------
Net Increase $ 11,988 $ 52,630
----------------- -------------
----------------- -------------
Class C:
---------------------
Shares:
Subscribed 883 3,629
Distributions Reinvested 184 --
Redeemed (3,989) (2,229)
----------------- -------------
Net Increase (Decrease) in Class C
Shares Outstanding (2,922) 1,400
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 14,140 $ 60,089
Distributions Reinvested 2,895 --
Redeemed (63,019) (36,430)
----------------- -------------
Net Increase (Decrease) $ (45,984) $ 23,659
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
</TABLE>
-----------------------
81
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>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 424 $ 666
Net Realized Gain 6,719 2,783
Change in Unrealized
Appreciation/Depreciation 7,544 3,203
------------- -------------
Net Increase in Net Assets
Resulting from Operations 14,687 6,652
------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (309) (443)
Class B (25) (17)
Class C (133) (209)
In Excess of Net Investment Income:
Class A (1) (12)
Class B -- (1)
Class C -- (10)
------------- -------------
(468) (692)
------------- -------------
Net Realized Gain:
Class A (1,555) (331)
Class B (209) (20)
Class C (1,482) (252)
------------- -------------
(3,246) (603)
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (3,714) (1,295)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 38,027 18,813
Distributions Reinvested 3,292 900
Redeemed (13,557) (16,260)
------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 27,762 3,453
------------- -------------
Total Increase in Net Assets 38,735 8,810
NET ASSETS -- Beginning of Year 43,352 34,542
------------- -------------
NET ASSETS -- End of Year (Including
distributions in excess of net
investment income of $(1) and
$(23), respectively) $ 82,087 $ 43,352
------------- -------------
------------- -------------
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,025 515
Distributions Reinvested 119 42
Redeemed (538) (816)
------------- -------------
Net Increase (Decrease) in Class A
Shares Outstanding 606 (259)
------------- -------------
------------- -------------
Dollars:
Subscribed $ 16,463 $ 7,053
Distributions Reinvested 1,785 573
Redeemed (8,501) (11,471)
------------- -------------
Net Increase (Decrease) $ 9,747 $ (3,845)
------------- -------------
------------- -------------
Class B:
---------------------
Shares:
Subscribed 714 174
Distributions Reinvested 15 3
Redeemed (27) (7)
------------- -------------
Net Increase in Class B Shares
Outstanding 702 170
------------- -------------
------------- -------------
Dollars:
Subscribed $ 11,773 $ 2,376
Distributions Reinvested 228 36
Redeemed (420) (93)
------------- -------------
Net Increase $ 11,581 $ 2,319
------------- -------------
------------- -------------
Class C:
---------------------
Shares:
Subscribed 623 685
Distributions Reinvested 85 21
Redeemed (312) (334)
------------- -------------
Net Increase in Class C Shares
Outstanding 396 372
------------- -------------
------------- -------------
Dollars:
Subscribed $ 9,791 $ 9,384
Distributions Reinvested 1,279 291
Redeemed (4,636) (4,696)
------------- -------------
Net Increase $ 6,434 $ 4,979
------------- -------------
------------- -------------
- -------------------------------------------------------------------
</TABLE>
- -----------
82
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>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 13,435 $ 8,304
Net Realized Gain 9,362 4,060
Change in Unrealized Appreciation
/Depreciation 14,412 (637)
------------- -------------
Net Increase in Net Assets
Resulting from Operations 37,209 11,727
------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A (5,678) (3,806)
Class B (4,269) (1,176)
Class C (3,020) (2,325)
------------- -------------
(12,967) (7,307)
------------- -------------
Realized Gain:
Class A (2,320) --
Class B (1,708) --
Class C (1,293) --
------------- -------------
(5,321) --
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (18,288) (7,307)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 133,028 103,978
Distributions Reinvested 11,818 3,981
Redeemed (63,040) (43,317)
------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 81,806 64,642
------------- -------------
Total Increase in Net Assets 100,727 69,062
NET ASSETS -- Beginning of Year 95,761 26,699
------------- -------------
NET ASSETS -- End of Year (Including
undistributed net investment income
of $311 and $1,157, respectively) $ 196,488 $ 95,761
------------- -------------
------------- -------------
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 5,082 4,713
Distributions Reinvested 423 190
Redeemed (3,469) (2,858)
------------- -------------
Net Increase in Class A Shares
Outstanding 2,036 2,045
------------- -------------
------------- -------------
Dollars:
Subscribed $ 67,886 $ 56,635
Distributions Reinvested 5,651 2,294
Redeemed (46,537) (34,479)
------------- -------------
Net Increase $ 27,000 $ 24,450
------------- -------------
------------- -------------
Class B:
---------------------
Shares:
Subscribed 3,787 2,125
Distributions Reinvested 246 44
Redeemed (622) (65)
------------- -------------
Net Increase in Class B Shares
Outstanding 3,411 2,104
------------- -------------
------------- -------------
Dollars:
Subscribed $ 50,939 $ 25,745
Distributions Reinvested 3,287 538
Redeemed (8,415) (797)
------------- -------------
Net Increase $ 45,811 $ 25,486
------------- -------------
------------- -------------
Class C:
---------------------
Shares:
Subscribed 1,057 1,792
Distributions Reinvested 217 95
Redeemed (596) (656)
------------- -------------
Net Increase in Class C Shares
Outstanding 678 1,231
------------- -------------
------------- -------------
Dollars:
Subscribed $ 14,203 $ 21,598
Distributions Reinvested 2,880 1,149
Redeemed (8,088) (8,041)
------------- -------------
Net Increase $ 8,995 $ 14,706
------------- -------------
------------- -------------
- -------------------------------------------------------------------
</TABLE>
-----------------------
83
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>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (131) $ 163
Net Realized Gain 13,981 752
Change in Unrealized
Appreciation/Depreciation 10,200 5,112
----------------- -------------
Net Increase in Net Assets
Resulting from Operations 24,050 6,027
----------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A -- (18)
In Excess of Net Investment Income:
Class A (117) --
Class B (17) --
Class C (13) --
----------------- -------------
(147) (18)
----------------- -------------
Net Realized Gain:
Class A (2,192) --
Class B (359) --
Class C (727) --
----------------- -------------
(3,278) --
----------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (3,425) (18)
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 114,111 19,885
Distributions Reinvested 3,304 15
Redeemed (46,502) (10,130)
----------------- -------------
Net Increase in Net Assets
Resulitng from Capital Share
Transactions 70,913 9,770
----------------- -------------
Total Increase in Net Assets 91,538 15,779
NET ASSETS -- Beginning of Year 27,522 11,743
----------------- -------------
NET ASSETS -- End of Year (Including
undistributed (distribution in
excess of) net investment income of
$(11) and $132, respectively) $ 119,060 $ 27,522
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 6,162 1,373
Distributions Reinvested 187 1
Redeemed (2,975) (737)
----------------- -------------
Net Increase in Class A Shares
Outstanding 3,374 637
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 90,337 $ 14,772
Distributions Reinvested 2,243 15
Redeemed (41,558) (7,673)
----------------- -------------
Net Increase $ 51,022 $ 7,114
----------------- -------------
----------------- -------------
Class B:
---------------------
Shares:
Subscribed 752 169
Distributions Reinvested 30 --
Redeemed (104) (5)
----------------- -------------
Net Increase in Class B Shares
Outstanding 678 164
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 11,139 $ 1,858
Distributions Reinvested 353 --
Redeemed (1,385) (52)
----------------- -------------
Net Increase $ 10,107 $ 1,806
----------------- -------------
----------------- -------------
Class C:
---------------------
Shares:
Subscribed 856 316
Distributions Reinvested 60 --
Redeemed (266) (224)
----------------- -------------
Net Increase in Class C Shares
Outstanding 650 92
----------------- -------------
----------------- -------------
Dollars:
Subscribed $ 12,635 $ 3,255
Distributions Reinvested 708 --
Redeemed (3,559) (2,405)
----------------- -------------
Net Increase $ 9,784 $ 850
----------------- -------------
----------------- -------------
- -----------------------------------------------------------------------
</TABLE>
- -----------
84
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>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (538) $ 465
Net Realized Gain (Loss) 14,993 (518)
Change in Unrealized
Appreciation/Depreciation 7,475 14,532
------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Operations 21,930 14,479
------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A -- (142)
In Excess of Net Investment Income:
Class A (291) --
Class B (52) --
Class C (44) --
------------- -------------
(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 133,953 141,283
Distributions Reinvested 1,855 133
Redeemed (111,716) (35,217)
------------- -------------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 24,092 106,199
------------- -------------
Total Increase in Net Assets 44,079 120,531
NET ASSETS -- Beginning of Year 168,867 48,336
------------- -------------
NET ASSETS -- End of Year (Including
undistributed (distributions in
excess of) net investment income of
$(659) and $306, respectively.) $ 212,946 $ 168,867
------------- -------------
------------- -------------
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 7,637 9,551
Distributions Reinvested 104 13
Redeemed (8,424) (2,502)
------------- -------------
Net Increase (Decrease) in Class A
Shares Outstanding (683) 7,062
------------- -------------
------------- -------------
Dollars:
Subscribed $ 89,680 $ 106,764
Distributions Reinvested 1,103 131
Redeemed (96,827) (27,528)
------------- -------------
Net Increase (Decrease) $ (6,044) $ 79,367
------------- -------------
------------- -------------
Class B:
---------------------
Shares:
Subscribed 2,028 883
Distributions Reinvested 20 --
Redeemed (205) (10)
------------- -------------
Net Increase in Class B Shares
Outstanding 1,843 873
------------- -------------
------------- -------------
Dollars:
Subscribed $ 23,982 $ 9,848
Distributions Reinvested 223 --
Redeemed (2,355) (116)
------------- -------------
Net Increase $ 21,850 $ 9,732
------------- -------------
------------- -------------
Class C:
---------------------
Shares:
Subscribed 1,753 2,245
Distributions Reinvested 51 --
Redeemed (1,086) (703)
------------- -------------
Net Increase in Class C Shares
Outstanding 718 1,542
------------- -------------
------------- -------------
Dollars:
Subscribed $ 20,292 $ 24,671
Distributions Reinvested 528 2
Redeemed (12,534) (7,573)
------------- -------------
Net Increase $ 8,286 $ 17,100
------------- -------------
------------- -------------
- -------------------------------------------------------------------
</TABLE>
-----------------------
85
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>
YEAR ENDED JANUARY 2, 1996* TO
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income (Loss) $ (135) $ 27
Net Realized Gain 3,674 943
Change in Unrealized
Appreciation/Depreciation 3,205 274
------- -------
Net Increase in Net Assets
Resulting from Operations 6,744 1,244
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (16) (17)
Class B (5) (6)
Class C (5) (7)
------- -------
(26) (30)
------- -------
Net Realized Gain:
Class A (711) --
Class B (452) --
Class C (439) --
------- -------
(1,602) --
------- -------
Net Decrease in Net Assets
Resulting from Distributions (1,628) (30)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 57,588 9,793
Distributions Reinvested 1,037 10
Redeemed (7,818) (627)
------- -------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 50,807 9,176
------- -------
Total Increase in Net Assets 55,923 10,390
NET ASSETS -- Beginning of Year 10,390 --
------- -------
NET ASSETS -- End of Year $ 66,313 $ 10,390
------- -------
------- -------
- -----------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,309 410
Distributions Reinvested 35 1
Redeemed (392) (37)
------- -------
Net Increase in Class A Shares
Outstanding 952 374
------- -------
------- -------
Dollars:
Subscribed $ 20,966 $ 5,351
Distributions Reinvested 522 9
Redeemed (6,373) (479)
------- -------
Net Increase $ 15,115 $ 4,881
------- -------
------- -------
Class B:
---------------------
Shares:
Subscribed 1,905 170
Distributions Reinvested 18 --
Redeemed (51) (1)
------- -------
Net Increase in Class B Shares
Outstanding 1,872 169
------- -------
------- -------
Dollars:
Subscribed $ 30,344 $ 2,086
Distributions Reinvested 262 --
Redeemed (818) (11)
------- -------
Net Increase $ 29,788 $ 2,075
------- -------
------- -------
Class C:
---------------------
Shares:
Subscribed 404 190
Distributions Reinvested 17 --
Redeemed (42) (10)
------- -------
Net Increase in Class C Shares
Outstanding 379 180
------- -------
------- -------
Dollars:
Subscribed $ 6,278 $ 2,356
Distributions Reinvested 252 1
Redeemed (626) (137)
------- -------
Net Increase $ 5,904 $ 2,220
------- -------
------- -------
- -----------------------------------------------------------------------------
* 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
- --------------------------------------------------------------------------------
U.S. REAL ESTATE FUND
<TABLE>
<CAPTION>
YEAR ENDED MAY 1, 1996* TO
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 280 $ 32
Net Realized Gain 2,077 --
Change in Unrealized
Appreciation/Depreciation 1,622 210
------------- ------
Net Increase in Net Assets
Resulting from Operations 3,979 242
------------- ------
DISTRIBUTIONS:
Net Investment Income:
Class A (162) (5)
Class B (57) (4)
Class C (31) (4)
------------- ------
(250) (13)
------------- ------
Net Realized Gain:
Class A (100) --
Class B (71) --
Class C (48) --
------------- ------
(219) --
------------- ------
Net Decrease in Net Assets
Resulting from Distributions (469) (13)
------------- ------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 23,984 5,578
Distributions Reinvested 268 1
Redeemed (9,254) --
------------- ------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 14,998 5,579
------------- ------
Total Increase in Net Assets 18,508 5,808
NET ASSETS -- Beginning of Year 5,808 --
------------- ------
NET ASSETS -- End of Year (Including
undistributed net investment income
of $55 and $19, respectively.) $ 24,316 $ 5,808
------------- ------
------------- ------
- ---------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,003 146
Distributions Reinvested 13 --
Redeemed (257) --
------------- ------
Net Increase in Class A Shares
Outstanding 759 146
------------- ------
------------- ------
Dollars:
Subscribed $ 15,148 $ 1,753
Distributions Reinvested 187 1
Redeemed (3,998) --
------------- ------
Net Increase $ 11,337 $ 1,754
------------- ------
------------- ------
Class B:
---------------------
Shares:
Subscribed 441 175
Distributions Reinvested 4 --
Redeemed (185) --
------------- ------
Net Increase in Class B Shares
Outstanding 260 175
------------- ------
------------- ------
Dollars:
Subscribed $ 6,607 $ 2,116
Distributions Reinvested 54 --
Redeemed (2,916) --
------------- ------
Net Increase $ 3,745 $ 2,116
------------- ------
------------- ------
Class C:
---------------------
Shares:
Subscribed 150 142
Distributions Reinvested 2 --
Redeemed (149) --
------------- ------
Net Increase in Class C Shares
Outstanding 3 142
------------- ------
------------- ------
Dollars:
Subscribed $ 2,229 $ 1,709
Distributions Reinvested 26 --
Redeemed (2,339) --
------------- ------
Net Increase $ (84) $ 1,709
------------- ------
------------- ------
- ---------------------------------------------------------------------
* 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
- --------------------------------------------------------------------------------
HIGH YIELD FUND
<TABLE>
<CAPTION>
YEAR ENDED MAY 1, 1996* TO
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 1,246 $ 110
Net Realized Gain (Loss) 312 (3)
Change in Unrealized Appreciation
/Depreciation 881 (86)
------- -------
Net Increase in Net Assets
Resulting from Operations 2,439 21
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A (434) (38)
Class B (454) (27)
Class C (338) (27)
------- -------
(1,226) (92)
------- -------
Realized Gain:
Class A (20) --
Class B (24) --
Class C (20) --
------- -------
(64) --
------- -------
Net Decrease in Net Assets
Resulting from Distributions (1,290) (92)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 12,562 10,709
Distributions Reinvested 237 6
Redeemed (2,025) --
------- -------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 10,774 10,715
------- -------
Total Increase in Net Assets 11,923 10,644
NET ASSETS -- Beginning of Year 10,644 --
------- -------
NET ASSETS -- End of Year (Including
undistributed net investment income
of $38 and $18, respectively.) $ 22,567 $ 10,644
------- -------
------- -------
- -------------------------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 461 327
Distributions Reinvested 10 --
Redeemed (101) --
------- -------
Net Increase in Class A Shares
Outstanding 370 327
------- -------
------- -------
Dollars:
Subscribed $ 5,790 $ 3,930
Distributions Reinvested 131 5
Redeemed (1,282) --
------- -------
Net Increase $ 4,639 $ 3,935
------- -------
------- -------
Class B:
---------------------
Shares:
Subscribed 397 287
Distributions Reinvested 6 --
Redeemed (20) --
------- -------
Net Increase in Class B Shares
Outstanding 383 287
------- -------
------- -------
Dollars:
Subscribed $ 4,971 $ 3,443
Distributions Reinvested 72 1
Redeemed (249) --
------- -------
Net Increase $ 4,794 $ 3,444
------- -------
------- -------
Class C:
---------------------
Shares:
Subscribed 144 278
Distributions Reinvested 3 --
Redeemed (39) --
------- -------
Net Increase in Class C Shares
Outstanding 108 278
------- -------
------- -------
Dollars:
Subscribed $ 1,800 $ 3,336
Distributions Reinvested 35 --
Redeemed (494) --
------- -------
Net Increase $ 1,341 $ 3,336
------- -------
------- -------
- -------------------------------------------------------------------------
* Commencement of operations
</TABLE>
- -----------
88
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
JUNE 30, 1997
(000)
<S> <C>
- -------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 170
Net Realized Gain 770
Change in Unrealized
Appreciation/Depreciation 4,184
-------
Net Increase in Net Assets
Resulting from Operations 5,124
-------
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 47,034
Distributions Reinvested 50
Redeemed (2,724)
-------
Net Increase in Net Assets
Resulting from Capital Share
Transactions 44,360
-------
Total Increase in Net Assets 49,332
NET ASSETS -- Beginning of Period --
-------
NET ASSETS -- End of Period
(Including undistributed net
investment income of $767) $ 49,332
-------
-------
- -------------------------------------------------------
Capital Share Transactions:
(1) Class A:
---------------------
Shares:
Subscribed 1,722
Distributions Reinvested 1
Redeemed (144)
-------
Net Increase in Class A Shares
Outstanding 1,579
-------
-------
Dollars:
Subscribed $ 21,512
Distributions Reinvested 14
Redeemed (1,786)
-------
Net Increase $ 19,740
-------
-------
Class B:
---------------------
Shares:
Subscribed 1,321
Distributions Reinvested 2
Redeemed (6)
-------
Net Increase in Class B Shares
Outstanding 1,317
-------
-------
Dollars:
Subscribed $ 16,670
Distributions Reinvested 18
Redeemed (73)
-------
Net Increase $ 16,615
-------
-------
Class C:
---------------------
Shares:
Subscribed 728
Distributions Reinvested 1
Redeemed (67)
-------
Net Increase in Class C Shares
Outstanding 662
-------
-------
Dollars:
Subscribed $ 8,852
Distributions Reinvested 18
Redeemed (865)
-------
Net Increase $ 8,005
-------
-------
- -------------------------------------------------------
* Commencement of operations
</TABLE>
-----------------------
89
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>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 5,375 $ 4,114
Net Realized Gain (Loss) 8 (99)
------------- -------------
Net Increase in Net Assets
Resulting from Operations 5,383 4,015
------------- -------------
DISTRIBUTIONS:
Net Investment Income (5,375) (4,114)
Net Realized Gain -- (12)
------------- -------------
Net Decrease in Net Assets
Resulting from Distributions (5,375) (4,126)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 359,068 1,373,640
Distributions Reinvested 4,349 3,511
Redeemed (414,635) (1,298,567)
------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Capital
Share Transactions (51,218) 78,584
------------- -------------
Total Increase (Decrease) in Net
Assets (51,210) 78,473
NET ASSETS -- Beginning of Year 145,978 67,505
------------- -------------
NET ASSETS -- End of Year $ 94,768 $ 145,978
------------- -------------
------------- -------------
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Shares:
Subscribed 359,068 1,373,640
Distributions Reinvested 4,349 3,511
Redeemed (414,635) (1,298,567)
------------- -------------
Net Increase (Decrease) in Shares
Outstanding (51,218) 78,584
------------- -------------
------------- -------------
- -------------------------------------------------------------------
</TABLE>
- -----------
90
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>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
(000) (000)
<S> <C> <C>
- -------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $ 8,859 $ 7,849
Net Realized Gain (Loss) 13 (100)
------------- -------------
Net Increase in Net Assets
Resulting from Operations 8,872 7,749
------------- -------------
DISTRIBUTIONS:
Net Investment Income (8,859) (7,849)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed 677,641 1,390,774
Distributions Reinvested 7,110 7,425
Redeemed (717,315) (1,398,641)
------------- -------------
Net Increase (Decrease) in Net
Assets Resulting from Capital
Share Transactions (32,564) (442)
------------- -------------
Total Increase (Decrease) in Net
Assets (32,551) (542)
NET ASSETS -- Beginning of Year 170,973 171,515
------------- -------------
NET ASSETS -- End of Year $ 138,422 $ 170,973
------------- -------------
------------- -------------
- -------------------------------------------------------------------
Capital Share Transactions:
(1) Shares:
Subscribed 677,641 1,390,774
Distributions Reinvested 7,110 7,425
Redeemed (717,315) (1,398,641)
------------- -------------
Net Increase (Decrease) in Shares
Outstanding (32,564) (442)
------------- -------------
------------- -------------
- -------------------------------------------------------------------
</TABLE>
-----------------------
91
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
-------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 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) 0.10 0.19 0.12 0.10
Net Realized and Unrealized Gain
(Loss) 2.76 2.82 0.67 0.90
------- ------- ------- -------
Total From Investment Operations 2.86 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 $ 16.57 $ 14.75 $ 12.60 $ 11.99
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN (1) 20.61% 24.62% 6.69% 9.02%
------- ------- ------- -------
------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 72,704 $ 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 to
Average Net Assets 0.59% 0.71% 1.01% 0.98%
Portfolio Turnover Rate 45% 44% 39% 30%
Average Commission Rate #
Per Share $ 0.0021 N/A N/A N/A
As a Percentage of Trade Amount 0.83% N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.03 $ 0.10 $ 0.04 $ 0.09
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.90% 2.06% 2.03% 2.58%
Net Investment Income (Loss) to
Average Net Assets 0.40% 0.35% 0.68% 0.10%
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------
JANUARY 4, 1993* YEAR ENDED AUGUST 1, 1995+
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993 JUNE 30, 1997 TO 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 (0.05) 0.30
Net Realized and Unrealized Gain
(Loss) 1.05 2.73 1.98
------- ------- -------
Total From Investment Operations 1.09 2.68 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 $ 16.15 $ 14.46
------- ------- -------
------- ------- -------
TOTAL RETURN (1) 10.90% 19.64% 18.08%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 10,434 $ 38,962 $ 14,786
Ratio of Expenses to Average Net
Assets 1.70%** 2.45% 2.45%**
Ratio of Net Investment Income to
Average Net Assets 1.04%** (0.11)% 0.45%**
Portfolio Turnover Rate 14% 45% 44%
Average Commission Rate #
Per Share N/A $ 0.0021 N/A
As a Percentage of Trade Amount N/A 0.83% N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.08 $ 0.09 $ 0.22
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.65%** 2.65% 2.81%**
Net Investment Income (Loss) to
Average Net Assets (0.91)%** (0.30)% 0.09%**
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 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
(Loss) 2.73 2.75 0.65 0.86
------- ------- ------- -------
Total From Investment Operations 2.70 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 $ 16.24 $ 14.49 $ 12.43 $ 11.90
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN (1) 19.69% 23.65% 5.84% 8.34%
------- ------- ------- -------
------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 78,199 $ 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 to
Average Net Assets (0.16)% (0.04)% 0.25% 0.23%
Portfolio Turnover Rate 45% 44% 39% 30%
Average Commission Rate #
Per Share $ 0.0021 N/A N/A N/A
As a Percentage of Trade Amount 0.83% N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.03 $ 1.16 $ 0.05 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.65% 2.81% 2.78% 3.34%
Net Investment Income (Loss) to
Average Net Assets (0.34)% (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
(Loss) 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 to
Average Net Assets 0.29%**
Portfolio Turnover Rate 14%
Average Commission Rate #
Per Share N/A
As a Percentage of Trade Amount N/A
- -------------------------------------------------------------------------------------------------------------------------
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 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 fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
- ------------------
92
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
-------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 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 0.44 0.53 0.56 0.52
Net Realized and Unrealized Gain
(Loss) (0.02) (0.01) 0.50 (0.42)
------ ------ ------- -------
Total From Investment Operations 0.42 0.52 1.06 0.10
------ ------ ------- -------
DISTRIBUTIONS
Net Investment Income (0.35) (0.79) (0.36) (0.50)
In Excess of Net Investment Income (0.06) (0.02) -- (0.12)
Net Realized Gain -- -- -- (0.47)
In Excess of Net Realized Gain -- -- -- (0.03)
------ ------ ------- -------
Total Distributions (0.41) (0.81) (0.36) (1.12)
------ ------ ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.95 $ 9.94 $ 10.23 $ 9.53
------ ------ ------- -------
------ ------ ------- -------
TOTAL RETURN (1) 4.27% 5.20% 11.41% 0.41%
------ ------ ------- -------
------ ------ ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,407 $ 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 4.40% 5.02% 5.84% 4.70%
Portfolio Turnover Rate 170% 223% 169% 168%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.12 $ 0.07 $ 0.07 $ 0.11
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.57% 2.16% 2.22% 2.48%
Net Investment Income to Average
Net Assets 3.25% 4.31% 5.07% 3.67%
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
------------------------------------------
JANUARY 4, 1993* YEAR ENDED AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1993 JUNE 30, 1997 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 0.41 0.64
Net Realized and Unrealized Gain
(Loss) 0.55 (0.07) (0.26)
------ ------ ------
Total From Investment Operations 0.80 0.34 0.38
------ ------ ------
DISTRIBUTIONS
Net Investment Income (0.25) (0.29) (0.69)
In Excess of Net Investment Income -- (0.05) (0.02)
Net Realized Gain -- -- --
In Excess of Net Realized Gain -- -- --
------ ------ ------
Total Distributions (0.25) (0.34) (0.71)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 10.55 $ 9.91 $ 9.91
------ ------ ------
------ ------ ------
TOTAL RETURN (1) 8.02% 3.48% 3.76%
------ ------ ------
------ ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 6,633 $ 1,716 $ 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%** 3.65% 3.38%**
Portfolio Turnover Rate 55% 170% 223%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07 $ 0.13 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.88%** 3.37% 3.57%**
Net Investment Income to Average
Net Assets 3.57%** 2.45% 2.01%**
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 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 0.39 0.37 0.49 0.43
Net Realized and Unrealized Gain
(Loss) (0.05) 0.08 0.47 (0.40)
------ ------ ------ -------
Total From Investment Operations 0.34 0.45 0.96 0.03
------ ------ ------ -------
DISTRIBUTIONS
Net Investment Income (0.29) (0.73) (0.30) (0.44)
In Excess of Net Investment Income (0.05) (0.02) -- (0.11)
Net Realized Gain -- -- -- (0.47)
In Excess of Net Realized Gain -- -- -- (0.03)
------ ------ ------ -------
Total Distributions (0.34) (0.75) (0.30) (1.05)
------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $ 9.90 $ 9.90 $ 10.20 $ 9.54
------ ------ ------ -------
------ ------ ------ -------
TOTAL RETURN (1) 3.48% 4.47% 10.24% (0.25)%
------ ------ ------ -------
------ ------ ------ -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 2,445 $ 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 3.65% 4.35% 5.09% 3.95%
Portfolio Turnover Rate 170% 223% 169% 168%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.12 $ 0.06 $ 0.08 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.35% 2.87% 2.97% 3.29%
Net Investment Income to Average
Net Assets 2.48% 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.
-----------------------
93
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
ASIAN GROWTH FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 23, 1993*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 TO JUNE 30, 1993
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 17.15 $ 16.42 $ 15.50 $ 12.00 $ 12.00
------------- ------------- ------------- ------------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.06) (0.04) -- (0.03) --
Net Realized and Unrealized Gain
(Loss) (0.14) 0.77 1.43 3.53 --
------------- ------------- ------------- ------------- -------
Total From Investment Operations (0.20) 0.73 1.43 3.50 --
------------- ------------- ------------- ------------- -------
DISTRIBUTIONS
Net Realized Gain -- -- (0.49) -- --
In Excess of Net Realized Gain (0.33) -- (0.02) -- --
------------- ------------- ------------- ------------- -------
(0.33) -- (0.51) -- --
------------- ------------- ------------- ------------- -------
NET ASSET VALUE, END OF PERIOD $ 16.62 $ 17.15 $ 16.42 $ 15.50 $ 12.00
------------- ------------- ------------- ------------- -------
------------- ------------- ------------- ------------- -------
TOTAL RETURN (1) (1.10)% 4.45% 9.50% 29.17% 0.00%
------------- ------------- ------------- ------------- -------
------------- ------------- ------------- ------------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 175,440 $ 248,009 $ 178,667 $ 138,212 $ 11,770
Ratio of Expenses to Average Net
Assets 1.84% 1.88% 1.90% 1.90% 1.90%**
Ratio of Net Investment Income
(Loss) to Average Net Assets (0.31)% (0.16)% 0.04% (0.24)% (0.81)%**
Portfolio Turnover Rate 74% 38% 34% 34% 0%
Average Commission Rate #
Per Share $ 0.0110 N/A N/A N/A N/A
As a Percentage of Trade Amount 0.51% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Loss -- -- -- $ 0.03 $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- -- -- 2.17% 11.83%**
Net Investment Income (Loss) to
Average Net Assets -- -- -- (0.51)% (10.74)%**
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
---------------------------------------
YEAR ENDED AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
- ----------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.81 $ 16.51
------------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.16) (0.03)
Net Realized and Unrealized Gain
(Loss) (0.15) 0.33
------------- -------
Total From Investment Operations (0.31) 0.30
------------- -------
DISTRIBUTIONS
Net Realized Gain -- --
In Excess of Net Realized Gain (0.33) --
------------- -------
(0.33) --
------------- -------
NET ASSET VALUE, END OF PERIOD $ 16.17 $ 16.81
------------- -------
------------- -------
TOTAL RETURN (1) (1.79)% 1.82%
------------- -------
------------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 62,786 $ 52,853
Ratio of Expenses to Average Net
Assets 2.59% 2.61%**
Ratio of Net Investment Income
(Loss) to Average Net Assets (1.04)% (0.52)%**
Portfolio Turnover Rate 74% %38
Average Commission Rate #
Per Share $ 0.0110 N/A
As a Percentage of Trade Amount 0.51% N/A
- ----------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Loss -- --
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- --
Net Investment Income (Loss) to
Average Net Assets -- --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA AND YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 23, 1993*
RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 TO JUNE 30, 1993
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 16.78 $ 16.19 $ 15.40 $ 12.00 $ 12.00
------------- ------------- ------------- ------------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Loss (0.21) (0.13) (0.12) (0.10) --
Net Realized and Unrealized
Gain (Loss) (0.10) 0.72 1.42 3.50 --
------------- ------------- ------------- ------------- ------
Total From Investment
Operations (0.31) 0.59 1.30 3.40 --
------------- ------------- ------------- ------------- ------
DISTRIBUTIONS
Net Realized Gain -- -- (0.49) -- --
In Excess of Net Realized Gain (0.33) -- (0.02) -- --
------------- ------------- ------------- ------------- ------
(0.33) -- (0.51) -- --
------------- ------------- ------------- ------------- ------
NET ASSET VALUE, END OF PERIOD $ 16.14 $ 16.78 $ 16.19 $ 15.40 $ 12.00
------------- ------------- ------------- ------------- ------
------------- ------------- ------------- ------------- ------
TOTAL RETURN (1) (1.79)% 3.64% 8.71% 28.33% 0.00%
------------- ------------- ------------- ------------- ------
------------- ------------- ------------- ------------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) $ 114,460 $ 168,070 $ 139,497 $ 116,889 $ 8,491
Ratio of Expenses to Average Net
Assets 2.59% 2.63% 2.63% 2.65% 2.65%**
Ratio of Net Investment Income
(Loss) to Average Net Assets (1.06)% (0.94)% (0.77)% (0.99)% (1.56)%**
Portfolio Turnover Rate 74% 38% 34% 34% % 0
Average Commission Rate #
Per Share $ 0.0110 N/A N/A N/A N/A
As a Percentage of Trade
Amount 0.51% N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Loss -- -- -- $ 0.03 $ 0.02
Ratios Before Expense
Limitation:
Expenses to Average Net Assets -- -- -- 2.92% 12.64%**
Net Investment Income (Loss)
to Average Net Assets -- -- -- (1.26)% (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 a periods of less than one year are
not annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
- ------------------
94
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AMERICAN VALUE FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 18, 1993*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 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 0.20 0.27 0.27 0.17
Net Realized and Unrealized Gain
(Loss) 4.05 1.94 1.44 (0.30)
------- ------- ------- -------
Total from Investment Operations 4.25 2.21 1.71 (0.13)
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income (0.20) (0.27) (0.28) (0.17)
In Excess of Net Investment Income (0.00)++ (0.01) -- --
Net Realized Gain (1.09) (0.19) (0.24) --
------- ------- ------- -------
Total Distributions (1.29) (0.47) (0.52) (0.17)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 17.59 $ 14.63 $ 12.89 $ 11.70
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN (1) 30.68% 17.41% 15.01% (1.12)%
------- ------- ------- -------
------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 34,331 $ 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 1.25% 1.90% 2.29% 2.14%**
Portfolio Turnover Rate 73% 41% 23% 17%
Average Commission Rate # $ 0.0452 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.04 $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.76% 1.81% 1.96% 2.48%**
Net Investment Income to Average
Net Assets 0.98% 1.59% 1.83% 1.16%**
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
------------------------------------------
YEAR ENDED AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.63 $ 13.37
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.09 0.15
Net Realized and Unrealized Gain
(Loss) 4.05 1.46
------- ------
Total from Investment Operations 4.14 1.61
------- ------
DISTRIBUTIONS
Net Investment Income (0.09) (0.15)
In Excess of Net Investment Income (0.00)++ (0.01)
Net Realized Gain (1.09) (0.19)
------- ------
Total Distributions (1.18) (0.35)
------- ------
NET ASSET VALUE, END OF PERIOD $ 17.59 $ 14.63
------- ------
------- ------
TOTAL RETURN (1) 29.77% 12.29%
------- ------
------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 15,331 $ 2,485
Ratio of Expenses to Average Net
Assets 2.25% 2.25%**
Ratio of Net Investment Income to
Average Net Assets 0.40% 1.18%**
Portfolio Turnover Rate 73% 41%
Average Commission Rate # $ 0.0452 N/A
- -----------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.06 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.48% 2.61%**
Net Investment Income to Average
Net Assets 0.14% 0.82%**
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 18, 1993*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 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 0.08 0.16 0.17 0.11
Net Realized and Unrealized Gain
(Loss) 4.05 1.94 1.44 (0.31)
------- ------- ------- ------
Total from Investment Operations 4.13 2.10 1.61 (0.20)
------- ------- ------- ------
DISTRIBUTIONS
Net Investment Income (0.09) (0.15) (0.17) (0.11)
In Excess of Net Investment Income (0.00)++ (0.01) -- --
Net Realized Gain (1.09) (0.19) (0.24) --
------- ------- ------- ------
Total Distributions (1.18) (0.35) (0.41) (0.11)
------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 17.59 $ 14.64 $ 12.89 $ 11.69
------- ------- ------- ------
------- ------- ------- ------
TOTAL RETURN (1) 29.67% 16.50% 14.13% (1.70)%
------- ------- ------- ------
------- ------- ------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 32,425 $ 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 0.49% 1.17% 1.54% 1.39%**
Portfolio Turnover Rate 73% 41% 23% 17%
Average Commission Rate # $ 0.0452 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.04 $ 0.04 $ 0.05 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.47% 2.58% 2.71% 3.28%**
Net Investment Income to Average
Net Assets 0.22% 0.84% 1.08% 0.36%**
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ The Fund began offering Class B shares on August 1, 1995.
++ Amount is less than $0.01 per share
(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 fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
-----------------------
95
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
----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED APRIL 21, 1994*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 TO 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 1.25 1.36 1.26 0.18
Net Realized and Unrealized Gain
(Loss) 2.30 0.80 (0.52) 0.16
------- ------- ------- -------
Total From Investment Operations 3.55 2.16 0.74 0.34
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income (1.25) (1.26) (1.22) (0.17)
Net Realized Gain (0.51) -- (0.12) --
------- ------- ------- -------
Total Distributions (1.76) (1.26) (1.34) (0.17)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 14.26 $ 12.47 $ 11.57 $ 12.17
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN (1) 30.29% 19.61% 6.87% 2.86%
------- ------- ------- -------
------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 76,439 $ 41,493 $ 14,819 $ 6,857
Ratio of Expenses to Average Net
Assets 1.52% 1.55% 1.55% 1.55%**
Ratio of Net Investment Income to
Average Net Assets 9.73% 11.95% 11.53% 8.29%**
Portfolio Turnover Rate 157% 220% 178% 19%
- ----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ -- $ 0.02 $ 0.05 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- 1.69% 1.97% 3.23%**
Net Invesment Income to Average Net
Assets -- 11.81% 11.11% 6.61%**
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------------------------------
YEAR ENDED AUGUST 1, 1995+
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 TO JUNE 30, 1996
<S> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.44 $ 11.63
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.07 1.18
Net Realized and Unrealized Gain
(Loss) 2.35 0.72
------- -------
Total From Investment Operations 3.42 1.90
------- -------
DISTRIBUTIONS
Net Investment Income (1.15) (1.09)
Net Realized Gain (0.51) --
------- -------
Total Distributions (1.66) (1.09)
------- -------
NET ASSET VALUE, END OF PERIOD $ 14.20 $ 12.44
------- -------
------- -------
TOTAL RETURN (1) 29.14% 17.07%
------- -------
------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 78,340 $ 26,174
Ratio of Expenses to Average Net
Assets 2.27% 2.30%**
Ratio of Net Investment Income to
Average Net Assets 8.86% 12.06%**
Portfolio Turnover Rate 157% 220%
- -------------------------------------------------------------------------------------------------------
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 -- 2.47%**
Net Invesment Income to Average Net
Assets -- 11.89%**
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED APRIL 21, 1994*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 TO 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 1.16 1.30 1.17 0.17
Net Realized and Unrealized Gain
(Loss) 2.26 0.77 (0.50) 0.15
------- ------- ------- ------
Total From Investment Operations 3.42 2.07 0.67 0.32
------- ------- ------- ------
DISTRIBUTIONS
Net Investment Income (1.15) (1.20) (1.13) (0.16)
Net Realized Gain (0.51) -- (0.12) --
------- ------- ------- ------
Total Distributions (1.66) (1.20) (1.25) (0.16)
------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 14.21 $ 12.45 $ 11.58 $ 12.16
------- ------- ------- ------
------- ------- ------- ------
TOTAL RETURN (1) 29.12% 18.71% 6.20% 2.62%
------- ------- ------- ------
------- ------- ------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 41,709 $ 28,094 $ 11,880 $ 6,081
Ratio of Expenses to Average Net
Assets 2.27% 2.30% 2.30% 2.30%**
Ratio of Net Investment Income to
Average Net Assets 9.04% 11.40% 10.72% 7.54%**
Portfolio Turnover Rate 157% 220% 178% 19%
- ----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ -- $ 0.04 $ 0.05 $ 0.06
Ratios Before Expense Limitation:
Expenses to Average Net Assets -- 2.44% 2.74% 4.00%**
Net Invesment Income to Average Net
Assets -- 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.
- ------------------
96
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
---------------------------------------------------------- ----------------
YEAR ENDED YEAR ENDED JULY 6, 1994* YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1997
<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 0.02 0.10 (0.02) (0.03)
Net Realized and Unrealized Gain
(Loss) 6.46 3.47 (2.70) 6.28
------- ------- ------- -------
Total From Investment Operations 6.48 3.57 (2.72) 6.25
------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income -- (0.02) -- --
In Excess of Net Investment Income (0.09) -- -- (0.08)
Net Realized Gain (1.63) -- -- (1.63)
Return of Capital -- -- (0.20) --
------- ------- ------- -------
Total Distributions (1.72) (0.02) (0.20) (1.71)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 17.39 $ 12.63 $ 9.08 $ 16.99
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN (1) 57.32% 39.35% (23.07)% 56.17%
------- ------- ------- -------
------- ------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 84,401 $ 18,701 $ 7,658 $ 14,314
Ratio of Expenses to Average Net
Assets 2.24% 2.11% 2.46%** 2.99%
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.08)% 1.18% (0.44)%** (0.78)%
Portfolio Turnover Rate 241% 131% 107% 241%
Average Commission Rate #
Per Share $ 0.0006 N/A N/A $ 0.0006
As a Percentage of Trade Amount 0.31% N/A N/A 0.31%
- -------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.10 $ 0.09 $ 0.13 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.77% 3.28% 4.30%** 3.55%
Net Investment Income (Loss) to
Average Net Assets (0.61)% 0.01% (2.26)%** (1.34)%
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 0.03
Net Realized and Unrealized Gain
(Loss) 2.84
------
Total From Investment Operations 2.87
------
DISTRIBUTIONS
Net Investment Income --
In Excess of Net Investment Income --
Net Realized Gain --
Return of 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 #
Per Share N/A
As a Percentage of Trade Amount N/A
- --------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 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
----------------------------------------------------------
YEAR ENDED YEAR ENDED JULY 6, 1994*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 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 (0.07) 0.04 (0.08)
Net Realized and Unrealized Gain
(Loss) 6.31 3.40 (2.73)
------- ------ ------
Total From Investment Operations 6.24 3.44 (2.81)
------- ------ ------
DISTRIBUTIONS
Net Investment Income -- -- --
In Excess of Net Investment Income (0.03) -- --
Net Realized Gain (1.63) -- --
Return of Capital -- -- (0.20)
------- ------ ------
Total Distributions (1.66) -- (0.20)
------- ------ ------
NET ASSET VALUE, END OF PERIOD $ 17.01 $ 12.43 $ 8.99
------- ------ ------
------- ------ ------
TOTAL RETURN (1) 56.04% 38.26% (23.83)%
------- ------ ------
------- ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 20,345 $ 6,780 $ 4,085
Ratio of Expenses to Average Net
Assets 2.99% 2.86% 3.20%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.79)% 0.42% (1.16)%**
Portfolio Turnover Rate 241% 131% 107%
Average Commission Rate #
Per Share $ 0.0006 N/A N/A
As a Percentage of Trade Amount 0.31% N/A N/A
- ----------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.05 $ 0.12 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.56% 4.06% 5.20%**
Net Investment Income (Loss) to
Average Net Assets (1.36)% (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 fund 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
- --------------------------------------------------------------------------------
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------- ----------------
YEAR ENDED YEAR ENDED JULY 6, 1994* YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1997
<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) 0.01 0.05 0.05 (0.03)
Net Realized and Unrealized Gain
(Loss) 1.57 1.44 (1.44) 1.50
---------------- ------------- -------- --------
Total From Investment Operations 1.58 1.49 (1.39) 1.47
---------------- ------------- -------- --------
DISTRIBUTIONS
Net Investment Income -- (0.04) -- --
In Excess of Net Investment Income (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 $ 13.47 $ 12.06 $ 10.61 $ 13.24
---------------- ------------- -------- --------
---------------- ------------- -------- --------
TOTAL RETURN (1) 13.54% 14.16% (11.58)% 12.67%
---------------- ------------- -------- --------
---------------- ------------- -------- --------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 119,022 $ 114,850 $ 26,091 $ 35,966
Ratio of Expenses to Average Net
Assets 2.21% 2.16% 2.33%** 2.96%
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.06)% 0.93% 0.81%** (0.64)%
Portfolio Turnover Rate 82% 42% 32% 82%
Average Commission Rate #
Per Share $ 0.0007 N/A N/A $ 0.0007
As a Percentage of Trade Amount 0.39% N/A N/A 0.39%
- ----------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.03 $ 0.02 $ 0.04 $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.41% 2.56% 3.10%** 3.17%
Net Invesment Income (Loss) to
Average Net Assets (0.27)% 0.53% 0.04%** (0.87)%
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 --
In Excess of 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 #
Per Share N/A
As a Percentage of Trade Amount 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 Invesment 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
-------------------------------------------------------------
YEAR ENDED YEAR ENDED JULY 6, 1994* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 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) (0.08) (0.01) --
Net Realized and Unrealized Gain
(Loss) 1.55 1.41 (1.47)
-------- -------- --------
Total From Investment Operations 1.47 1.40 (1.47)
-------- -------- --------
DISTRIBUTIONS
Net Investment Income -- -- --
In Excess of Net Investment Income (0.01) -- --
Net Realized Gain (0.13) -- --
-------- -------- --------
Total Distributions (0.14) -- --
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 13.26 $ 11.93 $ 10.53
-------- -------- --------
-------- -------- --------
TOTAL RETURN (1) 12.66% 13.30% (12.25)%
-------- -------- --------
-------- -------- --------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 57,958 $ 43,601 $ 22,245
Ratio of Expenses to Average Net
Assets 2.96% 2.91% 3.08%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.79)% (0.11)% 0.06%**
Portfolio Turnover Rate 82% 42% 32%
Average Commission Rate #
Per Share $ 0.0007 N/A N/A
As a Percentage of Trade Amount 0.39% N/A N/A
- -------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.02 $ 0.03 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.17% 3.34% 3.90%**
Net Invesment Income (Loss) to
Average Net Assets (1.00)% (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
+ 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 fund 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
- --------------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------- ----------------
YEAR ENDED JANUARY 2, 1996* TO YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.40 $ 12.00 $ 14.38
------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.01 0.06 (0.02)
Net Realized and Unrealized Gain 3.95 2.40 3.86
------- ------ -------
Total From Investment Operations 3.96 2.46 3.84
------- ------ -------
DISTRIBUTION:
Net Investment Income (0.03) (0.06) (0.02)
Net Realized Gain (1.35) -- (1.35)
------- ------ -------
Total Distributions (1.38) (0.06) (1.37)
------- ------ -------
NET ASSET VALUE, END OF PERIOD $ 16.98 $ 14.40 $ 16.85
------- ------ -------
------- ------ -------
TOTAL RETURN (1) 28.93% 20.52% 28.01%
------- ------ -------
------- ------ -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 22,521 $ 5,382 $ 34,382
Ratio of Expenses to Average Net
Assets 1.57% 2.03%** 2.32%
Ratio of Net Investment Income (Loss)
to
Average Net Assets (0.04)% 1.22%** (0.83)%
Portfolio Turnover Rate 241% 204% 241%
Average Commission Rate # $ 0.0536 N/A $ 0.0536
- ----------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.22 $ 0.06 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.38% 3.26%** 2.88%
Net Investment Income to Average
Net Assets (0.85)% (0.01)%** (1.43)%
Ratio of Expenses to Average Net
Assets
excluding dividend expense on
securities sold short 1.50% 1.50%** 2.25%
<CAPTION>
CLASS C
-------------------------------------------
JANUARY 2, 1996* TO YEAR ENDED JANUARY 2, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.00 $ 14.37 $ 12.00
------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.03 (0.06) 0.03
Net Realized and Unrealized Gain 2.39 3.89 2.38
------ ------- ------
Total From Investment Operations 2.42 3.83 2.41
------ ------- ------
DISTRIBUTION:
Net Investment Income (0.04) (0.02) (0.04)
Net Realized Gain -- (1.35) --
------ ------- ------
Total Distributions (0.04) (1.37) (0.04)
------ ------- ------
NET ASSET VALUE, END OF PERIOD $ 14.38 $ 16.83 $ 14.37
------ ------- ------
------ ------- ------
TOTAL RETURN (1) 20.18% 28.04% 20.10%
------ ------- ------
------ ------- ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 2,426 $ 9,410 $ 2,582
Ratio of Expenses to Average Net
Assets 2.67%** 2.32% 2.67%**
Ratio of Net Investment Income (Loss)
to
Average Net Assets 0.43%** (0.77)% 0.44%**
Portfolio Turnover Rate 204% 241% 204%
Average Commission Rate # N/A $ 0.0536 N/A
- ----------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.07 $ 0.07 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets 3.79%** 3.23% 3.80%**
Net Investment Income to Average
Net Assets (0.69)%** (1.67)% (0.69)%**
Ratio of Expenses to Average Net
Assets
excluding dividend expense on
securities sold short 2.25%** 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 fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
-----------------------
99
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 CLASS C
--------------------------------- --------------------------------- -------------
YEAR ENDED MAY 1, 1996* TO YEAR ENDED MAY 1, 1996* TO YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.52 $ 12.00 $ 12.52 $ 12.00 $ 12.52
------------- ------ ------------- ------ -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.37 0.08 0.15 0.07 0.20
Net Realized and Unrealized Gain 4.03 0.48 4.12 0.48 4.07
------------- ------ ------------- ------ -------------
Total From Investment Operations 4.40 0.56 4.27 0.55 4.27
------------- ------ ------------- ------ -------------
DISTRIBUTION:
Net Investment Income (0.29) (0.04) (0.19) (0.03) (0.19)
Net Realized Gain (0.24) -- (0.24) -- (0.24)
------------- ------ ------------- ------ -------------
Total Distributions (0.53) (0.04) (0.43) (0.03) (0.43)
------------- ------ ------------- ------ -------------
NET ASSET VALUE, END OF PERIOD $ 16.39 $ 12.52 $ 16.36 $ 12.52 $ 16.36
------------- ------ ------------- ------ -------------
------------- ------ ------------- ------ -------------
TOTAL RETURN (1) 35.75% 4.63% 34.58% 4.54% 34.56%
------------- ------ ------------- ------ -------------
------------- ------ ------------- ------ -------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 14,827 $ 1,829 $ 7,120 $ 2,197 $ 2,369
Ratio of Expenses to Average Net
Assets 1.55% 1.55%** 2.30% 2.30%** 2.30%
Ratio of Net Investment Income to
Average Net Assets 2.33% 4.11%** 1.49% 3.35%** 1.46%
Portfolio Turnover Rate 143% 0% 143% 0% 143%
Average Commission Rate # $ 0.0582 N/A $ 0.0582 N/A $ 0.0582
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.16 $ 0.08 $ 0.11 $ 0.07 $ 0.17
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.51% 5.58%** 3.39% 6.34%** 3.58%
Net Investment Income to Average
Net Assets 1.36% 0.08%** 0.39% (0.69)%** 0.16%
<CAPTION>
MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1996
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.00
------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.07
Net Realized and Unrealized Gain 0.48
------
Total From Investment Operations 0.55
------
DISTRIBUTION:
Net Investment Income (0.03)
Net Realized Gain --
------
Total Distributions (0.03)
------
NET ASSET VALUE, END OF PERIOD $ 12.52
------
------
TOTAL RETURN (1) 4.54%
------
------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 1,782
Ratio of Expenses to Average Net
Assets 2.30%**
Ratio of Net Investment Income to
Average Net Assets 3.39%**
Portfolio Turnover Rate 0%
Average Commission Rate # N/A
- --------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 6.32%**
Net Investment Income to Average
Net Assets (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 fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
- ------------------
100
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
--------------------------------------- ---------------------------------------
YEAR ENDED MAY 1, 1996* TO YEAR ENDED MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 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 1.07 0.13 0.98 0.12
Net Realized and Unrealized Gain
(Loss) 0.99 (0.09) 0.99 (0.09)
------ ------ ------ ------
Total From Investment Operations 2.06 0.04 1.97 0.03
------ ------ ------ ------
DISTRIBUTION:
Net Investment Income (1.07) (0.12) (0.99) (0.10)
Net Realized Gain (0.05) -- (0.05) --
------ ------ ------ ------
Total Distributions (1.12) (0.12) (1.04) (0.10)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 12.86 $ 11.92 $ 12.86 $ 11.93
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN (1) 18.12% 0.29% 17.22% 0.21%
------ ------ ------ ------
------ ------ ------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 8,980 $ 3,907 $ 8,617 $ 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 8.83% 6.85%** 7.99% 6.08%**
Portfolio Turnover Rate 104% 10% 104% 10%
- -----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.10 $ 0.04 $ 0.10 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.04% 3.51%** 2.82% 4.25%**
Net Investment Income to Average
Net Assets 8.04% 4.59%** 7.17% 3.83%**
<CAPTION>
CLASS C
---------------------------------------
YEAR ENDED MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996
<S> <C> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.93 $ 12.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.99 0.12
Net Realized and Unrealized Gain
(Loss) 0.98 (0.09)
------ ------
Total From Investment Operations 1.97 0.03
------ ------
DISTRIBUTION:
Net Investment Income (0.99) (0.10)
Net Realized Gain (0.05) --
------ ------
Total Distributions (1.04) (0.10)
------ ------
NET ASSET VALUE, END OF PERIOD $ 12.86 $ 11.93
------ ------
------ ------
TOTAL RETURN (1) 17.21% 0.21%
------ ------
------ ------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 4,970 $ 3,316
Ratio of Expenses to Average Net
Assets 2.00% 2.00%**
Ratio of Net Investment Income to
Average Net Assets 8.03% 6.07%**
Portfolio Turnover Rate 104% 10%
- -----------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.11 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.88% 4.25%**
Net Investment Income to Average
Net Assets 7.15% 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.
-----------------------
101
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
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1997 JUNE 30, 1997
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.00 $ 12.00 $ 12.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.17 0.10 0.06
Net Realized and Unrealized Gain 1.88 1.85 1.88
------- ------- -------
Total From Investment Operations 2.05 1.95 1.94
------- ------- -------
DISTRIBUTION:
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 $ 13.91 $ 13.84 $ 13.83
------- ------- -------
------- ------- -------
TOTAL RETURN (1) 17.30% 16.40% 16.27%
------- ------- -------
------- ------- -------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 21,961 $ 18,215 $ 9,156
Ratio of Expenses to Average Net
Assets 1.65% 2.40% 2.40%
Ratio of Net Investment Income to
Average Net Assets 1.39% 0.54% 0.29%
Portfolio Turnover Rate 22% 22% 22%
Average Commission Rate #
Per Share $ 0.0318 $ 0.0318 $ 0.0318
As a Percentage of Trade Amount 0.33% 0.33% 0.33%
- -------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income $ 0.11 $ 0.17 $ 0.21
Ratios Before Expense Limitation:
Expenses to Average Net Assets 2.50% 3.34% 3.45%
Net Investment Income (Loss) to
Average Net Assets 0.52% (0.42)% (0.77)%
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
(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.
- ------------------
102
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 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 0.0443 0.0464 0.0448 0.0243 0.0246
Net Realized and Unrealized Gain
(Loss) -- (0.0011) -- 0.0011 0.0002
------------- ------------- ------------- ------------- -------------
Total From Investment Operations 0.0443 0.0453 0.0448 0.0254 0.0248
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS:
Net Investment Income (0.0443) (0.0464) (0.0448) (0.0243) (0.0246)
Net Realized Gain -- (0.0001) -- (0.0011) (0.0002)
------------- ------------- ------------- ------------- -------------
Total Distributions (0.0443) (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 4.53% 4.72% 4.58% 2.45% 2.51%
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 94,768 $ 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 4.43% 4.68% 4.61% 2.40% 2.50%
- -------------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.27% 1.24% 1.12% 1.22% 1.19%
Net Investment Income to Average
Net Assets 4.10% 4.39% 4.44% 2.13% 2.26%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-----------------------
103
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.0450 0.0463 0.0446 0.0246
Net Realized and Unrealized Gain
(Loss) -- (0.0006) 0.0001 --
-------- -------- -------- --------
Total From Investment Operations 0.0450 0.0457 0.0447 0.0246
-------- -------- -------- --------
DISTRIBUTIONS:
Net Investment Income (0.0450) (0.0463) (0.0446) (0.0246)
Net Realized Gain -- -- (0.0001) --
-------- -------- -------- --------
Total Distributions (0.0450) (0.0463) (0.0447) (0.0246)
-------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL RETURN 4.60% 4.72% 4.55% 2.49%
-------- -------- -------- --------
-------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 138,422 $ 170,973 $ 171,515 $ 176,599
Ratio of Expenses to Average Net
Assets 0.98% 0.98% 0.98% 0.98%
Ratio of Net Investment Income to
Average Net Assets 4.50% 4.65% 4.45% 2.45%
- -------------------------------------------------------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.27% 1.22% 1.18% 1.19%
Net Investment Income to Average
Net Assets 4.20% 4.41% 4.25% 2.24%
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1993
<S> <C>
- -------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
--------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.0243
Net Realized and Unrealized Gain
(Loss) 0.0001
--------
Total From Investment Operations 0.0244
--------
DISTRIBUTIONS:
Net Investment Income (0.0243)
Net Realized Gain (0.0001)
--------
Total Distributions (0.0244)
--------
NET ASSET VALUE, END OF PERIOD $ 1.00
--------
--------
TOTAL RETURN 2.47%
--------
--------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $ 156,310
Ratio of Expenses to Average Net
Assets 0.98%
Ratio of Net Investment Income to
Average Net Assets 2.44%
- --------------------------------------------------------------------------
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.20%
Net Investment Income to Average
Net Assets 2.22%
- -------------------------------------------------------------------------------------------
</TABLE>
- ------------------
104
The accompanying notes are an integral part of the financial statements.
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
- --------------------------------------------------------------------------------
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 June 30, 1997, 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, Class A, Class B and Class C
Shares (with the exception of the Government Obligations Money Market and Money
Market Funds). Class A shares are sold with a front-end sales charge of up to
5.75%. Class B shares are sold with a contingent deferred sales charge on
redemptions made within 5 years of purchase which declines annually from 5% for
redemptions made in year one, down to 1.50% in year five. 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 Boards 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.'s 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 in 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 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 applicable, as the income and/or capital gains are
earned.
At June 30, 1997, the following Portfolios had available capital loss
carryforwards to offset future net capital gains, to the extent provided by U.S.
Federal income tax regulations, through the indicated expiration dates:
<TABLE>
<CAPTION>
EXPIRATION DATE
JUNE 30, 2004
PORTFOLIOS (000)
- ------------------------------------- -----------------------
<S> <C>
Government Obligations Money
Market............................. $ 90
Money Market......................... $ 98
</TABLE>
------------------
105
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
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, 1996 to June 30, 1997 certain
Portfolios incurred and elected to defer until July 1, 1997, for U.S. Federal
income tax purposes, net currency and capital losses of approximately:
<TABLE>
<CAPTION>
CURRENCY
AND CAPITAL
LOSSES
PORTFOLIO (000)
- ------------------------------------- -------------------
<S> <C>
Global Fixed Income.................. $ 83
Asian Growth......................... 8,841
Latin American....................... 11
Emerging Markets..................... 223
</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 is 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
investments and foreign currency translations in the Statement of Assets and
Liabilities. The change in net unrealized currency gains (losses) for the period
is reflected on the Statement of Operations.
The net assets of certain Portfolios include issuers located in emerging
markets. There will be certain considerations and risks of these investments not
typically associated with investments in the United States. Changes in currency
exchange rates will affect the value of and investment income from such
securities. The smaller size of the markets themselves, lesser liquidity and
greater volatility contribute to risks in valuation as compared with the U.S.
securities markets. Also there is often substantially less publicly available
information about these issuers. Emerging markets may be subject to a greater
degree of governmental involvement in the economy and greater economic and
political uncertainty. Accordingly the price which the Fund realizes upon the
sale of securities in such markets may not be equal to its value as presented in
the financial statements.
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. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into
foreign currency exchange contracts to attempt to protect securities and related
receivables and payables against changes in future foreign currency exchange
- -----------------------
106
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
rates. A 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 and the change in market value is recorded by the
Portfolio as unrealized gain or loss. The Portfolio records realized gains or
losses when the contract is closed, equal to 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 counterparties 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 purchase securities at the market
price to replace the borrowed securities 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 a 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 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 accrue to 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 Fund 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 June 30, 1997 is as
follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
PORTFOLIO (000) (000)
- ------------------------------------- ----------------------- ----------
<S> <C> <C>
Global Equity Allocation............. $ 26,175 $ 29,822
</TABLE>
At June 30, 1997, 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, an affiliate of the Investment Adviser,
administers the security lending program and for its services the Fund incurred
fees in the amount of $23,000 for the year ended June 30, 1997.
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 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
------------------
107
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
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.
10. STRUCTURED SECURITIES: The Worldwide High Income Fund may invest in
interests in entities organized and operated solely for the purpose of
restructuring the investment characteristics of sovereign debt obligations. This
type of restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing interests in,
the underlying instruments. Structured Securities generally will expose the
Portfolio to credit risks equivalent to that of the underlying instruments.
Structured Securities are typically sold in private placement transactions with
no active trading market. Investments in Structured Securities may be more
volatile than their underlying instruments, however, any loss is limited to the
amount of the original investment.
11. 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 respective 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.
12. 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 Portfolio 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 the cost of those securities.
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 presenting 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, Dean Witter, Discover & Co., 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>
- -----------------------
108
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
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.
Through December 13, 1996, the Administrative services provided by CGFSC
included transfer agency services. Effective December 14, 1996, transfer agency
services are provided to the Fund by ACCESS Investor Services, Inc., an
affiliate of MSAM.
Prior to September 26, 1996, Morgan Stanley Government Obligations Money Market
Fund and Morgan Stanley Money Market Fund, formerly referred to as PCS
Government Obligations Money Market Fund and PCS Money Market Fund, had an
Administration and Accounting Services Agreement with PFPC Inc., a wholly owned
subsidiary of the PNC Bank Corp. For administration services provided, PFPC Inc.
was entitled to receive from each Fund a fee, computed daily and payable
monthly, at an annual rate of 0.10% of the first $200 million of daily net
assets, 0.075% of the next $200 million of daily net assets, 0.05% of the next
$200 million of daily net assets and 0.03% of the daily net assets in excess of
$600 million.
Also, prior to September 26, 1996, PNC Bank Corp. served as custodian for each
of the Funds, and, PFPC Inc. served as the Fund's transfer agent.
D. DISTRIBUTOR: Through December 31, 1996 Morgan Stanley & Co. Incorporated,
then a wholly-owned subsidiary of Morgan Stanley Group, Inc. and an affiliate of
MSAM, served as the distributor of the Fund and provided all classes of each
Portfolio with 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. ("the
Distributor"), a wholly owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co., 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 an amount of 0.25% of the Class A shares and up to
1.00%, on an annualized basis, of the average daily net assets attributable to
the Class B and Class C shares of each Portfolio. The Government Obligations
Money Market and Money Market Funds pay the Distributor a fee which is accrued
daily and paid monthly, up to 0.50%, on an annualized basis, of the average
daily net assets of those Portfolios.
Prior to September 26, 1996, Morgan Stanley Government Obligations Money Market
Fund and Morgan Stanley Money Market Fund, formerly referred to as PCS
Government Obligations Money Market Fund and PCS Money Market Fund, had a
Distribution Agreement with Morgan Stanley & Co. Incorporated (the
"Distributor"), a wholly owned subsidiary of Morgan Stanley Group, Inc. Under
the Agreement the Distributor was entitled to receive from each PCS Portfolio
compensation of its distribution costs at an annual rate of up to 0.50% of daily
net assets.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain purchases of Class B and Class C shares of each Portfolio
redeemed within one to five years following such purchase. For the year ended
June 30, 1997, the Distributor has advised the Fund that it earned initial sales
charges of $4,004,439 for Class A shares and deferred sales charges of $73,809
and $207,030 for Class B shares and Class C shares, respectively.
E. CUSTODIAN: Morgan Stanley Trust Company ("MSTC"), a wholly owned subsidiary
of Morgan Stanley, Dean Witter, Discover & Co., 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
purchase and sales activity, an account maintenance fee, plus reimbursement for
certain out-of-pocket expenses.
For the year ended June 30, 1997, the following Portfolios incurred custody fees
and had amounts payable to MSTC at June 30, 1997:
<TABLE>
<CAPTION>
MSTC CUSTODY CUSTODY FEES
FEES INCURRED PAYABLE TO MSTC
FUND (000) (000)
- ------------------------------------- -------------------- -----------------------
<S> <C> <C>
Global Equity Allocation............. $ 202 $ 19
Global Fixed Income.................. 10 1
Asian Growth......................... 649 59
Worldwide High Income................ 40 4
Latin American....................... 174 13
Emerging Markets..................... 380 31
International Magnum................. 85 7
</TABLE>
In addition, a Portfolio may earn interest income or incur interest expense
relating to cash balances with MSTC.
F. PURCHASES AND SALES: For the year ended June 30, 1997, 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............. $ 94,822 $ 68,059
Global Fixed Income.................. 15,402 15,361
Asian Growth......................... 293,880 397,476
American Value....................... 62,195 36,646
Worldwide High Income................ 278,203 210,400
Latin American....................... 175,549 111,367
Emerging Markets..................... 156,210 122,696
Aggressive Equity.................... 106,672 61,287
U.S. Real Estate..................... 31,254 18,652
High Yield........................... 22,803 14,303
International Magnum................. 44,778 3,740
</TABLE>
------------------
109
<PAGE>
MORGAN STANLEY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT.)
JUNE 30, 1997
- --------------------------------------------------------------------------------
Purchases and sales of long term U.S. Government securities during the year
ended June 30, 1997 occurred in the Global Fixed Income Fund and totaled
$3,483,000 and $2,452,000 respectively.
G. OTHER: At June 30, 1997, 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
June 30, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Argentine Peso................ 0.99984 = $1.00
Australian Dollar............. 1.32450 = $1.00
Austrian Shilling............. 12.25850 = $1.00
Belgian Franc................. 35.93000 = $1.00
Brazilian Real................ 1.07650 = $1.00
British Pound................. 0.60074 = $1.00
Canadian Dollar............... 1.38050 = $1.00
Colombian Peso................ 1,090.00000 = $1.00
Danish Krone.................. 6.63590 = $1.00
Deutsche Mark................. 1.74310 = $1.00
Egyptian Pound................ 3.39750 = $1.00
Finnish Markka................ 5.18660 = $1.00
French Franc.................. 5.87420 = $1.00
Hong Kong Dollar.............. 7.74680 = $1.00
Hungarian Forint.............. 187.21000 = $1.00
Indian Rupee.................. 35.75000 = $1.00
Indonesian Rupiah............. 2,431.00000 = $1.00
Irish Punt.................... 0.66094 = $1.00
Israeli Shekel................ 3.58440 = $1.00
Italian Lira.................. 1,699.20000 = $1.00
Japanese Yen.................. 114.54000 = $1.00
Malaysian Ringgit............. 2.52350 = $1.00
Mexican Peso.................. 7.94200 = $1.00
Netherlands Guilder........... 1.96080 = $1.00
New Zealand Dollar............ 1.47275 = $1.00
Norwegian Krona............... 7.32460 = $1.00
Pakistan Rupee................ 40.41950 = $1.00
Peruvian Sol.................. 2.65000 = $1.00
Philippine Peso............... 26.35000 = $1.00
Polish Zloty.................. 3.28500 = $1.00
Singapore Dollar.............. 1.42920 = $1.00
South Korean Won.............. 886.00000 = $1.00
South African Rand............ 4.53550 = $1.00
Spanish Peseta................ 147.20000 = $1.00
Swedish Krona................. 7.73080 = $1.00
Swiss Franc................... 1.45950 = $1.00
Taiwan Dollar................. 27.78000 = $1.00
Thai Baht..................... 25.88000 = $1.00
Turkish Lira.................. 148,450.00000 = $1.00
Venezuelan Bolivar............ 486.31000 = $1.00
</TABLE>
During the year ended June 30, 1997, the Asian Growth Fund, American Value Fund,
Latin American Fund, Emerging Markets Fund and International Magnum Fund
incurred approximately $326,000, $1,000, $41,000, $80,000 and $15,000,
respectively, as brokerage commissions with Morgan Stanley & Co. Incorporated,
an affiliated broker/ dealer.
At June 30, 1997 the Global Equity Allocation Fund and Emerging Markets Fund
owned shares of affiliated funds for which the Funds earned dividend income of
approximately $277,000 and $38,000, respectively. The Global Equity Allocation
Fund incurred losses totaling $40,000 on sales of shares in affiliated funds
during the period.
At June 30, 1997, 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............. $162,933 $ 37,092 $ (5,725) $ 31,367
Global Fixed Income...... 9,641 80 (175) (95)
Asian Growth............. 320,218 63,343 (29,063) 34,280
American Value........... 71,159 13,694 (1,099) 12,595
Worldwide High Income.... 181,907 14,332 (581) 13,751
Latin American........... 106,111 14,672 (1,064) 13,608
Emerging Markets......... 192,835 41,940 (21,729) 20,211
Aggressive Equity........ 64,703 4,073 (782) 3,291
U.S. Real Estate......... 20,342 1,897 (74) 1,823
High Yield............... 21,617 814 (26) 788
International Magnum..... 49,695 4,657 (598) 4,059
Government Obligations
Money Market........... 94,977 -- -- --
Money Market............. 137,740 -- -- --
</TABLE>
H. SUBSEQUENT EVENTS: At a Special Meeting of Shareholders held on July 2, 1997,
the Shareholders elected a new Board of Directors and approved, effective July
2, 1997, a new investment advisory agreement with Van Kampen American Capital
Investment Advisory Corp., a wholly-owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co., and a new sub-advisory agreement with Morgan Stanley
Asset Management Inc. Also effective July 2, 1997, the responsibilities of MSAM
as administrator to the Fund were assumed by Van Kampen American Capital
Investment Advisory Corp.
The Morgan Stanley Value Fund, an additional series of the Fund, has commenced
operations effective July 7, 1997.
- -----------------------
110
<PAGE>
MORGAN STANLEY FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Morgan Stanley Fund, Inc.
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of each of the portfolios constituting Morgan
Stanley Fund, Inc. (the "Fund") as of June 30, 1997, and the related statements
of operations and of changes in net assets and the financial highlights for the
year then ended. We have also audited the statements of changes in net assets
and the financial highlights for the Global Equity Allocation Portfolio, Global
Fixed Income Portfolio, Asian Growth Portfolio, American Value Portfolio,
Worldwide High Income Portfolio, Latin American Portfolio, Emerging Markets
Portfolio, Aggressive Equity Portfolio, U.S. Real Estate Portfolio, High Yield
Portfolio and International Magnum Portfolio (collectively the "non-money market
portfolios") for each of the earlier periods presented. These financial
statements are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements based on our audits. The
statements of changes in net assets for the year ended June 30, 1996 and the
financial highlights for each of the four years in the period ended June 30,
1996 for the Money Market Portfolio and Government Obligations Money Market
Portfolio (formerly separate portfolios of The PCS Cash Fund, Inc.) were audited
by other independent accountants whose report dated July 31, 1996 expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities at June 30, 1997 by correspondence with the custodians and brokers
and the application of alternative auditing procedures where confirmations from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of each of the portfolios constituting Morgan
Stanley Fund, Inc. at June 30, 1997, the results of their operations, the
changes in their net assets and the financial highlights for the year then
ended, and the changes in net assets and the financial highlights of the
non-money market portfolios for each of the earlier periods presented, in
conformity with generally accepted accounting principles.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
August 11, 1997
------------------
111
<PAGE>
MORGAN STANLEY FUNDS
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
SHAREHOLDER MEETING: (UNAUDITED)
Morgan Stanley Fund, Inc. shareholders voted on proposals at a special meeting
held on July 2, 1997. The description of each proposal and number of shares
voted are as follows:
<TABLE>
<CAPTION>
1. To elect the following Directors to serve the Fund effective July 2, 1997 until such time as their VOTED FOR
successors have been duly appointed. (000)
-----------
<S> <C>
J. Miles Branagan........................................................................................... 278,313
Richard M. DeMartini........................................................................................ 278,320
Linda Hutton Heagy.......................................................................................... 278,324
R. Craig Kennedy............................................................................................ 278,318
Jack E. Nelson.............................................................................................. 278,315
Don G. Powell............................................................................................... 278,303
Jerome T. Robinson.......................................................................................... 278,291
Phillip Rooney.............................................................................................. 278,310
Fernando Sisto.............................................................................................. 278,255
Wayne W. Whalen............................................................................................. 278,316
<CAPTION>
1. To elect the following Directors to serve the Fund effective July 2, 1997 until such time as their WITHHELD
successors have been duly appointed. (000)
-----------
<S> <C>
J. Miles Branagan........................................................................................... 1,129
Richard M. DeMartini........................................................................................ 1,123
Linda Hutton Heagy.......................................................................................... 1,118
R. Craig Kennedy............................................................................................ 1,125
Jack E. Nelson.............................................................................................. 1,128
Don G. Powell............................................................................................... 1,139
Jerome T. Robinson.......................................................................................... 1,152
Phillip Rooney.............................................................................................. 1,132
Fernando Sisto.............................................................................................. 1,187
Wayne W. Whalen............................................................................................. 1,127
</TABLE>
<TABLE>
<CAPTION>
2. Approval of the investment advisory agreement by and between the following and Van Kampen AFFIRMATIVE AGAINST
American Capital Investment Advisory Corp. (000) (000)
----------- -----------
<S> <C> <C>
Global Equity Allocation Fund................................................................. 7,571 37
Global Fixed Income Fund...................................................................... 838 0
Asian Growth Fund............................................................................. 16,453 157
American Value Fund........................................................................... 2,723 5
Worldwide High Income Fund.................................................................... 9,498 71
Latin American Fund........................................................................... 3,181 25
Emerging Markets Fund......................................................................... 10,520 52
Aggressive Equity Fund........................................................................ 1,707 15
U.S. Real Estate Fund......................................................................... 980 2
High Yield Fund............................................................................... 1,182 --
International Magnum Fund..................................................................... 1,733 1
Government Obligations Money Market Fund...................................................... 77,583 21
Money Market Fund............................................................................. 143,488 204
<CAPTION>
2. Approval of the investment advisory agreement by and between the following and Van Kampen ABSTAIN
American Capital Investment Advisory Corp. (000)
-----------
<S> <C>
Global Equity Allocation Fund................................................................. 128
Global Fixed Income Fund...................................................................... 20
Asian Growth Fund............................................................................. 209
American Value Fund........................................................................... 32
Worldwide High Income Fund.................................................................... 150
Latin American Fund........................................................................... 57
Emerging Markets Fund......................................................................... 160
Aggressive Equity Fund........................................................................ 26
U.S. Real Estate Fund......................................................................... 10
High Yield Fund............................................................................... 4
International Magnum Fund..................................................................... 41
Government Obligations Money Market Fund...................................................... 0
Money Market Fund............................................................................. 578
</TABLE>
<TABLE>
<CAPTION>
3. Approval of the investment sub-advisory agreement by and between Van Kampen Capital AFFIRMATIVE AGAINST
Investment Advisory Corp. and Morgan Stanley Asset Management, Inc. (000) (000)
----------- -----------
<S> <C> <C>
Global Equity Allocation Fund................................................................. 7,569 41
Global Fixed Income Fund...................................................................... 838 0
Asian Growth Fund............................................................................. 16,441 162
American Value Fund........................................................................... 2,719 5
Worldwide High Income Fund.................................................................... 9,488 72
Latin American Fund........................................................................... 3,178 27
Emerging Markets Fund......................................................................... 10,514 58
Aggressive Equity Fund........................................................................ 1,702 19
U.S. Real Estate Fund......................................................................... 981 2
High Yield Fund............................................................................... 1,182 --
International Magnum Fund..................................................................... 1,735 1
Government Obligations Money Market Fund...................................................... 77,583 21
Money Market Fund............................................................................. 143,488 204
<CAPTION>
3. Approval of the investment sub-advisory agreement by and between Van Kampen Capital ABSTAIN
Investment Advisory Corp. and Morgan Stanley Asset Management, Inc. (000)
-----------
<S> <C>
Global Equity Allocation Fund................................................................. 126
Global Fixed Income Fund...................................................................... 20
Asian Growth Fund............................................................................. 216
American Value Fund........................................................................... 36
Worldwide High Income Fund.................................................................... 159
Latin American Fund........................................................................... 58
Emerging Markets Fund......................................................................... 160
Aggressive Equity Fund........................................................................ 26
U.S. Real Estate Fund......................................................................... 8
High Yield Fund............................................................................... 4
International Magnum Fund..................................................................... 39
Government Obligations Money Market Fund...................................................... 0
Money Market Fund............................................................................. 578
</TABLE>
<TABLE>
<CAPTION>
4. To eliminate the Morgan Stanley Worldwide High Income Fund's fundamental policy regarding AFFIRMATIVE
diversification and to reclassify the Fund as "non-diversified". (000) AGAINST (000)
--------------- ---------------
<S> <C> <C>
Worldwide High Income Fund.................................................................... 6,033 204
<CAPTION>
4. To eliminate the Morgan Stanley Worldwide High Income Fund's fundamental policy regarding
diversification and to reclassify the Fund as "non-diversified". ABSTAIN (000)
---------------
<S> <C>
Worldwide High Income Fund.................................................................... 204
</TABLE>
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112
<PAGE>
MORGAN STANLEY FUNDS
ADDITIONAL INFORMATION (CONT.)
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FEDERAL INCOME TAX INFORMATION: (UNAUDITED)
For the year ended June 30, 1997, the percentage of dividends that qualify for
the 70% dividend received deduction for corporate shareholders of the Global
Equity Allocation Fund, American Value Fund, Aggressive Equity Fund and High
Yield Fund is 15.81%, 92.51%, 7.28%, and 3.26%, respectively.
Global Equity Allocation Fund, Asian Growth Fund, American Value Fund, Latin
American Fund, Emerging Markets Fund and U.S. Real Estate Fund have designated
approximately $4,434,000, $8,522,000, $2,280,000, $1,429,000, $508,000 and
$1,000 as long-term capital gain for the fiscal year ended June 30, 1997.
Foreign taxes paid during the fiscal year ended June 30, 1997 amounting to
$254,000, $10,000, $963,000, $189,000 and $65,000 for Global Equity Allocation
Fund, Global Fixed Income Fund, Asian Growth Fund, Emerging Markets Fund and
International Magnum Fund, respectively, are expected to be passed through to
shareholders as foreign tax credits on Form 1099-DIV, which will be sent to
shareholders in late January 1998 for the year ended December 31, 1997. In
addition, for the year ended June 30, 1997, gross income derived from sources
within foreign countries amounted to $2,120,000, $489,000, $7,014,000,
$3,145,000 and $496,000 for Global Equity Allocation Fund, Global Fixed Income
Fund, Asian Growth Fund, Emerging Markets Fund and International Magnum Fund,
respectively.
For the year ended June 30, 1997, the percentage of income earned from direct
Treasury obligations was 22.94%, 25.73%, and 22.68% for the Global Fixed Income
Fund, Government Obligations Money Market Fund, and Money Market Fund,
respectively.
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113
<PAGE>
MORGAN STANLEY FUNDS
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DIRECTORS
Wayne W. Whalen
CHAIRMAN OF THE BOARD
Partner, Skadden, Arps, Slate Meagher & Flom
(Illinois)
J. Miles Branagan
Private Investor; Formerly Chairman, Chief Executive Officer
and President, MDT Corporation
Richard M. DeMartini
President and Chief Operating Officer, Individual Asset
Management Group, a division of Morgan Stanley, Dean Witter,
Discover & Co.
Linda Hutton Heagy
Co-Managing Partner of Heldrick & Struggles
R. Craig Kennedy
President and Director, German Marshall Fund
of the United States
Jack E. Nelson
President, Nelson Investment Planning Services, Inc.
Don G. Powell
Chairman and Director,
Van Kampen American Capital, Inc.
Jerome L. Robinson
President, Robinson Technical Products Corporation
Phillip B. Rooney
Vice Chairman and Director of The Servicemaster Company
Fernando Sisto
Professor Emeritus Stevens Institute of Technology;
Director, Dynalysis of Princeton
INVESTMENT ADVISER AND ADMINISTRATOR
Van Kampen American Capital Investment Advisory Corp.
One Parkview Plaza
Oakbrook Terrace, IL 60181
INVESTMENT SUB ADVISER
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
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
The Chase Manhattan Bank
3 Metrotech Center
Brooklyn, NY 11245
OFFICERS
Dennis J. McDonnell
PRESIDENT
Edward C. Wood III
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Curtis W. Morell
VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER
Ronald A. Nyberg
VICE PRESIDENT AND SECRETARY
Peter W. Hegel
VICE PRESIDENT
Alan T. Sachtleben
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Paul R. Wolkenberg
VICE PRESIDENT
John L. Sullivan
TREASURER
Tanya M. Loden
CONTROLLER
DIVIDEND DISBURSING AND TRANSFER AGENT
ACCESS Investor Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141
LEGAL COUNSEL
Skadden, Arps, Slate, Meahger & Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
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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.
